FOIA Lawsuit for Information Gathered from Tax Practitioners

Today we welcome guest blogger Nick Xanthopoulos.  Nick was a staff attorney at Nevada Legal Services’ Low Income Taxpayer Clinic (LITC) from December 2014 until October 2016, and a staff attorney at Mid-Minnesota Legal Aid’s LITC from November 2016 until July 2019.  From August 2019 until November 2019, Nick was an attorney at Kennedy Law Offices, P.A., a boutique law firm in Eagan, Minnesota that represents clients in tax, business, and estate related legal matters.  Nick is currently on sabbatical.  Keith

Before 2018, tax professionals with an IRS power of attorney (Form 2848) on file went through a familiar process when calling the IRS to represent someone: we provided the taxpayer’s Social Security number (SSN) and name, our name and Centralized Authorization File (CAF) number (a unique identifier), and which tax years and forms we were authorized to discuss.  During these calls we were often asked additional information about the taxpayer to verify the taxpayer’s address or phone number but not personal information about ourselves.  Indeed, the Internal Revenue Manual (IRM), a guide that IRS employees are supposed to follow, says that only those items are needed to verify that a caller is an authorized third party.  (IRM 21.1.3.3(2).)

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In January 2018, the IRS changed the procedure with no advance notice, and obviously, no opportunity for comment by the effected parties.  Since then, IRS employees begin nearly every phone call by forcing practitioners to say our own SSN, date of birth, and other personal information.  In gathering this information, the IRS should take responsibility for the protection of this information under Internal Revenue Code (IRC) section 6103 but also allow practitioners to know how it uses and protects that information.  If we refuse to state our confidential information during the recorded phone call, IRS will not let us represent our clients, thereby worsening an access to justice gap.  If we do answer the questions about our personal information, it becomes part of the client’s file.  I know that the IRS records calls and keeps them in taxpayers’ files because I have secured at least 4 such recordings through Freedom of Information Act (FOIA) requests.  In at least 2 of them, an IRS employee insisted on me stating my SSN despite knowing that my client was listening.

I have had several clients who were victims of tax-related identify theft.  ID theft damage can only be mitigated, never fixed.  Yet no IRS employee has ever instilled me with any confidence that the IRS would redact my SSN from all recordings and all case notes.  As a result, I have refused to state my SSN during any call when I was representing a client.  Practitioners should never be forced to choose between representing someone as effectively as possible and protecting ourselves from identity theft or other misuse of our own personal information.  If the IRS published the procedures it follows to ensure practitioners’ information is kept separate from clients’ files, then practitioners could make an informed decision about whether it is safe to state our SSNs in order to represent our clients.

In June 2019, Professor Keith Fogg and I made a FOIA request for “IRS agency records relating to precautions taken to safeguard the confidentiality of return and return information taken by the IRS from tax practitioners.”  In response, the IRS directed us to the www.irs.gov version of IRM 21.1.3.3, which is heavily redacted, and provided no other agency records.  In explaining why it redacted much of IRM 21.1.3.3, the IRS claimed the “records or information [was] compiled for law enforcement purposes” and that release “would disclose techniques and procedures for law enforcement investigations or prosecutions or would disclose guidelines for law enforcement investigations or prosecutions if such disclosure could reasonably be expected to risk circumvention of the law.” When Professor Fogg and I administratively appealed the partial denial of our FOIA request, the IRS Independent Office of Appeals summarily upheld the IRS decision.

As a result, Professor Fogg and I sued the IRS. We filed a complaint on November 29, 2019, in US District Court in the District of Minnesota seeking production of the requested records.  The IRS claims that the new authentication procedure’s “intent is to enhance protections for tax professionals and their clients.”  (IRM 21.1.3.3(3).)  The public and tax practitioners should have the right to see agency records about how the IRS is protecting tax professionals when the IRS forces professionals to state their own confidential information in order to represent a taxpayer.

The treatment of the information of professionals seeking to represent taxpayers should not be the type of information that the IRS hides from the professionals to protect law enforcement.  These professionals are not the taxpayers in the case and are seeking only to represent the taxpayers.  To hide from them the uses of the information and the safeguards surrounding the information denies them the opportunity to make an informed decision.  This is particularly important when the IRS has adopted a procedure without notice and comment and without input from the effected community.

Tax professionals provide an important service to the tax system.  They should not be treated as criminals entitled to no voice in what personal information is elicited from them nor have the use of the information hidden from them. Of course, the IRS has an important job in making sure that it only provides a taxpayer’s information to a properly authorized representative. That aspect of its mission, however, does not give it carte blanc to gather and use all manner of information from the professionals who practice before it, especially without giving those professionals a voice in what information is gathered, the safeguards placed on that information and the uses of that information.

The goal of the FOIA litigation is to find out answers to these questions so that the practitioner community can begin to have a voice in how its information is used by the IRS and protected from abuse.  Please take a moment to learn more about this important issue by reading the FOIA complaint.  You can access the complaint (including exhibits) for free here, thanks to Syracuse University’s Transactional Records Access Clearinghouse (TRAC).

Wichita Terminal and the Presumption That Occurs When an Available Witness Is Not Called

As a Chief Counsel, IRS attorney one of my favorite cases was Wichita Terminal Elevator, Inc. v. Commissioner, 6 T.C. 1158 (1946).  I am unsure if I ever read the actual opinion prior to writing this post but a decent percentage of briefs written by Chief Counsel, IRS attorneys will contain a cite to this case.  The case stands for the proposition that if a witness exists who could testify to facts that would aid your case, and you do not call that witness then a presumption arises that the witness would testify adversely to the point you are arguing.  Since the burden of proof in most cases fell on the taxpayer, the first line of defense for a government attorney was that the taxpayer simply failed to carry the burden, and Wichita Terminal served as an integral part of that argument since there almost always existed some witness that the taxpayer might have called and did not.

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Proud of myself now that I have read the Wichita Terminal case, I must subject you to a part of it.  Here is the important portion for purposes of this case:

If in fact the sale of petitioner’s properties was not negotiated prior to its dissolution, the evidence of such fact is in the possession of petitioner. If that were the fact, it must have been known by petitioner’s officers, who could have testified to that effect, but the only witnesses called at the hearing were its vice president, N. Louise Powell, and its secretary, C. P. Garretson, who were asked by petitioner’s counsel only to identify certain exhibits consisting of minute entries and other documents whereby the dissolution of petitioner was effected and the properties in question conveyed. Petitioner’s counsel invoked the rule forbidding the cross-examination of a witness except as to the matters testified to on direct examination.

Powell, who was the president of the corporation and who is shown to have actually negotiated the sale of the properties, did not testify. This is significant in view of the fact that a witness introduced by respondent testified that Powell had made the statement to him that he had, on June 1, 1944, discussed the sale with one Ross, who wished to buy the Wichita elevator property, and that he had advised Ross that it was their plan to sell the country elevators as well, and that thereupon Ross made an investigation of these four elevators and three or four days later resumed negotiations for their purchase. Petitioner’s counsel argues that this evidence is of no importance because there is no showing that the individual by the name of Ross who was negotiating for the purchase of the properties prior to petitioner’s dissolution was the Paul Ross who entered into the formal contract for their purchase three weeks later on the same day that the dissolution became effective. This argument is without weight. If these negotiations were with interests other than those to whom the properties were ultimately conveyed, this fact could readily have been established by petitioner.

Of course, as the government you do not want to rely exclusively on the burden of proof since that presents too many risks of failure, but you did want to try to win the case on the burden if possible.  A form of this same issue presents itself in the current political discourse.  The Democrats do not want to rest their case for impeachment solely on the failure of the administration to send up witnesses that might provide exculpatory evidence.  Even though they might make a case that the failure of the administration to send witnesses to the Hill to testify under oath means that an impeachable offense occurred, that’s a weak, and quite risky, way to win a case.  Always best to prove that you are right rather that to rely upon the burden of proof; however, you still try to win the easy way if possible.

In the case of Endeavor Partners Fund LLC et al. v. Commissioner; No. 18-1275; No. 18-1276; No. 18-1277; No. 18-1278 (D.C. Cir. 2019) the Tax Court cited to Wichita Terminal and on appeal the taxpayer argued that the reliance on Wichita Terminal was misplaced.  The D.C. Circuit goes into some detail explaining its rules regarding presumptions of this sort and, ultimately, why it doesn’t matter in this case, because if the Tax Court erred on this issue the error was harmless.  For those of you who have cited Wichita Terminal or had it cited against you, it may prove useful to appreciate the nuances that the D.C. Circuit brings to this issue.  Here’s what it had to say:

This leads us to the partnerships’ claim of a faulty evidentiary ruling. The Tax Court went on to note that the partnerships did not call “the most logical witness to testify about Deutsche Bank’s trading practices,” namely someone “from Deutsche Bank.” Id. The court observed “from this we infer that such testimony would not have been helpful to them.” Id. As the partnerships see it, the court thus drew an impermissible adverse inference from the absence of a Deutsche Bank witness. And — they argue — this error is fatal, because the court needed that inference to reach the conclusion that the parties rigged the rates.

But studying the court’s analysis, we conclude that any error was harmless. Under the common law formulation, a fact finder (typically, a jury) may but need not draw an adverse inference from the absence of a witness “if a party has it [1] peculiarly within his power to produce witnesses whose testimony would [2] elucidate the transaction.” United States v. Young, 463 F.2d 934, 939 (D.C. Cir. 1972) (quoting Graves v. United States, 150 U.S. 118, 121 (1893)).

The likely Deutsche Bank witnesses clearly had the potential to “elucidate the transaction” — they could directly address the question whether the rate-rigging had been intentional or accidental. Id. So the pertinent questions are whether the witnesses were “peculiarly within [the partnership’s] power” and, if not, whether the Tax Court’s conclusion rested materially on the adverse inference.

On the facts of this case, neither the partnerships nor the Commissioner peculiarly controlled Deutsche Bank’s employees. The partnerships’ business relationship with Deutsche Bank had long since withered, and the government’s non-prosecution agreement with the Bank did not, by itself, place its employees within the government’s power. See United States v. Tarantino, 846 F.2d 1384, 1404 (D.C. Cir. 1988) (“[N]o automatic inference of exclusive government control arises from the fact that witnesses are acting as government informants, or from a grant of immunity from prosecution.” (citations omitted) (emphasis added)). But see Burgess v. United States, 440 F.2d 226, 232 (D.C. Cir. 1970) (concluding that “[t]he testimony showed a relationship between the Government and the informer which placed it peculiarly within the power of the Government to produce him”); United States v. Williams, 113 F.3d 243, 246 n.2 (D.C. Cir. 1997) (construing Burgess as “alleviat[ing] the need for the defense to seek a witness by subpoena” to secure a missing-witness instruction).

The D.C. Circuit went further than just explaining when the presumption might work against a party and why it did not apply here.  It provided a horn book on this area of the law:

Some courts have relaxed the common law standard and dropped the requirement that the party against whom an inference is drawn have the witness “peculiarly within his power,” thus giving the fact finder fairly broad discretion to draw an inference and to choose the party against whom it is to be drawn. See, e.g., Wilson v. Merrell Dow Pharm. Inc., 893 F.2d 1149, 1152 (10th Cir. 1990) (“When an absent witness is equally available to both parties, either party is open to the inference that the missing testimony would have been adverse to it.”); United States v. Erb, 543 F.2d 438, 444 (2d Cir. 1976) (“[T]he weight of authority in this circuit and the more logical view is that the failure to produce (a witness equally available to both sides) is open to an inference against both parties.” (quotation and citations omitted)); United States v. Cotter, 60 F.2d 689, 692 (2d Cir. 1932) (Hand, J.) (“When both sides fail to call a witness who knows something of the facts, their conduct, like anything else they do, is a circumstance which a jury may use.”); State v. Greer, 922 N.W.2d 312, ¶¶ 18–19 (Wis. Ct. App. 2018) (unpublished).

We have given conflicting signals about whether control over a missing witness is required for a fact finder to draw an inference. Compare Young, 463 F.2d at 943 (“But in the in-between case where each side has the physical capacity to locate and produce the witness, and it is debatable which side might more naturally have been expected to call the witness, there may be latitude for the judge to leave the matter to debate without an instruction, simply permitting each counsel to argue to the jury concerning the ‘natural’ inference of fact to be drawn.”), with United States v. Norris, 873 F.2d 1519, 1522 (D.C. Cir. 1989) (“Exclusivity or peculiarity of power to produce is [ ] one of two necessary predicates for entitlement to the missing witness instruction.” (emphasis added)).
 
In at least one case involving an agency, we have reversed the National Labor Relations Board when it applied the adverse inference against a party that did not control the witness. Bufco Corp. v. NLRB, 147 F.3d 964, 971 (D.C. Cir. 1998). In the course of our (brief) analysis, we also noted that the Board’s decision conflicted with its own precedent on the subject. Id.
 
This multiplicity of viewpoints suggests the possibility that we should, in reviewing agency decisions, adopt a rule that saves agencies from undue risk of reversal due to their potential failure to estimate correctly what circuit will review a particular decision. Besides reducing the risk of inadvertent error, such a rule would prevent agencies from having to adopt different evidentiary rules depending on the circuit (or, indeed, multiple circuits) in which an appeal may lie. At least where good arguments exist for and against permitting the inference, we might allow an agency leeway to choose its own path.
 
Though lodged under Article I, the Tax Court is — in one relevant respect — unusual: Congress has specifically directed us to review that court in the “same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.” 26 U.S.C. § 7482(a)(1). This indicates that, even if we were to adopt the rule discussed above generally, we would still have to apply our circuit’s case law to Tax Court decisions rather than Tax Court precedent. See generally Dang v. Comm’r, 83 T.C.M. (CCH) 1627, 2002 WL 977368, at *3 (T.C. 2002) (concluding, in an unpublished, non-binding memorandum opinion, that “no adverse inference is warranted” if “a witness is equally available to both parties”).

The court then went on to explain why the error of citing to Wichita Terminal was harmless as it sustained the liability against the taxpayer.  I confess I long to cite to Wichita Terminal in the briefs that the clinic writes.  It was always so comforting to put it into a brief knowing that I might win my case simply because the other side did not fully meet their burden.  The Endeavor Partners case is both reassuring and disappointing.  It’s reassuring because it limits the times in which the IRS might be able to successfully cite the Wichita Terminal case against me now that I represent taxpayers.  Of all of the times the Tax Court has cited that case, I suspect that only a small fraction of the cases involve the taxpayer getting a benefit from its citation.  It’s disappointing because the decision makes it even less likely that I will get to cite it ever.  Maybe that’s a good thing.  I tried to throw in into a brief in the past year or two and was told by others working on the brief that it did not belong.  It’s less likely to belong based on the excellent explanation provided by the D.C. Circuit.  Maybe I should be glad.

TIGTA Report Reminds That IRS Regularly Misclassifies CDP Requests Impacting Taxpayer’s Ability to Obtain a CDP Hearing and the Statute of Limitations

When Congress passed the Restructuring and Reform Act in 1998, it demonstrated significant concern about the performance of the IRS in the collection area.  The law made significant changes to the way the IRS collects as well as to oversight of the IRS collection activity.  The principal oversight imposed involves annual reviews by the Treasury Inspector General for Tax Administration (TIGTA) of several aspects of IRS collection actions.  We have written about these reports many times because they can contain rich sources of information about what is happening inside of the IRS.

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TIGTA usually produces the bulk of these annual reports in September.  On September 6, 2019, TIGTA produced its annual report regarding Collection Due Process (CDP), and it points to continued problems two decades after creation of the CDP program.  Since TIGTA’s job involves identifying problems, the fact that it found some problems does not come as a surprise.  The problems that it identified fit nicely with some of the initiatives of the ongoing CDP summit as well as some of the problems we have discussed before.  I will focus on the two main problems identified by TIGTA.

Misclassifying CDP Requests

Here’s what TIGTA found:

We found that the IRS misclassified nine of the 140 CDP and Equivalent Hearing cases we reviewed. As a result, these taxpayers did not receive the hearings to which they were entitled or incorrectly received a hearing when they should not have. By comparison, we identified eight misclassified CDP and Equivalent Hearing cases in our prior year review. Based on our sample results, we estimate that 1,402 of 35,850 taxpayer cases closed in FY 2018 were misclassified by Appeals and, as a result, taxpayers did not receive the type of hearing to which they were entitled.

The results suggest a relatively significant error rate in classifying CDP requests.  When the IRS misclassifies the request of a pro se taxpayer, many will not have the tools to contest that misclassification and will accept the equivalent hearing instead of the CDP request to which they were entitled.  One of the suggestions made to the IRS regarding the making of the request for a CDP hearing is to make it simpler.  The IRS could create one fax number or one snail mail address to which all CDP requests could be sent.  Instead it has a confusing fabric of places to which a CDP request may need to be sent in order for the IRS to consider it mailed to the right place.  It also uses the CDP notice as a collection tool rather than just as a tool to notify taxpayers of their right to a CDP hearing.  By using the notice primarily as a collection tool, the hearing opportunity not only gets lost in translation but so does the address.  The TIGTA report identifies cases in which the IRS timely receives a CDP request but receives it at the wrong location.  Many other taxpayers might make a timely request if the CDP notice provided more notice and less collection information.

The TIGTA report notes that misclassification of the CDP request impacts the hearing the taxpayer receives and the notice following that hear but it does not address the jurisdictional arguments the IRS makes if the taxpayer petitions the Tax Court.  For a more extensive discussion of the issues raised by misclassification, see prior discussions here and here (this links to a Tax Notes article available only to subscribers.)

Statute of Limitations

With respect to the statute of limitations on collection, TIGTA found a significant number of errors here as well:

We found that eight of the 140 cases reviewed had an incorrect CSED. In comparison, we identified nine cases with CSED errors in our prior year review. We identified:

  • Five CDP cases for which the CSED was incorrectly extended. As a result, the IRS had more time to collect delinquent taxes than it was authorized. Based on our sample results, we estimate that the IRS may have incorrectly extended the CSED in 2,183 of 35,850 CDP and Equivalent Hearing cases closed in FY 2018.
  • Three CDP and Equivalent Hearing cases for which the CSED was incorrectly shortened. As a result, the IRS had less time to collect any outstanding balance from the taxpayer than it was authorized. Based on our sample results, we estimate that the IRS incorrectly reduced the CSED in 588 of 35,850 CDP and Equivalent Hearing cases closed in FY 2018.
  • The suspension of the CSED is systemically controlled by transaction codes on the Integrated Data Retrieval System. One code is entered to start the suspension, and another code is entered to stop the suspension and restart the statute period. Generally, the code to suspend the collection statute, along with the date the suspension should begin, is input by the Collection function. However, in certain instances, Appeals personnel are responsible for inputting the suspension code and start date. Upon completion of the CDP hearing, Appeals is responsible for entering the code to remove the suspension of the statute period along with the hearing completion date. The Integrated Data Retrieval System will systemically recalculate the CSED based on the dates entered for the two codes (which generally reflect the length of the Appeals hearing or the exhaustion of any rights to appeal following judicial review). We found that Collection function and Appeals personnel did not enter the correct date to start the suspension of the collection statute. In addition, Appeals personnel did not enter the correct date to end the suspension of the collection statute. Appeals management agreed with all but *1* of the errors we identified.

The fact that the IRS improperly extended the statute of limitations on collection in over 2,000 cases in one year should give any practitioner pause to rely on the statute of limitations calculated by the IRS.  Calculating the statute of limitations on collection has become very complicated.  See our prior discussion here.  Relying on the IRS to properly compute the statute of limitations seems risky given the over 5% error rate suggested by this report. 

The IRS does not bring many suits to reduce an assessment to judgment, but when these suits occur, the Department of Justice seems to file them right at the statute of limitations deadline.  This TIGTA report provides strong support for the practice of carefully reviewing the statute of limitations determination by the IRS.

Issues in Motions to Dismiss for Lack of Jurisdiction: Designated Orders 9/30/19 to 10/4/19

For the work week of September 30 through October 4, there were 4 designated orders.  Three have substantive issues (and all have motions to dismiss for lack of jurisdiction), discussed below.  The first order is a tangled series of notices and petitions that Judge Copeland sorts through.  For the last two orders, Judge Guy deals with two very different cases that both have motions to dismiss for lack of jurisdiction.  In contrasting the two, one involves the definition of a deficiency and the other deals with the classification of a remittance as either a payment or a deposit.

For the fourth order, available here, I wanted to take a brief moment to acknowledge that the Tax Court referred the petitioner to contact local Low Income Taxpayer Clinics to see if they could help.  The clinics are those covering the Tampa, Florida, Tax Court docket (Bay Area Legal Services, Gulfcoast Legal Services, and Florida Rural Legal Services).

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3 Notices and 3 Petitions

Docket No. 4460-17, Tramy T. Van v. C.I.R., Order available here.

To provide some clarity, it will be necessary to include some tables regarding the notices sent by the IRS and petitions filed by Ms. Van (sometimes referred to specifically as Petitioner) and her ex-husband, Denny Chan.

In 2010, Tramy Van and Denny Chan were married.  They filed a joint tax return in 2010 that included a $192,763.00 net operating loss carryforward.  They divorced after 2010 so none of the other tax returns involved are joint returns.

On 11/23/16, the IRS mailed three notices of deficiency.  The first notice was for tax years 2011, 2012, and 2013 (Notice # 1).  That notice was sent only to Petitioner at her last known address and she received it.  It proposed several adjustments, including an adjustment to the carryforward from 2010 to 2011.

Notice # 1 addressed to Petitioner only:

Year Deficiency Section 6663 Penalty Section 6651(a)(1) Addition to Tax
2011 $350,669.00 $263,001.75 $87,167.00
2012 $444,335.00 $333,251.25 None
2013 $550,174.00 $412,630.50 None

The second notice was for tax year 2010 only, sent to both parties at Mr. Chan’s last known address (Notice # 2).  The third notice was also for 2010 and was sent to Petitioner’s last known address, but she did not timely receive it.

Notices # 2 and 3 addressed to Petitioner and Mr. Chan:

Year Deficiency Section 6663 Penalty
2010 $441,539.00 $331,154.25

Petitions Filed by Tramy Van and Denny Chan:

Docket Number Petitioner Notice Attached Filed
2435-17 Denny Chan Notice 2 1/24/17
4460-17 Tramy Van Notice 1 2/21/17
15694-18 Tramy Van Notice 2 8/9/18

As noted above, Denny Chan petitioned the Tax Court, which has led to questions about consolidation of cases.

What we are concerned with, though, is the petition by Tramy Van filed in docket number 4460-17, concerning Notice # 1.  In paragraph five and, importantly, in the attachment to the petition, she explicitly contested “all the IRS’s changes to the tax returns examined for the applicable tax years ending 2010 through 2013 for the following taxpayers:  Tramy T. Van, Tramy Beauty School [Partnership], Tramy Beauty School, Inc. [S Corp].”  She explained that she had not received a notice for 2010, but expected to receive one.

The IRS filed an answer to that petition, alleging no notice was sent to Tramy Van for tax year 2010 (basically denying sending Notice # 2 and # 3).

The next year, Tramy Van filed another petition (15694-18) based solely on tax year 2010, attaching Notice # 2, which was received from Denny Chan’s counsel.

In the 4460-17 case, the IRS filed a Motion for Leave to File Amended Answer, admitting sending the 2010 Notice to Petitioner, with an attachment of Notice # 3, arguing the Court has jurisdiction over 2010.  That same day, they filed a Motion to Consolidate Mr. Chan’s case with the 4460-17 case.  The next day, both motions were granted.

In the 15694-18 case, the IRS filed a Motion to Close on Ground of Duplication, which was later denied.  The IRS later filed a Motion to Dismiss for Lack of Jurisdiction on 1/31/19.  They attached a certified mailing list, showing Notice # 3 was mailed 11/23/16 (this document came nearly two years after the 4460-17 petition).  Since the 15694-18 petition was filed 8/9/18, the IRS motion to dismiss was granted because the petition was untimely, filed eighteen months after the 90-day period for filing the petition expired.

Turning to the analysis in this case, the 2010 notice was deemed received by Petitioner in the 15694-18 case when sent to her last known address on 11/23/16, treating Notice # 3 as a valid notice of deficiency.

Next, since Notice # 3 was sent by certified mail on 11/23/16, a petition would be timely if postmarked on or before 2/21/17.  The 4460-17 petition was filed 2/21/17, within the statutory 90-day period, making it a timely filed petition.

Is there an objective indication Tramy Van contested the 2010 determination?  In order to do so, a taxpayer must give an objective indication of contesting a deficiency determined by the IRS against the taxpayer.  The petition must be ascertainable about the issues presented and give the parties and the Court fair notice of the matters in controversy and the basis for their respective positions.

The petition states that Tramy Van contests all changes to her 2010 return concerning her as an individual and regarding her two businesses.  She states she was not in actual receipt of the notice, which is why it was not attached.  She was in receipt of Notice # 1, which has a connection from 2011 to the disallowed net operating loss carryforward disallowed from 2010.  By stating she contested the changes for years 2010 through 2013, she gave notice to the Court and the IRS that 2010 would be a matter in controversy within the petition.

The Court denied the IRS motion to dismiss for lack of jurisdiction for Tramy Van as to tax year 2010.  All other arguments raised by the parties were deemed either moot or without merit.

Takeaway:  The multiple notices and petitions have led to a good amount of confusion that needed sorting out.  It is fortunate for Tramy Van that she listed the year 2010 on her petition, plus mailed the petition in a timely fashion, or it likely would have been dismissed before the Tax Court.

What Is a Deficiency?

Docket No. 5307-19S, Rajan R. Kamath v. C.I.R., Order of Dismissal for Lack of Jurisdiction available here.

Mr. Kamath did not timely file his federal tax returns for tax years 2011, 2012, 2013 and 2015.  The IRS audited him and prepared substitute tax returns under section 6020(b) and mailed 30-day letters regarding the income tax deficiencies for the years at issue.  Mr. Kamath filed delinquent tax returns for those years, leading the IRS to process the tax returns, resulting in tax liabilities and additions to tax under sections 6201(a)(1) and 6651(a)(2).

The IRS issued a notice of deficiency for the four tax years.  There were no deficiencies in federal income tax listed, but they determined Mr. Kamath to be liable for the following additions to tax based on his delinquent tax returns:  section 6651(a)(1) [late filing] for all four tax years, section 6651(a)(2) [late payment] for tax years 2013 and 2015, section 6654 [failure to pay estimated tax] for tax years 2012, 2013, and 2015.  Mr. Kamath timely filed a petition for redetermination challenging the notice of deficiency.

In the analysis, section 6212(a) authorizes the IRS to send notices of deficiency to taxpayers.  The question is – did the IRS determine a “deficiency” within the meaning of the Code?  Section 6211(a) defines a “deficiency” as the amount by which the tax imposed by subtitle A and B, or chapters 41 to 44 of the Code, exceeds the excess of the sum of the amount shown as the tax by a taxpayer on the taxpayer’s return plus the amounts previously assessed as a deficiency, over the amount of rebates made.  Section 6665(a) states the general rule that additions to tax are treated as “tax” for purposes of assessment and collection.  Section 6665(b) provides an exception to the general rule, however, that subsection (a) shall not apply to additions of tax under sections 6651, 6654, or 6655, except for applications of 6651 additions, to the extent such addition is attributable to a deficiency in tax under section 6211, or additions described in section 6654 or 6655, if no return is filed for the taxable year.

Mr. Kamath filed delinquent federal income tax returns for the four years that the IRS assessed under 6201(a)(1).  In the Court’s review, the tax liabilities reported do not constitute income tax deficiencies under 6211(a).  Also under 6665(b), the additions to tax are not “tax” subject to the Court’s jurisdiction.  The additions to tax under 6654 are also not subject to the deficiency procedures because Mr. Kamath filed delinquent tax returns for the years in issue.  It followed that the notice of deficiency is invalid and the Tax Court is obliged to grant the IRS motion to dismiss.

The Court has some sympathy to the petitioner’s argument that it is inequitable to deny him the opportunity to petition the Tax Court.  As they have said previously, “We recognize the difficult position in which petitioners are placed by not being able to come to the Tax Court to test the validity of the respondent’s action in asserting the penalty.  Nevertheless, that is the law and we must take it as we find it.”

The Court ordered that the IRS motion to dismiss for lack of jurisdiction is granted and dismissed the case for lack of jurisdiction on the ground that the notice of deficiency is invalid.

Takeaway:  Mr. Kamath’s delinquent filing of his tax returns led to greater issues with the IRS than if he had timely filed his tax returns.  If he had not filed those tax returns late, all of the penalties would have been on the statutory notice of deficiency the IRS would have been required to send in order to assess the taxes and he could have contested them in Tax Court.  By filing the late returns, Mr. Kamath cut off his ability to contest the penalties in a pre-payment forum.  The lesson here is that a taxpayer who doesn’t file his return and now wants to contest the late filing and late payment penalties that will necessarily follow should not agree with the IRS when it proposes an IRC 6020(b) return but should instead wait for the notice of deficiency which will give him the opportunity to put on information about the tax itself and probably settle it at the same place he would have been had he filed the late returns while preserving his pre-payment right to go to Tax Court to contest the penalties.  Unless he has very unusual facts the preservation of the pre-payment right to contest the penalties may not be of much value.

Is It a Payment or a Deposit?

Docket No. 25757-18S, Albert Carnesale & Robin Carnesale v. C.I.R., Order available here.

Before we dig into the issue of deposits versus payments, I am going to provide some citations where you can read more on the subject.  One prior post in Procedurally Taxing is available here.  You can also turn to the Saltzman and Book text in ¶6.06 Advance Remittances: Deposits vs. Payments.

Originally, the IRS mailed to the petitioners a CP2000 notice, stating that they owed additional tax of $23,171 for tax year 2016, an accuracy-related penalty under IRC section 6662(a) of $4,220, and interest of $1,120, offset by a credit of $2,070.  In response, the accountant for the Carnesales sent a letter to the IRS with a check for the tax liability.  The letter stated that they agreed with the changes in tax liabilities, but requested a waiver of the tax penalty.

The IRS followed up with a notice of deficiency with the same amounts for the tax liability and accuracy-related penalty.  The Carnesales filed their petition with the Tax Court, stating that they do not contest the underlying liability but do contest the penalty.  The IRS filed a motion to dismiss for lack of jurisdiction on the ground the notice of deficiency is invalid because the Carnesales paid the tax liability before the notice of deficiency was issued to them.

The IRS argues that the remittance should be treated as a payment of tax instead of a deposit because the Carnesales failed to follow the procedures in Rev. Proc. 2005-18, 2005-1 C.B. 798, to properly designate the remittance as a deposit.

In the transcript for 2016 submitted by the IRS, the remittance is recorded as “Advance payment of tax owed”.  No assessments were entered for the tax, penalty, or interest proposed in the CP2000, leaving a credit balance in the account for the Carnesales.

Contrary to the procedures established in Rev. Proc. 2005-18, the remittance was not offset by a corresponding assessment of tax to which the “payment” relates.  The Court concludes that the IRS treated the remittances as a deposit, not a payment, and did not assess additional tax equal to the amount of the remittance before issuing the notice of deficiency.

The Court dismissed the motion to dismiss for lack of jurisdiction.  Trial is currently scheduled for January 13 in Los Angeles.

Takeaway:  While there are procedures for designating a remittance as a deposit in Rev. Proc. 20015-18, it looks like the petitioners were fortunate in how the IRS treated the remittance so the case was not dismissed for lack of jurisdiction and they can be heard at their day in court.

Acting NTA Blog Highlights Role of TAS Recommendations on Taxpayer First Act Legislation and Challenges That The IRS Faces

Acting National Taxpayer Advocate Bridget Roberts’ recent blog post Highlights of the Taxpayer First Act and Its Impact on TAS and Taxpayer Rights discusses some of the main TFA provisions, including the impact of TFA on TAS and how many of TAS’ past recommendations have had a direct impact on the legislative changes.  While many of the provisions of TFA influence tax policy and administration rather than directly impacting tax procedure, the policy and administration changes will have direct and indirect influences on the tax procedures facing taxpayers and practitioners.

The post includes useful links to some of the major TFA changes. Some of the provisions are starting to generate litigation (see, for example, what evidence the Tax Court can consider in innocent spouse cases, a topic that PT has covered already a few times –see Christine’s discussion at TFA Update: Innocent Spouse Tangles Begin.)

In this post I will highlight the key parts of the post as well as offer some brief comments on some of the challenges the IRS faces as it marches toward meeting the TFA requirement of reporting on customer service and modernization.

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Highlights of NTA Post

First, the post is a reminder of how important TAS’s reports have been over the years as a contributing factor to legislative change. The Acting NTA notes that about 25 provisions within TFA were “recommended or strongly supported by the NTA or TAS.” The NTA blog post has a handy table with the TFA provisions, as well as links to underlying TAS work that relates to the TFA provisions.

Second, the post emphasizes that a few of the TFA changes directly implicate TAS, including the following:

  1. New rules on the next permanent NTA’s salary to limit the possibility that an NTA will face a personal financial conflict of interest when interacting with the Commissioner,
  2. A codification of the Taxpayer Advocate Directive (TAD) authority to make somewhat analogous the NTA’s ability to elevate systemic issues with its ability to raise individual case matters in Taxpayer Assistance Orders,
  3. Reducing the NTA’s annual reporting requirement on the most serious problems from 20 to 10,
  4. Requiring coordination with TIGTA on research studies, and
  5. Requiring the IRS to provide statistical support on TAS research studies, and requiring the NTA in the research reports to report in whether the IRS provided the support and determined the validity of the information.

Finally, the post praises for IRS and the way it is prioritizing implementing some of TFA’s sweeping changes, including the setting up of a dedicated “office within the IRS to oversee and coordinate the agency’s TFA implementation efforts.” While noting that the office includes the Commissioner’s Chief of Staff and executives from W&I, SBSE and IT, the Acting NTA notes one concern:

My one concern is that TAS has not been included as a core member of the TFA implementation team. Congress created the position of the NTA to serve as the statutory voice of the taxpayer within the IRS. To implement the aptly named “Taxpayer First Act,” I believe TAS should have a seat at the table to the same extent as key IRS operating divisions, particularly for purposes of implementing the TFA requirements that the IRS develop a comprehensive customer service strategy, modernize the IRS’s organizational structure, create online taxpayer accounts, and develop a comprehensive employee training strategy that includes taxpayer rights.

Concluding Brief Thoughts on TFA and Challenges the IRS Faces

In the run up to TFA and its requirement that IRS report on modernizing its structure and customer service strategy, IRS has dedicated a significant amount of time and energy around these issues. To that end see, for example the 2019 IRS Integrated Modernization Business Plan, released a few months before TFA became law this past summer. Part of the business plan had its origin in the IRS Future State initiative, as the GAO discussed in a 2018 letter with the subject Tax Administration: Status of IRS Future State Division to Senators Hatch and Wyden. That letter provides a nice historical perspective on Future State and its rebranding. Future State was a topic that inspired the recently retired NTA Nina Olson to conduct nationwide forums, which was a Special Focus in the NTA’s 2016 Annual Report to Congress.

In an era of scarce resources and rapid technological changes, tax administrators worldwide are focusing on how to efficiently deliver services. Online tools offer the promise of taxpayers able to help themselves, and minimize costly person-to-person exchanges.

Yet, one of the key themes that emerges from reading the transcripts of the 12 TAS led public forums on taxpayer needs and preferences is that there is a wide range of taxpayer resources and skills. Failing to recognize those differences when building models of service and enforcement can have an outsize impact on vulnerable taxpayers.

A Pew Research Center piece from earlier this year highlights the differing levels of access to technology across income classes, as well as the different ways that lower income individuals access the internet (see below). Simply put, lower income individuals have less access to the internet. When they do access the internet, they are often dependent on smart phones rather than tablets, laptops or desktops. The reliance on smart phones for internet access for more vulnerable taxpayers, combined with how important refundable credits are to the economic welfare of low and moderate income Americans, means that a tax system that fails to recognize the preferences and needs of these taxpayers is likely to fail to deliver quality service to many taxpayers who most need it.

This is a key challenge for those who are charged with the responsibility of ensuring that we have a 21st century tax system that delivers to all taxpayers. There is no simple way to build a world class tax system, especially one that is charged with not just collecting revenues (a herculean task in itself) but also a system that is responsible for delivering benefits that can mean the difference between living in and out of poverty.

Tax Court Proposes New Rules

On November 25th the Tax Court issued a press release announcing proposed amendments to its rules and a new fee schedule.  The amendments do not make major changes to the rules.  Essentially, the amendments make a few stylistic changes to the language of the affected rules and they replace Appendix II of the current rules with a reference to the Court’s web page and its schedule of fees and charges on the site.  The web page containing the Court’s fees has not been updated since 2016.  The proposed fee changes are contained in the press release at the end of the release.

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Based on the proposed fee changes, the Tax Court will remain one of the cheapest courts in which to file a petition.  At $60 for a petition, the cost of filing in the Tax Court has got to be one of the great bargains at this point.  For that small fee you get full access to the Tax Court no matter whether you are Google or an individual with modest income and no matter whether your case will have 100 motions or none.  There are no add ons once you are in the Tax Court.  It does not charge an additional fee for certain actions in the case.  It also regularly waives the fee with little fuss for individuals who are low income.

The biggest change occurs in the section on the “Periodic Registration Fee.”  Here is the change and the explanation:

(g) Periodic Registration Fee: (1) E The Court is authorized to impose on each person admitted to practice before the Court shall pay a periodic registration fee. The frequency and the amount of such fee shall be determined by the Court, except that such amount shall not exceed $30 per calendar year. The Clerk shall maintain an Ineligible List containing the names of all persons admitted to practice before the Court who have failed to comply with the provisions of this paragraph (g)(1). No such person shall be permitted to commence a case in the Court or enter an appearance in a pending case while on the Ineligible List. The name of any person appearing on the Ineligible List shall not be removed from the List until the currently due registration fee has been paid and arrearages have been made current. Each person admitted to practice before the Court, whether or not engaged in private practice, must pay the periodic registration fee. As to forms of payment, see Rule 11.

(2) The fees described in paragraph (g)(1) of this Rule shall be used by the Court to compensate independent counsel appointed by the Court to assist it with respect to disciplinary matters. See Rule 202(h).

Explanation

It is proposed that Rule 200(a)(2) and (3) be amended to delete references to Appendix II and replace them with references to the new Fee Schedule, which will be available on the Court’s website. It is also proposed that Rule 200(g)(2) be deleted. Code section 7475(b) describes how the Court may use periodic registration fees.

Most readers will scratch their heads trying to understand what the periodic registration fee is and when they should pay it.  A good reason for scratching your head about this fee is that only Tax Court bar members of a certain vintage will ever have paid this fee.  In my 40+ years of membership in the Tax Court bar I have paid it once.  The one time the periodic fee was imposed during my tenure, it was small but that did not stop those of us working for Chief Counsel from complaining since we had to pay it out of our own pockets.  As a government attorney you have a duty to complain about things like this.  The rule change does not signal that the court is about to impose a periodic fee again but simply provides that if it does the fee will be no more than $30 a year and the money collected will not go just to pay attorneys the Tax Court hires to go after members of its bar with possible disciplinary issues. 

For readers not intimately familiar with IRC 7475(b), the periodic fees can not only pay for hiring independent counsel but can also be used “to provide services to pro se taxpayers.”  The Tax Court regularly uses the fees to pay for costs that benefit pro se taxpayers such as paying for its web site explanations and paying for translators to assist with their cases.  By allowing the Tax Court to use periodic fees for this purpose, Congress fosters the already welcoming atmosphere that the Tax Court creates for pro se litigants.

Speaking of complaining, my one complaint about the proposed change in the fee schedule is that it does not reduce the fees for requesting copies or differentiate between parties making the requests.  The Tax Court is not a part of PACER.  Therefore, it is not a part of the ongoing litigation about the high cost of PACER fees; however, it’s interesting to note that the “high cost of PACER fees” alleged in the ongoing litigation concerning access to public documents involves fees considerably lower than the Tax Court’s fees and involves a system that routinely grants free access to documents to occasional users and users from organizations representing low income individuals.  There’s more to the issue than just fees and the Tax Court offers for free all of its orders (not only providing them gratis but providing a magnificent search feature).  Comparing the Tax Court’s public access provisions to PACER is somewhat, but not totally, apples to oranges.  Still, the Tax Court could make documents more accessible and cheaper.  As someone who regularly visits the Tax Court’s docket room to research cases on upcoming calendars in my city and for other purposes, I would appreciate a closer look at both access to and fees for the court’s documents.  We have previously written about access issues here and here.

Whose Household is It?

The IRS just issued two FAQs providing information regarding offers in compromise (OIC).  One of the FAQs is unremarkable while I find the other FAQ inadequate for reasons that I will explain further below. 

Every year in the seminar that accompanies the clinic, I devote one class to offers in compromise because so many of the clients coming to the clinic need an offer in compromise or, at least, need us to analyze whether they qualify for an OIC.  I tweak the fact pattern a little bit every year but I still use the fact pattern developed by Les Book when he ran the tax clinic at Villanova before I took his place.  The first issue presented by the case involves the taxpayer’s household.  The students do not find the IRS’ instructions clear on this point.  This year, as is typical, about half of the students found that taxpayer’s household included persons he was living with and half found that the taxpayer had a household of one.  Why do they have trouble with this basic issue?

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The fact pattern has Steve Freshstart living with his girlfriend.  Steve moved in two months ago.  Steve and the girlfriend maintain separate bank accounts.  Steve pays has $900 a month to cover his share of the rent and utilities on the apartment.  Steve buys his own food.  Steve uses his money for Steve while his girlfriend, Cindy, uses her money for herself and her two children.  Whether Steve must include his girlfriend’s finances in his offer in compromise matters not only to the computation of his allowable living expenses and ultimately his reasonable collection potential but also to his relationship with his girlfriend.

Imagine you are Cindy and your boyfriend who moved in with you two months ago now needs you to bare your financial soul to the IRS because you are living together even though your financial living arrangement seems very much like one of roommates rather than soulmates.  If Steve must ask Cindy to provide all of her financial information to the IRS just because she shares an apartment with him seems unnecessarily intrusive yet the IRS instructions lead half of my students to that conclusion.  The latest FAQs do nothing to alleviate the confusion. 

Here are the new FAQs:

Q. Does Form 8821, Tax Information Authorization, allow taxpayers to designate a third party to represent them before the IRS on an OIC?

A. No. Form 8821 does not authorize a third party to speak on the taxpayer’s behalf or to otherwise advocate the taxpayer’s position before the IRS. Form 8821 only authorizes the designated third party (appointee) to inspect and/or receive a taxpayer’s confidential information for the type of tax and the years or periods the taxpayer lists on their Form 8821. Therefore, a taxpayer’s appointee cannot represent the taxpayer in a collection matter, such as an OIC before the IRS. Taxpayers should use Form 2848, Power of Attorney and Declaration of Representative, to authorize an individual to represent them before the IRS.

Q. Does a taxpayer need to include his or her spouse’s income on the taxpayer’s Form 433-A (OIC), If the taxpayer’s spouse doesn’t owe taxes?

A. Yes. A taxpayer needs to provide information about the taxpayer’s entire household’s average gross monthly income and actual expenses when making an OIC. The taxpayer’s entire household includes all individuals, in addition to the taxpayer, who contribute money to pay expenses relating to the household, such as rent, utilities, insurance, groceries, etc. The IRS needs this information to accurately evaluate the taxpayer’s OIC. The information may also be used to determine the taxpayer’s share of the total household income and expenses and what the taxpayer can afford to pay the IRS.

 The first FAQ provides a logical piece of information, viz., that a person who does not represent the taxpayer cannot represent them in an OIC.  The Form 8821 permits the holder to receive information but has nothing to do with representation of a taxpayer before the IRS.  While I do not know how necessary it was to issue this FAQ because I have no idea how many people try to represent a taxpayer based on a form allowing them to merely obtain information, I have no problem with this FAQ.

The second FAQ provides very little information that will assist my students in deciding what to do with Cindy and her children.  In the simulated problem they have, it’s really just a question of math whether Cindy’s finances get added to Steve’s since the students do not need to interface with Cindy.  In real life the questions become much stickier.  On several occasions the clinic has encountered significant others quite reluctant to bare their finances to the IRS and quite put out with the clinic for suggesting that they must do so or their boyfriend/girlfriend will not reach the promised land of an OIC.

My view is that the IRS does not need or really want Cindy’s financial information.  At this point in the relationship she is financially a roommate rather than someone whose finances have intertwined with the taxpayer needing collection relief.  It is no more appropriate to ask her for financial information than it is to ask college roommates to provide financial information should one of the other roommates seek an offer in compromise.  Yes, she and Steve live in the same household and share the same bed but they do not share finances and that is the critical factor in requiring her financial information.

These questions can be close.  Deciding who constitute a household requires more than simply sharing space.  The FAQ would help if it made that clear and if it was written so that Harvard and Villanova law students could figure out who belongs to a household for this purpose.  If these law students cannot make that determination, imagine how hard it is for pro se taxpayers to try to work their way through this problem. 

Offset – Whose Funds Does the IRS Hold

In the recent case of Laird v. United States,  (5th Cir. 2019) the court addressed the issue of whether the IRS could offset an overpayment resulting from an attempted designated payment.  The Fifth Circuit distinguished earlier circuit precedent that the IRS could offset extra money that a taxpayer sent by creating a rule that the IRS can only do so when it applies the extra money to the tax account of the person remitting the money.  The rule makes sense but here the facts get muddy.

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If you have never represented someone who might have the trust fund recovery penalty (TFRP) assessed against them, you might wonder why one taxpayer would pay the taxes of another.  Sure, there are many good and generous people in the world and we are in the giving season, but still, the payment of someone else’s taxes is not a customary holiday gift nor an ordinary act at any time of the year.  The picture becomes clearer when the TFRP enters the picture.  Let’s look at a typical fact pattern.

Corporation A builds buildings.  It has 20 employees.  Business has been slow, but it expects a turnaround at any time.  Corporation A has a cash flow problem.  To get it through the lean times, it looks for ways to conserve cash.  One way it decides to do this is to pay its employees their salaries, otherwise they will walk, but to hold off on paying the IRS the withheld taxes and the employer’s share of FICA.  Corporation A anticipates that it will soon have a contract that will allow it to make the tax payments and has no intention of stiffing the IRS.  Unfortunately, the business downturn lasts longer than it anticipates, and some of its accounts do not pay on time.  The unpaid taxes build up for several months at which time a friendly revenue officer appears at the door of Corporation A to demand payment, or levies will occur and the responsible officers will have the TFRP assessed against them pursuant to IRC 6672.

An officer of Corporation A, Bob, decides that the best thing to do in order to avoid the consequences of non-payment of the taxes is to pay them himself.  He sends the IRS a check for the unpaid taxes and designates on the check how the funds should be applied.  Unfortunately, he miscalculates the amount of debt that brought the revenue officer to the door of Corporation A and he sends a check for too much.  While it does not happen too often that a corporate officer sends in too much in this situation, it does happen, and it did happen in the Laird case.

The IRS knew what to do with the extra money.  It applied the funds to another debt of Corporation A which had not yet reached the hands of the revenue officer or it applied the debt to the non-trust fund portion of Corporation A’s outstanding liability.  Bob did not intend to pay the non-trust fund portion of Corporation A’s debt because he had no personal liability for this debt.  He only sought to pay the trust fund portion.  He requests that the IRS return to him that portion of the check which overpaid the liability he sought to satisfy.  The IRS argued that it had the right to offset this money against other debts of Corporation A.

In the case of United States v. Ryan, (11th Cir. 1995), the Eleventh Circuit answered the question in this case by holding that the IRS could keep the extra amount of a check sent in with a specific designation; however, in Ryan the taxpayer sending the check was the same taxpayer who owed the money.  In Laird the person sending in the money, like Bob, is not the taxpayer.  The entity, like Corporation A, is the taxpayer.  The Fifth Circuit holds that this distinction makes a difference.  Here, it holds that the individual (Bob) may require the excess amount be returned to him.  In the case, however, these facts were unclear.  The Fifth Circuit could not tell the true source of the funds.  So, it remanded the case to the district court for a determination of the true payor of the funds.  If the IRS can show that the corporation really paid the funds instead of the individual, then the IRS will be allowed to offset the funds.  If the individual can show that the money was his, then the IRS must return the money to him.