Tax Court in Brief | Serna v. Commissioner | Collection Due Process, Offer in Compromise, and Hardship

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The Tax Court in Brief – June 27th – July 1st, 2022

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Tax Litigation:  The Week of June 27th, 2022, through July 1st, 2022

Serna v Commissioner, T.C. Memo. 2022-66 | June 27, 2022 | Urda, J.| Dkt. No. 13202-19L

Short Summary: In this collection due process (CDP) case Alejandro Serna sought review pursuant to sections 63201 and 6330 of a determination by the IRS Office of Appeals upholding the filing of a notice of federal tax lien (NFTL) with respect to an unpaid federal income tax liability for Serna’s 2016 tax year. Serna earned $38,990 in wages in 2016. He also received during that year a retirement distribution of $322,970. Serna used a portion of the funds to buy a home for his estranged wife and four children. Based on his late-filed 2016 federal income tax return, the IRS assessed the tax reported, as well as interest and penalties for the late filing (approx. total, $70,000). The IRS sent Serna a notice and demand for payment. In response Serna submitted an offer in compromise (OIC), proposing to settle the liability for $10,000 based on doubt as to collectability. Serna’s OIC was assigned to an appeals officer who analyzed his assets, income, and liabilities. The IRS rejected the OIC on the grounds that (1) his tax liabilities were less than his reasonable collection potential and (2) the special circumstances Serna noted did not warrant acceptance. Serna appealed the OIC rejection, asserting—as he did before—that the OIC qualified for acceptance because two of his four children suffered from developmental disabilities and that the house was essential to them. The IRS issued a notice of NFTL. Serna requested a CDP hearing, again on grounds relating to his children’s medical challenges. Later, Serna submitted his 2018 return, which claimed only one of his sons as a dependent. On September 12, 2019, the settlement officer issued to Serna both a rejection memorandum relating to his appeal and a notice of determination sustaining the NFTL filing. The IRS informed Serna that the account would be placed in currently-not-collectible status.  The settlement officer decided, however, that rejection was appropriate because Serna had sufficient equity ($152,000) to fully pay his liability. No information warranted the withdrawal of the NTFL filing, but the case—based on additional expenses of Serna—nonetheless was returned “for no further action.”

Key Issues:

Primary Holdings:

Key Points of Law:

Insights:  This case is an example of what may be deemed a hardship in the mind of the taxpayer is not a hardship that can overturn an IRS settlement officer’s decision to not accept an offer in compromise of a federal tax liability. The IRS settlement officers reviewed the documentation submitted by Serna and recognized his sensitive situation involving his estranged wife and children-in-need. But, Serna unquestionably had equity in real estate that could have been used to satisfy his tax liabilities, and he did not help his cause with the IRS or the Tax Court by presenting conflicting evidence to support his claim of non-collectability.2020). No public policy or equity grounds were presented that would convince the Tax Court that the settlement officer abused her discretion in rejecting the OIC.

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