On September 3, 1999, Joseph Dutton filed a request for innocent spouse relief for tax years 1984 to 1986. On April 24, 2001, he filed Form 656, Offer in Compromise, for tax years 1986, 1987 and 1993 to 1999. On May 7, 2001, the IRS sent Dutton a letter granting partial relief from joint and several liability under IRC section 6015(c) for 1986 and 1987. The letter said he could receive a refund of taxes he had paid for those years. Dutton’s attorney received a second letter from the IRS dated July 23, 2001, stating no refund was permitted if the IRS granted relief under section 6015(c)—contrary to the implication in the first letter.
On July 25, 2001, the IRS accepted Dutton’s offer in compromise. On August 12, 2002, it notified Dutton he was not entitled to relief from joint and several liability under sections 6013(c), 6015(b), (c) and (f) for 1986 and 1987. Dutton filed suit in Tax Court requesting that relief and asking for the previously accepted offer in compromise to be set aside so he could receive a refund. The IRS said the court should not set aside the offer and Dutton was not entitled to relief from liability.
Result. For the IRS. The court immediately dismissed the taxpayer’s request for relief under section 6013. Since the petition listed only section 6015, the court could not grant relief under section 6013. The court next turned to the issue of setting aside the offer in compromise.
Section 6015(g) says a taxpayer will receive a refund—where appropriate—if the IRS grants relief from joint and several liability under section 6015 unless IRC sections 6511, 6512(b), 7121 and 7122 apply. It also says no refund is permitted if relief has been granted under section 6015(c). Section 7122 says an accepted offer in compromise settles the taxpayer’s liability unless the request is withdrawn before accepted. The only exception is in cases of fraud or a mistake.
Since an offer in compromise is a contract, the court said it should be analyzed under general contract law, which provides a contract can be set aside if both parties have made a mistake as to a basic assumption and the mistake has had a material effect. The regulations under section 7122 provide for reopening an offer if there is a mutual mistake as to a material fact.
The taxpayer argued he was mistaken as to the availability of a refund because of the letter he had received from the IRS in 2001. The court rejected this argument because the IRS had notified Dutton that no refund was permitted before he accepted the offer. He should have withdrawn his offer if he wanted to pursue a refund claim.
The court’s conclusion appears to be very clear. An accepted offer in compromise terminates tax disputes absent a mutual, material mistake as to the basic facts of the case. In addition, new final regulations say no refund is permitted under section 6015 if a taxpayer enters into an accepted offer in compromise. Future taxpayers must be prepared to live with any deal they make.
Joseph Dutton v. Commissioner, 122 TC no. 7.
Prepared by Edward J. Schnee, CPA, PhD, Hugh Culverhouse Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.