In Tooke v. Commissioner,[1] the United States Tax Court recently reaffirmed the considerable discretion afforded to the Internal Revenue Service Independent Office of Appeals (“Appeals”) when evaluating collection alternatives. Although the taxpayer presented compelling evidence of significant personal hardship, including a Parkinson’s disease diagnosis, the financial consequences of a contentious divorce, and substantial expenses associated with caring for an adopted special-needs child, the court nevertheless concluded that Appeals did not abuse its discretion in rejecting both the taxpayer’s offer in compromise and proposed partial-pay installment agreement.
The decision provides a detailed examination of the standards governing offers in compromise[2] based upon doubt as to collectability and effective tax administration[3], emphasizing that sympathetic facts alone do not justify compromise where the taxpayer retains the financial ability to satisfy a substantially greater portion of the outstanding liability.
Background
The taxpayer accumulated unpaid federal income tax liabilities for tax years 2012 through 2017 after filing returns reflecting substantial balances due but making few corresponding payments. Following the filing of notices of federal tax liens and proposed levy actions, the taxpayer timely requested Collection Due Process (“CDP”) hearings and proposed several collection alternatives[4], including an offer in compromise and an installment agreement.
The taxpayer’s offer sought to resolve approximately $1.6 million of assessed liabilities through a lump-sum payment of $175,000, later increased during the administrative process to $375,000. In support of the proposal, he argued both doubt as to collectability and effective tax administration. He maintained that extraordinary personal events had produced his financial difficulties, including the loss of significant assets during the dissolution of a long-term relationship, extensive litigation, mounting medical expenses associated with Parkinson’s disease, and substantial costs incurred after he and his wife assumed responsibility for a special-needs child.
Appeals devoted significant attention to these circumstances throughout the administrative process. Revenue officers repeatedly revised the taxpayer’s reasonable collection potential calculation, allowing numerous deviations from the IRS’s national and local expense standards. Additional allowances were approved for estimated tax payments, private school tuition for the adopted child, medical insurance premiums, speech therapy, and other substantiated expenses. These revisions substantially reduced the taxpayer’s reasonable collection potential from an initial calculation exceeding $3.7 million to approximately $499,000.
Even after those adjustments, however, the taxpayer’s proposed compromise remained substantially below his reasonable collection potential. Appeals therefore rejected the offer, concluding both that the taxpayer retained the ability to pay significantly more than proposed offer amount and that the asserted special circumstances did not warrant acceptance of a reduced amount.
The Tax Court’s Analysis
The Tax Court reviewed the determination under the familiar abuse-of-discretion standard because the underlying tax liabilities themselves were not at issue.[5] Under that standard, the court considered whether Appeals properly verified that all statutory and administrative requirements had been satisfied, considered the issues raised by the taxpayer, and appropriately balanced efficient tax collection against the taxpayer’s legitimate concerns that collection actions be no more intrusive than necessary.[6]
Central to the court’s analysis was the concept of reasonable collection potential. In evaluating an offer based upon doubt as to collectability, the IRS estimates the amount it reasonably expects to recover through collection activity by considering both the taxpayer’s realizable equity in assets and anticipated future income.[7] As the court observed, Appeals ultimately determined that the taxpayer possessed reasonable collection potential of approximately $499,109, consisting of more than $363,000 in asset equity and nearly $136,000 in future income.
The taxpayer argued that Appeals improperly excluded approximately $1,550 of additional monthly[8] expenses relating primarily to tutoring and transportation for the adopted special-needs child. Even assuming those expenses should have been allowed, however, the court concluded that any resulting reduction in reasonable collection potential would still leave the taxpayer’s proposed compromise substantially below the amount the IRS could reasonably expect to collect. Consequently, the court found no abuse of discretion in rejecting the offer on doubt-as-to-collectability grounds.
The Taxpayer’s Economic Hardship Argument
The taxpayer next argued that Appeals improperly rejected his offer under the effective tax administration provisions governing economic hardship. Specifically, he sought permission to retain approximately $85,000 in emergency reserves to account for the possibility that either his Parkinson’s disease or the medical needs of his adopted special-needs child could require substantial future expenditures. The taxpayer argued that forcing him to devote those funds toward his tax liabilities created a significant likelihood of future economic hardship.
The Tax Court rejected that argument. Although the court acknowledged the taxpayer’s medical diagnosis and family circumstances, it emphasized that effective tax administration compromises based upon economic hardship require more than speculation regarding future financial needs. Appeals had already permitted numerous deviations from the IRS’s national and local expense standards to account for the taxpayer’s unique circumstances, including substantial allowances for medical insurance, therapy, private school tuition, and other documented expenses. More importantly, the taxpayer continued to earn approximately $42,000 per month and remained capable of meeting his ordinary living expenses despite his medical condition.
The court therefore agreed with Appeals that the requested emergency reserve rested upon the possibility of future hardship rather than evidence demonstrating that collection would presently leave the taxpayer unable to provide for his reasonable basic living expenses. While future medical complications were certainly conceivable, the administrative record contained no documentation establishing either the likelihood of those events or the necessity of maintaining the requested reserve. The Tax Court concluded that Appeals reasonably determined the taxpayer did not establish the type of economic hardship contemplated by Treasury Regulation § 301.7122-1(b)(3).
Extraordinary Circumstances
The taxpayer also argued that extraordinary circumstances involving his former spouse independently justified compromise on public policy and equity grounds. According to the administrative record, the taxpayer alleged that the divorce resulted in the loss of substantial assets, including proceeds from the sale of jointly owned real estate, significant litigation expenses, and ultimately financial losses exceeding $2 million. He maintained that these events, together with alleged theft and extortion by his former spouse, directly caused his inability to satisfy his federal tax obligations.
Again, the Tax Court found no abuse of discretion. Appeals concluded that the taxpayer’s unpaid tax liabilities did not result directly from criminal or fraudulent acts of a third party but instead arose because he failed to make required estimated tax payments beginning in 2012. The record further reflected Appeals’ determination that the taxpayer did not exercise prudent business judgment when he allowed the proceeds from the jointly owned property to be deposited into an account controlled solely by an individual whom he knew had struggled with addiction and deteriorating mental health.
The court agreed with Appeals’ reasoning. Although sympathetic to the taxpayer’s circumstances, it concluded that the record supported Appeals’ finding that the alleged misconduct was not the direct cause of the unpaid tax liabilities as contemplated by the Internal Revenue Manual’s effective tax administration provisions.[9] Likewise, the taxpayer’s own submissions demonstrated that he was aware of his former spouse’s worsening addiction before the disputed transaction occurred. Under those circumstances, the court found no basis for concluding that Appeals acted arbitrarily in determining that the taxpayer had failed to establish the exceptional public policy or equity considerations necessary to justify acceptance of an offer substantially below his reasonable collection potential.[10]
Installment Agreement
The taxpayer likewise challenged Appeals’ rejection of his proposed partial-pay installment agreement.[11] Once again, the dispute centered largely upon the calculation of the taxpayer’s ability to pay. The taxpayer argued that Appeals improperly excluded approximately $1,550 of additional monthly expenses associated with tutoring and transportation for the adopted special-needs child. However, the Tax Court noted that Appeals had already approved expenses significantly exceeding the standard national and local allowances in recognition of the family’s unusual circumstances. Even if the disputed expenses had been allowed, the taxpayer still possessed substantial disposable income and significant equity in assets that supported Appeals’ conclusion that the proposed installment agreement was inadequate.[12]
Conclusion
The court concluded that Appeals properly exercised its discretion in rejecting both proposed collection alternatives after thoroughly evaluating the taxpayer’s financial information, repeatedly revising its calculations, and carefully considering each argument advanced during the administrative proceedings. Appeals devoted considerable effort over an extended period to reassessing the taxpayer’s reasonable collection potential and modifying allowable expenses where appropriate. The Tax Court emphasized that disagreement with the outcome of that process does not establish an abuse of discretion.
In addition to the collection issues, the opinion briefly addressed the Supreme Court’s recent jurisdictional decision in Commissioner v. Zuch.[13] During the pendency of the proceedings, the taxpayer’s liability for tax year 2012 was fully satisfied through payments, credits, and abatements. Because no proposed levy remained with respect to that year, the Tax Court concluded that it lacked jurisdiction under Zuch to continue reviewing the collection action relating to the satisfied liability and dismissed that portion of the case as moot.
Takeaways
Tooke ultimately reinforces several recurring themes in the CDP process. First, Appeals retains substantial discretion when evaluating offers in compromise, particularly where the taxpayer’s proposed settlement remains well below reasonable collection potential. Second, extraordinary personal circumstances, even those involving serious illness, family responsibilities, or significant financial setbacks, do not automatically justify compromise under the effective tax administration provisions. Rather, taxpayers must demonstrate that those circumstances satisfy the specific regulatory standards governing economic hardship or compelling public policy and equity considerations. Finally, the opinion illustrates the importance of developing a comprehensive administrative record. Throughout the CDP process, Appeals repeatedly revisited the taxpayer’s financial information, accepted numerous adjustments in his favor, and carefully documented its reasoning for both the allowances granted and those denied. That extensive record presumably led to the reduction of the taxpayer’s reasonable collection potential from approximately $3.7 million to approximately $500,000, but also proved decisive when the Tax Court concluded that Appeals had exercised its discretion reasonably and in accordance with applicable law.
[1] T.C. Memo 2026-54.
[2] The IRS can accept a Taxpayer’s offer in compromise for three reasons, being (1) if there is a genuine dispute as to the existence or amount of the correct tax debt (i.e. “doubt as to liability”), (2) if the taxpayer’s assets and income are less than the full amount of the tax liability (i.e. “doubt as to collectability”), and (3) if there is no doubt that the tax is legally owed and the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances (i.e. “effective tax administration”).
[3] IRC Section 7122; Treas. Reg. § 301.7122-1.
[4] Under IRC Sections 6320 (with respect to the Federal tax lien) and 6330 (with respect to the levy).
[5] Sego v. Comm’r, 114 T.C. 604, 610 (2000); Goza v. Comm’r, 114 T.C. 176, 182 (2000).
[6] IRC Section 6330(c)(3).
[7] Brombach v. Comm’r, T.C. Memo. 2012-265.
[8] The IRS may allow expenses that exceed the applicable national and local standards if the taxpayer shows (with adequate documentation) that such expenses are necessary for the health and welfare of the taxpayer or their family. Nevertheless, as seen in the subject case, deviations from such standards are strictly evaluated.
[9] Murphy v. Comm’r, 125 T.C. 301, 309–21 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).
[10] Woodral v. Comm’r, 112 T.C. 19, 23 (1999).
[11] When a taxpayer’s assets and income are below certain thresholds with respect to the tax liability (i.e. income and equity that can be borrowed against are inadequate to pay the full amount of tax debt), the IRS may accept a partial payment installment agreement whereby the taxpayer pays some, but not all, of the outstanding tax debt over time.
[12] Mack v. Comm’r, T.C. Memo. 2018-54.
[13] 145 S. Ct. 1707 (2025).
