Tax Court Judge Holmes issued an order on November 6, 2015, holding that a petitioner’s claim of privilege under the 5th Amendment does not form the basis for assertion of the frivolous return penalty. I have written before on this penalty which is imposed under IRC 6702(a)(1). As required to implement this statute, the IRS publishes a list of frivolous positions but may assert the penalty for reasons that go beyond its own list. Here it asserted the penalty based on one of the items on the list. Citing the 5th amendment on a tax return is something that a tax protestor might do which is why such an assertion makes the list, but it is also something that someone with a legitimate fear of prosecution should do. The employees at the Service Center will have a difficult time distinguishing between legitimate and frivolous assertions of the 5th amendment just looking at the return. I suspect they generally default to presuming every assertion of the 5th amendment is a tax protestor tactic. The Youssefzadeh case provides an example of the appropriate use of the 5th amendment privilege and the inappropriate use of this penalty. The issue comes up in a collection due process (CDP) case which is also interesting because of the many posts we have had on when taxpayers can raise the merits of an assessable penalty in a CDP case or whether the opportunity to go to Appeals to contest the penalty bars the taxpayer from raising it in the CDP context. For those with a subscription to Tax Notes, see Ajay Gupta’s excellent post on this case on November 17, 2015, which focuses much more on the background of the FBAR civil and criminal penalties. Jack Townsend discusses this case as well in a good post summarizing the order in his Federal Tax Crimes blog.read more...
On Schedule B of his 2011 return Mr. Youssefzadeh asserted his 5th amendment right not to incriminate himself. After the IRS assessed the frivolous return penalty, it began sending the collection notices including the notice of intent to levy. He sent the IRS a request for a CDP hearing and raised the correctness of the assertion of the penalty in his circumstances. The appeals officer upheld the imposition of the penalty in the determination letter and Mr. Youssefzadeh filed a Tax Court petition. As frequently happens in CDP cases, the IRS filed a motion for summary judgment. In a much less frequent occurrence, petitioner filed a cross motion for summary judgment. Petitioner here had sophisticated representation from the Beverly Hills firm of Hochman, Salkin, Rettig Toscher & Perez, which many CDP petitioners do not. Because the Court decides the case on the basis of the motions for summary judgment, the decision comes out in the form of an order rather than in the form of an opinion.
A few interesting aspects of the CDP case cause me to stop before going further with the case to comment on the proceeding. Mr. Youssefzadeh filed his petition on June 25, 2014. On May 27, 2015, the Court sent the notice of trial setting the trial on October 26, 2015. The IRS did not file its motion for summary judgment until 14 months later on August 27, 2015, the last day to file a motion for summary judgment under the Tax Court Rule 121 which was revised in 2011 to prevent summary judgement motions at the last minute. Because the case went through Appeals before the petition, the case was with Chief Counsel’s office for over 14 months before it decided to file the motion for summary judgment. The staffing problems within Chief Counsel’s office undoubtedly contributed to the delay but this points out why CDP cases take so long to resolve. Even though Congress seemed to expect an expedited process by giving the taxpayer only 30 days to request a CDP hearing and only 30 days to petition the Tax Court, as a practical matter those two points where the taxpayer must act quickly remain the only points during which the CDP process receives expedited treatment. Carl Smith and I wrote about this several years ago detailing the time these cases spend in Appeals and the Court and the system does not seem to have changed.
Because petitioner lived in California at the time of filing the petition and because he contested the merits of the liability, venue for appeal in this CDP case is the 9th Circuit. The 9th Circuit, in the case of Keller v. Commissioner is one of the Circuits that has limited the Tax Court to the administrative record in CDP cases. Since the Tax Court is limited to the administrative record pursuant to the application of the Golsen rule, Judge Holmes issued an order on July 27, 2015, ordering the parties to stipulate to the administrative record by September 25, 2015. I had not seen an order like this before because I do not practice in a circuit that has limited the Tax Court to the administrative record. The order seems like a great way to cause the parties to prepare for the hearing. I would be interested to hear how the order works.
Here the joint motions for summary judgment eliminated the need for a trial of the case. The petitioner filed the 2011 return filling out “most of the lines in a normal fashion.” On Schedule B where he had to report dividends and interest he did not answer some of the questions and instead invoked his 5th amendment privilege against self incrimination. The opinion states that “the IRS warned that it would assess a frivolous return penalty against him unless he filed a return with all of the required information.” I imagine that this warning came from the Service Center as it processed the return but that is not clear. Whatever part of the IRS that made the request, petitioner refused to fill in the lines where he had invoked the 5th amendment. The case sets up the issue in simple fashion because Mr. Youssefzadeh’s argument was simply that he had a valid 5th Amendment claim, he had no desire to waste the time of the IRS but also no desire to incriminate himself by putting the missing information on the return. Does a valid assertion of the 5th amendment on the return allow the IRS to assert a frivolous return penalty or is a valid assertion of the right to not incriminate oneself also a basis for the IRS to assess a civil penalty.
To successfully assess a frivolous return penalty, the IRS must show three things: (1) the document purports to be a return; (2) the return omits enough information to keep the IRS from judging the substantial correctness of the return or appears substantially incorrect and (3) taxpayer’s position must be frivolous or demonstrate a desire to impede the IRS. The Court quickly found the document purported by be a return. It decided on a closer question that the return contained sufficient information. The IRS fought over this factor arguing that the missing information was needed to determine if the tax shown on the return was correct. The Court, however, determined that the test was not complete correctness but substantial correctness and the return met that standard.
On the third factor the IRS relied on its Notice 2010-33 implementing section 6702. The Court acknowledged that the notice lists use of the 5th Amendment on a return as a basis for assertion of the penalty but found that the notice does not discuss the legitimate use of the 5th Amendment. Because the tactic of using the 5th Amendment in inappropriate circumstances has been adopted over the years by tax protestors, the legitimate use of the 5th Amendment has out due to so much inappropriate use. Relevant IRS provisions (See IRM 188.8.131.52.1(10) and 184.108.40.206.2(6)) talk about “blanket assertion of the 5th amendment. Here, the return made a precise use of the 5th amendment with respect to certain questions but not a blanket assertion. In Garner v. United States the Supreme Court has held that taxpayers may make a legitimate assertion of the 5th Amendment on a tax return.
Mr. Youssefzadeh argued that 31 USC 5314 and 5322 make it a crime to willfully fail to file a Report of Foreign Bank and Financial Accounts (FBAR). The IRS could have easily used his answers to the questions he failed to answer to determine that should have filed an FBAR. The Court found that “because the lines that Youssefzadeh redacted ask for information that triggers the duty to file an FBAR and because willful failure to file an FBAR is a crime, we hold that Youssefzadeh has shown us a real and appreciable danger of self-incrimination…” The Court, therefore, held that the penalty should not apply in his case. This seems like the only result that does not penalize a taxpayer for the proper use of the right against self-incrimination. Of course, Mr. Youssefzadeh has brought a lot of attention upon himself. He may need to continue to employ his lawyers because his problems may not be over with the removal of the penalty if the IRS can identify his FBAR failure (assuming there was such a failure.)
Here the Court and the IRS allowed Mr. Youssefzadeh to raise the merits of the penalty without discussion of the Perkins case or the CDP regulation denying taxpayers the right to raise arguments where the taxpayer previously had an opportunity to go to Appeals.