Procedure Grab Bag: CCAs – Suspended/Extended SOLs and Fraud Penalty

My last post was devoted to a CCA, which inspired me to pull a handful of other CCAs to highlight from the last few months.  The first CCA discusses the suspension of the SOL when a petition is filed with the Tax Court before a deficiency notice is issued (apparently, the IRM is wrong on this point in at least one spot).  The second touches on whether failing to disclose prior years gifts on a current gift tax return extends the statute of limitations for assessment on a gift tax return that was timely filed (this is pretty interesting because you cannot calculate the tax due without that information).  And, finally, a CCA on the imposition of the fraud penalty in various filing situations involving amended returns.

read more...

CCA 201644020 – Suspension of SOL with Tax Court petition when no deficiency notice

We routinely call the statutory notice of deficiency the ticket to the Tax Court.  In general, when a taxpayer punches that ticket and heads for black robe review, the statute of limitations on assessment and collections is tolled during the pendency of the Tax Court case.  See Section 6503(a).  What happens when the petition is filed too soon, and the Court lacks jurisdiction?  Well, the IRM states that the SOL is not suspended.  IRM 8.20.7.21.2(4) states, “If the petition filed by the taxpayer is dismissed for lack of jurisdiction because the Service did not issue a SND, the ASED is not suspended and the case must be returned to the originating function…”  But, Chief Counsel disagrees. Section 6503(a) states:

The running of the period of limitations provided in section 6501 or 6502…shall (after the mailing of a notice under section 6212(a)) be suspended for the period during which the Secretary is prohibited from making the assessment or from collecting by the levy or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter. (emph. added).

Chief Counsel believes the second parenthetical above extends the limitations period even when the Tax Court lacks jurisdiction because no notice of deficiency was issued.   The CCA further states, “Any indication in the IRM that the suspension does not apply if the Service did not mail a SND is incorrect.”  Time for an amendment to the IRM.  I think this is the correct result, but the Service likely had some reason for its position in the IRM, and might be worth reviewing if you are in a situation with the SOL might have run.

CCA 201643020

The issue in CCA 201643020 was whether the three year assessment period was extended due to improper disclosure…of prior gifts properly reported on prior returns.  In general, taxpayers making gifts must file a federal gift tax return, Form 709, by April 15th the year following the gift.  The Service, under Section 6501(a) has three years to assess tax after a proper return is filed.  If no return is filed, or there is not proper notification, the service may assess at any time under Section 6501(c)(9).

In the CCA, the Service sought guidance on whether a the statute of limitations was extended where in Year 31 a gift was made and reported on a timely filed gift tax return.  In previous years 1, years 6 through 9, and 15 prior gifts were reported on returns.  On the year 31 return, however, those prior gifts were not reported.  That information was necessary to calculate the correct amount of tax due.

Section 6501(c)(9) specifically states:

If any gift of property the value of which … is required to be shown on a return of tax imposed by chapter 12 (without regard to section 2503(b)), and is not shown on such return, any tax imposed by chapter 12 on such gift may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. The preceding sentence shall not apply to any item which is disclosed in such return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature of such item.

Chief Counsel concluded that this requires a two step analysis.  Step one is if the gift was reported on the return.  If not, step two requires a determination if the item was adequately disclosed.  Counsel indicated it is arguable that the regulations were silent on the omission of prior gifts, but that the statutory language was clear.  Here, the gift was disclosed on the return, and the statutory requirements were met.  The period was not extended.  I was surprised there was not some type of Beard discussion regarding providing sufficient information to properly calculate the tax due.

CCA 201640016

Earlier this year, the Service also released CCA 201640016, which is Chief Counsel Advice covering the treatment of fraud penalties in various circumstances surrounding taxpayers filing returns and amended returns with invalid original issue discount claims.  The conclusions are not surprising, but it is a good summary of how the fraud penalties can apply.

The taxpayer participated in an “Original Issue Discount (OID) scheme” for multiple tax years.  The position take for the tax years was frivolous.  For tax year 1, the Service processed the return and issued a refund.  For tax year 2, the Service did not process the return or issue a refund. For tax year 3, the return was processed but the refund frozen.  The taxpayer would not cooperate with the Service’s criminal investigation, and was indicted and found guilty of various criminal charges.  Spouse of taxpayer at some point filed amended returns seeking even greater refunds based on the OID scheme, but those were also frozen (the dates are not included, but the story in my mind is that spouse brazenly did this after the conviction).

The issues in the CCA were:

  1. Are the original returns valid returns?
  2. If valid, is the underpayment subject to the Section 6663 fraud penalty?
  3. Did the amended returns result in underpayments such that the penalty could apply, even though the Service did not pay the refunds claimed?

The conclusions were:

  1. It is likely a court would consider the returns valid, even with the frivolous position, but, as an alternative position, any notice issued by the Service should also treat the returns as invalid and determine the fraudulent failure to file penalty under Section 6651(f).
  2. To the extent the return is valid, the return for which a refund was issued will give rise to an underpayment potentially subject to the fraud penalty under Section 6663. The non-processed returns or the ones with frozen refunds will not give rise to underpayments and Section 6663 iis inapplicable.  CC recommended the assertion of the Section 6676 penalty for erroneous claims for refund or credit.
  3. The amended returns did not result in underpayments, so the Section 6663 fraud penalty is inapplicable, but, again, the Service could impose the Section 6676 penalty.

So, the takeaway, if a taxpayer fails to file a valid return, or there is no “underpayment” on a fraudulent return, the Service cannot use Section 6663.  See Mohamed v. Comm’r, TC Memo. 2013-255 (where no valid return filed, no fraud penalty can be imposed).  In the CCA, Counsel believed the return was valid, but acknowledged potential issues with that position.  Under the Beard test, a return is valid if:

 four requirements are met: (1) it must contain sufficient data to calculate tax liability; (2) it must purport to be a return; (3) it must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) it must be executed by the taxpayer under penalties of perjury. See Beard v. Comm’r,  82 T.C. 766 (1984). A return that is incorrect, or even fraudulent, may still be a valid return if “on its face [it] plausibly purports to be in compliance.” Badaracco v. Comm’r, 464 U.S. 386 (1984).

The only prong the CCA said was at issue was the third prong, that the return “must be an honest and reasonable attempt to satisfy the requirements of the tax law.”  As the taxpayer had been convicted of Filing False Claims with a Government Agency/Filing A False Income Tax Return, Aiding and Abetting, and Willful Attempt to Evade or Defeat the Payment of Tax, it is understandable why you would question if the returns were “an honest and reasonable attempt to satisfy the requirements of the tax law.”  Further, the Service had imposed the frivolous filing penalty under Section 6702, which only applies when the return information “on its face indicates that the self-assessment is substantially incorrect.”

The CCA notes, however, it is rare for courts to hold returns as invalid solely based on the third prong of Beard, but clearly there would be a valid argument for the taxpayers in this situation.  The CCA acknowledges that by stating “[t]o guard against the possibility that the returns are not valid, the Service should include the Section 6651(f) fraudulent failure to file penalty as an alternative position,” so the taxpayer could pick his poison.

As to the underpayment, Counsel highlighted that overstatements of withholding credits can give rise to an underpayment under the fraud penalty.  The definition was shown as a formula of Underpayment = W-(X+Y-Z).  W is the amount of tax due, X is the amount shown as due on the return, Y is amounts not shown but previously assessed, and Z is the amount of rebates made.  Where the refund was provided, the penalty could clearly apply.  In “frozen refund” situations, the Service has adopted the practice of treating that amount as a sum collected without assessment, which can cancel out the X and Y variables so no underpayment for the fraud penalty will exist.

But, as shown above, even if the fraud penalty may not apply, the Section 6651 penalty will likely apply if the return is invalid, or the frivolous position penalty under Section 6702 may apply.

Grinches, Liechtenstein Royal Princes, Bankers, Toymakers (and Offshore Evasion): A Holiday Summons Tale

In today’s post returning guest blogger Dave Breen, the acting Director of Villanova’s Low Income Taxpayer Clinic, discusses the case of Greenfield v US. The issue in the case relates to the IRS’s cat and mouse game of finding assets and the unreported income from those assets that citizens have parked in offshore accounts. The issue in these cases does not generally involve much tax law.  The battle is won and lost on the issue of information.  If the IRS gets the information, the taxpayer generally loses.  Summons work is key and the Greenfield case is a major development.  For many years, Dave worked with IRS attorney John McDougal, whose retirement I wrote about last week.  In the spirit of the season, Dave recounts the story of the case and its implications.  Keith

A recent IRS setback in a summons enforcement case out of the Second Circuit piqued my interest, because I spent the final twelve years of my career in IRS Counsel working on IRS’s offshore initiatives addressing tax evasion through the use of offshore accounts in tax secrecy jurisdictions.  My take on this recent case is that taxpayers and some practitioners may believe that the era of IRS investigating offshore tax evasion has run its course.  I think this case does just the opposite.  The Court’s decision demonstrates that much of IRS’s data on offshore tax evasion is dated – possibly even too old to be of any value – but I also suspect that IRS has come to the same conclusion.  Rather than moving on to other areas of non-compliance though, I suspect IRS at this moment is developing more tools to secure the next wave of current information on offshore tax evasion.  This does not bode well for taxpayers who so far have avoided IRS’s inquiry into their offshore holdings.

read more...

A bit of history

In 2000 IRS used permission to use John Doe summonses to secure information on U.S. taxpayers who accessed funds in their secret offshore accounts through American Express and Mastercard credit cards.  IRS’s first major success occurred in 2002 when the U.S. District Court entered an order requiring American Express to comply with IRS’s John Doe summons.  The information IRS received pursuant to this summons provided the data for what became known as the Offshore Credit Card Project.  Rather than go into the specifics, I refer readers to Keith Fogg’s 2012 Villanova Law review article Go West: How the IRS Should Foster Innovation in Its Agents. Subsequent offshore initiatives relied on data secured through John Doe summonses to UBS and other foreign banks, information received from whistleblowers, and information provided by taxpayers applying to one of IRS’s voluntary disclosure programs.

Despite the success in securing records identifying offshore tax evaders, the quality of the information IRS received was sometimes problematic, because it was out of date or incomplete.  For example, when a federal judge in Miami ordered compliance with the aforementioned John Doe summons in 2002, it only covered records for tax years 1998 and 1999 – “old years” in IRS parlance. Further, information received often did not dove-tail with IRS’s information.  IRS is driven by social security number, name, and to a lesser extent, last known address.  Credit card data is driven by credit card number and billing address.  This created a mismatch.  Once IRS received the summoned information it took many months to link a specific taxpayer to a particular offshore account through a credit card, assemble the case, and assign it to an agent specially trained in examining offshore transactions.  The IRM discourages IRS from beginning examinations of “old” tax years – generally those returns beyond the most recent two tax years – unless there are compelling reasons.  IRS prefers to examine more current tax years where plenty of time remains on the 3 year statute of limitations under IRC §  6501(a).   Although the 1998 and 1999 credit card data was sufficient to prove a taxpayer had a foreign bank account in 1998 or 1999, the information was not particularly helpful in proving how much income was unreported in those years or whether there was unreported income in later, more current years.

As a result, examiners assigned to these early cases often had to issue administrative summonses under IRC § 7602 to taxpayers for their most recent foreign bank account records to secure foreign account information for years after 1999.  The Department of Justice, which handles summons enforcement matters before the U.S. District Courts for IRS, has been extremely successful in securing orders enforcing these summonses, but the process takes time.  During this long process the data gets older and has diminishing value to IRS.  Proof that the data has a limited shelf life was recently demonstrated in a summons enforcement case.

Greenfield decision

In August 2016 the Second Circuit placed a speed bump along IRS’s road to identifying offshore tax evasion with dated information.  In United States v Greenfield, 118 AFTR 2d 2016-5275 (2016) the court vacated the District Court’s order enforcing an IRS summons and remanded the case for further proceedings consistent with its opinion.  The case is noteworthy for several reasons, but most importantly I see this as a wake-up call for IRS as well as a reminder to offshore tax evaders that IRS continues to pursue offshore tax evasion rigorously.

In the spirit of the holiday season, I offer the following tale.

Once upon a time there was a toy maker named Harvey Greenfield, his son, Steven, and their toy shop, Commonwealth Toy, Inc.  We also have a Grinch, Heinrich Kieber, whose job was to copy, file, and safeguard records at Liechtenstein Global Trust (LGT) a financial institution owned by the Liechtenstein royal family.  One day, while tending to his copying duties at the bank, Mr. Kieber decided to press “2” instead of “1” and make an extra copy of records that identified individuals who banked (translate: “hid their untaxed income”) at LGT.  Kieber, playing “Secret Santa”, offered the documents to several nations.  Many told him to “go Fish,” while other countries, including the U.S. did not.  The U.S. found the information to be very helpful in finding out who was naughty and who was nice. Needless to say, Mr. Kieber’s decision did not make him any new friends among the 38,000 residents of Liechtenstein.  He was charged with theft of information under Liechtenstein law and promptly went into hiding, leaving a trail of Angry Birds in his wake.  Like the Cabbage Patch doll you stood 3 hours in line to buy for your daughter in 1983, his whereabouts today are unknown.

Back to the Greenfields.  Several of Kieber’s cache of confiscated documents tied Steven and Harvey to certain offshore entities that had been used, or were being used, to evade taxation.  It just so happens that at this time the U.S. Senate’s Permanent Subcommittee on Investigations had begun hearings in response to the LGT disclosure and a similar leak from the Swiss bank, UBS.  Harvey died in 2009, leaving Steven as primary beneficiary of the LGT holdings.  PSI twice invited Steven to come in and talk about LGT, Liechtenstein, and foreign accounts in general.  The first time Steven failed to appear.  PSI was not too pleased with being stood up for its Mystery Date with Steven, so they invited him again.  The second time he appeared but asserted his Fifth Amendment right to remain silent.

Enter the IRS, who decided to audit Steven’s 1040’s for 2005 – 2011.  But there was a snag.  Kieber did not copy everything about the Greenfields – just enough to identify them as beneficial owners controlling the funds in the offshore accounts.  These documents included some memos, a 2001 year-end statement for their Maverick Foundation (a stiftung, under Liechtenstein law), LGT account information forms for Maverick and two entities it owned, and a 2001 LGT profile for Maverick and another company.  Of particular interest to IRS was a March 23, 2001 memorandum prepared by LGT personnel, detailing a meeting in Liechtenstein between the Greenfields, LGT employees, and Prince Philip of Liechtenstein.  The memo stated in part:

“The clients are very careful and eager to dissolve the Trust with the Bank of Bermuda leaving behind as few traces as possible. The clients received indications from other institutions as well that U.S. citizens are not those clients that one wishes for in offshore business.”

Great stuff, but not enough for IRS to determine how much tax was owed.  IRS didn’t have a Clue as to Steven’s gross income.  To fill in the considerable gaps in information, IRS issued an administrative summons to Steven for records and testimony.  After discussions with Steven’s counsel regarding the breadth of the summons, IRS reduced its scope to the production of documents related to foreign entities to the 2001 through 2006 tax years.

Greenfield refused to comply with the “kinder, gentler” version of the IRS summons.  Convinced that this was no Trivial Pursuit, IRS refused to Lego of the issue and brought suit to enforce yet another less expansive version of the original summons in district court.  Steven wasn’t having any of that one either and defended by invoking his Fifth Amendment right to remain silent.

General Summons Law and Greenfield

Generally, a Fifth Amendment right to remain silent is not effective for documents because contents of documents are not testimonial.  Fisher v. United States, 425 U.S. 391 (1976).  However, while Fisher held that documents were not testimony, the Court held that the act of producing the documents could be testimonial, because it may communicate incriminatory statements of fact.  For example, if the only person with access to offshore bank statements is the person who controls the funds in them, the person coming to court with the bank statements is essentially saying (testifying or admitting), “The documents you want exist, I control them, they are authentic, and here they are.”  This is the “act of production” defense Steven raised.  But the Ping-Pong game did not end there.

The government’s comeback to the “act of production” defense is the “foregone conclusion” rule.  If the testimonial aspects of production are a “foregone conclusion”, that is, if the government can establish the “existence, control, and authenticity” of the records independent of the witness’s production of them, the act of producing them loses its testimonial nature.  But the government must be ready to establish independently that the documents exist, the witness controls them, and they are authentic.

Based on the record, the Court found the Government met the first two tests: it accepted the existence of the documents in 2001 and Greenfield’s control of them in 2001.  It was not so willing, however, to accept their authenticity and turned to the Government to establish the third prong of the test.

The Government elves had their work cut out for them.  They went back to their workshop and crafted several arguments with respect to the authenticity of the 2001 records. It put on its Poker face and argued that the 2001 documents could be authenticated in three ways: (1) an LGT employee could come to the United States and authenticate them in court; (2) Kieber himself could come out of hiding and authenticate them; or (3) authentication was possible through Letters of Request issued under the Hague Evidence Convention.

The Second Circuit wasn’t buying any of the Government’s arguments.  First, the Court found it unlikely that LGT would send a witness to the United States to authenticate the records.  Secondly, it was highly unlikely Kieber, who was in hiding, would do it; and (3) the Government could not show a single instance where Letters of Request issued under the Hague Evidence Convention had been used to authenticate documents from LGT or any other Liechtenstein financial institution in the past.  Why would the Government think it would work in this case?

The Court didn’t stop there.  Assuming arguendo that the Government passed the 2001 hurdle, it would still have to show that the documents existed and that Steven controlled them in 2013, twelve years later.  Existence and control in 2001 does not create an inference of existence and control in 2013.  Factors such as the type of records, the likelihood of transfer to another person, and the time interval involved all bear on the matter.  In rejecting the Government’s arguments the Court found any number of reasons why Steven may not have had a Monopoly on control of the records from 2001 to 2013 or that the documents still existed in 2013.  Therefore, the Court did not enforce most of the summons and Steven did not have to produce the records.

Conclusion

But before you settle your brains for a long winter’s nap, think about this.  Even though Steven may have sunk IRS’s Battleship, today IRS is not in any immediate Trouble.  In fact, it is already working on a new Mousetrap.  On November 30, 2016 IRS received permission to issue a John Doe summons to Coinbase, Inc., a virtual currency exchanger headquartered in San Francisco, California, that Les discussed last month in his post IRS Seeks Information via John Doe Summons Request on Bitcoin Users.  

The moral of the story?  Uno’s?  I suspect many clients with assets hidden offshore will still take a big Risk by not coming in under IRS’s voluntary disclosure program, but you don’t have to be a Mastermind to see that many of them will ultimately be Sorry.  But, I guess that’s The Game of Life.  Happy Holidays!

 

 

 

Effect of General Power of Attorney On Reasonable Cause Exception to Penalties

Chief Counsel Advice memorandums are great sources of statements on IRS policy and the thought process of the Service on various issues.  They often are not long, which can make them difficult to turn into standalone blog posts.  I found one from September fairly interesting though, which discusses penalty abatement for the delinquency penalties when someone is incapacitated.  The CCA touches on two issues, the first time abatement provisions and the impact of a power of attorney on the reasonable cause exception to the delinquency penalties. The power of attorney aspect is fairly interesting, especially in considering the related issue regarding refund limitations periods being tolled by financial disability.

In CCA 201637012, the Service requested guidance on whether a potentially incapacitated person who suffered from dementia could have delinquency penalties abated for reasonable cause.  I found the CCA interesting because it highlighted the fact that the taxpayer had a valid power of attorney in place, and sought guidance on how that impacted the reasonable cause determination.

read more...

The facts indicating that the taxpayer appointed an agent under a durable power of attorney (one that remains operative after someone is incapacitated) prior to becoming incapacitated.  Under the POA, the agent was authorized to file tax returns and handle other tax aspects for the taxpayer.  The agent knew of the POA.  In a later year,  the taxpayer filed untimely returns, and the Service assessed delinquency penalties under Section 6651(a)(1) (failure to file) and Section 6651(a)(2) (failure to pay).

At some point after the filing of the return, the agent under the POA petitioned the state court for an emergency guardian and conservator for the taxpayer.  Usually, when there is a POA in place, we try not to seek guardianship because an agent should have most of the same powers, so I’m curious as to why this was requested.  It is possible the taxpayer was fighting the agent, or power outside of the POA was needed.   The court did appoint the agent as guardian and used the term “incapacitated” in the order.  This was after the late filing, but the CCA seems to indicate it was close enough in proximity to evidence that the taxpayer was incapacitated when the return was not filed.

The two questions presented to Chief Counsel were:

  1. Whether the Service should abate the penalties because of the alleged incapacity.
  2. Whether the Service should deny the request to abate because the POA failed to fulfill the taxpayer’s obligation to timely file and pay tax on behalf of the taxpayer.

Chief Counsel first noted that Appeals should determine if the taxpayer qualifies for First Time Abatement under IRM 20.1.1.3.6.1.  We have discussed FTA on this blog in the past, which can be found here and here.  All tax practitioners should be very familiar with these provisions, as they provide a simple mechanism for eliminating penalties in many cases.  I have used these procedures in various cases, including some very large dollar cases, and have had no issue obtaining waivers when we fit within the framework.

The remainder of the CCA was the portion that I found more interesting.  The CCA went on to discuss reasonable cause for a person suffering from dementia.  As stated above, the taxpayer had a valid power of attorney in place the year in which she failed to file the tax return.  It is alleged that the taxpayer was incapacitated.  Chief Counsel did indicate that it lacked sufficient facts to determine the taxpayer was incapacitated at the time of filing, but seemed to indicate it was possible, and, for purposes of the analysis, assumed that was the case.

The taxpayer requested abatement of the penalties pursuant to Treas. Reg. Section 301.6651-1(c)(1), which provides for abatement due to reasonable cause.  Serious illness of the taxpayer or a family member can be sufficient to show reasonable cause (but not when your preparer is ill).  See IRM 1.2.12.1.2, Policy Statement 3-2.  The CCA indicated that if it could be shown that the taxpayer was demented during the year in question, and was unable to handle her own financial affairs, it could support a finding of reasonable cause.

What I found slightly more interesting was the discussion about the power of attorney.  In the CCA, Counsel states that the POA does not impact the conclusion.  Counsel essentially stated that if the guardian had been appointed during the year in question, reasonable cause would likely not apply.  This was because the guardian would have a duty to handle the finances, and therefore returns, of the ward.  See Bassett v. Comm’r, 67 F3d 29 (2d Cir. 1995) (taxpayer suffered from incapacity due to being a minor, and legal guardian had duty to file returns).  With a POA, however, there may be authorization to take actions regarding returns, but there is no affirmative legal duty to prepare and file returns on behalf of the taxpayer.  Looking to Boyle, Counsel said the duty to file the tax return is on the taxpayer, and not his agent or employee.

I think this is the correct result, but I found it interesting for two reasons.  First, that statement from Boyle is usually used to preclude reasonable cause defenses when a taxpayer fails to file due to the mistake belief that the taxpayer’s accountant, attorney, or other preparer is properly handling the return.  So, for once, I wasn’t muttering frustration about that case.

Second, this position is different than that applicable to seeking a refund due to financial disability.  In general, a refund must be timely made, and that time frame is normally three years from the date the return is filed or two years from the date the tax was paid, whichever expires later.  This statute can be tolled if the taxpayer is “financially disabled.”   Under Section 6511(h), the statute will not expire if the individual is unable to manage his financial affairs because he has a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months.  The general IRS requirements for this are found in Rev. Proc. 99-21.  Most focus on this Rev. Proc. is on the required doctor’s certification.  But, the procedure also requires the person signing the claim to certify that no person was authorized to act on behalf of the taxpayer in financial matters during the period of impairment.

The implication is that having a power of attorney in place could preclude the tolling of the statute, because the agent could/should have been acting.  Seeking to recoup improperly paid funds is slightly different that having penalties abated, but the situations are sufficiently similar that it is interesting that the Service has different positions.

The Practice of Secret Subpoenas in Tax Court: Tax Court Out of Step with Other Courts and IRS Itself

I read with interest blogger Lew Taishoff, whose blog Taishoff Law mainly covers the Tax Court. Last week in The Stealth Subpoena is Alive and Well Lew discussed Tangel v Commissioner. Tangel reveals an odd practice that distinguishes Tax Court litigation apart from other federal courts.  Rule 45(a)(4) of the Federal Rules of Civil Procedure requires parties who issue subpoenas to third parties compelling the production of documents or other evidence to notify the opposing party of the subpoena issuance. Tax Court rules do not explicitly require a party to notify the other side. The absence of an explicit notice requirement with respect to subpoenas creates the possibility of surprise. In addition to being out of step with other federal courts, it is inconsistent with the Tax Court’s general approach of encouraging parties to communicate and cooperate.

read more...

Tangel involves a series of motions that the taxpayers filed relating to IRS counsel having issued subpoenas to third parties under Tax Court Rule 147(a) or 147(b). We have not discussed Rule 147(a) or (b) but the Tax Court rules give the process for which a party may compel attendance of a person or of evidence at a trial or Tax Court proceeding. Essentially 147(a) applies to people required to give testimony; 147(b) extends the reach to commanding a person to bring documents or other evidence, with the Tax Court retaining discretion to quash or modify the latter subpoena if it is “unreasonable or oppressive.”

On their face, Tax Court Rules 147(a) and (b) do not mention of notice, and the subpoena is not filed with the court. It is thus not subject to the general Tax Court rules on notice, found in Rule 21(a). That rule provides that parties serve on other parties or other persons involved in the matter all filed paper including “pleadings, motions, orders, decisions, notices, demands, briefs, appearances, or other similar documents or papers relating to a case….”.

In Tangel, IRS counsel issued subpoenas to third parties and did not notify the Tangels. The order is brief and I have not read (nor can I unless I were to head down to DC) the underlying motions but the Tangels objected to the issuance of the subpoenas in part on the grounds that Counsel failed to notify them of their actions. Judge Chiechi, the judge in Tangel, dismissed that argument, noting that “[a] party that issues a subpoena under Rule 147(a) and/or (b) is not required to give prior notice to the other party.”

Tax Court practice is not always in lock step with federal court practice but not giving notice of a subpoena compelling the production of documents or other evidence seems wrong. Attorney Taishoff has discussed this aspect of Tax Court practice in a prior post called Judge Holmes’ Vendetta, where he discussed an order earlier this year in Ryder v Commissioner, which also involved the issuance of a subpoena under Rule 147(b). Unlike the outcome in Tangel, in Ryder, Judge Holmes explicitly disapproved of the practice of issuing subpoenas without notifying the taxpayer. In so doing, Judge Holmes gave a history lesson on why it is likely that Tax Court rules differ from the federal rules of civil procedure:

We do have to disagree with the Commissioner, however, that this absence of a rule creates an implication that secret subpoenas are favored. We promulgated our Court’s Rule 147, which governs subpoena practice, back in 1973. Tax Court Rules of Practice and Procedure, 60 T.C. 1057, 1137 (1973). At that time, we said that our goal was a rule substantially similar to FRCP 45. Id. Back then, FRCP 45 didn’t require notice for subpoenas. Fed. R. Civ. Proc. 45 (1970). The notice requirement was added in 1991 to give parties the same opportunity to challenge nonparty subpoenas for documents that they had to challenge subpoenas for depositions (since FRCP 30 and 31 already provided notice protection in these circumstances). See Fed. R. Civ. Proc. 45 advisory committee’s note (1991). We have never publicly stated that we intended to deviate from Article III practice — it’s just an example of the two sets of rules drifting apart over time.

We think that the current federal rule is a good one in litigation that is, as in these cases, especially hard-fought. The Court will therefore adopt the notification requirement of Federal Rule 45 as a modification to the pretrial order that governs this case.

Mr. Taishoff suggests perhaps that the judges in Ryder and Tangel get together and “discuss bringing Tax Court into the last decade of the Twentieth Century, if not into the second decade of the Twenty-First.” An earlier post of his suggested the Ryder approach find its way in a published opinion. Another thought is perhaps it is time for the Tax Court to modify its rules and coordinate Tax Court practice with that in other federal courts through a rule change.

It is interesting as well that the Tax Court practice is somewhat inconsistent with the IRS’s administrative practice. Consider the related issue of the notice that is required to be given when the IRS contacts third parties in an examination. As of 1998, Section 7602(c) provides that an employee of the Internal Revenue Service may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with persons other than the taxpayer may be made.”

This RRA 98 notice of third party contact rule has generated some controversy. The statute fails to define reasonable notice for these purposes, and IRS and taxpayers have fought about whether the IRS’s inclusion of generic notice in its Publication 1 at the start of an exam constitutes “reasonable notice” of a third party contact. For example, earlier this year a district court in California in Baxter v US that found that Publication 1 was insufficient as a matter of law to constitute the advance notice that Section 7602(c) contemplates. That resulted in the district court finding that the IRS did not meet the prima facie good faith requirement under US v Powell and to the court’s quashing of a summons IRS served on a third party.

TAS in its 2015 annual report flagged IRS third party contact procedures as one of its most serious problems, making the sensible point that advance adequate notice allows taxpayers the possibility of themselves providing the IRS what it needs without the possible damage to a taxpayer’s business or reputation that may follow IRS third party contacts. That report criticizes the IRS use of generic notice, finding them “ineffective because they do not identify the information the IRS needs, inform the taxpayer the IRS will make a [third party contact] in the taxpayer’s particular case, or provide the taxpayer with enough advanced notice to deliver the information before the contact.” TAS 2015 Annual Report MSP # 12, at p. 123 (note omitted).

It seems to me that similar taxpayer interests are implicated when considering notice rules for subpoenas at trial, with possibly more at stake in terms of both taxpayer reputation and damage and a heightened need to know what the other side is gathering as a trial looms. It seems prudent for the Tax Court to modify its approach and require both parties to give notice consistent with the Federal Rules of Civil Procedure. This will reduce surprise and provide another chance for the taxpayer himself (if the government is seeking the information) to serve up what is needed, all at rather minimal costs to the government.

 

 

ABA Names Procedurally Taxing to its List of 100 Favorite Legal Blogs

ABA Top 100 BlawgYou might notice a new logo on our home page.  Last week, Procedurally Taxing was chosen as a top 100 legal blog in the 10th edition of the ABA Law Journal’s survey of legal blogs.  Needless to say we were excited by the recognition.

read more...

We want to take a moment at the time of receiving this recognition to thank our readers and our contributors and to reflect briefly about the blog.  The idea for the blog came from Les.  He talked about it for a couple of years before we launched.  Because of his work succeeding the late great Michael Saltzman as the co-author and lead editor of the seminal Thomson Reuters tax procedure treatise “IRS Practice and Procedure” Les saw the need to keep up on procedural issues and he wanted to assist the tax community in keeping up on and thinking about these issues. Prior to the blog, Steve worked with Les and Greg Armstrong on the monumental task of rewriting the treatise and updating it.  After many conversations, Les somehow convinced Steve and me to join him in creating the blog.  After we started the blog, I became, with Steve, one of the contributing authors of the treatise and took the lead in the now-completed task of rewriting the book’s collection chapters.

Convincing Steve to start the blog with us was particularly important because Steve’s law firm hosts the blog.  Without the good graces of Gawthrop Greenwood (where Steve is a partner heading up the firm’s small but excellent tax practice) and Steve’s technical abilities, the blog never would have gotten off the ground and would not have continued.  When we started this in July of 2013, we envisioned something where we would post the occasional thoughts on tax procedure issues and had no idea it would morph into an almost daily event.

One of our readers in those early months, Professor Andy Grewal, occasional guest poster and excellent blogger on his own in Yale’s Notice & Comment blog, suggested that Procedurally Taxing should have a post every day. We have tried to post on most business days, a task that is difficult because of the responsibilities we have beyond the blog. It is safe to say when we started the blog we had no idea of how it would grow nor how much work it would require us to do to keep what we think is a place to not only report or link to developments but generally to try to add value with context and analysis.

We can post regularly on a variety of topics because we have talented guests who bring a wealth of experience and insights.  Of course, our most amazing guest is frequent guest blogger Carl Smith.  While you see posts by Carl more often than any other guest and while Carl’s posts offer an unmatched depth into tax procedure issues, what you may not know is that a high percentage of posts that Les, Steve and I write, result from suggestions by Carl as he reads Tax Court orders and opinions and points us toward cases and issues that would be missed by anyone else without his knowledge of tax procedure.  We have been unsuccessful in convincing Carl to officially join us as a PT blogger rather than a guest, but the blog would not be nearly as successful or provide nearly the coverage without his assistance.

In addition to Carl, however, we are fortunate to have attracted 75 others who have written a guest post for us.  I will not name everyone but you can go to the guest blogger link on our home page and review the list of individuals who have posted with PT.  Including in this list are many leading academic writers, many leading practitioners, several members of the low income taxpayer clinic community and even a few students.  We cannot promise that writing a guest post on PT will lead to a Tax Court judgeship but Judge Diana Leyden wrote for PT before ascending to the bench.  We encourage you to consider writing a guest blog post if you have something to say about tax procedure.

In addition to our guest bloggers, we also want to acknowledge the many readers who have written comments on our site.  If you are not reading the comments, you are missing some of the best procedural insights.  One long term and regular commenter, Bob Kamman, plays a similar role in our commenting section that Carl Smith does as a guest blogger.  He lets us know when we pontificate, stray too far from reality or misspell words.  One day I hope to actually, rather than virtually, meet Bob.  The commenters keep us on our toes, let us know that someone is actually reading what we say, offer insights that we miss and generally add great content that makes the blog a community of individuals interested in understanding and advancing tax procedure issues.

As academic writers Les and I know what it like to write the typical law review article.  It has a similar feel to that high school physics question about whether a tree falling in a forest with no one around actually makes a sound or whether for sound to be produced there must be someone to hear it.  Law review articles too often have the feel of trees falling in an empty forest.  Because of your engagement with the blog, we feel like our writing here has more meaning and impact.  That is not meant to denigrate legal scholarship which can play an important role in advancing issues but it is meant to say that the immediate acknowledgement of our writing and the feeling that our writing may have an actual impact propels us to continue the blog.

Thank you for your interest in our blog.  We look forward to the continued journey.

 

Misleading Taxpayers with Collection Letter

This is not the first post on the way the IRS collection letters mislead taxpayers.  This is also not the first post on the notice stream of letters sent in collection cases after assessment of tax.  This may be the first post in which I feel like I am writing about a deliberate attempt by the IRS to mislead taxpayers with a form.  I find the statements the IRS has deliberately chosen to make in Notice CP504 false and can only conclude that it has made these statements after giving thought to what it says in the letter because I know these letters receive much scrutiny before the IRS uses them.

Letters in the collection notice stream satisfy statutory requirements and collection goals.  Section 6303 requires the IRS send a notice and demand letter after it makes assessment when insufficient funds exist on the account to satisfy the liability.  The IRS should send this letter within 60 days of assessment; however, its failure to do so impacts the creation of the federal tax lien and not the validity of the assessment.

read more...

 

The notice stream fulfills two other statutory requirements – those found in IRC 6331(d) and 6330.  The interplay of these two sections creates the basis for the discussion in this post.  Because the IRS has chosen to misrepresent its authority to levy in Notice CP504, examining the role of these sections must precede the discussion of the misrepresentation itself.

Dating back at least the 1860s, Congress gave the IRS, and its predecessors, authority to levy on the assets of taxpayers who failed to pay their federal taxes.  Levy provides the IRS with a powerful administrative tool which, prior to 1998, involved no judicial check on the IRS before the levy occurred.  Before 1998, however, Congress did require that the IRS send taxpayers a notice of intent to levy 30 days before it could begin administratively taking their property.  The code section requiring this notice is IRS 6331(d).  This section provides:

1.     In general. Levy may be made under subsection (a) upon the salary or wages or other property of any person with respect to any unpaid tax only after the Secretary has notified such person in writing of his intention to make such levy.

2.     30-day requirement. The notice required under paragraph (1) shall be –

  1. Given in person
  2. Left at the dwelling or usual place of business of such person, or
  3. Sent by certified or registered mail to such person’s last known address,

No less than 30 days before the day of the levy.

In 1998 Congress decided that IRC 6331(d) provided inadequate protection to taxpayers before the IRS could levy on their property.  To remedy this failing, Congress did not remove section 6331(d) but added section 6330.  Now, the IRS had two notices it must provide to taxpayers before it could levy.  The new notice created in section 6330 not only gives the taxpayer notice of the IRS intent to levy but also gives the taxpayer the right to contest the levy by filing a Collection Due Process (CDP) request before the levy may occur.  Today, it is easy to forget that the section 6331(d) requirement still exists because it receives almost no attention but the statute still requires the IRS to provide this notice as well and the IRS does so.

In 1998, the IRS decided to make the last letter of its notice stream of collection notices, normally the 4th letter, a letter that combined the taxpayer’s notice rights under both 6331(d) and 6330 into the same letter.  It continued this practice for many years though no legal requirement exists that the same letter provide the notice required by both statutes.  Conversely, no statutory requirement causes the IRS to put the notices into separate letters.

At some point in the recent past, the IRS decided that it would split the notice required by 6331(d) and 6330 into two separate letters.  One of the reasons, a major reason, for combining the two notice requirements into one letter was cost.  Each statutorily required notice came with a requirement that the IRS send the notice by certified mail.  The CDP notice requires not only that the IRS mail it certified, but also that the IRS request return receipt.  Combining the two notices allowed the IRS to meet the costly statutory requirement of certified mail with one rather than two mailings.  Because of the number of notices of intent to levy sent each year and the extra cost of sending two letters by certified mail, the IRS could save several million dollars each year simply by combining the two notices.

The IRS has now decided that it will send the taxpayer, as the third notice in the notice stream, a section 6331(d) notice.Here is the notice sent to one of the clients of the Harvard clinic.  The IRS titles the notice “Notice of Intent to Levy.”  In the body of the notice, the IRS says that if the taxpayer does not pay the tax by the date specified in the letter, the IRS may levy on the taxpayer’s property and rights to property including: 1) wages, real estate commissions, and other income; 2) bank accounts; 3) personal assets (e.g., your car and home) and 4) Social Security benefits.  The problem with this notice and with these statements (some might say threats) arises because, at the time the IRS sends this notice, it has not yet provided the taxpayer with the CDP notice.  Without the CDP notice, the IRS cannot levy upon a taxpayer after 1998 and yet, it says to taxpayers in Notice CP504 that it can.  At best, the letter misleads taxpayers about their rights and viewed at worst, the letter contains false statements known by the IRS employees designing this letter as such.

To test the letter and the statements that the IRS could levy as a result of it, the Harvard clinic sent a Form 12153 to the IRS requesting a CDP hearing for a client who had received Notice CP504.  Even though the letter does not mention section 6330, it describes a procedure the IRS can only take after sending a CDP notice.  So, we thought that by sending a CDP request we would see what would happen.  We expected that the IRS would not provide our client with a CDP hearing, but it seemed better to try and find out.  First, we obtained the permission of our client to file the CDP request after explaining to him our reasons for wanting to do so.  In the first case in which we requested a CDP hearing, we eventually received a letter from the IRS saying that the client could not have a CDP hearing because the IRS had not sent a CDP notice.  Before we could petition the Tax Court from that letter, which might be characterized as a notice of decision from which the Tax Court has in certain circumstances granted jurisdiction, the IRS sent another notice of intent to levy citing to section 6330, and we did not want to impair the taxpayer’s ability to use the CDP process, so we filed another CDP request based on the notice which cited to section 6330 and have our case under consideration for an offer in compromise.

Another client received this notice and we sent another CDP request to the IRS.  In the second case, the IRS has neither responded to our request nor sent a notice citing to section 6330.  We will continue, with client permission, to send in requests for CDP hearings whenever our clients receive a notice of intent to levy stating that the IRS can levy upon their property.  We hope one day to uncover the mystery of how the IRS thinks that it can levy in 2016 based on a 6331(d) notice without sending a 6330 notice.  If anyone out there can help us to solve this mystery, we would appreciate your assistance.  For the moment, I remain of the opinion that Form CP504 seeks to purposely mislead taxpayers.  I find the letter offensive.  I believe it violates taxpayer rights.  I think the IRS should immediately stop sending a letter entitled Notice of Intent to Levy containing instructions in the body of the letter about the taking of a taxpayer’s property when the IRS has no authority to do so.

Retirement of a Friend and Driver Behind the IRS Offshore Program

Today, the IRS is honoring John McDougal, a special trial attorney based in Richmond, Virginia, with a retirement ceremony in the grand foyer of its national office at 1111 Constitution Avenue in Washington, D.C.  I cannot remember another person honored in this way who was not an executive in the organization.  I also cannot imagine a more deserving person for the IRS to honor.

In January, 1980, I moved into the office adjacent to John’s in the Richmond District Counsel Office of IRS.  How fortunate I was.  For almost 30 years I had John as my next door neighbor or nearby neighbor at work.  To have the opportunity to work next to the greatest attorney in all of Chief Counsel’s office certainly made me a better attorney.

read more...

Before recounting some of the amazing things John accomplished in his 43 years with Chief Counsel’s Office, I want to go back to the beginning of his tenure and talk about his sleep habits.  John is a night owl.  He does not stay up late to party but he has a bio rhythm that keeps him up into the wee hours of the morning and causes him to want to sleep into the later morning hours.  Today, many employers accommodate personal preferences and rhythms of this type but in the 1970s the world was a much more rigid place.

The official hours of the Richmond office were 8:30 AM to 5:00 PM.  In an effort to accommodate John’s schedule, the head of the Richmond office allowed employees to arrive by 9:00 AM before being charged with annual leave.  Each morning when they arrived for work, the office secretaries would begin calling John’s home in an effort to wake him up so that he could arrive by 9:00 AM.  On many days their efforts failed.  John would arrive at 9:05 AM or later and get charged one hour of annual leave.  He would then stay at the office and work each evening until 9, 10 or 11:00 PM; however, the office had no system of credit hours or comp time to accommodate this deviation from the official schedule and so John worked for several years with no ability to take a vacation because he used all of his leave time arriving late.

John, however, did not complain.  Finally, in the 1980s the office evolved into a form of work flexibility that accommodated John’s bio rhythms and allowed him to take vacations.  I tell this story in part because it is amazing in 2016 to imagine such a work world that would treat its most valued and hard- working employee in such a poor manner but also to make John human since John’s performance as an attorney and a colleague set such a high standard.

At his core, John is a great trial lawyer.  He loves to put a case together and to present it.  He has had many Tax Court trials over his career and taught trial practice skills at Chief Counsel and NITA programs.  He does not, however, love cases involving huge corporations that might take years to develop, teams of lawyers to assemble and lots of national office coordination.  He prefers fact intensive cases and especially fraud cases.  To my knowledge, he is the only special trial attorney in the SBSE stovepipe of Chief Counsel’s office because that designation was reserved for attorneys in the LB&I stovepipe until one Chief Counsel, who had litigated against John before becoming the Chief Counsel, reached out and gave John that designation in recognition of his ability.

In the 1980s John was assigned to a pilot program with the Department of Justice (DOJ) to handle criminal tax cases as a Special Assistant United States Attorney.  About eight attorneys from Chief Counsel offices around the country joined this program.  I believe that John was the only one who actually tried criminal cases.  During the 1980s and 1990s, he tried over 30 criminal cases while continuing to handle a heavy docket of Tax Court cases and advisory work in the office.  This was made possible by his skill, his organization and his hard work.

He went on a special assignment to the Virgin Island tax authority for several months, he went on assignment to the Senate’s Permanent Sub-Committee on Investigations for over a year and he was assigned to assist the Tax Court in handling a disciplinary hearing.

He traveled to the federal prison in Allenwood to try the Tax Court fraud case of master spy Aldrich Ames.  At the request of Washington District Counsel he tried the fraud case of Grossman v. Commissioner I discussed in a post recently.  He picked up a large fraud case on transfer from me where he tried it and won it and then convinced DOJ to have a receiver appointed in Florida to manage the assets of the taxpayer who had hidden them in many far flung ways, including offshore, and he worked with the receiver for over a decade to collect income from and sell the properties.  While working on that same case, he was stabbed and robbed late one night in Tampa but made it to work the following Monday where he showed his scar ala LBJ.  He created the theory that fraud on the tax return by anyone should hold open the statute of limitations and fought hard with the national office to convince it of the correctness of his theory which we have discussed here.

There are many other highlights of his career but I want to focus on his crowning achievement.  All of these special assignments together with his work in Tax Court and district court trials prepared him for his greatest assignment – working on the offshore credit card project and all that followed.

In 2000 when the IRS reorganized, all of the new divisions wanted John because of his reputation as a great attorney but he chose SBSE due to his desire for the types of cases it handled.  At almost that same time Revenue Agent Joe West in New Jersey had figured out how to find taxpayers hiding their assets offshore by obtaining credit card records in the United States.  John got paired to work with Joe and the world of taxpayers parking money offshore was turned upside down.  Though John was by no means the sole force behind the IRS efforts to break through the world of secrecy and offshore parking of assets to avoid taxes, John was a major force in this effort.  With the depth of knowledge he acquired earlier in his career and the penchant for hard work he always had, he played an important role for the past 16 years in changing the offshore landscape.  Through his efforts the IRS has collected billions of dollars.  It is hard to imagine an IRS attorney with greater impact over this time period than John.

As the IRS says farewell to a great attorney, I write to say thanks to a friend and colleague who taught me so much and who helped me in so many ways.

Fast Track Mediation for Collection

In Rev. Proc. 2016-57 the IRS announced a new fast track mediation specifically designed for collection cases (FTMC).  The program will allow taxpayers with issues in offer in compromise (OIC) cases and trust fund recovery penalty (TFRP) cases to go to a mediator in Appeals to try to resolve an issue in their case which could provide the basis for overall resolution if the parties could reach agreement on that issue.  I do not know how much demand exists for this type of mediation, but the effort to provide mediation in these fact intensive situations seems like an idea worth trying.

read more...

The Rev. Proc. points out that fast track mediation for SBSE cases has existed as a possibility since 2000 and the program included collection cases; however, mediation occurred in only a small number of collection cases.  In 2011 the IRS introduced fast track settlement for examination cases but that initiative did not include collection cases.  The idea for use of Appeals in FTMC does not include giving the Appeals employee settlement authority but rather to have them serve as a mediator acting as a neutral party to assist the taxpayer and the collection function in reaching agreement on a point of dispute.

Collection and Appeals will jointly administer the FTMC program.  Because SBSE handles all of the collection cases for the IRS, taxpayers falling into any of the stovepipes into which the IRS divided itself in 2000 can use FTMC.  The IRS envisions that FTMC will take place “when all other collection issues are resolved but for the issue(s) for which FTMC is being requested.  The issue(s) to be mediated must be fully developed with clearly defined positions by both parties so the unagreed issues can be resolved quickly.”  To use FTMC, both the IRS and the taxpayer must agree.  Neither party can force the procedure on the other.

The Rev. Proc. provides a list of issues in OIC and TFRP cases for which it contemplates FTMC use.  It does not state whether the list provides the exclusive opportunities for use of FTMC but the manner in which the Rev. Proc. is written makes me believe that engaging in FTMC for issues not on this list will rarely, if ever, occur.  For OIC the list includes the following issues:

  • Valuing the taxpayer’s assets, including those held by third parties;
  • Determining the amount of dissipated assets that the IRS should include in the reasonable collection potential (RCP) calculation;
  • Deciding whether the facts warrant a deviation from the national or local expense standards;
  • Determining the taxpayer’s proportionate interest in jointly held property;
  • Projecting the amount of future income based on projections other than current income;
  • Calculating the taxpayer’s future ability to pay when the taxpayer lives with and shares expenses with a non-liable person;
  • Evaluating doubt as to liability cases worked by Collection, e.g., a case involving TFRP; and
  • A catch-all provision that uses as an example whether a taxpayer’s contributions to a retirement savings account are discretionary or mandatory.

The TFRP list includes the following issues:

  • Whether the person meets the test as a “responsible person” of the business that failed to pay over the trust fund taxes;
  • Whether the person willfully failed to pay over the collected taxes or willfully attempted to evade or defeat the payment; and
  • Whether the taxpayer properly designated a payment.

The Rev. Proc. explains when FTMC will not apply:

  • To determine hazards of litigation or use the Appeals Officer’s settlement authority;
  • For cases referred to the Department of Justice (remember that once a case is referred to the Department of Justice settlement authority resides with the DOJ and while DOJ case refer a matter back to the IRS to obtain the views of the IRS, DOJ has total control of the outcome of the case);
  • For cases worked at an SB/SE Campus site (because almost all OIC cases are worked at campus sites in Brookhaven and Memphis, I assume that this statement in the Rev. Proc. does not apply to the OIC units but the Rev. Proc. does not make this 100% clear. To my knowledge TFRP cases are worked by Revenue Officers assigned to field units and this restriction would not have much impact on TFRP cases.  So, I am having trouble understanding what this restriction covers)
  • To cases in the Collection Appeals Program (OIC cases should not use the CAP program and TFRP cases would only get to the CAP program after the assessment of the TFRP and not before the determination of the liability exists. So, this exclusion would not seem to have much impact);
  • To Collection Due Process cases (this restriction could have a significant impact in the OIC context because many practitioners submit offers during the CDP process. I prefer to submit offers during a CDP case over submitting them outside of CDP.  It is not clear to me why the IRS would exclude offers submitted during a CDP case unless it assumes that the Appeals employee assigned to the CDP case could or would serve this function.  My experience is that the Appeals employee plays a relatively tradition role in CDP cases and does not get involved during the consideration of the offer by the offer unit.  To the extent that having a mediator provides a useful function, it seems that the mediator could assist in an offer arising during a CDP case just as the mediator could assist in other offers);
  • To cases in which the IRS determines the taxpayer has put forward a frivolous issue whether or not the issue makes the list in Rev. Proc. 2016-2 (this makes sense given that either party can nix the use of a mediator and the IRS position here just puts down a marker that it will not go to mediation on something it considers frivolous);
  • To cases in which the taxpayer has failed to respond to IRS communications or to submit documentation (the IRS does not want to use FTMC to allow the taxpayer to stall);
  • To OIC cases involving Effective Tax Administration offers except in limited circumstances, to cases in which the taxpayer refuses to amend the offer yet provides no specific disagreement, to cases in which the IRS has explicit guidance and to cases in which Delegation Order 5-1 requires a level of approval higher than a group manager (almost all of these exceptions involving reasons for which the IRS would not agree to FTMC on an individual case basis and just set out markers so the taxpayer would know in advance);
  • To cases where FTMC use would not be consistent with sound tax administration; and
  • To issues otherwise excluded in subsequent guidance.

A taxpayer can request FTMC after full development of an issue and before Collection makes its final determination.  The IRS has created Form 13369 for use in requesting this process.  Both the taxpayer and the IRS must sign the firm in order to invoke the procedure.  In addition to the form the taxpayer submits a written summary of their position with respect to the disputed issues and the IRS will submit a written summary as well.  Once the parties have prepared the form and the statements, Collection sends the package to the appropriate Appeals office.  The Appeals office decides whether to accept the case for FTMC.  The taxpayer must consent to disclosure of their tax information to participants in the mediation and does this in signing the Form 13369.

The Rev. Proc. goes on to describe the manner of the mediation as well as the post-mediation process.  If the mediation succeeds, it should allow the OIC or the TFRP case to move forward to resolution by removing a roadblock to agreement.  If it does not succeed, the taxpayer still retains the right to appeal the denial of the OIC or to appeal the proposed determination of the TFRP.  In this regard, the mediation seems to have little downside for the taxpayer except to the extent the denial of the mediation is perceived to have solidified the view of Appeals and keep the taxpayer from having a productive Appeals conference at a later stage.    Because I have never used mediation, I have no basis for forming an opinion of the likely success of this new process.  Perhaps those who have used it in the Examination context can comment on how it might work in these two specific collection situations.  I suspect that training of IRS employees to spot situations in which it might assist and to have open minds about using the process will have a high impact on its success.  If the employees considering OICs or TFRP assessments would prefer to move the case to Appeals in a more traditional manner than to have a mediator from Appeals intervene in their cases, the program will not succeed.