Designated Orders, 10/9 – 10/13

This week’s designated orders were written by Caleb Smith who directs the tax clinic at the University of Minnesota. Today the lessons from the orders concern the importance of the tax return itself. Keith

There were only four designated orders last week, three of which came from Judge Gustafson in Collection Due Process cases, and one from Judge Buch in a deficiency action. I won’t elaborate much on the Buch order, as it deals largely with tax protestor arguments. For those who remain interested, it does offer a look into “current trends” of tax protesting arguments (now apparently including Administrative Procedure Act claims). If nothing else, the sixth footnote of the order may also bring some levity to your day. The order can be found here.

The two Gustafson orders that I will focus on highlight, once more, the important lesson of getting your tax return right the first time. They also provide a look at what sorts of errors the IRS filters can and cannot easily pick up.

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Perils of Our Self-Reporting Tax System

Taylor v. C.I.R., Dk # 19243 -16L (order here)

The basics of Taylor are simple: taxpayer reported roughly $120,000 in tax liability with only about $8000 in withholding. No further payments were made, so the IRS began collection procedures. The gulf between the self-reported tax liability and withholding credits certainly catches the eye, and Judge Gustafson elucidates exactly what is at play. This is, quite frankly, a tax return that the taxpayer mangled almost beyond recognition, but not quite enough to keep from reporting a massive amount due.

Judge Gustafson does his best to get into both the mind of the taxpayer at the time of preparation, and what the real transactions seem to be. This is not an easy task. The basics are that the taxpayer prepared Form 1099-A (generally used for abandoned property transactions) listing himself as the lender and USAA Federal Savings Bank as the borrower on a note worth $358,031 with a balance of $190,403 remaining outstanding. If this is mistakenly based off of an actual transaction is anyone’s guess. How the taxpayer reported this (self-prepared) 1099-A on his tax return was to include the $358,031 as “other income,” thus generating a substantial liability. In a later, amended return the taxpayer continued to include the $358,031 as income, but also included the outstanding balance of $190,403 as a withholding credit. It appears that on the original return Mr. Taylor may have forgotten to include that withholding credit: in any event, the IRS did not allow it.

Who knows what motivated the taxpayer to report the transaction as he did, or if there even was a real transaction he was trying to faithfully report. It is hard to doubt that whatever transpired, it was reported incorrectly and very likely resulted in an incorrectly inflated tax liability. In any event, it is noteworthy that, but-for the case law holding that self-reported tax does not constitute “a prior opportunity to dispute” the liability under IRC § 6330(c)(2)(B), there would be effectively NO chance for judicial review when trying to fix these errors. Obviously there will be no notice of deficiency on self-reported tax, and paying the erroneous tax to sue for refund is almost certainly out of the question in most of these instances. I trust that 99% of the time working administratively with the IRS will resolve the problem when it is a clear typo. The bigger issue, to me, is the amount of time it may take for the IRS to resolve the problem (and the intervening events that can take place) when there is no judicial pressure. In the above case it was the taxpayer’s own fault for not meaningfully participating in the CDP hearing or the ensuing litigation to fix what was a clear mistake: the CDP procedures otherwise did what they are supposed to do.

Parikh v. C.I.R., Dk # 19875-16L (order here)

So we have seen that an error on income leading to an inflated, self-reported tax can be hard to unwind since it leads to immediate assessment. What about a typo on a social security number?

In Parikh, the taxpayer self-reported tax liabilities for 2009 – 2011. The IRS then increased those liabilities after disallowing a dependent exemption for each year, presumably after sending a notice to the taxpayer. The reason for the IRS disallowing the exemption is critically important: it isn’t that the IRS was auditing the return and concluding that the taxpayer didn’t meet the IRC § 152 tests. Rather, it was because the dependents Social Security number was incorrect. The first rationale would require a notice of deficiency; the latter may be a “math or clerical error” under IRC 6213(b), and accordingly does not require an NOD unless the taxpayer responds to the notice requesting abatement. If the taxpayer does not respond (as appears to be the case here), the IRS can assess the additional tax.

This is important because the lack of NOD issuance (may) open the door for the taxpayer to argue the underlying liability at a later CDP hearing under IRC § 6330(c)(2)(B) –the same provision that could have assisted Mr. Taylor in the first case had he properly engaged the process. Mr. Parikh, it seems, was slightly more involved and thus gets a slightly better outcome: he provided information for correcting the SSN of the dependent (that the IRS thereafter allowed, thus reducing his liability) but he did not provide financial information or other delinquent tax returns (thus tying the hands of the IRS for providing any variety of collection alternative).

If there is one lesson to be gleaned from the above orders, it’s that if you have a typo on your tax return make sure that it isn’t on an item of income. More specifically, make sure that it doesn’t inflate your actual income by an order of magnitude (say, by adding a couple extra zeros to your wages on line 7). While that isn’t exactly what happened in Taylor, it is the power of the of IRC § 6201(a)(1) that moves the problem forward. The IRS will take you at your word when you say you have a lot of income, even if third party sources don’t back up that claim. With an SSN typo you at least get a math error notice prior to assessment.

Short of a new, “friendly” version of the common CP 2000 notice (i.e. “Our computers think you may have over-reported income: can you explain the discrepancy between your return and our 3rd party sources?”) it is difficult to fault the IRS for treating the two typos differently. Over-reporting gross income is not a “math error,” and it is very difficult for the IRS to reasonably guess that the taxpayer DIDN’T have that income short of further examination. Further, if you are preparing your tax return with most commercial software there will be about a million blinking red lights before you file warning that you owe significant money… usually that is enough to have people take a second look before clicking “submit.” But if you file by PAPER and do not calculate the tax due there is no such warning. In fact, in some instances as a courtesy the IRS will figure the tax for you and either send a bill or refund thereafter (See Page 41, 2016 Form 1040 Instructions and Page 208, IRS Publication 17). It is unclear to me in the Taylor case whether the taxpayer listed an amount due (even by paper, handwriting a huge liability is a warning of its own), or whether the IRS “fixed” that missing information later. By whatever means the point remains: a self-reported liability is hard to erase.

Correct Liability, Incorrect Argument

Karim v. C.I.R., Dk # 17407-15L (order here)

The final Gustafson order also involves self-assessed liabilities, but with a twist: this time, it appears, the liability was correctly reported. Instead the case revolves around what remedy the taxpayer wants: either a double-check that he has had payments credited to the liability, or removal of the lien.

It is increasingly easy to be sympathetic to the taxpayer’s claim that the IRS has misapplied payments that should be credited to an outstanding liability (see posting here). In this case, the taxpayer didn’t really pursue the argument that there had been misapplied payments: the cursory IRS response “our records show” thus carried the day.

This case also provides an example of the difference in remedies when one is contesting a lien rather than a levy. Here the taxpayer was placed in CNC (usually, a good outcome for a levy action), but did not make a persuasive argument why the lien should be withdrawn.

Lastly, some may find the order interesting for the brief analysis of whether the administrative CDP request was on time. Here, the IRS apparently put a date on the Notice of Intent to Levy that did not match the reality of when the letter was actually sent: see previous orders calling into question the veracity of IRS notice dates here).

 

Designated Orders, 9/11 – 9/15

This week’s designated orders were written by Caleb Smith who directs the tax clinic at the University of Minnesota. With respect to the first order, you might think of other installment agreement problems we have highlighted in prior posts such as the difficulty of entering into an installment agreement, the difficulty of convincing the IRS to accept an installment agreement and the problems with loading an installment agreement. Keith

There were seven designated orders from the Tax Court from 9/11 – 9/15. Here is a look at the highlights:

Just Take My Money, Already”: Lingering Problems of Failing to File

Lewis v. C.I.R., Dk # 20410-16L (order here)

One would think that getting into an installment agreement (IA) would be an extremely easy route to take for resolving most collection controversies. At least, if the IA terms are such that the debt will be full paid within a fairly short period of time, it should be all-but-automatic. See IRC § 6159(c). In my experience (and apparently the experience of many others), that isn’t always the case. These administrative problems, as well as the frequency that taxpayers enter into IAs they can’t afford (see TAS blog here and report here), are problems that should be addressed by the IRS.

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In other circumstances, however, the IRS is well within its right to be skeptical (or at least more demanding) of taxpayers requesting an IA. Though the publicly available record is sparse, it is likely that the above designated order involves just such a case.

The facts presented in the designated order are simple. Through a Collection Due Process hearing, taxpayer requests an IA to settle his debts. The IRS, in turn, requires that taxpayer submit his missing tax returns and Form 433-A to confirm his ability to pay. Taxpayer provides neither. IRS denies the IA. Taxpayer petitions Tax Court, and Judge Gustafson has no difficulty in finding that the IRS did not abuse its discretion. About as routine as these things go, it would seem.

I don’t have access to, and Judge Gustafson does not discuss, any proposed IA terms that may have come about over the CDP process. It actually appears that the pro se taxpayer was waiting for the IRS to propose the terms of a monthly payment plan (“I am ready to start a monthly payment plan as soon as IRS can offer me such.” And “[…] all I have requested from the IRS is to establish a payment plan with me to pay the tax debt in question.”) Although the taxpayer frequently gives the appearance of wanting to pay the debt, it is not an abuse of discretion of the IRS to suggest levy under the circumstances. The taxpayer simply hasn’t given the IRS anything to work with.

Perhaps the IRS would have proposed IA terms if the taxpayer had just submitted Form 433A (the taxpayer would not because he found the form “invasive.”) To me, the real problem is that the taxpayer is a non-filer. If not for that fact, the taxpayer could (assuming his debt is less than $50K) apply for a payment plan online on his own without financial disclosures. Of course, this supposes that the payment plan system would work as it is advertised to, which the beginning paragraph of this article casts doubt on…

The takeaway point is that failing to file a tax return seriously ties your hands when working with the IRS (or asking the Court to review an IRS action. Another unsurprising order promptly denying relief for another non-filer in a CDP case can be found here. Even when the unfiled returns seem to be for years that shouldn’t matter, if you want the IRS to play ball on a collection issue compliance is key.

More Consequences of Failing to Take Action

Calica v. C.I.R., Dk. # 304-17 (order here)

As far as litigation goes, the Tax Court is one of the less “adversarial” venues a lawyer can find themselves in. From the requirement of attempting to use informal discovery, to the focus on stipulating as many facts as possible, the Tax Court is essentially set up to encourage the parties to work things out amongst themselves as much as possible before getting the court involved.

When one fails to work with the other party, however, the court does not take kindly to it. In Calica, the IRS “invited” the petitioner to conferences on two separate occasions to exchange documents. Both times the petitioner was a no-show. Because the IRS had earnestly tried and exhausted its attempts to get information through informal means, it was forced to rely on formal discovery with a motion to compel documents from the petitioner. This order grants that motion, and gives a warning in bold to the petitioner at the order’s end.

The order makes clear that a petitioner can’t just ignore the IRS, then hope to show up at trial and make their case. Judge Jacobs warns that if petitioner doesn’t respond the court may (1) treat the SNOD as accurate to the extent the IRS requested documents pertain to the items on the SNOD, and (2) strike the assignments of errors the petition alleges. Mathematically, “IRS SNOD is accurate + your assignments of error are stricken = complete IRS win.” If this was a particularly bad actor, the Court could even go further, treating failure to comply as contempt of court. It is highly doubtful the Tax Court would do so if the petitioner’s sin was merely failure to respond. Nonetheless, if petitioner has a substantive case, she will have to begin to make it now.

Loose Ends

The final three orders of the week will not be gone into detail. For those wanting to remind themselves of the horrors of TEFRA, an order from Judge Holmes briefly outlining how the Court treats partnership and non-partnership items in a deficiency proceeding can be found here. The order is also notable for its word-of-the-day quality, characterizing the usual TEFRA proceedings as “tohubohu.” The other two orders were notice of a case being calendared (here) and a whistleblower case set for trial largely to determine the administrative record (here).

Designated Orders Post: Week of 6/19 – 6/23

There were four designated orders this week, but only two that will be discussed in any detail. For the incurably curious, the two designated orders that will not be discussed can be found here (order to respond to a motion for summary judgment) and here (order granting IRS motion for summary judgment). The two orders that will be focused on concern Collection Due Process (CDP) hearings, and somewhat bizarre administrative moves by the IRS.

Penny-Pinching or Oversight? IRS Failure to Send Letter by Certified Mail Dooms Summary Judgment Motion

Dkt. No. 15248-16L, Security Management and Integration Company v. C.I.R. (order here)

The IRS has been trying to get this case dismissed for lack of jurisdiction since August, 2016 –filling supplemental motions in January and March of this year. Alas, all of those hours spent appear to be for naught, largely on the basis of the IRS’s failure to send a critical letter by certified mail. Whether this is the embodiment of the adage “penny-wise, pound-foolish” or just a simple mistake with redounding consequences is not clear from the available documents, and left to the reader’s biases.

As is often the case, the IRS begins with a challenge to Tax Court jurisdiction due on timeliness grounds. There are essentially two “timeliness hurdles” for getting into tax court on a Collection Due Process (CDP) case. The first hurdle is requesting the administrative CDP hearing within 30 days of the notice of intent to levy or notice of federal tax lien (IRC 6330(a)(3)). The second hurdle is filing a petition with the tax court 30 days after receiving a “notice of determination” from the IRS following that hearing (IRC 6330(d)). The IRS tries to argue both of these hurdles apply… and likely could have won on the second, if not for their paltry record-keeping.

As to the first hurdle, the IRS proclaims that the taxpayer cannot get into court because they didn’t get a notice of determination (which only issues from a timely CDP request). The Tax Court makes short work of this argument. Under Craig (discussed previously here and here) if the taxpayer timely requested a CDP hearing (as the Court so finds) the “decision letter” is a notice of determination, despite whatever the IRS may call it.

First hurdle: cleared. As we’ll see, it may well be a hurdle that ends up biting the IRS.

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But at first blush the second hurdle appears daunting for the tax payer. The IRS “decision letter” was dated April 6, 2016. The petition to the Tax Court? Not filed until July 5, 2016… considerably more than 30 days.

The Court finds that at least one letter was sent to the correct address (hedging their bets, the IRS sent multiple), so it would seem extremely unlikely that the taxpayer could argue they timely filed a petition in response. Except that this is a summary judgment motion to dismiss for lack of jurisdiction, and the IRS record is not nearly what it needs to be.

In fact, all the IRS can rely on to show that the date the decision letter was sent is the date printed on the letter (apparently not the postmark). Not infrequently, I have had cases where the date printed on an IRS correspondence is questionable, and would appear to have been dated well before it was actually placed in the mail. It isn’t particularly difficult to imagine a letter being prepared (and dated) at one time, and then placed in a queue only to be mailed when some later event takes place. This happens all the time when a letter is prepared but needs approval before being sent. Such circumstances are ones that Judge Carluzzo can likely envision, yielding his reluctance “to find that [the notice of determination] was mailed as dated.” Without the date on the notice holding any water, the argument devolves into “he-said-she-said” between the IRS and the taxpayer. That isn’t enough to win on summary judgment, and it isn’t enough for the IRS to show that the petition was not timely.

If only the IRS had some other evidence to show the date the notice was mailed… like, say, a certified mailing list. And this is where we return to the initial problem: the IRS (apparently mistaken) belief that the first timeliness hurdle was never met. For a timely CDP request, the IRS will generally send a notice of determination by certified mail. See Treas. Reg. 301.6330-1(e)(3) Q&A-E8. I was able to find no such regulation or internal policy for the IRS with regards to decision letters. Because the IRS didn’t think the CDP request was timely, they may not have thought that there was a reason to care much about proving when the decision letter was sent: the taxpayer couldn’t get into court no matter how quickly they respond to a decision letter that fails the first timeliness hurdle. Internally, when the IRS believes it is conducting an “equivalent hearing” it is supposed to investigate and make a “separate timeliness determination” about the request. See IRM 8.22.4.3 and 8.22.5.9. It is obvious, however, that this safeguard isn’t foolproof. The IRS may do well to better recognize these shortcomings (especially that the notice dates on many of its letters are not that convincing) and adjust its procedures accordingly.

I have seen some lawyers (and students) that appear a bit trigger happy with certified mailing, desiring a paper trail where proof of a mailing date is somewhat irrelevant and the certification proves nothing of the contents of the parcel. I would say reasonable minds can differ on the virtue of certified mailing in many cases. But where statutory deadlines are (or may be) at play, it is unthinkable that one would forego a certified mailing paper-trail. This is, if nothing else, a reminder to the IRS (and practitioners) of the perils that may follow such oversight.

 

“Trust Us, He Owes” Not Good Enough for IRS Summary Judgment Motion in CDP

Dkt. No. 27754-15L Walker v. C.I.R. (order here)

In the previous order, we saw the problems of a paper trail the IRS created for itself by failing to use certified mail. Here, that record-keeping problem resurfaces: in this case, by an administrative record so paltry that -by the IRS own admission- it “remain[s] unclear” why additional tax was assessed.

This order deals with an IRS motion for summary judgment against a pro se taxpayer that appears to want to argue (1) I don’t owe the tax, and (2) I filed some of those tax returns the IRS is saying that I didn’t. Argument (2) is fairly factual, and not a great candidate for summary judgment where the IRS records aren’t up to par. In this case, they aren’t exactly sterling, or at least they are suspect enough to allow for a genuine issue of law or fact (and thus, not suitable for summary judgment). Issue (1) is usually a good candidate for summary judgment, since the ability of a taxpayer to argue the merits of “I don’t owe the tax” is frequently unavailing in a CDP hearing. If the taxpayer previously had an opportunity to so argue the tax or received an SNOD, summary judgment will (likely) ensue. But what if you are not arguing the merits of the tax, so much as the fact that the IRS records are so bad they can’t properly show that you should owe it? When a taxpayer says “I don’t owe the tax,” can that be construed as arguing the merits of the tax (forbidden), or the procedure of the assessment (allowed)? This order may slightly blur those lines.

I think this order can stand for two different takeaways, depending on your preferred viewpoint. The first focuses on statutory requirements of a CDP hearing. The IRS is required to review that “the requirements of applicable law or administrative procedure have been met.” IRC 6330(c)(1). Under this viewpoint, focused mostly on tax procedure, some indicia of why the IRS assessed the tax is a component of verifying that applicable law was followed. This order simply clarifies what goes into the statutory requirement of IRC 6330.

The second potential takeaway is that general APA considerations and case law are creeping more and more into the tax arena, and are particularly amenable to CDP hearings. This is a slight twist on the notion that the IRS simply failed in its statutory obligations. Consider the question this way: if, on remand, IRS Appeals sufficiently verified that the IRS followed the proper deficiency procedures in assessing the tax (issued an SNOD, etc.) would that be enough? Or, would the IRS need to look at the substance of the SNOD (beyond such things as proper address) as well? If the latter is required (and in this case IRS Appeals is specifically ordered to identify “the reasons for the assessment”) it seems to implicate the sort of judicial review of deficiency notices in CDP cases that the Tax Court has balked at in deficiency cases (most notably, in QinetiQ (discussed here and here among many other places)). At the collection stage, and even assuming the deficiency procedures were properly followed, the IRS can’t get by with a “trust us, they should owe” assessment. One imagines that there must be a record somewhere in the bowels of the IRS explaining why they believe the taxpayer owes an additional $24,562. Special Trial Judge Daniel Guy Jr. rightly requires the IRS to make such a showing.

Of course, CDP is a relatively new aspect of the tax code and role of judicial review within it is still being hammered out. On remand, is all that IRS Appeals required to do is show that there was some rationale for the assessment in the administrative record (“we thought he had more taxable income”)? Or could that rationale thereafter be challenged for being arbitrary and capricious (an abuse of discretion)? Questions to ponder this holiday weekend…

Top of the Order – Tax Court Designated Orders

Top of the Order is a round-up of the Tax Court’s “designated orders” from the prior week. This feature is based on the premise that if a Tax Court Judge thinks something is important, you should probably pay attention to it. We generally won’t try to play the role of pop-psychologist in determining why the particular judge may have thought the order was important enough to “designate” it, but we will give a synopsis of the points and lessons that stood out to us. For those looking to gaze deeper into the crystal ball, links to each order is provided.

This post begins a new feature which will be written in rotation by four relatively new attorneys working in the low income taxpayer area:  Samatha Galvin of Denver University Law School; Caleb Smith; William Schmidt of Kansas Legal Services; and Patrick Thomas of Notre Dame Law School.  Today’s post is written by Caleb Smith.  Caleb is currently the clinic fellow in the Federal Tax Clinic at the Legal Services Center of Harvard Law School.  He will soon be leaving Harvard to become the director of the tax clinic at the University of Minnesota.  Caleb has written guest posts before and we welcome him back to kick off this new feature of PT.  We invite reader feedback on this feature and other possible features for the site.  Keith

Designated Orders: 4/24/2017 – 4/28/2017

S-Case Bumped Up to the Big Leagues: Precedential Decision Forthcoming

Docket # 015944-16, Skaggs v. C.I.R. (Order Here)

The decision to try a case as an “S” (or “Small”) case is sometimes a tactical choice. The relaxed evidentiary rules of an S-case mean that a client with a good story may find fewer hurdles or restrictions in presenting that story. See bottom paragraphs of Procedurally Taxing Post (Here). Also, because an S-Case cannot be appealed there may be a tactical opportunity for a quick win if the Tax Court has previously ruled on the issue but the circuit court that would have jurisdiction on appeal has not. Usually (at least in my experience) the taxpayer doesn’t much care that the S designation also means the decision cannot serve as precedent.

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Judges, however, do care about precedent. Thus we have the designated order from Judge Buch removing the S-designation because the case “presents an issue of first impression.” You’ll have to hold your breath on what that novel issue is. (Actually, you don’t. If you’re short of breath you can read the decision here. Spoiler: it involves what qualifies as “income received while an inmate” for purposes of the Earned Income Credit). But the designated order on its own is worth a review for those that routinely work with cases that qualify for S-treatment (Rules found here).

A couple take-away points:

(1) You can request the S-designation be removed (or changed from regular to S) really late in the process. In fact, the rules say that the request can be made “at any time after the petition is filed and before the trial commences.” This doesn’t mean, however, that the motion will be granted that late in the game. (Keith has a story of making the request to the judge when the case was called for trial and the judge asked if there were any preliminary matters on a case he picked up earlier in the day at calendar call.  He sought to change the case to S status on the basis that it was prior to trial. As may be expected, the motion was not granted.) Which leads to the second point:

(2) The IRS may oppose the S-designation, and the taxpayer may need to show why it should be a small case. Anecdotally, I have witnessed IRS recalcitrance on S-case designation at least once in the past where it was not entirely clear to me why they cared. The order provides a helpful review of what factors are in play when weighing the decision to remove an S-case designation by citing to the 1978 Congressional Conference report on point. Addressing these factors should help a taxpayer respond to a motion either in favor of S-case designation or removal of it.

Lawyer Behaving Badly

Docket # 005880-16 L, Baity v. C.I.R. (Order Here)

For those of you that routinely monitor designated orders, this one may seem like deja-vu. And that’s because it basically is. This is merely the latest in a line of designated orders pertaining to one lawyer trying seven different cases, all of which will be lost at the summary judgment stage.

In fact, the taxpayers already HAVE lost, but the Court is simply holding back from entering the decision so that the cases remain on calendar. Why? Solely so that the lawyer can show up and explain why there should not be sanctions and a referral to the ethics committee. Ouch.

At absolute best, it appears that the lawyer has been completely invisible as an advocate in the case, failing to respond to the IRS motion for summary judgment and Tax Court order that he so respond. The court cannot determine if counsel is “unaware of or is ignoring the Court’s orders.” At worst, the Court suggests that the lawyer may have knowingly brought merit-less claims using CDP judicial review inappropriately to evade collection, giving rise to sanctions under IRC § 6673.

A couple of observations:

  • Attorneys, remember FRCP Rule 11 when deciding to take a case and prepare a petition… And relatedly:
  • Attorneys: remember the difficulties of getting out of a case when you’ve entered an appearance. When you don’t yet have all the facts and a petition deadline is looming, the better option can be limited representation through Form 2848, written about here. But, no matter what you do, at the very least RESPOND to the Tax Court (and show up).

When the Court Bolds Instructions, You Should Probably Pay Attention to Them

Docket # 021815-15, Kanofsky v. C.I.R. (Order Here)

An uncharitable recap of this order would be as follows: Court orders a pro se petitioner to respond to the IRS’s motion for summary judgment. Pro se petitioner responds, but did not follow the instructions of the Court’s order close enough. Court grants motion for summary judgment.

Harsh result?

Not quite. In fact, there appears to be quite a lot of hand-holding from the Court leading up to this outcome. First, the Court denies the IRS motion for summary judgment because the motion would not be easy for the petitioner to respond to. (More on that below). Then, when the IRS makes a second, clearer motion, the Court specifically bolds what and how it wants the petitioner to respond. The Court even includes a Q&A printout on what a motion for summary judgment is and how to respond to it. The taxpayer appears to be familiar with (or at least make frequent use of) the court. (An earlier order from the court shows that the IRS has had previous run-ins with the taxpayer, and the taxpayer also appears to refer to himself as an accomplished whistleblower.) All things considered, this appears to be an instance of the Court doing what it can to help a pro se taxpayer help themselves.

If anything a take away from this case is a parable on “the value of specificity.” Number and separate your assertions so that the Court (and the opposing party) can respond to the discrete issues.

The first substantive order of the court was a denial of the IRS motion for summary judgment, without even directing the petitioner to respond. Why? Because the IRS motion was sloppily drafted: misusing terms of art, and bringing up facts that were irrelevant to the issues at hand. All the Court wants is a motion for summary judgment with assertions that can be responded to, by number, with reason and evidence for the disagreement. The original IRS motion for summary judgment is not congenial to such a response, so the Court (looking out for the pro se petitioner), says “try again.”

When the IRS did try again (this time adequately), the table was set. If the petitioner couldn’t comply with the order to respond with specificity, summary judgment would be warranted. And thus you have the designated order above.

Reminder: Timely CDP Requests Yield Notice of Determination, Not Decision Letter

Docket # 026578-16 L, Allen v. C.I.R. (Order Here)

This designated order from Special Trial Judge Armen looks at the jurisdiction of the Tax Court to review a CDP hearing that was timely requested with Appeals, but (for unknown reasons) a decision letter rather than a notice of determination was issued. A decision letter is typically what the IRS issues when the taxpayer has an “Equivalent” hearing rather than a full-fledged CDP hearing. (More on equivalent hearings can be found here.) Unlike CDP hearings, equivalent hearings cannot be reviewed by the Tax Court (thus the jurisdictional argument).

It is unclear from the available documents both why IRS counsel believes the Tax Court doesn’t have jurisdiction and why IRS Appeals issued a decision letter in the first place. If IRS counsel’s argument is that a (form-over-substance) “notice of determination” letter is required Special Judge Armen disposes of that with a reference to Craig v. Commissioner, standing for the proposition that a decision letter will be treated as a notice of determination if it was from a CDP hearing (and not an “equivalent” hearing).

Some thoughts and crystal ball gazing: This request was sent right at the buzzer, but ultimately was timely mailed (and received). What would the IRS have to do to show that the taxpayer WANTED an equivalent hearing even though the request would qualify for a full CDP?

As mentioned above, it is not immediately clear why the IRS thinks the Tax Court lacks jurisdiction. This may be a case where the IRS has created more work for itself by trying to dispose of something quickly, rather than correctly. The taxpayer is pro se and appears to want to argue tax years other than the one for which the proposed levy relates. The court quickly disposes of its jurisdiction to hear any of those other years. The taxpayer also appears to have checked pretty much every conceivable box for the court’s jurisdiction when filing her amended petition (e.g. Notice of Deficiency, Notice of Determination Concerning Collection Action, Notice of Determination Concerning Your Request for Relief From Joint and Several Liability, and Notice of Final Determination Not To Abate Interest (see order here)). It wouldn’t surprise me to see the Form 12153 CDP Request falling into a similar pattern…

 

 

Faulty Information Returns: A New Frontier

We welcome back my colleague, Caleb Smith, in the Harvard Tax Clinic at the Legal Services Center.  Caleb has the misfortune to sit next to me and have me come over and regularly pose to him guest blog posts he might write.  In today’s post he linked up with Toby Merrill and our amazing colleagues at the Legal Services Center in the Predatory Lending Clinic who have a nationwide project going to assist individuals who fell prey to unscrupulous for profit colleges.  We hope that the Revenue Procedure issued by the IRS that Caleb discusses here might become a model for future rulings in similar circumstances.  Kudos to the IRS and Treasury for identifying and implementing a solution to a problem that could have created a lot of headaches for individuals who were already suffering from their student loan problems.  Keith

A lot has recently been said about the problems that arise when 1099s and other information returns are issued when they shouldn’t be. These earlier posts seemingly run the gamut of 1099 issues: from how to strategically defend against “phantom income” here to insight on how difficult it is to bring action against potentially malicious 1099 issuers (bottom of the post, here). The prior posts focus mostly on what to do when a 1099 was issued that shouldn’t have been. This post focuses on preventing the issuance of the 1099 in the first place.

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As a tax practitioner, it can be easy to lose sight of the forest for the trees. Generally, you work with an individual client to solve their individual tax problem. Sometimes, however, you can’t help but take note that your client’s problem is identical to a pool of other individuals: think, for example, of the Bank of America underreporting of mortgage interest covered here, here and here. The recently issued IRS Rev. Proc. 2017-24 is perhaps an even better example of a systemic fix for a problem that will affect thousands of individual clients. Among other things, it demonstrates the potential of collaboration between tax and disparate fields of law to reach an optimal outcome. For your reading pleasure, it also provides an opportunity to learn a bit more about the sometimes-sordid world of for-profit colleges.

Background of Rev. Proc. 2017-24

In early 2013, a for-profit vocational school called the American Career Institute (ACI) closed suddenly, shutting out thousands of students in Massachusetts and Maryland. Shortly thereafter, the company went into receivership, and the Massachusetts Attorney General sued the company and its principals. After more than two years of contentious litigation, the Attorney General reached a consent judgment with the school in which the corporate defendants admitted significant wrongdoing and violations of state law.

At the same time that the Commonwealth was litigating the case, the U.S. Department of Education was dealing with an influx of applications for loan discharges from borrowers who were cheated by for-profit schools, especially the defunct Corinthian Colleges. Under federal law and the terms of all federal student loan master promissory notes, federal student loan borrowers are entitled to assert such “defenses to repayment” of their federal student loans when their schools violate their rights under state law.

The Department of Education eventually made a finding that certain subsets of former Corinthian Colleges students are presumptively entitled to have their loans discharged under this provision, and invited those borrowers to submit applications for discharge. Before the first discharges were granted or announced, advocates raised the issue with the Departments of Education and Treasury.

This advocacy helped result in the IRS issuing Rev. Proc. 2015-57, in which the IRS held that borrowers with federal loans taken out to attend ACI or Corinthian would not have income upon those loans cancellation. Rev. Proc. 2015-57 was a big win for taxpayers, but didn’t go quite as far as Rev. Proc. 2017-24…

What Rev. Proc. 2017-24 Does

Rev. Proc. 2017-24 essentially says three things: (1) “ACI/Corinthian students, completely disregard your cancelled student loans, (2) also, we want to avoid a bunch of other problems so don’t worry about things like potential ‘tax benefit rule’ issues on having taken education credits in the past, and most importantly (3) Creditor, you don’t have to report the cancelled debt under 6050P -so don’t bother issuing a 1099-C.”  The first two directives are pretty much already handled in Rev. Proc. 2015-57. It is the final point that addresses the most obvious problem that the IRS (and practitioners) could see looming on the horizon.

Without Rev. Proc. 2017-24 there is the serious risk that creditors would issue 1099-Cs to former students of Corinthian or ACI even though most of those students wouldn’t have discharge of indebtedness income under the disputed debt doctrine. The creditor would have impetus to avoid potential IRC § 6050P compliance problems by erring on the side of issuing 1099-Cs. This in turn would create an information reporting nightmare. To the IRS computers, it would look as if former students simply forgot to report the 1099-C on their returns. In fact, under the disputed debt doctrine there is no streamlined “form” for the former student to file “showing their work” as to why they did not include the 1099-C on their return (as they could on Form 982 for the insolvency exclusion). At best the taxpayer could attach a Form 8275 disclosure statement to their return explaining their disputed debt doctrine position. I have my doubts that this would ever be done. (As a side-note, low-income taxpayers seeking free tax assistance through VITA cannot file Form 982 for insolvency and very likely cannot file Form 8275, as it is “out-of-scope” of the VITA guidelines.)

But there is another issue that the IRS seems to acknowledge, albeit indirectly. After detailing the defense to repayment argument as a reason much of the debt wouldn’t be taxable, the IRS casually drops one more reason why much of the cancelled debt shouldn’t be included in income: the insolvency exclusion (see Section 2.03 of Rev. Proc. 2017-24). The IRS doesn’t say why it has reason to believe many of these individuals are insolvent (I don’t doubt that many are). It is just one more potential reason listed as to why we should treat ALL of the affected individuals as not having cancellation of debt income. Since the insolvency exclusion requires a reduction of tax attributes (and therefore properly requires a step beyond just “not reporting” the cancelled debt as income, see IRC § 108(b)), I think the IRS is actually mentioning insolvency for a different reason. Namely, that the IRS recognizes that many of these individuals would be very hard to collect from in the first place. And although it might seem unfair to administer assessment of tax based on collection criteria, to an extent this already happens all the time. Collectability is already cited as a factor in determining whether to pursue an examination of a taxpayer (see IRM 4.20.1.2). Treating collectability as a factor in the exam stage (which can be thought of, in a sense, as the assessment phase) is even cited with approval by TIGTA, as covered by Procedurally Taxing here.

The New Normal: Why Collectability and Efficiency Matters

The quote “an ounce of prevention is worth a pound of cure” is attributed to the great American statesman Ben Franklin. Given current budget issues, it could serve just as well as the IRS guiding principle.  Think of the downstream costs without Rev. Proc. 2017-24. Thousands of taxpayers, generally low-income and with the least access to competent tax advisors, would receive 1099s. My bet is that many would ignore them when they filed their returns. This, in turn, would lead to a flurry of activity from the Automated Under-Reporter function of the IRS, leading to the usual split of taxpayers that respond to the notices and those that do nothing until their paychecks are on the verge of getting levied. Those that wait to respond would, most likely, have an excellent argument on the merits that they shouldn’t have cancelled debt income… but good luck finding a venue to make that argument in the collection stage. Instead, out of expediency, many of these individuals would likely look to (and be eligible for) collection alternatives. The outcome? Skewed tax rolls, about an extra billion trees chopped down for IRS notices, and little to no more money taken in by the Treasury.

Of course, the IRS shouldn’t make decisions purely out of administrative efficiency concerns: the proper application of the tax law should govern. But where both equity and the law bend strongly towards broad strokes (that just so happen to carry significant efficiency gains as well), I for one find it hard to work up too much moral outrage. (A similar example can be found in the IRS administration of the PATH Act ITIN expiration statutes. The law plainly says all pre-2008 ITINs expire January 1, 2017 (See IRC 6109(i)(3)(c). The IRS plainly says (at page 5) all ITINs with 78 or 79 as the middle digit expire January 1, 2017… but that’s it. Don’t worry if your ITIN was actually issued before 2008, as it would be a nightmare to track those all down.)

And this leads to the final point: that the “new normal” of an under-funded IRS may provide greater opportunity for systemic advocacy and innovative alternatives to the usual procedures. As a recently publicized example, one may consider the educational letters sent out by TAS to EITC recipients that likely over-claimed their credit but weren’t audited. The IRS may have a greater appetite for a Rev. Proc. 2017-24 type solution when the argument is advanced that, on the whole, tax administration is better served by painting with a broad brush. Cancelled debts stemming from lawsuits are not the only area where this approach is being taken. But seeing where these opportunities are, and effectively advocating for them, requires collaboration and an eye to the non-tax world.

If nothing else, the value of Rev. Proc. 2017-24 may be as a reminder to tax practitioners on the value of stepping outside of the tax bubble (or even just noticing that you may be in one).

Form 2848: The First Hurdle

Today we welcome back guest blogger Caleb Smith.  Caleb is a fellow this year in the Harvard Federal Tax Clinic.  We have seen some interesting power of attorney issues in our clinic recently and Caleb provides some insight on problems that arise in this area.  Keith

The IRS is planning to implement new security measures (originally set for October 24 target date, but since pushed back) for its online services. In anticipation of these changes (and potential complications) it seems timely to devote some thought to one particularly important gateway for information gathering activities with the IRS: the Form 2848.

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Sometimes you just can’t avoid calling a general number of the IRS, especially if the 2848 hasn’t been processed by CAF yet or when there is an ID Theft Indicator on the account. When contacting such a call center, one of the first questions asked is whether you have POA on file for the entity you are calling about. The IRS employee will usually offer a personal fax number for you to send the 2848 (if you have one) so that they can continue to assist you. Once the 2848 is received what happens next can be downright Kafka-esque depending on the reticence and training of the IRS employee on the other line.

Recent calls to the IPSU unit of the IRS have yielded these Halloween-worthy responses:

1). We can’t speak to you because there is no signature from the taxpayer on your 2848. The signature you have is from the previous attorney [that was granted the power to substitute or add-in new representatives]

My charitable take on this is that the IRS employee was misunderstanding the core concept of the taxpayer granting their representative the power to substitute other attorneys. Who can sign a 2848 has been dealt with here before. The continued misunderstanding of certain IRS employees, unfortunately, is not an unusual occurrence for me. The idea that someone the taxpayer specifically said could substitute attorneys for them is now substituting an attorney for them somehow smacks of foul-play. In one instance, I directed an IRS employee to the 2848 instructions specifically stating that the taxpayer doesn’t need to sign the 2848 for a subbed-in representative. The IRS employee referred to that as a “loophole.” Further attempts to explain that requiring the taxpayer to sign my 2848 would obviate the whole point of granting representatives authority to substitute attorneys were fruitless. Perhaps I should have referred the employee to IRM 21.3.7.5.4, which reads in relevant part “Only the taxpayer can grant a recognized representative the additional authority to substitute or delegate authority. The notice of substitution or delegation must be signed by the representative appointed on the power of attorney.”

2). We can’t speak to you because a 2848 automatically expires after 45 days(!)

My charitable take on this is that the IRS employee was misunderstanding the rule that a 2848 is invalid if the taxpayer signature is dated more than 45 days before the representative’s (See IRM 21.3.7.5.1.4). As that wasn’t the case, my less charitable take is that the IRS employee just wanted to cut the call short. I am inclined to this less charitable take in part because the employee only brought up the 2848 issue after already speaking to me for several minutes about the client in a case where the IRS behavior looked somewhat bad.

 

All of this is to say that if an IRS employee wants to challenge your Power of Attorney they can put up a pretty big and pretty immediate roadblock. Yes, you can call back and almost certainly get a different person on the phone, but wait-times often make that impractical. During a recent visit from our local taxpayer advocate, our clinic (Harvard Legal Services Center) voiced concern about IRS employees that didn’t seem to understand how Form 2848 works and the barrier this caused for providing services. When such problems arise we were advised to request to be escalated to the employee’s manager, and that TAS would look into making sure that employees were well trained on 2848 issues. This is about as good as can be hoped for, but I’m not sure it is enough to provide a whole lot of relief. (A few weeks after that advice I attempted to put it into action and asked to be escalated to the manager on two separate occasions. On the first one, I was cut off after being put on hold. On the second, I was told (after being put on hold) that the manager wasn’t available.)

Of course, much of this can be avoided if your 2848 is on file with CAF, in which case, the main hurdle is submitting a 2848 that will be accepted and processed in the first place. Though this seems like it should be a fairly easy task (and generally it is), complications do arise.

Most recently, I’ve seen 2848s rejected for:

  1. Appearing to have a “stamp or electronic” signature of the representative (it wasn’t: it just looked that way because the form had been faxed so many times). See IRM 21.3.7.5.1.4.
  2. Having the taxpayer signature dated more than 45 days before the representative’s (it was, but only because the client signed with the wrong year) IRM 21.3.7.5.1.4 again. Note that the problem doesn’t arise if the taxpayer’s signature is more current than the representative’s.
  3. Form was illegible (a product of the Form 2848 being faxed multiple times, and perhaps my poor penmanship)
  4. Student Authorization Form missing for LITC Student Attorney (These generally result only in the student being unable to call the IRS: as an attorney, my authorization has generally still been processed.)

The first time I ever submitted a Form 2848 I was under the impression that the CAF fax basically fed into an enormous scan-tron type machine that checked for initial processing requirements. My belief in that was based (1) on the sheer volume of 2848s that must be sent and (2) the fact that the Treasury Regulations provide that a substitute for Form 2848 can be used (problem for the scan-tron theory), but an actual 2848 must be attached if submitted to CAF (see Treas. Reg. 601.503(b)(2)). In fact, actual humans do process and input the Form 2848, although the number of these dedicated souls may not be sufficient for the task (see TAS report here). Beyond just taking the IRS’s word on this, other evidence of a human touch can be found in the handwritten “OK” marked next to certain areas and practically undecipherable scribbles marked next to others on 2848s that have been sent back to me from CAF.

One problem is obviously the turn-around time for figuring out whether CAF is going to process the 2848 sent. Usually, the practitioner has no way of knowing the 2848 isn’t processed until either (1) weeks pass and they are still unable to access accounts via e-services, or (2) the taxpayer receives a letter from the IRS mentioning the unprocessed 2848 (a letter which also generally serves to freak out the taxpayer). Might this be an area for the IRS “Future State” (see post on Future State here) to bring in a greater degree of automation to speed up the process? On the one hand, the sensitive data at play may warrant keeping a greater human touch. On the other hand, I’m not really sure how humans do much of anything to prevent ID theft in this context: I am fairly confident that the person at CAF isn’t comparing signatures of the taxpayer and representative to a signature database.

Another problem has less to do with the time it takes to process the 2848, and more to do with the actual processing. I have seen numerous rejection notices for 2848s supposedly lacking the proper student authorization page, when it appears from the fax records that such authorization was in fact sent. Several comments on the ABA LITC listserv have also mentioned this issue. One commenter suggested creating a “2848 Sandwich” with the student authorization page placed between page 1 and 2 of the 2848, the rationale being that it is much harder to miss the authorization page in those circumstances. I have never tried this, and cannot vouch for its efficacy, but am always a fan of creative solutions.

One area that I HAVE had experience with and can vouch is in submitting Form 2848 as a substitute representative for the original attorney of the taxpayer. As mentioned above, a taxpayer may grant their attorney the power to substitute or add representatives (see line 5a of Form 2848). Doing so, obviously, gets rid of the need for the taxpayer to sign a new 2848 for the substituted representative. The instructions (and logic) make this clear: the new attorney “can send in a new Form 2848 with a copy of the Form 2848 you [the taxpayer] are now signing, and you do not need to sign the new Form 2848.” [emphasis added.] Reading the instructions literally, one might think that all the new attorney need do is fill out a new 2848 and include a copy of the old one with it. But IRM 21.3.7.5.4 requires a little more. For CAF to process the new 2848 you will need to send (1) the original 2848 signed by the taxpayer, and (2) a new 2848 signed by the original attorney. I usually have the original attorney sign on line 7 along with listing their CAF number. I have not found anywhere in the IRM that says this is the proper way to include the signature of the appointing attorney. But it has worked with CAF, and that is good enough for me.

When you need to speak with someone at the IRS about a client and the validity of your power of attorney is put at issue, you are essentially confronted with a brick wall. Systemic changes to how 2848s are processed by the IRS may be ideal, but in the absence of that practitioners are generally left with trading war-stories and tricks-of-the-trade. I invite anyone with such advice or stories to post below.

 

 

On Offsets and Posted Dates

We welcome guest blogger Caleb Smith.  Caleb has worked on tax returns and tax transcript issues for several years.  Before law school he worked for Prepare and Prosper as a Tax Program Manager for their VITA program.  At Lewis and Clark Law School he participated in the excellent low income taxpayer clinic there run by my former colleague, Jan Pierce.  Most recently Caleb has been working at Mid-Minnesota Legal Aid in their tax clinic.  Next month he will join me as the new fellow at the Harvard Tax Clinic.  Keith

When is an offset not a § 6402 offset? After the recent Tax Court memorandum opinion, Luque v. Commissioner, the answer seems to be only “when the offset didn’t actually happen.” And because of the nearly wholesale prohibition on Tax Court review of § 6402 offsets codified at § 6512(b)(4), checking to see if the offset actually happened is about as far as the court will go. The opinion serves as an illustration of the pitfalls many taxpayers face in getting to court, while also offering a look into the arcana of IRS transcript posted dates. Indeed, this latter endeavor appears to be the main objective of Judge Halpern in issuing the opinion.

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The facts of the case are fairly commonplace: taxpayer files a 2011 return showing a refund and the refund is credited in its entirety against a 2009 tax liability. In this instance, after the refund was credited the IRS issued a NOD for 2011, thus allowing the taxpayer into Court to argue (1) that the offset did not arise under § 6402 and (2), even if it did, the offset never actually was credited to 2009.

Prior to issuing the opinion the Court had essentially dashed the hopes that the liability giving rise to the offset, the 2009 liability, could be reviewed (i.e. didn’t arise under § 6402) in an earlier court order. It could be noted that the judge issuing the opinion, Judge Halpern, has been involved with previous cases questioning what is and is not an offset (found here with more insight on the matter provided by the First Circuit in appeal found here). But even though the Tax Court cannot “restrain or review” a § 6402 offset by examining if the taxpayer really owes the taxes being paid through the offset under § 6512(b)(4), Judge Halpern noted that it can look to see if the offset actually happened.

As this is usually a fairly straightforward inquiry (either the taxpayer had funds credited to a prior year or they didn’t), the import of the opinion seems to be elsewhere. Indeed, what appears to motivate the Court was the educational opportunity for tax practitioners in better understanding how IRS official records work. Judge Halpern almost explicitly acknowledges this rationale:

“On March 29, 2016, we issued an order concerning the motions in which we addressed and rejected petitioners’ jurisdictional argument. We, did not, however, dispose of the motions. Instead, we ordered respondent to address seeming anomalies between his representations and entries on the official records he submitted in support of his motion. Because there may be general interest in respondent’s reconciliation of those seeming anomalies […] we use this opportunity to make that reconciliation public.” [Emphasis added.] Luque at *3 – 4.

I’ll admit that as someone who frequently pores over IRS transcripts I counted myself as an enthusiastic member of the “general interest” Judge Halpern referred to. And yet, after reading the opinion, I couldn’t help but feel that the more important aspects of the decision remained elsewhere. But more on that later.

My naïve hope was that the opinion would give more insight on the meaning of IRS transaction codes. In my experience, the codes can be extraordinarily misleading or arbitrary. As one example, the notation “additional tax assessed” often does not mean that additional (i.e. “more”) tax was assessed, or even that any assessment action took place at that time. I have had one IRS employee tell me over the phone that the “additional tax assessed” transaction code is sometimes used as a “placeholder” just to show that some action was taken on the account… even where clearly no assessment action took place because the ASED had run years ago and the balance continued to show $0. The mind fairly boggles.

The opinion did not much address such things. However, if you are looking for insight on posted dates and cycle numbers you are in luck. I won’t spoil you with the mechanics (some may say, minutia) of their complete inner workings. You can read that for yourself at pages *12 – 14. I will, however, provide the general take-away points.

First of all, a “posted date” is the effective date of the transaction, which is either the actual date the transaction processing was finalized or the date it is deemed to have occurred by law (like withholding always being credited as paid on the last day to timely file). Meanwhile, a “cycle number” pertains to the dates the IRS actually processed the transaction. In the transcripts that are readily available to taxpayers and practitioners, the “cycle number” field is often left blank. This has never bothered me much because on the account transcript alone the cycle number is mostly useless: it leads off with a year (e.g. 2012) and ends with a number that appears to mean nothing. In Luque, for example, the cycle number was 201219, which corresponded to transactions taking place in 2012 over the month of… May. The 19, as far as I can tell, only has meaning if you have access to an IRS list of 2012 cycle numbers with their corresponding dates, as the IRS Appeals Officer does. With access to that list, you can then glean when the transaction was actually processed by the IRS: a three-step procedure concluding, in most cases, with the effective “posting date” (see above) unless there is an otherwise designated effective date.

This is all to say that cycle numbers are unlikely to matter much unless you are playing a game of inches (likely in a statute of limitations scenario). It also serves as a reminder that the law has numerous artificial constructs for when something is deemed to have actually taken place (like when you are deemed to have paid in withholding). Reconciling anomalies in these dates on the IRS records (when the return was filed, when the return was processed, and when the withholding was credited) was the reason the Court felt the matter was not resolved simply by saying “it was a § 6402 offset, and we have no jurisdiction to review those.”

Yet I am actually not convinced that the timing matters so much as to warrant much inquiry in this case. If the IRS can show that the 2009 liability on the books is $4,223 less (the amount of the 2011 credit), can a slight discrepancy in dates really do so much as to call into question if an offset actually occurred at all? Judge Halpern almost acknowledges as much, stating “Although the question of whether the overpayment reported on petitioners’ 2011 return was credited to their 2009 account is more important than precisely when that credit was allowed, the ambiguity in the dates […] called into question the reliability of the respondent’s certifications as evidence that the credit was, in fact, allowed.” Luque at *9. [Emphasis in original.] Of course, the exact date matters quite a bit if the liability causing the offset may have had the CSED run (or if the date to file a refund claim is close). But those issues both involve investigating the propriety of the offset: something § 6412(b)(4) does not allow. The date the offset occurred is essentially moot as far as the Tax Court should be concerned. It may matter, but it would presumably be litigated in a refund suit in district court.

And there, I think, is the lesson behind the opinion: what would be the victory to the taxpayer if the Court found the records so shoddy as to hold that an offset didn’t occur? I imagine the Court could find that the taxpayer is due that amount… which the IRS could promptly credit as an offset. For the Tax Court to do anything else (that is, compel the IRS not to offset) would be a violation of both § 6512(b)(4) and § 6402 since the choice to offset is committed to the IRS’s discretion. Thus, as Judge Halpern intimated, the greater point of the opinion may well be the education of taxpayers and (more likely) practitioners on the mysteries of IRS transcripts such that the issue can be resolved administratively when errors do arise. Failure to actually credit an offset certainly seems to be in the province of TAS, and a tax practitioner is better able to see when such errors arise (or don’t arise) if they have greater knowledge of the transcripts showing them. Indeed, in most cases it is doubtful that the Tax Court will even be able to review if an offset occurred: Luque was fortuitous in that both offset and NOD (i.e. ticket to tax court) occurred for the same tax year.

And that, in turn, allows us to close on what I believe to be the most important point is lurking behind this all: the difficulties of getting to court at all if you are low-income seeking to challenge an ancient, but sizeable, tax debt. Under § 6512(b)(4) when an offset occurs, the taxpayer better look elsewhere than Tax Court to challenge the propriety of the offset. That “elsewhere” is a refund action in federal district court. At least, it ought to be. The restrictions of Flora’s full-pay rule (discussed, among other times, here and here) and § 6512(b)(4) means that when a taxpayer has a substantial past tax debt that current year refunds will never full pay, the taxpayer can pretty much count on losing a refund they may desperately need for the foreseeable future. (Practitioners, of course, should be aware that the IRS offset for past federal income taxes is discretionary, and would do well to acquaint themselves with Offset-Bypass Procedures, discussed here in cases where the taxpayer is suffering hardship.)

Thus, under Flora and § 6512(b)(4), an offset applied to what may well be an inflated underlying liability will continue to haunt the taxpayer with little chance for judicial review. In such situations, the law seems to give short shrift to the right of the taxpayer to “pay no more than the correct amount.” The statutes as written give the Tax Court no power other than to ensure that at least the offset is properly credited to the earlier year… or give us practitioners the tools to read the transcripts and determine exactly when that happened for ourselves.