## Facts

- The Internal Revenue Service (IRS) assessed federal taxes, penalties, and interest against Orange County, California residents Mark Fowler and Joylyn Souter-Fowler (the Fowlers).
- In June 2000, the IRS filed notices of federal tax lien against the Fowlers with the Orange County recorder to secure collection of the assessed liabilities.
- In July 2000, the Fowlers participated in a Collection Due Process (CDP) hearing concerning the lien filings and sought to resolve their tax debt through an offer in compromise (OIC).
- The Fowlers offered to compromise their liabilities for $2,400, proposing to pay the amount in 24 monthly installments of $100.
- In their financial information presented during the CDP process, the Fowlers reported monthly gross income of $4,608 and monthly expenses of $3,989, leaving $619 per month available to pay the IRS.
- The Fowlers also advised the IRS appeals officer that they owned a car that could quickly be sold for approximately $2,400.
- The appeals officer accepted the Fowlers’ reported gross income and the stated value of the car.
- The appeals officer rejected the Fowlers’ reported monthly expenses as “unrealistic,” but did not give a specific explanation for why the submitted expense figures were unrealistic.
- Instead of using the Fowlers’ stated expenses, the appeals officer relied on IRS national statistical averages to estimate monthly expenses at $4,644.
- Based on that estimate, the appeals officer concluded the Fowlers had no ability to make the proposed $100 monthly payments, rejected the OIC, and upheld the liens.
- The Fowlers petitioned the United States Tax Court, arguing that the IRS abused its discretion by substituting national statistics for the Fowlers’ expense figures and sustaining the lien filings.

## Issues

1. In a CDP case challenging the filing of federal tax liens, did the IRS abuse its discretion by rejecting the Fowlers’ proposed $2,400 installment offer in compromise after replacing their reported expenses with IRS national averages without a specific, case-based explanation?

## Decision

- The Tax Court held that Appeals abused its discretion in the CDP determination by rejecting the Fowlers’ installment OIC using national statistical expense figures without adequately explaining why the Fowlers’ reported expenses were unrealistic.
- The court remanded the matter for further consideration consistent with its opinion.

## Legal Principles

- When a taxpayer does not properly place the underlying tax liability at issue in a CDP case under I.R.C. §§ 6320 and 6330, the Tax Court reviews the IRS’s administrative determination for abuse of discretion (i.e., whether it was arbitrary, capricious, or without a sound basis in fact or law).
- In making a CDP determination, Appeals must: (1) verify that legal and administrative requirements were met, (2) consider issues raised by the taxpayer (including collection alternatives such as an OIC), and (3) balance efficient collection against the taxpayer’s interest in collection action that is no more intrusive than necessary.
- IRS expense standards and statistical averages may be used as guidelines in evaluating a taxpayer’s ability to pay, but Appeals must still make a reasoned, fact-based evaluation of the taxpayer’s actual financial information and explain material departures from the taxpayer’s submissions.
- A CDP determination may be an abuse of discretion when it rests on unsupported conclusions (such as labeling expenses “unrealistic” without explanation) and when it substitutes standardized figures for case-specific financial data without showing why the substitution is justified.

## Conclusion

Fowler v. Commissioner is a CDP lien case in which the Tax Court found that Appeals acted unreasonably by rejecting the Fowlers’ proposed $2,400 installment offer in compromise after discarding their reported expenses and using IRS national averages without explaining why the taxpayers’ expense figures were not credible, and the court sent the case back for reconsideration.


Fowler v. Commissioner, T.C. Memo. 2004-163 (2004)