United States v. Kenny, No. 1:16-cv-02149 (N.D. Ohio June 6, 2018) involves a spectacularly non-compliant taxpayer against whom the IRS seeks both the reduction of assessments to judgment and an injunction. The court grants both. Mr. Kenny’s defense relied upon the statute of limitation on collection and the failure of his three OICs to extend it. The issue arises regularly because of the handling of OICs by the offer groups in Brookhaven and Memphis.
Mr. Kenny failed to pay taxes voluntarily for about 25 years. He receives income as an independent contractor or a business owner and not as a wage earner. The court described in some detail his failure to voluntarily comply with his tax obligations and his expenditures which included almost $5,000 in monthly rent, almost $2,000 each month in meals and gas, extensive travel, payment of his son’s student loans and his daughter’s tuition. As with almost any case of this type, the described behavior would appear to have the facts needed in order to pursue prosecution under IRC 7201 for evasion of payment; however, for reasons not explained in the opinion, the government seeks other remedies against Mr. Kenny.
In addition to obtaining a judgment against him for the outstanding balance of the taxes, the IRS also sought an injunction to “to comply with his on-going tax obligations.” In addition to the almost $1.5 million in income taxes he also owes about $10,000 in trust fund recovery penalty. I have seen injunction cases to keep taxpayers from pyramiding trust fund taxes, but his case appears to be an injunction directed at complying with the income tax laws.
The court starts out stating that it generally disfavors injunctions “that do no more than require on-going compliance with the law.” The court goes on, however, to state that the unique facts here support the use of injunction as a tool to promote compliance. It cites to five factors developed by the 6th Circuit for determining whether to issue an injunction:
- The gravity of the offence
- Extent of participation
- Scienter
- Recurrent nature of offense
- Likelihood that his business activities will involve him in some offense again
The court spends a long paragraph explaining how Mr. Kenny fits into all of the categories set out by its circuit. The paragraph ends with the notation that the IRS withdrew the request for the appointment of a receiver to handle the business affairs of Mr. Kenny. The appointment of a receiver is a remedy even more extraordinary than an injunction.
Statute of Limitations
Mr. Kenny’s defense to the effort to obtain a judgment against him focuses on the statute of limitations and the impact on the statute on the three offer in compromise (OIC) requests that he filed with the IRS. Essentially, he argues that the IRS rejected the OICs as non-processable returning them without consideration. Further, he argues that because each of the offers were returned as non-processable his submission of the OICs would not extend the statute of limitations on collection and that the IRS needs the extra time it argues results from his submission of the OICs in order for the suit against him reducing the liability to judgment to be considered timely. The applicable IRM provision (IRM 5.8.7.2) provides “An offer can be returned as either a “not processable return” or a “processable return”. It is important to note the distinction because when there is a not processable return the collection statute is not suspended…” The court does not provide the detail needed to reveal exactly what happened when Mr. Kenny submitted his OIC requests; however, it appears that the IRS rejected the OICs at some time after the processability point thereby triggering the statute of limitations extension needed by the IRS.
The issue of when the IRS rejects an OIC has significance not always noted when the OIC gets returned to the taxpayer. Just as a taxpayer should not submit an OIC without thinking about the statute of limitations implications, a taxpayer should carefully note the basis for the IRS returning an OIC without acceptance. Many things can cause the IRS to return an OIC as non-processable and a detailed description of the circumstances that cause the IRS to determine an offer is non-processable as well as the process for making the determination can be found in IRM 5.8.2. The Centralized OIC units make the determination as stated in IRM 5.8.7.2.1 which provides:
Not Processable Returns
- An offer is determined to be not processable if any of the “Not Processable” criteria listed in IRM 5.8.2.3.1, Determining Processability, is present. This decision is the sole responsibility of the Centralized OIC (COIC) sites located in the Brookhaven and Memphis Campus.
About a dozen years ago several taxpayers litigated the processability issue with respect to the bankruptcy criteria. These taxpayers argued that making bankruptcy a processability criteria disadvantaged them in an inappropriate manner. After a couple of victories at the bankruptcy level (See In re Holmes, 298 B.R. 477 (Bankr. M.D. Ga. 2003); In re Chapman, 1999 Bankr. LEXIS 1091 (Bankr. S.D. W. Va. 1999)), the tide turned on this issue and the IRS prevailed (See In re Shope, 347 B.R. 270 (Bankr. S.D. Ohio 2006); In re Uzialko, 339 B.R. 579 (Bankr. E.D. Pa. 2006). I mention the cases for those who might have interest in attacking the processability criteria to show that such an attack would prove difficult because of the discretion IRC 7122 gives to the IRS in making the OIC determination.
A sure sign that the IRS is returning an OIC as non-processable is that the IRS does not give a taxpayer appeal rights when it rejects an OIC. Those who regularly submit offers know that getting a call from the OIC unit relatively quickly after submitting an OIC where the person at the offer unit says “if I do not receive X within 10 days I am going to return your offer as non-processable” happens fairly regularly.
It appears from IRS activity on Mr. Kenny’s OIC submissions several months after the initial submission that the IRS did consider the OICs on their merits before rejecting them; however, the type of rejection may not always be clear. In a recent post complaining about the telephone number provided by the offer unit, I spoke about a processability rejection (an incorrect one) because the assessment occurred as a result of a restitution order and when it does the IRS has no ability to administratively compromise the liability. Unfortunately, the Kenny case offers little guidance on when the return of an OIC results from a non-processable submission verses an unacceptable one on the merits of the offer because Mr. Kenny did not provide much evidence. Despite the absence of clear guidance, the Kenny case serves as a reminder that submitting an offer suspends the statute of limitations on collection and submitting multiple offers can suspend it for quite some time if the submitted offers make it past the processability stage. For taxpayers seeking to defend collection suits on the basis of the statute of limitations keeping careful track of these submissions and the basis for denial of the OIC requests becomes important in deciding if a procedural defense to the suit is available.