IRS may not use offset doctrine to increase balance due.

• Author: Stein, Ronald A.
• Position: Offsetting in estate tax context

It is well settled that' a taxpayer must establish that he has overpaid his tax liability to obtain a refund. A corollary to this rule is that, in determining the extent to which an overpayment exists, the IRS is entitled under the so-called "offset doctrine" to offset any adjustment otherwise barred by the statute of limitations (SOL) on assessment against the amount claimed by the taxpayer as a refund. One question left unanswered until recently was whether the Service could use the offset doctrine outside of the refund setting. In a significant case of first impression, the Fourth Circuit has held that the IRS cannot reopen a tax liability agreed to in an estate closing letter and attempt to collect additional taxes after the SOL has expired by offsetting a time-barred adjustment against an otherwise available foreign death tax credit.

Est. of Michael

In Est. of Michael v. Lullo (4th Cir. 4/2/99), the taxpayer's estate timely filed an estate tax return reflecting a tax due of $175,487. On audit, the Service determined an estate tax deficiency of $85,776, to which the taxpayer agreed in a 1992 closing letter. The IRS thereafter gave the taxpayer credit for foreign death taxes paid of $228,939, and the taxpayer remitted the assessed balance plus interest, in 1993.

After the SOL on assessment had run, the IRS determined that the deficiency should have been $139,134 greater than that originally computed (due to an error by the examiner that failed to take into account the value of certain assets reported on the estate tax return). The IRS reopened the case in 1994, and sent the estate a letter indicating that it would offset the computational error against the agreed credit, resulting in an unpaid estate tax liability. The IRS then sought to collect this amount from the estate.

The estate refused to pay, arguing that the IRS was required by law to allow the full credit and filed a district court action seeking to obtain a writ of mandamus under 28 USC Section 1361 (the Mandamus Act) to compel the IRS district director to allow the credit. (28 USC Section 1361 grants jurisdiction to a Federal district court to compel a Federal official or employee to perform a ministerial duty owed to the plaintiff.) The district court rejected the estate's contention on jurisdictional grounds, observing that a writ of mandamus is proper only if the plaintiff has a clear right to relief, the government official has a clear duty to act, and no other adequate...