Offers in Compromise Are Reviewable

he Eighth Circuit Court of Appeals held that courts can review an IRS decision to reject a taxpayer’s offer in compromise.

Ronald Speltz exercised incentive stock options to buy shares of McLeod Network Service worth $745,372 for $34,254. Speltz incurred a $224,869 alternative minimum tax (AMT) liability when the shares were valued at $1,647. He submitted an offer in compromise for $4,457 when the balance was $148,745; the IRS rejected it. Arguing an abuse of discretion, Speltz appealed to the Tax Court (124 TC 165) and then to the Eighth Circuit after the Tax Court held for the IRS.

Result. For the taxpayer and for the IRS. The Eighth Circuit held for the taxpayer on the issue of reviewability. The IRS maintained that its rejection of an offer in compromise was an exercise of its administrative discretion. Citing IRC section 7122(a), which says the Secretary of the Treasury “may compromise any civil … case arising under the internal revenue laws,” the IRS argued that the word may meant that courts could not review these decisions. In its holding the Eighth Circuit, referencing IRC section 7482, said that Congress intended to include offers in compromise when it granted courts of appeal the authority to review Tax Court decisions. The circuit court concluded that the judiciary “does decide whether the executive decisions conform to law or represent an abuse of executive discretion.”

At the same time, though, the Eighth Circuit also held for the IRS in finding it did not abuse its discretion when it rejected Speltz’s offer in compromise. Speltz had failed to meet the factors supporting a claim of “economic hardship” or of “public policy and equity” and the service had followed established procedures.

This case demonstrates the legislative and judicial support for the IRS’s procedures in offer-in-compromise cases. With a reported $300 billion tax gap and increased collection efforts by the IRS, this information is important when dealing with such cases.

Ronald Speltz v. Commissioner, 454 F3d 782 (CA8).

Prepared by Michael H. Brown, CPA, PhD, assistant professor of accounting, Tabor School of Business, Millikin University, Decatur, Ill.