IRS Can Revoke Your Offer in Compromise if it Does Not Like You – Houston Tax Attorneys

Imagine working for years to resolve your tax problems and finally reaching an agreement with the IRS to settle your tax debt. You make all the required payments, fulfilling your part of the bargain.

You think you are in the clear, but say the IRS employees who worked on your case do not like you. Say that they send you a letter saying the IRS has decided to void the agreement entirely. When you ask why, the IRS refuses to provide specifics or allow you an opportunity to challenge its decision. Could a case like this ever happen? This question brings us to the Novoselsky v. United States, Case No. 24-cv-387-bhl (E.D. Wis. 2024) case.

Facts & Procedural History

The taxpayers in this case had negotiated and entered into an offer-in-compromise with the IRS for the 2009 to 2014 tax years. According to the court opinion, the taxpayers fulfilled all their obligations under the offer. As with the comment in the intro for this post, in May 2023, the IRS sent the taxpayers a letter revoking the offer and informing them it would restart tax collection proceedings.

The court opinion indicates that the taxpayers made various efforts to understand the basis for the revocation. The IRS’s response included only vague allegations about misrepresentations the taxpayers supposedly made concerning their home, including unclear claims about ownership interests and property values. When the taxpayers requested specific details about these alleged misrepresentations so they could attempt to address them, the IRS flatly refused. Instead of providing specifics or allowing any opportunity to cure potential issues, the IRS simply informed the taxpayers they had no right to even seek an internal review of the revocation decision.

The taxpayers then filed a civil action against the IRS, asserting that the IRS had revoked the offer based on “personal animus” against them. This dispute resulted in the court opinion at issue in this post. This case does not say who at the IRS would have had the personal animus, but it could have been any number of IRS employees. For example, if the case originated with a revenue officer, it could have been the revenue officer. The revenue officer generally does have the ability to influence the offer acceptance when they have the case prior to the offer being submitted.

About the Offer in Compromise

An offer-in-compromise allows taxpayers to settle their tax debt for less than the full amount owed. Congress granted the IRS authority to settle tax balances. The term “offer-in-compromise” is the name the IRS gave to the program it created under this authority.

The offer-in-compromise can be a great way to get a fresh start and to come into compliance. It brings in elements of bankruptcy discharge, without some of the negative aspects of bankruptcy. As with any government program providing relief, there are numerous requirements that one must meet to qualify. There are also drawbacks, such as an extension of the time the IRS has to collect.

Most offers are submitted by taxpayers based on doubt as to collectibility. With these offers, there is no challenge to whether the underlying liability is owed. Rather, the challenge centers on the taxpayer’s inability to pay the liability (there are other types of offers that can be made for the liability).

The taxpayer must submit a detailed application with comprehensive financial documentation and offer at least what the IRS calculates as their “reasonable collection potential.” The IRS evaluates offers based on the taxpayer’s ability to pay, income, household expenses, and asset equity. The IRS applies its collection rules to determine whether a taxpayer can pay the liability.

These requirements exist in addition to other standard qualifications, such as being current with all filing and payment requirements and not having an open bankruptcy proceeding.

When a taxpayer submits an offer, they must provide detailed financial information under penalties of perjury. But what obligation does the IRS have to verify this information before accepting the offer? And if the IRS fails to verify information it could have easily checked during the offer process, should it be able to later void the agreement based on that same information?

Contract Law Applies

The offer-in-compromise is fundamentally a contract. The courts have consistently held that contract law applies in resolving disputes related to offers.

Under basic contract law principles, a contract can be voided for fraudulent inducement when one party makes material misrepresentations that lead the other party to enter into the agreement. However, the party seeking to void the contract typically must show they reasonably relied on the misrepresentation and could not have discovered the truth through ordinary diligence.

The IRS’s actions in this case—claiming misrepresentation about readily verifiable property records without showing they actually verified anything—seem to fall short of this standard. But this raises an important question: can taxpayers actually sue the IRS for breach of contract?

Limited Remedies for Taxpayers

This case involved a claim under the Declaratory Judgment Act and the IRS’s defense citing the Tax Anti-Injunction Act.

The Declaratory Judgment Act allows courts to issue declarations about parties’ legal rights in many situations. However, the Act specifically excludes cases “with respect to Federal taxes.” This tax exception is interpreted broadly and generally prevents courts from issuing declaratory judgments about tax matters.

The court held that determining whether the IRS properly revoked an offer falls squarely within this tax exception. Even though the taxpayers framed their argument in contract terms, the court found that the fundamental nature of the dispute involved federal taxes. Because reinstating the offer would effectively declare the taxpayers’ rights regarding their tax obligations, the court concluded it lacked jurisdiction under the DJA. The stark conclusion: you cannot sue the IRS for breach of contract. The IRS is free to breach as it sees fit.

The Tax Anti-Injunction Act provides another barrier. It generally prohibits suits that would restrain the assessment or collection of taxes. Congress enacted this law to ensure the government could collect taxes without judicial interference disrupting the flow of revenue. The Act essentially requires taxpayers to pay first and litigate later, with only a few narrow statutory exceptions.

In this case, the court found that the taxpayers’ attempt to reinstate their offer would effectively restrain the IRS’s ability to collect taxes. Even though the taxpayers argued they were merely seeking to enforce a contract, the court viewed this as an indirect attempt to stop tax collection. The court reasoned that because an offer by definition allows for payment of less than the full tax liability, forcing the IRS to honor the offer would interfere with its ability to collect the full tax amount.

Remedies After Collection Attempts

Absent these remedies, taxpayers who contract with the IRS are in a difficult position. They cannot preemptively challenge the IRS’s revocation of their contract through normal judicial channels. However, taxpayers may have alternative remedies once the IRS attempts collection.

A wrongful levy action under I.R.C. § 7426 could provide an opportunity to challenge the underlying validity of the tax debt and the offer revocation. This would require waiting until the IRS actually seizes property, but it might offer a path for judicial review that isn’t barred by the Anti-Injunction Act.

Taxpayers might also consider a Collection Due Process hearing, though the scope of review may be limited. In some cases, taxpayers might be able to file a refund suit if they can fully pay the liability for at least one tax period. None of these options are ideal, but they may provide some avenue for challenging an improper offer revocation.

The Takeaway

This case highlights a fundamental unfairness in tax administration. When taxpayers enter into offers, they must provide extensive financial documentation and make specific representations about their assets and income. The IRS scrutinizes this information before accepting an offer. Yet after acceptance, the IRS can apparently revoke the agreement based on vague allegations of misrepresentation, without having to prove or even clearly articulate what those misrepresentations were.

The practical implications are serious. Taxpayers who have fulfilled their obligations under an offer and moved forward with their lives can suddenly find themselves back at square one, facing their original tax liability plus additional interest and penalties. The lack of meaningful review or appeal rights makes the IRS’s revocation power nearly absolute.

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Stephan Dorsey

Stephan is the sports journalist for the Maple Grove Report.

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Navigating the Highway Transportation Excise Tax – Houston Tax Attorneys

Many of our tax laws are written in very broad language. This provides a significant advantage to the IRS, as the IRS can issue interpretive guidance to clarify these rules in a way that is easier to administer and, often, in ways that maximize tax revenue for the government.

This flexibility also aids IRS auditors in proposing adjustments during examinations. Even diligent taxpayers attempting to comply fully with the law can find themselves caught in this interpretive web.

Those who are new to working tax disputes often wonder why the IRS settles tax debts. The answer is often that the IRS has to be careful with disputes that could clarify the law. Tax disputes that result in more precise guidance can help taxpayers understand their obligations, but it also creates opportunities for taxpayers to restructure to minimize their taxes or even avoid the tax altogether.

The federal excise tax system provides a prime example of this dynamic. Excise taxes are specialized levies designed to either discourage certain activities or impose costs on specific types of transactions. There are a number of different types of excise taxes, such as the tire import excise tax. In this article, we’ll consider the highway transportation excise tax. The recent Rockwater, Inc. v. United States, No. 23-11893 (11th Cir. 2024), provides clearer guidance on when this excise tax applies.

Facts & Procedural History

The taxpayer in this case is a manufacturer of specialized trailers designed to dry and transport peanuts from farm fields to buying points. According to the court case, the trailers have unique design elements for peanut processing, including a perforated floor system for drying and specialized unloading mechanisms. The vehicles also incorporate standard highway equipment, such as DOT-compliant lighting and brakes.

This case started like most other tax disputes. The IRS conducted an audit. The IRS determined the trailers the taxpayer sold were subject to a 12% excise tax on their first retail sale. The taxpayer paid the taxes and filed a refund suit to recover the payment. The case addresses whether these particular types of trailers qualify as “off-highway transportation vehicles” that are exempt from the excise tax.

About the Transportation Excise Tax

The highway vehicle transportation excise tax is similar to a sales tax that is paid by the seller. It is a 12% tax on the first retail sale of truck trailer and semitrailer chassis and bodies.

This tax only applies to vehicles designed to perform a function of transporting a load over public highways, whether or not they are also designed to perform other functions. The term “public highway” includes any road, whether a federal highway, state highway, city street, or otherwise, that is not a private roadway. Given these rules, these vehicles are likely those that would already qualify the end-user for favorable tax treatment as qualified non-personal use vehicles.

Congress created an exemption for “off-highway transportation vehicles.” To be an off-highway vehicle, the vehicle has to meet two key requirements. First, the vehicle must be specially designed primarily for transporting loads other than over public highways. Second, due to this special design, the vehicle’s capability to transport loads over public highways must be “substantially limited or impaired.” The statute specifically states that a vehicle’s design is determined solely based on its physical characteristics.

Court Interpretations and Analysis

So this sets up the tax dispute in this case. So what is a highway transportation vehicle versus a non-highway transportation vehicle? For taxpayers who could be subject to this tax, avoiding the tax would result in a 12% tax savings. For some taxpayers, this amount could dictate whether the taxpayer is profitable or not.

The courts have considered several cases that touch on these tax rules. In these cases, the courts have focused on the physical characteristics of vehicles rather than their intended use. For example, in Worldwide Equipment v. United States, the Sixth Circuit examined coal-hauler dump trucks. The trucks had special engines, transmissions, and off-road tires that would overheat at highway speeds. The court found the trucks were non-highway vehicles given these physical limitations. In Florida Power & Light Co. v. United States, the Court of Federal Claims emphasized that the design for frequent off-road use alone was insufficient. The court concluded that the vehicle must be primarily designed for off-road use.

That brings us to the current court case. In Rockwater, the court found that the peanut trailers’ special features were specific to peanut drying rather than transportation. The presence of standard highway equipment and the absence of specific off-highway transportation features showed that the trailers were not primarily designed for off-highway use. The appellate court noted that the ability to operate at normal highway speeds without special permits further undermined the taxpayer’s claim that the vehicles were non-highway transportation vehicles.

While the taxpayer in this case lost the case, this court case creates a more concrete rule that taxpayers can follow and apply.

Avoiding the Excise Tax

Given that this excise tax only applies to vehicles that can travel unimpeded on highways at highway speeds, one can easily envision ways to avoid this excise tax.

For specialized equipment like the peanut trailers in this case, the manufacturer might be able to incorporate design elements that create legitimate highway limitations and thereby avoid this 12% tax. For example, using specialized off-road tires that are incompatible with extended highway travel, or designing weight distributions that require special permits for highway transport, could help qualify for the exemption. One could envision other arrangements that would also create genuine physical limitations that the end users may find acceptable.

Another approach might be to separate functions between different vehicle types. The manufacturer could create two vehicles instead of one–with one vehicle consisting of the peanut processing components and the other being the highway transportation part of the rig. Companies could use specialized equipment solely for off-highway operations and then transfer loads to separate highway-specific transport vehicles. This operational structure naturally separates highway and off-highway transport functions while potentially qualifying the specialized equipment for the exemption. Perhaps the manufacturer could go even further and charge a high price for the peanut processing components and provide the highway transportation part of the rig at minimal or no cost. Or alternatively, the taxpayer may have a different entity handle the sale of the highway transportation component.

Takeaway

Excise taxes like the highway transportation excise tax have the effect of preventing taxpayers from engaging in certain activities. With this tax, it is the sale of specialized equipment that includes components that, collectively, are able to travel down highways without significant limitations. As noted by this court case and in this article, the tax may be relatively easy to sidestep with enough creative tax planning. Creating genuine physical limitations on highway use through vehicle design, not just operational constraints, may be sufficient given the holding in this case.