Last week, the Tax Court remanded a collection due process case to the IRS Appeals Office for consideration of an offer in compromise (OIC) on the grounds that the IRS had failed to adequately consider whether the OIC promoted effective tax administration. Bogart v. Commissioner, T.C. Memo. 2014-46. The case involved a collection due process hearing for unpaid individual income tax liabilities where the taxpayers discovered that their bookkeeper and tax preparer had been embezzling funds from them. The Court found that the bookkeeper had perpetrated a fraud against the taxpayers, and that she had used the stolen funds to pay for her gambling addiction. The bookkeeper embezzled at least $116,000 from the taxpayers, and did not include those stolen funds in the taxpayers’ gross income, which resulted in tax deficiencies for two years. The bookkeeper pleaded guilty to 10 counts of theft in the first degree and was sentenced to prison.

During their collection due process hearing, the taxpayers submitted an OIC for “effective tax administration,” which is a type of OIC that the IRS can accept for public policy or equity reasons if the taxpayer demonstrates that exceptional circumstances exist. Further, the taxpayer is required to remain in compliance since incurring the liability, the taxpayer must have acted reasonably and responsibly in incurring the liability, and the IRS must determine that other taxpayers would view the compromise as fair and equitable.

In this case, the IRS failed to consider whether the theft loss constituted “exceptional circumstances,” and instead focused solely on economic hardship, which is a distinct ground for accepting an OIC for effective tax administration. The Court found that the record was undeveloped and remanded it for further consideration.