FAQ Disclaimers: Balancing the Need for Guidance and Taxpayer Reliance on FAQs

Today we follow up on Alice G. Abreu and Richard K. Greenstein‘s post discussing the recent NTA blog on IRS FAQ with some additional thoughts from guest blogger James Creech. As yesterday’s post noted, IRS FAQs have grown more important since the coronavirus hit, as the IRS responded to the urgent need for a high volume of guidance by increasing its use of website FAQs in place of IRB guidance.

While IRS FAQs are particularly voluminous and consequential right now, recent observations build on years of criticism. For example, in 2012 Robert Horwitz and Annette Nellen authored a policy paper for the State Bar of California’s Taxation Section. This paper recounts the evolution of the IRS’s use of website FAQs and proposes solutions to concerns, including “(1) the lack of transparency, (2) the lack of accountability, (3) the lack of input by the public, (4) the difficulty in finding specific FAQs on the IRS website, (5) whether FAQs are binding on IRS personnel, and (6) the extent to which FAQs can be relied upon by taxpayers and tax practitioners.” I recommend reading this paper not only for the history of IRS website FAQs but for the authors’ proposals to address these concerns without scrapping the practice or reducing its utility as a quick method of communication to taxpayers.

Former NTA Nina Olson also addressed IRS FAQ in reports to Congress and in Congressional testimony, as discussed and linked in this 2017 blog post.

In addition to her recent blog post discussed yesterday, NTA Erin Collins addressed FAQ in several sections of her 2021 Objectives Report to Congress. The report discusses the pros and cons of informal guidance “in the face of widespread closures of core IRS functions as well as the enactment of the FFCRA and CARES Act,” and notes that by June 10, the IRS had issued 273 FAQ relating to pandemic tax relief. That number has continued to grow in the last four weeks. Due to the uncertainties facing taxpayers, the NTA argues that “if the IRS continues issuing and relying on FAQs, the regulations under IRC § 6662 need to be amended to clarify that FAQs can be used to establish reasonable cause for relief from the accuracy-related penalty.” I wholeheartedly agree. Christine

The IRS has routinely used FAQs as a way inform the public about some of the nuances of tax administration. However as part of the COVID-19 FAQs something new has emerged. The IRS has started to put disclaimers at the beginning of some recently issued FAQs. For example the preamble to the Employee Retention Credit FAQs states:

This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.

and the preamble to the COVID Opportunity Zone FAQs states:

These Q&As do not constitute legal authority and may not be relied upon as such. They do not amend, modify or add to the Income Tax Regulations or any other legal authority.

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As discussed in some detail in a previous post by Monte Jackel, these disclaimers are necessary because of the lack of weight given to these otherwise official sounding pronouncements. Technically speaking, FAQs are considered unpublished guidance because they are not printed in the Internal Revenue Bulletin like Notices and Revenue Rulings. They are not binding on the IRS. They are not binding on the taxpayer and cannot be used by a taxpayer as substantial authority when taking a legal position or penalty protection. FAQs are subject to change at any time (which is why practitioners should print any on point FAQs instead of bookmarking the webpage) and are frequently revised based upon real world feedback.

Yet despite these limitations, FAQs have real value because they allow the IRS to push out guidance faster without the worry of unintended consequences. For taxpayers they can offer some comfort that their interpretation of how to approach a murky situation is not at odds with the IRS’s approach. The trouble is that for many taxpayers there is no recognizable difference between FAQs published on IRS.gov and a Notice (published in the Internal Revenue Bulletin) done in FAQ format and also published on IRS.gov.

While including disclaimers on some of the COVID guidance is a good start, it is a little disappointing that the disclaimers are not uniform and are not part of every set of FAQs regardless of when they were issued. Recognizing, of course that this is not the right time for the IRS to start new projects, even the COVID specific FAQs are haphazard. Surprisingly the FAQs regarding the Economic Impact Payments (at the time this article was written) do not have a disclaimer. This is despite the target audience being individual taxpayers who may be less able to parse statutory language when compared to sophisticated opportunity zone investors.

For an FAQ disclaimer to be effective for all taxpayers it should be written in plain English in a manner understandable to all taxpayers. The Employee Retention Credit disclaimer for example does not make it clear that the FAQs are not binding on the IRS. Unless the reader knows the importance of publication in the Internal Revenue Bulletin, the statement that the FAQs “cannot be used to support a legal argument in a court case” could seem to indicate that a taxpayer could cite to the FAQ during an administrative dispute regarding the credit.

A better disclaimer might read “These FAQs are informational purposes only and are subject to change at any time. Taxpayers cannot rely on these FAQs as the official position of the IRS and cannot be cited as legal authority. FAQs do not change the Internal Revenue Code or Treasury Regulations. For more information on FAQs click here”

Effective FAQs are an important element of agency communication and like it or not they are here to stay. However getting them right means not only drafting answers that reflect the law but giving taxpayers the tools to understand exactly what they can and cannot rely on.

NTA Blog Post On “Protecting the Rights of Taxpayers Who Rely on FAQs” Is Timely and Welcome, But Doesn’t Go Far Enough

We welcome first time guest bloggers Alice G.  Abreu and Richard K. Greenstein, both Professors of Law at Temple’s Beasley School of Law in Philadelphia.  They offer their reactions to the recent blogpost in which the National Taxpayer Advocate, Erin Collins, addresses the issue of taxpayer reliance on frequently asked questions (FAQs) and makes several recommendations. The issue of taxpayer reliance on FAQs specifically, and subregulatory guidance more generally, is not new, but it has received increased attention given the accelerated pace of tax legislation in response to the COVID-19 pandemic and the IRS’s need to provide prompt guidance. Professors Abreu and Greenstein have spoken and are writing on the subject and here they not only offer their reactions to National Taxpayer Advocate’s recent post but also their own recommendations.

We have touched on this issue before here with an excellent post in May by Monte Jackel and PT Contributor Nina Olson blogged on this topic when she was the National Taxpayer Advocate.  Keith

Kudos to NTA Erin Collins for taking on the issue of taxpayer reliance on IRS written guidance.  Her blogpost, released on July 7, is spot-on in identifying an important problem.  We particularly liked that she began by framing the issue clearly and persuasively: she described the plight of a taxpayer who goes to the IRS website for guidance on the deductibility of a particular item, finds a Frequently Asked Question (FAQ) on point, and takes the deduction, only to be audited and denied the deduction because the IRS changed its position, and is subjected to the 20 percent accuracy related penalty to boot. To make matters worse, the taxpayer can no longer access the FAQ because the IRS has removed it from its website, and no archive of removed FAQs exists.

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We agree with NTA Collins that “[i]f the Taxpayer Bill of Rights is to be given meaning, this scenario violates ‘The Right to Informed’ and ‘The Right to a Fair and Just Tax System.’”  We also emphatically agree that “[i]t is neither fair nor reasonable for the government to impose a penalty against a taxpayer who follows information the government provides on its website.” But we think that by focusing on the penalty, NTA Collins understates the unfairness faced by the taxpayer in this scenario.  Of course it is unfair for a taxpayer to be penalized for doing what the IRS itself said she could do, in a document specifically intended to guide taxpayer actions. And it is also unfair for the IRS to take down the document so that the taxpayer cannot offer it in support of a claim that she had “reasonable cause” for the position that resulted in the alleged underpayment, as provided by IRC § 6664(c)(1), which should allow her to avoid the penalty without reaching the question of whether the FAQ constitutes substantial authority for the taxpayer’s position. Indeed, removing an FAQ from the IRS website after a taxpayer has relied on it may also violate the taxpayer’s “Right to Challenge the IRS’s Position and Be Heard” because the IRS is thereby interfering with the taxpayer’s ability to provide adequate documentation for her position.  We therefore heartily endorse the NTA’s recommendation that the IRS create and maintain an archive of all FAQs issued.

But the unfairness depicted in the opening scenario of the NTA’s blogpost is far deeper than the post acknowledges. The core unfairness is that by refusing to stand by the positions it takes in written guidance intended for the specific purpose of informing taxpayers, the IRS is disrespecting the taxpayer’s reasonable reliance. And respect for the reliance interest is at the core of justice. Outside of the tax law, respect for reliance has led to the development of entirely new theories of obligation, such as promissory estoppel.  As we have previously noted, by refusing to stand by its written statements the IRS is behaving like the Peanuts character Lucy:  Lucy tormented Charlie Brown by repeatedly offering to hold a football for him to kick, only to pull it away just as he was going to kick it, which sent him up in the air and caused him to end up lying flat on his back. The IRS should not behave like Lucy, and taxpayers deserve to be treated better than Charlie Brown.

We therefore believe that the IRS, which itself adopted the Taxpayer Bill of Rights even before Congress made it a part of IRC § 7803(a)(3) in 2015, should change its position and respect taxpayer reliance on written guidance, whether that guidance is included in the Internal Revenue Bulletin or in publications, instructions to forms, FAQs, or other written guidance.  Respecting reliance operationalizes the taxpayer’s right to be informed as well as the right to a fair and just tax system because respecting reliance is at the core of justice and due process.

We understand the IRS’s need for nimbleness in issuing guidance in the face of recently enacted and immediately effective legislation, and we agree with NTA Collins that “[b]ecause FAQ’s aren’t subject to thorough review, Treasury and the IRS may later decide some of them are wrong and change them.” Indeed, we believe that similar concerns apply to much subregulatory guidance, and we think it salutary for the IRS to remain open to alternative interpretations of legislative language and to change its position in light of further reflection and discussion. As Stanley Fish noted over three decades ago, “No text reads itself.” Stanley Fish, Consequences, 11 Critical Inquiry 433, 446 (1985) (“The semantic meaning of the text does not announce itself; it must be decided upon, that is, interpreted . . . . In short, no text reads itself . . . .”). The susceptibility of provisions of the Internal Revenue Code to reinterpretation is ongoing.

But neither the IRS’s need for nimbleness in issuing guidance nor its understandable desire for precision, which NTA Collins noted, require that it refuse to stand by the positions it takes in published documents it issues for the specific purpose of guiding taxpayer behavior. The IRS is entitled to change its position, but until it announces that it has done so it should stand by that position, and not assert a different position against taxpayers who have reasonably relied on its publicly issued written statement. While we agree with NTA Collins that FAQs and other written documents intended for taxpayer guidance should constitute substantial authority for penalty relief purposes, we don’t think her recommendation to classify FAQs as “’Internal Revenue Service information’” under Treasury Regulation § 1.6662-4(d)(3)(iii),” goes far enough. The IRS should stand by its all of its written, publicly announced, positions until it announces that it has changed positions, and it should do so for all purposes, not just for penalty protection. In other words, the IRS should apply the changed position prospectively only and not apply it to any taxpayer who has reasonably relied.

Moreover, the IRS’s inclusion of a non-reliance disclaimer in some FAQs, like many courts’ assertion that “[i]t is hornbook law that informal publications all the way up to revenue rulings are simply guides to taxpayers, and a taxpayer relies on them at his peril,” Caterpillar Tractor Co. v. United States, 218 Ct. Cl. 517 (1978) (citing, Carpenter v. United States, 495 F.2d 175 (5th Cir. 1974)), while arguably well intentioned, only serves to undermine the agency’s legitimacy.  As NTA Collins pithily observed, “Why should taxpayers even bother reading and following FAQs if they can’t rely on them and if the IRS can change its position at any time and assess both tax and penalties?” The same question can be asked with respect to publications and instructions to forms.

We publicly expressed our views on taxpayers’ right to rely on statements in IRS written guidance in May, 2019, at the 4th International Taxpayer Rights Conference in Minneapolis when we participated in a panel discussion at a session on “The Virtues of Tax Authority Advice.” A recording of that panel discussion is available here and archived materials from the Conference can be found here. (Information on future International Taxpayer Rights Conferences to be held in Pretoria, South Africa, and Athens Greece, can be found here.) Our Conference presentation is now a draft article which we expect to be able to post on SSRN in a few weeks; its working title is Stand by your Words: Operationalizing Taxpayer Right to be Informed. In addition to fleshing out the positions articulated here and explaining why the change in the IRS’s stance on taxpayer reliance should not result in weaponizing IRS written guidance, we also argue that if the IRS persists in behaving as depicted by the opening scenario of the NTA’s blog, courts should apply the doctrine of equitable estoppel to protect taxpayers from harm.  We recognize that asserting equitable estoppel against the government is extraordinarily difficult, but, again, we believe that enactment of the TBOR and its adoption by the IRS provide a basis for a change in the status quo.

Clients’ Identities and the IRS Summons Power

The recent Fifth Circuit case of Taylor Lohmeyer v U.S. explores the limits of the attorney-client privilege in the context of the IRS using its John Doe summons powers seeking the identity of a law firm’s clients the firm represented with respect to offshore transactions. The case provides a useful opportunity to explore the general rule that the attorney client privilege does not extend to client identity and fee arrangements, as well as a limited exception that would allow the privilege to exist when disclosure of the client identity would effectively disclose the nature of the client communication. 

In this post, I will summarize the circuit court opinion, as well as highlight briefs addressing the law firm’s request for a rehearing en banc.

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Taylor Lohmeyer involves the IRS’s serving a John Doe summons on the law firm seeking the identity of “John Does”, who were U.S. taxpayers

who, at any time during the years ended December 31, 1995[,] through December 31, 2017, used the services of [the Firm] … to acquire, establish, maintain, operate, or control (1) any foreign financial account or other asset; (2) any foreign corporation, company, trust, foundation or other legal entity; or (3) any foreign or domestic financial account or other asset in the name of such foreign entity.

According to a declaration by an IRS revenue agent, the IRS sought the information because it was familiar with a taxpayer who used the firm’s services in an effort to avoid US income tax:

[The prior IRS] investigation “revealed that Taxpayer-1 hired [the Firm] for tax planning, which [the Firm] accomplished by (1) establishing foreign accounts and entities, and (2) executing subsequent transactions relating to said foreign accounts and entities”. Additionally, “[f]rom 1995 to 2009, Taxpayer-1 engaged [the Firm] to form 8 offshore entities in the Isle of Man and in the British Virgin Islands” and “established at least 5 offshore accounts so [Taxpayer-1] could assign income to them and, thus, avoid U.S. income tax on the earnings”. “In June 2017, [however,] Taxpayer-1 and his wife executed a closing agreement with the IRS in which they admitted that Taxpayer-1 … earned unreported income of over $5 million for the 1996 through 2000 tax years, resulting in an unpaid income tax liability of over $2 [m]illion.”

In seeking to quash the summons, the law firm argued that the identity of its clients was protected by the attorney client privilege because the identifying information itself was tantamount to disclosing confidential client communication.

In finding that the exception did not apply and rejecting the law firm’s petition to quash, the Fifth Circuit relied on general precedent that explored the exception in cases that did not involve the IRS, as well as the few cases exploring the exception in the context of IRS investigations. The Fifth Circuit framed the discussion by noting that the few cases that have allowed shielding clients’ identity do so by not expanding the reach of the attorney-client privilege; the cases emphasize that the exception is a subset of the privilege itself. As such a client’s identity is shielded “only where revelation of such information would disclose other privileged communications such as the confidential motive for retention”. Citing In re Grand Jury Subpoena for Attorney Representing Criminal Defendant Reyes-Requena, 913 F.2d 1118, 1124 (5th Cir. 1990), the opinion emphasized that:

the privilege “protect[s] the client’s identity and fee arrangements in such circumstances not because they might be incriminating but because they are connected inextricably with a privileged communication—the confidential purpose for which [the client] sought legal advice”. Reyes-Requena II, 926 F.2d at 1431 (emphasis added).

The firm argued that the IRS’s request for client identities was “connected inextricably” with the purpose for which its clients sought advice. In rejecting that argument, the opinion explored the Third Circuit case of United States v. Liebman, 742 F.2d 807  (3d Cir. 1984). In Liebman, the Third Circuit sought the identity of a law firm’s clients.  The IRS had issued a John Doe summons to the firm seeking the identity all clients who paid fees over a three-year period in connection with the acquisition of certain tax shelters.

The Third Circuit held that the identity of the clients was protected by the attorney client privilege:

If appellants were required to identify their clients as requested, that identity, when combined with the substance of the communication as to deductibility that is already known, would provide all there is to know about a confidential communication between the taxpayer-client and the attorney. Disclosure of the identity of the client would breach the attorney-client privilege to which that communication is entitled

Liebman and Taylor Lohmeyer are facially similar. One key difference though was that the affidavit of the revenue agent in Liebman tipped the IRS’s hand and revealed that the IRS itself linked the identity of the clients with the specific legal advice that the firm itself gave to the clients:

The affidavit of the IRS agent supporting the request for the summons not only identifies the subject matter of the attorney-client communication, but also describes its substance. That is, the affidavit does more than identify the communications as relating to the deductibility of legal fees paid to Liebman & Flaster in connection with the acquisition of a real estate partnership interest, App. at 116a-121a. It goes on to reveal the content of the communication, namely that “taxpayers … were advised by Liebman & Flaster that the fee was deductible for income tax purposes.” App. at 117a. Thus, this case falls within the situation where “so much of the actual communication had already been established, that to disclose the client’s name would disclose the essence of a confidential communication ….” See United States v. Jeffers, 532 F.2d 1101, 1115 (7th Cir. 1976) (and cases cited therein).

The Fifth Circuit in Taylor Lohmeyer highlighted this distinction. Unlike in Liebman, 

the “agent’s declaration did not state the Government knows the substance of the legal advice the Firm provided the Does. …Rather, it outlined evidence providing a “reasonable basis”, as required by 26 U.S.C. §7609(f), “for concluding that the clients of [the Firm] are of interest to the [IRS] because of the [Firm’s] services directed at concealing its clients’ beneficial ownership of offshore assets”. The 2018 declaration also made clear that “the IRS is pursuing an investigation to develop information about other unknown clients of [the Firm] who may have failed to comply with the internal revenue laws by availing themselves of similar services to those that [the Firm] provided to Taxpayer-1”. (Emphasis added.)

Following the adverse circuit court opinion, the Taylor Lohmeyer firm has filed a petition for an en banc rehearing. The American College of Tax Counsel Board of Regents submitted an amicus brief in support of the petition (disclosure: Keith and I are members of the ACTC but did not participate in the amicus filing). 

In submitting its petition, the Taylor Lohmeyer firm emphasized that the panel failed to explore fully circuit precedent, especially United States v. Jones, 517 F.2d 666 (5th Cir. 1975), which it believed supported the privilege applying even in the absence of a declaration that did not definitively tie the request to the firm’s substantive legal advice. The ACTC brief’s main substantive point emphasizes that the summons request should be thought of as covered by the exception flagged in Liebman because the summons is “premised upon the IRS’s purportedly knowing the motive of clients in engaging Taylor Lohmeyer.” (page 11). The ACTC brief states that “[b]ecause the summons at issue requires the Firm to provide documents that connect specific clients with specific advice provided by the Firm, compliance with the summons effectively requires testimony by the Firm regarding that advice.”

In essence both briefs minimize the importance of explicit substantive tax issue that the agent identified in his declaration in support of the summons in Liebman and ask the court to consider the context of the request in Taylor Lohmeyer, which in their view inexorably links the request to the substance of the advice. 

Some Concluding Thoughts

There is more to the briefs, including a detailed discussion of circuit precedent in the petition and the ACTC’s distinguishing of the Seventh Circuit’s United States v. BDO Seidmananother case the Fifth Circuit relied on, and a policy argument alleging that an undisturbed Taylor Lohmeyer opinion will “impose a discernible chill over the attorney-client relationship between taxpayers and tax counsel.” But the key part of the briefs is the point that courts should consider the overall context of the IRS request and not limit the privilege to circumstances when an agent says aloud in a declaration what was driving the request for the client identities.

My colleague Jack Townsend blogged this case when the Fifth Circuit issued its opinion this past spring, and we are discussing it in the next update to the Saltzman and Book treatise (Jack is a contributing author). As he noted in his blog, in Taylor Lohmeyer the IRS request for information “was not connected to ‘identified specific, substantive legal advice the IRS considered improper;’ rather, the request asked for documents of clients for whom the Firm established, maintained, operated or controlled certain foreign accounts, assets or entities, without limitation to any specific advice the Firm rendered, so that it was ‘less than clear . . . as to what motive, or other communication of [legal] advice, can be inferred from that information alone.’

The ACTC suggests that even without the agent’s declaration explicitly referring to the legal advice the law firm purportedly provided the request itself implicates the legal advice in such a way that the identity itself should be protected. This approach, if accepted, would extend the exception in tax cases in a way that other courts have not embraced, at least not in cases that solely focus on the tax consequences of the unknown clients. 

When Do We Have to File and Pay Our Federal Taxes This Year?

Today we welcome back guest poster Tom Greenaway. Tom is a principal in KPMG’s Tax Controversy Services practice. He discusses the issue of 7508A and this year’s tax deadlines.

Most years, the due dates for federal tax filings and payments are obvious. This year, the answers are not so clear, especially as disruption caused by the COVID-19 pandemic continues to spread through the summer.

As some practitioners noted early this spring, this year is different for two reasons: COVID-19 and Congress. COVID-19 has created, among other things, an ongoing nationwide disaster. And Congress, late last year, passed a law shielding qualified taxpayers against tax deadlines until 60 days after the last incident in a presidentially-declared disaster area

In this post, we focus again on the potential technical “60-day rolling shield” defense to tax deadlines provided by section 7508A(d) of the Internal Revenue Code. As applied to the pandemic, this position has been embraced by the American Bar Association Tax Section and the IRS National Taxpayer Advocate. Taxpayers facing significant financial hardships—and their advisors—should consider the merits of this position before reaching for their checkbooks on July 15, the extended due date set by IRS. The ability to use the funds for other purposes, delinquency penalties, and interest hang in the balance.

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Background: How Hard Can It Be To Figure Out Tax Deadlines?

IRS computers automatically assess delinquency penalties on late-filed returns and late-paid taxes. These penalties can be substantial. They are, however, subject to reasonable cause relief for taxpayers who exercise ordinary business care and prudence. Outside the context of IRS administrative waiver provisions (like first-time abate), it is hard to obtain reasonable cause relief for delinquency penalties, especially when claiming reasonable reliance on professional advice.

As the Supreme Court noted in the 1985 Boyle case: “The Government has millions of taxpayers to monitor, and our system of self-assessment in the initial calculation of a tax simply cannot work on any basis other than one of strict filing standards. Any less rigid standard would risk encouraging a lax attitude toward filing dates. Prompt payment of taxes is imperative to the Government, which should not have to assume the burden of unnecessary ad hoc determinations.” All well and good.

Here’s the punchline from Boyle: “It requires no special training or effort to ascertain a deadline and make sure that it is met.” In Boyle, the Court rejected an executor’s claimed reliance on an attorney to prepare and timely file an estate tax return to avoid delinquency penalties. The Court established a bright-line general rule, holding that that the failure to timely file could not be excused by the taxpayer’s reliance on an agent to establish reasonable cause for a late filing. The Court allowed, however, that this general rule would not apply in “a very narrow range of situations.”

In particular, Boyle explicitly declined to resolve the circuit split as to whether a taxpayer demonstrates reasonable cause sufficient to avoid delinquency penalties when, in reliance on the advice of an accountant or attorney, the taxpayer files a return after the actual due date but within the time the advisor erroneously thought was available. Before and after Boyle, the Tax Court and some circuit courts consistently have held that erroneous professional advice with respect to a tax deadline constitutes reasonable cause if such reliance was reasonable under the circumstances.

This Year: Pretty Hard

This year, there is a legitimate question about when federal tax returns must be filed and federal tax liabilities paid. In short, this year we may have fallen into one of those narrow situations anticipated by—and expressly reserved in—the Supreme Court’s Boyle opinion.

As noted above, in late 2019 Congress amended the Internal Revenue Code section that gives Treasury authority to postpone tax deadlines by reason of presidentially declared disasters. In a nutshell, new section 7508A(d) extends the postponement period for any qualified taxpayer 60 days after the “latest incident date” specified in the presidentially declared disaster declaration, “in the same manner as a period specified under subsection (a).” Section (d) applies in addition to any other postponement period provided by IRS and Treasury under subsection (a).

Every FEMA Major Disaster Declaration with respect to COVID-19 lists January 20, 2020 as the start date of the “Incident Period.” On March 13, 2020, the President issued an emergency declaration under the Stafford Act in response to COVID-19. The Emergency Declaration instructed the Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a).” IRS and Treasury invoked section 7508A(a) by issuing Notice 2020-23 and other guidance postponing tax filing and payment deadlines until July 15 for all affected taxpayers. Neither the President nor IRS mentioned section 7508A(d) in the declaration or guidance, and IRS didn’t say on which day the Incident Period started: January 20, March 13, or some other date.

While some may argue that Congress did not contemplate ongoing disasters (such as the COVID-19 outbreak) when enacting subsection (d), the provision by its terms is not limited to time-limited disasters such as tornados, hurricanes, or floods.

In March, the IRS issued a tolerably terse statement for use in a Wall Street Journal article: “The President’s March 13 Stafford Act declaration didn’t automatically trigger the full range of filing relief.” Since then, IRS and Treasury have gone mute on the question as to why, in their view, section 7508A(d) does not add a rolling 60-day tail onto the end of the relief Treasury provided under section 7508A(a).

Interested groups have asked IRS for more time, but last week the IRS Commissioner testified to the Senate Finance Committee that IRS anticipates no shift from its current position that July 15 is the final payment deadline for postponed payments. “Protecting the revenue” is always a dubious rationale for IRS enforcement priorities, see Rev. Proc. 64-22, and it seems even more so in the current environment. To be clear, the Commissioner assured the Senate Finance Committee that IRS will “exercise discretion on the back end,” but it is better to build a technical basis before taking a tax position rather than depend on the discretion of the IRS afterwards.

Conclusion

Practitioners and academics continue to discuss the merits of the 60-day rolling shield position. Most taxpayers with no liquidity issues or appetite for picking a fight with IRS will pay their outstanding taxes on or before July 15. And IRS offers many payment plans and alternative arrangements to qualifying taxpayers.

Most taxpayers do not plan into fights with the IRS, and taxpayers and practitioners should not take the 60-day rolling shield position as an opportunistic way to circumvent the postponed due dates. Nevertheless, the position might be proven correct in time.

Taxpayers in dire straits may want to work with their professional tax advisor to consider whether they may further postpone their tax filing and tax payment obligations this year. The first building blocks in any such position would rely on more well-established grounds for reasonable cause relief, such as “undue hardship.”  But the 60-day rolling shield position deserves serious consideration as well. Even if the 60-day rolling shield position is not sustained, obtaining competent professional advice before July 15 may mitigate the downside risk of delinquency penalties for taxpayers who rely on that advice in good faith.

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax advisor. This article represents the views of the author(s) only, and does not necessarily represent the views or professional advice of KPMG LLP.

The Tide Keeps Going Out, Carrying Overpayment Interest Suits Away from District Courts

We welcome back regular guest blogger Bob Probasco. Bob is the director of the Low Income tax Clinic at Texas A&M University School of Law. Prior to starting the clinic at Texas A&M, Bob had a long a varied career in different tax positions. Before law school, he spent more than twenty years in various accounting and business positions, including with one of the “Big Four” CPA firms and Mobil Oil Corporation. After law school and a year clerking with Judge Lindsay of the Northern District of Texas, he practiced tax law with the Dallas office of Thompson & Knight. He left T&K in 2014 and started a solo practice before switching to full time academia. Keith

We return to the jurisdictional dispute over taxpayer stand-alone suits claiming additional overpayment interest in excess of $10,000.  The latest development, a decision on July 2nd by the Federal Circuit in Bank of America v. United States, docket number 19-2357, continues a trend that I’ve been following for two years now.  Until recently, the only decision on this issue at the Circuit Court level was E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005), which concluded that district courts can hear such claims.  For years, most lower courts followed the Sixth Circuit.  But recently the tide turned.  Here’s a timeline of recent cases illustrating the change.

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First, the lower courts follow Scripps and agree that district courts have jurisdiction over these claims:

  • October 31, 2016:  The Southern District of New York follows Scripps in Pfizer, Inc. v. United States, 118 A.F.T.R.2d (RIA) 2016-6405 (S.D.N.Y. 2016) and decides it has subject matter jurisdiction.  On May 12, 2017, the court dismissed the case for lack of jurisdiction for failure to timely file the refund suit.  Prior discussion here.  The taxpayer appeals.
  • July 1, 2019:  The Western District of North Carolina follows Scripps in Bank of America Corp. v. United States, 2019 U.S. Dist. LEXIS 109238, 2019 WL 2745856 (W.D.N.C. 2019), and denies the motion to transfer the case to the Court of Federal Claims.  Prior discussion here.  The government appeals.
  • August 30, 2019:  In the Southern District of Florida, the magistrate judge’s report and recommendation in Paresky v. United States, 2019 U.S. Dist. Lexis 149629, 2019 WL 4888689 (S.D. Fla. 2019) follows Scripps.  The magistrate judge concludes that the court has subject matter jurisdiction but recommends dismissal in part for failure to file timely refund claims. Prior discussion here.

And then a break, with cases now holding that only the Court of Federal Claims, not district courts, have jurisdiction over these claims:

  • September 16, 2019: The Second Circuit reverses the S.D.N.Y., in Pfizer, Inc. v. United States, 939 F.3d 173 (2d Cir. 2019) and concludes there is no subject matter jurisdiction.  Prior discussion here.  The court transfers the case to the Court of Federal Claims, docket number 19-1803. Plaintiff files a motion for summary judgment on April 30, 2020.
  • October 7, 2019:  The District of Colorado agrees with Pfizer, in Estate of Culver v. United States, 2019 U.S. Dist. LEXIS 173235, 2019 WL 4930225 (D. Colo. 2019).  The court transfers the case to the Court of Federal Claims, docket number 19-1941.
  • October 21, 2019:  In the Southern District of Florida, the district court judge in Paresky v. United States declines to adopt the magistrate judge’s report and recommendation and follows Pfizer, dismissing the case for lack of subject matter jurisdiction.  Prior discussion here.  The taxpayers appeal.
  • July 2, 2020:  The Federal Circuit agrees with Pfizer and reverses the WDNC, in Bank of America Corp. v. United States. It remands the case to the WDNC, to sever some of the claims and transfer them to the Court of Federal Claims.

So now we have the Sixth Circuit holding that district courts have jurisdiction over such suits while the Second and Federal Circuits disagree, with one more circuit court considering the issue.  Mr. and Mrs. Paresky’s case is currently pending in the Eleventh Circuit, docket number 19-14589.  Appellants filed their primary brief on May 27, 2020.  The government’s brief is due on July 27, 2020.

When only one circuit court has ruled on a difficult issue, district courts – even in other circuits – tend to follow that decision.  But once another circuit court disagrees, the better analysis tends to win out and lower courts change direction.  It’s possible that the magistrate judge in Paresky, and the district court in Bank of America, would have reached a different conclusion if they were deciding after Pfizer.  My guess is that the Eleventh Circuit will agree with the Second and Federal Circuits on this issue.  This is still a small sample size, but I suspect the tide has turned decisively.

Caveat:  Bank of America lost in the Federal Circuit but has a strong incentive (see below) to seek review by the Supreme Court.  Similarly, the government may want a ruling by the Supreme Court to overturn Scripps once and for all.  With a circuit split, and if both parties ask the Supreme Court to hear the case – well, the Court hates tax cases but might take this one.  If so, all bets are off.

How did we get here?

Before I get into the court’s decision, a brief reminder why Bank of America, appealed from the Western District of North Carolina, wound up in the Federal Circuit instead of the Fourth Circuit. The government had moved to dismiss the case, or in the alternative to transfer it to the Court of Federal Claims, on the basis that the district court did not have jurisdiction for such cases. The district court denied both alternatives, as the court concluded it had jurisdiction. However, if a district court issues an interlocutory order “granting or denying, in whole or in part, a motion to transfer an action to the United States Court of Federal Claims,” a party can make an interlocutory appeal and the Federal Circuit has exclusive jurisdiction. 28 U.S.C. § 1292(d)(4). The government could have done the same in Pfizer, when the district court ruled against it on the first motion to dismiss for lack of subject matter jurisdiction, but it chose not to do so. In the second motion to dismiss, based on failure to timely file the refund suit, the government did not request transfer, so Pfizer’s appeal was to the Second Circuit.

Statutory interpretation

The jurisdictional provision at issue in these cases is 28 U.S.C. § 1346(a)(1). It has no dollar limitation. That’s the statute we rely on when filing tax refund suits, so I think of it as “tax refund jurisdiction.”  The taxpayers in these cases argued that it also covers stand-alone suits for overpayment interest, although technically those are not refund suits.  The alternative jurisdictional provision for district courts, the “little Tucker Act” at § 1346(a)(2), provides jurisdiction for any claim against the United States “founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department . . . .” but is limited to claims of $10,000 or less.  The comparable jurisdictional statute for the Court of Federal Claims, § 1491(a)(1), has no such limitation.  So, if § 1346(a)(1) covers stand-alone suits for overpayment interest, taxpayers can bring suit in either district court or the CFC.  If it doesn’t, and the claim exceeds $10,000, the only option is the CFC.

Here’s what § 1346(a)(1) says, with the relevant language italicized:

Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws

The language is very similar to Section 7422(a), which sets forth requirements for tax refund suits.  Because those requirements – exhaustion of administrative remedies and a shorter statute of limitations than for the little Tucker Act – have frequently been held not applicable to these stand-alone overpayment interest suits, the government argues that § 1346(a)(1) doesn’t apply to such suits either.

Overpayment interest doesn’t fall within the first two categories because it is neither tax nor penalty.  But Scripps interpreted the third category, “any sum alleged to have been excessive,” as broad enough to cover overpayment interest suits.  After all, the Supreme Court had stated in Flora v. United States, 362 U.S. 145, 149 (1960): “One obvious example of such a ‘sum’ is interest.”  Scripps concluded that the amount was “excessive” if you looked at how much the government retained rather than collected and, more importantly, focused on the entire balance of the account rather just individual components such as the overpayment interest.  (I provided an illustration of this last point here.)  The comparison to section 7422(a) was inapt because section 7422(a) includes a qualifying header (“No suit prior to filing claim for refund”); § 1346(a)(1) does not and therefore could include both refund suits and “non-refund” suits.

Both the Second Circuit and the Federal Circuit disagreed completely with that analysis.  The comment in Flora, in context, referred to underpayment interest (which is assessed and collected) rather than overpayment interest (which is paid out).  The structure of § 1346(a)(1), including the first two categories in the list, and the use of the present-perfect tense “have been” made it clear that it referred to amounts that had been previously paid to, or collected by, the IRS.  And the statutory language mattered much more than the header for section 7422(a) versus lack of such for § 1346(a)(1).

Legislative history

Both parties in Bank of America also pointed the court to legislative history in support of their positions.  In its opening brief, the government pointed out that the final version of the provision was understood by courts to establish a narrow exception to the $10,000 limitation for “little Tucker Act” claims – only for tax refund claims.  The government also focused on the Supreme Court’s discussions of the legislative history in Flora v. United States, 357 U.S. 63 (1958), and Flora v. United States, 362 U.S. 145 (1960).

Here is a summary of the arguments in the taxpayer’s brief: 

  • The predecessor statutes to § 1346(a)(1) were designed to eliminate several distinctions and inequities.  For example, the earlier provisions (a) for district court jurisdiction, requiring suing the Collector and could not brought after he died; and (b) for Court of Claims jurisdiction, did not allow for awarding interest.  Thus, in some instances, a taxpayer would have no way to recover overpayment interest.  In a floor statement introducing an amendment to the Revenue Act of 1921, a Senator noted those issues and stated that the amendment was intended to eliminate the problems.
  • The Assistant Chief Counsel of the Bureau of Internal Revenue represented, in a 1953 Senate subcommittee hearing, his opinion that the language of § 1346(a)(1) already covered stand-alone overpayment interest suits.
  • In connection with that same hearing, Treasury later provided by letter a list of several cases in district court involving stand-alone claims for interest.    

In its reply brief, the government took issue with the taxpayer’s arguments based on legislative history:

  • The Senator who introduced amendments to the Revenue Act of 1921 was concerned about tax refund claims, on which overpayment interest might be paid, rather than stand-alone claims for overpayment interest.
  • It was not entirely clear that the Assistant Chief Counsel’s statement at the 1953 Senate subcommittee hearing concerned stand-alone claims for overpayment interest.  In any event, a witness from the ABA testifying at the same hearing disagreed with the Assistant Chief Counsel’s opinion that the existing statute covered stand-alone claims. 
  • None of the 14 cases listed on the letter from Treasury of district court litigation concerned jurisdiction under § 1346(a)(1) for stand-alone claims of overpayment interest, the issue in Bank of America.  Only six cases involved overpayment interest at all, of which: (a) two declined to exercise jurisdiction; (b) two didn’t question jurisdiction; and (c) two were based on different jurisdictional provisions and involved claims under $10,000.

This brief summary doesn’t do the arguments justice, of course.  For those interested in more details, I suggest a review of the parties’ briefs, which provide a detailed history of the evolution of the jurisdictional provisions.  I was impressed by the thoroughness of both sides’ work, scratching and clawing for anything they could find or infer in support of their respective positions.  They did the best possible with what little was out there.

I count myself among those who consider legislative history relevant in interpreting ambiguous statutes, and a good tax lawyer (or judge) can find ambiguity in almost anything if they want to.  Even so, I considered these examples unlikely to persuade a court that had not already decided for other reasons.  I went back and looked at some of the original sources when reading the district court decision and they didn’t persuade me in either direction.  The Federal Circuit didn’t seem impressed either.

Impact on Bank of America

When I originally looked at the case, I thought that “most” of Bank of America’s claim would be eliminated if it lost in the Federal Circuit.  The third amended complaint was for $163 million, of which $141 million related to interest netting.  The interest netting claims seemed particularly vulnerable if Bank of America had to litigate in the CFC (see below), based on a cursory review of the complaint.  Now that I’ve reviewed the motion to dismiss more carefully, it appears that “most” overstated the potential impact on Bank of America, although it’s still significant.

The benefits of interest netting – the section 6621(d) adjustments to eliminate the interest rate differential – can be effected two ways.  The government can pay additional overpayment interest to bring that rate up to the underpayment interest rate, or it can refund underpayment interest to bring that rate down to the overpayment interest rate. 

Over $95 million of the benefit from interest netting came from years in which the adjustments were for reductions/refund of underpayment interest. A claim for refund of excessive underpayment interest clearly fits with § 1346(a)(1); under section 6601(e)(1), underpayment interest is treated as tax, except that it is not subject to deficiency procedures. 

Thus, there would be no basis for transferring those claims to the CFC.  (There were small amounts of overpayment interest in those years, presumably interest on the claimed refund of underpayment interest rather than directly from interest netting.  That overpayment interest would not be a disallowed stand-alone claim for overpayment interest; it would be permitted under ancillary jurisdiction.)  The government sought to transfer only $67 million of the total complaint amount to the CFC, of which only $44 million involved interest netting.  Assuming that the non-interest netting claims are not at a particular disadvantage in the CFC, Bank of America’s loss from the Federal Circuit’s decision may be only $44 million, or even less.  Well, to the taxpayer losing the claim, “only” is an inappropriate adverb; that’s still a lot of money.

Interest netting

Most taxpayers are perfectly willing to litigate interest cases in the CFC.  The CFC judges tend to have more experience with interest issues and most large interest cases are litigated there instead of district courts. In fact, Bank of America has another interest netting case pending there now. Taxpayers tend to bring substantial stand-alone interest cases in district court only to: (a) take advantage of favorable precedent in that circuit; or (b) avoid unfavorable precedent in the Federal Circuit.  Pfizer was an example of the former.  It wanted to rely on a favorable precedent, Doolin v. United States, 918 F.2d 15 (2d Cir. 1990).  It won’t necessarily lose its case elsewhere; it might persuade the CFC to reach the same decision as the Second Circuit did in Doolin.  Based on the complaint, I suspect Bank of America is an example of the latter, in this case trying to avoid an unfavorable precedent regarding interest netting, Wells Fargo & Co. v. United States, 827 F.3d 1026 (Fed. Cir. 2016).  (Prior discussion here.) 

Wells Fargo involved interest netting claims between separate corporations that had merged.  The Federal Circuit decided that, in such contexts, interest netting is only permitted if the period of overlap (an underpayment balance for one period and an overpayment balance for another period) began after the date of the merger. Here’s an illustration:

Company A had a $2.5 million underpayment balance for its 2008 tax year outstanding from 3/15/2009.  Company B had a $2 million overpayment balance for its 2011 tax year outstanding from 3/15/2012.  If the balances were still outstanding until paid/refunded on 12/1/2016, there was a $2 million overlap from 3/15/2012 (when the second balance began) until 12/1/2016 (when both balances ended).  During that overlap period, there was an interest rate differential; corporations earned from 1% to 4.5% less on overpayments than they paid on underpayments, and in this scenario the difference would more likely be 4.5% than 1%. 

If the companies merged in 2010, $2 million of the respective balances could be netted to avoid that differential, for the entire period from 3/15/2012 to 12/1/2016.  But if the companies merged in 2013, under Wells Fargo those balances could not be netted at all.  I think a better interpretation of the law would allow interest netting for part of the overlap period, starting from the date of the merger.  But the CFC will rule based on Wells Fargo, not based on my interpretation.

As noted above, Bank of America’s claims that will now wind up in the CFC include $44 million of interest netting benefits.  I don’t know if the entire $44 million will be denied based on Wells Fargo.  But (a) those claims involve Merrill Lynch’s tax years 1987, 1990, 1991, 1999, 2002, 2003, 2005, 2006, and 2007 tax years; and (b) Merrill Lynch merged with Bank of America on October 1, 2013.  I didn’t try to review the interest computations attached to the motion to dismiss, but I anticipate Bank of America stands to lose the vast majority of the $44 million.  Worth a cert petition to the Supreme Court?

Impact elsewhere?

The above discussion concerns how this case impacts Bank of America and more broadly other companies that might prefer to bring stand-alone overpayment interest suits in district court.  That doesn’t mean the impact of this line of cases is limited to overpayment interest.  Pfizer and Bank of America identified a certain type of claim that arises under the Internal Revenue Code but is not a tax refund claim for purposes of jurisdiction.  This distinction might affect not only the available forum, which is what I’ve been focusing on here, but also other issues. For example, a “non-refund claim” under the little Tucker Act will not be subject to the requirement to exhaust administrative remedies and will have a different statute of limitation.

Are there other examples of “non-refund claims” arising under the Code?There may well be, and Carl Smith pointed out one prominent recent example that cited Pfizer. On June 19, 2020, the district court of Maryland decided in R.V. v. Mnuchin, 2020 U.S. Dist. LEXIS 107420 (D. Md. 2020), that the government had waived its sovereign immunity with respect to the CARES Act economic impact payments (EIPs).  The plaintiffs claimed jurisdiction under, among others, the little Tucker Act, § 1346(a)(2).  That jurisdiction requires a separate “money-mandating” statute, for which the plaintiffs pointed to section 6428.  The government argued that section 6428 is a tax statute; any challenge to the denial of a credit falls within the jurisdiction of § 1346(a)(1) instead of § 1346(a)(2) and is subject to the restrictions of section 7422.  The plaintiffs’ failure to exhaust administrative remedies was fatal to their claim. 

The court dismissed the government’s motion to dismiss without prejudice.  It stated: “The Government argues that 26 U.S.C. § 6428 is not a money-mandating statute because it is a tax statute.  True.  But the two are not mutually exclusive.”  It cited Pfizer for that proposition.  To put it another way, a tax statute authorizes refund claims, but it also may authorize claims that are not “tax refund claims” for purposes of § 1346(a)(1) and not subject to section 7422 but are money-mandating provisions sufficient to support a Tucker Act claim.

The Advance Premium Tax Credit under the Affordable Care Act would likely be another “non-refund claim.” As with the EIPs, it is reconciled on the taxpayer’s tax return, but it is paid in advance pursuant to a clear money-mandating statute. Michelle Drumbl points out that the U.S. at one time had an advance earned income credit and other countries currently have similar advance credits. If Congress ever enacted her proposal for a transition to periodic payments rather than when the tax return is filed, that would likely also qualify as a “non-refund claim.”

What about refundable credits that are not paid in advance? That might be a harder argument to make; it’s not clear whether there is a money-mandating provision other than section 6402(a), working with section 6401(b)(1). But “hard” doesn’t always mean “impossible.” I haven’t researched enough to know whether a taxpayer has ever tried filing suit for payment of refundable credits based on the little Tucker Act instead of § 1346(a)(1). It might be the only route for recovery for a taxpayer who filed a return claiming a refund (based on a refundable credit) more than three years after the due date. The six-year statute of limitations for a little Tucker Act suit might avoid the problem of the “look back” limitation of section 6511(b)(2). It might be worth a try if you have a client with the right facts.

After all, ten months ago we weren’t sure the government would convince a court that stand-alone overpayment interest suits are “non-refund claims” for which district court jurisdiction is only available under the little Tucker Act. Now, the government has won in the Second and Federal Circuits and seems to have momentum heading into the Eleventh Circuit.

Postscript

While I was working on this post, Jack Townsend posted on his blog concerning the Federal Circuit’s decision in Bank of America.  Jack’s observations are always worth reading.

Suspension of Collection Statute of Limitations Redux

Les and I have blogged previous cases involving Mr. Weiss here, here and here.  Thanks to sharp eyes by Carl Smith, we get to revisit Mr. Weiss in his continuing, and long lasting, journey along the path to tax compliance.  When we first wrote about Mr. Weiss, he had a Collection Due Process case underway in which he argued that he was purposefully attempting to file an equivalent hearing so that the statute of limitations on collection would run.  The problem he had with the argument stemmed from a difference between the date on the CDP notice and the date of actual delivery to the postal service.  In his case the revenue officer (RO) attempted to hand deliver the CDP notice, but a dog prevented him from making it up the driveway. So, the RO went back to his office where two days later, the RO mailed the CDP notice using certified mail but did not change the date on the notice itself from the date it bore on the date he attempted personal delivery. The taxpayer claimed that the earlier date on the notice governed the 30-day period within which he needed to file a timely CDP request.  The Tax Court held that the date of mailing governs and not the date on the notice.  He unsuccessfully appealed that decision as discussed further below. And for further discussion, Jack Townsend has also written about this case here.

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In 2019, the Department of Justice (DOJ) brought a collection suit against Weiss for his self-reported taxes shown on his 1986-1991 returns seeking to reduce the assessment to judgment.  He filed all those returns late in 1994.  By the time the suit was filed, he owed about $800,000.  How could the collection statute of limitations (CSED) remain open more than 15 years after it would normally have expired?  The opinion of the court does an excellent job detailing the facts and walking carefully through all of the suspensions that occurred.

Mr. Weiss filed bankruptcy three times.  Filing bankruptcy extends the CSED from the time of the bankruptcy petition until the lifting of the automatic stay plus an additional six months.  Depending on the type of bankruptcy, this period can add several years to the CSED. Then he received a notice of intent to levy (NOIL) and requested a CDP hearing, petitioned the Tax Court (in 2011), appealed to the D.C. Cir., then unsuccessfully sought cert.  This part of his collection history is chronicled in the prior blog posts referenced above.  The consequence of three bankruptcy cases and one very long CDP case is that the IRS calculated the statute of limitations on collection remained open as of the date of the filing of the suit against Mr. Weiss.  Because of the amount of money he owed combined with some belief at the IRS that he had assets which would at least in part exist to satisfy the liability, the RO assigned to his case, perhaps the same one last seen running from the dog in Mr. Weiss’ yard, recommended that the government file suit, the IRS Chief Counsel’s office concurred as did DOJ.

In the collection suit, Mr. Weiss moved for summary judgment once again arguing that the CSED had expired by the time the DOJ brought suit.  His argument in this case differed from his argument in the CDP case which is a good thing, since he would have been barred from making the exact same argument again.  Here he argues that the filing of the request for cert with the Supreme Court did not extend the CSED.  Here is the pertinent tolling language from 6330(e)(1):

[I]f a hearing is requested under subsection (a)(3)(B), the levy actions which are the subject of the requested hearing and the running of any period of limitations under section 6502 . . . shall be suspended for the period during which such hearing, and appeals therein, are pending. In no event shall any such period expire before the 90th day after the day on which there is a final determination in such hearing.

Mr. Weiss argued that a cert. petition is not an “appeal” under the terms of the statute, since it is discretionary and not called an appeal.  The district court, in an opinion dated May 21, denied the motion, holding that a cert. petition is an appeal.  The district court says that a cert. petition is commonly called an appeal, even if it technically isn’t.

The district court’s opinion does not surprise me.  I will also not be surprised if Mr. Weiss decides to appeal the opinion.  I do not say that because I think he will win his appeal.  In the end, if Mr. Weiss decides not to appeal or loses on the appeal, the IRS will have a judgment against him.  As discussed in a prior post, the judgment will give the IRS many more years to attempt to collect from him.  We may have further opportunities to discuss tax procedure issues related to Mr. Weiss.  

In addition to bringing the case to my attention, Carl also reminded me that the language concerning Mr. Weiss in the most recent case is language that has created some controversy in the CDP area before because Congress chose the wrong language to describe a petition to the Tax Court. The opinion doesn’t mention the fact that in 2015, 6330(d)(1) was amended to cease calling the Tax Court proceeding an appeal. While it fixed one problem regarding the language it used to describe the filing of a Tax Court petition, Congress forgot at that time to conform the language in 6330(e)(1).  But, the Tax Court proceeding was called an “appeal” at the time that Weiss petitioned from his wrongly dated CDP notice. 

Carl reminded me that any work done on fixing CDP should make sure to ask for this technical correction to conform 6330(e)(1) language to 6330(d)(1)’s current language. There are two sentences in section 6330(e)(1) that need to be fixed — the above-quoted one and the final sentence, which reads:  “The Tax Court shall have no jurisdiction under this paragraph to enjoin any action or proceeding unless a timely appeal has been filed under subsection (d)(1) and then only in respect of the unpaid tax or proposed levy to which the determination being appealed relates.”  Perhaps Mr. Weiss’ argument concerning the description of the request for cert. will cause a tightening and conforming of the language in the statute the next time it is amended.  If it does, then some good will have come out of the lengthy effort to collect from Mr. Weiss.

Whistleblower Week – Designated Orders, March 2 – 6, 2020

This week was apparently Whistleblower Week at the Tax Court, featuring three separate whistleblower orders from Judges Copeland, Jones, and Kerrigan. We’ll also discuss a short order on limited entries of appearance (which has less importance after the Court’s recent administrative order regarding limited entries of appearance in the time of COVID-19), as well as an order to dismiss a deficiency case for lack of jurisdiction.

Other orders included:

  • An excellent refresher from Judge Urda on motions to vacate under Tax Court Rule 162 and Federal Rule of Civil Procedure 60(b).
  • An order from Judge Toro granting a motion to dismiss from Petitioner in a standalone innocent spouse case.
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The Whistleblower Orders

There were three orders granting summary judgment to Respondent in whistleblower cases. (There were technically four, but the orders in the unconsolidated Keane cases are essentially identical).

  • Docket No. 10662-19W, Horsey v. C.I.R. (Order Here)
  • Docket Nos. 22897-18W, 23240-18W, Keane v. C.I.R. (Orders Here & Here)
  • Docket No. 22395-18W, Lambert v. C.I.R. (Order Here)

These cases follow the Tax Court’s decision from last fall in Lacey v. Commissioner, 153 T.C. No. 8 (2019), which held that the Court has jurisdiction under I.R.C. § 7623(b)(4) to review decisions of the Whistleblower Office to reject a claim for failing to meet threshold requirements in the regulations applicable to whistleblower claims. See Reg § 301.7623-1(c)(1), (4). The Court has long held that it has no jurisdiction to force the IRS to audit or collect proceeds from target taxpayers and that if the IRS fails to audit and collects no proceeds from the target, the Court likewise has no jurisdiction to review the decision not to audit or collect proceeds. Cohen v. Commissioner, 139 T.C. 299, 302 (2012).

In Lacey, it was undisputed that the IRS did not audit the taxpayer and collected no proceeds. However, the Court determined that an initial rejection of the whistleblower complaint without a referral to the IRS operating division could be reviewed for abuse of discretion. The Court noted that permissible reasons for rejection at this level included those threshold regulatory requirements: that the whistleblower’s complaint provides specific and credible information that the whistleblower believes will lead to collected tax proceeds; reports a failure to comply with the internal revenue laws; identifies the persons believed to have failed to comply; provides substantive information, including all available documents; and does not provide speculative information. Under the regulations, the Whistleblower Office should first determine whether the claim is deficient in this regard, and if not, forward the case to an IRS operating division (e.g., LB&I for large business taxpayers, etc.).

At that point, a “classifier” in the operating division takes over, and determines whether to proceed with an audit. However, they too could determine that the claim was deficient for any of the reasons the initial classifier could. In Lacey, the Court denied summary judgment to Respondent because the administrative record was not sufficiently clear to discern whether the Whistleblower Office considered the whistleblower’s claim at all; thus it was likewise impossible to determine why the claim was rejected.

In these three cases, however, the Court has no trouble of the kind that tripped up the IRS in Lacey. In all of the cases, the IRS neither audited nor collected proceeds from the target taxpayers. And the Whistleblower Office, in each case, did refer the case to a “classifier” in the relevant operating division. That employee, in turn, determined that the initial claim was speculative and recommended that the IRS not proceed with further investigation of the target taxpayers. Unlike Lacey, all of this information was apparently included in the administrative record, and so the Court could grant summary judgment more easily.

In Keane, Judge Jones noted that the IRS may continue to run into problems where it rejects claims using “and/or” language in the determination letter. Here, the classifier rejected the claim because “the information provided was speculative and/or did not provide specific or credible information regarding tax underpayment or violations of internal revenue laws.” This is important, because under the Chenery doctrine, the Court may only review the IRS determination for the reasons that the IRS actually relied on in making its determination. See Lacey, 153 T.C. at *14 (citing Kasper v. Commissioner, 150 T.C. 8, 23-24 (2018)). Using “and/or” language makes the grounds for the IRS determination unclear. While Judge Jones notes that the record support both reasons here, other cases might be closer.

Judge Jones cites a memorandum opinion from Judge Gustafson, who raised a similar concern earlier this year. See Alber v. Commissioner, T.C. Memo. 2020-20. This aligns with his analogous view of the IRS’s practice in issuing Notices of Determination in CDP cases, where the IRS typically writes that “There was a balance due when the Notice of Intent to Levy was issued or when the NFTL filing was requested.” In a previous order (covered here), Judge Gustafson wondered whether someone at Appeals actually did verify that a balance due existed, given the lack of clarity in the notice.

What to distill from Lacey and these orders? First, the Tax Court can review an initial rejection from the Whistleblower Office—even if no proceeds are collected. Second, if an employee of the IRS operating division decides not to pursue collection after referral from the Whistleblower Office, that will generally be sufficient to resolve the case in favor of the IRS—though one might reasonably suspect a different result could lie if that classifier failed to meaningfully review the case, as potentially occurred in Lacey with the Whistleblower Office. Finally, if the administrative record provides multiple reasons for rejecting the claim in an “and/or” formulation, this could prove problematic for the IRS under Chenery if at least one reason isn’t supported in the administrative record.

Docket No. 722-19L, Jenkins v. C.I.R. (Order Here)

This short order from Judge Gale deals with a defective limited entry of appearance. Counsel attempted to file a motion to dismiss for Petitioners based on an electronically filed “limited” entry of appearance. However, the Tax Court’s previous administrative order authorizing limited entries of appearance only allowed her to do so on paper, and then only at the trial session itself. So, the Court struck the motion. Counsel found an easy remedy here, however, and simply entered an appearance normally, filed the motion to dismiss; the Court granted it days later.  

On May 29, the Court issued a new administrative order that authorizes the filing of a limited entry of appearance electronically, at any time during the pendency of a Tax Court case. It offers much more flexibility for practitioners to limit their representation to a prescribed proceeding. This includes the trial session itself, as did the previous order, but can also include motion hearings, pre-trial conferences, and other matters at anytime between the issuance of the Notice Setting Case for Trial until the adjournment of the trial session. Because the end of representation isn’t necessarily as clear-cut under this new order, the attorney must file a Notice of Completion at the end of the limited appearance; the Court is not required to approve the end of the representation.

Docket No. 18705-18S, Patten v. C.I.R. (Order Here)

This is the order that keeps a tax attorney up at night. It explains, in minute detail, the process by which an attorney missed the 90-day jurisdictional deadline to file a Tax Court petition in a deficiency case.

The Notice of Deficiency was dated June 22, 2018; the Petition was filed with the Tax Court on September 21, 2018: the 91st day after June 22. Apparently, Respondent’s counsel didn’t notice this in filing the Answer, but Judge Leyden’s chambers did. She issued an order to show cause, directing Respondent to provide the “postmarked U.S. Postal Service Form 3877 or other proof of mailing” regarding the notice of deficiency. After all, it’s not the date listed on the Notice of Deficiency that controls under the statute; it’s the date of mailing of the Notice of Deficiency. See I.R.C. § 6213(a).

Chief Counsel responded to the order and attached Form 3877 showing that the Notice was indeed mailed to Petitioner’s last known address by certified mail (along with two other addresses). The Notice sent to the last known address was returned, as was one of the other notices. But it looks like one notice was successfully delivered. (Of course, that’s irrelevant to the validity of the Notice itself, as Respondent established that the Notice was sent to the taxpayer’s last known address by certified mail. See I.R.C. § 6212.)

Respondent also showed that Petitioner, through his attorney, mailed the petition to the Court on September 19, 2018. As we know, the Court received it on September 21, 2018—one day late. Ordinarily, documents are “filed” when they are received—either by the IRS or the Tax Court.

So, can’t the mailbox rule under I.R.C. § 7502 save the taxpayer’s petition? Not here. Petitioner’s attorney, in his response to the order, acknowledged that the petition was mistakenly sent via FedEx Express, rather than FedEx Overnight due to an “office slipup”. While section 7502(f) allows taxpayers to use private delivery services, such as FedEx, UPS, or DHL, instead of the USPS, practitioners and petitioners alike must ensure that they are using a “designated delivery service.”

What’s a designated delivery service? Section 7502(f)(2) defines the type of services that the Secretary may designate, and Reg. § 301.7502-1(e)(2)(ii) describes the process of designating the service (i.e., publishing it in the Internal Revenue Bulletin). And in practice, the Secretary does so periodically—most recently in Notice 2016-30. The list also appears more accessibly on the IRS website.

So, does FedEx Express appear on this list of designated delivery services? No. Therefore, it can’t trigger the mailbox rule under section 7502. The petition is filed late, and the Tax Court has no jurisdiction to decide the case. Judge Leyden therefore dismisses the case—which involves liabilities for four separate tax years—for lack of jurisdiction.

The lesson for practitioners? Mail the petition so the Court receives it before the deadline. Otherwise, mail the petition via USPS certified mail. Train your office staff to only mail petitions to the Tax Court via USPS certified mail. Is there a good reason to ever use a private delivery service when mailing a Tax Court petition? I don’t see one, given the very real risks involved that bear out here. 

Sending Notices with Bad Dates

On June 22, 2020 National Taxpayer Advocate Erin Collins issued a blog post advising readers to keep an eye out for notices with expired action dates.  The post notes that “during the shutdown, the IRS generated more than 20 million notices; however, these notices were not mailed.  As a result, the notices bear dates that now have passed, some by several months and some of the notices require taxpayers to respond by deadlines that have also passed.” I will repeat myself once or twice in this post but if I am reading it correctly the IRS is knowingly and intentionally creating a false entry on thousands, perhaps tens of thousands, of taxpayers’ official records of account.

The NTA describes as a silver lining the fact that the IRS is granting additional time to respond before interest or penalties apply and that the IRS is putting inserts with the letters to explain something about the mismatch in the date of mailing and the dates on the letters.  I will talk more about some of the letters the NTA mentions in her blog post.  I found myself wondering about several things that were not explained in the NTA’s blog post.  Why did the IRS print these notices?  Why doesn’t the IRS shred the notices and recycle the paper in order to issue new notices with the proper dates on the notices?  Why hasn’t the IRS issued a news release or Tax Tip about the notices to alert taxpayers and practitioners?  Prior to the NTA blog post, the IRS only released this information though its National Public Liaison (NPL), which, while helpful, does not reach a wide audience. And while many people read the NTA blog posts, I don’t think it has a readership on a par with broadly released statements from the IRS.

The IRS might think it has communicated to practitioners. It pushed this news out through the NPL on June 9. The stakeholder liaison is an inadequate way to disseminate important news. On the day of the stakeholder liaison email, IRS quietly updated the page on IRS operational status to include the information. It also posted this news as a “Statement on Balance Due Notices” here.  I do not want to detract from the important discussion of the decision itself, but it is also worth mentioning that the information the IRS has made public on this situation and the method and medium of making it public, fails to signal the importance of this action.

Yesterday the NTA released her 2021 Objectives Report to Congress, which confirms the information in her blog post. Kudos to the NTA for including the problem of outdated notices in the news release accompanying the report. This will help get the word out to practitioners.

In a letter to Commissioner Rettig, Representatives Neal and Lewis expressed their concern over the outdated notices and suggested that the IRS take steps to “ensure no taxpayers are penalized” for the IRS’s inability to timely process correspondence. For the reasons explained below, this will not be easy to do if the IRS moves forward with its plan to mail the outdated notices.

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The NTA states that several dozen kinds of IRS notices will be mailed in the next month or two.  Maybe there is still time for the IRS to reconsider its decision to send out-of-date notices.  I hope so.  Here, I will discuss a few of the notices she mentioned.  Before starting the specific discussion, I note that many of these notices are required by statute.  I draw a distinction between statutorily required notices and other types of IRS notices.  While the best practice would be to send out notices on the date listed on the notice for all notices, the purposeful mailing of misdated statutorily required notices creates a more serious problem.

No matter what an insert says, the taxpayer will receive a statutorily mandated notice triggering statutorily prescribed duties and response times with the wrong date on the notice and the wrong date(s) for responding.  In the last two sentences of her blog post the NTA mentions that the IRS computer system will show as the business record of the IRS the wrong date.  She says “[c]ompounding confusion surrounding notice dates, IRS transcripts for taxpayers’ accounts will also reflect incorrect dates for some of the notices.” 

This could have grave consequences for both taxpayers and the IRS if the dates on the letters compromise the IRS business records.  First, taxpayers who do not keep the envelope and the letter may have trouble proving that the dates on the letter did not reflect the actual mailing date when making a future challenge.  Second, if the IRS builds a business record which it knows contains inaccurate information it makes all of its records suspect.  Courts regularly rely on certified transcripts from the IRS for the accuracy of the date an action took place.  If the IRS knowingly puts the wrong dates into its system of records, that calls the entire system into question.  This could have consequences for the IRS far beyond the consequences of recycling these letters and making sure that its records accurately reflect actions taken.

Here you have the NTA saying that the IRS business record is inaccurate.  That could be powerful evidence in court to strike at many IRS actions taken that stem from 2020.  It also has the potential to support grounds for damages if certain collection actions occur after a wrongful assessment or wrongful filing of a notice of federal tax lien.  It may present the possibility that in a CDP case a taxpayer may wish to lean on a rights-based failure to inform argument as a grounds to invalidate the proposed collection action.

Notice and Demand

IRC 6303 requires that the IRS send out a notice and demand letter within 60 days of the making of an assessment.  Case law going back at least three decades holds that the failure to send the notice and demand letter within the 60-day period does not invalidate the assessment but there is some possibly contrary case law.  The failure impacts the timing of the creation of the federal tax lien.  IRC 6321 and 6322 provide that the federal tax lien arises upon assessment, notice and demand and failure to pay within the demand period.  Ordinarily, failure to pay within the demand period causes the federal tax lien to relate back to the date of assessment.  If the IRS sends out the notice and demand beyond the 60-day period, the FTL will only arise upon non-payment and will not relate back to assessment.

You might say “so what,” because who cares about the FTL.  Only after the IRS filed the notice of federal tax lien (NFTL) does the IRS create a perfected lien.  The unperfected FTL still, however, has meaning.  For example, it attaches to property transferred for less than full value.  If a fight arises regarding the attachment of the FTL, the actual date of the mailing of the notice and demand letter matters.  Because of the pandemic, the IRS could not avoid sending out many notice and demand letters after the 60-day period.  Sending them out beyond the time frame must occur due to no fault of the IRS but sending a significantly backdated letter will undoubtedly confuse many recipients and may cause some to even challenge the validity of a notice which on its face asks the taxpayer to do something impossible.  If the notice and demand letter is invalid, the IRS has real problems because it would not have created the FTL, which has many consequences, including but certainly not limited to violating disclosure of a taxpayer’s liability if the IRS records a notice of federal tax lien when no underlying lien exists.

There is also the problem of the address.  The IRS must mail the notice and demand letter to the taxpayer’s last known address.  The IRS must use the taxpayer’s address as shown on the taxpayers most recently filed and properly processed return, unless clear and concise notification of a different address is provided. See, e.g., Duplicki v. Comm’r, T.C. Summary Opinion 2012-117.If these notices have been sitting in the bowels of a service center for months during the filing season, it is quite possible that many taxpayers have filed returns between the time of the creation of the notice and demand letter and the mailing of that letter.  The NTA does not mention if the insert changes the address on the letter.  I imagine it does not.  While many paper returns filed in the past few months remain in the parking lots of the service centers to which they were sent, the vast majority of taxpayers filed electronically.  Many of those returns will have gone through processing, and the IRS will know the taxpayer’s new address before these musty notices get mailed.  Mailing the notice and demand letters to something other than the taxpayer’s last known address will create an invalid notice and demand letter creating the same problems described above.  Maybe these are all notice and demand letters based on returns filed with insufficient remittance and processed early in the filing season, so the notice on the letter is the address on the most recent return.  If these notices do not come from that source, the likelihood that a fair percentage will bear an address other than the last known address is reasonably high.  This means taxpayers should be prepared to challenge the notices on this basis, which is not often done.

Math Error Notices

As most readers know the name math error notice is a misnomer.  Subsection 6213(g)(2) provides the definition of math error notice.  Sixteen different actions trigger the sending of a math error notice only one of which is 1+1=3.  Earlier this year, Les updated Chapter 10 of the treatise “IRS Practice and Procedure” and adopted the practice of the Taxpayer Advocate Service of calling this notice the summary assessment authority notice.  For this post I will stick with the misleading language of the statute, but errors in math play a small role in these notices.

The math error notice provides an exception to the need for the IRS to send a notice of deficiency in order to make an assessment.  Instead of a 90-day letter offering the chance to go to Tax Court, the taxpayer receiving a math error notice has 60 days to write back to the IRS expressing disagreement or the IRS will make the assessment.  We have not written enough about math error notices but some of our prior posts on this topic exists here, here, here and here.  Nina Olson wrote often about these notices as the NTA.  Find some of her writings here, here, here and here

This notice cuts off rights.  Most taxpayers fail to respond giving the IRS a shorter, easier path to assessment than the notice of deficiency.  Math error notices confuse taxpayers in the best of times as discussed in some of the NTA annual reports.  If you couple the ordinary confusion of these notices with dates that make no sense, the likelihood of a failure to response undoubtedly goes up.

Note that the math error notice must be mailed to the taxpayer’s last known address and the discussion above concerning notices with something other than the last known address applies here.  If the math error notice goes to the wrong address but the IRS makes an assessment following a failure of the taxpayer to respond, then the IRS has a bad assessment and all of the things that flow from a bad assessment.  These “things” can take a lot of time and effort to unwind.  They can also cause the IRS to lose the right to assess if the unwinding occurs after the statute of limitations on assessment has passed.

On a smaller scale the government faced a similar problem in the government shutdowns of 2013 and 2018-2019.  The system seems to generate notices automatically at certain points in time.  The system does not understand when the government ceases to operate.  In the prior shutdowns it sent out notices of deficiency and collection due process notices while the government was closed, but those letters didn’t have the wrong date and the taxpayer could still file a Tax Court petition or CDP request in the right time frame.

Collection Due Process Notices  

I wrote a blog post in 2018 about a CDP case in which the Revenue Officer went to the taxpayer’s house to deliver the CDP notice but the taxpayer’s dog deterred the RO from making delivery.  He went back to his office and mailed the CDP notice to the taxpayer to avoid bodily injury; however, he mailed the notice two days later.  When he mailed the notice, it still bore the date of his canine-thwarted personal delivery effort.  The Tax Court concluded that the time to make a CDP request runs from the date of mailing (or delivery) and not the date on the CDP notice.

Now the IRS will throw into the system potentially thousands of wrongly dated CDP notices, causing the recipients confusion and filing dates that may or may not fall within 30 days of the actual date of mailing.  How many taxpayers will keep the letter and the envelope?  Will the IRS have the correct date of mailing in its database or the original date of mailing?  Remember that these mailings result not from a single RO working a case but from a mass-produced effort at the service centers.

Are CDP notices sent by the IRS with knowingly wrong dates valid CDP notices?  If invalid, it makes all downstream levy actions wrongful.  Will the CDP notices be sent to the taxpayer’s last known address or to some other address?  If sent to something other than the taxpayer’s last known address, the CDP notices are not good.

Conclusion

The IRS should throw away these letters.  (Recycle them please with appropriate taxpayer identification precautions.)  Send new letters in which the dates on the letters match the dates of mailing.  Yes, this will be expensive in cost of production of the letters and the time it takes to create the new letters.  But it may prove less expensive than the alternative.  It certainly will create less confusion among the taxpayers receiving the letters, the representatives trying to assist the letters, and the courts interpreting the IRS actions.