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Newsletter
March 1, 2004

IRS Misstate About Refund Does Not Negate Offer in Compromise

An incorrect statement by the IRS that the taxpayer would be granted innocent spouse relief and a refund for certain years was not enough to set aside a subsequent offer in compromise for later years. Dutton v. Commissioner, 122 T.C. No. 7 (2/11/04).

In 1999, Joseph Dutton filed a Form 8857, Request for Innocent Spouse Relief, for tax years 1984, 1985, and 1986. In 2001, he submitted an offer in compromise for tax years 1986, 1987, and 1993 through 1999. Subsequently, the IRS sent Joseph a letter explaining that it was proposed that Joseph be granted innocent spouse relief and that Joseph would be entitled to a refund.

After the IRS accepted Joseph's offer in compromise, it denied him innocent spouse relief. Joseph filed suit arguing that the statement that he would be entitled to a refund resulted in a mutual mistake of material fact or misrepresentation sufficient for the offer in compromise to be set aside. According to Joseph, the projected refund allowance would have eliminated his 1986 and 1987 liabilities, fully paid his outstanding balance for 1993 through 1999, and given him a refund of approximately $81,000. He argued that he would not have agreed to an offer in compromise if he had known he was waiving his right to any refunds.

The Tax Court held that there was no mutual mistake or misrepresentation sufficient to cause the office in compromise to be set aside. The court found Joseph's argument illogical because his reliance upon the mistaken suggestion in the IRS letter that he might receive a refund was approximately two weeks after he had submitted the form offering to compromise his liabilities and waive any refunds. On the basis of Joseph's own argument, the court stated, such an offer would have been unnecessary had he believed that he would receive the mistakenly suggested refund.

Don Fitch CPA CITP Donald Fitch CPA paylesstax (877)CPA-Help