Requesting Information about IRS Collection Activity on a Spouse or Former Spouse

We recently celebrated the 20th anniversary of the Restructuring and Reform Act of 1998 (RRA 98). That legislation requires the Treasury Inspector General for Tax Administration (TIGTA) to perform a number of annual audits to determine if the IRS complies with specific provisions of the Internal Revenue Code. One of the matters that TIGTA must review and report on each year concerns compliance by the IRS with the requirement that the IRS provide information to spouses about collection from the other spouse or former spouse on an account resulting from a joint return. TIGTA has recently issued its 20th annual report on this topic which shows that 22 years after enactment of the law requiring disclosure to the other spouse and 20 years after requiring an annual review a high percentage of IRS employees do not understand the law and the guidance in the Internal Revenue Manual (IRM) does not adequately guide.

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For anyone who has asked the IRS for information about a spouse or former spouse regarding a liability stemming from a joint return, the TIGTA report will not come as a surprise. Maybe the civil and criminal penalties IRS employees face for making a wrongful disclosure, in addition to the employee sanctions, should cause us to expect that if you ask for information about someone other than yourself the IRS employee’s knee jerk reaction will be no since not providing the information will almost never get the employee into trouble but providing it when they should not has a high likelihood of creating a personal problem for the employee. The IRS generally does a good job of not disclosing. Ask President Trump who should be a big fan of the IRS and its compliance with disclosure laws. We have not seen his returns despite a lot of curiosity about them. The lack of a leak speaks highly of the IRS ability to follow the disclosure provisions.

When Congress has created an exception to the general rule of non-disclosure, the IRS does not get high marks. Part of the problem stems from the complexity and length of IRC 6103. Anyone taking the time to read that statute from end to end knows that it is not only one of the longest sections in the code but is also quite complex. Still, the subsection added in 1996 to allow one spouse to find out what is happening regarding collection from the other spouse (or former spouse) should not create too difficult a technical barrier to compliance. Yet, a relatively high percentage of the employees at the IRS cannot get it right.

One of the issues that regularly tripped up IRS employees was mirrored accounts. We recently discussed the misinformation delivered by IRS regarding a mirrored account and that case did not involve the disclosure exception in IRC 6103(e)(7) or (8). The TIGTA report shows that when the IRS creates mirrored accounts, as it will do when there is an innocent spouse request or a Tax Court or bankruptcy petition by just one party to a joint return, IRS employees become even more reluctant to disclose information about the other party to the joint return. For anyone not familiar with the term mirrored account discussed in the TIGTA report, read our post here, which provides a brief explanation of the IRS master file system and the non-master file, or mirrored system of accounts, created in certain circumstances where the accounts of taxpayers on one master file assessment, typically a joint return assessment, move in different directions and require special handling.

The TIGTA report not only shows that IRS employees do not understand how to respond when the IRS creates a mirrored account but also that the IRS has done a poor job of writing the IRM to guide its employees on how to handle requests for information from one spouse about another. Helpfully, the IRS does not require the request to be made in writing; however, in far too many cases taxpayers requesting information about their spouse or former spouse simply get turned away and told they do not have access to such information. Anyone trying to obtain this information on behalf of a client may not be able to convince the IRS employee by citing them to an IRM provision – the normal place to start any discussion with an IRS employee – since the IRM has not provided clear guidance.

In March, the IRS attempted to address this problem by putting a number of examples in the IRM to guide its employees to the right answer. Look at IRM 5.19.5.4.11.1 (Mar. 9, 2018). Perhaps the new IRM provisions will help to clear up the problem either by making IRS employees more informed in the first place or making them comfortable when the taxpayer or the representative cites the IRS to the new IRM provision in support of releasing the information. Anyone who has sought to convince an IRS employee of the law knows that citing to the Code is a waste of breath. The only thing that matters to 99% of IRS employees is the guidance in the IRM. The TIGTA report did not test IRS employees after the release of the new IRM provisions. Perhaps spouses seeking information in the future will have better luck. My guess is that they will not but with the new IRM provisions perhaps knowledgeable representatives will have more success in citing to the IRM.

 

Paying the Full FBAR Penalty

Few penalties have the bite of the FBAR penalty. As the IRS obtained more information and more sophistication in locating foreign bank accounts, it offered taxpayers who had used such accounts the opportunity to limit their civil and criminal exposure through a series of Offshore Voluntary Disclosure Initiatives (OVDI and its cousin OVDP). We have discussed OVDI and OVDP in previous posts here and here. Les wrote about a non-wilful FBAR case here.

The Court of Federal Claims recently rendered an opinion in Norman v. United States, No. 1:15-cv-00872 (July 31, 2018) finding the taxpayer liable for the 50% penalty imposed by 31 U.S.C. 5314. The 50% penalty means that Ms. Norman owes the IRS half of the money in her foreign bank account which makes the FBAR penalty one with an enormous bite. Jack Townsend’s blog covers FBAR issues extensively and is a much better source than PT on this issue. As usual, he wrote about this case the day after it came out and his post can be found here. The Norman case has importance not only because the court finds her conduct willful but also because the court addresses the application of the regulations. For that reason, it deserves mention in PT where we spend relatively little time writing about foreign bank accounts.

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In October, 2013, the IRS assessed an FBAR penalty against Ms. Norman in the amount of $803,530 for willfully failing to report her foreign bank account. After unsuccessfully contesting the penalty administratively, she paid it and brought a suit for refund. The IRS tried to win the case on summary judgment but the court found that the issue of willfulness required the gathering of facts in a manner not possible through summary judgment. So, a three hour trial took place in Brooklyn on May 10, 2018.

A couple of things about the trial deserve note. First, the location of the trial shows that the Court of Federal Claims regularly travels around the country for its trials to a site near the taxpayer. This is not news for those familiar with the Court of Federal Claims but for those not familiar with this court it may come as a surprise.   Second, the timing of the decision in this case vis a vis the trial stands in stark contrast to the normal time for a decision from the Tax Court. Unless decided by a bench opinion, I would not expect a Tax Court decision following a trial of this type for about a year instead of less than three months; however, it did take almost three years after the filing of the complaint in the Court of Federal Claims before the case came to trial.

In short, the court did not believe the testimony of Ms. Norman. It found her memory quite selective. It went through the elements necessary to prove a willful failure to report a foreign bank account, then through the facts she did and did not prove in order to reach the conclusion without much difficulty that Ms. Norman knew about the account and knew she should have reported it. It’s not worth going through all of the factual findings here but for those representing individuals with foreign accounts the details might matter. As Les mentioned in his post, the number of opinions coming out on this issue is relatively low. The IRS settlement initiative doubtless has resolved the vast majority of cases without litigation.

Having found a willful violation, the court then had to deal with the amount of the penalty. The taxpayer argued that the court should cap her penalty based on regulation 31 C.F.R. 1010.820 which was written under the previous version of the Bank Secrecy Act and which capped the penalty at $100,000 which would be quite a reduction from the assessment here. Taxpayer requested that the court adopt the reasoning set forth in Colliot v. United States, 2018 U.S. Dist. LEXIS 83159 (W.D. Tex. 2018), and in Wadhan v. United States, 122 AFTR2d 2018-5208 (D. Colo. 2018). In 2004 Congress amended the law to increase the penalty. Colliot and Wadhan held that the new law did not supersede the regulation promulgated under the prior statute. The Colliot district court reasoned that:

[The amendment] sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor. Instead, 5321(a)(5) vests the Secretary of the Treasury with discretion to determine the amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by 5321(a)(5)(C).

The Court of Federal Claims found that the statement in Colliot “mischaracterizes the language of 5321(a)(5)(C), by ignoring the mandate created by the amendment in 2004.” The revised statute provided that the maximum penalty “shall be increased” to the greater of $100,000 or 50% of the account. Because Congress used the imperative, the amendment did not merely permit a higher ceiling on penalties based on the decision of the Secretary it “removed the Treasury Secretary’s discretion to regulate any other maximum.” It found Congress superseded the regulations.

In invalidating the regulations the Court of Federal Claims refused to follow precedent that could have damaged the IRS not just in FBAR cases but in other similar situations in which a revised statute did not immediately trigger a withdrawal or revision of a regulation by the IRS. Of course, the Colliot decision turned on an interpretation of the intent of Treasury in leaving the regulations on the books but it had potentially far reaching consequences for the IRS. The Norman decision does not mean the IRS has won this issue but it does mean that a court of nationwide jurisdiction has not signed on to the interpretation of one district court.  While I agree with the decision in Norman, the IRS could do itself a favor by addressing the regulation.  It seems that it has the power to avoid having to litigate this issue repeatedly.

 

 

IRS Updates Guidance on How to Handle Premature Petitions

The work that the IRS must perform at the beginning of a Tax Court case requires more effort than readily meets the eye and results in issues easily overlooked. Bob Kamman wrote earlier this year about the answers the IRS files in Tax Court cases in which the taxpayer has yet to pay the filing fee (and in some cases never does so.) That discussion raises questions concerning the filing of an answer before a case has properly come before the court.

In another issue involving answers in Tax Court case, the IRS has been trying for over a decade to reverse a 2007 decision of the Tax Court to require answers in small tax cases. Since approximately 50% of the petitions filed in the Tax Court request small case status, this issue has a huge impact on the effort the IRS must expend at the beginning of the case. The attachment to the IRS submission on the issue, attached to our post, discusses that impact on the IRS. I see no change coming on that front in the near future. The IRS will continue to file answers in small tax cases. The answers will continue to provide almost no useful information since the IRS denies everything in the vast majority of cases including matters it could admit if it took the time to look in its file. The answers will confuse pro se taxpayers. The answers will provide the taxpayer with the name of the IRS attorney and that, at least, will keep, or at least reduce the numbers, taxpayers from contacting the Tax Court to find out the status of their case. Filing the answer also should cause the IRS attorney to pay attention to jurisdictional issues at the outset of the case although that does not always happen.

Today’s post discusses another issue that the IRS faces at the outset of the Tax Court case – identifying and addressing petitions filed prior to the time the taxpayer receives the notice of deficiency. (The issue can arise in other types of Tax Court jurisdiction such as notices of determination in CDP and innocent spouse cases or whistleblower cases but the Chief Counsel notice discussed today focuses on deficiency cases.) It is important that the IRS identify cases filed prematurely since the filing can have an impact on the statute of limitations on assessment and collection.

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Notice CC-2018-008, issued on July 6, 2018, alerts Chief Counsel attorneys to revisions in their manual regarding Tax Court petitions filed prior to the issuance of the notice giving the taxpayer the right to petition. The Notice makes clear that the suspension of the statute of limitations on assessment provided by IRC 6503 does not apply when someone petitions the Tax Court in a situation in which the IRS did not issue a notice of deficiency. Of course, Chief Counsel attorneys are not the only part of the IRS that play a role in these cases. They must coordinate with exam and with appeals as they tie down the facts to show that no notice of deficiency was sent. The information regarding the absence of a notice of deficiency needs to be gathered quickly so that the Chief Counsel attorney handling the case can notify the Tax Court before the case gets too far along and so that it does not impair the examination division in its review of the case.

Although the Tax Court rules and the instructions printed on the form petition require that the taxpayer attach a copy of the notice of deficiency to the petition, many petitioners do not attach the notice.   If the taxpayer attaches a valid notice of deficiency, the case becomes easy to work. Once the IRS attorney receives the administrative file, the IRS can file an answer or file any other appropriate responsive pleading. In the relatively high percentage of cases in which a notice of deficiency is not attached to the petition, then the Service must run down the notice of deficiency before it knows what to do. While it may seem like a simple task to run down a notice of deficiency, the IRS sometimes has problems finding the administrative file. The task becomes more difficult if the IRS has not recently been handling the case. Some taxpayers file petitions based on almost any document they receive from the IRS and some do not mention the year(s) at issue. Determining the reason for the petition can involve a fair amount of detective work in some cases.

The notice informs Chief Counsel attorneys that internal guidance is changing regarding the handling of these cases and that their manual will soon change. One change provides that:

If no notice of deficiency is attached to the petition, the attorney should determine whether a notice of deficiency has in fact been issued. If a notice of deficiency has not been issued because the tax year is still under examination, the petition is premature…. For any such year, the attorney should file a motion to dismiss for lack of jurisdiction… also remind Examination personnel that the statute of limitations on assessment is not tolled by premature petition and the ASED must be protected by extending the statute of limitations with Form 872….

Further in the Notice Chief Counsel attorneys are advised that:

If the petition is premature, attorneys should move to dismiss the case for lack of jurisdiction. In this instance, the motion should make out a prima facie case that the petition is based upon a 30-day letter, notice of rejection of a claim for refund, or other similar notice, or not based on any communication from the Service at all… If Field counsel does not receive a Form 15022 (a form the IRS has devised to certify to the attorneys that a notice of deficiency was NOT issued), Field Counsel must conduct a search to verify that a notice of deficiency or other determination letter that would confer jurisdiction on the Tax Court has not been issued to the taxpayer for the tax/period at issue….

I do not know what prompted the Notice. It’s possible that the IRS blew the statute of limitations on assessment in one or more case because it failed to pay careful attention to the running of the statute while it sorted out a prematurely or improperly filed petition. In any event, the IRS seems to seek to catch these issues with renewed vigor. Because of the high volume of cases handled by correspondence examination providing low income taxpayers with no person to really talk to about their case, it’s not surprising that many taxpayers get confused about when to file their Tax Court petitions. The fact that the IRS publishes this Notice suggests that representatives should look closely at the statute of limitations on assessment for clients they represent who may have prematurely petitioned the Tax Court so that a decision can occur regarding the timeliness of the proposed assessment.

 

Ninth Circuit’s Opinion in Altera Withdrawn

Susan Morse and Steve Shay wrote last week about the significant Ninth Circuit opinion reversing the fully reviewed and unanimously decided Tax Court case in Altera. Earlier today the Ninth Circuit withdrew the July 24th opinion to allow time for a newly reconstituted panel to confer about the appeal.  The order occurred because Judge Stephen Reinhardt, one of the judges in the majority in the 2-1 decision, passed away five months after oral argument and before the publication of the opinion.

On August 2 the court issued an order selecting Judge Susan P. Graber to replace the late Judge Reinhardt on the three-judge panel in the case citing chapter 3.2(h) of the Ninth Circuit General Orders. This section provides that if a member of a three-judge panel becomes unavailable for certain stated reasons , including death, “the Clerk shall draw a replacement as needed, utilizing a list of active judges randomly drawn by lot.”

These events provide even more excitement for a case that did not need more procedural turns to draw attention to its importance.

Bankruptcy and the Voluntary Payment Rule

The IRS has a rule that if a taxpayer makes a payment voluntarily the taxpayer can direct the tax debt to which the IRS must apply the payment. In the absence of a valid designation, the IRS takes the position that it can apply payments in the manner most beneficial to the government. It frequently occurs that a taxpayer will owe for multiple periods and perhaps multiple types of tax debt. Having a payment go to pay down certain tax debts before others can greatly enhance a taxpayer’s position in certain circumstances. Persons assessed the trust fund recovery penalty (TFRP) find designation particularly important.

The policy regarding designation leaves open then the question of the voluntariness of a payment. If the IRS obtains the payment via levy, that generally presents an easy case of a non-voluntary payment. On the other hand, if the taxpayer mails in a check to partially satisfy a debt, that generally presents an easy case of a voluntary payment. Payments made in situations not as clear as these provide opportunity for discussion and debate which occurred in the case of In re Donaldson, No. 16-14126 (Bankr. N.D. Miss. July 2, 2018) a chapter 13 case.

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Mr. Donaldson served as President and CEO of a charitable organization that failed to pay its payroll taxes for several quarters. A few quarters passed prior to Mr. Donaldson learning of the failure to pay the payroll taxes. Upon learning of the problem, he did not insure payment of the taxes, past or current, but determined that the assets of the entity could cover the arrearages should the entity fail to rectify its cash flow.

The entity had two parcels of real estate and a claim against BP for the Deepwater Horizon Settlement. The entity passed a resolution that it would use the proceeds of the claim to make a voluntary payment to the IRS of the past due taxes; however, this resolution was an internal document to which the IRS was not a party. Eventually, the IRS levied on the BP Claim. The levy resulted in the IRS receiving funds with a designation on the settlement check that the funds be applied to the trust fund taxes. The IRS ignored the designation since it received the funds pursuant to a levy and arguably applied in its best interest by applying the funds to both trust fund and non-trust fund taxes. The opinion does not state exactly what the IRS did but I suspect that it applied the money to the oldest periods and just paid them off in chronological order until the money ran out. Doing so provided a significant benefit to Mr. Donaldson since the IRS could have applied the money first to all of the outstanding non-trust fund liabilities which, in my opinion, would have been its best interest.

The two parcels proved worthless for paying the past due taxes. Since the BP settlement funds did not fully satisfy all of the outstanding taxes, the IRS used the other tool at its disposal to collect the unpaid portion of the taxes that represented monies held in trust for it, viz., the TFRP. Found in IRC 6672, TFRP allows the IRS to assess against all persons responsible for the failure of the taxpayer to pay over money collected for the IRS and held by the taxpayer in trust. The IRS determined that Mr. Donaldson, and others at the charitable entity bore responsibility for the failure to pay. It made assessments against several individuals. In doing so the IRS seeks to collect the unpaid taxes only once. So, if one of the other persons responsible pays off the debt, Mr. Donaldson no longer owes the IRS on this debt but may owe the individual who paid if that individual seeks contribution from him. In this case it does not appear that one of the other responsible officers made any payment and certainly none of the other responsible officers made a payment sufficient to eliminate the liability.

Once the IRS turned its collection attention to him, Mr. Donaldson filed a chapter 13 petition, and the IRS filed a claim for $87,564 based on his obligation as a responsible officer of the entity. Because the claim resulted from unpaid trust fund liabilities, it acquired priority claim status pursuant to BC 507(a)(8)(C). Because it had priority status, Mr. Donaldson had to provide for full payment of the claim in order to confirm his chapter 13 plan. (Though not at issue here, Mr. Donaldson will also find out to his sorrow that when the chapter 13 ends he will owe interest on the liability for the full life of the chapter 13 plan even if he has fully paid the amount of the IRS claim. The IRS cannot claim postpetition interest from the chapter 13 debtor but can seek this interest from the individual after the lifting of the stay.) TFRP represents the worst type of debt to carry into bankruptcy because it always has priority status no matter how old and it will haunt the taxpayer coming out of bankruptcy even if the full amount of the prepetition debt gets paid through the bankruptcy.

Mr. Donaldson argues that the IRS must honor the designation on the payment written on the BP claim payment designating that the IRS apply the funds to trust fund taxes. The IRS argues that the bankruptcy court does not have jurisdiction to reallocate the payments (and that the payment here fails to meet the voluntary payment test.) The court agrees that it lacks authority to order the IRS to reallocate the payment to satisfy the trust fund portion of the entity’s liability. It notes that the entity is not before it. Because the entity is not before the bankruptcy court, the court lacks the ability to dictate the manner of the application of the funds recovered by the IRS as a result of a levy. What the IRS does with a payment of the entity’s liability is simply outside the scope of an individual officer’s bankruptcy case.

It distinguished U.S. v. Energy Resources Co., Inc., 495 U.S. 545 (1991) which held that an entity in bankruptcy could designate payments in its chapter 11 plan to trust fund liabilities. In Energy Resources the Supreme Court determined that a bankruptcy court has the power to determine that designation of payments is necessary for a successful reorganization. I have always had trouble understanding how designation, as a factual matter, benefited the entity and not the individual but the Supreme Court decided the issue on the basis of the power of the court and not the logic of the decision. The bankruptcy court in Donaldson, which does not have the entity before, lacks the power that the court had in Energy Resources where the entity that failed to pay the tax was the entity seeking to confirm the plan.

Next the court addressed Mr. Donaldson’s TFRP liability. He argued that while he met the statutory definition of responsible person he should not be liable because “(1) other, perhaps more culpable, responsible persons also failed to pay the trust fund taxes,” and (2) his nonpayment was not willful. His first argument totally falls flat. The court cites a couple of cases but could have cited many more. This argument has no legs. The TFRP statute allows assessment against many people and makes no provision for allocating the amount of the liability based on the amount of culpability.

His willfulness argument also fails. He knew of the liability and thought that the entity could cover it with available assets. The fact that his mistaken calculation of the value of the entity’s assets occurred in good faith does not provide any cover for him in avoiding the liability. He knew other creditors received payment instead of the IRS. That’s all it takes.

So, he will need to commit to full payment in order to confirm his chapter 13 plan and he will have to make those payments in order to obtain his discharge. Assuming he succeeds in his chapter 13 plan, he can also look forward to a bill from the IRS for the interest on the TFRP liability it could not charge the bankruptcy estate. A nice parting gift from chapter 13.

 

Detrimental Reliance on the IRS

The Tax Clinic at Harvard has, so far, unsuccessfully litigated on behalf of individuals misled by the IRS regarding the last date to file a Tax Court petition as discussed here. Getting bad advice on when to file a Tax Court petition represents only one way in which bad advice from the IRS can mislead a taxpayer. In Kerger v. United States, No. 3:17-cv-00994 (N.D. Ohio 2018) another situation in which incorrect advice can harm a taxpayer surfaces. In all of these cases the individual at the IRS does not seek to mislead but a wrong answer from someone who would seem to hold a position of knowledge and authority can send taxpayers down the wrong path.

In this case the Kergers seek a declaration that certain taxes were discharged in a prior bankruptcy case. The IRS argues that the Declaratory Judgment Act prohibits such an action against the United States. Of course, as discussed in a recent post, the debtors could obtain a determination of wrongful collection if the taxes were discharged and the IRS kept pursuing them. Here, the IRS not only defended against the suit but used the suit as an opportunity to reduce the taxes to judgment which will have the effect of keeping them around forever (or at least until the taxpayers can successfully discharge them in their next bankruptcy.)

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The Kergers asked the court to equitably estop the IRS from collecting taxes they contend a previous bankruptcy discharged. In 2008 the Kergers filed a chapter 11 bankruptcy case in 2008 but eventually converted to a chapter 7 in 2010. Individual chapter 11 cases do not happen with great frequency. I did not study their bankruptcy case to determine why they needed to convert. The tax debt may have caused the conversion because they would have to commit to full payment of all priority taxes in order to confirm their chapter 11 plan. Following the conversion, they obtained a discharge after which the IRS pursued collection of the liabilities at issue in this case. The Kergers disagreed that the tax debt survived bankruptcy but could not obtain a response from the IRS.

In 2014 they had to abandon their home due to the presence of mold. The cost to fix the mold problem was estimated at $100,000. They decided to sell the house; however, the IRS had filed a notice of federal tax lien which created a problem in selling the property since the sale would result in payment of the tax liability prior to their ability to receive any proceeds. Their attorney contacted the IRS to obtain a payoff amount since the amount they would need to pay could influence their decision to sell. The IRS representative told the attorney that the Kergers did not owe any taxes. The IRS sent transcripts showing no liability and a conversation with an Appeals Officer confirmed that the lien would release due to the absence of a liability.

Relying on the representations of the IRS, the Kergers spent the money to clean the house, prepared for an auction and purchased a new home. The home sold on August 15, 2015, “with the understanding that the IRS liens would fall off before the thirty day closing period concluded.” Before the running of the 30 days, the Kergers received several pieces of certified mail notifying them of the taxes owed. The Kergers learned that the IRS had moved their liabilities from master file accounts to non-master file accounts due to the bankruptcy. Of course, the IRS individuals with whom the Kergers and their attorney spoke looked only at the master file accounts and did not access the non-master file accounts where the data about their liabilities resided.

The Kergers brought the case seeking a declaratory judgment that the bankruptcy discharged the liabilities or, in the alternative, that the actions of its employees equitably estopped the IRS from collecting on these liabilities. The opinion does not state why the Kergers brought suit seeking a declaratory judgment rather than an action for a determination that the action of the IRS violated the discharge injunction. The court does mention that their complaint expressly states “there is no issue as to the discharge raised in this Complaint.” The district court had little trouble determining that it could not grant a declaratory judgment because the language of the statute clearly bars the court from doing so because it lacks subject matter jurisdiction.

In an effort to save the Kergers, the court found that the claim of equitable estoppel could survive bankruptcy because an issue regarding the discharge of the liability exists. The court does not decide this aspect of the case but allows the case to continue so that the debtor can present information about the tax liability and show that the discharge provisions apply. The case does not contain enough information to allow me to speculate whether they have a chance to show the taxes were disqualified in the prior bankruptcy. The court does not say that it intends to hold for them as a result of the bad advice they received from the IRS. As of the writing of this post, the court had not issued a ruling on the discharge of the liabilities.

The court also discusses the pleadings and finds Twombly and Iqbal concerns. We have discussed this issue previously. Here, it finds the pleadings adequate.

We have discussed it before but switching accounts from master file to non-master file can cause confusion at the IRS as well as with the taxpayer. If the taxpayer whom you represent has a liability that you think exists and you see an IRS transcript that says nothing is owed, you need to talk to the IRS about the possible existence of a non-master file account. Do not get joyous prematurely. Taxpayers who have filed a joint return and who go into bankruptcy, request innocent spouse relief, or otherwise have some action on their account that causes it to need to be split must exercise caution when reading master file transcripts. Usually, the master file transcript has a transaction code removing the liability that hints of the creation of another account. If you are concerned, get someone at the IRS to pull the non-master file transcript before celebrating the end of the liability. Maybe the Kergers will still find relief in this case but generally, relying on bad advice from the IRS in this setting does not eliminate the liability. The IRS may apologize as it takes the next collection action.

 

 

 

Celebrating the 5th Anniversary of Procedurally Taxing

Today marks the 5th Anniversary of the first Procedurally Taxing post. As we have mentioned before, the blog is the brainchild of Les. He recruited Steve and me to join him in this endeavor as he recruited us to join him in working on the “IRS Practice and Procedure” treatise. When we met to discuss the blog prior to the first post, we anticipated that we might post once or twice a week. Before the end of the first year, we were posting almost daily, and we have tried to keep up the daily posting practice though there are days when we do not get our act together. Regular readers know our blog does not run like clockwork but rather operates based on the varying schedules of those of us trying to pull it together.

In the first post Welcome to Procedurally Taxing! Les wrote the following:

Welcome to Procedurally Taxing. Our blog will be a place where you can learn about important developments in federal tax procedure and tax administration, as well as occasional musings on general items that interest us. We started this blog because we want to be a site that readers can trust to learn about important developments. In addition, Keith, Steve and I are all involved in editing and rewriting books that deal with tax procedure; we are constantly reading and thinking about cases and administrative developments that may not jump out at the reader. We will highlight some of these less obvious developments and provide analysis and context reflective of our many years of practice in the area.

The most amazing stats of our first five years involve you. We have 1841 email subscribers to the blog. It has been 1825 days since we started. We have maintained a pace of approximately one additional email subscriber per day since the beginning of the blog. We know that readers access the blog through media other than email but the one additional subscriber per day stat has been a constant. You have accessed the web site slightly over 750,000 times since we started.

Some other stats about the blog:

– 373 guest posts written on a wide variety of topics which greatly enriched the blog

– 332 posts by Les, 372 by Keith, 164 by Stephen and 3 by Christine (plus 10 guest posts)

– 96 posts by frequent guest blogger Carl Smith

– 392 comments by frequent commenter Bob Kamman

In addition to bringing on Christine as a regular contributor, we have added regular bloggers Samantha Galvin, William Schmidt, Caleb Smith and Patrick Thomas, who comment on the Tax Court’s designated orders.

We hope that we have met our stated goal to keep you current on important developments in federal tax procedure and administration. We also have reported on less obvious developments and we have definitely provided our views on the developments.

As we mark this anniversary we invite you to comment on the blog – the good, the bad and the ugly. Tell us about anything that has made the blog useful or not useful to you and tell us how we can improve it going forward. Thanks for being our loyal readers. Our hats are off to you.

Filing the Notice of Federal Tax Lien during the Automatic Stay

Once the IRS makes an assessment, it sends the taxpayer a notice and demand letter as required by IRC 6303. If the taxpayer fails to pay the full amount in the notice and demand letter within time period set out in the letter, usually 10 days, then a federal tax lien arises and relates back to the moment of assessment. This lien sometimes goes by the name of assessment lien or secret lien but whatever name it may receive, this lien is the federal tax lien and it exists in essentially every case in which the taxpayer has an outstanding liability even if few taxpayers appreciate that a lien exists and has attached to all of their property and rights to property. The existence of the federal tax lien allows the IRS to file a notice of that lien alerting the world to the person’s tax debt. Filing the notice of lien serves as a disclosure of a person’s tax situation which IRC 6103 normally prevents but Congress permits the disclosure in this circumstance in order to allow the IRS to perfect its lien vis à vis the four parties listed in IRC 6323(a).

The IRS normally has total control over the decision to file the notice and the timing of the filing of the notice; however, the filing of a bankruptcy petition by the taxpayer limits that unfettered ability to decide when to file the notice. The automatic stay found in BC 362(a) prohibits creditors from, inter alia, filing liens and taking other actions to collect. I cannot recall seeing a case in which the IRS filed a motion to lift the stay to allow it to file a notice of federal tax lien after the filing of a bankruptcy petition; however, in In re Gorokhovsky, No. 17-28901 (Bankr. E.D. Wis. 2018) the IRS did exactly that and the court granted the IRS request. For that reason the case deserves some attention.

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The debtor owned three separate pieces of property at the time of filing the bankruptcy petition, none titled in his name:

  • A house in Ozaukee County, Wisconsin titled in the name of his ex-wife but awarded to him in a 2011 divorce;
  • A condo in Cook County, Illinois titled in the name of his ex-wife but awarded to him in the divorce; and
  • A condo in Milwaukee County, Wisconsin titled in the name of a defunct LLC owned by the debtor.

At the time of the filing of his bankruptcy chapter 7 proceeding he owed the IRS over $450,000. The IRS filed a notice of federal tax lien in Ozaukee County, Wisconsin but not in Cook County, Illinois or Milwaukee County, Wisconsin. In his bankruptcy schedules, Mr. Gorokhovsky acknowledged ownership of all the properties and acknowledged the tax debt. The chapter 7 trustee abandoned the three properties after determining that they had inconsequential value to the bankruptcy estate. Chapter 7 trustees routinely abandon property after researching the value of the property and outstanding liens attached to it since the job of the chapter 7 trustee involves recovering value for the unsecured creditors of the bankruptcy estate. Property that the trustee cannot turn into value for unsecured creditors has no benefit to the estate since all of the value will go to the secured creditors.

The IRS wanted to pursue collection against the properties. It asked the court to lift the stay so it could do so. The abandonment of the property removed it from the estate; however, the opinion did not say whether the stay was lifted against the debtor by the granting of the discharge or some other means of lifting the stay. The debtor opposed the lifting of the stay. The IRS first showed that the debtor had no equity in the property. The IRS could show that the debtor did not need the property in order to reorganize since the debtor filed a liquidating bankruptcy case. The IRS argued that its interests were not adequately protected and it could be harmed by maintaining the stay. The court concluded that lifting the stay would not interfere with the bankruptcy case and that the harm the IRS might suffer outweighs any harm to the debtor.

Because the bankruptcy case is a no asset chapter 7 case and because the trustee had already determined that the property had no value for the bankruptcy estate, the result here naturally flows from the facts. In most no asset chapter 7 cases, the debtor will already have received a discharge as an individual by the time the trustee abandons the property. The stay applies to actions regarding individuals and actions regarding property of the estate. Here, it appears the IRS needs the stay lifted because the stay on the individual remained in effect. The granting of the stay relief requests now clears the deck for the IRS to file the notice of federal tax lien it should have filed previously in order to perfect its interest in two of the properties and to bring suit. If it brings suit quickly enough, it can avoid the need to file the notice. While the case seemed odd to me at first glance, the timing of the request to lift the stay makes sense if the stay regarding the individual remained in effect.