Does Failure to List a Refund Claim in a Debtor’s Bankruptcy Schedules Provide the IRS a Defense Barring the Refund

The case of Martin v. United States (C.D. Ill 1-5-2017) examines the jurisdictional objection raised by the Department of Justice Tax Division to a claim for refund filed by taxpayers who went through a chapter 7 bankruptcy proceeding prior to filing the claim for refund.  The bankruptcy proceeding matters because the refund claims here relate to pre-bankruptcy petition years.  Because the refund claim existed at the time of the bankruptcy, the claim became property of the bankruptcy estate under B.C. 541.  The taxpayers had a duty to list all of their property and rights to property when they entered bankruptcy.  The taxpayers did not list the refund claims on their bankruptcy schedules and did not file the refund claims until just prior to closure of their bankruptcy case in 2005.

In this case, the IRS seeks to knock out their claim because of the failure to list it in the bankruptcy proceeding regardless of the merits of the claim.  The position of the IRS has a sound basis.  The district court does not dismiss the refund claim but discusses several theories raised by the IRS.  The court signals that it may dismiss the claim once it acquires more facts.


I first saw this issue almost 30 years ago in a Third Circuit case Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414 (3rd Cir. 1988). Citing to In Re Hannan, 127 F.2d 894 (7th Cir.1942), the Court stated

“a long-standing tenet of bankruptcy law requires one seeking benefits under its terms to satisfy a companion duty to schedule, for the benefit of creditors, all his interests and property rights.”

The Court also pointed to the debtor’s statutory duty stating

“Section 521 of the current Bankruptcy Code outlines a non-exhaustive list of the debtor’s duties in a bankruptcy case. Foremost for our purposes, the debtor is required to ‘file a … schedule of assets and liabilities … and a statement of the debtor’s financial affairs….’”

Oneida argued that at no point in the bankruptcy case prior to the time it filed its action against the bank did the right moment exist to bring such an action.  The Court gave little weight to this argument stating

“Although Oneida may be technically correct in its argument that it was never procedurally compelled to raise its claim, we are satisfied that its failure to mention this potential claim either within the confines of its disclosure statement or at any stage of the bankruptcy court’s resolution precludes this later independent action. Even absent a specific mandate to file a counterclaim, complete disclosure is imperative to assist interested parties in making decisions relevant to the bankrupt estate.”

In Oneida, the debtor brought a suit against a bank for breach of duty but failed to list the chose in action in its schedules and failed to mention it in its plan of reorganization.  Because Oneida was a chapter 11 case, it presents a slightly different setting than Martin but most of the principles remain the same.  I should also note that there was a vigorous dissent in Oneida pointing out the negative impact to the estate of barring the suit against the bank.

The issue presents the question of fair play.  The law has some doctrines that apply when a party fails to treat others properly while seeking benefits for themselves.  By failing to list the claim for refund, which exceeds $100,000, the taxpayers here misled their creditors regarding the amount of assets available from the bankruptcy estate.  The creditors received distributions from a bankruptcy estate that did not include all of the assets owned by the debtors.  Based on those facts, it seems unfair to allow the debtors to benefit, in this case to substantially benefit, from their own failure to properly file their schedules which they signed under penalties of perjury.  I acknowledge that it is possible that at the time of filing the schedules they may not have been aware of the existence of the refund claim but that still raises a question of whether the timing of their becoming aware of an asset is the controlling event for a determination of who should benefit.

A logical way to prevent the debtors from benefiting would be to deny their claim, but there is more to the story.  I want to paint a fuller picture of fairness before I go back to the doctrines examined by the Court.  Here, the debtors in Martin did go back to the trustee and notify him of the possible refund many years after the closing of the bankruptcy case.  The trustee did seek to find and notify the creditors of the estate but none stepped forward to renew their claims.  I did not go and pull the schedules in this case to see what kind of payout occurred from the bankruptcy estate, how many creditors existed, what type of creditors existed, etc.  Depending on the type of creditors and the distance in time between the close of the case and the correspondence from the trustee, it is almost certain that the creditors had written the taxpayers’ accounts off several years prior to the inquiry from the trustee about a possible additional distribution.  If they looked back on their computerized accounts they may have seen that no liability was due from the debtors and may not have had a good way to recreate the account.  The creditors had a duty to write off all dischargable debt in order to avoid violating the discharge injunction imposed by the bankruptcy code and would have taken steps to do so many years before the trustee wrote to them.  If the creditors had not taken immediate steps to write off the debt following discharge, they would have incurred the significant penalties that arise when it is violated.  While it is easy to question why the creditors of the taxpayers’ bankruptcy estate did not raise their hands and request the money when given the opportunity to do so, it may not have been easy or possible for them to identify the debt so long after writing it off.  Because no creditor came forward to ask that their long forgotten debt be paid, the trustee told the bankruptcy court that no creditor of the estate had an interest in the taxpayers’ pre-bankruptcy refund even though it was potentially a six figure refund and even though the creditors probably got paid only a fraction of what they were owed.

First, the taxpayers allege that they did not know of the refund claims until 2005.  If they did not allege this, or at least allege that they did not know of the claims at the time they filed their bankruptcy petition and the attendant schedules under penalty of perjury, they would risk prosecution.  By bringing the refund action and exposing their failure, the debtors would know that this issue would arise.  Without knowing more, I believe them that they were unaware of the refunds at the time of filing their bankruptcy petition because of the defense such belief provides to the possible prosecution for bankruptcy fraud.  So, their failure to list the refund claims may well have resulted not from an effort to deceive their creditors but rather from a desire to claim a benefit once discovered.

Second, the IRS, assuming the taxpayers’ refund claim deserves acceptance, would itself become the beneficiary of a windfall at the expense of the debtors pre-bankruptcy creditors should the court deny the debtors the refund under a theory that no pre-bankruptcy refund could ever be paid if not listed in the schedules.  Unlike the Oneida case, in which the unlisted asset the debtor sought to later recover was against a creditor of the estate, nothing in the facts suggests that the IRS had an unpaid claim in the bankruptcy case.  Should the remedy for a situation such as this provide a windfall to the IRS as it argues?  While the IRS might receive a windfall, it did nothing wrong.  The denial of the refund would result from the debtors’ failure and not due to any actions by the IRS.

Third, maybe an appropriate remedy in a case like this should not allow debtors or the IRS to reap a benefit that, had debtors submitted a timely claim, would have gone to the creditors.  Perhaps a doctrine such as Cy Pres should apply to send the funds to a deserving charity.   The equities at issue here do not favor the debtor even though the debtor did eventually go back to the trustee and bring up the existence of the claim.  It will be interesting to see what remedy the bankruptcy court fashions out of the mess created by the failure to list an asset.  Because the debtors may not have had a good way to identify the refund at the time of filing their bankruptcy petition, the debtors here do not have the same level of culpability that the debtor in the Oneida case had because the cause of action against the bank in the Oneida case would have something that debtor knew or should have known existed at the time of filing the schedules and at the time of presenting a plan of reorganization.  With tax refunds, the existence of the refund sometimes does not become clear for some period after the refund potentially arises, what is a fair method of dealing with parties when such an even occurs.  Maybe Martin will shed some light on the best answer.

What Does “Prior Opportunity to Dispute a Liability” Mean?

In Keller Tank Services II, Inc. v. Commissioner, No. 16-9001 (Feb 21, 2017) the 10th Circuit upheld the Tax Court’s determination of “prior opportunity to dispute a liability.”  The Tax Court, in turn, upheld the IRS determination of this phrase in the Collection Due Process (CDP) regulations.  The 10th Circuit went through a Chevron analysis of the statute and the regulation in making its decision to uphold the regulation.  We have discussed this issue previously here, here, here and here.  The last link discusses in detail that Keller Tank is the first of three recent circuit court arguments by Lavar Taylor challenging the regulation.

The result here is disappointing for those of us hoping that the CDP process can provide a pre-payment forum for tax liabilities, usually a penalty, that do not have the benefit of the deficiency process and are not divisible.  For these liabilities, the decision in Keller Tank places the taxpayer in the unenviable position of having an Appeals Officer as the only person standing between them and a sometimes crushing liability for which they will never have the opportunity to litigate because paying several million dollars to satisfy the liability and the Flora rule is not a possibility.


The IRS asserted a penalty under 6707A against Keller Tank for engaging in and failing to report a listed transaction.  This case does not reach the merits of the penalty assessment and finds that the taxpayer cannot contest the merits in the CDP case.  The 10th Circuit correctly points out that the taxpayer still has an opportunity to contest the merits through a refund suit.  It does not mention that in many cases that opportunity is illusory because of the amount of money the taxpayer would have to pay in order to satisfy the Flora rule.  The amount of the penalty in Keller Tank is not so high that it presents a practical inability to pay; however, I have no idea if the amount, though not astronomically high, still exceeds the taxpayer’s ability to pay.

Section 6330(c)(2) describes the matters that can be heard at a CDP hearing.  Subparagraph (B) under that section provides that

“The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”

Treas. Reg. 301.6320-1(e)(3) addresses matters considered at a CDP hearing.  The regulation is primarily in Q&A format.  Q-E2 asks the question:

“When is a taxpayer entitled to challenge the existence or amount of the tax liability specified in the CDP notice?”

A-E2 answers that question in a long paragraph that includes the following statement:

“An opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.  An opportunity for a conference with Appeals prior to the assessment of a tax subject to deficiency procedures is not a prior opportunity for this purpose.”

The language of the regulation stating that the conference with Appeals satisfies the requirement of section 6330(c)(2)(B) formed the basis for the appeal.  The taxpayer argues that this language conflicts with the intent of the statute.  The IRS refused to allow the taxpayer to argue the merits of the penalty in the CDP hearing because it had a prior opportunity to address the merits of the penalty during the assessment phase although that opportunity did not include the ability to contest the assessment of the penalty in a pre-assessment judicial forum.  According to the IRS, that opportunity arose after the IRS issued a 30-day letter because the taxpayer submitted a written protest challenging the grounds for issuing the penalty and participated in a telephone conference, which resulted in Appeals sustaining the penalty.  The Tax Court agreed with the determination CDP by Appeals on this point which was the only point raised by the petitioner in the CDP request.  On appeal to the 10th Circuit, Keller Tank argued that the refusal to allow it the opportunity to raise the merits of the penalty assessment in the CDP process violated the goal of the statute and that the regulation impermissibly frustrated that goal.

The regulation creates a clear distinction between taxes governed by the deficiency procedures and those that are not.  A taxpayer with a liability covered by the deficiency procedures can have a pre-assessment conference with Appeals at which Appeals sustains the liability proposed by the Examination Division.  If the taxpayer does not receive the notice of deficiency, the taxpayer can raise the merits of the underlying liability in the Tax Court in the context of a CDP hearing because of the failure of the opportunity to go to Tax Court prior to the assessment due to the non-receipt of the notice of deficiency.  In this situation, the IRS must have mailed the notice of deficiency to the taxpayer’s correct address or the taxpayer could set aside the assessment.  Yet, Congress recognized that sometimes taxpayers did not receive the notice of deficiency and sought to give them an opportunity to have their day in court because of the non-receipt of the notice.

In contrast a taxpayer with a liability not governed by the deficiency procedures offered an opportunity to meet with Appeals prior to or after the assessment of the liability, receives no opportunity to have their day in court through the CDP process even though they previously had no opportunity to go to court to contest the merits of the liability.  For these taxpayers, the right to contest the liability through the refund procedure remains their only path to court.  The regulation acknowledges that taxpayers whose taxes are assessed through the deficiency process are not limited to only using the refund procedure while forcing the refund procedure on those taxpayers whose liabilities did not related to a tax assessed through the deficiency process.  The 10th Circuit and the Tax Court find that regulation reaches a logical result in interpreting an unclear statute despite the distinction it draws between the types of taxes.

To sustain the Tax Court decision, the 10th Circuit engaged in a Chevron analysis of the regulation.  It first looked at the language of the statute to determine if the language of the statute spoke to the precise question at issue and determined that it did not.  The 10th Circuit agreed with the Tax Court that the “otherwise have an opportunity to dispute” language in the statute was ambiguous and was not defined in the 1998 legislation creating the language or elsewhere in the Internal Revenue Code.  That determination allowed the Court to move on to step 2 of the Chevron analysis which looks at the interpretation of the statute by the regulation in question in order to decide if that interpretation is based on a permissible construction of the statute.  The 10th Circuit again agreed with the Tax Court that a reasonable interpretation of “opportunity to dispute” includes “a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.”  A factor influencing both the Tax Court and the 10th Circuit is the failure of Congress to simply say that a taxpayer who has not had a prior opportunity for judicial review will receive on in the CDP process.  No doubt, this is a strong basis in support of the decision.

The 10th Circuit opinion has a paragraph that attempts to support its determination using logic I cannot follow.  It suggests that accepting the taxpayer’s argument would promote similarly situated taxpayers to skip the conference with Appeals and wait until collection begins so they can go directly to court.  Few taxpayers would want to pass up an opportunity to resolve their problem at the lowest level in the cheapest way simply so they could argue a case before a court.  Taxpayer’s argument in favor of an opportunity to go to court does not minimize the importance of Appeals and does not undercut the importance of the informal conference.  To the extent the 10th Circuit relied on this logic to reach its conclusion, I think its based its decision on flawed reasoning.

After reaching its conclusion, the 10th Circuit doubled back to address arguments presented by the taxpayer.  Keller Tank argued that the regulation impermissibly limits the jurisdiction of the Tax Court through a regulation because the regulation limits the matters the Tax Court may hear.  The 10th Circuit finds that the regulation does not diminish the Tax Court’s jurisdiction but only limits what may be heard in the administrative process before the IRS in a CDP proceeding.  Because the limitation is on the administrative process and not on the Tax Court, even though the Tax Court is limited to addressing matters that may be raised in the administrative hearing, the 10th Circuit finds that the regulation does not directly limit the Tax Court’s jurisdiction.  Not only is this logic unsatisfactory but the opinion goes on to throw in an additional paragraph here noting that taxpayers have the ability to bring a refund suit without discussing the realities of this ability.

Next, the 10th Circuit addresses taxpayer’s argument that the regulation contains internal inconsistencies.  Keller Tank first argued that the regulation “is inconsistent because it precludes liability challenges at a CDP hearing even when the taxpayer failed to exercise its opportunity to dispute liability at the Appeals Office and was therefore not actually heard.”  Because the statute on speaks to “opportunity” and not to an opportunity the taxpayer exercises, the 10th Circuit finds that the regulation is consistent with the statute and it promotes the statutory purpose of encouraging taxpayers to meet with Appeals.  Keller Tank next argued the regulation was inconsistent “because it precludes liability challenges at a CDP hearing for some, but not all, prior administrative opportunities.”  Keller Tank’s argument here goes to the discrepancy between taxes arises under the deficiency process and those outside that process.  The 10th Circuit simply finds that the distinctions are not “unreasonable or arbitrary or that it is inconsistent to treat different administrative proceedings differently.”

One down and two to go

Arguments occurred within a short time in three circuits.  Taxpayers have lost the first but have two more opportunities.  If the arguments do not succeed, perhaps the judicial interpretations of the language in the statute will persuade Congress to fix the inconsistency between deficiency and non-deficiency process taxes and allow all taxpayer to have a day in court before they must pay.  Congress seemed to want that result in 1998 when it passed the CDP provisions.  If the courts cannot be persuaded that Congressional language allows that result, it is time to push for legislative change.  Because many, though certainly not all, of the people assessed penalties through the non-deficiency process are people with whom few legislators will be excited to assist, getting a legislative change may prove difficult.



Quick Follow Ups on Vigon v. Commissioner and Private Debt Collection


I recently wrote about an order in the case of Vigon v. Commissioner in which Judge Gustafson provided instruction to respondent’s counsel because of a failure to lay the proper foundation for a the summary judgment motion.  IRS Counsel took the instruction to heart quickly and requested a continuance for a trial scheduled for February 22, 2017.  The IRS now agrees that petitioner is not liable for the penalties at issue in the case and stated in its motion that it was in the process of abating the penalties.  The IRS further stated that it was in the process of releasing the liens.  This is a great result for a pro se taxpayer who did not initiate the arguments resulting in these concessions.  The Court granted the continuance but had a question for the IRS:

“We understand how collection issues under section 6330(c)(2)(A) become moot if collection activity ceases. It is less clear how a liability challenge under section 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 issues.”

So, the Court ordered the IRS to make an appropriate filing by March 24, 2017, and to explain in the filing how it provide adequate relief to the petitioner on the merits side of this case.

Private Debt Collection

I also recently wrote about private debt collection and wanted to provide a quick update.

The IRS recently released sample CP40 notice letter.  The letter alerts the taxpayer that their account has been assigned to a PDC.  The hope is that the letter will prepare the taxpayer for the call(s) from the PDC and keep the taxpayer from having concerns that the PDC is a scam artist.



Continued Developments in Private Debt Collection

Based on the resounding failure of past efforts at private debt collection of federal taxes chronicled by the National Taxpayer Advocate and others here, here, here, here,  and here or perhaps based on the need for certain members of Congress to aid their constituents in the business of private debt collection discussed here and here, Congress revitalized IRC 6306 and enacted IRC 6307 on December 4, 2015 as part of the Fixing America’s Surface Transportation Act legislation requiring the IRS to once again use private debt collectors to collect accounts which the IRS has sitting on its shelf gathering dust.  I described the bill in an earlier post.  I will not again point out that over the past six plus years Congress has severely cut the IRS budget so that it does not have the resources to collect many of the accounts sitting on its shelf or to train its staff in how to appropriately collect that debt or that debt collection seems like an inherently governmental function which should not be privately sourced.  Instead of rehashing what a bad idea this is, I will try in this post to talk about what is about to happen with respect to private debt collection.


Although the IRS was supposed to start using private debt collectors by now, it has not been sitting on its hands over the past 14 months but has been moving to the reimplementation of private debt collectors (PDCs) as Congress required it to do.  We should expect accounts to move into the hands of the PDCs within the next couple of months and the phones begin to light up as the PDC employees begin to contact the taxpayers whose accounts were turned over to them.  The IRS just issued Publication 4518 which provides some information on what taxpayer should expect with the coming of the PDCs.

Distinguishing PDCs from Scam Artists

One of the biggest issues surrounding the use of PDCs this time around concerns the proliferation of scam artists in the past couple of years who have preyed on people scared of the IRS and willing to believe that the scam artist represented the IRS.  So, the injection of a non-governmental player into the system has the potential to exacerbate the problem created by the scam artist.  One of the big problems for the IRS in the roll out of the PDC program addresses the concerns that taxpayers will have when contacted by a PDC.  The IRS has had its own employees questioned with respect to their authenticity.  It will be interesting to see how this plays out.  In its publication, the IRS addresses the problem by noting that it will send the taxpayer a letter advising the taxpayer their account has been assigned to a PDC and the PDC will send the taxpayer a letter confirming the assignment.  This will allow the taxpayer, in theory, to be comfortable that the call from the PDC represents a legitimate call and not a scam.  Two paragraphs in the publication address this issue:

What will the private collection agency do? The private collection agency assigned to your account is working on our behalf. They will send you a letter confirming assignment of your unpaid tax liability and then contact you to resolve your account. They will explain the various payment options and help you choose one that is best for you.

How can I be sure it is the private collection agency calling me? The private collection agency will send you a letter confirming assignment of your tax account. The letter will include the same unique taxpayer authentication number that is on the letter sent to you from the IRS. As part of the authentication process the PCA employee will use the unique number for identity verification. Keep both letters in a safe place for future reference.

Exclusion from Being Sent to PDCs

Moving past the issue of the authentication of the PDC, another issue facing the IRS as it assigns accounts to the PDC is which accounts should be assigned.  The IRS created an initial list of ten types of accounts that would not be assigned to PDCs.  This list can be found on its web site describing the program.  The list does not need to stop with the ten types list on the web site and depends on how the IRS decides to assign accounts and what Congress intended the IRS to do.  The answer to that question turns in part on how you view the authority of the IRS with respect to the creation of the PDCs.  If you take the view that the IRS does not have inherent authority to hire PDCs and that its authority derives only from the statute, then you would look at the statute as the sole source of authority for choosing the accounts to go to the PDCs.  Under this view, the IRS can only send to the PDCs the things specifically granted in the statute.  The interpretation of the statute on this point seems to have created some disagreement within the IRS, with the National Taxpayer Advocate taking the view that the statute provides a narrow grant of authority, while others in the IRS or Chief Counsel take a more expansive view.

The statute uses the term ‘potentially collectable inventory’.  What does that mean?  Together with others led by Chi Chi Wu at the National Consumer Law Center, I argued that the term, not defined in the Code, should be interpreted to exclude the same types of taxpayers the IRS excludes from the Treasury offset program.  This would exclude individuals on fixed income falling below 250% of poverty, which is a line used for other purposes in the Code including the cut off for services from low income taxpayer clinics.  The IRS leadership was kind enough to give us a high level meeting to discuss this and other issues regarding PDCs but did not agree with our view on the statute.  The IRS has continued to debate the IRS into the office of the Commissioner.  At present it seems that the IRS will not send to PDCs cases that have already achieved the Currently Not Collectible (CNC) categorization because it considers these as closed cases.  Everyone acknowledges that CNC cases can come out of that category and that the IRS can offset refunds to collect from cases in that category, but these cases will nonetheless not get sent to the PDCs – a decision that makes a lot of sense particularly when you consider that PDCs do not have the authority to place a case into CNC.

The Commissioner has also agreed to place a freeze on sending SSDI and SSI cases to the PDCs under the presumption that, even though a specific taxpayer receiving these payments may not yet have received the CNC designation, such a designation would likely occur if the IRS took a hard look at the case.  The Commissioner’s decision may have little practical impact if the IRS does not have the programming to cull these cases from the ones sent to the PDCs.  This is a big victory for consumers if the practical effect of IRS computer limitations does not totally undercut the decision.  The Commissioner did not decide to exclude taxpayers receiving regular social security or railroad retirement payments from referral because those individuals might have assets that would lift them out of CNC.  All cases pending in TAS will be excluded from referral and the National Taxpayer Advocate will likely issue an order that TAS will take any case in which the PDC seeks to collect from a taxpayer as she did the last time PDCs existed.  The NTA has the power to create special designations of public policy cases that qualify for the services of her office as I have discussed in a prior post.  Expect an order on this in the near future.

Voluntary Payments

Another issued presented by PDCs is how many times they can contact a taxpayer who does not have the ability to enter in an installment agreement but is willing to make a voluntary payment.  Many taxpayers do their best to avoid paying the IRS anything, but a significant number of taxpayers who owe the IRS try hard to pay off the debt even in the face of significant financial odds.  I spoke to a prospective client recently who owes the IRS about $2,000.  Last year she only made $2,500 yet somehow she is on an installment agreement and makes a $25 a month payment.  She called because she had a question on the offer in compromise form she could not answer.  Her mother was willing to give her money that would satisfy almost half of the outstanding liability.  I love her commitment to paying her taxes but I explained to her that with her financial situation we could make an offer for a much lower amount and that she could stop immediately making the monthly payments.  She did not want to stop.  That’s ok because that is her decision and what makes her feel right; however that attitude can be exploited.

Many others like my prospective client exist and the PDCs can obtain from them voluntary payments even though the individual falls into a hardship category and would not have to pay.  The issue before the IRS concerns how many voluntary payments can the PDC solicit from one taxpayer.  Keep in mind that the PDC gets paid for money it collects.  So, it has an incentive to keep going back to the well for people who have demonstrated a willingness to make a voluntary payment.  The PDCs, as mentioned above, do not have the ability to place the individual into CNC status, so they can just keep calling month after month or week after week or day after day trying to squeeze another voluntary payment out of the individual unable to enter into an installment agreement.  Does the statute allow the IRS to authorize the PDCs to make multiple calls for voluntary payments or, put another way, does the statute require the IRS to limit the PDCs in the number of calls made for voluntary payments.  Framing the question can drive the answer.  The Commissioner has apparently decided that the PDCs can make one, but not multiple, request for a voluntary payment.  This is a major victory for consumers because the calls can quickly become harassing if the PDCs have open season on these individuals.

Who are the PDCs

The IRS chose four PDCs.  The PDCs selected are Conserve, Pioneer, Performant and CBE Group.  One of these has recently been deselected by the Department of Education for apparently not following the rules for private debt collection of loans in a program administered by that department.  PDCs do not have a good reputation in the world of consumer law.  While that is natural and not unexpected, it means that taxpayers and their representatives should be looking out for practices that seem inappropriate.   To make a complaint about a PDC call the Treasury Inspector General for Tax Administration (TIGTA) hotline at 800-366-4484 or write to  Like the IRS, PDCs are covered by the restrictions set out in IRC 6304 which I have discussed in prior posts here and here.  Consumer advocates requested great restrictions and more openness regarding the policies and practices the PDCs would use in collecting but these requests were denied by the IRS.

Final Observations

I think PDC is a bad idea so I may be a bad person to comment about it.  It will soon come again.  Understanding how it works will help you in advising clients who may have grown complacent as the IRS ability to reach delinquent taxpayers has diminished over the past several years.  While I hope it works, my expectations remain quite low.

Appeals Abuses Discretion in a Collection Due Process Case by Failing to Engage in Financial Analysis

In an order issued on January 24, 2017, in the case of Brown v. Commissioner, Judge Holmes declines to uphold the determination by a Settlement Officer because she did not engage in an analysis of the impact of the taxpayer’s monthly shortfall in income necessary to pay expenses as it related to the assets he had available to satisfy his outstanding tax liability.  The analysis in the case provides an important look at how at least one judge on the Tax Court looks at the duty of Appeals in reviewing a CDP case as well as how he calculates ability to pay in the context of someone with assets but a negative monthly balance sheet.  The decision does not mean that the IRS cannot require the taxpayer use the assets to satisfy the outstanding liability but does mean that in the CDP process Appeals must analyze the need for the asset in order to make ends meet in the future.  We have talked about abuse of discretion previously but the Brown case seems to place a higher, though not inappropriate, burden on the IRS that most other cases we have reviewed.  The approach also follows a similar path to the one taken by Judge Gustafson in in some of his recent holdings discussed here and here  and breaks from some older opinions that did not delve as deeply into a situation the IRS appeared to ignore.


The IRS determined that Mr. Brown was a responsible officer of Hudson Steel Fabricators & Erectors, Inc.  After going through the appropriate process, it assessed a trust fund recovery penalty against him of almost $200,000.  He engaged in an administrative appeal of the determination of the TFRP and lost.  Eventually, the IRS sent him a CDP notice which caused him to timely request a hearing.  He wanted to bring back up the merits in the CDP concerning his underlying liability for the TFRP but Appeals said he could not and the Court agreed.  Based on the information available in the order, nothing suggests that he had failed to receive a fair hearing on the issue prior to assessment or that he had a clear basis for overturning the assessment, as in a case Les discussed previously.  In addition to trying to seek to have another hearing on the correctness of the TFRP assessment, he also raised the issue that his account should be placed into Currently Not Collectible (CNC) status rather than have the IRS levy upon his assets.  The Court focused on the CNC issue and how Appeals should go about determining when someone qualifies for CNC status.

Though not quick to do so, Mr. Brown submitted to the Settlement Officer not too long after the CDP hearing a Form 433-A, also known as a collection information statement (CIS).  The Settlement Officer reasonably told him that if he wanted her to consider CNC as an option he had to give her the CIS so that she would have a basis for making a decision.  The CIS showed that each month his income was less than his allowable living expenses.  The Settlement Officer seemed to accept that the income and expenses on the CIS correctly stated his living situation; however, the ability to qualify for hardship status, a predicate to CNC designation, also includes the taxpayer’s assets.  A taxpayer could have a negative monthly cash flow but have a savings account with a million dollars.  The IRS would not, in those circumstances, stand back from collection just because of the negative monthly cash flow.

In analyzing Mr. Brown’s assets, the Settlement Officer found that he had equity in a retirement account that totaled nearly $70,000 and a whole life policy worth more than $20,000.  The inquiry does not, or should not, however, stop once the SO finds assets of value.  In order to determine if a hardship situation exists, the SO should consider other factors.  Judge Holmes went to two IRS regulations from which he pulled guidance regarding the situation in which a taxpayer has an asset but also has expenses exceeding current income.  Treas. Reg. 301.6343-1(b)(4)(ii) discussing hardship status provides that the SO could consider a host of factors including: age, employment status, employment history, medical expenses, earning capability, number of individuals the taxpayer supports as well as the necessary reasonable expenses.  Treas. Reg. 301.7122-1(c)(3)(iii) discussing effective tax administration offers in compromise gives examples of hardship even where a taxpayer could fully pay the liability.  The regulation gives an example of someone whose retirement account represented their only asset.  The regulation provides that if “liquidation of the retirement account would leave him without adequate means to provide for basic living expenses, that is hardship.

Judge Holmes says that his role is not to decide whether Mr. Brown’s circumstances satisfied the conditions of hardship but whether the SO abused her discretion in denying him the relief he requested in the CDP case.  He describes his review as constrained by the Supreme Court’s decision in SEC v. Chenery Corp., 332 U.S. 194 (1947).  We have discussed Chenery before here (in a post that links to several other posts discussing Chenery), but it does not get cited in many CDP cases by judges other than Judge Holmes.  Here, the SO’s determination simply stated that Mr. Brown had an ability to pay because of his assets.  The SO made no effort to determine if he would need those assets in order to cover the monthly shortfall of expenses over income.  Judge Holmes cites to the case of Riggs v. Commissioner, TCM 2015-98 in which the Court held in a non-precedential opinion that if a taxpayer makes a request for CNC status a part of the CDP hearing the SO “must determine whether or not there is financial hardship.”  (emphasis in original).  Here, the SO states Mr. Brown has an ability to pay but does not perform the analysis set forth in the Internal Revenue Manual which discusses whether enforced collection “would not cause hardship.”

Because she did not analyze what would happen if the IRS took away all of his assets leaving him with an income shortfall each month, the determination abuses the discretion given to Appeals which means that the Court will not sustain the determination.  Judge Holmes denied the summary judgment request filed by the IRS but stated that it did not know if Mr. Brown would prefer a supplemental hearing on remand or an entry of decision in his favor.  I discussed before the uncertainty of victory in a CDP case and Judge Holmes acknowledges that in the choices he offers to Mr. Brown.  In an order entered in the case of Stark v. Commissioner  Judge Holmes provided a significant discussion of the choices facing a CDP petitioner who succeeds in showing that Appeals abused its discretion in sustained a CDP Notice.  The petitioner must choose whether to allow the court to deny permission to levy in the CDP Notice and “win” the CDP case in Tax Court or have the case remanded to Appeals to try to work out a collection alternative.  Judge Holmes allows victorious petitioners to choose after counseling them on the pluses and minuses of their options.  Winning means that the IRS cannot levy until it issues another CDP notice and, as Judge Holmes points out, it is unclear if the language of IRC 6320(b)(2) “means the taxpayer isn’t entitled to another hearing if the IRS issues a new notice of lien or levy after we don’t sustain the first one…. To date, no court has answered this question, and we don’t do so here either.  We bring it up to highlight the potential risk to the taxpayer.”

The order here is important for anyone arguing a CDP case and seeking CNC status which is a high percentage of persons seeking relief in the CDP process.  The fact pattern presented here is quite common.  Many taxpayers, at least a high percentage of taxpayers coming into my clinic, have allowable expenses that exceed their income.  Many taxpayers with tax liability are at or near the end of their working careers and hoping to rely on their savings to assist them in retirement.  Almost anyone on social security, even those with the highest monthly amounts of social security which my clients rarely receive, can have allowable expenses that exceed their monthly social security payments.  Judge Holmes’ approach would shelter from collection savings set aside to supplement the social security payments to the extent the income from those savings does not cause the taxpayer’s income to exceed allowable expenses.  Practitioners who have not regularly been making this argument should be taking a copy of this order together with the sources cited by Judge Holmes into their CDP hearings but also citing the same material to the ACS employee who the taxpayer will encounter before the collection of the account reaches the point of a CDP hearing.  The order should also cause Appeals to take notice and give direction to its employees about their responsibilities in reaching the determination and it gives Counsel employees another lesson in the primer on summary judgment motions that Judge Gustafson’s recent orders have provided.


Judge Gustafson Continues His Primer for Chief Counsel Attorneys on Motions for Summary Judgment

I recently wrote about an order issued by Judge Gustafson in the case of Vigon v. Commissioner in which he explained to a Chief Counsel attorney what the attorney needed to provide in order to succeed in a motion for summary judgment in a case involving a penalty.  In the case of Hill v. Commissioner, Judge Gustafson continued his lessons to Chief Counsel attorneys on this subject.  It appears that the attorney in the Hill case may have missed my prior post since it came out before he submitted his motion and could have been helpful to him in drafting the motion.


Judge Gustafson has the unusual background for a Tax Court judge of service as a career attorney at the Department of Justice Tax Division.  Few Tax Court judges have a background as career civil servants litigating cases for the government because becoming a Tax Court judge requires a political appointment and such appointments do not usually go to individuals who have spent their careers working for the federal government in the executive branch where opportunities for the kinds of relationships that lead to a political appointment do not come easy.  At the time of his appointment, Judge Gustafson was the chief of the court of claims section of the Tax Division.  That section, not surprisingly, represents the IRS in cases brought before the Court of Federal Claims.  The work in that section differs from the work in the other civil trial sections at the Tax Division because of the limitations of the Court of Federal Claims.  Attorneys in that section do not typically handle bankruptcy cases, do not get involved in collection suits brought by the government, do not have jury trials but do, like the Tax Court, have some unique jurisdictional issues because of the nature of that court and do handle large, high profile refund matters.  Like all civil trial sections at the Tax Division, attorneys in that section do have a substantial practice in motions for summary judgment.

Unlike Tax Division attorneys, Chief Counsel attorneys do not have a long tradition in summary judgment work.  Prior to the passage of the collection due process (CDP) provisions in 1998, summary judgment motions in Tax Court cases were rare.  Even after 1998, it took some time, maybe a decade or so, before Chief Counsel’s office settled upon summary judgment motions as a go to option for resolving CDP cases.  So, many of the managers in Chief Counsel’s office did not cut their teeth on summary judgment motions and may not be in the strongest position to review and guide the attorneys in preparing such motions.  Judge Gustafson, who would have prepared many summary judgment motions as a DOJ trial attorney and reviewed many as a supervisor there, is in a good position to provide guidance on these motions and he does so again in the Hill case.  Now, the question is whether the Chief Counsel attorneys are paying attention to his orders since orders do not get published by the Tax Court in a formal manner but do go up on the Court’s web site each day and can be searched by issue or by judge.  Because IRS attorneys may view summary judgment motions against pro se taxpayers as shooting fish in a barrel, they may not take the time to develop all of the evidence necessary to support such motions.  They are finding in the recent orders issued by Judge Gustafson that even unrepresented taxpayers may present a challenge in successfully obtaining a summary judgment if the Court carefully reviews the motions submitted.

The IRS assessed a frivolous tax submission penalty against Ms. Hill.  The case is set for trial on March 27, 2017.  The IRS filed a motion for summary judgment in the case on January 25, 2017.  The timing of the filing of the motion is not accidental.  For the first several years after the IRS adopted motions for summary judgment as their go to option for CDP cases, they tended to file the motions the week before the trial calendar.  Carl Smith and I wrote about this in an article back in 2011.  The Tax Court changed Rule 121(a) regarding the timing of filing motions for summary judgment in 2011 to require that they be filed at least 60 days before the calendar.  The Tax Court rule drove the timing of the IRS filing of the motion on January 25 for a calendar 61 days later.  Keep in mind that some Chief Counsel attorney had this case in their inventory since shortly after it was filed on March 30, 2016.  CDP cases do not go back to Appeals after the filing of the petition since the notice of determination always issues from Appeals.  Chief Counsel attorneys each handle many cases.  Here the attorney decided to wait to the very last minute to file the motion for summary judgment.  There could be many reasons for the timing of the filing including that the case was only recently assigned to the attorney filing the motion but the timing of the motion was typical of the cases I see.  As with the Vigon case, Judge Gustafson did not wait until the last minute to issue his order in response to the summary judgment motion and did not require a response from the pro se taxpayer.

Judge Gustafson finds that the IRS did not support some of the factual predicates in the motion as required by Tax Court Rule 121(d), sent. 3 and did not address patent legal questions.  The IRS did not attach the allegedly frivolous return to the motion.  So, the Court could not see what made the return frivolous.  The Court describes the Form 12153 submitted by petitioner as containing “handwritten notations, words, and symbols, none of which we can understand” together with a four page handwritten attachment of “similarly indecipherable writing.”  The description raises my curiosity and reminds me of some handwritten law school exams I have had to grade.  The Court goes on to say that the written matter “does not appear to assert typical tax protestor contentions.”  This is important if you remember the types of things that can trigger the frivolous return penalty which we have discussed in a prior post.  The gibberish, if that is the right word, made it past the IRS filters for frivolous CDP requests (also discussed here and here) which differ from the filters for application of the frivolous return penalties.

The notice of determination issued by Appeals interpreted the difficult to read Form 12153 as one in which it could not determine if the petitioner intended to dispute the liability and so it did not seek to determine if the IRS should have asserted the frivolous return penalty.  The Court, however, assumes that it did.  Apparently, Appeals made no mention of a prior opportunity to contest the penalty which might have barred petitioner from raising the penalty in the CDP hearing.  Since Appeals did not consider the merits of the penalty and since Counsel did not attach the allegedly frivolous return to the motion, the motion will fail at least in part but the failure does not stop here.  The Court notes that on the penalty issue the IRS bears at trial the burden of production under IRC 7491(c) and the burden of proof under IRC 6703(a) which it fails to meet.

The liability at issue here is a penalty which raises the issue of appropriate approval which raises the issue of verification by Appeals.  Appeals determination makes no mention of its efforts to verify the IRS gave the necessary approval for assertion of the penalty as required by IRC 6751(b)(1).  The motion for summary judgment does not address this issue.  To show compliance with this issue, which the IRS would have known had it read Judge Gustafson’s order from December in the Vigon case, it “must show (1) the identity of the individual who made the “initial determination”, (2) an approval “in writing”, and (3) the identity of the person giving approval and his or her status as the “immediate supervisor”.”  The IRS failure to address any of these elements in its motion, including attaching the Form 8248 designed for this purpose dooms the motion.

I suspect that the Vigon and Hill motions for summary judgment are not the only ones out there in which the IRS has failed to meet its burden under section 6751.  The IRS routinely files summary judgment motions and often does so in rote, cookie cutter fashion based on the last summary judgment motion it filed.  A high percentage of cases have penalties.  Until it clears out of its system the summary judgment motions that fail to mention the verification process, it may be easy to push back on such motions.  Of course, many of these motions involve pro se taxpayers.  It will be interesting to see if other judges begin to push back as Judge Gustafson has done on this issue.





Tax Court Holds That a Notice of Deficiency Stating Taxpayer Owes $.00 Meets Standard

In a fully reviewed case, the Tax Court holds, in a very fractured vote, that an IRS Notice of Deficiency stating the taxpayer owes $.00 is a valid notice of deficiency conferring jurisdiction on the Court. The decision in Dees v. Commissioner, 148 T.C. 1 (2017) finds the judges engaged in a debate about just how bad a Notice of Deficiency can be and still meet the standard of a Notice of Deficiency. In upholding the notice as valid, the split vote came out seven judges in favor of the notice in an opinion by Judge Buch, two judges in favor of the notice in a concurring opinion by Chief Judge Marvel, one judge in favor of the notice in a lengthy concurring opinion by Judge Ashford (for a total of 10) versus seven judges in a dissent by Judge Foley and six of those same judges signing onto a separate dissent written by Judge Gustafson. The result almost reminds you of a presidential election and makes me feel better that the Harvard tax clinic was able to unify the Court in a jurisdictional case last year, Guralnik discussed here, in which it voted 16 to 0 against a position espoused by the clinic.


One of the interesting aspects of the opinion is the opportunity it gave the Court to recount the many ways in which it has held over the years that bad Notices of Deficiency still conferred jurisdiction. Judge Buch cites to a host of cases in which the IRS screwed up the Notice of Deficiency in one way or the other and yet the Court still found a valid notice existed. Those cases included notices which determined taxes on a calendar year basis even though the taxpayer used a fiscal year (Miles Prod. Co. v. Commissioner, 96 T.C. 595 (1991)); even though the IRS attached pages concerning another taxpayer (Campbell v. Commissioner, 90 T.C. 110 (1988)); and even though the notice attached pages related to a different year from the notice (Erickson v. Commissioner, TCM 1991-97)(citing older Tax Court opinions with the same issue.)

When the IRS makes a mistake in the Notice of Deficiency and the Tax Court nonetheless holds that the notice meets the minimum standard to satisfy the statutory definition of a Notice of Deficiency, the IRS still faces some hurdles in most cases because the burden of proof often shifts to it to prove the basis for the poorly described adjustment. In the Dees case, the various opinions supporting the notice discussed the burden shifting aspect of the Court’s jurisprudence with respect to poorly drafted notices. The judges in the dissent noted the many ways a bad notice can still constitute a valid notice but reached a tipping point with a notice that on its face said that the taxpayer had a $.00 deficiency. I cannot do a great job of distilling all of the arguments presented in the five separate opinions in a blog post but I will try to briefly describe the points made by each opinion.

“Majority” Opinion

Judge Buch’s opinion follows a long line of Tax Court opinions holding that various problems with the Notice of Deficiency do not invalidate the notice. In this regard, the opinion here represents just another small step in a 90-year march to save notices whenever possible while imposing other consequences on the IRS for the failures in its notice. In order to save this notice, Judge Buch looks at the notice as a whole and does not stop on the first page of the notice where the notice states quite clearly that it finds no deficiency. Judge Buch, as the Court has done in many prior opinions, goes into the back pages of the notice to figure out that the IRS really did find something wrong with the taxpayer’s return and that what it found wrong really did result in a deficiency in the taxes reported on the return. This opinion finds that in making the determination to validate a notice a Court looks at both objective and subjective facts. The objective facts include the “package” of the notice as a whole. When read together what does the IRS really say? Here, it found, as is common in the opinions reviewing the validity of notices, that when considered as a whole, the notice made sufficiently clear that the IRS did find the taxpayer had claimed a refundable credit he should not have claimed, the IRS intended to disallow that claim, and that in disallowing that claim the tax result created a liability that meets the definition of deficiency. Judge Buch’s opinion goes on to look at the subjective effect of the notice in order to determine its validity. Here, he found that not only did the notice as a whole evince a deficiency determination but the taxpayer realized what the IRS intended to say even though the IRS drafted an inartful notice. Because this notice met both prongs of the test for a valid notice, Judge Buch and six other judges determined that this notice conferred jurisdiction on the Tax Court.

Concurring Opinions

Chief Judge Marvel agrees with Judge Buch’s opinion to the extent that it discusses the objective test to determine the validity of the notice including the use of material outside the notice itself, but she balks at the second prong. She finds the subjective intent of the taxpayer regarding the notice inappropriate. Those references draw on dicta in earlier opinions and the Court should not elevate “those references into a test that has no place in resolving the real jurisdictional issue – whether the Commissioner in the notice of deficiency made a determination with respect to the taxpayer that confers jurisdiction on this Court.”

Judge Ashford writes alone but also writes the longest of the opinions. At the risk of distilling her argument too far, she seems to say that the title of the document is what really matters. If the IRS sends a letter entitled Notice of Deficiency, the IRS has sent a Notice of Deficiency and the rest of the discussion concerns other issues. She looks hard at the relevant statutes more than prior law. She too disagrees with Judge Buch’s opinion concerning the importance of the taxpayer’s subjective intent. On this point she writes that “we will never find that we lack jurisdiction under it, because we will never be faced with a case in which a taxpayer has not filed a petition.” While it is true that the Tax Court will never be faced with a case in which the taxpayer has not filed a petition, it may be faced with a case in which the taxpayer files a petition long after the 90 days passes and after the statute of limitations on assessment passes in which the taxpayers argues that a timely petition was not filed because the taxpayer did not believe that the document entitled Notice of Deficiency that said the taxpayer owed $.00 was really a Notice of Deficiency. In such a case, the Tax Court would face the intent issue under the view of the Buch opinion.


Judge Foley and the other six judges joining in the dissent choke on the notion that a Notice of Deficiency can exist where the notice says $.00 on its face because the notice “does not fairly advise the taxpayer that the Commissioner has, in fact, determined a deficiency and … specify the year and amount.” His opinion points out that the existence of a deficiency represents the most fundamental requirement of a Notice of Deficiency. His opinion finds that “only taxpayers with counsel at the ready and pro se taxpayers with extrasensory perception will be able to divine the meaning of these misleading missives.” Because the Notice of Deficiency is designed to satisfy certain fundamental rights and because a notice that on its face says that the taxpayer owes nothing seems not to satisfy those rights, it is hard to argue with the concerns expressed by the dissent. The dissent is short and does not spend much time with prior precedent because it seems to view that the line crossed here is not one that can be patched up by flipping through the back pages of the notice or relying on the taxpayer understanding the true meaning of what the IRS intended. I interpret the bottom line of this opinion as saying that even though the Tax Court has a long history of precedent looking at the back pages of the Notice of Deficiency to ascertain what it really means or looking at other documents, as Chief Judge Marvel points out, that precedent does not support crossing the line to uphold a notice which on its face says the taxpayer owes $.00. Once the notice says that, it does not warrant further inquiry but simply fails to satisfy a necessary condition.

Judge Gustafson writes a separate dissent in which all of the judges joining in Judge Foley’s dissent also join except for Judge Gale. Judge Gustafson further articulates the importance of putting the $.00 amount on the face of the Notice of Deficiency. He points out that the notice twice states that the deficiency is $.00. “A notice that reports such a zero is not a notice of a deficiency; it is a notice of no deficiency.” (emphasis in original) He looks to the requirement that the IRS mail a Notice of Deficiency. Here it mailed a notice of disallowance and of no deficiency. This meant that the notice lacked a statutory predicate and the Court should dismiss the case.


The Tax Court bends over backwards to determine it has jurisdiction when a taxpayer files something within the time frame set out by the relevant statute – usually 90 days. It treats many types of documents filed by petitioners as petitions, or imperfect petitions, allowing taxpayers to perfect their filing as long as the original document arrives at the Court on time. As pointed out by all of the prior opinions cited in Judge Buch’s opinion, the Court has similarly bent over backwards as it determines jurisdiction when a taxpayer timely files a petition in response to a Notice of Deficiency containing defects by allowing the IRS to repair the damage caused by the inadequacy of its notice.

The Dees case presents a factual situation the Court had not previously faced – a notice that literally says no deficiency exists but which when you dig deeper shows that the IRS really did mean to say a deficiency did exist. The majority views the poorly drafted notice as just one more example of a notice that requires peeking behind the first page and they have plenty of case support for that view. The dissent says there must be some line over which the IRS cannot cross and still have a valid notice and that this notice crosses that line. Because I do not have to vote, I will stop there except to say that to the extent the majority is correct, I think the concurring opinion of Chief Judge Marvel places a reasonable limit on the inquiry to which the Court should go in making its determination. It seems tough enough to determine what the IRS means with the written notice without having to try to figure out what the taxpayer thought the IRS meant and how that matters for purposes of granting the Court jurisdiction.

IRS Examination Division’s Requirement to Consider Collectibility of Potential Assessment

On September 7, 2016, the Treasury Inspector General for Tax Administration (TIGTA) issued a report, entitled Examination Collectibility Procedures Need to be Clarified and Applied Consistently, looking at the failure of the Examination Division to consider collection in making decisions on who it should examine.  It found that the Examination Division did not follow its own collectibility procedures in 56% of the cases it sampled.  TIGTA pointed out in the report that the failure to follow these procedures led to collection closing 50% of all exam cases that came into the hands of field collection offices and 19% of all exam cases that came into the Automated Collection System (ACS).  At a time when the IRS examination resources have dropped by about 30% over the past six years and collection resources have dropped by almost 40% over that period, does it make sense to go after taxpayers at the examination stage who will turn into uncollectible accounts, or would it make more sense to look on the shelf at cases needing examination where the taxpayer has the ability to pay the liability in the event of an additional assessment.


IRM (February 26, 2013) provides that the Examination function of stovepipe SBSE “must strive for quality assessments and promote and increased emphasis on early collections in the continuing effort to reduce the Collection function’s inventory and currently not collectible (CNC) accounts.”

The full text of this IRM provision states:

  1. Examination may need to suspend collection activity on a taxpayer’s account. Examiners can suspend collection activity using Transaction Code (TC) 470 with Closing Code (cc) 90 or by using “STAUP” procedures.
  1. The use of TC 470 with cc 90 is restricted to those situations where it is expected that an adjustment will fully pay the tax for the suspended tax year. For example, if the IRS discovers that an obvious error created a balance-due condition in one tax year, and an adjustment will reduce the balance due to zero, the IRS can request the necessary tax adjustment and also request that this collection suspension code be entered for the specific tax year. This will ensure collection action is suspended while the adjustment is made and overpayments for other tax years will not be used to pay the tax in question.
  1. It is imperative that TC 470 with cc 90 is used correctly and only in those instances that meet the criteria outlined above. If TC 470 cc 90 is used incorrectly when adjustments may not be appropriate or when an adjustment does not eliminate the balance due, credits from a taxpayer’s other tax years will be refunded to the taxpayer rather than being used to satisfy the amount still owed for the suspended tax period. See IRM 5.1.15, Abatements, Reconsiderations and Adjustments.
  1. In instances where the TC 470 cc 90 criteria is not met, Collection activity can be suspended for a fixed period of time using Command Code “STAUP.” For example, an examiner encounters the situation where the suspension of collection activities is necessary when one or more of the following is expected to reduce the balance due to zero:
    1. Claims
    2. Net operating loss (NOL) carryback
    3. Credits carried back

In these instances, examiners can request a suspension with Command Code “STAUP.” Command Code STAUP is an IDRS command code used to accelerate, omit, or delay the issuance of an IDRS balance due notice. A STAUP will stop any notice from being issued or destroy a printed notice not yet mailed. See IRM 2.4.28, Command Codes STAUP, STATI, and STATB.

To achieve that goal, IRM (February 26, 2013) provides that Exam employees should consider collectibility during the pre-contact, audit and closing phases of an examination.  In fiscal year 2015 approximately 75% of the accounts receivable owed to the IRS was listed as uncollectible.  The IRM provisions seek to keep the IRS from building more and more inventory in the uncollectible category.

I wrote about this issue previously in the context of the trust fund recovery penalty (TFRP).  Since the collection function handles TFRP investigations it sits in the best place to determine whether to work the case and does not need to refer the matter to anyone in order to make that determination.  Despite language directing the IRS to only pursue TFRP investigations on taxpayers able to pay, the comments received to that post almost uniformly took the view that the collection function did not make a determination on collectibility prior to initiating TFRP investigations.  If collection is not doing this, it is easy to believe that Exam would not follow the requirement to select cases that will result in collection of the resulting assessment.

TIGTA has some good stats in its report.  One is the information that between 2011 and 2015 Collection received an average of 707,789 new delinquent accounts each year as a result of an examination assessment.  TIGTA determined that if the examination division had focused on auditing taxpayers with the ability to pay the IRS “could have assessed approximately $109 million on cases that were more collectible.”  The IRS must balance the use of its enforcement tools such as an examination as a basis for generating revenue against the need to ensure a fair and just tax system.  The idea that taxpayers with a low potential for collection should get a free pass from collection does not sit well.  Yet, neither does the idea that the IRS spends a significant percentage of its examination resources generating assessments that merely sit on the books for 10 years without any resulting collection.

The IRM provisions do not require that the IRS examiners guarantee the collection function will collect on the assessments they generate, but the IRM does suggest that considering the collectibility of an assessment should factor into the decision to pursue an examination.  TIGTA stated that it planned to “review a sample of Examination cases closed as surveyed due to doubt of collectibility; however, the IRS does not systemically track these cases.”  So, TIGTA had no way to determine if the IRS had declined to audit cases, “survey” them in IRS parlance, in circumstances in which the taxpayers had even a less chance of collection than the ones the IRS chose to audit.

TIGTA interviewed examination employees during this course of its study and these employees “told us that they rarely or never survey a return due to collectibility.”  These employees cited the potential adverse impact on voluntary compliance as a reason for not surveying cases due to a lack of collectibility.  TIGTA cited to the language in the IRM which speaks in absolutes about the ability to collect rather than in degrees.  It seems very logical to conclude that the IRS should not exam returns where the chance of collection is absolutely zero.  I have watched it do that on many occasions in the assessment of individuals following a criminal prosecution.  The 2010 changes allowing assessment based on the restitution order removes the need for the IRS to devote examination resources to those cases in most criminal cases, though I do not know whether it walks away from the assessment of additional taxes in all criminal cases in which collection has a near zero chance.

TIGTA recommends that the IRS change the IRM to provide “clear instruction on documenting collectibility determinations, including examples of when cases should be given consideration for being surveyed….”  The IRS agreed with this recommendation and stated that it will update the IRM.  The IRS response also stated that the broader goal of examination in promoting voluntary compliance must enter into the decision and that collectibility should not drive the decision of who to examine.  The IRS response hits the right tone.  Whether the IRS will make changes that meaningfully change the role of collectibility in the choosing of cases to exam is something to watch as the IRS updates this IRM and implements the suggestions made by TIGTA.

The recommendations section of the report contains a discussion of the need for the examination division to coordinate with the collection division in making the collectibility determination.  The response suggests that the examination division has concerns about that proposal.  Based on the comments received in my earlier post about the collection division’s ability to incorporate collectibility into its own TFRP determinations, I cannot fault the examination division for their concerns.  The issue of how to incorporate collectibility into workload decisions requires a deep policy look by the IRS.  The TIGTA report exposes the issue but cannot resolve the policy issues that underlie the correct approach.  The same policy issues presented here also exist as the cases move forward into litigation and the difference in approaches between the litigators in Chief Counsel’s office and the Department of Justice also cry out for a uniform policy that takes into account the need to have a tax oversight system that promotes uniformly fair laws but does not waste limited resources chasing uncollectible accounts.

Because I represent low income individuals, a high percentage of the cases in which I represent individuals in Tax Court involve assessments the IRS will probably never collect.  I tell my clients that the fight in Tax Court represents a skirmish.  Even if we lose that skirmish, we can win the overall battle by obtaining an offer in compromise.  We do not send our clients away after the Tax Court phase, and post-trial work on those cases is often more important than the pre-trial or trial work because we settle the matter for a very low payment.  Knowing that the case will get resolved for a nominal payment makes me sad at all of the resources that Exam, Counsel, and the Tax Court put into the case so that my client will pay $50 and keep current on their filing obligations for the next five years.  I do not have the answer but it lies in a policy that avoids spending significant resources on uncollectible cases.