Series of Errors With Installment Agreement and Collection Actions Leads to Taxpayer Victory on Collection Statute of Limitation

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With CDP, taxpayers have a limited avenue to make the IRS face consequences for errors it makes in the assessment and collection process. In RRA 98 Congress amended Section 6502(a) and limited the circumstances when taxpayers can extend the 10-year statute of limitations (SOL) on collections. Grauer v Commissioner illustrates how taxpayers can walk away from an agreed and assessed liability when the IRS is sloppy and fails to demonstrate that a taxpayer has validly extended the statute of limitations on collections in light of Section 6502(a).

The mistakes led in Grauer to the taxpayer escaping from a 2000 assessment of over $57,000 in taxes, penalties and interest. Because this case is so fact-specific, below I repeat many of the opinion’s findings, with some paraphrasing and omitted references to the record.

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Facts

  1. On April 6, 2000, petitioner Grauer filed his 1998 Federal income tax return. He reported $103,495 of taxable income, a $40,637 tax liability, and a $38,577 balance due.
  2. IRS, on May 8, 2000, assessed a $57,698 tax liability against petitioner.
  3. IRS’s account transcript relating to 1998 indicates that on July 13, 2001, it received a signed return receipt relating to a notice of intent to levy.
  4. On October 2, 2001, the parties executed Form 900, Tax Collection Waiver, on which the 10-year period of limitation for collection was extended until “May 8, 20015” (emphasis added).
  5. IRS’s account transcript relating to 1998 further indicates that on October 3, 2001, petitioner Grauer entered into an installment agreement;
  6. On February 20, 2006, the installment agreement was terminated;
  7. From 2006 to 2012 respondent issued petitioner balance due notices; and
  8. IRS, on February 11, 2013, issued petitioner a notice of intent to levy relating to 1998.

The Key Mistakes in the Case

IRS transcript shows an earlier CDP notice from a notice of intent to levy though IRS says transcript is wrong

The opinion notes that in 2001 the transcript indicated Grauer received a notice of intent to levy. Why is that important? The right to a CDP hearing  only attaches to the first notice of intent to levy. IRS told the court that its transcript on that point was wrong. The court agreed, or at least in the absence of direct evidence to the contrary, felt that the issue was unclear enough to allow the case to proceed (that is a jurisdictional issue that the IRS could not waive):

[N]o direct evidence of such a notice was produced by either party…we agree with respondent that his account transcript is inaccurate and that we have jurisdiction

Grauer claimed he did not enter into an installment agreement; this time IRS said transcript was right

Grauer said he did not enter into an installment agreement. The IRS said that he did, this time using the transcript to back its assertion. This was a key point, as in amending 6502(a) Congress limited situations to when taxpayers can extend the SOL on collection only in cases of installment agreements or levy releases after the 10-year period expires. The court here concluded that in making his affirmative defense Grauer made a prima facie case that the 2013 notice of intent to levy was issued beyond the 10-year period from assessment. At that point the IRS had the burden of producing an exception to the 10-year period, and that is where the IRS came up short because it failed to produce the installment agreement itself:

Respondent produced a waiver relating to 1998, on which the parties extended the 10-year period of limitation for collection. He did not, however, produce an installment agreement that was entered into in connection with the waiver. See sec. 6502(a)(2)(A). In fact, respondent’s only evidence that such an agreement exists is an account transcript that he concedes is inaccurate and an indecipherable and unconvincingly explained collection of numerical codes. Accordingly, we find that an installment agreement was not agreed to in connection with the waiver, and the 10-year period of limitation for collection has expired. (emphasis added).

Parting Thoughts

While the IRS was able to serve up an extension (albeit sloppily drafted with an end date in 20015), the absence of the installment agreement itself in conjunction with IRS both disavowing and relying on transcripts was what gave the taxpayer the win. While some of the IRS abuses of the late 20th century that led to RRA 98 were more theater than substance, there were many problems surrounding the IRS practice of squeezing extensions out of taxpayers entering into installment agreements. Moreover, since then, there appears to be less than careful practice when it comes to documenting entering or terminating those agreements. To that end, Keith has a good discussion of installment agreements, including the history that led to 6502(a) and often times informality at IRS when it comes to them in a post discussing the Antioco case a couple of years ago. If Grauer is representative of IRS practice, practitioners who work with taxpayers beyond the normal 10-year period on collection should be careful to put the IRS to the test to establish that it has dotted its I’s and crossed its T’s, especially when it comes to extensions surrounding installment agreements.

What about the importance of the court not allowing the IRS to rely on the transcripts? Normally, the IRS transcript serves as a business record.  That is critical because the event here occurred almost two decades ago and the IRS will have great difficulty keeping paper documents of the transaction for that long.

Because the other aspects of this business record contained errors, the transcript here did not receive the deference that the Tax Court and other courts normally give to the IRS transcript as a business record.  From the IRS’s perspective, it is problematic if it cannot rely on transcripts in court.  Maybe this is an isolated incident but the IRS should treat this as a wake up call.  The IRS must maintain high quality in its transcripts or it will start losing cases like this in a wholesale manner.

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Charlotte E says:

    This was super helpful. Thank you. I have a case right now with a similar issue. Transcript is showing an IA in conjunction with waiver but taxpayers do not remember ever signing a waiver and IRS has never been able to produce one. My concern is that in my case there was a prior Ntc of intent to levy. However SOL was not an issue back when first levy notice was issued. CLients also have BK and innocent spouse filings but I think the IRS is wrong in its timeline by at least 6 months.

    • Anonymous says:

      The Internal Revenue Manual states IRS keeps the original Form 900 in the case file for 3 years beyond the CSED. See IRM 5.4.10. It doesn’t always happen, but my client was lucky enough to wait out the extended CSED without aggressive collection action being taken by IRS.

  2. Norman Diamond says:

    I think it was on this site that another article discussed a taxpayer with two cases where the IRS produced differing administrative records.

    Recently I figured out that in my multiple cases IRS transcripts (with those “indecipherable and unconvincingly explained collection of numerical codes”) differ from each other.

    I bet this isn’t rare.

    Meanwhile I’m wondering how a return filed April 6, 2000 could get an assessment on May 8, 2000. I guess there was no notice of deficency or CP2000 or whatever, but how did the IRS get to make an assessment so quickly?

  3. Norman Diamond says:

    If the IRS bungled so badly then the ruling wasn’t really wrong.

    The IRS already admitted that some entries in the transcript were wrong. Mr. Grauer alleged that more entries were wrong, and even though the court didn’t believe Mr. Grauer, the IRS didn’t provide evidence to support that disbelief.

    “Did the IRS terminate an installment agreement that never existed? No, I’d bet that same IRS account transcript also shows (say) $500 credits to Mr. Grauer’s 1998 tax account for at least 48 straight months. Coincidence? Or installment agreement?”

    OK, I’m not the only person betting. I’d bet that the transcript didn’t show monthly payments. But it doesn’t matter. I’ve figured out enough about IRS transcripts by now that even if I lose this bet, i.e. even if the transcript shows monthly payments, they might be more lies.

    TIGTA reports of crimes committed by IRS employees aren’t all about identity thieves. TIGTA doesn’t always describe what kinds of illegal accesses were performed on IRS records. Some are corrupt alterations.

  4. Norman Diamond says:

    I made a mistake in this statement: ” Mr. Grauer alleged that more entries were wrong, and even though the court didn’t believe Mr. Grauer, the IRS didn’t provide evidence to support that disbelief.”

    The court DID believe Mr. Grauer. It was the IRS that didn’t believe him, but the IRS didn’t provide evidence to support that disbelief.

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