Accounts Management not Well Managed

The work done by the IRS Accounts Management function serves an important but often overlooked role.  This part of the IRS must keep the IRS books and records straight.  With hundreds of millions of accounts to manage, keeping the data correct on each account provides a challenge.  The recent Summary Opinion in the Collection Due Process case of Fagan v. Commissioner, T.C. Summary Opinion 2017-61 provides a glimpse of what happens when things go wrong.  Without having the transcripts for a 20-year period, it is not possible to tell exactly how things went wrong over that two decade period but the IRS messed up the account to a sufficient degree that the judge holds for the taxpayer on the issue of payment, finding that the IRS simply did not properly keep its books.

In addition to my description of the case in this post you might look at the Comment provided on August 12, 2017, by Bob Kamman which provides further insight on this case.  As we have mentioned several times before, a number of people write comments on our posts which provide additional detail and insight on the cases discussed.  Bob’s comment is someone unusual in that he commented on the case before the post went up.  We might have asked him to let us use the comment as a guest post had this post not already been drafted.  In addition to reminding readers to check out the comments section of the blog, we also remind you that we welcome guest posts.

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Mr. Fagan worked as a lawyer in Buffalo for many years before retiring to Florida for the easy life.  He thought he had resolved his tax problems before he went into retirement and, no doubt, did not enjoy learning that tax issues that arose about a decade before he retired continued to plague him after he reached the Sunshine State.  Based on the description in the opinion, his tax problems may have started with a divorce in the mid-1990s.  Anyone who practices in this area knows that divorce frequently serves as a trigger for tax problems.  Life breaks out of settled routines and the many moving parts occurring during a divorce often have a way of washing over into tax issues.  Additionally, divorce can make it difficult for the IRS in managing a taxpayer’s account.  Liabilities reflected on a joint account may transition from the master file account holding the joint liability and get split into mirrored accounts in the non-master file system.  I cannot tell if the divorce played a role in Mr. Fagan’s tax account problems but, if it did, I would not be surprised.

Mr. Fagan owed some individual income tax liabilities starting in 1996 and he owed some employment tax liabilities arising from his law firm.  He ended up in a CDP case in the Tax Court.  In that case he reached a settlement with Chief Counsel’s office that the decision document in the case memorialized.  The decision document binds the parties.  It required Mr. Fagan to make installment payments of $2,125 for twelve months which he did.  Once he did that, the IRS should have removed all of the liabilities covered by his first CDP case.  For reasons unexplained, and maybe unknown, it did not.

When Mr. Fagan filed his 2011 return, he had a liability of $2,346.46 and he asked the IRS to apply $2,900 he had overpaid as a result of the IRS misapplication of payments on his account.  The IRS did not do this.  In 2013, he received notice of more taxes and interest for the years covered by the first CDP case.  He convinced the IRS that its notice was incorrect.  While he convinced the IRS of the incorrectness of that notice, the IRS seized $8,700 of his funds and he convinced the IRS to return that money as incorrectly seized.  The opinion recounts several other missteps by the IRS because it could not get the account corrected.

In his second CDP case, which relates to the $2,346 liability for 2011, he does not contest the liability but argues that the IRS misapplied payments which, had they been properly applied, would have satisfied this liability.  The Court makes a point of saying that Mr. Fagan is “not claiming an overpayment or credit.”  Of course, if he were claiming an overpayment, the Court would tell him that it has no ability to order the overpayment because of its decision in Green-Thapedi.  From the facts presented, it appears that Mr. Fagan may have had an overpayment of the difference between $2,900 and $2,346.  The decision does not go there because of the expression that he did not request an over payment of this difference.

The IRS, having made numerous account errors spanning almost a decade, did not concede this $2,346 case and avoid the embarrassment of exposing its inept account management in this case but instead insisted on arguing that it could apply overpayments in whatever manner it saw fit.  While the IRS position is essentially correct, it misses the point here.  The Court finds “we agree with petitioner that his payments cover the amount due for 2011 and that it was an abuse of discretion for respondent to pursue collection.”

So, Mr. Fagan completely wins this CDP case.  Will this be the end of his problems?  Perhaps the next case we read about Mr. Fagan will be his suit against the IRS for unauthorized collection if it continues to make errors in his account.  This is the kind of case I would occasionally see when I worked in Chief Counsel’s office and someone’s account got badly messed up.  When you have an account that is badly messed up, there are a few wizards at the Service Centers in accounts management that can fix it; however, if you do not get to one of those wizards and the account continues to be handled by one employee after another who fails to take the time and effort to do the spade work to fix all of the problems in the account, then you get a problem such as Mr. Fagan had.  What I cannot understand here, and it may be because of a lack of information, is why Chief Counsel moved forward with this case to the point of obtaining such an embarrassing opinion.

 

IRS Takes Pugnacious Attitude toward Mr. Mayweather

On July 5, 2017, well-known boxer Floyd Mayweather filed a Tax Court petition seeking Collection Due Process (CDP) relief.  Mr. Mayweather’s petition uses the Tax Court’s form petition and parts of the petition are handwritten.  My clinic uses the form petition but most of our cases do not involve $22 million.  The use of the petition for a case of this dollar amount shows the ability of the form to serve taxpayers at all ends of the income spectrum.  The form gets the job done and wastes little energy.

The petition attaches the determination from Appeals as the instructions provide.  The determination offers a couple of interesting side notes to discuss.  First, the notice of determination sent to a taxpayer, like a statutory notice of deficiency, contains the Social Security Number of the petitioner.  Petitioners receive instruction from the Tax Court in the form package to redact the SSN.  The Court will get the SSN on the special form it has devised for that purpose and putting the SSN on that form keeps the number from the public eye.  Leaving it on the determination letter without redacting it opens the petitioner up to things that happen when the SSN gets in the wrong hands.  We try to be diligent in the clinic to find and redact the social security information of the taxpayer on every page of the notice we attach.  Programs exists that will allow you to perform the redaction in a cleaner form than might be available if you just use a marker.  Don’t miss this important step in filing a petition.

In addition to the redaction issue which is present in every case, the CDP notice of determination contains the misleading guidance on when to file the Tax Court petition that we have discussed previously.  Carl Smith has carefully tracked Tax Court orders over the past two years.  Because of his work, we know of seven cases in which the language in the CDP notice of determination has caused taxpayers to petition on the 31st day which has caused them to be dismissed for lack of jurisdiction.  With Carl’s help, the Harvard clinic is litigating some of these cases and arguing that the notice has misled the petitioner in to filing late.  We have blogged about this before.  Look carefully at the wording in the second paragraph.  The IRS should change this wording and avoid misleading taxpayers into losing their Tax Court opportunity.

Enough diversions, let’s talk about Mr. Mayweather’s little $22 million dollar problem.

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Maybe you and I wish we earned enough to have a $22 million tax problem.  It’s hard to imagine.  We know the amount because the IRS filed a notice of federal tax lien (NFTL).  The NFTL provides an exception to the normal rules regarding disclosure of a taxpayer’s information.  In order for the IRS to protect and secure its interest in a delinquent taxpayer’s property, Congress authorized the IRS to make the liability public.  When the IRS does file a NFTL against a celebrity, the news media usually picks it up and the celebrity is held up to a mild form of public shaming or at least notoriety.  Several news outlets, here, here, here, and here together with many others did the honors in covering the NFTL filed against Mr. Mayweather.

In 2015, Mr. Mayweather made a lot of money in a fight.  When a foreign fighter gets paid in the United States, 30% is paid to the IRS.  When a US citizen fights, the fighter gets the entire purse with no withholding so it is up to the fighter to make the appropriate estimated payments.  I presume that insufficient estimated payments were made on the $100 million paid to Mr. Mayweather for his fight in 2015, but I do not know that for certain.  I am told that a fighter earns the money in one of these fights as soon as the opening bell rings and that the money is frequently paid on the night of the fight.  The payments to Mr. Mayweather go to a corporation that he controls which would then distribute money to him.  I am also told that someone from the IRS attends these major fights in an effort to ensure that the IRS gets its take from the purse.  The fact that Mr. Mayweather does not seek to contest the liability in the CDP context suggests that he agrees with the amount.  Now, the question is how will he pay the tax and what will the IRS do about it if he does not.

I assume without knowing that some breakdown in communication between Mr. Mayweather and the IRS may have occurred before the IRS sent the notice of intent to levy.  It is also possibly based on their respective positions taken in the CDP case that what I am calling a breakdown was an offer from Mr. Mayweather to fully pay the liability with a short term installment agreement following certain liquidity events with the IRS rejecting that proposal and demanding immediate payment by liquidating assets or borrowing money.  The notice of determination speaks only about sustaining the levy action and not about the NFTL.  The newspaper stories would only know the amount of the liability because of the filing of a NFTL.  I cannot tell why the NFTL was not a part of the CDP case.

With the focus on levy, the parties each took their respective corners in the CDP hearing.  From the IRS corner came a pronunciation that Mr. Mayweather had sufficient income and equity in assets to fully satisfy the liability.  From the Mayweather corner came the position that although he did have enough assets to satisfy the liability, it did not make financial sense to liquidate or borrow on those assets when he would soon have a liquidity event and was about to have another fight with a proposed payday that would more than satisfy the outstanding liability.  The proposed purse for Mr. Mayweather from the upcoming fight is purported to be between $100 and $200 million.  Mr. Mayweather offered to fully pay the liability with a short term installment agreement.  Without knowing more, it’s hard for me to argue with the logic of a short delay in these circumstances.

In pre-CDP days, the IRS would simply have issued a levy on the fight promoter or whoever makes payment of the purse to the fighters after a fight.  I doubt the Revenue Officer in pre-CDP days would have exhausted too much effort trying to persuade Mr. Mayweather to liquidate his assets because the RO could tie up the purse and doing so would solve the problem in the easiest, most efficient manner.  Because the timing of the CDP notice and the upcoming fight allow Mr. Mayweather to keep the IRS from levying on the purse unless it can show jeopardy, the statute gives him the upper hand while the CDP matter awaits final disposition.  By filing a relatively simple form (Form 12153) followed by the filing of the Tax Court petition (using the simple form provided by the Court), Mr. Mayweather wins this fight for the low cost of $60 and some attorney’s fees.

Unless the IRS wants to find that jeopardy exists, its hands are tied.  The championship fight will occur even before the answer is due in the Tax Court CDP case.  The Settlement Officer must have known this yet did not want to enter into an agreement allowing for a short term installment agreement.  Now, Mr. Mayweather can make the installment payments he proposed while the CDP case is pending in Tax Court without having to pay the fee for an installment agreement.  The savings in the installment agreement fee will more than make up for the $60 fee he paid to file his petition.  I would like to know what the SO thought would happen with the issuance of this notice of determination.  The taxpayer couched his request as a short term installment agreement.  It sounds similar to a forbearance request because it essentially requests the IRS to wait to a date certain for full payment.  A short term installment agreement or a forbearance request provides a type of resolution where the taxpayer has the ability to full pay upon the occurrence of an event sometime in the near future.  The IRS gains little by forcing a taxpayer to sell or lien assets when a big payday is coming up.  There may be more than meets the eye here but agreeing to take the taxes through a short term installment agreement seems in everyone’s interest.

Although the filing of the CDP petition essentially allows Mr. Mayweather to win this fight over the timing of the payment and structure the payment in a manner convenient to him, the IRS does not lose here if it gets the $22 million.  I hope the purse is large enough to fully pay the 2015 liability and the tax on the new winnings.  I wish Mr. Mayweather well in his upcoming fight with a person other than the tax man.  If his tax issues cause him to want to assist others at a different end of the income spectrum in their fights with the tax man, I know a clinic willing to accept a share of the purse and put it to use providing representation.

 

 

Innocent Spouse Denied Attorney’s Fees

In Kazazian v. Commissioner, T.C. Memo 2017-135, the Court denied attorney’s fees to a petitioner who succeeded in gaining innocent spouse status.  The Court determined that she was not a prevailing party under the statutory definition of IRC 7430.  The Court also determined that even if she were a prevailing party she did not prove that she incurred meaningful costs with the respect to the case.

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Petitioner is a lawyer who had a solo practice run as a Schedule C.  She also owned real estate and the joint return reported losses attributable to the rental real estate activities.  The year at issue in the case is 2009.  She separated from her husband in 2010 and divorced in 2011.  The IRS audited the joint 2009 return and disallowed the rental losses, disallowed some of her claimed Schedule C expenses and disallowed each spouses’ claim for innocent spouse relief.  In Appeals, some losses and some expenses were allowed and the husband was granted partial innocent spouse relief.  Appeals did not grant Petitioner innocent spouse relief.  She agreed to the tax adjustments but did not agree to the determination regarding her status as an innocent spouse.  Both spouses alleged abuse by the other.

Petitioner filed her Tax Court petition on the issue of her status as an innocent spouse.  Shortly before the case was calendared, the IRS agreed that she was entitled to relief under 6015(f) and a stipulation of settled issues was filed.  She requested fees.  As a curious person, I would like to know why the IRS granted her innocent spouse relief since the liabilities seem to stem from adjustments related to her if I am reading the opinion correctly.  That, however, will remain a mystery.

The Court addresses her claim for fees and notes that she makes the request both with respect to both the administrative and litigation phases of the case.  Because petitioner did not file a qualified offer, the Court states that the position of the IRS is “substantially justified” if it is “justified to a degree that could satisfy a reasonable person” and has a “reasonable basis both in law and fact.”  Swanson v. Commissioner, 106 T.C. 76, 86 (1996).  The fact that the IRS ultimately loses or concedes a case does not make the position unreasonable but the Court notes that this can be considered in determining reasonableness.

Petitioner argued that the return preparer acting on behalf of her ex-husband made the decision to treat her as a real estate professional without consulting her.  The Court finds that no factual basis for this argument exists.  It finds she actively engaged with the preparer.  The Court goes through a brief analysis of the determination of the Appeals Officer that she did not qualify for innocent spouse relief.  The Court seems to have the same problem I do understanding why Chief Counsel’s office conceded this case.  It finds the determination of the Appeals Officer reasonable and states that “there is no evidence in the record as to the basis for this concession.”  Neither party is required to put such evidence into the record when making a concession but here it would have been very helpful if petitioner had done so.  If we could know why Chief Counsel decided to concede the case perhaps we could understand why they did so and why it was unreasonable for the Appeals Officer to fail to concede the case.

The Court finds that “notwithstanding this concession, we conclude that the AO’s determination that the petitioner was entitled to no relief under section 6015(f) had a ‘reasonable basis both in law and fact’ and was ‘justified to a degree that could satisfy a reasonable person.’”

Aside from the problem of not providing the Court with an understanding of how she came to win the case and how it was unreasonable for Appeals not to have conceded it, petitioner has the problem of not proving the basis for her claim for a specific amount of fees.  She failed to submit the affidavit required by Rule 232(d) and relied on the declaration included with her original motion.  Because she represented herself (and did a great job), she has trouble showing her costs other than her $60 filing fee.  Her time entries and those of her accountants do not break out the time to reflect time worked on the innocent spouse aspect of the case as opposed to the other issues present.  In response to a request by the IRS for more detailed records regarding the time spent on the innocent spouse issue, petitioner made what the Court deemed as a frivolous response stating that she devoted 1,000 hours over four years to resolve the matter and her billing rate is $350 per hour.  So, she argued she should really receive $350,000.

Petitioner’s path to victory on the innocent spouse issue remains a mystery and that mystery makes it hard for the Court to decide the IRS was unreasonable when it initially decided she did not qualify for such relief.  The case makes the point that when the IRS concedes and you want fees and the basis for the concession does not jump out from the available facts, you must take the time and effort to put into the record the basis for the concession.  I hope there is some reason that the Chief Counsel attorneys conceded what looks like from these facts to be a very strong case on their side of the argument.  Whatever reasons that exist for the concession need to be made known by petitioner in order to show the Court that she substantially prevailed.  Without a qualified offer, it is hard enough to show this.  On these facts it seems impossible.

Of course, showing why the IRS was so wrong is only one thing you must do if you want fees.  You also have to show how you calculated the fees you seek.  Petitioner’s somewhat frivolous response to the request for more data further doomed her chances for recovering fees.

 

District Court Denies 6511(h) Financial Disability Claim

We have covered several cases in which the taxpayer sought to hold open the statute of limitations based on financial disability here, here, here, and here.  In Estate of Kirsch v. United States, the taxpayer’s estate loses, which is the norm for these cases, but does so with slightly different facts than the usual case.

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Ms. Kirsch passed away on September 16, 2016.  Her estate brought this action seeking to recover a refund of an overpayment for her 2008 return.  She did not file the 2008 return until June 5, 2015.  Her estate argued that the delay in filing was due to financial disability.  When she filed her 2008 return seeking a refund, she knew that she had missed the time for filing a refund absent the suspension caused by the financial disability provisions.  So, she submitted with the return two statements, one from her doctor and the other from her son.

The doctor’s statement provided:

Florence W. Kirsch is a patient known to me.

  1. [Ms.] Kirsch has been diagnosed with a cognitive mental impairment;
  2. It is my medical opinion that in addition to issues in remembering to take certain medications, her mental impairment has prevented [Ms.] Kirsch from managing certain aspects of her financial affairs;
  3. It is my medical opinion that the mental impairment has lasted for a continuous period of not less than twelve months and will continue to last indefinitely;
  4. While first diagnosed on January 3, 2012, [Ms.] Kirsch first began reporting issues with her memory in 2007. Given the progressive nature of cognitive mental impairments, [Ms.] Kirsch would have begun to experience adverse effects of her mental impairment first in 2007 and it became progressively worse.

 

The statement from her son, which it what makes this case somewhat unusual, involves a durable power of attorney granted to him.  In 2003, Ms. Kirsch created a durable power of attorney naming her husband as her agent and her son, Ken Kirsch, as the successor agent.  Mr. Kirsch, the husband, passed away on March 28, 2009, before the 2008 return was due.  Ken Kirsch did not exercise his authority under the power immediately.  He said in his statement that he lives on the West Coast, some distance from his mother in Massachusetts and did not realize that his assistance was required until about the time the refund claim was filed when her symptoms became more pronounced.

The statute requires that the taxpayer seeking to suspend the normal three year period for filing a refund claim show financial disability and defines that as someone who “is unable to manage [her] financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”    You cannot be considered financially disabled unless “proof of the existence thereof is furnished in such form and manner as the secretary may require.”  The IRS has not gotten around to writing regulations on this issue yet but it issued Rev. Proc. 99-21 which sets out the requirements regarding a statement from a physician’s medical opinion.  The Rev. Proc. also sets out the requirement of a statement from the claimant that no person was authorized to act on the individual’s behalf during the period of impairment described in the doctor’s statement.  The second requirement exists because the statute also provides that a person is not financially disabled if “any other person is authorized to act on behalf of such individual in financial matters.”

The IRS argued that no suspension of the statute should occur in this case based on the inadequacy of the doctor’s statement and the existence of the durable power of attorney to the son.  The court agreed with both points.

The problem with the doctor’s statement her is the uncertainty of the starting point.  The statement says Mrs. Kirsch “would have begun” experiencing the effect of her mental impairment in 2007 but does not make a clear statement that in 2007 she could not manage her financial affairs.  The problem may stem in part from the doctor’s uncertainty about the progression of her illness.  The situation here mirrors other situations in which taxpayers have tried to claim financial disability.  The creation of the durable power of attorney several years before might suggest her family members saw a problem but, on the other hand, the delay in action by her son suggestions whatever impairment existed, he did not see it from afar.  The family tried to fix the problem by submitting another statement from the doctor.  The court acknowledged a willingness to receive a supplement statement citing Bowman v. Internal Revenue Serv., No. CIV-S-09-0167 MCE GGH PS, 2010 WL 178094 (E.D. Cal. Apr. 30, 2010); however, it found that the supplemental statement did not cure the defect because it still did not say exactly when she became financially disabled.  The physician continues to discuss her abilities based on an examination in 2012 where the issues existed and her statements that they began in 2007 but does not describe when the impairment crossed the line into financial disability.  Doing so would be a hard task for almost any physician.  The statement just talks about her cognitive abilities becoming worse over time.

Additionally, the Court finds that even if the doctor’s statement had contained satisfactory language, it still would not have found financial disability because of the power of attorney given to the son to assist her.  His letter states that he was authorized to assist her.  The son argued that the durable power of attorney did not become effective under Massachusetts law until “the designees became aware that they had such authorization.”  The Court holds that even if he is right about Massachusetts law he was authorized to act on his mom’s behalf during the time periods referenced in the doctor’s letter.  As such, the estate cannot meet the criteria in the statute.

I agree with the Court that the doctor’s letter leaves something to be desired in terms of clarity about exactly when Mrs. Kirsch became impaired.  The statute creates a very difficult task for a doctor how sees a patient only infrequently.  The doctor knows when the patient can no longer function with financial affairs (or can make a reasonably educated opinion based on observation) and knows that the inability did not turn on like a light switch but does not know exactly when the line was crossed.  It would seem that where the doctor makes a statement like the one here that other evidence should be allowed to more precisely pinpoint the timing when the line was crossed or a non-treating professional should be allowed to take the doctor’s opinion coupled with the other evidence and give a professional opinion.  Stating precisely when someone can no longer handle their financial affairs would not have been the goal of the doctor at the time of treatment and hindsight will not always allow for precision in this type of diagnosis.

The problem with the power of attorney exists whenever the person with the power is remote or not paying careful attention.  Not many children want to step in and declare their parent incompetent with financial affairs.  It is nice to create the power before the parent loses the capacity to grant it; however, deciding to exercise it requires a different calculus.  Where, as here, the son was remote it becomes even more difficult.  He was not seeing his mom on a regular basis apparently and would have had difficulty recognizing when her actions crossed over the line.  I see this with my own dad.  My sisters and I are in constant contact with him.  While at 91 his cognitive abilities are not what they once were, he is still quite financially able.  We see little things but we are watching closely.  Someone who is remote will have a very difficult time until a significant event occurs.

No one is arguing that the refund does not belong to the estate but for the statute of limitations on claiming it.  While the finality of a statute of limitation provides benefits, I question whether the benefits are great enough in these situations.  Do we have to make it so hard to recover monies lost because of cognitive decline?  I do not think we do.  I think we should be more compassionate.  This money is an overpayment of tax.  Someone who has spent a lifetime complying with the tax statutes should get a break when compliance becomes difficult because of cognitive decline.  We should err on the side of returning the money.

National Taxpayer Advocate Blogs on Private Debt Collection

On July 5, the National Taxpayer Advocate (NTA) posted a blog on the private debt collection program.  She has followed that up with two more blogs on this subject found here and here.  In June, she posted two blogs, found here and here, about the passport revocation program which contain a number of useful examples about how that program will work.  Because of her position inside the IRS and her knowledge and insight on collection issues, these blogs serve as an important resource for practitioners confronted with these issues.  I have blogged before on private debt collection here and here.  The private debt collectors are now at work contacting taxpayers.  One of our prior clients has received contact which is not surprising as you will find out when I discuss the statistics in her second blog post on this subject.

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Nina starts her first blog with a background about the earlier failed effort to use private debt collectors and about the statutory authority surrounding their use.  She notes that it was agreed that the IRS could not use private debt collectors with specific Congressional authorization.  The American Jobs Creation Act in 31 U.S.C. 3718 generally permits federal agency heads to contract with private debt collectors but that act specifically excludes federal tax debts.  Viewed through that lens, IRC 6306 authorizes the IRS to hire private debt collectors for very specific limited activities.

The specific action authorized is entering into “qualified tax collection contracts.”  The statute defines this term as an agreement for services: “(A) to locate and contact a taxpayer; (B) to request full payment from such taxpayer and, if the taxpayer cannot make full payment, to offer the taxpayer an installment agreement for a period not to exceed five years; and (C) to obtain financial information with respect to such taxpayer.”  Nina’s blog takes the position that the IRS has gone beyond the authorization in the statute.

She points first to installment agreements.  The agreement allows the private debt collectors to enter into installment agreements that last up to seven years.  If the agreement for an installment agree goes beyond five years, the private debt collector must obtain approval from an IRS technical analyst.  She feels that allowing this goes beyond the language of the statute but that, even worse, the private debt collectors can monitor the installment agreements that go beyond five years and receive commissions on them even though this monitoring is not specifically authorized by IRC 6306.

When Congress passed the newest version of private debt collection and mandated that the IRS use it, the carrot in the legislation is that the IRS gets to keep 25% of the amounts collected.  This carrot provides an incentive for the IRS to maximize the use of private debt collections and may lead to use of them in a manner not authorized by the statute.

The IRS is not requiring private debt collectors to solicit financial information from debtors even though that is one of the categories of things the private debt collectors are explicitly allowed to do.  This information would allow the IRS to determine a taxpayer’s ability to pay.  Private debt collectors did this the last time they were working tax debts.

Their scripts instruct their employees to “suggest that liquidating assets or borrowing money may be advantageous” and to provide ideas on how and where to borrow including borrowing from a retirement plan or obtaining a second mortgage.  Since the private debt collectors are not gathering information about the taxpayer’s financial situation, unlike the IRS when it is engaged in collection, the private debt collectors might suggest borrowing that would be detrimental to the taxpayer’s financial well-being.  Because of the payment structure, the private debt collectors have an incentive to get the taxpayer to pay even if it would prove to create financial hardship.

As sad as you might be about private debt collectors after reading Nina’s first blog, her second post provides a clearer picture of which accounts are going over to these companies.  Not surprising, the accounts include a high percentage of low income taxpayers.  One of the reasons for the failure of the last effort to use private debt collectors is that they receive the accounts the IRS cannot collect.  A high percentage of those accounts involve individuals who have little or no ability to pay.  The data in her second post makes this clear.  She has had her researchers look at the income levels of the accounts being sent out.  The median income of the group of almost 10,000 taxpayers sent out early in the program was $31,000 and about half of the group fell under 250% of poverty level which means they would qualify for the services of my clinic under the guidelines Congress established in creating the grant funds for low income taxpayer clinics in IRC 7526.

Nina does note that she has once again made being the subject of private debt collection a policy basis for getting assistance from her office even if the taxpayer does not meet the hardship criteria of the statute.  Most of these individuals will not know that or know why they should seek assistance from her office or clinics like mine, but assistance is available for the taxpayers who are the subject of private debt collection.  As Nina points out, the IRS voluntarily agreed to exclude certain taxpayers but declined to exclude others she felt should be added to the list meaning that a fair number of vulnerable individuals will be handed over to the private debt collectors.

In her third and final blog on the subject, she points out that one decision made by the IRS is to send new tax debt out to the private debt collectors in situations where the taxpayer has old debt already in their hands.  The post has an informative chart on the amount of money each of the four notices in the IRS collection stream brings into the coffers.  New debt is much easier to collect for the IRS than old debt.  A statistic I remember from working on similar issues years ago is that the IRS only collections about 15% of debts once they go past two years.  By turning over new debt to the private debt collectors, the IRS is giving them debt the IRS itself might have collected in its notice stream without having to pay the fee to the private debt collectors.

Here is where potential gamesmanship comes into play.  While the new debt might get collected without assistance from the private debt collectors, if they do collect it not only do they get to take out a fee but 25% of the amount collected goes into a fund the IRS can use for its operation.  Going back to 1954, Congress eliminated incentives for tax collectors to collect money to make it a more professional operation.  The new IRC 6306 puts this type of incentive out there for the IRS as a way to augment its budget.  To be sure, none of this 25% directly benefits anyone at the IRS but the system does provide an incentive for the IRS to toss to the private debt collectors some of the “better” debt because the more debt collected by them the more the IRS has additional funds to spend at a time when Congress has decided to starve it.

 

When is a Collection Due Process Case Over

I have written twice before, here and here, about the case of Matthew Vigon.  Mr. Vigon, representing himself, has now moved from the Tax Court order pages into its fully bound volumes of opinions with a full T.C. opinion, Vigon v. Commissioner, 149 T.C. No. 4 (July 24, 2017).  Judge Gustafson continues to use Mr. Vigon’s case to teach us about Collection Due Process (CDP) issues that had previously gone unanswered.  Today’s lesson concerns when does a CDP case end and what effect does an IRS concession on part of the case have on the whole.

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The IRS filed a notice of federal tax lien (NFTL) against Mr. Vigon because he did not pay the penalties assessed against him for frivolous tax submissions.  He filed a CDP request and then a CDP petition contesting the penalties.  When we first saw his case early in 2017 with an order linked in the blog above, Judge Gustafson raised the concern that the IRS had not proven that it got the appropriate supervisor approval under IRC 6751 prior to making the assessment.  Now, the IRS has abated the penalties, released the lien and moved to dismiss this case because of mootness.  The IRS does not concede, however, that Mr. Vigon is not liable for the frivolous tax submissions and takes the position that it has the right to reassess the penalties at the conclusion of the case.  The matter before the Court is whether the position of the IRS keeps the case open.  The Court finds that it does and that has a significant impact on the meaning of merits litigation in CDP cases which causes the Court to designate this opinion as one with precedent.

Mr. Vigon lives in Canada and is a citizen of Canada.  He filed nine returns the IRS deemed frivolous.  He argued to Appeals in the CDP case that he filed the returns because he was trying to purchase property in the US and a man named Peter told him he needed to file these returns.  Appeals did not agree with his reason for abating the penalty but when the case moved into Tax Court the Chief Counsel attorney asked to return the case to Appeals for it to make a determination that the penalties were properly authorized.  The Court granted that request.  Appeals determined that the penalties were properly authorized in a supplemental determination.  The IRS then told the Court it had decided to abate the penalties and submitted the motion dismissing the case based on mootness but the Court issued an order stating “It is less clear how a liability challenge under 6330(c)(2)(B) becomes moot merely upon an announced concession, which would not seem to have any res judicata or collateral estoppel effect.  Perhaps a CDP petitioner who makes a liability challenge that the IRS concedes is entitled to decision in his favor on the liability issue.”

In its response the IRS acknowledges that the abatement of the frivolous penalty assessment and the release of the notice of federal tax lien related to the assessment and the dismissal of the CDP case for mootness does not have a res judicata effect.  The IRS argued that could hypothetically reassess the penalties at any time as these penalties do not have a statute of limitations on assessment but that if it did reassess the taxpayer would have the opportunity for another CDP hearing concerning the assessment.  Since, if this were to occur (and the IRS does not indicate that it intends to reassess), petitioner would have the chance to come back to the Tax Court the petitioner’s interests are adequately protected even without res judicata or collateral estoppel.  The IRS argues that “no current case or controversy exists for the Court to adjudicate.”

Before I get to the Court’s response, I want to pause and point out that I am not certain why Mr. Vigon has been able to contest the merits of his IRC 6702 penalty in this CDP case.  If he had been offered a conference with Appeals in conjunction with the assessment of the penalties, the IRS would take the position that the pre-assessment conference with Appeals forecloses the opportunity to raise the merits of the liability in his CDP case and that only by paying the penalty and suing for refund could he contest the merits of the penalty.  Three circuit courts, upholding the decisions of the Tax Court, have recently sustained the regulation on this point and we have discussed the issue in several posts here, here, here and here. So, while Mr. Vigon has the opportunity to contest the IRC 6702 penalty in the current CDP case (“the IRS acknowledges that Mr. Vigon was entitled to challenge the penalty liabilities at the CDP hearing.”), his ability to do so in a future CDP he might bring does not seem clear.

The Court notes that Mr. Vigon did not respond to the motion to dismiss on the grounds of mootness.  He had informed the Court previously of his incarceration in Canada.  The Court speculates that his incarceration may continue and then moves forward with its discussion of the case without the benefit of his input.  The Court also notes that it is not yet called upon to decide whether he is liable for the IRC 6702 penalties and so it will not discuss the principles and standards that apply to the penalty.

The Court points out that Mr. Vigon did not raise a challenge to the appropriateness of collection action but focused his CDP request on the challenge to the liability.  The Court describes the basis for its jurisdiction to decide the merits of a tax liability in the CDP context and notes that “the liability issue may remain even after the collection issues have been resolved or become moot.”  The Court states that “the question now before us is whether the liability issue may remain even after the assessment has been abated.”

The IRS argues that once the collection action goes away the basis for any merits determination goes away with it.  The Court quotes the IRS argument:

In order for the Court to determine a liability in a CDP case notwithstanding the lack of a proposed collection action, the Court must find a specific jurisdictional grant under I.R.C. 6330.  However, section 6330(d)(1) only gives the Tax Court jurisdiction to review the determination referred to in section 6330(c)(3).  Section 6330(c)(3) directs Appeals to determine, inter alia, whether the [“]proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.”  Without an assessment, there can be no collection action and accordingly no valid determination for the Tax Court to review under section 6330(d)(1).  This does not constitute a specific grant of jurisdiction to conclusively determine petitioner’s liability irrespective of the collection action.

The Court points out that 6330(c)(3) is not confined to balancing collection issues but in (B) also permits jurisdiction of the issues raised “under paragraph (2).”  Paragraph (2) allows the petitioner in a CDP case “to raise challenges to the existence or amount of the underlying tax liability for any tax period.”  The Court finds that “having obtained jurisdiction of a liability challenge when the petition was filed, the Tax Court does not lose jurisdiction over it if the IRS releases a lien and ceases collection.”  The Court notes that even if it has jurisdiction it could still dismiss a case if it becomes moot as many CDP cases do.  The Court discusses how CDP cases involving only collection issues typically become moot when the collection issue is resolved.  CDP cases involving a merits challenge typically do not offer the IRS the opportunity to reassess because of the statute of limitations on assessment which has normally run by the time the case gets decided.  If the IRS explicitly disclaims intention to pursue a liability, that could also cause a case to become moot.

This case offers a different situation because of the IRS position that the 6702 penalty has no statute of limitations on assessment.  The Court finds that “here, abatement is a tactical retreat but not a surrender.”  The IRS has not, in Mr. Vigon’s case, disclaimed its interest in making another assessment even while saying such as assessment is unlikely.  The Court asked the IRS to comment on the case of Hotel Conquistador, Inc. v. United States, 597 F.2d 1348 (Ct. C. 1979) and did not like its response.  That case, like this one, involved a party who wanted to shut down a suit but who had the possibility of reopening the same litigation at a later point.  The Court decides that the motion to dismiss the case on the grounds of mootness fails.

This may not be altogether good news for Mr. Vigon.  While the IRS did not promise that it would not reassess the penalties, it signaled that it was unlikely to do so.  Moving forward with a trial on the merits, Mr. Vigon will need to make his case that the penalties do not apply to his actions.  He has been ably “represented” by the Court in three written opinions/orders thus far but he may need more than the Court’s assistance on legal issues to actually win his case on the merits.  The Court’s assistance involves placing checks on IRS actions and not on putting evidence on during a trial.  If the IRS does not file a statement conceding that it will never reassess the frivolous filing penalties, there is more yet to come in this case and that may not be to Mr. Vigon’s advantage.  If he had responded, he might have asked the Court to dismiss the case and let him take his chances with the IRS not assessing again.  I realize the parties do not confer or necessarily terminate the Court’s jurisdiction but worry that Mr. Vigon will lose on the merits unless he steps up his activity in the case or receives representation.

 

Can Tax Preparer Recover Damages for Revoked EFIN

The recent decision rendered by the Court of Federal Claims in Snyder & Associates v. United States provides a stark reminder about the perils of building a business based on a government privilege or license – in this case the ability to electronically file tax returns for clients.  It also provides a reminder of the limitations of federal employees to bind the government for which they work.

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Snyder & Associates engaged in return preparation in the Los Angeles area.  It had a symbiotic relationship with a lender that funded refund anticipation loans (RALs).  Even though RALs ended several years ago, at least in their first decade of the 21st Century form, this case relates back to that era.  The same person owned both the return preparation firm and the lender.  Nothing in the opinion suggests that the businesses or the owner of the businesses engaged in inappropriate activity; however, one of the associates of the business, Nancy Hilton, who prepared returns there in the capacity of an independent contractor, did engage in fraudulent activity.

Ms. Hilton approached the IRS criminal investigators and advised them of the scheme in which she participated.  The scheme used stolen identities to seek benefits through tax filing.  After she brought the scheme to the IRS, Special Agents sought to use her to set up a sting.  For the sting to work, the IRS wanted Ms. Hilton’s co-conspirators to cash the checks written as refund anticipation loans.  Cashing those checks meant pulling money out of the lender side of the business.  The owner initially balked at the plan because of concerns of losing the money.  One of the special agents directly stated or implied that the IRS would make the lender whole.  The sting went forward.  In the end, the IRS declined to make the lender whole and, to add insult to injury, it terminated the EFIN license held by Snyder & Associates – an act which effectively terminated the return preparation business.

The business sued to recover the funds lost through the sting operation and to restore its EFIN privileges.  It lost on both counts.

With respect to the money lost in the sting, the issue turned on the authority of the special agent to bind the government.  I am probably oversimplifying this, but my experience working in the federal government for over 30 years suggests that first line employees like special agents, revenue agents, revenue officers, attorneys, etc., have extremely limited ability to bind the government.  Almost everything that they do which might create a monetary liability for the government must first be approved by their supervisors.  The principle extends beyond contracting for repayment of a sting obligation or other monetary obligations to matters such as settlement authority or referral authority.  There is a fairly elaborate system of delegation orders granting authority for certain acts.  The system generally does not go lower than the front line manager and frequently does not go that low.

Snyder & Associates ran full force into this system.  The special agent who told it that the money used to pay the fraudulent RALs would be repaid to the business by the government simply did not have the authority to bind the IRS.  The Court expended little effort in denying this claim for relief because the IRS had not committed itself to repayment of losses.  Based on my experience, the special agent who made the representation will receive counseling about their scope of employment which will include a discussion about not doing this again.  Such counseling will be cold comfort to the business that has lost the money with little or no hope of recovering it from the participants in the fraudulent scheme who will also owe the IRS and whose debt to the IRS will generally have a higher priority than the debt to the business.

Having lost the money spent to support the sting, the business then sought to reobtain the right to electronically file returns which the IRS pulled at approximately the same time the business cooperated with the sting operation.  The business argued that the termination of the EFIN rights was an improper taking of a property interest.  The Court points out that the IRS did not take the business or in any way deny the business use of the business.  The termination of the EFIN certainly impacted the business but the business had “no cognizable property interest in their EFIN in the first place.”  Citing Mitchell Arms v. United States, the Court stated that “when a party receives a permit to engage in an activity ‘which, from the start, is subject to pervasive Government control,’ no cognizable property interest capable of supporting a takings claim ever arises in that permit.”

Although the Mitchell Arms case involved the import and sale of assault rifles rather than electronic filing of returns, the Court found the action of ATF in that case exactly paralleled the action of the IRS in this one.  Because no property interest attached to the EFIN, the termination of the right to electronically file could not constitute a taking under the constitution.

Conclusion

The decision here, though harsh, does not cover new ground.  The business had good reason to expect the IRS would make it whole for assisting with the sting operation based on the representations of the special agent.  Not everyone knows of the limitations governing federal employees.  The case reminds us to take care in contracting or thinking we have contracted with the federal government.  Authority is critical.  Here, the special agent did not have proper authority to bind the IRS and the actions of other IRS officials did not act to ratify the actions of the special agent.

Similarly, licenses like EFINs do not come with a guarantee or with special protections.  When a business relies on the EFIN for its financial life, it must take extreme care to avoid actions that can result in its removal.  Even though the actions here appear to be those of an independent contractor working with the business, the concern of the IRS about fraudulent return filing schemes ends up punishing the business as well as the individual perpetrator in an effort to keep the system clean.  The result here reaches a much different result for the preparer than the D.C. Circuit in Loving because of the difference in the nature of the fight.  In Loving, the IRS sought to assert its authority over a previously unregulated matter – tax return preparation.  Here, the IRS exercised control over use of its electronic filing procedures something which it has carefully regulated from the start.  The challenge was not to the IRS ability to regulate electronic filing but whether the business had a property interest in the ability to electronically file.

 

New Rock Baptist Church Continues Development of Collection Due Process Law

Located not too far from the Tax Court’s building in D.C., New Rock Baptist Church and its nursery school provided the setting for an interesting full TC opinion looking at who can bring a Collection Due Process (CDP) case as well as when does the case become moot.  The Court finds that only the real taxpayer can bring a CDP case even if the IRS lists the wrong taxpayer in its notice of federal tax lien and that fixing the lien problem by withdrawing the notice does not end the CDP case for the taxpayer seeking to adjudicate their collection issue.

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It’s not unusual for a church to host a nursery school.  It’s not unusual for the church and the nursery school to exist as two separate entities despite the close relationship they have in sharing a building and often other matters as well.  In this case, the church and the school did have separate identities and separate EINs and even separate addresses.  The nursery school ran into trouble with its payroll taxes.  The IRS eventually assessed a decent sized liability of over $400,000 against the nursery school and decided that it needed to file a notice of federal tax lien in order to protect its interest.

Unfortunately, when the IRS filed the notice of federal tax lien, it did not file it in the name of the New Rock Baptist Church Child Development Center but rather filed it in the name of New Rock Baptist Church.  Although the NFTL correctly identified the address and EIN of the nursery school, the church did not appreciate having a NFTL filed in its name rather than the name of the nursery school and took the opportunity to join in filing a CDP request.  The person receiving the CDP notice at the nursery school seems to have shared the notice with the church, and one might even imagine some discussions occurring regarding the nature and the existence of the NFTL, because the nursery school also filed a CDP request.

The CDP requests of the church and the school were consolidated in the hands of one settlement officer.  I base my comments on the opinion and not the underlying documents.  Based on the opinion, it appears that the CDP requests filed by both entities focused on obtaining an installment agreement for the nursery school instead of focusing on the separate issue of the correctness of the NFTL.  The SO, perhaps unaware of the incorrectness of the NFTL, rejected the proposed installment agreement stating “no collection alternative can be approved.”  The Court notes that the SO did not make the basis for rejection clear.  I would speculate that the basis was a failure of the nursery school to keep current with its filing requirements or payment requirements.  Surprisingly, although perhaps attributable to neither party raising the issue, the SO further determined that “the NFTL was correctly and properly filed.”  Even if neither the church nor the nursery school mentioned the incorrect name on the NFTL, the existence of CDP requests from both entities should have served as at least a mild clue that something was amiss.

On June 20, 2014, the IRS issued a notice of determination.  The Court’s choice of words makes me think that only one notice of determination was issued.  It was sent, like the NFTL to the correct address, with the correct EIN and the wrong taxpayer name.  The nursery school and the church jointly petitioned the Tax Court from the notice of determination requesting that the IRS should withdraw the NFTL.  Chief Counsel’s office requested a remand of the case to Appeals for it to: 1) give further consideration into withdrawing the NFTL, and 2) provide greater explanation regarding why it rejected the IA.  The Court granted the motion of the IRS for a remand.

On remand the IRS assigned a new SO.  The new SO, perhaps alerted to the issue by the Chief Counsel attorney, determined that the NFTL was ambiguous (this is the Court’s word; it is possible to conclude that the NFTL was simply wrong or that it violated disclosure laws by wrongfully naming a taxpayer with no liability and telling the world that it had a whopping liability) and that the NFTL should be withdrawn.  The new SO determined that the nursery school did not qualify for an IA because it was not in compliance with all return filing requirements.  Despite having identified the problem with the lien, the new SO sent the supplemental notice of determination to the correct address for the nursery school, with the correct EIN and with the name of the church rather than the nursery school.  Some things die hard.  Once the IRS has used the wrong name, getting it to switch and use the right name can require an act of God, or at least a Tax Court judge, and here again the IRS misidentifies the taxpayer even after recognizing the problem of misidentification.

Before finishing the discussion of the case, I want to pause here to make sure everyone understands that the withdrawal of the NFTL does not impact the federal tax lien itself which continues to exist and continues to attach to all property and rights to property owned by the nursery school.  Withdrawal of a NFTL simply removes the notice of the lien but not the lien itself.  Withdrawing the notice has an impact on the security of the lien and its priority vis a vis other creditors, but not the validity of the underlying lien or the liability secured by the lien.  Do not get sucked into thinking that withdrawal of the NFTL fixes the nursery school’s tax problems.  Withdrawal does, however, remove from the public record the erroneous statement that the church has a tax liability.  The church may still need more statements from the IRS to the effect that it never owed any federal taxes giving rise to the NFTL because creditors will, or may, know that the withdrawal does not signal the church no longer owes.

So, back in the Tax Court the IRS moves to dismiss the case as moot since the new SO fixed the problem by withdrawing the NFTL.  The nursery school, however, says not so fast because it still wants to have a hearing on the liabilities it owes.  The Tax Court determines that it has jurisdiction over the CDP case involving the nursery school basically finding that even though the NFTL did not mention the nursery school by its precise name it was close enough to trigger CDP rights; however, with respect to the church the Court finds that it was not a proper party.  It says no valid notice of determination was issued to the church despite the fact that the notice of determination listed the name of the church and not the nursery school.  Maybe this works in an opinion written when the NFTL has already been withdrawn; however, I am troubled that an entity clearly listed on the NFTL and on the notice of determination is denied the opportunity to seek relief from the impact of the NFTL.

Perhaps the Court thinks that the 7432 provisions regarding liens provide sufficient protection but it does not spell out why it thinks an individual or entity listed on an NFTL and listed in the notice of determination as the taxpayer against whom the IRS is taking collection action giving right to a CDP hearing has no right to seek redress through such a hearing.  It says that no valid federal tax lien existed with respect to the church.  True, but CDP protection does not depend on a valid federal tax lien it depends on the filing of an NFTL.  Determining the validity of the NFTL is an integral part of the CDP process.  A taxpayer listed in an NFTL should be able to use the CDP process to contest the validity of the NFTL and the underlying lien.  The Court does not explain why the lack of an underlying federal tax lien has an impact on the jurisdiction of the Court in a CDP case.  Does this mean that if the Court should reach the conclusion in another case that no lien exists, say because the assessment is invalid, it must dismiss the case rather than grant relief.  I cannot follow the logic here.

The Court also says no valid notice of determination was issued.  I have a similar problem.  A notice of determination was issued in the name of the church.  Yes, the IRS made a mistake in sending the notice of determination (as well as the notice of supplemental determination) in the name of the church but that should not prevent the church from receiving relief.  Maybe it would be useful for a taxpayer who wrongfully gets listed on an NFTL and who receives a notice of determination to have a court opinion that says it was wrong so it can show its creditors that it was wrong.

The Court may reach its conclusion because the notice of determination uses the separate address of the nursery school to say that the church did not receive this notice.  It does not make that explicit and the link between the organizations still creates a problem for the church that CDP might resolve.

In the end, after determining that it has jurisdiction to consider the CDP relief requested by the nursery school, the Court finds that the withdrawal of the NFTL did not moot the case.  Even though it has jurisdiction and even though issues regarding liability still exist, the nursery school has problems that prevent it from getting any relief through CDP.  It raised some issues it wanted the Court to address after making its CDP request, and the Court says those issues are not properly before it.  Because the nursery school was not in compliance with its filing requirements at the time of the Appeals determination, the Court sustains the Appeals determination that it is not eligible for an IA.  The nursery school alleges that it is now in filing compliance, and the Court responds correctly that losing a CDP case does not prevent it from entering into an IA at the conclusion of the case.  That’s the nice thing about CDP.  It’s just a skirmish on the road to collection and not the ending point.