Crawford v. Commissioner

The $100 Offer vs. The $200,000 W-2

A business owner’s attempt to settle a ~$29,000 Trust Fund Recovery Penalty (TFRP) for a mere $100 has been rejected by the Tax Court. The court granted summary judgment for the IRS, finding the taxpayer's ability to pay far exceeded his proposed offer. The core conflict arose from the taxpayer's claim that his substantial W-2 income was merely "phantom," as he purportedly reinvested it back into his struggling company, a claim he ultimately failed to substantiate.

Pile Driving and Unpaid Taxes

Following the rejection of Mr. Crawford’s offer, the IRS's pursuit of the unpaid employment taxes of Crawford Pile Driving, LLC, took a more assertive turn. The company, formed on November 3, 2010, had failed to fully pay its employment tax reported on Form 941, Employer’s Quarterly Federal Tax Return, for the period in question. The IRS assessed the unpaid employment tax liability on October 7, 2019.

Revenue Officer (RO) C. Smith was assigned to collect the company’s outstanding employment tax. As part of his investigation, on September 24, 2020, RO Smith summoned the company’s bank records, which he received on November 13, 2020. These records revealed that Mr. Crawford had signatory authority over the company's bank accounts. RO Smith also noted that Mr. Crawford had signed the Michigan state annual report for the relevant period.

To determine whether Mr. Crawford was a “responsible person” liable for the unpaid trust fund taxes, RO Smith scheduled a trust fund interview with him for February 19, 2020, but Mr. Crawford did not attend. After reviewing state corporate records, the company’s Form 433-B, Collection Information Statement for Businesses (executed August 3, 2018), the company’s filed tax returns, and the summoned bank records, RO Smith determined that Mr. Crawford was responsible for collecting and paying over the trust fund tax to the IRS.

On November 13, 2020, RO Smith prepared and forwarded Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, to his manager, recommending that Mr. Crawford be assessed the Trust Fund Recovery Penalty (TFRP) under Section 6672. Section 6672 allows the IRS to assess a penalty equal to the unpaid trust fund taxes against individuals responsible for withholding and paying those taxes, if they willfully failed to do so. The same day, RO Smith’s manager approved the assessment of the TFRP. Letter 1153 and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, were mailed by certified mail to Mr. Crawford at his last known address in Bloomfield Hills, Michigan. RO Smith received notification on December 16, 2020, via USPS Form 3811 that Letter 1153 had been delivered to Mr. Crawford on November 24, 2020. The IRS assessed the TFRP for the period at issue on March 8, 2021. As of June 17, 2025, Mr. Crawford’s TFRP liability for the period at issue was $28,977. Mr. Crawford neither disputed receipt of Letter 1153 nor requested a hearing with the Appeals Office within the stipulated timeframe.

A Disputed Ledger: The Reinvestment Defense

The core of Crawford's appeal hinged on his inability to pay the assessed Trust Fund Recovery Penalty (TFRP). In an attempt to resolve the matter, Crawford submitted an Offer in Compromise (OIC) to the IRS, proposing to settle his outstanding tax liability of $28,977 for a mere $100. He based his OIC on "doubt as to collectibility," arguing that his financial situation made it impossible to fully satisfy the debt.

The IRS, however, was not persuaded. According to Section 7122, the IRS has the authority to compromise tax liabilities under certain circumstances. One such circumstance is doubt as to collectibility, which exists when the taxpayer's assets and income are insufficient to pay the full amount of the tax liability. The IRS's preliminary rejection of Crawford's OIC stemmed from their calculation of his "reasonable collection potential" (RCP). The RCP represents the IRS's assessment of the taxpayer's ability to pay the tax debt, considering factors like income, assets, and expenses.

The initial discrepancy arose from a Form W-2, Wage and Tax Statement, indicating that Crawford had earned $208,000 in 2021. Crawford countered that he had reinvested roughly half of that income back into his company. Settlement Officer (SO) Moore requested documentation to substantiate this claim, emphasizing that it would be difficult to refute the W-2 without sufficient proof.

Crawford's representative, Mr. Dettloff, subsequently submitted a QuickBooks ledger to SO Megyesi, who took over the case, to demonstrate the alleged reinvestment. Unsatisfied with the ledger alone, SO Megyesi requested additional information, specifically bank account records, to verify the flow of funds. While bank statements covering 11 of the 12 months of 2021 were eventually provided, Crawford never explicitly proved the reinvestment of the disputed funds. Instead, the documentation showed $137,442 in payments to Crawford from the company. SO Megyesi ultimately used the lower $137,442 figure to recalculate Crawford's RCP, arriving at a figure of $568,280 and a minimum monthly payment capacity of $4,334. The IRS maintained its rejection of the $100 OIC, which led to the Notice of Determination.

The Tax Court initially denied the Commissioner’s Motion for Summary Judgment and remanded the case for further proceedings regarding Section 6751(b), which requires supervisory approval for penalty assessments. This remand focused on whether the IRS had properly complied with the procedural requirements in assessing the TFRP liability against Crawford.

The Letter 1153 Bar

Following the remand regarding Section 6751(b), the court turned to Crawford's ability to challenge the underlying tax debt. The IRS assessed the Trust Fund Recovery Penalty (TFRP) against Crawford. The TFRP, authorized by Section 6672, allows the IRS to hold individuals personally liable for a company's unpaid employment taxes – specifically, the employee's withheld income and FICA taxes.

Before the IRS can assess a TFRP, Section 6672(b)(1) requires the Commissioner to notify the taxpayer in writing, via mail to their last known address, that the TFRP will be assessed. IRS Letter 1153 serves this purpose, providing preliminary notice of the proposed assessment.

The Tax Court explained that a taxpayer cannot challenge the underlying tax liability in a Collection Due Process (CDP) hearing—and, consequently, the Tax Court cannot review that liability—if the taxpayer had a prior opportunity to dispute the assessment. This principle is codified in Section 6330(c)(2)(B). The Tax Court in this case explained that Letter 1153 provides taxpayers with an administrative avenue to protest a proposed TFRP assessment, thus constituting an "opportunity" to dispute the underlying tax liability. However, a Letter 1153 that is neither received nor deliberately refused does not count as such an opportunity.

The court noted that Crawford asserted he did not receive Letter 1153. He argued that the "ordinary and usual means" of confirming delivery by USPS were absent in his case. However, the court reviewed USPS Forms 3800 and 3811, along with the Revenue Officer's case notes, which verified receipt of the return receipt confirming delivery of Letter 1153. USPS Form 3811 serves as proof of delivery for certified mail. The court concluded that Crawford did receive Letter 1153. Because he failed to protest the proposed TFRP after receiving the letter, he waived his opportunity to challenge the underlying liability. Thus, the court stated it would only review the Settlement Officer's determination for abuse of discretion.

Calculators Out: The RCP Reality

The court had already determined that Crawford was barred from challenging the underlying tax liability under Section 6330(c)(2)(B), which prevents taxpayers from disputing a tax liability in a Collection Due Process (CDP) hearing if they had a prior opportunity to do so. The IRS had sent Letter 1153, and that served as an opportunity to challenge it. Thus, the court stated it would only review the Settlement Officer's (SO) determination for abuse of discretion. The court then turned to the offer in compromise (OIC).

Crawford argued the SO abused discretion by rejecting his OIC of $100. The IRS can compromise tax debts under Section 7122(a), which allows the agency to consider "doubt as to collectibility." Treasury Regulations Section 301.7122-1(b)(2) states that doubt exists when a taxpayer's assets and income are less than the full liability. Crawford contended that he reinvested roughly half of his $208,000 Form W-2 income back into his pile driving business, thus lowering his Reasonable Collection Potential (RCP).

An OIC based on doubt as to collectibility will only be accepted if it reflects the taxpayer's RCP, which is the amount the IRS could collect through administrative and judicial means. The court noted that it does not recalculate a different amount for an acceptable OIC, but only determines whether the SO's decision to reject the OIC was arbitrary, capricious, or without sound basis. Generally, an Appeals officer will reject any offer substantially below the taxpayer’s RCP, unless special circumstances justify acceptance.

For the SO to conclude that Crawford’s OIC should be rejected, he needed to find only that Crawford’s RCP exceeded $100. The IRS initially determined that Crawford’s RCP was $1,003,664. Over the course of the CDP hearing, Crawford maintained that his income was below the $208,000 reported on his 2021 Form W–2. Upon further review, the SO determined that Crawford’s annual income for purposes of the OIC was $135,420, resulting in a recalculated RCP of $568,280. This was still vastly higher than his OIC of $100 - more than 5,000 times higher.

The court noted that Crawford had multiple opportunities to submit additional documentation demonstrating a lower RCP, but he repeatedly supplied incomplete or unreliable records. The SO considered all the information Crawford submitted and properly concluded that Crawford did not qualify for an OIC. Therefore, the court concluded that the SO’s decision to reject Crawford’s OIC was not arbitrary, capricious, or without sound basis in fact or law.

This case underscores the importance of substantiating claims that W-2 income is not available for collection with hard evidence, not just ledgers. Taxpayers must provide credible documentation to support arguments for a lower RCP when negotiating an OIC.