Identity Theft Meets Student Loans and Wrongful Collection

An interesting case at the confluence of identity theft, student loans, and wrongful collection is set for oral argument in the D.C. Circuit on November 21, 2017. As with many cases we write about on PT, thanks goes out to Carl Smith for finding this case and bringing it to our attention. The case is Reginald L. Ivy v. Commissioner. Although Mr. Ivy is pro se, the court has appointed Travis Crum and Brian Netter of Mayer Brown LLP as Amicus Curiae to write in support of his position.

Mr. Ivy owed student loans and the Department of Education certified those loans to the Treasury Department for offset because he was in default. Someone stole Mr. Ivy’s identify and filed a false return claiming a refund. The IRS allowed an overpayment of $1,822, and the money was sent to DOE to pay off the student loan. I can only imagine the chagrin of the identity thief for being good enough to prepare a return that got through the IRS filters only to find out that the selected victim had an outstanding federal liability subject to the federal offset procedures.

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In August of 2013, the student loan was fully satisfied thanks, in part, to the offset of the refund on the fraudulently filed return by the ID thief. In September of 2013 Mr. Ivy learned of the false 2011 return and prepared and submitted his own return for that year. On his return, he showed an overpayment of $634.

The IRS became aware that the first return filed under Mr. Ivy’s name for 2011 was a false return and it reversed the credit which had the effect of putting Mr. Ivy into default on his student loan. When the IRS reversed the credit, it caused the “real” overpayment by Mr. Ivy to go to, or stay with, DOE. Mr. Ivy complained that he should receive his $634 refund because his student loan was satisfied and argued that in keeping his $634, the IRS acted impermissibly. He brought suit in federal district court under IRC 7433, seeking the return of his money plus damages, arguing that the failure of the IRS to send him the refund caused him to miss a payment on another debt and triggered higher interest charges on the other debt.

The IRS argued that IRC 6402(g) prohibited suit against the IRS and that Mr. Ivy would have to sue DOE on the debt. In effect, the IRS argued that it gave him his refund and that his recourse was to go against the agency that prevented him from receiving the refund, and that agency was not the IRS. This is the standard argument that the IRS makes when someone has their refund offset because of the debt of owed to another agency of the state or federal government participating in the Treasury offset program and is a logical argument because of the language of the statute. In effect, his real beef was not with the IRS which had allowed not one but two refunds on his account, but rather was with the agency seeking to collect his student loan debt.

The district court agreed with the IRS and dismissed the suit. Mr. Ivy appealed, and the Circuit Court brought in the pro bono lawyers. The briefs have been filed. Attached are the Opening Brief of Amicus Curiae and the reply brief of Amicus Curiae. The briefs were filed this summer. During the briefing, the IRS sent Mr. Ivy a check for $634 plus interest. I cannot explain why the IRS did that. The sending of the refund means that only the damages portion of the suit remains.

At issue is the interplay between IRC 6402(g) and 7433(a). Section 6402(g) provides:

No court of the United States shall have jurisdiction to hear any action, whether legal or equitable, brought to restrain or review a reduction authorized by subsection (c), (d), (e) or (f). No such reduction shall be subject to review by the Secretary in an administrative proceeding. No action brought against the United States to recover the amount of any such reduction shall be considered to be a suit for refund of tax. This subsection does not preclude any legal equitable, or administrative action against the Federal agency or State to which the amount of such reduction was paid or any such action against the Commissioner of Social Security which is otherwise available with respect to recoveries of overpayments of benefits under section 204 of the Social Security Act.

Section 7433(a) provides

If, in connection with an collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

The issue is whether there is any room left between to two statutes for Mr. Ivy to squeeze in a claim. Does the very broad bar of 6402(g) stop all action as the district court found (and as I am inclined to believe), or do the actions of the IRS with respect to the refund somehow constitute collection action on which the IRS has recklessly, intentionally, or negligently disregarded the code or regulations? So, Mr. Ivy must not only get past the bar of the first statute, he must find that sending the refund to DOE is collection activity. The amicus brief makes that argument after examining, through other cases, what is collection activity. It gets there in part because the refund is sent after an assessment, and an assessment is a predicate to collection action. But assessment, as they point out, is also a predicate to creation of an overpayment. I cannot make the leap that granting someone a refund and then sending it to another agency is collection action taken by the IRS in any sense, other than the sense covered by the jurisdictional bar of 6402(g).

The situation makes for an interesting discussion, but I cannot get past the fact that it looks like the IRS did exactly what the jurisdictional bar covers and nothing more. I would love to know why the IRS sent Mr. Ivy his refund in the end. I am curious to know if DOE is still trying to collect from him after the IRS reversed the credits. Of course, I would also like to know more about the ID thief and whether he or she, after starting this whole mess, has been caught.

 

Sixth Circuit Holds Potential Misconduct in CDP Hearing Does Not Give Rise to Wrongful Collection Action

In Agility Network Services v US the Sixth Circuit held that a taxpayer who alleged that Appeals botched its collection due process hearing could not bring a wrongful collection action against the IRS because the hearing did not arise “in connection with any collection of Federal tax.”

In this post I will summarize the court’s reasoning and offer some observations on its approach.

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Agility Network Services involves a CDP case that did not go well. The owner of Agility Network Services (Agility Network) and her husband were employees of the company. Agility Network had overdue employment taxes; after the IRS filed a notice of federal tax lien, it requested a CDP hearing. After seven months (and according to the taxpayer only after it got Taxpayer Advocate involved because the Revenue Officer would not forward the case file), the hearing was scheduled for December 2012. Once the hearing was scheduled and held, the taxpayer did not like the manner in which it was conducted and the outcome:

[The Appeals Officer] refused to investigate the taxpayers’ assertion that they tried to make payments but that the IRS refused to accept them; [the Appeals Officer] misstated the tax code and Internal Revenue Manual while offering excuses for [the Revenue Officer’s] failure to process the taxpayers’ CDP request; Allen refused to discuss the taxpayers’ requested installment plan, reasoning that they did not make enough money to justify one; and Allen denied the taxpayers’ request to abate penalties. Furthermore, [the Appeals Officer] stated at the hearing “that she knew . . . [the Revenue Officer’s] actions were made with the genuine intent to help the taxpayers.” The taxpayers contend that this statement proves [the Appeals Officer] had an impermissible ex parte communication with [the Revenue Officer]. The hearing ended with the taxpayers having discussed only one issue of the many they had planned to raise.

In May of 2013 (about seven months after the first meeting and I think prior to the issue of a determination) Appeals scheduled a follow-up meeting. In July 2013, and pursuant to the taxpayer’s request, a new Appeals Officer met with the taxpayer. At the follow-up meeting, the taxpayer requested that IRS withdraw the NFTL and agree to a proposed installment plan. The new Appeals Officer rejected the request (and a request to record the meeting), though this Appeals Officer based his installment agreement rejection on the grounds that the taxpayer earned too much money rather than too little.

After the unsatisfactory second meeting, the taxpayer began a voluntary $5,000 month payment. It also brought an action in federal district court seeking a restraining order against the IRS to prevent enforced collection and sought damages under Section 7433 alleging that the Appeals conduct in both hearings amounted to wrongful collection action. The district court found that the Anti-Injunction Act prevented the restraining order and that the Appeals Officer’s conduct did not arise in connection with a “collection action.”

On appeal the Sixth Circuit quickly affirmed the lower court’s tossing of the restraining order request on the grounds that the Anti-Injunction Act prevented the request to restrain the government’s collection efforts.

The Sixth Circuit gave the Section 7433 issue some more attention. Section 7433 provides for damages for wrongful collection actions. As Appeals has become more involved with collection matters some taxpayers have unsuccessfully sought to use Section 7433 to recover damages for misconduct that arises in a collection case in Appeals. We have previously discussed this issue; see Keith’s post on the Antioco case Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement, which Stephen also discussed in a Summary Opinions post. In those prior posts, we noted that the district court in Antioco held that in a CDP case the Settlement Officer was not engaged in collection action but was rather reviewing the collection action. That review was not enough to bring Appeals’ alleged misconduct within the scope of a Section 7433 wrongful collection claim.

Agility Network likewise concludes that 7433 is not a remedy for alleged misconduct in a CDP hearing but has a more robust appellate court consideration of the issue. In deciding against the taxpayer, the Sixth Circuit explained that it its view Appeals’ conduct in the hearings relates to affirmative rights that a taxpayer has in the collection process, rather than the government’s collection of taxes:

The relevant question, then, is whether an IRS agent acts “in connection with any collection of Federal tax” when she conducts a CDP hearing. Under the most reasonable interpretation of the phrase, the answer is no. In common parlance, an IRS agent acting in connection with tax collection would be taking an affirmative step to recover money owed to the government. In contrast, a CDP hearing is a right bestowed upon a taxpayer, at the taxpayer’s request, to provide protection from abusive or unduly burdensome tax collection. The hearing does not help the IRS collect on a tax debt, but in fact impedes collection, at least temporarily, to the taxpayer’s benefit

To be sure the Sixth Circuit also acknowledged that it was possible to take a broader reading of the phrase “in connection with any collection of Federal tax” to include CDP proceedings:

Under this reading, any IRS agency action involving a person who owes a tax debt is “in connection with tax collection.” Under this interpretation, an IRS agent acts in connection with tax collection during a CDP hearing because, at that point, the IRS has already initiated the levy or lien process against the taxpayer.

It rejected that broader reading for two reasons: one, such an approach renders the language in the statute limiting the remedy to collection actions superfluous, essentially encompassing “almost everything IRS agents do. The agency exists to collect revenue, after all.”

Second, the Sixth Circuit cited the maxim that courts are to narrowly interpret exceptions to sovereign immunity, leading it to note that between two reasonable interpretations courts should opt for the one that leads to a narrower waiver.

Some Observations

I think this presents a closer case than perhaps the opinion reflects. The rationale the court uses to distinguish a CDP matter from collection action is a bit outdated. While a CDP hearing is certainly a taxpayer right that arises only if a taxpayer properly invokes the proceeding, it is a statutory right that all taxpayers enjoy in the collection process. Once invoked, Appeals has jurisdiction to compel IRS to refrain from collection and also to dictate the manner that the IRS collects an agreed and assessed liability. To argue that CDP is only an impediment to collection misstates the possible benefit that CDP is meant to provide to the government. It is not in the government’s interest to collect a tax when the IRS fails to ensure that it followed its statutory or administrative procedures.

Collection cases are the mainstay of the Appeals docket. Like it or not Appeals is part and parcel of the collection process. There is a functional partnership between Appeals and Collection. This is especially apparent in cases where the taxpayer requests a withdrawal of an NFTL, where it is in the taxpayer’s strong interest to get prompt review of the request.  It is clear in this case that Appeals’ delay in considering and deciding contributed to the taxpayer dissatisfaction.  Under CDP, Appeals is statutorily charged with ensuring that the collection action balances the need for efficient collection action with the taxpayer’s concern that the action be no more intrusive than necessary.  In a CDP hearing, especially in the context of considering the request to withdraw a notice of federal tax lien filing, Appeals’ responsibilities seem to directly relate to the IRS’s collection of taxes.