Making up Rules


One of my sons has been in Indonesia for several months doing research while on sabbatical.  He is preparing to leave, and leaving requires that he go through a multi-step process.  One of the steps involved getting the signature on an appropriate form of someone from the Ministry of Research (I may have this name wrong) and a later step involved presenting the form as part of getting the exit visa.  At the later step, the person processing the exit visa insisted that in order to process the exit visa he had to have a copy of the identity card of the person signing the earlier form.  This requirement was not in the instructions or the regulations.  My son requested that the person call the Minister who signed off on the form.  At that point the person at the exit visa office backed down.  My son felt the request was part of an indirect request for a financial contribution by the person processing the exit visa.  Such requests are common in Indonesia, but not in the U.S.

In the U.S., however, we are not immune from requests that do not have grounding in the code, or regulations, or even the manual.  Sometimes we run into an office procedure that someone thought would be good but that makes accomplishing the transaction very difficult.  A recent CDP case involved one of these made up rules.  The disposition of the case demonstrates the benefit of having CDP and getting Tax Court oversight of some of the practices of the IRS.  Although this case does not have the importance of the Vinatieri v. Commissioner opinion in which the Tax Court struck down the IRS rule that a taxpayer must have filed all of their back tax returns in order to qualify for hardship status under IRC 6343, it has the same flavor.  The case, Houk v. Commissioner, Dk. No. 22140-15L, comes to us via designated order and not an opinion of the court.


In Houk, the taxpayer wanted to raise the merits of their tax liability in the CDP context.  The Appeals Office determined that in order to properly raise the merits argument the taxpayer must submit an amended return.  The description of the merits issue in the request for a hearing and the related document were insufficient to cause the Appeals employee considering the CDP case to cause them to look at the merits argument.  The notes of the Appeals employee related to the CDP hearing stated:

“It appears taxpayers could be disputing the underlying liability issue.  Self-assessed – Taxpayers need to file an amended tax return [i.e. a Form 1040X] for the tax period in questioned [sic].”

In the determination letter, the Appeals employee stated:

Challenges to the liability

While you were allowed to challenge the amount and existence of underlying liability, you did not present any relevant, non-frivolous documents for consideration.  The taxpayers’ 2013 tax liability was determined based on the documents they submitted.  If any of the figures were in error, the taxpayers should have submitted a Form 1040X to the designated Service Center.”

The IRS filed a motion for summary judgment.  The Court determined that the Houks conceded the innocent spouse and collection alternative issues mentioned in their CDP request; however, the Court found that “Appeals acknowledged, and respondent’s counsel has not denied, that the Houks were entitled to challenge their self-reported 2013 income tax liability.  The record is clear that, at every turn, the Houks have raised this issue – in their Form 12153 requesting the CDP hearing, in the CDP hearing, and in their petition commencing this Tax Court case.”

The Court denies summary judgement because some of the administrative record was missing, but the remaining parts suggested that the IRS may not have considered the liability challenge because of taxpayers’ failure to submit a Form 1040X.  If Appeals denied the request for relief because of the failure to submit a Form 1040X, the denial was an abuse of discretion.  Because there may have been an abuse of discretion, the IRS did not show that no genuine dispute regarding the liability existed and without showing an absence of such a dispute, the predicate to a successful summary judgment request does not exist.

Nothing in the statute or the regulations requires that a taxpayer who files a return and later realizes that filing that return created a liability that is too big imposes on the taxpayer a duty to file an amended return in order to successfully challenge the liability in the CDP context.  It may be more convenient for Appeals to receive a Form 1040X in order to more easily understand and process the request, but convenience is not a factor mentioned in the statute.  The decision of the Court demonstrates that it will not join with the IRS in imposing made up rules in order to deny CDP relief.  If the taxpayers provided inadequate proof of the reason they owed less taxes than was shown on their originally filed tax returns, Appeals could have denied CDP relief on that basis.  The Houks have not won their case.  They still need to prove that the return overstated their tax liability but now they have the opportunity to do that in the Tax Court case.


Arrests Made in IRS Scam Call Center Probe; Dark Web a Home for Stolen Tax Information

In New York Times Article on Call Center Tax Scams Highlights How Criminals Prey on Our Citizens Fear of IRS I discussed how a New York Times reporter uncovered some of the methods and motives of the overseas IRS imposters who preyed on American fear of IRS. The other day the Wall Street Journal reported that Indian police have arrested the apparent ringleader of the scammers in Indian Police Arrest Man Allegedly Behind Tax Scam Call-Center Network. The same day as the WSJ article Accounting Today had a story about how Americans’ tax information is out there on the dark web, for sale and available for scammers seeking to file fake returns and access refunds.


First, I will briefly discuss the call center scams. Most are familiar with them; as the WSJ reported, the scammers “received phone numbers and other details about U.S. taxpayers from a contact in the U.S. Call-center workers would make hundreds of calls, telling whoever answered they owed back taxes and risked financial ruin, humiliation and arrest if they didn’t pay immediately.”

The WSJ article discusses how the call center scammers were taking in about $150,000/ day. Indian authorities arrested the ringleader and seized his Audi R8 as evidence.

A DOJ indictment from last fall named the ringleader as one of the co-conspirators. The indictment discusses the IRS scam as well as a few other confidence scams that prey on the vulnerable and unsophisticated, including one where callers impersonating ICE agents threaten deportation unless the victim paid a fee.

These schemes suggest that the callers know something about how some Americans fear IRS and government in general. As I discussed last week in a brief post on a TIGTA review of IRS CI conduct in investigating structuring violations the IRS does not help itself when it fails to respect taxpayer rights when it investigates structuring violations. As the TIGTA report described, “when property owners were interviewed after the seizure, agents did not always identify themselves properly, did not explain the purpose of the interviews, did not advise property owners of any rights they might have, and told property owners they had committed a crime at the conclusion of the interviews.” This kind of behavior (and the publicity surrounding it) plants the seeds of fear.

Added to the mix of likely confusion and fear is the onset of private debt collection, an issue Keith has discussed and one that is likely to contribute to new opportunities for scamming Americans. The upshot is I suspect that while perhaps the Indian authorities have put one bad guy away, there are many more right behind him, and many future victims who are a mere phone call (or text) away.

On to the dark web. Wikipedia defines the dark web as “content that exists on darknets, overlay networks which use the public Internet but require specific software, configurations or authorization to access.” Last week Accounting Today in Tax refunds are selling cheap on the Dark Web discusses how there is a fully active market for sales of individuals’ W-2s. There is a sobering link to an IBM study outlining a 6,000 per cent increase in IRS scam emails over the past year, and how cybercriminals are selling W-2 information for $30, with an additional $20 charge for last year’s AGI, a necessary bit of information to allow a scammer to efile a return.

The Accounting Today story is terrific and I recommend a read; it has useful screenshots showing ads on the Dark Web and includes some new vocabulary that the fraudsters use to discuss the crimes. The piece ends with a reminder of how the fraudsters depend on people opening and responding to phishing emails and that “[n]o matter how enticing—or scary—the supposed offer or threat is in the supposed IRS letter, which will try to entice you into clicking on a link, or opening a file, resist, and forward the phishing attempt to the IRS at”

Good advice.


The tax clinic at Harvard has had a great clinical fellow this year, Caleb Smith.  Caleb is leaving Harvard to become the director of the clinic at University of Minnesota, a wonderful opportunity for him to direct one of the oldest and best tax clinics in the country.  Congratulations to occasional guest blogger Caleb Smith and continued success in the future.

I am using this space to post the announcement that the tax clinic at Harvard is seeking to find someone to replace Caleb.  The announcement is for a two year position although it has the possibility of reappointment at the end of that period.  Please contact Caleb ( if you want to know more about what the position entails or just want to congratulate him or contact me (  I plan to continue working in the Harvard clinic moving forward and am excited that Harvard is committing the resources to hire a full-time fellow with long term prospects.

The announcement contains a link to the Harvard’s human resources office but you can also use this link to get directly to the announcement.  The announcement also has a link to the web site of the Legal Services Center.  The other clinics and other clinicians at the Center make it a great environment in which to work.  Keith

Position Available:  The Legal Services Center of Harvard Law School (LSC) seeks to hire a Clinical Fellow in the Federal Tax Clinic.  The Clinic—through which Harvard Law students receive hands-on lawyering opportunities—provides direct legal representation in tax controversies to low-income taxpayers. The Clinic’s docket includes cases before the IRS, in Federal Tax Court, and in the U.S. Circuit Courts of Appeal.  Many of the Clinic’s cases raise cutting-edge issues regarding tax procedure and tax law.  The Fellow’s responsibilities will include screening cases for merit and law reform opportunities, representing clients, helping to manage the Clinic’s docket, contributing to community outreach and engagement efforts, and supporting the Clinic’s teaching mission. The Fellow will work closely with Clinical Professor Keith Fogg, who directs the Clinic.  The position represents a unique opportunity to join Harvard Law School’s clinical program, to work in a dynamic public interest and clinical teaching law office, and to develop lawyering and clinical teaching skills.  Salary is commensurate with experience.  The position is for an initial two-year appointment.  The possibility of reappointment depends on the availability of funding and Law School and project requirements.

Minimum Requirements: Candidates must have received a J.D. within the last three (3) years or expect to receive a J.D. in spring 2017.  Candidates must already be admitted to a state bar or be able to sit for a state bar exam in summer 2017 with the expectation of admission to a state bar in fall 2017.  Massachusetts bar admission is not required.  The successful candidate will have experience in tax law, whether clinical, pro bono, government, or private practice, and a demonstrated commitment to the needs of low-income taxpayers.

To Apply:  Applications must be submitted via Harvard’s Human Resources website.  Applicants should apply for the position designated as Clinical Fellow, Harvard Law School (ID #42289BR).   

About the Legal Services Center:  Located at the crossroads of Jamaica Plain and Roxbury in the City of Boston, we are a community-based clinical law program of Harvard Law School. Through five clinical offerings—Family Law/Domestic Violence Clinic, Predatory Lending/Consumer Protection Clinic, Housing Clinic, Veterans Legal Clinic, and Federal Tax Clinic—and numerous pro bono initiatives we provide essential legal services to low-income residents of Greater Boston and in some instances, where cases present important law reform opportunities, to clients outside our service area. Our longstanding mission is to educate law students for practice and professional service while simultaneously meeting the critical needs of the community. Since 1979, we have engaged in cutting-edge litigation and legal strategies to improve the lives of individual clients, to seek systemic change for the communities we serve, and to provide law students with a singular opportunity to develop fundamental lawyering skills within a public interest law setting. To these ends, we actively partner with a diverse array of organizations, including healthcare and social service providers and advocacy groups, and continually adapt our practice areas to meet the changing legal needs of our client communities. We encourage diversity, value unique voices, and pursue with passion our twin goals of teaching law students and advocating for clients. To learn more, please visit the LSC website.


When Can the IRS Reassess After Abatement

Guidance was issued on December 7, 2016, and released on March 31, 2017, regarding reassessment after abatement.  The Procedure and Administration Division of Chief Counsel’s office issued the guidance to an attorney in a field office.  The guidance addressed the following question:

“Whether the statute of limitations for assessment of the section 6651(a)(2) addition to tax for failure to pay remains open after an erroneous administrative First Time Abatement, such that the Service may reassess the addition to tax.”

The guidance concludes that the normal three year statute of limitations for assessment does not apply to the addition to tax imposed in 6651(a)(2) and, therefore, the IRS can reassess a failure to pay addition to tax at any time during the ten year statute of limitations for collection.  The guidance document, though relatively short, contains a couple of statute of limitations issues worth discussing.


The facts giving rise to the opinion deserve brief mention.  In this case the taxpayer filed a joint return with her husband.  They reported the tax on the return but failed to pay the tax reported on the return.  Later they filed an amended return reporting more tax which they also failed to pay.  The taxpayer’s husband filed a bankruptcy petition but she did not.  The filing of the bankruptcy petition by one spouse causes the IRS to split the tax account from one master file account into two non-master file accounts.  Guest blogger Marilyn Ames discussed master file and non-master file accounts in an earlier post and understanding the differences is important in interpreting IRS transcripts.

Depending on the timing of the bankruptcy, the husband might have discharged the 6651(a)(2) liability.  For penalties and additions to tax, the provision governing discharge is found in BC 523(a)(7) and has a three year rule.  For the same reason, discussed below, that the normal assessment rules do not apply to the 6651(a)(2) liability, the three year rule is a little different in a failure to pay situation since the liability derives from post-return actions (or inactions.)  Whether the husband discharged this liability does not matter in this advisory opinion.  The opinion focuses on the wife’s liability.  Because she did not file bankruptcy, her husband’s discharge, if any, will have no impact on her.  He might discharge not only the 6651(a)(2) liability but the tax and the interest.  She would still have a liability for these amounts no matter how her husband’s bankruptcy treats them with respect to him.

Because she still owes this liability, she called the IRS and requested first time abatement.  Steve has written a couple of excellent posts on first time abatement (FTA), here and here, which have proven to be among the most popular posts of all time.  FTA more frequently occurs with late filing and not late payment but here the IRS person on the phone granted her FTA for late payment.  However, sometime after granting her FTA, the IRS determined that it made a mistake because “she had a penalty or addition to tax within the three years prior to the tax period at issue.”  I suspect the mistake related to the placing of her liability for the tax in a non-master file account.

When the IRS mistakenly abates a liability, it has a few good, but old, cases on which it relies to reverse the mistake and it cites to those cases in the advisory opinion.  The first case is Carlin v. United States, 100 F. Supp. 451 (Ct. Cl. 1951) which held that “if the Commissioner abates the assessment, it ceases to exist or to have any effect thereafter.  The Commissioner cannot subsequently rescind his actions or restore the assessment, but must rather make a new assessment unless, of course, the statute of limitations has previously expired.”  The second case always cited in these situations is Crompton-Richmond v. United States, 311 F. Supp. 1184 (S.D.N.Y. 1970) holding that “if the statute of limitations has not run, the IRS may simply make a new assessment of the tax liability that has been abated.”

These cases allow the IRS to essentially have a “do over” when it erroneously abatement a taxpayer’s liability; however, they limit the do over to the statute of limitations.  Although neither of the quotes in the preceding paragraph make precisely clear which statute of limitations it means, the relevant statute of limitations in these cases is the statute of limitations on assessment.  That gives the IRS a relatively short window within which to fix the problem.  The normal rule on the statute of limitations for assessment of three years from the due date of the return does not apply, however, if the liability comes from 6651(a)(2).

The guidance explains that the assessment period for a 6651(a)(2) liability cannot end three years from the due date (or filing date) of a return because this addition to tax runs for 50 months after the filing date.  During the 50 months after the filing date, the taxpayer gets hit with another liability under the statute for every month that passes based on the outstanding liability as of that month.  Because the assessment of this liability must extend past the normal three year period for assessment, the guidance concludes that the time period for assessment remains open for the ten year statute of limitations on collection.  As with the reassessment after abatement case law, the case law on this ten year statute of limitations is fairly thin and exists in lower court opinions.  The leading case is United States v. Estate of Hurd, 115 A.F.T.R.2d 2015-38 (C.D. Cal 2015).

So, the guidance concludes that because the statute of limitations on collection remained open in W’s case the IRS could reverse the abatement and reassess the liability against her.  The guidance is not surprising and does not break new ground but because this issue does not arise and get discussed very often the guidance is worth looking at if you have a reassessment situation.


S Corp Shareholders Unable to Deduct Losses As Guarantee Does Not Create Basis

While not a procedure case, for those wanting a primer in an important nook when it comes to the tax treatment of shareholder positions in S Corporations, I recommend a reading of this week’s Tax Court opinion in Phillips v Commissioner.

Phillips addresses the limits on shareholders’ ability to generate basis when the shareholders guarantee a corporate debt rather than make a bona fide loan themselves to the corporation. The facts in Phillips involve shareholders in S Corps that were in the business of developing and selling real estate in Florida, a business that was hit hard by the great recession. Husband and wife Robert and Sandra Phillips personally guaranteed loans of the S corporations. When the economy turned south, the banks sued the Phillips (and other guarantors) on the guarantees, resulting in millions of dollars in judgments, which the Phillips were unable to pay.


How did this trigger a tax dispute? The Phillips increased their basis by a pro rata amount of the creditor judgments. A shareholder’s basis in an S Corp is important as items of loss are passed through reducing basis. A shareholder in S Corps may only claim the benefit of the loss or deduction to the extent of the shareholder’s basis (and basis in bona fide debt the corporation owes him) under Section 1366(d). The judgments were in the many millions of dollars; so were the losses that the S Corp was racking up. So, with the basis creation, the Phillips claimed losses they otherwise would not have been able to use immediately, generating NOLs that they used to carryback to years when everyone in Florida real estate was living high on the hog.

The problem is that there is a long line of cases holding that a shareholder’s loan guarantee for loans that the S Corp itself incurs is insufficient to generate basis needed to soak up the losses. Those cases provide that absent an economic outlay, (i.e, the shareholder paying on the guarantee), there is no basis impact from the guarantee itself.

This is a useful contrast with subchapter K, where partnership liabilities are generally allocated to partners. In contrast, the liabilities of the S Corp only generate a basis kick up when in fact the shareholder makes the loan to the corporation or actually pony up the dollars as a result of the creditor seeking payment on the guarantee. It does not matter that the S Corp shareholders could have structured the financing differently (e.g., borrowed the money and then loaned the $$$ to the corp).

The taxpayers in this case made the creative argument that while they accepted that a guarantee itself is generally insufficient to generate basis, there was enough adverse economic impact on them to justify a basis boost. To that end, the taxpayers emphasized that the creditors sued them individually, obtaining a judgment resulting in liens against their property.

Phillips notes that the taxpayers attempted to make lemonade out of lemons, but restates the maxim that taxpayers are generally stuck with the consequences of the form they choose. In Selfe v US the 11th Circuit found a limited exception for the “no basis from a guarantee rule” if the shareholders can establish that the lender in substance viewed the shareholder as the primary obligor. No doubt the presence of the liens and the judgment has some economic impact, but under 11th Circuit (and other) precedent it was not enough to move the needle:

Petitioners urge that the deficiency judgments against Mrs. Phillips gave rise to an “actual economic outlay” by (among other things) impairing her credit. This argument misapprehends the theory that formed the basis for the Eleventh Circuit’s remand in Selfe. The theory was that the bank, while nominally lending to the S corporation, may in substance have lent to the shareholder, who then contributed the loan proceeds to the corporation. In order to identify the “true obligor” in such circumstances, it is necessary to examine the lender’s intentions and other economic facts existing when the lender makes the loan. A court’s entry of a deficiency judgment against a guarantor many years later, after the corporation has defaulted and the corporation’s collateral has proven insufficient, is simply not relevant in determining whether the lender, when initially extending credit, looked to the shareholder as the primary source of repayment.

At the end of the day, this is a pretty tough outcome for the taxpayers. The rationale for the difference in treatment for S Corp shareholders and partners is due in part on the theory that the S Corp shareholders are generally not personally liable on the corporate debts. The guarantee is a bit too remote; when the creditor comes knocking and in fact obtains a judgment (as here) that liability is no longer remote.

Philips is a good reminder that form matters, especially when using S Corps (a lesson we also explored in Financial Consultant Fails To Avoid Self-Employment Tax With S Corp Structure) and shareholders seeking to ensure basis to offset losses should structure the transaction in the form of a direct loan to the shareholder, followed by a shareholder loan or contribution to capital.

Continued Developments in Taxpayer attempts to Litigate the Merits of Taxes in Collection Due Process Cases

As we have reported before, here, occasional guest blogger Lavar Taylor brought three appeals into the circuit courts.  Two circuit courts have ruled thus far and both sustained the decision of the Tax Court upholding the regulation promulgated by the IRS which prevents a taxpayer from bring a merits dispute in a collection due process (CDP) case if the taxpayer had the opportunity for a conference with Appeals prior to bringing the CDP case even if the opportunity to go to Appeals did not include an opportunity to contest the matter in court.  We are still waiting on the third circuit court in which Lavar made his arguments to decide the case that came before it in order to determine if a split in the circuits on this issue might lead to Supreme Court review.  Meanwhile, the Keller Tank decision decided by the 10th Circuit has had further developments and the Tax Court continues to decide cases on this issue.  Both the new developments in Keller Tank and the recent activity in the Tax Court deserve mention.


On March 31, 2017, the IRS filed a request with the 10th Circuit in the Keller Tank case entitled “APPELLEE’S MOTION TO AMEND OPINION TO CLARIFY AUTHORITY OF IRS OFFICE OF APPEALS OVER RESCISSION OF I.R.C. § 6707A PENALTIES.”  In the motion, the IRS requests that the 10th Circuit amend the opinion in the case, which was entirely favorable to the IRS, to remove language suggesting that the Appeals Office could rescind the 6707A penalty.  The motion states that the Commissioner has not delegated that authority to Appeals and that the opinion could mislead others.  You do not often see the winning party asking the court to rewrite its opinion but the reason for the request makes perfect sense for an agency trying to administer a statute and wanting to make sure that parties follow the correct procedure when requesting remedies.

Following on the heels of the motion by the IRS, on April 7, 2017, the taxpayer filed a PETITION FOR REHEARING AND REQUEST FOR REHEARING EN BANC.  In this petition, the taxpayer essentially asks the court to reconsider its decision and sets out the reasons why it should do so.  We will continue to follow the developments in this case as well look for the final circuit court opinion.

Meanwhile, back in the Tax Court a couple of decisions on this topic deserve brief mention and discussion.  The first was an order and decision issued by Judge Holmes on January 3, 2017 in White v. Commissioner, Dk. No. 9967-15L.  Mr. White filed his 2008 return in 2013.  The IRS not only assessed the taxes reflected on the return but also assessed penalties for late filing and late payment.  In his CDP case Mr. White wanted to contest the penalties.  Judge Holmes set out the timeline regarding the penalties and Mr. White’s efforts to contest them in the order:

-October 4, 2013 — Mr. White writes to IRS Appeals to ask for relief from the penalties;

– January 24, 2014 — IRS Appeals denies his request;

-April 9, 2014 — Mr. White files an administrative appeal of the denial;

-May 20, 2014 — while this administrative appeal is pending, the IRS sends Mr. White a notice of federal tax lien;

-June 6, 2014 — Mr. White files his request for a CDP hearing and states that he only wants to challenge the penalties;

-October 28, 2014 — The administrative appeal leads to a partial abatement of the penalties;

-December 24, 2014 — the Appeals settlement officer conducting the CDP hearing writes to Mr. White to schedule the hearing but warns him that his filing of a request with IRS Appeals and pursuit of an administrative appeal constituted his one chance to challenge his liability;

-March 17, 2015 — The Appeals settlement officer issues the notice of determination in which he rules that Mr. White may not challenge the penalties in a CDP hearing because he had challenged them administratively.

Mr. White pressed for consideration of the penalty assessment amount in the CDP hearing.  The IRS filed a motion for summary judgement.  Because he never received a notice of deficiency regarding the underlying taxes, since they are taxes on his return filed without remittance, Montgomery v. Commissioner would allow him to contest the taxes in the CDP hearing but what about the penalties which he contested prior to the CDP hearing in appeals in the penalty abatement context.

The relevant regulation is 26 CFR § 301.6320-1(e)(3), A-E2  and it provides:

“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 Court notes that the second sentence of the regulation does not apply because his opportunity for a conference with Appeals came after and not before the assessment of the tax.  In its brief in support of the summary judgment motion, the IRS cited to two trust fund recovery penalty cases in which the taxpayer received a hearing with Appeals but TFRP cases have their own special regime for obtaining Appeals conferences.  Even though the IRS apparently did not cite to Lewis v. Commissioner, 128 T.C. 48 (2007), Judge Holmes looks at it and finds the facts essentially identical.  On the basis of Lewis, he upholds the determination of Appeals and grants the motion for summary judgment.

The decision in White raises the question of what would have happened to Mr. White’s request to have the penalties reviewed by the Tax Court in the CDP case if he had not first sought to have Appeals look at them.  I think that he may have gotten his review.  If I am right, perhaps taxpayers should not engage in the penalty abatement process immediately after filing a late return but wait until the CDP process begins.  That is not the most efficient result but taxpayers who want the ability to challenge the denial of penalty abatement in court must wait for CDP or fully pay and sue for refund.

On March 29, 2017, Judge Lauber issued an opinion in Bitter v. Commissioner, T.C. Memo 2017-46.  The Bitter case is another 6707A case.  The Court picks up on the two recent circuit court decisions and cites them in the decision.  The case shows what taxpayers should expect if they seek to litigate the merits in a CDP case of this type of penalty.  The door is firmly shut and will only open if a circuit court agrees with the argument that the regulation goes too far by preventing taxpayers who can only obtain review from Appeals from raising the merits of the underlying liability in a CDP case.  Judge Lauber goes through all of the recent decisions if you want a thorough update on the state of the law in this area.

The Interplay of Restitution and Deficiency Assessments

As we have discussed before here, here and here, in 2010 Congress amended 6201(a)(4) to permit the IRS to make an immediate assessment based on an order of restitution in a criminal case.  In Rozin v. Commissioner, T.C. Memo 2017-52 the Tax Court continues to instruct taxpayers on the interplay between restitution assessments and deficiency assessments.  The opinion comes close to being an advisory opinion because very little separated the position of the IRS and the petitioner; however, the opinion brings clarity to the role of restitution assessments and payments.

In 2008 Mr. Rozin was convicted of two tax crimes and conspiracy with respect to his 1998 return.  On October 29, 2010, he sent the IRS a payment of $387,687 based on the tax loss from his criminal actions as calculated by the U.S. Probation Department.  On February 4, 2011, the federal district court entered an order of restitution in the amount of $775,294 and in July of 2011, he essentially paid the balance of the liability.  His conviction was affirmed by the 6th Circuit in 2012.  I do not know if anyone has studied the impact of the change in the law in 2010 on the amount the IRS collects following criminal convictions but I expect the impact is significant.  The full payment in this case of such a large amount may not be solely or even partially attributable to the law change but signifies a good trend in criminal tax cases for the IRS and particularly its collection division.  Because the IRS delays traditional assessment and collection until after it has finished with the criminal aspect of the case, many criminally convicted taxpayers have few resources left with which to satisfy the civil liability once the criminal case comes to an end.  The revenue agents usually get a relatively simple case because the special agents provide a clear roadmap to the needed adjustments but the revenue officers often ended up with an uncollectible account that sat in their inventory gathering dust.


The Tax Court case is about whether there should be a Tax Court case.  Mr. Rozin paid the tax.  The IRS assessed the tax.  He objects to the deficiency determined by the IRS a few years after he thought he had taken care of the tax problem.  After he thinks he has paid everything, here comes the IRS examiner wanting to reopen the wound and go back over his 1998 tax year fifteen years after the end of the tax year at issue.  Essentially, Mr. Rozin argues that the restitution assessment and his payment should have ended the matter and the IRS should not get to assess the taxes again.  He agrees with the IRS that he underreported $392,083 in tax on his 1998 return and that because he did so fraudulently the 75% penalty of 6663 applies in the amount of $294,062.

The IRS argues that the new statute allowing it to immediately assess the restitution amount does not allow it to credit Mr. Rozin’s account until the deficiency and fraud penalty are assessed.  It cites to IRC 6201(a)(4); 6213(a) and (b)(5) and to Schwartz v. Commissioner, T.C. Memo 2016-144.  The IRS makes clear that once it assesses the tax through the deficiency procedures that it will apply the payment he made during the restitution process.  So, Mr. Rozin knows from the outset of this case that the deficiency assessment will add nothing to the liability created by the restitution order with the possible exception of interest.


The Court carefully explains the difference between the restitution assessment and the proposed deficiency assessment.  It states that:

“A deficiency must first exist before restitution remittances for taxes owed can be applied to reduce that deficiency.  In other words, the restitution assessment, which is assessed ‘as if’ it were a tax, cannot offset a tax assessment until a tax assessment of the deficiency has been made.  The amount of a deficiency turns not on what payments have been applied to an account, but rather on what assessments have been made with respect to that account.”

Mr. Rozin argues that the IRS made a mistake in calculating his liability in the notice of deficiency because it did not give him credit for the payments he made.  The Court points out that the IRS should not give credit for these payments in the notice of deficiency, not because he will not ultimately get credit for them, but because these amounts were not “shown as tax” on his 1998 and the IRS has not made an additional civil tax assessments on that period.  Even though the IRS did previously assess based on the restitution order, the previous assessment was a summary assessment and not a deficiency assessment.  The restitution assessment does not create a final determination of civil liability.

“Thus, petitioner’s restitution payments are not included as ‘amounts previously assessed… as a deficiency,’ and respondent was not permitted to reduce his determination by those payments under 6211(a)(1)(B)….  Because restitution does not fit within the definition of a deficiency under section 6211, restitution payments made do not reduce or discharge a deficiency determination before the deficiency is assessed.”

The Court points out that by refusing to sign the waiver on assessment the IRS sought to have him sign in lieu of sending the notice of deficiency, Mr. Rozin prevented the IRS from doing the very thing he wants it to do.  Yet, by bringing the suit Mr. Rozin allowed the Court to provide us with a further explanation of how the restitution assessment and the deficiency assess work together.  If you have to lose a Tax Court case it is better to lose one in which the Court tells you that its decision to allow the IRS to assess the amounts in the notice of deficiency will be covered by your previous payment.  This will not happen in every restitution case.  The notice of deficiency could establish a liability far in excess of the restitution payment ordered in the criminal case.  Mr. Rozin’s full payment of the restitution order is also someone out of the norm as many individuals who go through the criminal process lack sufficient resources to make full payment at the conclusion of that process.  From a collection point of view the case demonstrates how the change in the law to allow the IRS to assess the restitution amount works well even if it creates duplication in the assessment process that confused Mr. Rozin.

Some More (Depressing) Weekend Tax Reading: IRS in Crosshairs for Violating Rights in Anti-Structuring Investigations

In a widely publicized report TIGTA this week discussed how IRS enforcement of the Bank Secrecy Act’s anti-structuring provisions often violated the fundamental rights of small business owners who obtained money legally but who IRS suspected were structuring transactions to violate the reporting requirements that accompany certain deposits and transfers of cash.

As most readers know, deposits of over $10,000 trigger additional reporting requirements. There are many reasons to avoiding the requirements by depositing amounts less than the trigger; some of the reasons are legitimate and others are done with the intent to shield illicit activities. The BSA is meant to give government the tools to combat money laundering and terror financing, and not to hassle small business owners.  Getting the balance right between enforcement to catch bad guys and not catching good guys requires careful calibration by the administrative agency.  Recent information suggests the IRS dialed up the enforcement side too high.

TIGTA looked at a sample of cases where IRS Criminal Investigation (CI) used its broad forfeiture powers in response to suspicions of structuring. It essentially found that in many cases the underlying activity was legal; using the broad forfeiture powers in response to legal source activities essentially amounts to use of a power that is extraordinary for what is in essence a reporting violation. Moreover, the report discusses how in many instances CI agents did not when interviewing suspects tell them that they were potentially the subject of a criminal investigation or explain their constitutional rights.

The Washington Post article The IRS took millions from innocent people because of how they managed their bank accounts, inspector general finds is typical of the reaction the mainstream press has had to the report; in one word: outrage.

One voice among the many who has criticized IRS practice is the National Taxpayer Advocate.  As she should, the NTA’s criticism focuses on the harm to taxpayers created by CI enforcement practices and the failure of CI to recognize fundamental taxpayer rights – something she has championed.  Following the TIGTA report, the NTA released a statement  expressing concern over CI’s apparent position that taxpayer rights don’t apply in these anti-structuring investigations:

CI takes the position that taxpayer rights, such as those included in the TBOR, only apply when it is conducting investigations under Title 26 of the U.S. Code (i.e., the Internal Revenue Code). CI says taxpayer rights do not apply in the cases examined in TIGTA’s report, either (1) because CI is acting at the direction of the Justice Department in a grand jury investigation or (2) because the structuring laws are codified in Title 31 of the U.S. Code (rather than Title 26), so the subject of the investigation should be viewed as a “property owner” rather than a “taxpayer.”

As a refresher Section 7803(a)(3) requires the Commissioner to ensure that “employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by [Title 26], including [the ten rights in 
the TBOR].”  She points out that the IRS engages in the administration of laws across the federal code including bankruptcy law found in title 11, the freedom of information act (FOIA) found in title 5, as well as numerous other provisions.  The position taken by CI, if applied to all parts of the IRS would create a big gap in the coverage of the taxpayer bill of rights not intended by Congress.

The NTA makes the strong point that Section 7803(a)(3) does not make exceptions or append to the statute that the protections are only meant to apply when the IRS is investigating a Title 26 matter.

The NTA statement connects this issue to fundamental taxpayer rights:

The right to be informed is particularly important because, without adequate information, it is difficult to exercise the right to challenge the IRS and be heard. If people do not know what they are suspected of, they may not provide exculpatory information that they possess. At the same time, the government is more likely to waste resources pursuing cases against innocent people. Pursuing such cases also violates the right to privacy, which includes the right to “expect that enforcement will be no more intrusive than necessary.”

The NTA makes the sensible recommendation that IRS should clarify that its agents should act in accord with taxpayer rights in these investigations. Rights mean different things in different contexts, and there is still the question as to what those rights would mean in these investigations. Yet taking as a starting point that IRS employees should act in accord with respecting these rights is surely a good recommendation for an agency that seems at times to make itself an easy target for critics.  This discussion also offers the opportunity to show how the codification of taxpayer rights may (or at least should) make a difference in the way the IRS approaches enforcement.  Had it followed the provisions in TBOR, CI would likely have avoided this opportunity for adverse publicity.  Maybe it would have caught a few less bad guys, but it could have prevented numerous good guys from getting caught in a net cast too widely.