Review of the Combined Annual Wage Reporting Program

In a recent report, the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS was not using the Combined Annual Wage Reporting (CAWR) Program to the best advantage.  I will talk about the report in some detail but I took from the report that the investigation into CAWR provides a good example of what happens when you grossly underfund the IRS.  Undoubtedly, finding other examples of this would prove easy.  The CAWR program provides a valuable and relatively easy way to reconcile wage reporting and find discrepancies.  If the IRS cannot do anything with the findings, the situation needs correction.


Employers must report wage and withholding information to both the Social Security Administration and the IRS.  The reported information should reconcile; however, the IRS and SSA learned long ago that it did not and established a program to look into the cases in which it did not.  SSA wants to ensure that employees receive proper credit for working and for covered earnings since the earnings have a direct impact on Social Security benefits based off each person’s highest 35 years of earnings.  Employer mistakes could rob a worker of benefits or keep a worker from receiving the correct amount of benefits if the data reported to SSA does not properly report the worker’s earnings.  Similarly, the IRS wants to make sure that employers report the proper amount of taxes and tax withholding.  The program matches the information reported to the IRS on Forms 1099-R and W-2G (Certain Gambling Winnings) with the Forms W-3, W-2, W-3c (Transmittal of Corrected Wage and Tax Statements), and W-2c (Transmittal of Corrected Wage and Tax Statements) transmitted to SSA.

The CAWR program looks for discrepancies in the reporting information that exceed certain limits – the idea is that the IRS would take action to correct the situation which could result in substantial assessments against the employer whose data does not match.  The program also identifies employers who fail to file employment tax returns with the IRS.  That failure, of course, could result in substantial liabilities and should cause swift action by revenue officers assigned to those accounts.

Looking at the 2013 data (and keeping in mind that CAWRs generally runs a couple of years behind), TIGTA found that the IRS only worked 17% of the discrepancy cases identified.  It estimated that the potential amount of tax underreported was $7 billion and that it would take about 55 IRS employees to work these cases.  It estimated that these 55 employees would cost the government about $2.7 million (with an M not a B).  How many of us would like the opportunity to invest $2.7 million to obtain a return of $7 billion.  I seriously doubt the IRS could collect all of the $7 billion even if it could assess that amount and I also doubt if the 55 employee number considers all of the downstream work that might need to occur in collection and other parts of the IRS to fully recover this amount, but it still seems like an eye popping return on investment opportunity.  While the IRS response gave other reasons for not addressing some of the cases or not prioritizing them as TIGTA might, the IRS pointed to limited resources as a major reason for not going after cases it identified as having discrepancies.

Interestingly, on the SSA side a lawsuit settled in 1990  causes the government to work all of the SSA cases and the IRS can only spend whatever limited resources it has left in working the IRS discrepancy cases.  I suppose that should make those of us hoping for social security benefits feel good, but it also leaves me wonder if someone should bring a lawsuit on behalf of taxpayers to get the same deal for the tax cases.  Here is an example of the government spending the resources necessary to ensure that the benefits side makes out but not spending the resources to ensure that the money is captured that will enable it to pay out the benefits without printing more money.

The report contains detailed statistics for anyone wanting to delve deeper into this topic and one chart shows the types of cases identified.  As with many TIGTA reports, it provides an interesting glimpse into the inner workings of the IRS.  In this case, a discouraging one as well.


Rolling the Beds and Wheelchairs to the Curb – Applying the Hardship Provision of IRC 6343 to Corporations

Starting in March the Tax Court has issued several Collection Due Process opinions involving nursing homes: Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 T.C. No. 9 (March 23, 2017); Lindsay Manor Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-50 (March 23, 2017); Crescent Manor, Inc. v. Commissioner, T.C. Memo. 2017-94 (May 31, 2017); Sulphur Manor, Inc. v. Commissioner, T.C. Memo. 2017-95 (May 31, 2017); Silvercrest Manor Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-96 (May 31, 2017); Hennessey Manor Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-97 (May 31, 2017); Seminole Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-102 (June 5, 2017). For good measure, there was a 10th Circuit case during this same span – United States v. Hodges, 684 Fed. Appx. 722 (10th Cir. April 10, 2017).  When I worked for Chief Counsel it was my opinion that the worst types of collection cases to encounter were the cases involving nursing homes that were not paying their employment taxes.  Even though the IRS could potential seize the assets of the business or levy on the Medicare or other stream of funds, taking these types of actions would shut down the nursing home leaving a number of relatively helpless people homeless.  Closing down a nursing home had very little upside except for stopping an entity from pyramiding taxes.  So, seeing several of these cases in a short span made me wonder if something had changed at the IRS.  Nothing I read about these cases makes me think that a magic solution has occurred.  I would like to know the IRS strategy for these cases because closing down these businesses without a plan would seem unwise.

The first case decided, Lindsay Manor Nursing Home, breaks new ground by addressing the issue of hardship in IRC 6343.  As discussed below, the Court upholds the interpretation of hardship in the applicable regulation finding that a corporation cannot suffer economic hardship and so cannot use the prospect of economic hardship as a basis for arguing that the IRS cannot levy on corporate assets no matter how dire the corporation’s financial situation.  This important decision has a domino effect on the outcome of the CDP cases of the related nursing homes.


In defending these cases in the CDP process, taxpayer’s attorney made a couple of arguments that failed.  I want to focus on those arguments even though in the back of my mind I am still wondering what will happen now that the nursing homes have lost their CDP cases.  The first argument concerns the hardship exception to levy and the second argument, which I have difficulty understanding, concerns the meaning of prior involvement.

The nursing homes in the recent decisions all operated as corporations.  They argued that the levy action proposed by the IRS in its Notice of Intent to Levy would create havoc and financial ruin for these corporations.  The petitioner in Lindsay Manor attacked Treas. Reg. 301.6343-1(b)(4)(i) which limits hardship to individual taxpayers.  Petitioner argued that the regulation should be declared invalid because it is inconsistent with IRC 6343(a)(1)(D).  The statute does not specify that it applies only to individual taxpayers.  Petitioner argued that the term “taxpayer” in section 6343 is a defined term in IRC 7701(a)(14) and the definition is broad including corporate taxpayers.  This is a logical, statute based argument that seems to be made here for the first time.  Even though the taxpayer ultimately loses, the argument was certainly worth making.

The Court responds to the argument by finding that it must look at the term in the context used included other instances of use of the term in IRC 6343, the meaning of the phrase “economic hardship” in IRC 6343(a)(1)(D) , and the grammatical structure of the statute.  The Court finds that the term taxpayer was used seven times in IRC 6343.  Twice its meaning clearly related to individuals and five times the meaning could have related to individuals or corporations.  So, the Court continues its search for the meaning of the term in this context.

The Court finds that the term “economic hardship” appears nowhere in the IRC.  Although the IRS argued that the answer lay in the use of this term the Court does not find the answer here and moves on with its inquiry.

The Court finds that the statute is “simply silent or ambiguous with respect to the meaning of taxpayer; the relationship between ‘hardship’ and a taxpayer’s ‘financial condition,’ and whether congress intended to require prospective relief.”  So, the Court looked at the legislative history.  In 1988, in the Taxpayer Bill of Rights I, Congress added (1)(E) which talks about necessary living expenses – something clearly related to individuals.  However, other aspects of legislative history left the Court uncertain of the applicability to individuals only.  Since the statute is unclear, the Court moved to Step 2 of the Chevron analysis to determine if the regulation is a permissible interpretation of the statute.

The Court finds that the interpretation of the statute chosen by the regulation is permissible because 1) the statute might be interpreted in a manner argued by either party; 2) choosing to apply hardship only to individuals is not inconsistent with IRC 6343(a)(1)(D); and 3) the regulation provides greater relief than the statute and does not limit the statute.

In addition to the argument concerning the meaning of hardship, petitioner also argued that the Settlement Officer had prior involvement in its case and this involvement barred her from making the determination.  Petitioner did not argue that the Settlement Officer had worked on a matter involving it prior to her assignment to this CDP case but rather that “she reviewed petitioner’s documents before the CDP hearing.”  Wow.  Petitioner’s hardship argument presented an innovative and thoughtful attack on the regulation.  This argument, at least as described by the Court, makes no sense to me and undercuts the validity of the first argument because it makes no sense.  Petitioner seems to argue that in a CDP hearing, which will almost always occur by phone, the call should take place and then the petitioner should sit silently by the phone while the Settlement Officer for the first time cracks open the file and begins to look at the documents in the case.  Depending on the size of the case, the silent portion of the CDP hearing could last quite a long time.  The Court took only four paragraphs to describe and resolve this argument.  This may have been three paragraphs too many.

As a result of the determination that the regulation validly interpreted the statute and that the Settlement Officer had the requisite impartiality, the Court denies the summary judgment motion filed by petitioner.  This opinion only addressed petitioner’s motion.

On the same day it ruled on petitioner’s motion for summary judgment, the Tax Court issued a second opinion in the case at T.C. Memo 2017-50, ruling on the motion for summary judgment filed by the IRS.  In this opinion, the court grants the IRS request for summary judgment.  The Court points out the long history of non-compliance by the taxpayer including many breached installment agreements.  Because another installment agreement was the collection alternative sought by the taxpayer and because of the failure of prior installment agreements coupled with nothing suggesting a new agreement would succeed, the Court found that the Settlement Officer did not abuse her discretion in denying an installment agreement as an alternative to levy.  The Settlement Officer determined that the taxpayer could satisfy the outstanding liability by liquidating or borrowing against its accounts receivable.  Another factor that tipped the scales against the taxpayer in the decision concerned the taxpayer’s current state of non-compliance.  As with almost any employment tax liability case where the taxpayer cannot keep current while seeking relief from levy, the Court finds this fact an important one in denying relief.

The other cases in the group followed the same script as the TC Memo opinion in Lindsay Manor even though they come out over a period of time following the release of that opinion.  All grant the motion for summary judgment requested by the IRS.  Although the IRS won these cases, the ability to potentially close these nursing homes by levying on their accounts receivable puts the IRS in a tough spot.  It does not want to condone pyramiding of employment taxes but it also does not want to negatively impact the lives of many vulnerable senior citizens.

An appeal has been filed with the 10th Circuit in Lindsay Manor.  Here is the docket sheet in the appeal:


05/24/2017 — [10469509] TAX COURT RECORD FILED. NUMBER OF VOLUMES FILED: 6. [17-9002] TC [ENTERED: 05/24/2017 09:13 AM]








Affordable Living Expense Standard

In the National Taxpayer Advocate’s Fiscal Year 2018 Objectives Report to Congress, she identifies the affordable living expense standards as most serious problem #13.  These standards now provide critical information for almost all collection cases and deserve attention.  She seeks to move the IRS to a different way of calculating the living expenses based on need rather than on expenditures by individuals without enough money.  If she succeeds, it could make a difference for numerous individuals seeking to compromise their tax liability, to obtain an installment agreement, or to move into currently not collectible status.


The affordable living expense standards have been around for two decades.  The NTA’s report cites to IRC 7122(d)(2)(A) as the legal mandate to the IRS to develop such standards for offer in compromise cases; however, as with many of the provisions enacted into law in the legislative actions in 1988, 1996 and 1998 labeled Taxpayer Bill of Rights I, II and III, Congress codified something that the IRS had already done.  As I have discussed before, the IRS abandoned about 130 years of ignoring the offer in compromise provisions in the early 1990s when under pressure from Congress to reduce its accounts receivable and after Congress, with no prompting from the IRS or Treasury, increased the statute of limitations on collections from six years to ten thinking it would produce more revenue.  The IRS knew the change in the statute of limitations would produce little revenue but would approximately double the size of its accounts receivable, making it look even worse.  Casting about for ways to avoid looking bad, it settled upon an offer in compromise program as a possible way to write debt off its books before the end of the 10-year period.

When the IRS jumped into accepting offers in compromise (OIC), it did so with very little thought regarding standards.  Revenue Officers, who handled OICs for the first several years of the program before most offers were centralized in Brookhaven and Memphis, received very little direction on what to allow.  Some were overly stingy while others were overly generous.  Most had a good sense of reasonable expenses but all were flying by the seat of their pants.  Because IRC 7122 at that time required that all offers in which the taxpayer owed more than $500 must be reviewed by Chief Counsel’s office, my office reviewed all of the offers in Virginia and, for a time, West Virginia.  Reviewing the offers with no standards on expenses was difficult.  So, I set some standards for vehicles and life insurance in an effort to bring order to the process.  The IRS headquarters heard many complaints about the lack of standards from without and within, and established standards by 1996 using Bureau of Labor Statistics data for expense standards and exemptions from levy for asset standards.

Since the beginning of the adoption of standards, taxpayers have complained about them.  The IRS has responded to some of the complaints adjusting and tweaking the formula occasionally.  Some of the biggest adjustments came in 2008, 2011 and 2012 with the adoption of the Freshstart Initiative.   The NTA writes her most serious problem report in this background and brings up some good points which the IRS might consider as it continues to adjust the living standards which have now become such an important part of the IRS collection process and which Congress adopted for use in bankruptcy cases in Bankruptcy Code 707(b)(2)(A)(ii) as part of the 2005 amendments.

The NTA points out that the IRS relies heavily on the Consumer Expenditure Survey (CES).  This survey measures what people spend and not what goods and services actually cost.  Because of the way it is designed, the survey will fail to recognize even necessary expenditures of taxpayers who must cut out such expenditures because of lack of funds.  She points out that the survey does not take into account the high percentage of a low income taxpayer’s funds that must be spent on housing and that the survey is out of date in many areas such as child care, technology, or retirement savings.  She proposes that the IRS develop alternate measures that better capture the true costs of living.

The IRS responded that it strives to make the allowable expenses up to date pointing to the many updates it has made over the years.  The IRS expressed concerns that the standards sought by the NTA do not meet “standards of accuracy or cover sufficient geographic area; they are also not collected regularly or generally accepted as a reliable data source.”  The IRS further replied that the allowable standards “are not based on the official poverty level or the average expenditures of poor households.  They are based on average expenditures for all income groups combined,” and that 10 years ago the IRS removed income based ranges at the suggestion of the NTA.

The NTA responds that the IRS is using data that measures expenditures and not what it actually costs to live.  The debate in which the NTA seeks to engage the IRS is an important debate.  Since moving to Boston, I find myself in a very high cost of housing area.  I have clients making $40,000 who are essentially homeless and couch-surfing to find a roof over their head.  Boston is not the only place where housing located near reasonable public transportation options forces residents to make tough choices.  Those choices can include many alternate living situations in order to make ends meet.  Do we want the standards to reflect what people spend when their ability to spend is limited by available funds or do we want the standards to reflect what they should be allowed to spend in order to live with what we as a society see as basic necessities?

The IRS is probably right that the survey data out there does not do a good job of capturing what should be allowed because there are so many ways to make ends meet.  Someone with access to housing in Boston because of family and friends will have a much easier time making ends meet than someone trying to find housing without those connections.  Housing is not the only area where these cost issues exist.  I applaud the NTA for seeking to engage in the discussion.  I do not expect the answers to come easily.  Should my very frugal clients who somehow make ends meet by cutting back on what many would consider to be life’s essentials be required to pay more than my more extravagant clients?  This is a question that comes up repeatedly.  I know of no easy answers but I hope we keep asking the questions.

Tax Court Exercises Equity to Allow Late Rollover of IRA

At procedurallytaxing we generally discuss things that happened a week or two or three ago.  Sometimes, we take even longer.  The case of Trimmer v. Commissioner, 148 T.C. No. 14 (April 20, 2017) came out four months ago.  It deserves attention if you have not yet seen it.

When the case came out, I was very excited not just for the Trimmers but because this case was tried by the Fordham Tax Clinic.  The students, Amanda Katlowitz, Ravi Patel, and Regina Yoon, together with their director, Elizabeth Maresca, did an outstanding job in winning an equitably compelling case but a difficult one which resulted in a precedential opinion from the Tax Court.  The Court declares by making the case precedential that it breaks new ground.  It provides good news for taxpayers who fail to timely roll over their IRAs and perhaps good news for taxpayers in other circumstances who have a good equitable argument.  Because of changes in the way that individuals who fail to timely roll over their IRA may remedy the problem as we discussed here, I hope that most of these cases get resolved administratively going forward, but that does not diminish the importance of this victory.


The IRS determined that the Trimmers had a deficiency of $37,918 in 2011 for pulling funds out of an IRA and failing to timely roll it over to another qualifying account.  Mrs. Trimmer is a school teacher and Mr. Trimmer, age 47, was a recently retired police officer.  They have two sons who were not too far from college.  A tax hit of this amount would have been devastating to their financial well-being.

When Mr. Trimmer retired from the New York police force he anticipated continuing to work and had lined up a job at the New York Stock Exchange as a security guard.  After he retired and just before he was to begin work, the NYSE job fell through.  The loss of this job and his inability to quickly find another one sent him into a tailspin and he “began experiencing symptoms of a major depressive disorder.”  The Court details other symptoms but the one that relates to this case involves the receipt of distributions from his New York City retirement accounts.  He received checks for $99,990 and $1,680 and these checks sat on his dresser for a month before he deposited them in the family joint bank account – but not a retirement account.  Mrs. Trimmer thought/hoped that Mr. Trimmer was properly dealing with the retirement funds.

Mr. Trimmer was also the person who normally took care of getting the family tax return prepared.  Unfortunately, his depression caused him to delay the task.  Eventually, he went to their preparer who took note of the 1099-R detailing the distribution and told him to put the money into an IRA.  Mr. Trimmer did so the following month but by that time more than 60 days had elapsed.  The funds simply sat on his dresser or in the joint bank account until moved to the IRA.  The preparer filled out the return as if a proper rollover had occurred and may not have known of the timing issues.  The IRS did notice the timing of the rollover eventually, however, and sent the Trimmers a notice of proposed changes.

Mr. Trimmer wrote to the IRS and explained what had happened and how his post NYPD depression had impacted the timing of the rollover.  The IRS summarily denied the request for relief and did not mention the ability of the IRS to grant hardship waivers.  A notice of deficiency and Tax Court petition followed.  The Trimmers argued that they qualified for a hardship waiver under IRC 402(c)(3)(B) because “his failure to make timely rollovers was caused by his major depressive disorder during the relevant period.”  The IRS argued that the Trimmers did not qualify because they failed to “apply for relief pursuant to the terms of Rev. Proc. 2003-16.”  The IRS next argued that “there has been no final administrative determination denying petitioners relief, and that even if there had been, it would not be subject to judicial review.”  The IRS also argued that its refusal to grant him relief during the audit process was not an abuse of discretion.

The Court pointed out that the IRS had supplemented Rev. Proc. 2003-16 with Rev. Proc. 2016-47 discussed in our prior blog post.  The 2016 Rev. Proc. provides that the IRS “may determine that the taxpayer qualifies for a waiver of the 60-day rollover requirement under section 402.”  The 2016 Rev. Proc. has an effective date of August 24, 2016.  The IRS argued that the 2016 Rev. Proc. was not issued when the IRS examined the Trimmers’ 2011 return and the examiners had no authority to make a determination.

The Court does not buy this argument pointing out that nothing in Rev. Proc. 2003-16 or IRC 402(c)(3)(B) limits or constrains an examiners ability to find hardship during an examination whereas IRM in effect during the examination of the Trimmers’ return stated: Examiners are given the authority to recommend the proper disposition of all identified issues, as well as an issues raised by the taxpayer.”  The Court found that the 2016 Rev. Proc. did not create new authority but made clear the existence of that authority.  The Court looked at the way the IRS behaved during the examination and found that it did not deny relief because it could not make a determination but rather denied relief summarily without pointing to the statute or the then applicable Rev. Proc.

The IRS pointed to several earlier memorandum decisions of the Tax Court declining to consider equitable relief.  The Court responds that these cases did not involve any administrative request for hardship waiver through a private letter ruling or during the examination.  Mr. Trimmer did request administrative relief during the examination.  So, the Court finds the IRS did have the authority to consider the hardship request made during the examination and made a final determination to deny relief.

Having made that determination, the Court then moved on to its own review of the denial.  The IRS argued that the Tax Court did not have the authority to review the waiver denial as a part of a deficiency case.  The Court finds that the claim for a waiver here goes to the heart of the proposed deficiency.  It points to the “strong presumption that an act of administrative discretion is subject to judicial review” and that “agency action is only exempt from judicial review where the governing statues expressly preclude review or where the action is committed to agency discretion by law.”  Nothing in the applicable statute expressly precludes judicial review and the procedures for judicial review logically apply here.  So, the Court finds that it has jurisdiction to review the denial of the hardship waiver.  The appropriate standard for review is abuse of discretion.

The Court next addressed the IRS motion in limine objecting to the expert witness offered by the Trimmers.  A motion in limine is usually filed by a party to obtain a ruling in advance of trial so that the party might know how to proceed during the trial.  Having the decision on the motion appear in the opinion limits some of its usefulness and makes the determination more like the ordinary determination of the value of an expert witnesses testimony.  Nonetheless, the IRS seeks here before, during or after the trial to limit the value of the Trimmers’ expert witness. In deciding what to do with this testimony, the Court goes through the usual rules applied to allowing expert testimony.  The Court finds the expert’s testimony relevant, that she is qualified as an expert and reliable.  On the issue of reliability, the IRS argued that she did not observe Mr. Trimmer while he was going through the period of alleged depression.  This issue of timing comes up regularly when parties seek an expert in IRC 6511(h) cases.  It would be convenient if people experience life problems would go to a qualified expert at the start of their problems but all too often the problems also prevent the person from seeking timely treatment.  Here, the Court became comfortable that the expert used the proper technique to put the pieces together after the fact and it found that her expert testimony was supported by the credible testimony of the other three family witnesses who, although not experts, observed and lived through Mr. Trimmer’s period of incapacity.

The IRS had other problems with the expert including her alleged violation of state law because of her licensure (she was not treating him), the late submission of the expert report 22 days before trial instead of 30 (the Court cut the academic clinic a break), the use of an assistant in preparing the report (permitted under Court rules),  the lack of a statement of compensation (she did it pro bono), the failure to list her publications (these were on an attached CV) and the failure to list other cases in which she testified as an expert (there were none to list.)  So, the Court denied the motion in limine and admitted the expert’s testimony leaving still the determination of whether the IRS abused its discretion in denying the waiver.

The Court carefully examined the phrase equity and good conscience.  It found that the applicable statute giving the IRS authority to grant a waiver where taxpayers had missed the statutory time period for rollovers reflected “a broad and flexible concept of fairness, by providing a non-exhaustive list of situations that might satisfy the general standard.”  The Court listed the four objective factors to be used in making this evaluation.  Looking at those factors it determined that the one did not apply (a failure by a financial institution which frequently occurs in rollover cases), two were favorable to the Trimmers (their lack of use of the funds and the prompt rollover after the return preparer pointed out the problem) which left the factor of the inability to complete the timely rollover.  On this point the Court found that Mr. Trimmer’s failure resulted from a disability which materially impacted his ability to function.  The Court noted that it reviewed a number of private letter rulings and determined that its decision here was consistent with the rulings made by the IRS.

The case represents a great victory for the Trimmers and others who might seek equity in the Tax Court.  I must confess I am jealous of the success of the Fordham clinic since my clinic’s efforts at equitable results have not met with the same success.  The case is cause for continuing to try as well as for celebrating a victory of justice.


Litigating Your Innocent Spouse Claim in Bankruptcy

If you were interested in yesterday’s post concerning the mismanagement over a period of years of the account of Mr. Fagan, please read the comment posted yesterday by Bob Kamman.  Bob took the time to call Mr. Fagan and get the kind of background details not possible to find by just reading the opinion.  Based on the information from Mr. Fagan, his efforts to fix the problem in TAS, Appeals and Chief Counsel where he was working face to face with a real human were totally unsuccessful.  This is the type of case I expected Senator Roth to find in his hearings before the 1998 legislation.  These cases exist because sometimes accounts get badly mangled.  I did not expect to see Chief Counsel litigating such a case.  From the comments it appears that accounts management was not the only place badly managed on this case.

In March, the bankruptcy court for the Southern District of Texas ruled in In re Pendergraft that it had jurisdiction under Bankruptcy Code 505(a) to determine whether Jane Pendergraft qualified for relief from her joint and several liability under IRC 6015(f).  The IRS strenuously objected to the bankruptcy court’s decision that it had the power to decide she qualified for innocent spouse relief.  It views the Tax Court as the exclusive avenue for obtaining such relief.  The case, which maybe the first case to decide this issue – at least the first one to decide the case favorably to the taxpayer, deserves attention because it may open up opportunities for relief in a forum previously unused for this purpose and because the of policy tensions that support the bankruptcy court’s decision even if the language of the statute may not.


Section 505(a) of the bankruptcy code offers taxpayers in bankruptcy the opportunity to contest their tax liabilities in that forum instead of the more traditional forums of Tax Court, district court, or Court of Claims.  The reason that Congress granted this power to the bankruptcy court is that sometimes the tax liability needs to be final in order to the bankruptcy case to move forward.  The time frame for deciding a tax case in the other forums does not necessarily match the time frame for the bankruptcy case.  By giving the bankruptcy court the ability to decide the tax matter, Congress allowed it to control the timing.

The reasoning behind the grant of jurisdiction to the bankruptcy court to hear the tax matter extends to the determination of innocent spouse status; however, the decision of whether someone is an innocent spouse does not turn on whether the tax is due, i.e., the merits of the liability, but rather whether this person claiming innocent spouse status should be relieved of the liability even though it is due.  The IRS argues that this distinction precludes the bankruptcy court from deciding the innocent spouse issue because its authority under section 505(a) covers determining the merits of the liability and does not extend to the issue of innocent spouse status even though such a determination would clearly have an important outcome on a taxpayer’s bankruptcy case and whether the debtor could confirm a plan.

The facts of the case are not unusual for an innocent spouse argument.  Mrs. Pendergraft, who was 66 at the time of the decision, married Mr. Pendergraft in 1988.  During the period of their marriage, they split household responsibilities with Mr. P taking on “exclusive responsibility for the financial activities of the homestead, including the preparation and paying of taxes.”  Mrs. P operated a private psychotherapy practice part time and took primary responsibility for child care and household maintenance.  For the years 2001-2006, the Pendergrafts failed to file tax returns or to pay the taxes.  Mrs. P alleged that she did not know of the failures and signed returns for each year expecting her husband to file them.

She learned of the problem when the IRS levied on her separate bank account in 2008.  Although Mr. P initially denied knowledge of the problem he eventually confessed to her he had forgotten to pay the taxes for one year.  He later informed her that he had retained attorneys and accountants to fix the IRS problem, that the agreement required they pay the IRS $10,000 a month for an extended period, and that he would make sure all future returns were timely filed.  She alleged that he may have misappropriated money she gave to him between 2008 and 2016 to deal with the IRS and that he caused the IRS to mail all correspondence to his office address preventing her from learning of ongoing problems.

In late June 2016, she attended a meeting with their attorney in which she alleges that she learned for the first time that their income and property taxes had not been paid for 15 years and that they faced criminal prosecution.  According to her, this attorney advised her that she must join her husband in filing for bankruptcy in order to prevent the IRS from seizing their house and from prosecuting them.  I note that if the attorney gave such advice, it incorrectly described the effect of bankruptcy on possible criminal tax prosecution.  Bankruptcy code section 362(b)(1), one of the exceptions to the automatic stay, provides that bankruptcy has no impact on criminal prosecution.  By October of 2016, she had obtained permission of the bankruptcy court to proceed with divorce and in November she asked the bankruptcy court to determine that she qualified as an innocent spouse.  The IRS filed a motion to dismiss the request for an innocent spouse determination arguing ‘that a bankruptcy court’s jurisdiction is limited by the fact that it is a judicial offer of the district court, that the structure of 26 U.S.C. 6015(f) vests the determination of innocent spouse relief strictly in the IRS and tax courts, and that the United States has not consented to being sued on the innocent spouse issue in bankruptcy court.”

The bankruptcy court looked at section 6015(e)(1)(A) which allows a court to grant innocent spouse relief if the IRS fails to make a determination within 6 months.  The bankruptcy court pointed to the language of the statute providing that the remedy available in Tax Court for innocent spouse determinations is “[i]n addition to any other remedy provided by law.”  Bankruptcy section 505(a) is another “remedy provided by law.”  The bankruptcy court looked at applicable 5th Circuit law on the application of section 505(a) which it found supported the court’s ability to make an innocent spouse determination.  The court acknowledged the case law cited by the IRS finding bankruptcy court an inappropriate forum for innocent spouse determinations.

The bankruptcy court rejected the authorities provided by the IRS for three reasons: 1) the case law did not address 5th Circuit precedent interpreting 505(a); 2) the plain language of the statute; and 3) a decision by the bankruptcy on this matter would not lead to inconsistent judgments or conflict with basic principles of judicial economy.

Having decided that it can decide the innocent spouse issue, the bankruptcy court then determines that it must wait for the IRS to make a decision.  It required Mrs. P to submit to the IRS Form 8857 and indicated that it will make a decision if the IRS fails to do so in six months (not adopting the four-month rule for claims for refund as the shortened time period in 505 cases) or after the IRS makes an adverse decision.  It is possible, of course, that the IRS will decide in her favor in the administrative process.  If it does not, watch this case as I expect the IRS will not give up this issue at the bankruptcy court level.  We looked quickly at the bankruptcy case  and did not see any developments yet on this issue.



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.


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.


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.


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.