Wesley Snipes, the actor and producer who had a dominant run starring in a number of ‘90s era classics, is in the headlines again due to his well-publicized tax problems. Recently, Snipes’ Tax Court case wrapped up, stemming from his failure to file Federal income tax returns for the years 2001, and 2002 through 2006.
In August 2013, the IRS assessed Federal income tax liabilities of approximately $23.5 million due from Snipes in respect of the tax years mentioned above. A month later Snipes requested a Collection Due Process hearing and asked for either an installment agreement or an Offer in Compromise as collection alternatives. Eventually, Snipes made a cash Offer in Compromise of $842,061 and advanced arguments based on his economic hardship, as well as improper advice/conduct of a former financial advisor.
In June 2014, an initial collection hearing was held, and the settlement officer made efforts to verify Snipe’s income and assets to determine his “reasonable collection potential.” Snipes had numerous assets and real estate holdings that were held in multiple entities, but in reviewing the information collected from both Snipes and the IRS Compliance Division, the settlement officer was unable to definitively determine that Snipes no longer owned certain properties that he claimed to have lost or transferred. As such, the officer came up with a reasonable collection potential amount of $17,482,152.
The settlement officer concluded it was not in the best interest of the government to accept Snipes’ offer, and Snipes filed suit against the IRS in Tax Court.
The validity of Snipes’ underlying tax liabilities was not an issue at trial. Rather, the Tax Court was asked to review the settlement officer’s conduct for abuse of discretion in refusing Snipes’ Officer in Compromise.
The IRS may compromise a tax liability on the basis of “doubt as to collectability” where the taxpayer’s assets and income render full collection unlikely. Conversely, the IRS may reject an Offer in Compromise when the taxpayer’s reasonable collection potential exceeds the amount he or she proposes to pay. Generally, settlement officers are directed to reject offers substantially below the taxpayer’s reasonable collection potential, unless “special circumstances” justify acceptance of such an offer.
Snipes contended that payment of his reasonable collection potential, as calculated by the IRS, would render him unable to meet basic living expenses. However, the Tax Court felt the settlement officer spent considerable time and effort in her endeavor to determine Snipes’ income and assets, as well as his equity in his assets, trusts, and businesses. Snipes also failed to provide bona fide documentation showing that he no longer owned the assets he claimed he lost or transferred. Thus, the Court held the settlement officer properly based her determination on the required factors and did not abuse her discretion in determining that acceptance of petitioner’s Offer in Compromise was not in the best interest of the United States.
Taxpayers who seek a compromise of their tax liabilities should be prepared to substantiate their claim that they are entitled to tax relief. If you have questions about restructuring debt with the government, please reach out to your local Withum Tax Advisor.
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Author: CJ Stroh, Esq. | firstname.lastname@example.org