How Does Appeals Notify You of Their Involvement in the Case

Over the past year, the decision by Appeals to no longer hold face to face meetings and the subsequent partial reversal of that decision served as the highest item of interest regarding Appeals. Taxpayers with cases involving controversies large enough to warrant assignment to an Appeals Officer in the field can now obtain a face to face conference with Appeals again. Taxpayers whose cases do not have sufficient dollars at issue continue to be sent to the back of the bus because the low dollar amount of their controversy means their cases get assigned to low graded Appeals employees who reside in the six Service Centers where Appeals has employees.

One of the concerns that Appeals has in allowing the case of a taxpayer with a small amount of tax at issue to meet with a “live” Appeals employee in a face to face meeting is that the case is scored for assignment to a low graded Appeals employee and in the local offices Appeals does not have low graded employees, or enough low graded employees, so it needs to send these case to the Service Centers where the low graded Appeals employees reside. Because of the limited geographical availability of these employees and the fact that Service Centers do not really accommodate meetings with taxpayers, taxpayers with smaller dollars at issue continue to have the pleasure to deal with the IRS via phone and fax just as they did during the examination phase of their case.

On the listserv for clinicians who work on cases involving low income taxpayers, a new issue concerning Appeals emerged recently. The new issue involves the manner in which Appeals notifies the taxpayer, or the representative, of the assignment of the case in Appeals. Several individuals posting to the listserv reported receiving contact via phone instead of mail of the assignment of the Appeals employee and some reported that in that phone contact the Appeals employee also wanted to discuss the merits of the case. Because the phone contact came “out of the blue” with no opportunity for the person receiving the call to prepare for the discussion, the representatives receiving these calls invariably sought to put off the discussion of the case with varying degrees of success. In questioning the Appeals employee about the approach of calling out of the blue to discuss a case with prior correspondence, some representatives received the explanation that Appeals no longer sent letters in order to save money.

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Donna Hansberry, the Director of Appeals, attended the most recent Low Income Taxpayer Clinic conference on December 7 to discuss the interplay between Appeals and those representing low income taxpayers. She did not seem to be aware of any changes within Appeals that stopped the employees from sending letters to taxpayers and representatives upon assignment of the case and that encouraged Appeals employees to “cold call” taxpayers or representatives seeking to discuss the case. She asked that attendees send her information about this practice and also solicited comments on what Appeals should adopt as the best practice for notifying taxpayers and representatives of the case assignment as well as notifying them of the time (and for taxpayers owing sufficient money, the place) for holding the Appeals conference.

One of the slides she used in her presentation showed that the number of Appeals employees in the past three years. She said that the number has dropped by 1/3 since 2010. The number of cases has dropped but not by the same percentage.

Another slide she displayed showed the breakdown of the caseload in Appeals which is now heavier on collection cases than examination cases.

Because Donna solicited feedback on this issue, PT will be glad to collect feedback and forward it to her. If you have experienced the type of cold call described above, let us know by sending in a comment. We also will forward to her suggestions on how to make the interaction with Appeals work best. Do you want a letter immediately upon assignment of the case to an Appeals employee letting you know the name, address, fax number and phone number of the employee and then another letter setting up the conference? Is there a way to reduce the number of letters and still allow you to properly prepare for the Appeals conference? Let us know your thoughts so we can pass them along or pass them along directly to Appeals.

 

Tax Court Holds that Evidence of Internet Postage Purchase Constitutes Private Postmark for Timely Mailing Purposes

We welcome back frequent guest blogger Carl Smith who discusses another case dealing with the jurisdiction of the Tax Court. Here, the taxpayer’s issue concerns the postage which was purchased over the internet. Keith

In Pearson v. Commissioner, 149 T.C. No. 20 (Nov. 29, 2017), the Tax Court, sitting en banc, abandoned the holdings in its memorandum opinion in Tilden v. Commissioner, T.C. Memo. 2015-188, and adopted the holdings of the Seventh Circuit in Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017), that (1) postage bought over the internet that is affixed to an envelope creates a private postmark as of the date of purchase for purposes of the regulations under the timely-mailing-is-timely-filing provisions of section 7502 and (2) internal tracking data of the USPS is not treated as a USPS postmark for purposes of those regulations. Applying those holdings to the facts of Pearson (which were virtually identical to Tilden – even involving the same law firm), the Tax Court found that it had jurisdiction.

Pearson frees up the Tax Court to issue similar rulings in a number of cases where the Tax Court had stayed proceedings in anticipation of both the Seventh Circuit’s ruling in Tilden and the Tax Court’s response in Pearson. Indeed, on the same day that Pearson was issued, the Tax Court issued a similar jurisdictional ruling in Baham v. Commissioner, T.C. Summary Op. 2017-85 – a case also involving internet-purchased postage.

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I have blogged five previous times on the Tilden case as it winded its way through the courts (see here, here, here, here, and here), so I will try to keep repetition in this post to a minimum.

Pearson Facts

To understand how the Pearson holdings occurred and were applied, I will summarize the facts (noting the trivial differences between Pearson and Tilden) and the relevant regulation provisions.

Pearson is a deficiency case where, on the 89th day after the notice was issued, an employee at a lawyer’s office in Salt Lake City (the same office as in Tilden) went to the internet website of stamps.com and purchased a stamp for the appropriate postage amount. (In Tilden, the stamps.com postage was purchased and the envelope was mailed on the 90th day.) After printing out the stamp, the employee affixed it to an envelope addressed to the Tax Court. The stamp had printed on it the date of purchase. The employee then filled out a certified mail receipt form (the white slip) and also attached it to the envelope. On the white slip, where there is space for the USPS to stamp a postmark, the employee wrote in by hand the date the stamp was purchased. Then, the employee walked the envelope over to the Post Office and mailed it, without getting a stamp from the USPS on the envelope or on the receipt. The employee kept the receipt.

The USPS never placed its own postmark on the envelope during its long journey to the Tax Court, but internal USPS tracking data showed the envelope first in the USPS system on the 91st day. (In Tilden, the tracking data indicated the 92nd day.) The tracking data for the initial entry was from a different Salt Lake City postal facility from the site of mailing, however.

On the 97th day, the envelope arrived at the Tax Court in Washington, D.C. – presumably after the now-common delay to irradiate the envelope to kill possible anthrax. (In Tilden, the envelope arrived on day 98.) The IRS concedes that if an envelope were mailed from Salt Lake City to the Tax Court on the 90th day, it would ordinarily be received in a range of days that included the 8th day after mailing.

Potentially Relevant Regulations 

Section 7502(b) states: “This section shall apply in the case of postmarks made other than the United States Postal Service only if and to the extent provided by regulations prescribed by the Secretary.”

Two regulations could have applied to determine whether the filing was timely.

A regulation involving a situation where there is a private postmark, but not a USPS postmark, Reg. section 301.7502-1(c)(1)(iii)(B)(1), reads:

(B) Postmark made by other than U.S. Postal Service.–(1) In general.–If the postmark on the envelope is made other than by the U.S. Postal Service–

(i) The postmark so made must bear a legible date on or before the last date, or the last day of the period, prescribed for filing the document or making the payment; and

(ii) The document or payment must be received by the agency, officer, or office with which it is required to be filed not later than the time when a document or payment contained in an envelope that is properly addressed, mailed, and sent by the same class of mail would ordinarily be received if it were postmarked at the same point of origin by the U.S. Postal Service on the last date, or the last day of the period, prescribed for filing the document or mailing the payment.

A regulation involving a situation where there is a USPS postmark and a private postmark, Reg. section 301.7502-1(c)(1)(iii)(B)(3), reads, in part:

(3) U.S. and non-U.S. postmarks.–If the envelope has a postmark made by the U.S. Postal Service in addition to a postmark not so made, the postmark that was not made by the U.S. Postal Service is disregarded . . . .

Tilden Tax Court Holding 

On these virtually identical facts in Tilden, the Tax Court had held that it lacked jurisdiction because the petition was untimely filed. In the opinion, the Tax Court always referred to the stamps.com date stamp on the postage as a “postmark” – using quotes around postmark to apparently indicate that the court was dubious about calling a mere internet stamp purchase date a true postmark. However, even if it were a true private postmark, then the court held that USPS tracking data constitutes a USPS postmark, so that the second regulation quoted above governs and makes the USPS postmark determinative. The judge relied on the Tax Court’s earlier opinion in Boultbee v. Commissioner, T.C. Memo. 2011-11, where it had held that timely USPS tracking information could be used by a party as a timely USPS postmark in the case of an envelope lacking a true USPS postmark. (In Boultbee, the envelope was mailed from Canada through its own postal system and never got a USPS postmark after it crossed the border.)

Tilden Seventh Circuit Holding

The Seventh Circuit overruled the Tax Court in Tilden, noting that the initial USPS tracking information could occur at a time long after true mailing, so was not reliable evidence of the date of mailing. Thus, the Seventh Circuit refused to treat the tracking information as a USPS postmark. By contrast, the Seventh Circuit held that the date stamp on the stamps.com postage affixed to the envelope constituted a private postmark for purposes of the first regulation quoted above. The court noted that, while it is true that there is no guarantee that the date of purchase is also the date that the envelope was mailed, that is also true in the situation (addressed by the regulations) where postage meters (such as by Pitney-Bowes) affix private postmarks with dates that can be manipulated by parties. Thus, since the envelope with this timely private postmark arrived within the ordinary period that a letter mailed from Salt Lake City on the 90th day would arrive, the petition was timely filed.

Pearson Holding

The Tax Court in Pearson completely accepted the Seventh Circuit’s analysis in its Tilden opinion, even though the Pearson case would be appealable to the Eighth Circuit. This now creates a nationwide rule that internet-purchased postage is a private postmark for purposes of the regulations and that USPS tracking data does not create a USPS postmark.

The Pearson majority opinion and the joint dissent of Judges Gustafson and Morrison sparred over the definition of “postmark” in the regulations – with the majority looking to a dictionary definition. The dissent did not think this envelope contained a private postmark. There are interesting discussions in both opinions of the origins of section 7502(b) – originally titled “Stamp Machine”, but now titled “Postmarks” – and the history of Pitney-Bowes-type machines. The majority wrote: “[A] Stamps.com postage label is the modern equivalent of the output of an old-fashioned postage meter. We find no plausible basis for making a legally significant distinction between these two means of affixing postage.”

The majority also gave Auer deference to the IRS’ current interpretation of the word “postmark” in its regulations to include dates shown on internet-purchased postage. (See Auer v. Robbins, 519 U.S. 452, 461 (1997).) The dissent did not think Auer deference should be accorded and pointed out the shaky continuing existence of the Auer deference line of cases in the Supreme Court.

Baham

Baham, issued the same date as Pearson, is a case where Judge Wherry, on his own, investigated the USPS tracking information and took judicial notice of it. In Baham, the envelope contained a petition that was signed on the 89th day and that was mailed to the Tax Court from “The UPS Store” in Acadia, California. The envelope bore a shipping label purchased from Endicia.com on the 90th day. The taxpayer also introduced a receipt from The UPS Store for mailing at 2:44 pm on the 90th day, but, of course, that evidence is not itself a postmark. Other evidence was later introduced that The UPS Store typically brought its mail over to the USPS at 5 pm on the date the mail was received. The envelope was sent by certified mail, but never acquired a USPS postmark. USPS certified mail tracking information showed the envelope first in the USPS system at 8:03 am on the 91st day. Judge Wherry held that the petition was mailed on the 90th day and so was timely.

Observations

Since the IRS agrees with the Tax Court in Pearson, it is doubtful that any party (the IRS or the taxpayer) will ever argue in the courts of appeals that a petition was late under facts similar to Pearson, Tilden, or Baham. Thus, I expect no further appellate court opinions on this issue.

However, given the widespread use of internet-purchased postage, I think it long overdue that the IRS update the regulations under section 7502 to bring them into the 21st Century. There should be no need for people to ever wonder about whether internet postage or USPS tracking information constitutes a postmark.

 

Paper Highlights How Taxpayers Can Game Proposed Tax Legislation

A group of mostly law school academics and one partner at a large law firm has written an important article highlighting some major problems with the current tax legislation. Here is the abstract from The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation

This report describes various tax games, roadblocks, and glitches in the tax legislation currently before Congress. The complex rules proposed in the House and Senate bills will allow new tax games and planning opportunities for well-advised taxpayers, which will result in unanticipated consequences and costs. These costs may not currently be fully reflected in official estimates already showing the bills adding over $1 trillion to the deficit in the coming decade. Other proposed changes will encounter legal roadblocks that will jeopardize critical elements of the legislation. Finally, in other cases, technical glitches in the legislation may improperly and haphazardly penalize or benefit individual and corporate taxpayers. This report highlights particular areas of concern that have been identified by a number of leading tax academics, practitioners, and analysts.

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We have previously posted on the House and Senate versions of tax legislation, though have noted that for the most part the proposed legislation does not have many provisions that directly address tax procedure or tax administration.

I recommend this paper to our readers. It invariably follows that whenever there is tax legislation some very smart people consider ways to exploit the legislation’s ambiguities. For years, Congress, the IRS/Treasury and the courts are left to legislate, administer and adjudicate around the uncertainty.

Yet as the authors describe in this paper, the proposed Senate and House legislation presents gaming opportunities of a different scale. Consider two of the key domestic provisions, the lowering of rates on C Corps and the preferential treatment of passthrough entities. As the paper discusses, in the absence of major changes, or broad anti-abuse provisions that require an engaged and funded IRS, there are likely to be gaming and planning opportunities spinning off this that will keep the tax advice business fully employed.

For those who do not have the time to read the paper take a look at the Twitter feed of Tax Notes regular Martin Sullivan, who neatly summarizes the paper in a series of tweets (I list the first seven of these; his twitter feed has a bunch more):

  • “Tax Games” Paper warning to Congress #1: Malpractice for advisors not to advise clients to use of C corps as shelter so interest otherwise taxed at up to 43.4% will be taxed at 20% under new bill
  • “Tax Games” Paper warning to Congress #2: Malpractice for advisors not to advise clients to use of C corps as shelter so tax on dividends otherwise taxed at up to 23.8% will be taxed at 10% under new bill
  • “Tax Games” Paper warning to Congress #3: Employees (presumably wealthy, who do not need immediate cash) can become C corps and instead of getting salaries taxed at regular rates can pay 20% tax now and defer or completely eliminate tax on distribution
  • “Tax Games” Paper warning to Congress #4: Active business owners of C Corps can minimize taxes by paying themselves low salaries. Determining “reasonable compensation” is a judgment call fraught with controversy.
  • “Tax Games” Paper warning to Congress #5: Taxpayer can put C corp in Roth IRA and, if payouts delayed to retirement, only pay total of 20% tax on C corp income.
  • “Tax Games” Paper warning to Congress #6: Employees at service firms can form own partnerships and charge for services in lieu of salary. Then they receive 23 percent deduction (in Senate bill) on fees for service instead of paying full freight on wages.
  • “Tax Games” Paper warning to Congress #7: Limits on doctors and lawyers and such qualifying for passthrough benefits can be avoided by splitting business into unqualified professional business and qualified business that provides services

Many of the House and Senate provisions will likely allow the well-advised to game the system. Less sophisticated employee/taxpayers will be left behind. The result will be more pressure on IRS/Treasury and the courts to police abuses and attempt to figure out who is on the right side of Congress’ largesse. So, while the proposed legislation may not have in the traditional sense many tax procedure and administration provisions it will, if enacted, be the most significant legislative development relating to tax administration for decades to come.

UPDATE: To see Martins Sullivan’s summary of the paper see here

Authors of Tax Games paper:

Reuven S. Avi-Yonah  University of Michigan Law School

Lily L. Batchelder New York University School of Law

J. Clifton Fleming Jr. Brigham Young University – J. Reuben Clark Law School

David Gamage  Indiana University Maurer School of Law

Ari D. Glogower Ohio State University (OSU) – Michael E. Moritz College of Law

Daniel Jacob Hemel  University of Chicago – Law School

David Kamin  New York University School of Law

Mitchell Kane  New York University

Rebecca M. Kysar  Brooklyn Law School; Fordham University School of Law

David S. Miller  Proskauer Rose LLP

Darien Shanske  University of California, Davis – School of Law

Daniel Shaviro  New York University School of Law

Manoj Viswanathan  University of California Hastings College of the Law

 

 

 

 

 

 

 

The Idea of Equitable Tolling in Collection Due Process Request is Gaining Traction

Today we welcome guest blogger Samantha Galvin from the University of Denver. Professor Galvin is one of the four writers of our feature on designated orders published by the Tax Court. During the week she was “on” for the designated orders, the Court issued an which deserved its own post, and she took on that task. In the cases discussed below, the Tax Court reverses course and mitigates a somewhat harsh result that can occur when a taxpayer sends the CDP request to the wrong place within the IRS. The IRS has taken the position that if the taxpayer sends the CDP request to the wrong office, the taxpayer loses their right to a CDP hearing if the request does not find its way to the proper office within the 30 day time period allowed for making such a request. This rule has tripped up a number of pro se and represented taxpayers and becomes even harder to meet when the IRS gives wrong information. One issue raised by the cases Professor Galvin writes about today is whether these decisions represent a crack in the door regarding equitable tolling. Keith 

In the last couple of months, two designated orders have come out that suggest an unstated, equitable tolling exception may exist when it comes to collection due process (CDP) hearings requested pursuant to sections 6330 and 6320(a). The two most recent designated orders are Tarig Gabr v. C.I.R., Docket No: 24991-15 L (order here) and Taylor v. C.I.R., Docket No: 3043-17 L (order here). This issue has previously been covered in PT posts by Carl Smith most recently here and here.

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Typically, a taxpayer, or his or her representative, must request a collection due process hearing to the appropriate IRS office within 30 days from receiving either a “Final Notice of Intent to Levy” (LT 11) or a “Notice of Intent to File a Lien and Your Right to Request a Hearing” (Letter 3172).

The designated orders involve taxpayers who sent CDP requests within the 30-day period, but to the wrong IRS offices. The requests were not received by the correct offices until after the 30-day deadline. As a result, the IRS denied the taxpayers a right to a CDP hearing and instead granted them an equivalent hearing. If a request is not timely as to the 30-day deadline, but sent within one year a taxpayer is entitled to an equivalent hearing. An equivalent hearing provides a forum with IRS Appeals similar to a CDP hearing, however, it does not provide the same protection from collection or allow for judicial review.

The IRS and Tax Court’s position has generally been that the 30-day deadline is jurisdictional, which means it cannot be subject to equitable tolling. If it is instead a claim-processing rule, then there is an argument to be made that equitable tolling may apply in some cases.

The door to make this argument was opened by the Supreme Court in the context of veterans’ affairs related claims. In Irwin v. Department of Veteran’s Affairs, 498 U.S. 89 (1990), the Supreme Court held that a rebuttable presumption of equitable tolling should apply to suits against the United States, unless Congress clearly intends otherwise.

As to the question of whether the 30-day deadline is jurisdictional, in Henderson v. Shineski, 131 S. Ct. 1197 (2011), the Supreme Court urged courts to discontinue using the word “jurisdiction” for claim-processing rules, stating that the conditions that accompany the jurisdiction label should be reserved for rules that govern a court’s adjudicatory capacity such as subject-matter or personal jurisdiction. The Supreme Court acknowledged that it must look to Congress’ intent for a clear indication that a deadline is intended to carry harsh jurisdictional consequences before deciding whether equitable tolling should apply.

There have not been any Tax Court cases that decide whether equitable tolling should apply to collection due process requests, but in the recent designated orders the Tax Court rejects respondent’s argument that the Court lacks jurisdiction when a collection due process hearing request is filed within 30 days but sent to the wrong IRS office. According to respondent, this contradicts sections 7502 and 7503 which are used to determine timeliness only if a request is properly transmitted pursuant to Treas. Reg. sections 1.301.6320-1(c)(2) Q&A C-6 and Q&A C-4. In other words, respondent argues timeliness is only met when a request is sent within 30 days to the office where the request is required to be filed.

In Gabr, the taxpayer’s representative allegedly received erroneous instructions from an IRS employee and faxed the CDP request to the wrong office. In determining whether to grant or deny respondent’s motion to dismiss for lack of jurisdiction, the Tax Court acknowledged guidance from the Internal Revenue Manual section 5.9.8.4.2(8) that provides that if a taxpayer receives erroneous instructions from an IRS employee resulting in the request being sent to the wrong office then the postmark date for when the request was sent to the wrong office is used to determine timeliness.

In Taylor, however, there were no erroneous instructions given, rather the representative sent the request to a local office, instead of the office listed on the notice. Respondent relies on cases dealing with tax return filing and the assessment statute, bankruptcy, and foreclosure and lien withdrawal to argue that the CDP request cannot be equitably tolled. Respondent also relies on Gafford v. Commissioner, T.C. Memo 16-40, citing Andre v. Commissioner, 127 T.C. 68 (2006), where the Court held that requiring taxpayers to follow claim-processing rules creates procedural consistency in effectively and efficiently processing such requests. But Andre is distinguishable from Gabr and Taylor, because Andre dealt with a request that was sent to an incorrect address prematurely, prior to the issuance of an LT 11 or Letter 3172.

In Taylor, the Tax Court was not convinced by any of respondents’ arguments since it denied respondent’s motion to dismiss for lack of jurisdiction and stated that respondent did not demonstrate sufficient prejudice to enforce strict compliance with the Treasury Regulations on the matter.

Does this mean these cases will result in decisions that can be relied upon to argue that the 30-day deadline can be equitably tolled for CDP requests in certain circumstances? So far, no. In Gabr, respondent conceded the case so the final decision issued by the Court did not speak on the issue. We will have to wait and see what happens in Taylor, but at the very least these designated orders suggest the Court is open to entertaining the argument.

WARNING: In Guralnik v. Commissioner, 146 T.C. 230, 235-238 (2016), the Tax Court held, en banc, that the different 30-day period in section 6330(d)(1) to file a Tax Court petition after a CDP notice of determination is issued is jurisdictional and not subject to equitable tolling under current Supreme Court case law. But the sentence containing the 30-day period in section 6330(d)(1) explicitly contains the word “jurisdiction”, while the 30-day periods in subsections (a)(3)(B) of section 6320 and 6330 do not. Keith and Carl Smith are in the midst of litigating whether the Tax Court’s position in Guralnik is correct in both Cunningham v. Commissioner, Fourth Circuit Docket No. 17-1433, and Duggan v. Commissioner, Ninth Circuit Docket No. 15-73819 (both cases where taxpayers mailed off their petitions a day late, but argue that they were misled by the language of the notice of determination that appeared to give them 31 days to file courting from the day of the notice of determination). Oral argument happened in Cunningham on December 5, and you can hear the argument here. (Harvard Federal Tax Clinic student Amy Feinberg argued the case for Ms. Cunningham.) Whichever way the Cunningham case comes out, it is clear that the judges there were giving Keith’s and Carl’s argument a serious hearing and not dismissing it lightly. The Duggan case was submitted without oral argument on December 7.

 

DOJ Argues that Small Tax Case Designations Can Only Be Removed for Exceeding the Jurisdictional Amount in Dispute Limit

We welcome back frequent guest blogger Carl Smith who writes about an interesting development regarding the government’s view of the effect of electing small case status in a Tax Court case. Keith

I write this post because I am sure that what the DOJ is arguing in the Tenth Circuit is, if accepted, going to be a shock to both the Tax Court and the IRS. I suspect that the latter has no idea that the DOJ is trying to take away a case management tool it has been using for almost 50 years. The DOJ is arguing that under section 7463(d), the sole circumstance in which the Tax Court may remove a small tax case designation is when it is belatedly discovered that the $50,000 amount in dispute limit for small tax cases has been exceeded. The DOJ argues that legislative history (relied on by the IRS and Tax Court over the years) that suggests other reasons for removing the small tax case designation (such as to create precedential rulings either in the Tax Court or the appellate courts) should be ignored, as the statute itself is clear.

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Section 7463 gives taxpayers the option (concurred in by the Tax Court pre-trial) to designate a case as a small tax case. The scope of the authority to remove the small tax case designation is one thing at issue in the Tenth Circuit in an appeal of Vu v. Commissioner, T.C. Summary Op. 2016-75 – a case on which Les previously blogged here.

In Vu, the taxpayer filed a pro se innocent spouse petition under section 6015(e) too early (though she had no reason to think so). The IRS filed an answer that did not allege any premature filing. By the time that the IRS moved to dismiss her case for lack of jurisdiction as prematurely filed, she could no longer correct her error by timely filing another petition. Judge Ashford stated that she had to dismiss the petition for lack of jurisdiction because the filing deadlines in section 6015(e) are jurisdictional. Though, as she did so, Judge Ashford herself wrote that “this is an inequitable result”.

At that point, Keith and I stepped in to represent Ms. Vu pro bono and moved for reconsideration, to vacate, and to remove the small tax case designation.

In the motions for reconsideration and to vacate, we argued that (1) under current Supreme Court case law, the filing deadlines are not jurisdictional and (2) the IRS waited too long to raise – and so forfeited – what is really a non-jurisdictional statute of limitations defense. At the time we made those arguments, the Tax Court in Pollock v. Commissioner, 132 T.C. 21 (2009), had held the 90-day filing deadline in section 6015(e) to be jurisdictional – based, in part, on Supreme Court case law up to 2009. But, no court of appeals had ruled one way or the other on whether the filing deadlines in section 6015(e) are jurisdictional.

In our motion to remove the small tax case designation, we pointed out the novelty of the jurisdictional issue in the appellate courts, that Ms. Vu’s case (if the designation were removed) could be appealed to the Tenth Circuit, and that the issue of whether the section 6015(e) 90-day filing deadline is jurisdictional was presented in two then-pending Circuit courts in appeals that Keith and I had also brought.

Rather than ruling immediately, Judge Ashford waited until the Second and Third Circuits held the 90-day period in section 6015(e) jurisdictional in Rubel v. Commissioner, 856 F.3d 301 (3d Cir. 2017), and Matuszak v. Commissioner, 862 F.3d 192 (2d Cir. 2017). Then, relying on Pollock, Rubel, and Matuszak, Judge Ashford denied the motions to reconsider and to vacate.

In the same order (on which Patrick Thomas blogged here in a designated order post), Judge Ashford also denied Ms. Vu’s motion to remove the small tax case designation. Judge Ashford noted that the amount in dispute in the case did not exceed $50,000. She also thought there was now enough precedent on the jurisdictional issue adverse to Ms. Vu so as not to justify removing the designation so that Ms. Vu could attempt to create Tenth Circuit precedent. The Judge also felt that, while technically timely (since the motion was made before the decision was final or any trial began), granting a motion to remove the small tax case designation after the judge had already issued an opinion “violates the spirit of the Court’s small tax case rules”.

Section 7463(b) states, in part: “A decision entered in any case in which the proceedings are conducted under this section shall not be reviewed . . . .”

Section 7463(d) states, in relevant part:

At any time before a decision entered in a case in which the proceedings are conducted under this section becomes final, the taxpayer or the Secretary may request that further proceedings under this section in such case be discontinued. The Tax Court, or the division thereof hearing such case, may, if it finds that (1) there are reasonable grounds for believing that the amount of the deficiency placed in dispute, or the amount of an overpayment, exceeds the applicable jurisdictional amount described in subsection (a), and (2) the amount of such excess is large enough to justify granting such request, discontinue further proceedings in such case under this section.

Legislative history states:

In view of the proposed increase in the small tax case jurisdictional amount to $5,000 it is contemplated that, the Tax Court will give careful consideration to a request by the Commissioner of Internal Revenue to remove a case from the small tax case procedures when the orderly conduct of the work of the Court or the administration of the tax laws would be better served by a regular trial of the case. . . . [R]emoval of the case from the small tax case category may be appropriate where a decision in the case will provide a precedent for the disposition of a substantial number of other cases or where an appellate court decision is needed on a significant issue.

  1. Rept. 95-1800 at 277-278.

Relying on this legislative history, the Tax Court, over the years, has taken the position (with which the IRS agreed) that it had the power to remove small tax case designations for pretty much any reason (if the taxpayer asked) and for the reasons stated in the legislative history (if the IRS asked or the court acted sua sponte). See, e.g., IRS Chief Counsel Memorandum 200115033, 2001 IRS CCA LEXIS 13 (Feb. 14, 2001) (“While the small tax case designation turns chiefly on the amount in dispute, the government has succeeded in having the small tax case designation removed in cases where a decision in the case will provide a precedent for the disposition of a substantial number of other cases or where an appellate court decision is needed on a significant issue.”) The Tax Court views the second sentence of section 7463(d) as providing merely an illustration of one of the grounds for removing small tax case designations, not the exclusive reason.

Despite our setback in not getting the Tax Court to remove the small tax case designation – which would have made an appeal easier – Keith and I appealed the Vu case to the Tenth Circuit (Docket No. 17-9007). That Circuit suspended briefing in the case and requested the parties to discuss its appellate jurisdiction in light of section 7463(b)’s prohibition on appeals from small tax cases.

On November 15, 2017, Keith and I filed a response to the Tenth Circuit arguing two grounds for appellate jurisdiction:

First, we contend that section 7463(b) does not preclude appellate review of certain procedural rulings of the Tax Court in small tax cases. This is a novel argument under section 7463(b). However, section 7429(f) precludes appellate review of district court or Tax Court determinations made in section 7429 jeopardy assessment proceedings, and the majority of courts of appeals to have considered the issue has held that review of section 7429 procedural rulings is not barred by the statute. See, e.g., Wapnick v. United States, 112 F.3d 74 (2d Cir. 1997) (“Following other circuits, we hold that this limitation applies only to decisions on the merits regarding the jeopardy assessment in question. A dismissal of a Section 7429 proceeding for lack of subject matter jurisdiction is, therefore, appealable.”; citations omitted). Keith and I argue that the limitation of appeal in small tax cases should similarly not preclude review of the Tax Court’s (in our view erroneous) dismissal of a small tax case for lack of jurisdiction.

Second, we take the position that a denial of a motion to remove a small tax case designation is itself appealable (also a novel issue on which there is no case law). We argue (1) that Judge Ashford abused her discretion in denying a taxpayer request that was technically timely, and (2) that the statute’s authorization of removal before a decision in a small tax case becomes final shows that Congress intended to have the Tax Court sometimes remove small tax case designations after the court had already ruled on an issue. Relying on the legislative history of section 7463(d) and long-standing Tax Court practice, we argue that Judge Ashford was wrong to deny Ms. Vu a chance to create Tenth Circuit precedent on a significant, novel legal issue in that Circuit.

In a response filed on November 30, 2017, the DOJ distinguished section 7429(f) precedent on the ground that the statute there precludes the review of “determination[s]”, not “decision[s]” (as in section 7463(b)). Most shockingly, though, the DOJ, while conceding that Ms. Vu timely filed her motion to remove the small tax designation, argues that section 7463(d) only allows the Tax Court to remove a small tax case designation where the court finds that the $50,000 jurisdictional amount in dispute limit is exceeded. The DOJ contends that the statute’s language plainly shows this, so the legislative history laying out other grounds for removing the small tax case designation should be disregarded.

On December 7, 2017, Keith and I filed a reply that showed the Tenth Circuit the long history of the Tax Court making determinations on motions to remove small tax case designations using the criteria set out in the legislative history (such as to create appellate precedent) – not just looking at whether the jurisdictional limit has been exceeded.

Observations

As a litigant in the Vu case, I don’t feel comfortable saying anything more than this: Whether the DOJ is right on the removal power’s scope, I am pretty certain that the DOJ did not consult with the IRS before making the argument that the only ground on which the Tax Court can remove a small tax case designation is that the jurisdictional limit has been exceeded. Indeed, it is ironic that Ms. Vu’s case is an innocent spouse case where an argument is untimely filing. It wasn’t too many years ago that the Tax Court in Lantz v. Commissioner, 132 T.C. 131 (2009), invalidated a 2-year limitation on requesting section 6015(f) equitable innocent spouse relief that was set out only in a regulation. In order to challenge this ruling in many Circuits, the IRS sought to remove small tax case designations in a number of pending Tax Court cases so that the IRS could create precedent in many Circuits (and hopefully generate a Circuit split). See Iljazi v. Commissioner, T.C. Summary Op. 2010-59 at p. *4 n.1, where I was counsel for the taxpayer and where Judge Panuthos denied the IRS motion – basically on the theory that taxpayer preferences to stay as small tax cases should generally be honored.

 

 

 

Designated Orders: 11/20-11/24

 Professor Samantha Galvin of University of Denver Sturm College of Law brings us Designated Orders for the week ending November 24. The post looks at an order concerning a request to seal records and two interesting bench opinions. One bench opinion concerns the challenges proving deduction of vehicle expenses when a taxpayer has multiple sources of income and multiple cars. The other shows the dangers of petitioning the Tax Court when the return in question has other questionable items that could lead to a deficiency greater than initially proposed in a notice of deficiency–especially when the taxpayer fails to participate in the case beyond filing the petition. Les

Only five orders were designated for the week ending November 24, and the orders not discussed are here (granting respondent’s motion to dismiss and imposing a 6673 penalty) and here (granting petitioner’s motion for protective order).

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The Penleys’ Privacy

Docket No: 13243-15, Penley v. C.I.R. (Order Here)

The Penleys are back in the designated order spotlight. It’s unclear why Judge Wherry is continuing to highlight their case, but this most recent designated order addresses petitioners’ motion to seal the case pursuant to Rule 103(a) to which respondent objects. This motion comes after petitioners were denied a motion for reconsideration in October.

Petitioners state that respondent failed to redact their social security numbers and other sensitive information from some court filings which resulted in theft of either their or a witness’s identity and a telephone scam. Petitioners did not provide any proof of this which appears to be a recurring theme for them.

The Court agrees that the sensitive information should be redacted. The Court also addresses a specific instance where respondent did not redact the petitioners’ SSNs in accordance to Rule 27(a), but respondent had subsequently corrected the error by substituting the unredacted copy with a redacted copy. The unredacted copy was removed from the public record and sealed.

Some unredacted information, not under seal was submitted by petitioners themselves, which generally means they have waived the protection of the privacy rules. Another order dealt with a similar issue and was highlighted in a previous PT post .

The Court balances the public needs for fairness and truth which are satisfied by making court records publicly available with the need, pursuant to Rule 103(a), to protect petitioners or witnesses from annoyance, embarrassment, oppression, or undue burden or expense.

To balance these competing interests, the Court decides a less drastic alternative to sealing the record using Rule 27(h) should be used and denies petitioners’ motion to seal the entire case. Rule 27(h) permits the petitioners to correct their inadvertent disclosure by submitting a redacted, substitute filing. The Court also allows petitioners to notify respondent of any other unredacted documents, and that may be the last time we will see the Penleys.

Miles and miles

Docket No: 10629-14, Asong-Morfaw v. C.I.R. (Order Here)

This is the first of two designated orders from the week that contained bench opinions. Bench opinions are permitted under I.R.C. 7459(b) and Rule 152(b), and like designated orders cannot be cited as precedent. Not all bench opinions become designated orders, so there is a reason these are being highlighted – perhaps to serve as means of educating the public and pro se petitioners.

The first bench opinion involves whether a petitioner was entitled to take the vehicle expenses he had claimed on his 2010 tax return. Petitioner worked at a translator, tax preparer, and part-time employee at a center for mentally ill individuals in the year at issue.

Petitioner originally claimed $16,251 in vehicle expenses in connection with his translation business and during the audit stage, he was disallowed all but $1,743 of the expenses. Petitioner states that he had driven 3,485 miles but his mileage log only listed 1,416 miles. At trial, he testified that he actually had three cars which he used, along with other members of his family, for mixed business and personal use.

One of those vehicles is a Toyota RAV and petitioner purchased this vehicle in April of 2010. Petitioner alleges that he only used the Toyota RAV for business, so he wants to take actual repair costs and bonus depreciation under section 179. The Court starts chipping away at this argument and petitioner reveals that he also used the Toyota to commute to his part-time employment, so those miles are personal rather than business-related.

As a result of the mixed business and personal use, all of petitioner’s vehicles, including the Toyota, are listed property under section 280F, so if petitioner wishes to take actual expenses rather than mileage, he must determine what percentage of the vehicle use was qualified business use. Petitioner fails to allocate between personal and business miles for his three cars and it was impossible for the Court to determine the use percentage based on the record.

Then the Court analyzes whether petitioner is entitled to bonus depreciation. Section 168(k) allows for 50% depreciation in the year a vehicle is placed in service, or 100% if acquired between 9/8/2010 and 1/1/2012. The Toyota was placed in service on 4/17/2010, so it is not eligible for 100% bonus depreciation. The Toyota is also not eligible for 50% depreciation, because petitioner did not prove that it was predominantly used for business purposes, so it was not qualified property.

The Court allows the amount the auditor originally allowed while acknowledging that the government is being generous. Petitioner is entitled to mileage for 3,485 miles even though his mileage log reflected less.

Respondent Meets Burden without Petitioner Present

Docket No: 16860-16 S, Wallace v. C.I.R. (Order Here)

This second bench opinion may be an example of what can happen when petitioner does not participate in the trial, even when the burden with respect to some items has shifted to respondent. The following issues are before the Court: 1) cancelled debt income, 2) filing status, 3) dependency exemption, 4) earned income tax credit, 5) itemized deductions and 6) education credits.

Only the cancelled debt was raised in the notice of deficiency, but respondent raised the remaining issues in his answer. Respondent has the burden to any new matter or increases in deficiency raised in an answer pursuant to Rule 142(a)(1). Petitioner did not provide evidence on any of the issues, and even though the burden was on respondent for most of the issues, petitioner still did not fair well.

With respect to each issue:

Since petitioner did not appear nor provide any evidence about the cancelled debt, the Court finds for respondent. Cancelled debt is an issue that we see in our clinic often because many taxpayers don’t understand that cancelled debt is taxed as income, unless an exception or exclusion applies.

Petitioner filed as head of household and his wife filed as single. The Court determined petitioner was not entitled to head of household status because he was married during the whole year. The burden is on respondent who offers proof that petitioner had filed a bankruptcy petition with his wife in the year at issue reflecting that they were married, and also used a married filing status on the following year’s return. Head of household status also requires that the petitioner has a qualifying dependent – which is the next issue the Court analyzes.

Again, respondent has the burden and proves that petitioner’s son, who was claimed as a dependent, was 25 years old in the year at issue which makes him too old to be a qualifying child even if he was a student, and there is no evidence that he was disabled. Respondent also proves that petitioner’s son earned more than $8,000 in the year, which is too much income for a qualifying relative.

After finding the petitioner ineligible for head of household status and the dependency exemption for his son, the Court analyzes whether he would qualify for the earned income tax credit (EITC). Respondent proves petitioner’s AGI exceeds the income limitations for taxpayers without qualifying children, so he is not entitled to EITC.

As to the itemized deductions, petitioner claimed tax preparation fees but had not used a paid preparer. He also claimed substantial medical expenses, but the expenses had been discharged in bankruptcy.

Petitioner claimed education credits but the IRS did not receive any information, such as a form 1098-T, from a qualified educational institution reporting that petitioner had paid educational expenses so he is not entitled to the credits.

Respondent met his burden using information available through public records and other means, so the Court disallows all items. Perhaps had the petitioner participated, things would have gone differently for him.

Collection from Retirement Accounts Part 3 – IRS Pushes Hard to Collect from F. Lee Bailey

The bankruptcy court in Maine has granted relief from the automatic stay to allow the IRS to collect from Mr. Bailey’s pension accounts and Social Security benefits. While the IRS has the power to go after these accounts, its exercise of this power is governed by the issues discussed in the first two parts of this series. This is another defeat for Mr. Bailey in his efforts to protect his assets from the collection of federal taxes. I wrote previously about Mr. Bailey’s filing of the bankruptcy petition after suffering a massive loss in Tax Court.

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In my earlier post regarding Mr. Bailey’s Tax Court loss, I speculated that Mr. Bailey might achieve relief in bankruptcy because his Tax Court case resulted in the imposition of an accuracy related penalty rather than the fraud penalty. That may still be true; however, the type of penalty does not stop the IRS from pursuing his assets and that is what it is doing with a vengeance. The bankruptcy court starts off the opinion stating “This bankruptcy case is another chapter in the decade long struggle between the Internal Revenue Service and Mr. Bailey over taxes.” We have not previously written much about the ability of the IRS to take a taxpayer’s social security payments and pension accounts. In addition to the first two posts in this series, I briefly touched on it recently in a post about military pensions where I discussed the federal payment levy program. Mr. Bailey’s case provides the opportunity to discuss how and when the IRS will take these assets as the policies apply to a specific individual rather than the group of individuals studied by TIGTA.

Based on the pursuit of these assets in the bankruptcy case, it seems clear that the IRS has determined that Mr. Bailey meets its definition of having committed flagrant conduct regarding the payment of his taxes. I discussed, and linked to, the IRS definition of flagrant conduct in the first post in this series. Cases where the IRS makes the determination that the taxpayer’s conduct is flagrant are the ones in which you see the IRS using its collection tools to their full effect. You should always seek to have your clients behave in a way that keeps them from fitting into the flagrant criteria or, should their conduct fall into the flagrant criteria, have them work quickly to mitigate that behavior because that type of behavior can cause the IRS to use some tools at its disposal that it might otherwise keep holstered.

The IRS will routinely go after 15% of a taxpayer’s social security payments through the federal payment levy program. As discussed in the post referenced above, the IRS has filters that it applies, thanks to the National Taxpayer Advocate, which exclude from the FPLP taxpayers whose income appears to be less than 250% of poverty. Section 6343 requires that the IRS not levy on taxpayers when the levy would put the taxpayer into a hardship situation and the filters the IRS applies in the FPLP program recognize that a high percentage of the individuals with income below 250% of poverty would end up in a hardship situation if the IRS levied on 15% of their Social Security payments. Of course, individuals whose income exceeds 250% of poverty can come into the IRS and show that the levy places them in hardship status if the IRS takes 15% through this program. For a detailed description of FPLP, see part two of this series.

The IRS need not limit itself to 15% of a taxpayer’s Social Security payments and it can levy on the entire amount of the payments if it chooses and if doing so does not place the taxpayer into hardship status. The opinion does not say whether the IRS plans to take only 15% of his Social Security payments or all of them; however, I would be surprised if it is not planning to take them all. When it seeks to take all of a taxpayer’s Social Security payments, the discussion in the last part of part two of this series becomes important. Mr. Bailey’s case is or was prior to bankruptcy in the hands of a revenue officer. Now that he is in bankruptcy, there will also be a bankruptcy specialist working on his case and probably an attorney at the Office of Chief Counsel. These individuals will apply the policy decisions set out in the manual in deciding to take his social security payments. The only legal impediment, aside from the automatic stay, is IRC 6343 setting out the hardship exception to levy.

As discussed previously, taking social security payments does not stop when the statute of limitations on collection ends. The IRS lien attaches to the taxpayer’s right to the stream of payments. Because the taxpayer’s right to this stream is fixed, once the IRS levies on the taxpayer’s interest in the social security payments the levy attaches to the right to receive all of the payments. So, as long as the taxpayer lives and the tax debt remains outstanding, the IRS can continue to receive the social security payments.

From part one of this series you know that the IRS can also levy on interests that taxpayers have in IRAs or pension plans. Even though ordinary creditors cannot reach assets in pension plans because of restrictions put in place by ERISA, these restrictions do not apply to the IRS. The IRS has policies that cause it to pause and obtain approvals and certain levels within the agency in order to levy on pension plans but the law places basically no restrictions that prevent the IRS from levying on these plans. A levy on a pension plan does not accelerate payment from the plan, but just like the levy on the taxpayer’s Social Security payments, the levy on the pension plan does attach to all of the rights the taxpayer has in the plan even if those rights include future and not present payments. I can only assume that prior to seeking to lift the stay in Mr. Bailey’s bankruptcy case, the IRS and its lawyers have already made a determination that neither the policies in the manual or the provisions in IRC 6343 prevent levies upon his pension plan or social security payments.

These IRS rights to pursue Social Security and pension plan payments play out in Mr Bailey’s bankruptcy case in the context of the automatic stay. The automatic stay comes into existence the moment a debtor files a bankruptcy case and works to prevent creditors from taking most assets of the debtor and of the estate. Bankruptcy code section 362(a) lists eight separate matters covered by the automatic stay; however, creditors can apply to the bankruptcy court to lift the automatic stay to permit the creditor to go after an asset otherwise protected by the stay. That is what the IRS has done in Mr. Bailey’s case. The bankruptcy court must then determine whether to lift the automatic stay to permit the IRS to collect from these assets while the bankruptcy case proceeds.

The concern of the IRS is that if Mr. Bailey receives these payments he might spend them. Each time he spends the payments from Social Security and the pension plan, he dissipates an asset on which the IRS has a lien interest and allowing him to receive the payments can only occur if he provides adequate protection to the IRS that its lien interest will not be harmed by his receipt of these payments. The bankruptcy court notes that he has the burden of proof on all issues connected with the motion of the IRS to lift the stay except on the issue of the equity in the Social Security and pension benefits. The IRS must show these assets have equity to which the federal tax lien has attached. Showing that equity exists in social security and pension plan payments is very simple.

By the time the IRS filed the motion to lift the automatic stay, Mr. Bailey had already received his chapter 7 discharge. The discharge lifted the automatic stay with respect to collection against him personally but the stay would continue with respect to assets of the bankruptcy estate until the estate was closed. The claims of the IRS survived the discharge in the chapter 7 case according to the bankruptcy court but the court does not provide specific information as to why they survived. It appears that even if some or all of the IRS claims were not excepted from discharge under bankruptcy code 523, the federal tax lien continued to attach to property belonging to Mr. Bailey which he kept after the chapter 7. After the conclusion of the chapter 7 case, Mr. Bailey filed a chapter 13 bankruptcy case. This maneuver is sometimes called a chapter 20.

The court finds that the IRS lien interest in the Social Security and pension payments is not adequately protected. Mr. Bailey said he needed to use the payments from these sources to fund his chapter 13 case and therefore he should get to keep them; however, that is exactly what the IRS fears since in using them to fund the plan he will spend the money from these plans and as he does so he destroys the lien interest of the IRS. The court points out that though it rules for the IRS in this summary type proceeding, Mr. Bailey can challenge the lien claim of the IRS in another proceeding should he seek to do so.

Mr. Bailey continues in his second bankruptcy case to do what many taxpayers before him have tried to do and use bankruptcy to wriggle free from federal tax debt. While it is possible to do that in certain circumstances, where the IRS has perfected its lien, debtor has assets to which the lien attaches, and the IRS is diligent in protecting its rights, the debtor will basically always lose. That does not mean the IRS will ultimately collect the $5 million dollars owed to it, but it does mean that while some or all of that debt remains due and owing, the IRS will continue to have open season on his assets including his Social Security and pension assets.

 

Levies on Retirement Accounts – Part 2 of 3 Social Security

In Part 1 of this series of posts on levies, I wrote about the ability of and the restrictions on levies on retirement plans by the IRS. In this post, I will discuss the ability of the IRS to levy upon a taxpayer’s social security payments, the choice the IRS has in how to do that, and the restrictions the IRS places upon itself as it decides to impose these levies. The big difference between levying on retirement accounts and on social security derives from the source of the funds. Retirement accounts rest with private parties while it is the government itself that makes the social security payments while at the same time being the party owed the unpaid taxes. In many ways, taking all or a part of a taxpayer’s social security payments is a form of offset; however, the Code does not treat it as an offset the same way it treats the offset of a refund in one year and a liability for a prior period.

IRC § 6331(h)(2)(A), as prescribed by the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1024, authorizes the IRS to issue continuous levies on certain federal payments. The Bureau of the Fiscal Service (BFS) (formed from the consolidation of the Financial Management Service and the Bureau of the Public Debt) is the Department of Treasury agency that processes payments for various federal agencies. Payments subject to FPLP include any federal payments other than those for which eligibility is based on the income or assets of the recipients. With a regular offset, the IRS simply programs its computers to check for any liabilities before it sends the refund to BFS for payment to the taxpayer. With social security, the IRS sends notice of the liability to BFS and the taking of the funds occurs at that level outside of the IRS since the funds, although coming from the federal government, come from another agency.

IRC Section 6334(a)(11) exempts from levy certain needs based payments such as Supplemental Security Income payments to the aged, blind, and disabled as well as State or local government public assistance or public welfare programs for which eligibility is determined by a needs or income test. The exemptions in section 6334 do not apply to regular social security payments since they are based on contributions and not based on need. Some taxpayers receiving social security do not need their social security payments to meet basic needs but many do. The IRS knows that many social security recipients will face hardship if all or a part of their social security payments are taken to satisfy tax liabilities. The debate concerns how to take the money of the taxpayers who do not need it while identifying the taxpayers who need it in order to avoid hardship.

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As with the discussion on retirement accounts, this discussion is built upon a report issued by the Treasury Inspector General for Tax Administration (TIGTA). On June 30, 2016, TIGTA issued “Revenue Officer Levies of Social Security Benefits Indicate That Further Modification to Procedures Is Warranted” in which it discusses in detail the rules governing the IRS levy upon social security benefits and reviews how the IRS has done in following those rules. The discussion starts with a reminder of the federal payment levy program (FPLP). For the publication on FPLP created by the Taxpayer Advocate’s office look here.

Federal Payment Levy Program and Social Security

The TIGTA report describes the FPLP as follows:

“The FPLP is an automated program that includes taxpayers in both the Automated Collection System and the Collection Field function along with inventory that is currently not being worked by either Automated Collection System or the Collection Field function….

Through the FPLP, the IRS can issue a continuous levy of 15 percent on Social Security benefits. During Fiscal Year 2014, the majority of revenue collected by the FPLP program was from Social Security benefits. Between Calendar Years 2002 and 2006, the IRS had a low-income filter for Social Security benefits levied through the FPLP, but that particular filter was found to be inaccurate by the Government Accountability Office. The Government Accountability Office’s recommendation advised the IRS to eliminate the exclusion until a more accurate criterion could be developed. “

The IRS reinstated the filter in 2011, and it causes taxpayers whose income presents itself to the IRS as under 250% of poverty to bypass the FPLP in order that they can receive their full payment.

IRM 5.11.7.2 contains the description of all of the automatic offset programs operated between the IRS and Treasury. While the offset of funds from social security payments is the largest of these programs, it is only one of several including many designed to capture past due taxes from federal employees. According to IRM 5.11.7.2.3.4.2, the IRS sends the name of social security recipients with past due taxes over to the IRS after sending out a notice of intent to levy letter:

“For Social Security payments matched, a FPLP levy will be transmitted to BFS at least eight (8) weeks but no more than twenty-six (26) weeks from when the CP 91 or 298, Intent to seize up to 15% of your Social Security benefits, was issued (indicated by the unreversed TC 971 AC 169 posting cycle). A FPLP levy TC 971 AC 662 will post on the module with the literal “SSA” displayed in the Miscellaneous Field and TIN in the XREF TIN field.”

The NTA has written extensively on social security levies and particularly on the issue of the filters imposed to allow certain accounts to bypass the social security levy. For background, an interested reader might want to check out her report found here from the 2014 annual report to Congress. The discussion in the report focuses heavily on the decision of the IRS to exclude from its filters those taxpayers with unfiled returns. This discussion which also gets some play in the TIGTA report focuses on the reason for these levies and whether levies on retirement accounts and social security payments where taxpayers are known to be especially vulnerable should be used for general enforcement. The IRS has long used the levy as a means of promoting compliance because it wakes up the taxpayer by moving the IRS from its status as “pen pal” by sending many letters requesting payment, to the status of law enforcement when the taxpayer feels the pain of lost funds.

Collection by Revenue Officers

The TIGTA report focuses on the collection by revenue officers of social security payments. As discussed previously, the cases in the hands of revenue officers, the IRS field collection agents, will primarily be accounts in which a large amount of tax is due. TIGTA points out that revenue officers have no special instructions regarding pursuit of collection from social security payments. It made the following diverse findings from its interviews of 26 collection employees at various levels:

When making Social Security levy determinations, revenue officers are not required to consider whether the taxpayers’ income level is below 250 percent of the Federal poverty level . Field Collection procedures require that they determine if the FPLP process will be part of their strategy to resolve the case. Some other observations made in our audit interviews include:

  • Some Field Collection group managers require that all other taxpayer resources be levied before attempting to levy Social Security benefits, while others do not.
  • Some group managers believed that, in upwards of 90 percent of their cases in which paper levies are made on taxpayers, the taxpayer possesses no other source of income.
  • Some group managers stated that the case had to be “egregious” before Social Security Benefits would be levied above the 15 percent FPLP levy.
  • Some group managers indicated that Social Security levies were used to get a taxpayer’s attention, while others believed such use of a levy is not appropriate.
  • Some revenue officers use Form 668-W, Notice of Levy on Wages, Salary, and Other Income, which ensures that levied taxpayers receive the exemptions to which they are entitled, while others use Form 668-A, Notice of Levy, to maximize the levy.
  • Most interviewees indicated that most cases involving Social Security benefits already have an FPLP levy on the case when the case is assigned.
  • In one territory, the territory manager indicated that the groups in that territory never levy 100 percent of Social Security benefits. A revenue officer within that same territory indicated that he had issued as many as five Social Security levies in the past year and used Form 668-A to levy the maximum amount.
  • All interviewees indicated that a financial analysis should be performed on a Collection Information Statement to assess the taxpayer’s ability to pay the tax, and all stated that the“250 percent above Federal poverty level” criterion is not factored into their analysis.

In most of the cases in which the revenue officers were assigned, the IRS had already begun collecting 15% through the FPLP process and the question for the revenue officer was whether to take the entire social security payment. The median amount owed of the accounts sampled by TIGTA was over $80,000. TIGTA found that in 85% of the cases in which the revenue officer decided to levy, the decision fell within the guidance; however, in 15% of the cases the levy exacerbated or caused hardship. TIGTA noted that in the cases in which it determined the levy caused hardship the notes of the revenue officer usually supported the conclusion reached by TIGTA. TIGTA recommended better guidance for revenue officers on when to pursue a taxpayer’s social security and the IRS management agreed.

Conclusion

The ability to determine between a “can’t pay” and a “won’t pay” taxpayer is a difficult decision that requires both training and judgment. Both TIGTA and the NTA have written about the failure of the IRS to train and the failure of revenue officers and their managers to use appropriate judgment. If a revenue officer levies on a client’s social security payments because the client did not cooperate or did not file past due returns, use the decision in Vinatieri v. Commissioner, 133 T.C. 392 (2009) as well as the relevant manual provisions to convince the revenue officer to remove the levy. TIGTA’s report shows that the IRS gets the decision right most of the time but if the 15% error rate is correct, that still leaves a large number of taxpayers, many of whom are unrepresented, losing necessary funds to make ends meet. Providing revenue officers with better training and better oversight requires funds which is a problem we have discussed many times before.