Crawford Pile Driving, LLC v. Commissioner

Vendor Advance or Windfall? A $2.3 Million Surprise

Crawford Pile Driving, LLC sought to settle approximately $56,000 in federal unemployment (FUTA) and employment tax liabilities with an offer in compromise (OIC) for roughly $111,000. However, a seemingly routine remand procedure backfired spectacularly. Updated financial information revealed an $849,000 profit year, leading the IRS to recalculate the company's collection potential at over $2.3 million. The Tax Court ultimately sustained the IRS's rejection of the offer.

The Path to Remand: Assessments and Offers

Crawford Pile Driving, LLC sought to settle approximately $56,000 in federal unemployment (FUTA) and employment tax liabilities with an offer in compromise (OIC) for roughly $111,000. However, a seemingly routine remand procedure backfired spectacularly. Updated financial information revealed an $849,000 profit year, leading the IRS to recalculate the company's collection potential at over $2.3 million. The Tax Court ultimately sustained the IRS's rejection of the offer.

The initial tax liabilities stemmed from the company's late filings. For the quarter ending September 30, 2018, the IRS assessed $45,222 in employment taxes related to Form 941, Employer’s Quarterly Federal Tax Return, plus penalties under Section 6651(a)(1) for failure to timely file, Section 6651(a)(2) for failure to timely pay, and Section 6656 for failure to make timely deposits, in addition to statutory interest. Section 6651(a)(1) imposes a penalty for failure to file a tax return on time, while Section 6651(a)(2) penalizes the failure to pay taxes on time. As of February 6, 2025, the outstanding Form 941 liability totaled $44,558. The company also late-filed its Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for 2017, resulting in an $888 assessment, plus similar penalties and interest. After an examination, the IRS assessed additional unemployment taxes, bringing the total Form 940 liability to $11,302 as of February 6, 2025.

To address these liabilities, Crawford Pile Driving requested Collection Due Process (CDP) hearings under Sections 6320 and 6330 after receiving notices of intent to levy and a notice of federal tax lien (NFTL). Section 6330 provides taxpayers the right to a hearing before the IRS levies their property, while Section 6320 offers a similar right when the IRS files a notice of federal tax lien. The company initially submitted an Offer in Compromise (OIC) of just $500, citing doubt as to collectibility. This offer was rejected because the company had not become current with its filing and payment obligations.

The case was then assigned to Settlement Officer (SO) Megyesi, who requested additional financial documentation. Based on this information, SO Megyesi determined that the company's reasonable collection potential (RCP) was $111,077. The company then increased its OIC to match this amount and submitted the required 20% down payment, as mandated by the Tax Increase Prevention and Reconciliation Act of 2005. However, SO Megyesi discovered that trust fund recovery penalties had not been assessed for all the periods listed on the offer, leading to the OIC's rejection in a letter dated May 12, 2023.

This rejection prompted the company to petition the Tax Court, arguing that the IRS abused its discretion by improperly rejecting the OIC and delaying its processing. The procedural twist occurred when the IRS filed a motion to remand the case to the Appeals Office. The IRS argued that the company was now eligible for reconsideration of its previously rejected OIC because valid assessments existed for all tax periods included in the offer. The court granted this motion, remanding the case for a supplemental CDP hearing.

The Supplemental Hearing: A Financial Reversal

Following the Tax Court's remand, the case returned to Settlement Officer (SO) Megyesi, and a supplemental Collection Due Process (CDP) hearing took place on November 8, 2024. SO Megyesi, though prepared to resubmit the Offer in Compromise (OIC) for acceptance, first required the company to file its delinquent 2023 Form 940 (Employer's Annual Federal Unemployment (FUTA) Tax Return) and 2023 Form 1120-S (U.S. Income Tax Return for an S Corporation). This updated financial information was crucial because the initial $111,077 offer was based on the company's 2020 Form 1120-S, which indicated a loss due to the COVID-19 pandemic.

The company submitted the requested returns on November 15, 2024. Upon review, SO Megyesi discovered a dramatic shift: the company reported an $849,000 profit in 2023, coupled with a $364,155 increase in asset value. The SO informed Mr. Dettloff that the IRS could no longer accept the original OIC given this significant improvement in profitability.

Mr. Dettloff countered that the large 2023 profit stemmed from a vendor advance received late in the year, which could not be offset by related expenses until 2024. He further claimed the company operated at a loss during 2024. To verify these claims, SO Megyesi requested a Profit and Loss (P&L) statement and bank statements.

In December 2024, Mr. Dettloff submitted the requested documentation. However, SO Megyesi's review of the 2024 P&L statement revealed a different picture. Contrary to Mr. Dettloff's assertions, the company had $298,151 in profits through October 2024, projecting a profitable year overall. Furthermore, the equity in the company’s assets was $523,077. Consequently, SO Megyesi updated the applicable Reasonable Collection Potential (RCP) tables.

The IRS calculates RCP to determine a taxpayer's ability to pay their tax liabilities. As defined in IRM 5.8.5, it considers the taxpayer’s assets and income.

The updated RCP calculation yielded a value of $2,312,037. Based on this figure, SO Megyesi concluded that the company's improved financial standing made the original OIC unacceptable. The IRS believed the company could fully pay its liabilities by liquidating its assets and paying $29,816 monthly for 60 months. SO Megyesi attempted to discuss an installment agreement, but Mr. Dettloff did not respond. The OIC was proposed for rejection.

On December 23, 2024, Mr. Dettloff acknowledged in a fax that he understood the OIC rejection, based on the provided documents, and stated he would provide more accurate financial information. However, this documentation never materialized. On January 15, 2025, the Commissioner issued Supplemental Notices of Determination formally rejecting the OIC and sustaining the proposed collection actions.

Court Analysis: Verification and Reasonable Collection Potential

Following the fax from Mr. Dettloff acknowledging the OIC rejection and promising more accurate financial information, which was never provided, the Commissioner issued Supplemental Notices of Determination on January 15, 2025, formally rejecting the OIC and sustaining the proposed collection actions. The Tax Court then turned to its analysis.

The standard of review in Collection Due Process (CDP) cases is abuse of discretion. The Tax Court cited Pough v. Commissioner, 135 T.C. 344, 351 (2010), and Goza v. Commissioner, 114 T.C. 176, 182 (2000), noting that it considers whether the Settlement Officer (SO) (1) properly verified that the requirements of applicable law or administrative procedure have been met, (2) considered any relevant issues the taxpayer raised, and (3) weighed whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary, as per Section 6330(c)(3).

Regarding verification, the court noted its authority to review the SO's verification regardless of whether the taxpayer raised the issue at the CDP hearing, citing Hoyle v. Commissioner, 131 T.C. 197, 202–03 (2008), supplemented by 136 T.C. 463 (2011). Because the company did not challenge verification, the court found no issues with the SO's review, and concluded SO Megyesi verified that all applicable requirements were met.

The core of the dispute centered on the Offer in Compromise (OIC). The court explained that, under Section 7122(a), the Commissioner may compromise a tax liability based on doubt as to liability, doubt as to collectibility, or effective tax administration. Here, the company’s OIC was based on doubt as to collectibility, arguing insufficient assets and income to cover the unpaid liabilities. The court explained that doubt as to collectibility exists when the taxpayer's assets and income are less than the full amount of the liability, citing Treas. Reg. § 301.7122-1(b)(2).

The court emphasized that an OIC based on doubt as to collectibility is accepted only if the offer reflects the Reasonable Collection Potential (RCP). The RCP is the amount the IRS could collect through administrative and judicial collection remedies. The court cited Murphy v. Commissioner, 125 T.C. 301, 309 (2005), stating that the Commissioner may reject an OIC when the taxpayer’s RCP exceeds the proposed payment, citing Johnson v. Commissioner, 136 T.C. 475, 486 (2011), aff'd, 502 F. App’x 1 (D.C. Cir. 2013).

The court noted that it does not determine what an acceptable collection alternative would be, but instead determines whether the SO abused his discretion, meaning if the decision to reject the OIC was arbitrary, capricious, or without sound basis in fact or law. Furthermore, the court observed that generally, an Appeals officer is directed to reject any offer substantially below the taxpayers’ RCP, unless special circumstances justify acceptance of such an offer. The court referenced Internal Revenue Manual (IRM) 5.8.4.3, noting adherence to IRM guidelines does not constitute an abuse of discretion.

The court highlighted that SO Megyesi only needed to find that the company’s RCP exceeded $111,077 (the OIC amount) to justify rejection. SO Megyesi determined the company’s RCP was $2,312,037, based on a significant increase in profits during 2024 and the amount of equity in its assets, using documents submitted by the company. The court stressed that the company had the opportunity to submit additional documentation demonstrating a reduced RCP but failed to do so. The court cited Tucker v. Commissioner, T.C. Memo. 2014-103, at *27, underscoring that it is not an abuse of discretion to reject an OIC when taxpayers fail to submit the financial information necessary to fully evaluate their ability to pay their tax liabilities.

Impact: The Double-Edged Sword of Remand

For tax practitioners, this case highlights the double-edged sword of seeking a remand in Collection Due Process (CDP) cases. While a remand offers a chance to correct procedural errors or present new information, it also reopens the record for updated financial analysis by the IRS. In this case, the remand, initially sought to address issues regarding the taxpayer's offer in compromise, ultimately led to a reassessment of the company's financial situation.

If a taxpayer’s financial circumstances improve during the delay caused by litigation or the remand process itself, a previously "reasonable" offer, based on an earlier calculation of Reasonable Collection Potential (RCP), may become unacceptable to the IRS. The RCP, as defined in IRM 5.8.5, is the sum of the taxpayer’s net realizable equity in assets and future income valuation, and serves as the benchmark against which offers are evaluated.

The court's decision underscores the necessity of substantiating any claims of temporary or "flash in the pan" income with concrete documentation. Mere assertions that increased income is unlikely to continue are insufficient. Taxpayers must provide bank statements, profit and loss statements, or other verifiable evidence to support their claims. Without such documentation, the IRS, and ultimately the Tax Court, are likely to rely on the most recent financial data available, as they did here, in determining the taxpayer's ability to pay the outstanding tax liability. The court highlighted that the company had the opportunity to present additional documentation demonstrating a reduced RCP but did not. The Tax Court referenced Tucker v. Commissioner, T.C. Memo. 2014-103, at *27, underscoring that it is not an abuse of discretion to reject an Offer In Compromise (OIC) when taxpayers fail to submit the financial information necessary to fully evaluate their ability to pay their tax liabilities.