Preview of This Week’s ABA Tax Section Virtual Fall Meeting

The ABA Section of Taxation kicked off its Fall Meeting virtually yesterday, with a plenary address by Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation, followed by CLE programs from the Corporate Tax, Employee Benefits, State & Local Tax, and Transfer Pricing committees. A full week of programming follows, starting at 10:30 AM Eastern each day.

I will preview several sessions of interest in this post. The full program is available here, with the “schedule at a glance” here. To register, click here. (Registration is free for J.D. and LL.M. students, and $25 for LITC practitioners.)

Sessions are all held live, but registrants can also view sessions on replay – a major bonus of the virtual format for those of us who like to attend multiple committee meetings and for those with conflicting obligations.

read more...

The CLE sessions presented yesterday are already available for viewing, as is the plenary address, Rewriting the Internal Revenue Code in a Pandemic, presented by Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation. Those curious about the budget reconciliation process, the Byrd rule, and what tax writing looks like on the ground will find it illuminating and thought-provoking. The plenary session also includes remarks by Julie Divola, Chair of the Tax Section, by Wells Hall, Chair-Elect, and by Caroline Ciraolo, Vice Chair of Membership, Diversity & Inclusion.  

Readers of this blog may be interested in the panels happening at the Administrative Practice, Individual & Family Taxation, Civil & Criminal Tax Penalties, Court Procedure & Practice, Diversity, Tax Collection, Bankruptcy and Workouts, and Teaching Tax Committees, as well as the Pro Bono and Tax Clinics Committee. There are too many excellent panels to highlight them all here. Several committees also offer informal networking events, and the week ends with the always excellent Women in Tax Forum. I encourage readers to check out the full program and the schedule at a glance.

The Civil & Criminal Tax Penalties committee offers two programs today, at 12:30 and 2:30 p.m. ET. Part One includes subcommittee reports on important developments, followed by a cutting-edge discussion evaluating taxpayers’ exposure from their participation in COVID relief programs. Part Two presents additional important developments, and a final panel on taxpayer privacy versus the public’s right to know at 3pm, at which PT contributor Nina Olson is speaking.

Taxpayer Privacy v. The Public’s Right to Know. In the wake of the Watergate scandal Congress substantially increased the statutory protections for taxpayer privacy, including imposing criminal penalties for various forms of unauthorized disclosure. At the same time, the First Amendment provides for freedom of the press and journalists are tasked with informing the public on matters of national import. Recently, high profile leaks of tax return information have led to blockbuster reports by ProPublica (on the tax strategies of high net-worth individuals) and the New York Times (on former President Trump’s tax returns), among others. This panel will explore what I.R.C. §§ 6103 and 7213 protect and prohibit, how these laws potentially interact with the First Amendment, how newsrooms think through the legal and ethical questions surrounding the publication of leaked or stolen information, and more.

Moderator: Benjamin Eisenstat, Caplin Drysdale, Washington, DC

Panelists: Jesse Eisinger, Senior Reporter & Editor, ProPublica, Washington, DC; Cara Griffith, President and CEO, Tax Analysts, Washington, DC; Nina Olson, Executive Director, Center for Taxpayer Rights, Washington, DC; Jenny Johnson Ware, McDermott Will & Emery, Chicago, IL

The Administrative Practice committee teams up with the Court Procedure & Practice committee to present three joint sessions tomorrow. The Current Developments program at 10:30 ET is sure to be of interest to PT readers. The second program at 12:30 p.m. ET concerns CIC Services, which PT has covered in many prior posts, several of which can be found here, with Les’s most recent post here. The third session focuses on John Doe Summonses and begins at 2:30 p.m. ET on Wednesday.

Current Developments. This panel will include a report from the Tax Court, as well as a discussion of significant IRS guidance and pending litigation.

Moderators: Kandyce Korotky, Covington & Burling LLP, Washington, DC; Michael J. Scarduzio, Jones Day, New York, NY

Panelists: The Honorable Emin Toro, U.S. Tax Court, Washington, DC; Richard G. Goldman, Deputy Associate Chief Counsel (Procedure & Administration) Office of Chief Counsel, IRS, Washington, DC; Natasha Goldvug, Department of Treasury, Washington, DC (Invited)

CIC Services, LLC v. Internal Revenue Service: Opening the Floodgates to Pre-Enforcement Tax Litigation? In a unanimous decision, the Supreme Court held that the Anti-Injunction Act’s bar on lawsuits for the purpose of restraining the assessment or collection of taxes did not bar a pre-enforcement challenge under the Administrative Procedure Act of an IRS reporting rule backed by tax penalties. This panel will discuss helpful background regarding the Anti-Injunction Act and Administrative Procedure Act; examine the facts of the case and key arguments presented to the Court by the parties and amici curiae; and debate the implications of the Court’s ruling for pre-enforcement lawsuits challenging the validity of Treasury and IRS rules and regulations.

Moderator: Antoinette Ellison, Jones Day, Atlanta, GA

Panelists: Bryan Camp, Texas Tech University School of Law, Lubbock, TX; Kristin Hickman, University of Minnesota Law School, Minneapolis, MN; David W. Foster, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC; Gil Rothenberg, former Chief of the Justice Department Tax Division’s Appellate Section, Adjunct Professor of Law at American University’s Washington College of Law, Washington, DC

Also on Wednesday afternoon, Teaching Taxation presents an important program on promoting diversity, equity, and inclusion in tax at 12:30.

Promoting Diversity, Equity, and Inclusion in Tax: Ideas and Resources for Mentoring Diverse Students and Leading Discussions of DEI in Tax. (Recommended for Young Lawyers) “We will all profit from a more diverse, inclusive society, understanding, accommodating, even celebrating our differences, while pulling together for the common good.” Ruth Bader Ginsburg. “Diversity requires commitment. Achieving the superior performance diversity can produce needs further action − most notably, a commitment to develop a culture of inclusion. People do not just need to be different, they need to be fully involved and feel their voices are heard.” Alain Dehaze. This panel will document the need for greater diversity in the field of tax law − in practice and in Academia – and share ideas to promote this goal, with a focus on law students and recent law school graduates. The panelists will (1) provide information about existing programs to promote DEI in the tax profession, (2) discuss ways to build the tax profession pipeline, to recruit and retain diverse tax attorneys, and to provide strong platforms for professional success, and (3) solicit audience participation and ideas for new initiatives.

Moderator: Katie Pratt, Professor of Law and Sayre Macneil Fellow, LMU Loyola Law School Los Angeles

Panelists: Professor Alice Abreu, Honorable Nelson A. Diaz Professor of Law and Director, Temple Center for Tax Law and Public Policy, Temple University Beasley School of Law, Philadelphia, PA; Caroline D. Ciraolo, Kostelanetz & Fink, LLP, inaugural Vice Chair, Membership, Diversity, and Inclusion, Tax Section Council, ABA; Professor Steven Dean, Brooklyn Law School; Honorable Juan F. Vasquez, US Tax Court; Lany L. Villalobos, Kirkland & Ellis, LLP, Assistant Secretary, Tax Section Council, American Bar Association (2021-2022), Immediate Past-Chair, ABA Tax Section Diversity Committee

Wednesday afternoon’s programming continues with a Diversity Committee session on return preparer fraud at 2:30 p.m.

Protecting Vulnerable Taxpayers Against Tax Preparer Fraud. (Recommended for Young Lawyers) Many taxpayers turn to paid tax preparers to help them navigate the tax code and accurately prepare their tax returns each year. While most tax return preparers are qualified and professional, unscrupulous tax return preparers do exist and can cause financial hardship and legal problems for the taxpayers who hire them. This is especially true for low-income taxpayers and other vulnerable communities. This panel will provide a comprehensive discussion of tax return preparer fraud and how to help those who have been taken advantage of by unethical tax return preparers. Panelists will identify resources to report tax return preparer fraud and what options are available to taxpayers to help remedy the damage caused by the tax return preparer. Lastly, the panel will discuss regulation of tax return preparers and what steps the tax community can take to reduce the risk of tax return preparer fraud.

Moderator: Shahin Rahimi, Legal Aid Society of San Diego, San Diego, CA

Panelists: Hana M. Boruchov, Boruchov Gabovich & Associates PC, New York, NY; Omeed Firouzi, Philadelphia Legal Assistance, Philadelphia, PA; William Schmidt, Legal Aid of Western Missouri, Kansas City, MO; Patrick W. Thomas, Frost Brown Todd, Louisville, KY

The Pro Bono and Tax Clinics committee presents two programs on Thursday morning. The first panel highlights administrative barriers that often prevent low-income taxpayers from receiving tax benefits to which they are entitled. This discussion is extremely timely as Congress debates whether to extend advance CTC payments.  We have covered problems with the IRS identity verification program here and here. Nina Olson wrote about problems with customer service and return processing recently here.

The second panel on determining a taxpayer’s “last known address” under the Code is a topic that has also prompted many PT posts.

Barriers to Tax Benefits: Resolving ID Verification and Payment Delivery Issues. (Recommended for Young Lawyers) The CARES Act and American Rescue Plan Act expanded numerous important benefits for low-and-middle income individuals delivered through the tax code -for example, the Advance Child Tax Credit and the Recovery Rebate credits. This panel will discuss numerous barriers that have emerged in getting those payments to the rightful recipients including ID verification issues, payments to the unbanked, and working with incarcerated individuals and the housing insecure.

Moderator: Anthony Marqusee, Philadelphia Legal Assistance, Philadelphia, PA

Panelists: Laura Baek, IRS TAS, Washington, DC; Barbara Heggie, Low-Income Taxpayer Project, Concord, NH; Nanette Downing, Director of Identity Assurance, IRS, Washington, DC; Denise Davis, Director of Return Integrity Verification Program Management, Atlanta, GA

A Simple Question with a Complicated Answer: Determining a Taxpayer’s Last Known Address. (Recommended for Young Lawyers) Many IRS notices are required to be mailed to a taxpayer’s “last known address.” Failure of the IRS to properly mail such notices can carry profound consequences. Determining exactly what a taxpayer’s last known address should be, however, is increasingly contentious. This panel will review the regulatory and subregulatory guidance on what is required for a taxpayer to effectively change their address with the IRS. It will also discuss how the recent 3rd Circuit decision Gregory v. Commissioner and the online IRS “portals” may affect this area of law.

Moderator: Briana Fehringer, Partner at Anderson & Jahde, P.C., Littleton, CO

Panelists: Christopher Valvardi, IRS Office of Chief Counsel (P&A), Washington, DC; Audrey Patten, Harvard Legal Services Center, Jamaica Plain, MA

Speaking of IRS customer service, on Friday the Individual & Family Taxation Committee presents a two-part session featuring IRS Wage & Investment Commissioner Ken Corbin.

The Service of the Service: Interacting Now and in the Future. (Recommended for Young Lawyers) This two-part panel will examine the current state of IRS customer service and how technology may transform how the IRS interacts with taxpayers. Part one will focus on common scenarios that taxpayers, practitioners, and IRS personnel have faced with the continuing backlog of correspondence and return processing. The panel will focus on how practitioners have attempted, with varying degrees of success, to resolve these problems. It will bring together viewpoints from private practice, tax clinicians, the Taxpayer Advocate, and the IRS. Part two will focus on strategic IRS initiatives to use Artificial Intelligence (AI) and data analytics to automate core components of customer service – some already in testing. The panel will discuss the IRS’s concierge service initiative, which will be AI-driven with some IRS representative collateral support, and how the initiative interacts with the broader Taxpayer First Act implementation programs. The panel will explore issues of equity in accessing responsive service by different taxpayer populations.

Part One Panelists: Kenneth C. Corbin, Commissioner, Wage & Income Division, IRS, Atlanta, GA; Andrew VanSingel, Local Taxpayer Advocate, IRS, Chicago, IL; Olena Ruth, Ruth Tax Law, Denver, CO; W. Edward (Ted) Afield, Clinical Professor of Law and Director, Philip C. Cook Low Income Taxpayer Clinic, Georgia State University, Atlanta, GA

Part Two: Joshua Beck, Attorney Advisor, Taxpayer Advocate Service, Des Moines, IA; Leigh Osofsky, Professor of Law, University of North Carolina School of Law, Chapel Hill, NC; Joshua Blank, Professor of Law, University of California, Irvine School of Law, Irvine, CA; W. Edward (Ted) Afield, Clinical Professor of Law and Director, Philip C. Cook Low Income Taxpayer Clinic, Georgia State University, Atlanta, GA

Taxpayer Rights as Human Rights: Registration is open for the 6th International Conference on Taxpayer Rights

Back in pre-pandemic days, the Center for Taxpayer Rights planned to hold its 5th International Conference on Taxpayer Rights (ICTR) at the University of Pretoria in South Africa in October 2020.  We had a fascinating theme – Taxpayer Rights, Human Rights: Issues for Developing Countries.  We’d pulled together a great group of panelists, the locations in Pretoria were terrific, there was lots of excitement.

And then COVID hit.  We postponed the conference to October 2021, hoping we would be able to be there in-person.  Unfortunately, that is not to be; the University is pretty much operating remotely, and travel is restricted on the African continent.

But we are not deterred – the Center is holding the 6th ICTR online, from 05 to 08 October, 2021.  We will be having two panels a day, to accommodate all the different time zones.  The Conference will kick off with a free online workshop on 05 October on The Role of Tax Clinics and Taxpayer Ombuds/Advocates in Protecting Taxpayer Rights.  You can see the agenda here.  And you can register for the conference here.

read more...

Now, you may be thinking to yourself, this is not for me; I don’t practice tax law in a developing country.  Here are a few reasons why you might want to attend this conference.  First of all, I have to say that I have spent a lot of time over the last two decades meeting and working with different tax administrations; there are many things the US can learn from other tax agencies and systems, especially in terms of taxpayer service, technology, data use, and online accounts.  Developing countries often aren’t weighted down with legacy systems that require Rube Goldberg-like workarounds.  Every time I met with folks from another country’s tax agency, I learned something new about tax administration and also about my own country’s tax system vis a vis theirs.  This information is helpful when trying to improve our own system.

But there is a more important reason to focus on the issues raised when thinking about taxpayer rights as human rights in the context of developing countries.  Unlike developed countries, which have established tax systems and administrative structures, and a fairly high level of voluntary compliance, developed countries are … developing those things.  They cannot take anything for granted.  Most of them have emerged from colonial (read paternalistic/infantilizing) regimes.  They are wrestling with pandemics, unemployment, droughts, civil war and strife.  And they are trying to meet the basic needs of their population and provide them some human dignity.

Human dignity is at the heart of human rights.  And human dignity is the rationale behind government – that together we can meet the needs of the populace.  The United Nations has established 17 Sustainable Development Goals that governments should seek to achieve.  Governments must have funds to fulfill those goals and meet the needs of their people.  Developing countries often have young constitutions, with explicit recognition of human rights and the social contract between the government and its citizens.  Taxation is a key means for a state to fulfill that social contract.  These countries are wrestling with elemental principles that developed countries take for granted.  By taking them for granted, developed countries often forget why taxation exists – they forget first principles.

So, to that end, I encourage you to register for and attend the 6th International Conference on Taxpayer Rights.  It should be fascinating and give cause for reflection about our own status as a “developed” country.

Here’s the link for more information about and to register for the conference.

Congress to Consign IRC 6751(b) to the Graev?

Carl Smith brought to my attention that one of the provisions in the tax bill currently working its way through Congress proposes to repeal IRC 6751(b) and he provided me with the title to this post.  I joked with others on the email thread that such a repeal could spell the end of our blog.  We have written so many posts on this poorly drafted law that having it repealed could significantly reduce the topics upon which we would write.

The other thought that went through my head was that the IRS had regained its voice in influencing tax legislation.  In the 1960s, 1970s, and into the 1980s perhaps up to the first Taxpayer Bill of Rights legislation, the IRS had less to fear from adverse judicial precedent because it could generally fix bad precedent by going to Congress to reverse the problem caused by adverse precedent.  This influence seemed particularly present when Wilbur Mills chaired the Ways and Means Committee.  I have wondered about the impact of his dip in the Tidal Basin with Fanne Foxe on tax legislation and its trajectory.  For the past couple decades, or more, the IRS seemed to have lost that ability, although there are some notable exceptions.  Maybe it is returning.  Congressman Neal, be careful where and with whom you go swimming.

read more...

Congress passed 6751(b) as a part of the Restructuring and Reform Act of 1998 (RRA 98) in an effort to curb perceived abuse of penalty provisions to pressure taxpayers into conceding tax liabilities.  No doubt some IRS agents used penalties or the prospect of penalties to cajole taxpayers into settlements.  I never perceived this as a common practice, but I may not have been in the best position to observe behaviors regarding this issue.  Whether real or mostly imagined, the statute drafted to fix the alleged problem was drafted by someone with little or no knowledge of tax procedure.  It caused the Tax Court to twist itself into knots in order to interpret it and led Judge Holmes in dissenting from the interpretation in the Graev case to predict that the decision would led to many unpredicted and poor outcomes that he labeled Chai ghouls after the Second Circuit decision on this issue.  He was right, but that’s not to say the majority of the court got the Graev case wrong.  The statute is so poorly worded that no judge could draw the precise meaning.

One thing that saved the tax procedure world from 6751(b) for most of its life was that everyone ignored it.  Neither the IRS nor the bar seemed to pay attention to its requirements, whatever they were or are, for over 15 years.  Thanks to Nina Olson and the annual report to Congress and to Frank Agostino, litigation finally began to seek to provide meaning to the statute.  The cases have led to results that don’t necessarily follow the goal of the statute and that let many taxpayers off the hook for penalties, not because the IRS used them inappropriately as bargaining tools but because it failed to secure the appropriate approvals.  In some instances, the IRS would have had difficulty knowing what approvals would have been appropriate at the time of the imposition of the penalty since the court interpretation of the statute came several years thereafter.  Of course, the IRS could have headed this off with timely regulations that sought to interpret the provision and set up clear rules to follow but it did not create such regulations and suffered in several cases for its inaction.

Maybe this obit for 6751(b) comes too early.  Proposed legislation does not change the law.  Here is the language of the proposed repeal which contains its own surprise:

SEC. 138404. MODIFICATION OF PROCEDURAL REQUIREMENTS RELATING TO ASSESSMENT OF PENALTIES. 

(a) REPEAL OF APPROVAL REQUIREMENT.—Section 6751, as amended by the preceding provision of this Act, is amended by striking subsection (b).  

(b) QUARTERLY CERTIFICATIONS OF COMPLIANCE WITH PROCEDURAL REQUIREMENTS.—Section 6751, as amended by subsection (a) of this section, is amended by inserting after subsection (a) the following new subsection:  

‘‘(b) QUARTERLY CERTIFICATIONS OF COMPLIANCE.—Each appropriate supervisor of employees of the Internal Revenue Service shall certify quarterly by letter to the Commissioner of Internal Revenue whether or not the requirements of subsection (a) have been met with respect to notices of penalty issued by such employees.’’.  

(c) EFFECTIVE DATES.—  

(1) REPEAL OF APPROVAL REQUIREMENT.—   

The amendment made by subsection (a) shall take effect as if included in section 3306 of the Internal Revenue Service Restructuring and Reform Act of 1998.  

(2) QUARTERLY CERTIFICATIONS OF COMPLI ANCE WITH PROCEDURAL REQUIREMENTS.— 

The amendment made by subsection (b) shall apply to notices of penalty issued after the date of the enactment of this Act.

Notice in subsection (c)(1) of the proposed legislation that it repeals 6751(b) back to 1998.  Wow!  While wiping this statute off the books makes Congress look better and gets rid of a provision that makes it look incompetent, few examples exist of such a period of retroactivity.  Might the repeal itself, assuming it occurs, create yet more blog post opportunities for Procedurally Taxing?  Maybe the repeal is a good thing for the blog since the number of different permutations of 6751(b) may be dwindling, reducing the number of future posts if the current law continues unchanged.  A repeal such as this could be just the ticket for an additional round of posts as taxpayers whose cases are currently pending at some point on the continuum of audit or litigation will want to fight for the right to have their penalty removed.

Note also that section 6751(a), which provides that “The Secretary shall include with each notice of penalty under this title information with respect to the name of the penalty, the section of this title under which the penalty is imposed, and a computation of the penalty,” would not be repealed by the proposed legislation. The legislation would merely replace subsection (b) with a certification requirement within the IRS by managers on a quarterly basis as to their employees’ general compliance with subsection (a) – something likely of no use to taxpayers.

What about the sentiment that caused the essentially unanimous passage of RRA 98 regarding using penalties as an inappropriate bargaining chip?  Has the IRS cleaned up its act in this regard over the past quarter century?

We almost never write about pending legislation but with the opportunity to use the title to today’s post coupled with the possible loss of one of the most productive post producers, it seemed appropriate in this instance.  Now that you know about the proposal, you can start your lobbying efforts on behalf of the legislation or against it.  No matter which way this plays out, 6751(b) has to remain among the top few provisions as the worst ever drafted in the tax procedure realm.

IRS Did Not Appeal This Tax Court Decision. They Just Ignored It.

We welcome back commenter in chief Bob Kamman writing today about his experience in a Tax Court case.  One of the benefits of going to Tax Court is getting an attorney from Chief Counsel’s Office assigned to the case.  While not everyone will have a perfect encounter with the attorneys from Chief Counsel’s Office, dealing with them to fix a problem beats almost any other option offered in trying to fix a problem with the IRS.  Sometimes, paying the $60 to get to a Chief Counsel attorney can be worth the cost of admission.  If something goes wrong with the client’s case that relates to a year in Tax Court, don’t try to fix it by calling the place at the IRS that made the mistake or contacting the Taxpayer Advocate’s office, go straight to the Chief Counsel attorney, who will almost always be able to fix the problem with a lot less effort than it would otherwise cost you.  Keith


I’m Nobody! Who are you?

Are you – Nobody – too?

Emily Dickinson

About 20 months and one pandemic ago, I complained here about how IRS did not timely answer a Tax Court petition I had filed.

I feel better now. I’m not the only one IRS ignores. They ignore Tax Court orders also.

read more...

The tardy IRS answer was filed shortly after the blog post appeared. Judge Gustafson initially rejected it because it was not accompanied by a motion to request late filing. IRS Counsel filed a “motion for leave to file out of time answer,” it was granted, and the case proceeded two weeks later.

This case arose from a CP-2000 notice dated July 22, 2019, involving omitted income from a 2017 return. IRS initially proposed an assessment of $4,761 plus interest. On August 6, 2019, we provided documents showing the actual amount owed was only $2,847.

Two months later, the response from IRS was to issue a notice of deficiency dated October 15, 2019, for the same $4,761 shown on the CP-2000. This happened shortly after the end of the fiscal year, but I’m just guessing that timing had something to do with it.

My experience has been that IRS never rescinds a notice of deficiency, even though they have a form (8626) for agreeing to that. As Janet Hagy, a CPA in Austin wrote here, “obtaining a rescission is not an easy process. In most cases, it is probably more expedient to just file a Tax Court petition and use the Appeals process to resolve the case.”

So, in November 2019, my clients sent a check for $2,847 to IRS, identifying it as an advance payment under Section 6603. At the same time, we bought the $60 ticket to Tax Court and filed a petition. Chief Counsel’s January 2020 answer was late, but after that, they were quick to agree with us and stipulate to the $2,847 amount already paid.

On March 3, 2020, Chief Judge Foley signed the stipulated decision that the tax due was $2,847. This was one of his last actions before Covid-19 shut down the Tax Court building and then trials everywhere, within weeks.

My clients had paid the tax, but I told them to wait for a final bill from IRS before paying the exact amount of interest owed. They received a bill and paid it. I should have told them to let me review the bill, but what could go wrong?

What went wrong is that IRS in Ogden, Utah issued a revised CP-2000 five months later, on August 17, 2020, proposing an assessment of $3,057. A tuition tax credit was still being disallowed, although we had addressed that issue with them a year earlier. Then on September 14, 2020, like computer clockwork, a CP-22A first collection notice demanded payment of this amount, less the advance payment of $2,857. My clients paid the additional $210, along with $297 interest, and I did not discover the error until I heard from them again in April 2021 to prepare their 2020 returns.

By then it was a year into the pandemic. I mailed a letter on April 7, 2021, to the Counsel attorney who had handled the case, explaining what had happened and enclosing copies of relevant documents. There was no response.

So, on May 20, 2021, I filed a Form 911 asking my local Taxpayer Advocate for assistance with correcting the error. There was no response to that, either. Such has been my experience in other requests for Taxpayer Advocate help. I attribute it to my lack of academic or tax-clinic credentials.

Surely, I thought, the Tax Court must have some rule governing enforcement of its decisions when IRS ignores them. All I could find, though, was Rule 260, which deals with a “proceeding to enforce an overpayment determination.” There had not been an overpayment determination; my clients had agreed there was a deficiency. They had paid the exact amount ordered by the Tax Court decision. Our problem was with the IRS decision, which was to ignore the case history and demand more tax.

Fortunately, an unexpected development allowed me to suspend my search for possible Tax Court relief. The letter I had sent to the Counsel attorney at his last known address was returned to me as undeliverable, several months later. I checked the Tax Court docket online, and physical addresses no longer appear there. The only contact information is an email address.

So, I emailed my request for help. A couple weeks later, a paralegal specialist called and left a message that they are working on fixing the problem.

Maybe I’m not such a nobody, after all.

TIGTA Report Highlights Major Compliance Issues When Businesses Fail to Pay Salaries to Sole Shareholder S Corporations

We mostly stick to procedure on this blog. So we do not often talk about the taxation of entities. But most of us, even true procedure folks know that S corporations generally do not pay federal income tax on their profits. Instead, the profits flow through to shareholders and are not subject to self-employment taxes. This creates the incentive for shareholders to minimize or even fail to pay any compensation for service-providing S Corps. The savings for S Corps who fail to pay reasonable or in some cases any compensation means that there is a hefty amount of owed Social Security and Medicare taxes that the fisc misses out on (and I leave aside any 199A issues that create further incentives for S corps and their service performing shareholders to avoid or minimize salaries).  

A recent TIGTA report highlights the problem. While IRS has made employment taxes a priority, TIGTA notes that IRS selects few S corporations for examination.  On top of that, “when the IRS does examine S corporations, nearly half of the revenue agents do not evaluate officer’s compensation during the examination even when single-shareholder owners may not have reported officer’s compensation and may have taken tax-free distributions in lieu of compensation.”

This is bad news.  The study looked at a few years of S Corp returns and noted that some really profitable S Corps with only one shareholder pay absolutely no compensation:

TIGTA’s analysis of all S corporation returns received between Processing Years 2016 through 2018 identified 266,095 returns with profits greater than $100,000, a single shareholder, and no officer’s compensation claimed that were not selected for a field examination. The analysis found that the single-shareholder owners had profits of $108 billion and took $69 billion in the form of a distribution, without reporting they received officer’s compensation for which they would have to pay Social Security and Medicare tax. TIGTA estimated 266,095 returns may not have reported nearly $25 billion in compensation and may have avoided paying approximately $3.3 billion in Federal Insurance Contributions Act tax.

As TIGTA notes, there are many cases that hold that shareholder-employees are subject to employment taxes even when shareholders take distributions, dividends, or other forms of compensation instead of wages. The substantive rules require that S Corp shareholders performing services are to take reasonable salaries.  For some of these cases, see Veterinary Surgical Consultants, P.C. v. Commissioner, 117 T.C. 141 (2001). Joly v. Commissioner, T.C. Memo. 1998-361, aff’d by unpub. Op., 211 F.3d 1269 (2002). Joseph M. Grey Public Accountant, P.C. vs. Commissioner, 119 T.C. 121 (2002). David E. Watson, PC vs. U.S., 668 F.3d 1008 (8th Cir. 2012).

Reasonable compensation cases have been around for many decades.  It used to be that the reason for the cases was the flip side because solely owned companies wanted to pay a high salary in order to avoid the problem with dividends.  So, companies with lots of assets would structure their compensation to the executives to avoid having any money left over for dividends and avoid the tax on leaving excess profits in the corporation.

To get to a court case is labor intensive, though for sure in any situation with zero compensation it would be fairly easy for the government to prove that there should be some deemed compensation. S Corp audits are handled in the field. For FY 2017-2019 there were about 5 million S corp returns filed. The audit coverage ranged from a high of 12,169 in FY 2017 to a low of 9,556 in FY 19, with coverage ranging from .2% to .3%.  TIGTA notes that many of the audits failed to even raise the issue of officer compensation. While IRS should audit more and do a better job targeting the issue, I wonder if there needs to be a statutory fix that requires or perhaps presumes some minimum salary that is pegged to earnings. Any legislative fix should consider how to minimize the burdens both to the IRS and taxpayers and remove the temptation for businesses to play the lottery.

As Keith notes, there is a long-term cost to not paying a salary which is that the owner is not building Social Security credits.  So, their social security upon retirement could be significantly less than it would have been otherwise if this goes on for a long time.  While there is a back end savings to the government that may not be reflected in the loss figures that may be much less than the costs to the government relating to the foregone employment taxes.

10th Circuit Affirms That Nursing Homes and Other Entities Lack Protection from Levy for Hardship

In 2017, the Tax Court issued rulings in several cases regarding the application of IRC 6343(a)(1) to entities.  The lead case was Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 T.C. No. 9 (2017).  I blogged about the group of cases here in a post with a catchy tag line about rolling the wheelchairs and beds to the curb.  Lindsay Manor appealed the decision.  I wrote about the outcome of that appeal which basically vacated the decision because Lindsay Manor was in receivership at the time of the Tax Court’s decision.

Now, another nursing home in the same group of cases, Seminole Nursing Home, Inc., has made its way to the 10th Circuit after being told in the Tax Court that it did not qualify for hardship.  The 10th Circuit decision upholds the decision of the Tax Court and the validity of the Treas. Reg. 301.6343-1(b)(4)(i).  I don’t know if the nursing home has been keeping itself open in the four years since the Tax Court decision, but now it must either succeed in getting the Supreme Court to hear the case, pay the outstanding tax, work out some form of payment agreement or, potentially, watch the IRS shut it down.

read more...

This case came to the Tax Court as a Collection Due Process case.  IRS Appeals rejected Seminole’s offer of an installment agreement prior to the Tax Court case, stating:

Seminole had sufficient assets to pay its tax debt in full; and (2) it was ineligible for an installment agreement because it had not made all its required federal tax deposits for 2014. The Office also rejected Seminole’s economic-hardship argument, explaining that Treasury Regulation § 301.6343-1(b)(4) limits economic-hardship relief to individual taxpayers. And it determined that “[i]n balancing the least intrusive method of collection with the need to efficiently administer the tax laws and the collection of revenue, . . . the balance favors issuance of the levy, and is no more intrusive than necessary.”

The 10th Circuit engaged in a Chevron analysis to determine if the regulation appropriately interpreted the statute.  Seminole argued that the Code provides an unambiguous answer at step one, citing to IRC 7701(a)(14) for support that entities are persons under the IRC.  That section defines person to include “an individual, a trust, estate, partnership, association, company or corporation.”  Seminole also pointed out that IRC 6343(a)(1)(D) makes no distinction between individual and corporate taxpayers.

While the language of the definitional provision in IRC 7701 appears favorable to Seminole’s argument, the 10th Circuit notes that the preface to the definitions says they apply “[w]hen used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof.”  It finds that the use of the word taxpayer elsewhere in the Code makes clear the word can be limited to individuals.  It says that corporations can experience economic hardship, citing an earlier case in which it made such a holding, but looking at the exemptions to levy in IRC 6343, it finds they all essentially apply to individuals and not to entities. 

The court finds it important that Seminole did not attempt to show what economic hardship for entities would look like.  It also noted that no one commenting on the regulation suggested the result for which Seminole argues.  Looking at the situation as a whole, it decides that the statute does not compel a result, leaving the Treasury free to apply its expertise in writing a regulation.

Seminole did not make the argument about disqualification of the Settlement Officer for looking at the file before the hearing that was made in the companion case of Lindsay Manor, but it did make a second argument using the reversal of the Lindsay Manor case as a basis for arguing the underlying Tax Court decision in its case lost its foundation upon the vacating of the Tax Court’s decision in Lindsay Manor for mootness.  The 10th Circuit says, however, that it did not vacate Lindsay Manor on the merits but only because of mootness at the time of the Tax Court’s ruling.  It finds that the adoption of the reasoning of Lindsay Manor to the facts of Seminole did not create an abuse of discretion.

The Seminole case fills the hole created by the mootness of Lindsay Manor.  While the outcome does not provide a surprise, this is a major victory for the IRS regarding the interpretation of the statute.  This doesn’t mean there will not be further challenges in other circuits.  The decision does, however, provide the kind of support that will greatly assist the IRS should those challenges arise.

Limiting economic hardship to individuals seems consistent with the statutory scheme of the levy provisions.  Because of the hardship that closing down a nursing home could create for the individuals living there, nursing home cases provide one of the best litigating vehicles for challenging the limits created by the regulation.  Still, the hardship is directly the hardship of the entity and not of the individuals who reside at the facility.  The situation becomes very sympathetic if the economic hardship experienced by the entity results from government delays.  Other cases have addressed the imposition of the trust fund recovery penalty upon nursing home operators who could not make the necessary tax payments because of significant delays in Medicare payments.  If the cause of the hardship is another part of the government, courts should look for ways to mitigate the taxpayer’s problem even where the taxpayer is an entity but limiting the concept of hardship to individuals generally seems appropriate.  It’s hard to say the 10th Circuit was wrong in upholding the regulation as a reasonable interpretation of the statute.

Proving the Liability – The Presumption of Regularity

I am not sure, but I don’t think we have written about a case from Guam since Les cited one in a post during our first month of existence as a blog.  The case of Government of Guam v. Guerrero, No. 19-16793 (9th Cir. 2021) gives us a chance to make up for lost time regarding tax law and Guam.  Perhaps the first issue to address concerns why we care about Guamanian tax issues.  We care because their tax code essentially mirrors our, similar to other territories, and procedural issues regarding their tax issues decided by the 9th Circuit could impact similar issues arising from the U.S.

At issue in the Guerrero case is whether the government of Guam kept adequate records to prove the liability it asserted and to prove that the statute of limitations remained open for it to act.  The court makes a decision regarding the presumption of regularity that could easily apply to the IRS.  For that reason, this circuit court opinion matters.

read more...

Guam’s Department of Revenue and Taxation (DRT) determined that Mr. Guerrero owes about $3.7 million in unpaid taxes for 1999-2002.  He filed his returns late for those years.  The dispute concerns when the taxes were assessed.  The court states:

the official records are missing, likely due to water, mold, and termite damage at the storage facility where they were housed.

This suggests that Guam does not maintain its tax records on a computer system.  That’s surprising.  Maybe the antiquated IRS system is not the worst system in the world.

The court says that after assessment the DRT filed tax liens (I assume the court meant to say the DRT filed notices of federal tax liens) on various parcels of real property (I assume the DRT simply filed notices against Mr. Guerrero and the liens attached to his real property along with his other property.)  After filing the liens, DRT brought this case to foreclose the liens on the real property to which the liens attached.

Mr. Guerrero asserts that DRT cannot prove that it timely assessed the taxes against him.  DRT acknowledges that it does not have the original certificates of assessment, but invokes the presumption of regularity relying on the DRT procedures:

Guam’s evidence that the Department timely assessed Leon Guerrero’s taxes instead consists only of the Department’s internal documents rather than the certificates of assessment. Guam argues that these internal documents are sufficient evidence that the Department assessed Leon Guerrero’s unpaid taxes in January 2006 and sent the relevant notices before the three-year statute of limitations expired. Guam relies on the Department’s internal registers (record lists of delinquent taxpayers) known as TY53 and TY69 registers, as well as an internal transmittal sheet sent to the collections branch after the TY53 and TY69 notices were sent to Leon Guerrero, to demonstrate both that it followed standard procedure for purposes of the presumption of regularity and to show the assessment dates.

At a meeting on March 10, 2006, DRT learned that the notices of assessment did not reach Mr. Guerrero but instead went to his ex-wife’s address.  During the meeting, DRT gave Mr. Guerrero final demand and notice of intent to file a lien and he signed an acknowledgment.  This meeting took place about two weeks before the expiration of the assessment statute of limitations.  The court describes the testimony of the DRT officials who testified at the two-day trial explaining the system for making assessments and notifying taxpayer.  The statutory scheme, and much of the system, mirrors the system in the U.S. used by the IRS.

Because the assessment certificate itself is missing, DRT seeks to prove that it timely made the assessments in question by some other means, here the presumption of regularity.  The court notes:

We have held that a public actor is entitled to the presumption of regularity where there is some evidence that the public actor properly discharged the relevant official duties, which an opposing party must rebut with clear, affirmative evidence to the contrary….

As previously observed, whether the presumption applies or has been rebutted with clear and affirmative evidence to the contrary are mixed questions of law and fact that may be reviewed for clear error. The clear error standard is significantly deferential, and clear error is not to be found unless the reviewing court is “left with the definite and firm conviction that a mistake has been committed.”

Here, the 9th Circuit is not deciding the case as an initial matter but as a reviewing court.  It finds that the district court did not make clear error but it also finds that the district court’s opinion was “opaque and did not adhere to the proper steps of the analysis.”  So, the 9th Circuit sets out to explain the proper steps for making a presumption of regularity determination.

First, it should have considered if some evidence existed to support timely assessment of the taxes.  Instead, the district court determined the presumption was automatically available.  Despite this misstep, the testimony of the DRT officials did provide evidence in support of a timely assessment.  The district court should have explicitly stated that it relied upon the credibility of the DRT witnesses.

Next, the court should have examined whether Mr. Guerrero rebutted the presumption that could be drawn from the testimony.  At the trial level, he did not argue that the records presented were inaccurate.  Therefore, he waived that argument.  He failed to build the type of record he needed to build at the trial level.  The arguments he does make that are not waived by his prior actions are insufficient to cast adequate doubt on the records of the DRT.

The opinion leaves the impression that no one had a good idea what they were doing at the trial level but that DRT had enough on the ball to put into the record evidence supportive of a conclusion that a timely assessment occurred.  The presumption here is one on which the IRS may need to rely if its records are destroyed or it otherwise suffers a degradation of its system.  The court provides a bit of a roadmap for someone trying to attack a record like an assessment.  Certainly, the attack should be straightforward and clearly done at the trial level.  Mr. Guerrero should have sought the testimony of individuals who could talk about the impact of the lost records and how it cast doubt on the correctness of the entire system.  The importance of an expert testifying on this point to counteract the testimony of the government officials cannot be overstated.  Unless the government officials were destroyed on cross, Mr. Guerrero needed to give the court something to cause it to pause before presuming DRT handled the case correctly.  He gave the court nothing to go on and the 9th Circuit finds that significant.

The dissent picks up on some of the errors by DRT and offers a roadmap for how Mr. Guerrero might have attacked the validity of the assessment.  The dissent provides good lessons for those who find themselves in this situation trying to combat a presumption of this nature.  The case leaves me a little concerned about the use of the presumption of correctness in this situation to prove the timeliness of the assessments.  Like the dissent, I felt the majority made some leaps to get to the favorable result for the DRT.

Credit Carry Forward as Timely Refund Claim

In Libitzky v. United States, No. 3:18-cv-00792 (N. D. Cal. 2021) the district court dismisses cross motions for summary judgment in a refund suit and pushes the case forward for a determination by a jury.  The parties agree that the Libitzkys overpaid their 2011 liability by almost $700,000.  They disagree on the issue of whether the Libitzkys timely filed a claim for refund seeking return of their money.  The court finds the filing of a timely refund claim jurisdictional, a determination at odds with at least one other court.  The court also finds that the possibility exists that the forms filed by the Libitzkys requesting a carryover of their 2011 refund could meet the requirements of an informal claim.  A jury will decide the issue.  The case raises interesting issues regarding both jurisdiction and informal claims.

read more...

The Libitzkys were investors in real estate and did well.  They regularly had income tax liability in the half million dollar range.  Because of the way their investment income fluctuated, making a precise determination of the amount of estimated payments they should pay difficult, they elected each year to roll over their tax refunds to apply the refunds against the estimated tax payments for the subsequent year.  This practice regularly created large refunds for them which they left with the IRS.

Something happened with respect to their 2011 return.  They unquestionably seem to have prepared the return on time in their usual manner.  They requested an extension, sending it by certified mail on April 17, 2012.  The extension estimated a tax liability of about $1.5 million, stated they had made payments of about $1.2 million and included a check for about $300,000.  The taxpayers believe they timely filed their 2011 return before the extended due date but acknowledged that they had no mail receipt showing that they did so.  The return, which may or may not have been filed, showed an overpayment of $692,690 with a request that this amount be applied to their 2012 taxes as per their usual practice.

In 2013, they requested an extension of time to file their 2012 return, estimated a liability of about $500,000 and stated they had made payments already of about $1.15 million.  They did not get around to filing the 2012 return until February 6, 2015.  The filed return reflected almost the same liability and payment amounts as they stated when requesting the extension.  The payment amounts included $692,690 from their 2011 overpayment.  The 2012 return reported an overpayment of $645,119 which they elected to apply to their 2013 estimated taxes.

They filed their 2013 return in December 2014, showing tax owed of about $1 million and payments of $1.12 million which included the $645,119 credit forwarded from the 2012 overpayment.  On December 15, 2014, the IRS sent the taxpayers a notice stating that they owed $577,924.18 based on changes to their 2013 form.  This started a back and forth which led to the discovery that the 2011 return had never been filed. 

On January 20, 2016, a Revenue Officer (RO) showed up at their property (the opinion skips over that the IRS must have sent a series of collection notices including a Collection Due Process (CDP) notice that the Libitskys did not pursue).  On that date, they gave the RO a signed copy of the 2011 return.  The court states that the “Libitzkys’ 2011 return was deemed filed on January 20, 2016”, showing the tax and payments resulting in an overpayment of $692,690.  (Note that handing a signed return to an RO or a revenue agent does not always result in the IRS treating the return as filed.  This is at issue in a case currently before the 9th Circuit – Seaview Trading, LLC, AGK Inve v. CIR, No: 20-72416.)

On April 20, 2016, the IRS issued a letter to the Libitzkys informing them that their claim for the $692,690 could not be allowed because “[y]ou filed your original tax return more than 3 years after the due date. Your tax return showed an overpayment; however, we can’t allow your claim for credit or refund of this overpayment because you filed your return late.” Dkt. No. 1-1, Ex. B. The letter continued, “We can only credit or refund an overpayment on a return you file within 3 years from its due date. We consider tax you withheld and estimated tax as paid on the due date (i.e., April 15) for filing your tax return.” Id.

By letter dated August 3, 2016, plaintiffs’ counsel appealed the denial of the Libitzkys’ $692,690 claim for the 2011 tax year to the IRS. Dkt. No. 1-1, Ex. C. On November 29, 2017, the IRS again determined that there was “no basis to allow any part of your claim” for the $692,690. Dkt. No. 1-1, Ex. D. The letter advised plaintiffs that they could further pursue the matter by filing suit with the district court within two years of the April 20, 2016 claim denial letter. Id.

The 9th Circuit points out that the three year look back rule of IRC 6511(b) presents a problem here since the 2011 return was not deemed filed until January 20, 2016, but the payment giving rise to the overpayment would have been deemed paid on April 17, 2012, more than three years prior to the filing of the claim.

For that reason, the Libitzkys argue that “[w]hether through the 2012 Form 4868, or through the 2012 Form 1040, or the combination thereof, or other documents and communications, [they] made a formal or informal claim (either of which is legally sufficient), timely.” Dkt. No. 51 at 35. Ordinarily the Court would have been inclined to find that what is recoverable is a merits inquiry, while the Section 6511(a) timely claim requirement is satisfied by the 2011 tax return at a minimum, thus establishing the Court’s jurisdiction over this dispute. The circuit has stated, however, that “§ 6511(b)(2)(A) is jurisdictional.” Zeier v. United States Internal Revenue Service, 80 F.3d 1360, 1364 (9th Cir. 1996). As another court has observed, this essentially collapses the jurisdictional and merits inquiries in cases like these. See Stevens v. United States, No. 05-03967 SC, 2006 WL 1766794, at *3 n.3 (N.D. Cal. June 26, 2006) (“accepting that Section 6511(b)(2)(A) creates a jurisdictional bar to Plaintiff’s case, Plaintiff may clear that bar with proof that the estate submitted an adequate informal claim, the same thing it will need to prevail on the merits.”).

The court finds that in order to determine if the overpayment is recoverable questions of fact exist on which a jury will need to decide.  By taking the position that the timeliness of the claim creates a jurisdictional issue, the court makes the inquiry slightly more difficult and places it at odds with at least one other jurisdiction.

The court says it has recognized the informal claim doctrine and that could provide a path forward for the taxpayers.  The IRS counters that neither the 2012 extension request nor the 2012 return could meet the test for an informal claim because neither provides the IRS with the information necessary to determine if the claim is correct.  If the court finds that the subsequent year return can serve as a formal or informal claim for refund for the year in which the taxpayer seeks a credit carryforward on an unfiled return, the decision would expand the informal claim doctrine and would offer a large benefit to taxpayers who fail to timely file their returns. 

The equities are interesting here.  You could say the IRS led the taxpayers on by accepting the 2012 return with the somewhat phantom 2011 overpayment.  The IRS did not start questioning the overpayment until the taxpayers filed their 2013 return, lulling the taxpayers into a false sense of security.  On the other hand, the taxpayers not only failed to file the 2011 return for unknown reasons, but also failed to react quickly when the IRS brought them the problem.

Disallowing the credit would be a harsh result here, particularly if the taxpayers have a history of filing and apparently only missed the 2011 year filing due to inadvertence of some type. For those interested in credit carryover issues, a CDP case involving these issues just had an order entered which you can read here.