Tax Court Just Upheld an IRS Rejection of an Offer in Compromise: What the Tooke Case Teaches You About Realistic Offers

A federal tax court just handed the IRS a complete win in a case where a taxpayer raised his settlement offer significantly, still got rejected, and then lost his appeal in court. If you owe back taxes and are thinking about an Offer in Compromise, the lesson from Tooke v. Commissioner is one you need to understand before you file anything.

What Happened in the Tooke Case

Charlton C. Tooke III faced unpaid federal individual income tax liabilities for taxable years 2012 through 2017. After the IRS filed a notice of federal tax lien for 2013 through 2017 and issued a final notice of intent to levy for those years, Tooke timely requested Collection Due Process (CDP) hearings and proposed two collection alternatives: an Offer in Compromise and, in the alternative, an installment agreement.

His OIC, premised on doubt as to collectibility and effective tax administration, initially offered $175,000, which he later increased to $375,000. That sounds like a substantial sum. The problem was what the IRS calculated it could actually collect from him.

IRS revenue officers repeatedly revised the taxpayer’s reasonable collection potential calculation, allowing numerous deviations from the IRS’s national and local expense standards. These revisions substantially reduced the taxpayer’s reasonable collection potential from an initial calculation exceeding $3.7 million to approximately $499,000. Even after all those favorable adjustments, the taxpayer’s proposed compromise remained substantially below his reasonable collection potential.

The IRS didn’t abuse its discretion by rejecting the executive’s offer in compromise despite his claim that his Parkinson’s disease diagnosis and special needs child created economic hardship, the Tax Court held. On economic hardship, the Tax Court agreed with Appeals that Tooke’s request to preserve $85,000 against hypothetical future medical events did not establish that collection would leave him unable to meet his reasonable basic living expenses.

In this Collection Due Process case, the Tax Court held that IRS Appeals did not abuse its discretion in rejecting both the offer in compromise and the installment agreement that fell short of the taxpayer’s reasonable collection potential. The Tax Court granted the IRS summary judgment, sustaining the rejection of the taxpayer’s proposed collection alternatives and upholding both a notice of federal tax lien and a proposed levy.

The Number That Decides Everything: Reasonable Collection Potential

If there is one concept every taxpayer considering an OIC must understand, it is Reasonable Collection Potential, or RCP. This is the floor the IRS uses, and it is not a negotiating starting point.

The IRS won’t agree to an OIC unless the amount offered is equal to or greater than the reasonable collection potential. The RCP includes the value that may be realized from assets, including real estate, vehicles, bank and financial accounts, and so on, plus anticipated future income less certain amounts allowed for basic living expenses.

Here is how the math actually works. The IRS calculates Reasonable Collection Potential by adding two components: net realizable equity in your assets, valued at 80% of fair market value minus debts, and future income, which is your monthly disposable income multiplied by 12 or 24 months, depending on whether you choose a lump sum or periodic payment offer.

The multiplier matters more than most people realize. A Lump Sum Cash Offer requires 20 percent of your proposed amount with the application, with the rest paid in five or fewer installments within five months of acceptance, and it uses 12 months of future income in the calculation. A Periodic Payment Offer requires the first proposed installment with the application and continuing monthly payments while the IRS reviews it, and RCP is calculated using 24 months of future income, which usually produces a higher settlement number.

One more important detail on assets: the IRS uses its own valuation rules, specifically quick sale value for assets and Collection Financial Standards for allowable expenses, and these differ from what you would use on your own. That gap between how you value your situation and how the IRS values it is exactly where many offers fall apart.

Why Personal Hardship Arguments Often Fall Short

Tooke did not simply offer less money than the IRS wanted. He argued that special circumstances justified a lower amount. He pointed to a Parkinson’s disease diagnosis, a dispute with a former spouse, and a desire to set aside funds for potential future medical costs. The court rejected each argument.

The court noted that the Commissioner does not abuse his discretion by rejecting an OIC that falls short of a taxpayer’s RCP. Even when the court performed a favorable recalculation of the RCP by allowing disputed expenses, the taxpayer’s offer remained significantly lower than the resulting figure. Consequently, the court found that the rejection of the OIC was legally sound unless special circumstances justified a lower amount.

Appeals therefore rejected the offer, concluding both that the taxpayer retained the ability to pay significantly more than the proposed offer amount and that the asserted special circumstances did not warrant acceptance of a reduced amount.

This is a critical lesson. Health challenges and personal difficulties are real and deserve compassion. But the IRS evaluates hardship claims through a specific legal framework. Pointing to a diagnosis or a difficult life event does not automatically clear the bar. The IRS will accept an Offer in Compromise below RCP only when special circumstances justify departure under IRM 5.8.11. That standard is high, and meeting it requires detailed documentation, not just a compelling story.

What the Court Said About the Installment Agreement

When the OIC failed, Tooke also sought an installment agreement as an alternative. That, too, was rejected, and the court upheld the rejection. The court found no abuse of discretion, noting that the IRS was willing to implement two different collection alternatives, such as an OIC or an installment agreement, but that Tooke declined to accept either as a collection alternative.

The takeaway here is not that installment agreements are impossible to get. It is that the terms of any agreement, like the amount of an OIC, must reflect what the IRS calculates you can actually pay. Proposing numbers that your own financial picture does not support gives the IRS grounds to walk away.

The Mistakes That Sink Most Offers Before They Start

The Tooke case is not unusual. Most self-prepared OIC applications are rejected because the RCP calculation is done incorrectly. Here are the patterns that most often cause problems.

• Undervaluing assets. People often forget that the IRS looks at retirement accounts, equity in a home, and even interests in a business. Each of those can add thousands to your RCP before a single dollar of income is counted.
• Using personal expense estimates instead of IRS standards. Allowable expenses are determined using the IRS Collection Financial Standards, which cap expenses in categories like housing, transportation, food, clothing, and healthcare. If you spend more than those caps allow, the excess does not reduce your RCP.
• Choosing the wrong payment type. As noted above, a periodic payment offer uses a 24-month income multiplier instead of 12. That alone can double the income portion of your RCP and push your required offer much higher.
• Assuming sympathy is a substitute for math. The Tooke case demonstrates that even documented medical and personal difficulties may not be enough if the numbers do not support the offer.

What You Should Do Before Filing an Offer in Compromise

An Offer in Compromise is a legitimate path to resolving tax debt for taxpayers who may qualify, but it is not the right tool for everyone and it is not a simple form to fill out. The RCP calculation requires a thorough review of your assets, income, and allowable expenses, all measured by IRS rules, not common sense.

Before you file Form 656 and pay the $205 application fee, consider the following steps.

1. Get a full financial picture done correctly. That means accounting for every asset the IRS counts, every expense category it limits, and the specific payment type you plan to use.
2. File all outstanding returns. You cannot have an OIC considered if you are behind on filing. The IRS requires that all required returns be filed before it will process an application.
3. Understand your alternatives. An installment agreement, currently not collectible status, or another resolution path may be a better fit depending on your circumstances.
4. Work with a tax resolution professional. The difference between an offer that gets accepted and one that gets rejected often comes down to how the RCP is built, what documentation supports it, and whether special circumstances are argued in a way the IRS framework recognizes.

The Tooke case is a reminder that the IRS does not owe you a deal simply because you made one. The offer has to meet the number. Getting that number right, and building the strongest possible case around it, is exactly the kind of work that Clear Start Tax does on behalf of clients every day. If you owe back taxes and want to understand whether an Offer in Compromise or another resolution option could work for your situation, the right next step is a consultation with a tax professional who can review your actual numbers, not just your hopes.