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.

 

Collection Due Process Determination Letter Continues to Mislead Taxpayers into Filing Their Tax Court Petition Too Late

The Harvard Tax Clinic is litigating the issue of the Tax Court’s jurisdiction to hear cases filed late. The Tax Court has soundly rejected our arguments that it has jurisdiction to hear Collection Due Process (CDP), discussed here, and Innocent Spouse (IS) cases, discussed here, filed after the respective 30 and 90 day periods following the issuance of the determination letters to the taxpayers. Not only has the Tax Court rejected our arguments, but the 2nd and 3rd Circuits have agreed with the Tax Court with respect to the IS statute. We expect to argue about the CDP statute in the 4th and 9th Circuits later this fall.

In the CDP cases, the issue concerns situations in which the taxpayers filed one day late relying on the language of the determination letter explaining to them the time within which they needed to file a Tax Court petition. In each case, the taxpayer filed on the 31st day and in each case, in responding to the motion to dismiss filed by the IRS, the taxpayer explained why they felt their petition was timely. In the Cunningham case cited below, Chief Judge Marvel described Ms. Cunningham’s interpretation of the notice as novel, and so it may seem to lawyers trained to read the type of language used in the determination letter, but after eight cases in a little over two years, the novelty has worn off and it has become clear that the language is misleading people on a regular basis. (One of the eight cases involves a pro se petitioner who is a lawyer. So, it is not only lay people who have found the language confusing.)

We blogged about this problem in a post on March 24, 2016, at a time when only three pro se taxpayers had been misled since mid-2015. See here http://procedurallytaxing.com/cdp-notice-of-determination-sentence-causing-late-pro-se-petitions/. In effect, this is an update post because five more pro se taxpayers have been misled since our last post. We have never gone back to look for orders before mid-2015 in which similar dismissals may have happened, so the figure of eight pro se taxpayers misled may actually severely understate the problem that has existed since, probably, 2006 or 2007, when the notice of determination was redrafted to include the confusing language for the first time.

Whether or not the Tax Court has jurisdiction to hear a case filed late because of the misleading notice, the notice itself needs to be changed now in order to avoid the continuation of a bad situation.

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I wrote about the third letter in the collection notice stream that the IRS has been sending for the past 18-24 months that misstates the law. The good news with respect to that letter is that I am told that the IRS agreed to change the letter to remove the language that misstates the law and that tells the taxpayer that the IRS can levy upon their property when it cannot levy upon their property. Based on the information provided to me, the new, improved third letter in the notice stream will go out starting in January of 2018. Until then, taxpayers will continue to receive the incorrect letter; however, I am encouraged that the IRS is changing the letter in response to concerns about its accuracy. I know that changing letters is a slow process at the IRS because of the procedures it has for approving letters and getting them into mass mailings, though I wish it were not so slow when a letter is actually wrong. Because I have not seen the new, improved third letter in the notice stream, I cannot say how improved it is.

Based on the ability of the IRS to listen and adapt regarding the wrong letter it was using in the notice stream, I am hoping that it will also change the letter that it uses in sending a taxpayer a notice of determination. Carl Smith has been tracking Tax Court orders over the past few years. He has found eight cases in which the language of the notice of determination letter has misled the taxpayer into filing Tax Court petition on the wrong day:

Order dated June 26, 2015, in Duggan v. Commissioner, Tax Court Docket No. 4100-15L, on appeal, Ninth Circuit Docket No. 15-73819;

Order dated December 7, 2016, in Cunningham v. Commissioner, Tax Court Docket No. 14090-16L, on appeal, Fourth Circuit Docket No. 17-1433;

Order dated March 4, 2016, in Pottgen v. Commissioner, Tax Court Docket No. 1410-15L;

Order dated January 14, 2016, in Swanson v. Commissioner, Tax Court Docket No. 14406-15S (The Swanson case order does not discuss any argument that the language of the notice of determination misled the taxpayer.  But, Carl Smith went down to the Tax Court and looked at Swanson’s opposition to the motion, wherein Swanson attached the notice of determination and quadruple-underlined the words “day after” in the sentence that is misleading all these pro se people, including Swanson.  It is because of the language of that sentence that he argued his filing was timely — an argument rejected in the order);

Order dated April 20, 2017, in Wallaesa v. Commissioner, Tax Court Docket No. 1179-17L;

Order dated May 31, 2017, in Saporito v. Commissioner, Tax Court Docket No. 8471-17L;

Order dated May 31, 2017, in Integrated Event Management, Inc. v. Commissioner, Tax Court Docket No. 27674-16SL;

Order dated September 26, 2017, in Protter v. Commissioner, Tax Court Docket No. 22975-15SL.

We could provide good advice to these individuals that waiting until the last day to file your Tax Court petition is not a good idea. It is a good practice to send the petition at least a week before the last day to file in order to provide some cushion, though we understand that this may not always be possible, given the short deadline in CDP (30-days) and the fact that taxpayers do not receive the notice of determination until several days after the IRS mails it. Despite this nice advice that could have saved these petitioners, we all know that filing on the last day is normal for many pro se petitioners as well as many lawyers. There should not be a question about what is the last day. The notice should make that clear.

The notice of determination creating this confusion states:  “If you want to dispute this determination in court, you must file a petition with the United States Tax Court within a 30-day period beginning the day after the date of this letter.”  (Emphasis added).  That is not the statutory language.  The statute provides:  “The person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).”  § 6330(d)(1) (emphasis added).  Prior to a 2006 amendment of § 6330(d)(1) (an amendment which centralized all CDP review only in the Tax Court), the notice of determination more closely tracked the statutory language, stating: “If you want to dispute this determination in court, you must file a petition with the United States Tax Court for a redetermination within 30 days from the date of this letter.”  See Jones v. Commissioner, T.C. Memo. 2003-29 at *3 (language from notice issued in 2001; emphasis added).

The IRS apparently chose to write a sentence in the current version of the notice that conflates the words of the statute with elements of Tax Court Rule 25(a)(1) (discussing how to count days) and Reg. § 301.6330-1(f)(1) (“The taxpayer may appeal such determinations made by Appeals within the 30-day period commencing the day after the date of the Notice of Determination to the Tax Court.”).  However, the IRS failed to alert taxpayers as to the rules it was summarizing or where taxpayers could find examples of how the 30-day rule operated (including omitting any discussion of weekend days).  It has become clear that this language is misleading to many pro se taxpayers.  Indeed, it is because pro se taxpayers have difficulty understanding how to count days that, in 1998, Congress specifically required the IRS to place a last date to file on notices of deficiency and amended § 6213(a) to provide that taxpayers can rely on any incorrect dates shown. § 3463, Pub. L. 105-206.  (Unfortunately, Congress forgot to write the same sentences requiring showing the last date to file on the new notices of determination issued under §§ 6330(d)(1) and 6015(e)(1) that were adopted in the same statute.)

The National Taxpayer Advocate has written about problems with the innocent spouse notice before:

Problem

Even though the IRS’s relief determination under IRC § 6015 is subject to judicial review, the IRS is not required to provide and does not provide taxpayers with the last date to petition the U.S. Tax Court in the final determination letters it issues to them in connection with requests for innocent spouse relief. In contrast, IRS deficiency determinations are similarly subject to judicial review, but Congress has directed the IRS to assist taxpayers by providing them with the last date to petition the Tax Court in notices of deficiency. Providing such assistance is important because it may be difficult for some taxpayers to determine the deadline for filing a petition in Tax Court without professional assistance, assistance which many taxpayers who need relief may be unable to afford. Sixty-five percent of the taxpayers who request innocent spouse relief make less than $30,000 per year. Thus, it may be even more helpful for the IRS to include the last date to petition the Tax Court in innocent spouse determination letters than to include it in notices of deficiency.

Perhaps one reason the IRS does not include the last date to petition the Tax Court in its notice of determination letters is that if the IRS enters a date beyond the requisite period and the taxpayer relies on it, then the taxpayer could miss the filing deadline. In contrast, if the IRS enters a date beyond the requisite period for filing a Tax Court petition in a notice of deficiency, then a taxpayer will not be harmed as long as he or she files the petition on or before the date contained in the notice of deficiency because IRC § 6213 (a) provides that a taxpayer may petition the Tax Court any time on or before the date specified in the notice.

[Example and footnotes omitted]

Recommendation

Require the IRS to include the last date to petition the Tax Court in any final determination letter the IRS issues in connection with an election or request for innocent spouse relief in a manner similar to that provided by IRC § 6213 (a). Provide that a taxpayer may petition the Tax Court within 90 days of the date of the determination or by the date specified in the letter, whichever is later.

I understand that the NTA will have something about the CDP notice problem in her next annual report.

The filing deadline language in the notice of determination for CDP cases is also inconsistent with the filing deadline language for other similar IRS-issued notices that constitute “tickets” to the Tax Court.  Notices of deficiency issued under § 6212 have long stated: “If you want to contest this deficiency in court before making any payment, you have 90 days from the above date of this letter (150 days if addressed to you outside of the United States) to file a petition with the United States Tax Court for a redetermination of the deficiency.”  See Erickson v. Commissioner, T.C. Memo 1991-97 at *21 (language from 1988 notice; emphasis added); Rochelle v. Commissioner, 116 T.C. 356, 357 (2001) (same, except for addition of the word “mailing” before “date” in language from 1999 notice).  Notices of determination for Tax Court review of innocent spouse relief claims under § 6015(e)(1) state: “You can contest our determination by filing a petition with the United States Tax Court. You have 90 days from the date of this letter to file your petition.”  See Barnes v. Commissioner, 130 T.C. 248, 250 (2008) (language from 2001 notice; emphasis added).

The IRS should change the language in the notice of determination now. Undoubtedly, this will not stop late petitions. It should, however, greatly decrease the number of late petitions caused by confusing language. The language of the CDP notice now provides the date by which the taxpayer must make their CDP request. It is hard to object to that type of clarity.

 

 

Designated Orders: 9/18 – 9/22/2017

Professor Patrick Thomas brings us this week’s Designated Orders, which this week touch on challenges to the amount or existence of a liability in a CDP case without the right to that review, a pro se taxpayer fighting through a blizzard of a few differing assessments and an offset, and the somewhat odd case of the IRS arguing that a taxpayer’s mailing was within a 30-day statutory period to petition a determination notice. Les

Thank goodness for Judge Armen’s designated orders last Wednesday. In addition to Judge Halpern’s order in the Gebman case on the same day (which Bryan Camp recently blogged about in detail), Judge Armen’s three orders were the only designated orders for the entire week.

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A Review of the Underlying Liability, without a Statutory Right

Dkt. # 7500-16L, Curran v. C.I.R. (Order Here)

The Curran order presents a fairly typical CDP case, though both the IRS, and I’d argue the Court, give the Petitioners a bit more than they were entitled to under the law. Mr. Curran was disabled in 2011, and received nearly $100,000 in disability payments from his employer, Jet Blue. Under section 104(a)(3), such payments are included in gross income if the employer paid the premiums for the disability policy (or otherwise contributed to the cost of the eventual disability payments). If the employee, on the other hand, paid the premiums, the benefits are excluded from gross income.

It appears that Jet Blue paid for Mr. Curran’s benefits, but Mr. Curran did not report these on his 2011 Form 1040. Unfortunately for Mr. Curran, employers (or, in this case, insurance companies contracted with the employer to provide disability benefits) are required to report these benefits on a Form W-2. The IRS noticed the W-2, audited Mr. Curran, and issued a Notice of Deficiency by certified mail to Mr. Curran’s last known address, to which he did not respond. The IRS then began collection procedures, ultimately issuing a Notice of Intent to Levy under section 6330 and a Notice of Determination upholding the levy.

The Court does not critically examine the last known address issue, but presumes that the Petitioner has lived at the same address since filing the return in 2012. So, ordinarily, Petitioners would not have had the opportunity to challenge the liability, either in the CDP hearing or in the Tax Court.

Nevertheless, the IRS did analyze the underlying liability in the CDP hearing, yet concluded that Mr. Curran’s disability payments were included in gross income under section 104(a)(3). The Court also examines the substantive issue regarding the underlying liability, though notes that Petitioners do not have the authority to raise the liability issue. Of particular note, the IRS’s consideration of the liability does not waive the bar to consideration of the liability, and most importantly, does not grant the Court any additional jurisdiction to consider that challenge. Yet, Judge Armen still engages in a substantive analysis, concluding that Petitioners’ arguments on the merits would fail.

It’s also worth noting that the Petitioners provided convincing evidence that, at some point after 2011, they repaid some of the disability benefits (likely because he also received Social Security Disability payments, and his contract with the insurance company required repayment commensurate with those SSDI benefits). Under the claim of right rule, Petitioners were required to report the benefits as income in the year of receipt. Repayment of the benefits in a latter year does not affect taxation in that earlier year; rather, the Petitioners were authorized to claim a deduction (for the benefits repaid) or a credit (for the allocable taxes paid) in the year of repayment.

Three Assessments, Two Refund Offsets, and One Confused Taxpayer

Dkt. # 24295-16, McDonald v. C.I.R. (Order Here)

In LITC practice, we often encounter taxpayers who are confused as to why the IRS is bothering them, what the problem is, and even why they’re in Tax Court. Indeed, at a recent calendar call I attended, a pro se taxpayer asked the judge for permission to file a “Petition”. This mystified the judge for a moment; further colloquy revealed the Petitioner actually desired a continuance.

In McDonald, we see a similarly confused taxpayer, though I must also admit confusion in how the taxpayer’s controversy came to be. Initially, the taxpayer filed a 2014 return that reported taxable income of $24,662, but a tax of $40.35. Anyone who has prepared a tax return can immediately see a problem; while tax reform proposals currently abound, no one has proposed a tax bracket or rate of 0.16%. Additionally, Mr. McDonald did self-report an Individual Shared Responsibility Payment (ISRP) under section 5000A of nearly $1,000 for failure to maintain minimum essential health coverage during 2014.

So, the IRS reasonably concluded that Mr. McDonald made a mathematical error as to his income tax, and assessed tax under section 6213(b)(1). Such assessments are not subject to deficiency procedures. Because the assessment meant that Mr. McDonald owed additional tax, the IRS offset his 2015 tax refund to satisfy the liability. Another portion of his refund was offset to his ISRP liability (which appeared on a separate account transcript—likely further confusing matters for Mr. McDonald).

But then the IRS noticed, very likely through its Automated Underreporter program, that Mr. McDonald did not report his Social Security income for 2014. Unreported income does not constitute a mathematical error, and so the IRS had to use deficiency procedures to assess this tax. The IRS sent Mr. McDonald a Notice of Deficiency, from which he petitioned the Tax Court.

Mr. McDonald filed for summary judgment, pro se, arguing that he had already paid the tax in question. Indeed, he had paid some unreported tax—but not the tax at issue in this deficiency proceeding. Rather, this was the tax that had already been assessed, pursuant to the Service’s math error authority—and of course the ISRP, that Mr. McDonald self-assessed. Accordingly, Judge Armen denied summary judgment, since Petitioner could not prove his entitlement to the relief he sought.

Headline: IRS Argues for the Petitioner; Loses

Dkt. # 23413-16SL, Matta v. C.I.R. (Order Here)

I just taught sections 7502 and 7503 to my class, so this order is fairly timely. Judge Armen ordered the parties to show cause why the case shouldn’t be dismissed for lack of jurisdiction due to an untimely petition.

Now why the Petition was filed in the first instance, I can’t quite discern. The Notice of Determination, upon which the Petition was based, determined that the taxpayer was entitled to an installment agreement, and did not sustain the levy. The Notice was dated on September 12, 2016, but the mailing date was unclear. (This is where the eventual dispute lies).

A petition was received by the Court on October 31, 2016. Clearly, this date is beyond the 30-day period in section 6330(d) to petition from a Notice of Determination. However, the Court found that the mailing date of the petition was October 13, 2016, as noted on the envelope. The mail must have been particularly slow then. This creates a much closer call.

The twist that I can’t quite figure out is that it’s the Service here that’s arguing for the Petitioner’s case to be saved, rather than the Petitioner, who doesn’t respond. The Service argues that, although the Notice was issued on September 12, it wasn’t actually mailed until September 13—which would cause the October 13 petition to fall within the 30-day period. The Service argues that because the Notice arrived at the USPS on September 13, that’s the mailing date.

But Judge Armen digs a bit deeper, noting that the USPS facility the Service references is the “mid-processing and distribution center”, and that it arrived there at 1:55a.m. Piecing things together, Judge Armen surmises that the certified mail receipt, showing mailing on September 12, must mean that the Notice was accepted for mailing by the USPS on September 12, and then early the next morning, sent to the next stage in the mailing chain. That means the Notice was mailed on September 12, and that accordingly, the Petition was mailed 31 days after the determination.

Helpfully for Petitioner, it looks as if decision documents were executed in this case, as Judge Armen orders those to be nullified. Perhaps the Service and the Petitioner can come to an agreement administratively after all, as Judge Armen suggests.

More on the Successful Challenge to the Anti-inversion Regulations

Today Professor Bryan Camp shares with us some of his views on the government’s loss in Chamber of Commerce v IRS, the challenge to Treasury’s anti-inversion regs that I discussed here.The case has been generating significant comment. For example, Professor Andy Grewal on the Notice & Comment blog nicely summarized the outcome and gave some additional context.

Below Professor Camp discusses why the court’s approach may be out of sync with traditional views of the Anti-Injunction Act. As Bryan suggests, the AIA battle is likely to be one where the Treasury may be able to circle the wagons and fend off early challenges to its rulemaking procedures. Les

I know everyone is chomping at the bit to get to the cool APA stuff, but I think the Anti-Injunction Act is the big issue here.  Or at least should be.  If I read the decision correctly (a big if), this appears to be a suit by an Association and they get standing only because one of their members believed that the regulation under attack would deny them a tax benefit they believed they would get absent this section 7874 regulation on inversion.

The court took an extremely narrow view of the Anti-Injunction Act, seeming to say that it only applies when a particular taxpayer seeks to contest an already assessed tax.  The court believed that ANY attack on the procedural validity of ANY regulation is permissible under the anti-injunction act.   The court says “Here, Plaintiffs do not seek to restrain assessment or collection of a tax against or from them or one of their members.  Rather, Plaintiffs challenge the validity of the Rule so that a reasoned decision can be made about whether to engage in a potential future transaction that would subject them to taxation under the Rule.”

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That statement reflects a poor understanding of tax administration.  You could say that about ANY substantive tax reg.  Is the court really saying that ANY tax regulation can be attacked by any taxpayer whose taxes are potentially affected by the regulation???  That cuts against loads of precedent going at least as far back at Fleet Equipment Co. v. Simon, 76-2 U.S. Tax Cas. (CCH) P16,231 (D.D.C. 2976).  This is exactly the kind of suit that the Anti-Injunction Act is supposed to stop.

In contrast to substantive regs the courts have allowed suits to restrain implementation of regulations that go to tax administration, such as return preparer regulations or information reporting regulations.  Those cannot be attacked in a refund suit and they do not affect the self-reporting taxpayers of the taxpayers subject to them.  But the time and place to attack a substantive tax regulation is in a refund suit.  Gosh and golly.

If the TP here wanted to attack the regulation, it could do so in a refund suit if it takes a different position, gets audited, and wants to fight.  Sure, the regulation would be in place, but the TP would argue that the regulation gets zero deference because it was (allegedly) invalidly promulgated.  Without the regulation, the IRS would still take the same position on the return item but the court would be faced with the TP’s position and the IRS position, unsupported by the authority of a valid regulation.  Just like an assessment is not valid when not properly done.

 

Tax Court Reverses Course and Allows Taxpayers to Change Filing Status

Today we are privileged to have Tom Thomas as our guest blogger. Tom and I worked together for many years at Chief Counsel’s Office though we were never working together in the same office at the same time. When I retired, he was my boss’s, boss’s boss. Put another way, he was the head lawyer for all of the Chief Counsel attorneys in the SBSE stovepipe. These are the lawyers who primarily populate the field offices of Chief Counsel, who try the bulk of the Tax Court cases and who provide the collection advice to the IRS. Tom held that position for about a decade before he retired a couple of years ago. In retirement he found the pull to work in a low income tax clinic and he is now the Assistant Director of the Kansas City Tax Clinic. That clinic and the low income taxpayers of Kansas City are extremely lucky to have Tom providing assistance.

The case Tom discusses marks an important shift at the Tax Court in its approach to taxpayers who use the wrong filing status on their original return and want to shift to a correct and usually more favorable filing status in response to a notice of deficiency. As Tom discusses, the Court reaches its decision in a fully reviewed, precedential opinion. Although the issue has existed for decades and come before the Tax Court on several occasions, it had previously only addressed the issue in non-precedential memorandum opinions. The life of this issue in Tax Court opinions provides an interesting glimpse in how and when a case becomes precedential. Unfortunately, I cannot say that the glimpse makes the process any clearer to me.

The case also provides an important glimpse at what makes the Tax Court so wonderful. Judge Thornton provides a beautifully written law review like explanation of the history of the statute involving joint returns. He does this without the benefit of a much help from the petitioners who were pro se. I recently presented a paper to the Harvard faculty on access to judicial review in tax cases. I concluded in the paper that the best answer to the problem I perceived was to insure access to the Tax Court, and I drew a question from a professor on why I preferred to insure access to an Article I court rather than an Article III court. The Camara case is my answer. The Tax Court puts a lot of effort into finding the right answer for a pro se taxpayer on an issue that typically plagues low income taxpayers. While I do not always agree with the Tax Court, I am always impressed with the efforts it takes to insure equal justice for all taxpayers appearing before it. The opinion here is worth reading for the education it provides on filing status issues but also for the care it takes to find the answer with little help from the pro se taxpayers who appeared before it. Keith

In a fully reviewed opinion, a unanimous Tax Court held that petitioner Fansu Camara’s originally filed return, erroneously claiming “single” status, did not constitute a “separate return” under section 6013(b) and, thus, petitioner is not barred from filing a subsequent joint return. Camara v. Commissioner, 149 T.C. No. 13 (September 28, 2017). Section 6013(b)(2) bars a joint return for a married taxpayer who initially filed a separate return if either spouse received a notice of deficiency and files a petition with the Tax Court. Because Mr. Camara did not file a separate return within the meaning of section 6013(b)(2), he and his wife were entitled to file a joint return and enjoy joint tax rates and filing status.

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In holding for Mr. Camara, the Tax Court rejected its own precedent in several memorandum opinions, the most recent being Ibrahim v. Commissioner, T.C. Memo. 2014-8, rev’d and remanded, 788 F.3d 835 (8th Cir. 2015). In rejecting those memorandum opinions, Judge Thornton noted that the Tax Court has never addressed the issue in a reported or reviewed opinion. Further, Ibrahim was reversed by the Court of Appeals for the Eighth Circuit in 2015. Also, in Glaze v. United States, 641 F.2d 339 (5th Cir. Unit B Apr. 1981), aff’g 45 A.F.T.R2d (RIA) 80-740 (N.D. Ga. 1979), the Court of Appeals for the Fifth Circuit in 1981 held that a single return is not a “separate” return under section 6013(b). In light of these circuit court opinions, Judge Thornton concluded “that the importance of reaching the right result in this case outweighs the importance of following our precedent.”

This issue has been of interest to our clinics. Ibrahim was tried by a student attorney under the supervision of Professor Kathryn Sedo of the University of Minnesota Law School; the student also successful argued the case in the Eighth Circuit. Mr. Ibrahim had erroneously filed as head of household before filing a joint return with his spouse. If his HOH return was a separate return, as the IRS and the Tax Court found, he would have been precluded from claiming his earned income credit.

The Code and the regulations do not define “separate return” within the context of section 6013. The Tax Court found that the term means a return on which a married taxpayer has elected to file a married filing separate return, rather than a return on which a married taxpayer files a return with an incorrect filing status, that is, a single or head of household status. Judge Thornton reasoned that because section 6013(b)(1) refers to an “election,” an erroneous filing status impermissible under the Code cannot be an election. Further, the Tax Court’s exhaustive review of the legislative history reveals that the ability under the Code to switch from one allowable filing status to another was never intended to preclude one from correcting a return with an erroneous filing status.

Mr. Camara pursued his Tax Court case pro se. The case was submitted under Rule 122, that is, by stipulation without trial. The Tax Court ordered briefs, but Mr. Camara did not file one. It appears that the Tax Court was on the lookout for a vehicle to reconsider the issue.

Where do we go from here? Judge Thornton’s opinion in Camara is as well reasoned as it is taxpayer friendly. The next step is for IRS Chief Counsel’s office to decide whether to recommend that the Department of Justice appeal the opinion to the Sixth Circuit Court of Appeals or acquiesce in the Tax Court opinion. If the IRS acquiesces, it will issue an action on decision (AOD) and abandon its current postion. If it recommends an appeal, it will be up to the Department of Justice to decide whether to continue pursuing the issue. In either case, the Camara opinion is a big step forward for taxpayers.

 

District Court in Texas Strikes Down Treasury’s Anti-Inversion Regs

A district court in Texas has struck down Treasury’s anti-inversion regulations for violating the APA’s notice and comment requirements.  The opinion can be found here  and a brief Reuters story on the background and opinion can be found here

Given the subject, the opinion is major news. It is also a significant tax procedure case, addressing at least 6 issues, each which could take up a post or article.

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  • Standing-it concludes that the Chamber of Commerce and the Texas Association of Business had standing to bring the suit;
  • Anti-Injunction Act-it concludes that the APA claims (that the rules were arbitrary and capricious and issued without required notice and comment) were not barred by the AIA, finding that the suit was not for the purpose of restraining assessment and collection of tax;
  • Statutory Authority-it concludes that the issuance of rules on the subject was within Treasury’s statutory authority;
  • Arbitrary and Capricious- it concludes that the Treasury reg, as buttressed by the preamble’s explanation, demonstrated that the rule was not arbitrary and capricious;
  • Interpretive Rules-it concludes that the regulations are legislative and not interpretive, an important conclusion because interpretive rules are exempt from the APA notice and comment regime; and
  • No Notice and Comment Exception for Temporary Regulations-it concludes that Section 7805(e) does not authorize the issuance of binding temporary regulations without notice and comment in the absence of an explicit notice-and-comment exception found in the APA or the Code itself; given that the regs were issued in temporary form without notice and comment, the court concluded that the regs were invalid.

The last point is the main APA issue in the case. As a brief refresher, the APA generally provides that in the absence of an exception (like for good cause, not argued here, or if a rule is merely interpretive, argued here but a loser in this case and likely others involving Treasury regs), an agency must give the public notice and the right to comment as per 5 USC § 553.

Treasury has argued that Section 7805(e), which provides that temporary regulations must be accompanied by a notice of  proposed rule making and sunset after three years, is evidence of Congressional intent to exclude temporary regs from the main APA notice and comment regime. No controlling opinion had addressed that issue directly, though in Intermountain Insurance v Commissioner a concurring opinion by Tax Court Judges Holmes and Halpern makes the strong case that the 7805(e) was not sufficient to give Treasury a free pass on notice and comment.

Commentators, including persuasively Professor Kristin Hickman in her 2013 Vanderbilt law review article Unpacking the Force of Law, argue that Treasury’s practice of issuing temporary regulations without notice and comment likely violates the APA. (A 2012 National Tax Journal article by Professor Ellen Aprill also gives a careful look at APA and other procedural requirements accompanying Treasury rule making, including some great admin law context on Treasury temporary reg practice). Looking to other instances where Congress has exempted agencies from notice and comment, Professor Hickman notes that nontax legislation is more explicit in carving out the agency’s rule making from notice and comment, and that the Supreme Court has generally required there to be an explicit legislative pass on APA requirements. Moreover, Section 7805(e) is, in her (and my) view better seen as a provision that should be read in light of notice and comment requirements, rather than excepting the agency from it altogether.

I suspect that there will be an appeal here though this issue is a political hot potato. I believe the district court gave short shrift to the AIA issue (one that I have recently discussed in the updated IRS Practice and Procedure and an issue that Professor Daniel Hemel also discussed for us in a guest post on PT here) so there is a real possibility that an appellate court may not even reach the APA.  Yet this opinion should be a wake up call to the Treasury practice of issuing Temporary Regulations without a safer exemption from notice and comment. Where there is the demonstrated need to promulgate a rule without going through notice and comment, the APA provides a good cause exception. In this post-Mayo world, taxes, while vital, are not enough to justify an agency practice that seems out of sync with the rest of administrative law.

Tax Reform: Some Thoughts on Simplification and Passthrough Income

This past week saw the release of the outline of the next big push for tax reform. Titled a “Unified Framework For Fixing Our Broken Tax Code” the Trump Administration and the majority in the Senate Finance and House Ways and Means Committees discuss in 9 pages basic principles and  major changes, including corporate and individual rate reductions, a new top rate for some passthrough entities lower than the top individual rate, an expansion of the standard deduction, elimination of many personal deductions, and a shift to a territorial system of taxation.

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We try to stay in our lane of tax procedure and tax administration on this blog. I will state the obvious and note that tax reform is a heavy lift, and there is likely to be some serious legislative give and take over the next few months.

Just this past week the National Taxpayer Advocate blogged on her vision of tax reform, in Tax Reform: Hope Springs Eternal This Fall. The NTA, while noting many policy goals around tax reform, picks one issue for emphasis: the need for simplification. Stating that if she had to sum up everything she has learned in her tenure as NTA, it is that the “root of all evil in the tax system is the complexity of the Internal Revenue Code.”  To that end, the NTA discusses sources and effects of complexity and offers a number of suggestions that she has discussed in past reports as a way to meaningfully simplify the Code. Those include streamlining the Code’s myriad savings and education incentives and consolidating civil penalties and family status provisions. As someone who has thought about tax reform for a long time, the NTA makes sensible substantive suggestions that I hope Congress considers as it moves forward.

There have been many articles discussing complexity in the tax system: they often define differing levels of complexity; some suggest that simplification in a meaningful sense is often diametrically opposed to other goals we also care deeply about, like equity (itself a loaded term) and the need for certainty. (For a good example see a 2013 article in the Wyoming Law Review by Jeffrey Partlow). It is easy to see how other goals soon run smack into and conflict with the shared stated goal of simplifying the tax code.

Consider one of the Framework’s proposals: a lowering of the top rate on small and family owned business income from passthroughs to 25%, a rate lower than the top individual rate. Now it does not take a law professor to consider the possibility for mischief from such a proposal: people with labor income will be incentivized to funnel their work into a small business passthrough format to try to game the rate differential. We already see that to an extent in existing law (for much less at stake), as individuals use S Corp structures to try to avoid paying employment taxes on what might otherwise be compensation income.

The proposal addresses that mischief by noting that the framework “contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”

I have not deeply thought through the ways that legislation could achieve that anti-abuse goal, but I suspect that any measure will require greater IRS attention to this structure (already we have discussed in PT the heavy resource lift of IRS  trying to determine on audit whether S Corps are paying shareholders a reasonable compensation). The Center on Budget and Policy Priorities in a report that predates the current proposal discusses some of these challenges, including discussing how some estimate that over 30% of the cost of this change would come from high earners trying to shift income into this structure to game the system and the challenges IRS would likely face in trying to stem the abuse[Ed: note that the CBPP discussion looks at an earlier proposal with an even lower passthrough rate].

Conclusion

It is far too early in the tax reform season to know where things will land. I note that the Trump Administration’s “first principle” of tax reform is to “make the tax code simple, fair and easy to understand.” The passthrough proposal suggests the potential for significant administrative complexity. As IRS struggles with resources (like we learned this week as IRS has confirmed that it has suspended its ASFR program, at least temporarily), Congress should explicitly consider whether it will give the IRS the resources it needs to police a program that at first blush is one that is susceptible to abuse.

 

 

Applying the Federal Payment Levy Program to Veterans

The National Taxpayer Advocate has recently written a couple of blog posts on the application of the Federal Payment Levy Program (FPLP) to veterans which can be found here and here. The posts provide significant detail and insight into the application of the program to veterans and argue persuasively that the IRS has applied the program too broadly by failing to use filters that it has adopted for other similar FPLP programs. If you are not generally familiar with FPLP the first post provides a good deal of background into the program generally.

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In May, 2017, the Service expanded it application of the FPLP to include military retirement payments paid by the Defense Finance and Accounting Service. The decision to expand FPLP to these payments makes good sense. It stems from a recommendation in an audit by the Treasury Inspector General for Tax Administration (TIGTA). This seems to be one of those situations in which the auditors of the IRS did an excellent job of noticing a hole in the collection system, the IRS relatively quickly followed up to implement a program which will collect money from people receiving federal payments who have not fulfilled their tax obligations at little cost to the Treasury.

If the program is so good, why is the NTA complaining and why do I think her complaint is valid? The problem is not the program itself but the scope of the program. In implementing this program, the Service made a decision not to exclude from the levy program military retirees whose incomes fall below 250 percent of the federal poverty level. The decision to apply the FPLP to all military retirees means that money will be taken from the pensions of many retirees who are quite vulnerable. The second post goes into details about the numbers of military retirees whose income falls below 250% of poverty. When the IRS levies on a person whose income is that low, it almost always comes into the prohibition on levy when the taxpayer is in a hardship situation. A high percentage of the military retirees whose income falls below 250% of poverty will have allowable expenses that exceed their income. This qualifies them to have the IRS remove the levy. Many of the military retirees, like many of the recipients of Social Security payments, lack familiarity with IRC 6343. So, they will not raise it. For those that do raise the hardship issue, with or without knowing the statutory basis, the IRS will expend its precious resources undoing the levy and probably cost itself more in that process than it obtains from several others. For these reasons the IRS has chosen not to levy on similarly situated individuals in other settings.

The Service developed a filter to the FPLP which it uses to screen out low income taxpayers receiving Social Security old age or disability benefits and Railroad Retirement Board benefits. I applaud the use of this filter because applying the FPLP to the vast majority of taxpayers with income under 250% of poverty would implicate the hardship restriction on levy imposed by IRC 6343. It does not make good business sense or good policy to levy on these individuals with a high likelihood that hardship exists and require them to raise the hardship exception to levy.

For the same reasons that it makes good business sense and policy not to impose the FPLP on recipients of federal payments under the Social Security or Railroad Retirement Board, it also makes sense to extend the application of the exclusion to military retirement payments made to military retirees whose income is less than 250% of poverty. Military retirees, having served our country in such an important way, do not deserve to be discriminated against in this way. They have the same financial constraints as non-military retirees whose income is less than 250% of poverty. We should not honor their service by making it harder for them to receive the hardship relief granted by the Internal Revenue Code. The same presumptions that they would qualify for such relief should apply to this group as well.

The expansion of the FPLP to military retirement payments followed an internal audit criticizing the Service for failing to capture these payments under the FPLP. The internal audit, however, did not suggest that the same exclusions offered to individuals in the lowest economic strata of our society should be ignored when those individuals were recipients of a military pension based on their long and honorable service to the country. Many military retirees fall into the low income category and should receive the same treatment with regard to the low income filter as other recipients of federal benefits.

The NTA has marshalled the data showing that the levy will fall hard on the low income military retirees just as it falls hard on other persons receiving federal payments. The IRS should reconsider its decision not to apply the filter. The removal of the filter does not give the group with less than 250% of poverty in earnings a free pass and the decision is not a static decision that applies for the 10 year statute of limitations. If the IRS has information about the military retiree’s assets or other sources of support suggesting that imposition of the levy would not produce a hardship, nothing prevents the IRS from imposing FPLP or other collection remedies at any time.