Tax Court upholds IRS rejection of Wesley Snipes offer in compromise

The U.S. Tax Court has rejected Wesley Snipes’ appeal of the IRS’s rejection of his offer in compromise.

Snipes has federal tax liabilities of approximately $23.5 million for tax years 2001-2006, largely as a result of his failure to file tax returns. The movie actor served three years in prison for failure to file tax returns after a high-profile legal battle in which he was ultimately convicted of three misdemeanor counts. He was released in 2013. The IRS assessed the liabilities, filed a notice of federal tax lien, and issued a notice and demand for payment of the liabilities.

When Snipes did not pay, the IRS issued a notice of the filing. Snipes timely requested a collection due process (CDP) hearing under Code section 6330(d) and stated that he wanted a collection alternative — an OIC or currently not collectible status — and wanted the notice of federal tax lien withdrawn.

Wesley Snipes speaking at the 2018 San Diego Comic Con International, for "Cut Throat City", at the San Diego Convention Center in San Diego, California.

Snipes did not challenge his underlying tax liabilities. He made a cash offer of $842,061, less than 4 percent of his total underlying liability. The IRS issued a notice of determination rejecting his offer in compromise and sustaining the notice of federal tax lien, and Snipes filed a petition with the Tax Court.

The Tax Court held that in light of Snipes’ failure to provide bona fide documentation to prove his assets and financial condition, as well as the disparity in his offer versus his reasonable collection potential (RCP) as determined by the IRS, the settlement officer did not abuse her discretion in her rejection of Snipes’ offer, refusing to conduct an expedited transferee investigation, or sustaining the filing of the notice.

Snipes contended during both CDP proceedings that his financial adviser, W. Johnson, had taken out loans and disposed of assets and income on his behalf, diverting the funds without his knowledge or benefit. He provided affidavits from Johnson regarding his misconduct and misuse of his assets and income, but did not provide any definitive documentation showing the dissipation or diversion of his assets or income.

Snipes requested that that the IRS conduct a transferee investigation of Johnson, and that his offer be accepted with the condition of proving Johnson’s transferee liability. The settlement officer requested permission from her manager to conduct an expedited transferee investigation, but the manager explained that the CDP hearing could not be held open for a transferee investigation, nor could the IRS accept an OIC with conditions imposed on it.

Following a review of Snipe’s case, the settlement officer reduce Snipers’ RCP to $9,581,027 in an effort to compromise for settlement purposes. Snipes maintained his original OIC of $842,061. The settlement officer concluded it was not in the best interest of the government to accept the OIC, and issued Snipes a supplemental notice sustaining the notice of federal tax lien, and again rejecting Snipes’ OIC.

The Tax Court noted that the validity of Snipes’ underlying tax liabilities was not at issue. The court concluded that the settlement officer properly based her determination on the required factors, and that she did not abuse her discretion in determining that acceptance of the OIC was not in the best interests of the United States. It therefore sustained the IRS supplemental notice of determination.

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