Crawford Pile Driving, LLC v. Commissioner

From Loss to Windfall: $850k Profit Sinks Contractor's Offer

A Michigan construction company, Crawford Pile Driving, LLC, found its attempt to settle unpaid employment taxes for approximately $111,000 dashed by a dramatic turn of financial fortune. The company initially sought an Offer-in-Compromise (OIC), a process allowing taxpayers to resolve tax liabilities for less than the full amount owed, based on financial hardship. However, during the proceedings before the Tax Court, the IRS discovered the company had experienced a massive profitability swing, reporting nearly $850,000 in profit for 2023. This revelation led the IRS to recalculate the company's Reasonable Collection Potential (RCP) – the total amount the IRS believes it can realistically collect – to over $2.3 million. Consequently, the Tax Court granted summary judgment for the IRS, effectively rejecting the company's OIC.

A History of Delinquency and Rejected Offers

Following the revelation of the company's $850,000 profit swing in 2023 and the IRS's revised $2.3 million Reasonable Collection Potential (RCP), the history of the company's tax delinquency and prior offers-in-compromise (OIC) became central to the Tax Court's decision.

The company's troubles began with late filings. Specifically, the company late-filed its Form 941, Employer’s Quarterly Federal Tax Return, for the quarter ending September 30, 2018, leading the IRS to assess $45,222 in employment taxes. In addition to the tax itself, the IRS also assessed penalties under Section 6651(a)(1) for failure to timely file and Section 6651(a)(2) for failure to timely pay. Section 6651(a)(1) imposes a penalty for failing to file a tax return on time, while Section 6651(a)(2) penalizes the failure to pay the tax owed by the due date. Further penalties were assessed under Section 6656 for failure to make timely deposits of taxes, as well as statutory interest. By February 6, 2025, this Form 941 liability stood at $44,558.

The company also late-filed its Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for 2017. This resulted in an initial assessment of $888 in unemployment taxes, along with penalties under Sections 6651(a)(1) and (2), a Section 6656 penalty, and statutory interest. After an examination, the IRS assessed additional unemployment taxes along with a Section 6651(a)(1) addition to tax, a Section 6656 penalty, and statutory interest, bringing the total Form 940 liability to $11,302 as of February 6, 2025.

To collect the unpaid Form 941 liability, the IRS mailed the company Letter 1058, a Final Notice of Intent to Levy, on November 19, 2020. The IRS then filed a Notice of Federal Tax Lien (NFTL) on December 1, 2020, to secure the unpaid Form 941 liability, sending Letter 3172 to notify the company of the filing and its right to a hearing under Section 6320. Section 6320 gives taxpayers the right to a Collection Due Process (CDP) hearing when a lien is filed. Similarly, to collect the unpaid Form 940 liability, the IRS mailed a second Letter 1058 on March 17, 2021.

The company responded by requesting Collection Due Process (CDP) hearings. In a request postmarked December 19, 2020, the company sought a CDP hearing regarding the lien and the first levy notice, requesting collection alternatives such as an Offer in Compromise (OIC) and currently not collectible status. A separate CDP Hearing Request Form, dated April 13, 2021, addressed the second levy notice, again requesting an installment agreement, an OIC, and currently not collectible status. The company did not dispute the underlying tax liabilities in either request.

The initial CDP hearings involved Settlement Officer (SO) J. Mansager. During a May 19, 2021, telephone hearing, the company's representative indicated the company wished to pursue an OIC. Subsequently, on June 17, 2021, the company submitted Form 656, Offer in Compromise, offering $500 to settle its unpaid Form 940 tax liability for 2017 and its unpaid Form 941 tax liabilities for ten quarterly periods, citing doubt as to collectibility as its reason.

The IRS's Centralized Offer in Compromise unit (COIC) reviewed the offer, and in a letter dated April 5, 2022, informed the company that it needed to become current with its filing and payment obligations to receive further consideration. The company failed to meet these obligations, leading to the rejection of the $500 OIC on June 29, 2022. The case was then transferred back to the Appeals Office and reassigned to SO L. Moore and later to SO C. Megyesi.

SO Megyesi requested additional documentation to verify the value of the company's assets and the income of its owner, Todd A. Crawford. After reviewing the submitted documents, SO Megyesi determined that the company's reasonable collection potential (RCP) was $111,077. He informed the company of this finding in a letter dated February 24, 2023. In response, the company increased its offer to $111,077 on March 9, 2023, submitting the required 20% down payment as mandated by the Tax Increase Prevention and Reconciliation Act of 2005. However, during the final acceptance process, SO Megyesi discovered that trust fund recovery penalties (TFRP) had not been assessed for all the relevant periods. Consequently, the OIC was rejected on May 12, 2023.

The IRS then issued Notices of Determination Concerning Collection Action on May 15, 2023, sustaining the first levy notice, the second levy notice, and the NFTL filing. The company petitioned the Tax Court in June 2023, arguing that the IRS abused its discretion by improperly rejecting the OIC and by causing excessive delays in processing the OIC, preventing full consideration of fair alternatives and the company's actual ability to pay. The company contended the delay was "contrary to the Mission Statement of Appeals.” On August 1, 2024, the Commissioner filed two separate Motions to Remand.

The Supplemental Hearing: A Financial U-Turn

Following the remand, Settlement Officer (SO) Megyesi conducted a supplemental Collection Due Process (CDP) hearing with the company on November 8, 2024. The cases had been remanded after the company petitioned the Tax Court in June 2023, arguing that the IRS abused its discretion by improperly rejecting the Offer in Compromise (OIC) and causing excessive delays.

During the hearing, SO Megyesi initially intended to resubmit the OIC for acceptance. However, he first required the company to file its delinquent 2023 Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and 2023 Form 1120S, U.S. Income Tax Return for an S Corporation. This updated financial information was crucial because the original $111,077 offer was based on the company's 2020 Form 1120–S, which reflected losses due to the COVID–19 pandemic.

Upon reviewing the submitted returns, SO Megyesi discovered a dramatic financial turnaround. In 2023, the company had generated a profit of $849,000, and its assets had increased in value by $364,155. SO Megyesi informed the company that the IRS could no longer accept the original OIC amount given this significant improvement.

The company's representative, Mr. Dettloff, argued that the large 2023 profit stemmed from an advance payment by a vendor late in the year, with offsetting expenses not recognized until 2024. He further claimed that the company was operating at a loss in 2024.

To substantiate these claims, SO Megyesi requested a Profit and Loss Statement and bank statements. Mr. Dettloff provided the documentation in December 2024. However, after reviewing the 2024 Profit and Loss Statement, SO Megyesi concluded that the company's financials told a different story. Through October 2024, the company had profits of $298,151, was projected to remain profitable for the year, and held $523,077 in equity in its assets.

As a result, SO Megyesi updated the Reasonable Collection Potential (RCP) tables. The RCP is the IRS's calculation of the amount it could realistically collect from a taxpayer, considering their assets, income, and expenses. This figure is central to evaluating an OIC based on "doubt as to collectibility". The calculation of RCP jumped to $2,312,037. SO Megyesi concluded that the company's financial position had improved considerably since 2020, rendering the original OIC unacceptable. He determined that the company could fully pay its liabilities by liquidating its assets and paying the IRS $29,816 a month for 60 months.

Court Upholds $2.3 Million Collection Potential

The court then addressed whether the IRS settlement officer (SO) abused his discretion in rejecting the contractor's offer. The Tax Court employs an "abuse of discretion" standard when reviewing IRS determinations in Collection Due Process (CDP) cases where the underlying tax liability isn't in dispute. Abuse of discretion, the court explained, exists when determinations are "arbitrary, capricious, or without sound basis in fact or law."

The Tax Court referenced Section 6330, which outlines the requirements for CDP hearings. Section 6330(c)(3) specifies that the SO must verify that legal and administrative requirements have been met, consider relevant issues raised by the taxpayer, and weigh the need for efficient tax collection against the taxpayer's concerns about the intrusiveness of collection actions.

The court sided with the IRS, finding no abuse of discretion. First, SO Megyesi properly verified the applicable legal requirements. Second, the SO considered the company's offer-in-compromise (OIC) based on "doubt as to collectibility." An OIC based on doubt as to collectibility, the court noted citing Treasury Regulations Section 301.7122-1(b)(2), is appropriate where the taxpayer's assets and income are less than the full amount of the tax liability. However, such an offer 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 emphasized that it does not substitute its judgment for the SO's or recalculate acceptable collection alternatives. Instead, it determines whether the SO's decision to reject the OIC was arbitrary or without sound basis. The court found that SO Megyesi's determination that the company's RCP was $2,312,037 was based on a significant increase in the company’s profits during 2024 and the amount of equity in its assets. This determination used documents submitted by the company. The SO's rejection of the OIC was thoroughly explained, included calculations of the company's RCP, and adhered to Internal Revenue Manual (IRM) guidelines. Because the company failed to provide additional documentation demonstrating a reduced RCP, the court found no abuse of discretion. The court observed that it is not an abuse of discretion to reject an OIC when taxpayers fail to submit the financial information necessary to fully evaluate its ability to pay its tax liabilities.

Practically speaking, this means that an OIC based on "doubt as to collectibility" cannot succeed if the taxpayer's assets or income significantly exceed the offer amount during the review period. Finally, the court concluded that SO Megyesi appropriately balanced the need for efficient tax collection with the company's concerns, as required by Sections 6320(c) and 6330(c)(3)(C).