Refund Claims and Section 7508A

Bob Probasco, a regular guest poster, has joined Procedurally Taxing as a contributor. In today’s post, Bob unravels the intersection of the suspension rules of Section 7508A and the refund lookback limits in Section 6511. Les

In normal years, the President may make multiple regional disaster declarations; in 2020, we had a nationwide disaster declaration related to the COVID pandemic.  Our work environments and financial security were affected dramatically, as were IRS operations.  The IRS generally provides taxpayers broad-based relief under section 7508A after such disaster declarations.  That has resulted in more than a few PT blog posts on the complexities of those provisions (see herehere,herehere, and here for just the tip of the iceberg; you can find several more if you go to the top of the blog webpage and type “7508A” or “7508A(d)” into the Search box).  

The National Taxpayer Advocate submitted her 2021 Annual Report on January 12, 2022.  As Les noted, it really is required reading for those interested in tax administration.  Alas, I’ve fallen behind in my reading, but someone brought one particular legislative recommendation in the 2022 Purple Book to my attention.  The #10 legislative recommendation (starting at page 30) proposes an amendment to avoid problems arising from the interaction between section 7508A and refund claims.

read more...

The problem and the proposed fix

As we all remember, there are two different statutes of limitations with respect to refund claims in section 6511.  Section 6511(a) describes how soon a refund claim must be filed – three years after the return was filed.  (If the refund claim is not filed by then, it will still be timely if paid within two years of a payment by the taxpayer.  That option is not relevant to this discussion.)  That deadline is clearly one that the IRS has discretion to suspend.   § 301.7508A-1(c)(1)(iv).  For the pandemic, the IRS exercised that discretion in Notice 2020-23.

But there is the second limitation.  Section 6511(b)(2) limits how much the taxpayer can recover, even from a timely filed refund claim.  When the claim is timely filed within three years after the return was filed section 6511(a), section 6511(b)(2)(A) limits the amount of the recovery:

If the claim was filed by the taxpayer during the 3-year period prescribed in subsection (a), the amount of the credit or refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return. 

If you filed your tax return for 2018 (without an extension) late on June 10, 2019, a refund claim will be timely if filed by June 10, 2022.  A refund claim timely filed on June 10, 2022, can only recover amounts paid by June 10, 2019: three years preceding the date the refund claim was filed and without adjustment because there was no extension of time to file.  For many taxpayers, most if not all payments (withholding, estimated taxes, or payment with return or extension request) will have been made on or before April 15, 2019, and are deemed to be paid on that date.  Thus, the taxpayer has very limited if any recovery on that timely filed refund claim.

Ah, but for 2019 tax returns, we had until July 15, 2020, to file returns, as a result of a determination by the Secretary of the Treasury pursuant to section 7508A.  If we filed our return on July 15, 2020, it was timely because of section 7508A.  If we later file a refund claim on July 15, 2023, the refund claim would satisfy the first limitations requirement, in section 6511(a).  Thus, both the return and the refund claim were filed timely.  Oops!  The “lookback” period is “3 years plus the period of any extension of time for filing the return.”  Section 7508A doesn’t extend the deadline for filing returns.  It suspends or postpones it.  And it doesn’t change the fact that most payments were deemed paid on April 15, 2020.  A suspension is not an extension.  So the lookback period only goes back to July 15, 2020, but payments of withholding or estimated taxes were deemed paid on April 15, 2020.  Result – limited or no recovery after a timely-filed return and a timely-filed refund claim.  Of course, that’s probably not what Congress had in mind – maybe Congress didn’t consider it at all – but Chief Counsel Advise 2020-53013 concluded that’s exactly what would happen.  

Thus, the Taxpayer Advocate Service recommended that Congress amend section 6511(b)(2)(A) to increase the lookback period by the period of any postponement of the filing deadline under section 7508A.  The legislative recommendation makes perfect sense and I whole-heartedly agree with it.  Unfortunately, that leaves us dependent on Congress.  Even if the proposed fix is enacted, it may take a while.  In the meantime, taxpayers may be losing legitimate refund claims because they didn’t understand the Service’s interpretation of the rules.  The deadline for refund claims associated with 2019 tax returns is still more than a year away, but some taxpayers received section 7508A relief for their 2018 tax returns and the deadline for refund claims for those returns is only three months away.

Non-legislative fix?

While we wait to see if Congress will enact the NTA proposal, is there anything that the IRS could do in the meantime to solve the problem?  I think perhaps there is, although TAS may have already discussed non-legislative fixes with the IRS and been rebuffed.  And we still want the statutory fix as much more certain.

We’ve mostly focused on declarations under section 7508A as postponing filing and payment deadlines.  The actual language of Section 7508A(a) states that the Secretary “may specify a period of up to 1 year that may be disregarded in determining” three things:

(1) whether any of the acts described in paragraph (1) of section 7508(a) were performed within the time prescribed therefor (determined without regard to extension under any other provision of this subtitle for periods after the date (determined by the Secretary) of such disaster or action),

(2) the amount of any interest, penalty, additional amount, or addition to the tax for periods after such date, and

(3) the amount of any credit or refund.

The first two are fairly obvious, but how does disregarding a period of time change the determination of the amount of a credit or refund, instead of just whether the refund claim was timely??  The only thing I can think of offhand – other than overpayment interest, for which that period specified by Treasury is explicitly not disregarded – is the lookback limitation for refund claims.

The regulations include an example where section 7508A relief was granted to disregard a period including the refund claim deadline.  See § 301.7508A-1(f), Example 5.  A timely refund claim for 2008 would normally have to be filed no later than April 16, 2012.  Due to an earthquake, the IRS determined that deadlines from April 2, 2012, through October 2, 2012, were postponed to October 2, 2012.  That included the section 6511(a) deadline for filing a refund claim.  The example concluded that the lookback provision was effectively changed by section 7508A(a)(3).  The specified period was disregarded for purposes of the lookback provision.

Moreover, in applying the lookback period in section 6511(b)(2)(A), which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is disregarded under paragraph (b)(1)(iii) of this section [which duplicates the statutory language].

Moreover, in applying the lookback period in section 6511(b)(2)(A), which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is disregarded under paragraph (b)(1)(iii) of this section [which duplicates the statutory language].

It’s notable that the regulation just states that the specified period is disregarded, rather than any distinction between “suspension” or “extension” that the CCA relied on.  Although they were not dealing with the same fact pattern, the regulation and the CCA seem fundamentally at odds.  (There’s no discussion of the regulation in the CCA, so perhaps the author didn’t check it.  That’s easy to understand; email advice by its very nature cannot require the same depth of careful analysis and review.)  Before concluding that we have a regulation that we can rely on, though, there are a few questions to address.

First, does the suspension of the lookback period determined in the regulation depend on it being explicitly stated by the IRS in its determination under section 7508A, or is it an automatic result of the determination of that specified period? The example doesn’t mention an explicit statement in the determination; it only references the regulation language that duplicates the statutory language.  There was no mention of the lookback period in Notice 2020-23, which perhaps suggests that the IRS normally doesn’t make such an explicit statement about the lookback period.  That in turn perhaps suggests that the IRS considers the result as automatic and need not be stated in the determination.  It’s not entirely clear, but before having researched it further I think the better answer is that it’s automatic.

Second, does the result in the regulation only apply if a disregarded period includes the deadline for the refund claim (fact pattern in the regulation) or also if a disregarded period includes the deadline for filing the original return (fact pattern in the CCA)?  The CCA didn’t try to distinguish the regulation, but perhaps it could/would have.  

The rationale for a longer lookback period in the former situation is that, absent the disaster, the taxpayer could have filed the refund claim within three years of timely filing the return and satisfied the lookback rule.  The rationale for a longer lookback period in the latter situation presumably would be different.  A disaster in the year that the return was filed wouldn’t make it more difficult for the taxpayer to file the refund claim three years later.  I think the rationale rests on the disadvantage to taxpayers who are familiar with the basic 3-year statute of limitations for refund claims (often widely publicized by the IRS and tax practitioners each year) but unaware of the lookback rule.

So, there’s some uncertainty.  I would certainly be willing to argue in court for the result proposed by the NTA, even without a fix.  The regulation ties the language of section 7508A(a)(3) to the lookback limitation for refunds.  The “amount of any credit or refund” in the statute is not explicitly limited to a refund claim filed during that disregarded period.  Section 6511(b)(2)(A) is structured so that the taxpayer’s refund is not limited if she files her return timely and files the refund claim timely.  Why should that principle be invalidated because the taxpayer was in a disaster area when the return was filed?    

But I would feel more comfortable with at least a regulatory fix, while we’re waiting for a legislative fix.  The IRS could amend the regulation to provide an example reaching the result described by the NTA, and perhaps state explicitly the effect on the lookback rule in any determinations pursuant to section 7508A.  Perhaps the IRS could reconsider that CCA from 2020.  

In determining the language for the legislative and/or regulatory fix, Congress and/or the IRS will also have to answer a third question.  For the 2019 tax year, for which the return is due in 2020 and a refund claim would have to be filed in 2023, which determinations by the IRS disregarding a period pursuant to section 7508A will have that same effect on the lookback period?  A determination with respect to a disaster in 2023 that includes the deadline for filing a refund claim?  Yes, per the existing regulation.  A determination with respect to a disaster in 2020 that includes the deadline for filing the return?  Yes, per the NTA’s recommendation.  What about disasters in 2021 and 2022?  Draft carefully if you want to exclude those.

NTA Report Released: Essential Reading

Earlier this week the NTA released the 2021 Annual Report to Congress (link to full report). The report also includes as a separate volume the 2022 Purple Book, which lists 68 legislative recommendations that focus on ways to strengthen taxpayer rights and improve tax administration.  Both the Annual Report and the Purple Book have separate appendices. For example, the Purple Report has an appendix featuring additional reference materials relating to its recommendations and a separate appendix detailing the considerable number of prior legislative proposals that have been enacted into law. For those wanting a quick snapshot, there is also a standalone Executive Summary that includes the preface from NTA Erin Collins.

read more...

The report has generated significant national media coverage, with that focus mostly on the Report’s situating issues facing taxpayers in the context of the considerable service problems the IRS has and continues to face. For example see NBC News’ Get ready for ‘frustrating’ tax season as IRS battles historic backlogs and staff shortages.

For people interested in tax administration, the NTA report continues to be a must read document. Most readers of PT need little reminder of IRS problems but the Report details in striking ways the decline in IRS resources and the concomitant reduction in service metrics and compliance activities.  We will undoubtedly revisit in detail some of the figures, but for purposes of this brief post I wanted to highlight two significant differences in this year’s report compared to prior annual reports.

First, the report contains a new feature, At a Glance,  which for the Ten Most Serious Problems “summarizes what taxpayers want from the IRS, explains why the problem is serious, and provides some key statistics.” This feature nicely brings attention to the highlighted problems, and provides ample justifications for the NTA’s proposed fixes.

Another welcome development is the Report’s discussion of Most Litigated Issues. In the past the discussion relied on commercial research that keyed in on published opinions issued by all federal courts (including Tax Court). This year, for Tax Court cases TAS added a new wrinkle, by looking not only at the court’s output but also reviewing the notices of deficiency relating to the petitions filed with the Tax Court. This allows for study of the approximately 28,000 petitions filed in FY2021, a number considerably higher than the 224 decided Tax Court opinions. (Of course many substantive Tax Court determinations come in published orders that do not find their way into opinions.) As the report notes, the change in methodology produced some differences as compared to prior years’ lists of  most litigated issues, with new topics including the American Opportunity Credit, the standard deduction, and issues relating to withholding.

 

Tax Judgments and Quiet Titles

I have written before about the effect of the IRS obtaining a judgment with respect to a tax assessment.  In Boykin v. United States, No. 5:21-cv-00103 (W.D.N.C. 2022), the fact that the IRS had a judgment carries the day in a contest with a taxpayer involving a quiet title action.  The case provides no great revelations but shows how obtaining a judgment can benefit the IRS many years past the normal 10-year statute of limitations.

Between this case and the Tilley case I recently blogged from the Middle District of North Carolina, it appears that the Chief Counsel office in North Carolina has been busy in pursuing collection against taxpayers using real property held by nominal owners, with both opinions coming out on January 4, 2022.

read more...

Mr. Balvich owed the IRS for 1999 through 2006.  The IRS filed an action to reduce the assessments to judgment in 2019 and obtained a judgment on August 6, 2020.  In bringing an action of this type, the IRS must sue before the collection statute expires.  The opinion in the current case doesn’t spell out the status of the statute of limitations on collection of the assessments for the years at issue, but something must have caused the statute to be open for each of the years at the time the IRS brought the suit.  It could have been that the assessments for those years occurred many years after the close of the tax year, or that Mr. Balvich filed bankruptcy or made a CDP request.  Many possibilities exist for the statute on collection to still remain open 20 years after the end of the tax year.

The plaintiff in the quiet title action, Rebecca Boykin, began a relationship with Mr. Balvich in 2010 and eventually married him in 2015.  She worked as an administrative assistant at a company owned by Mr. Balvich.  When they got married, he gifted to her a 50% interest in his medical services business.  He and the business also, according to the IRS, put up the money to buy real property in Boone, North Carolina in which Ms. Boykin is the record owner.  On March 20, 2019, the IRS filed nominee liens encumbering the Boone property.  I have discussed nominee liens previously here

After Ms. Boykin brought suit to quiet title seeking a declaration that the nominee liens were invalid, the IRS filed a counterclaim arguing that the money used to purchase the property was fraudulently transferred from the taxpayer who sought to place his property out of the reach of the IRS.

She argued that the North Carolina Uniform Voidable Transaction Act barred the IRS argument regarding the fraudulent transfer claims because it placed a four-year statute of limitations on such claims.  The district court graciously described her argument as misguided.  It pointed to the Supreme Court case of United States v. Summerlin, 310 U.S. 414, 416 (1940), where the court held:

It is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights.

The court followed the Supreme Court cite with a string cite of federal circuit court cases following the Summerlin case and swatting back arguments similar to Ms. Boykin’s that have been made in the eight decades following the Supreme Court’s pronunciation.

Piling on to Ms. Boykin’s legal woes, the court explained further that the judgment obtained by the IRS took its time period for seeking a remedy against this property outside of the mere 10-year period into the much longer period provided to the holder of a judgment:

Additionally, when the United States has obtained a timely judgment, its “subsequent efforts to enforce the liability or judgment against a third party will be considered timely.” United States v. Anderson, 2013 WL 3816733, at *2 (M.D. Fla. July 22, 2013) (holding that civil action to collect federal income taxes of an Estate from the Estate’s beneficiaries as a result of transferee liability under the Uniform Fraudulent Transfer Act was not time barred by the ten-year statute of limitations found in 26 U.S.C. § 6502(a)); see also United States v. Worldwide Lab. Support of Illinois, Inc., 2011 WL 148196, at *2 (S.D. Miss. Jan. 18, 2011) (holding that the ten-year statute of limitation period of “Section 6502 is inapplicable” to an action “against an alleged transferee in aid of collecting a judgment already obtained against the taxpayer”)

The decision here does not mean that the IRS has proven there was a fraudulent transfer, but only that she cannot dismiss the counterclaim based on the statute of limitations.  Perhaps she will concede, knowing that the IRS can prove a fraudulent transfer or fight the next battle in the effort to retain ownership of the property.  I hope that she does not choose to appeal this decision and add to the long string of cases holding that the Supreme Court meant what it said in holding that state statutes of limitations do not override the controlling federal statute here.

Tax Court Going Remote for the Remainder of January

In an announcement that did not surprise me, or maybe only surprised me in that I thought I might see it last week, the Tax Court has announced that it will go remote for the remainder of January.  This decision makes total sense given what is happening with the pandemic now and may signal more remote proceedings in the months to come as the pandemic drags on.  The good news, in a continued dreary picture resulting from the pandemic, is that the Court knows how to pivot and how to handle remote proceedings.

The press release is reproduced below the fold.

read more...

UNITED STATES TAX COURT
Washington, D.C. 20217

January 12, 2022

After assessing public health and other factors relating to the rapid nationwide increase of COVID-19 cases, the U.S. Tax Court has determined that it is not appropriate to conduct in-person proceedings in January 2022. Accordingly, these trial sessions are modified as follows:

Trial SessionCalendarChange
January 18, 2022San Francisco (Special) Docket No. 21959-16In-person to remote on January 31, 2022
January 24, 2022Houston (Regular)In-person to remote
January 31, 2022San Diego (Small)In-person to remote
January 31, 2022Seattle (Regular)In-person to remote

Appropriate notices will be issued in each case remaining on the above-referenced calendars. General information about remote proceedings is on the Tax Court website (https://ustaxcourt.gov/) under Rules & Guidance/COVID-19 Resources.

Questions regarding cases calendared for the impacted trial sessions should be directed to the appropriate chambers, and general inquiries should be sent to the Public Affairs Office at publicaffairs@ustaxcourt.gov.

 

Local Taxes and the Federal Tax Lien

Cases involving lien priority fights between the IRS and local taxing authorities became quite rare after the Tax Lien Act of 1966.  That act has stood the test of time and brought federal lien law into the “modern” age.  With almost no changes to the statute since its enactment, it still operates with great efficiency.

The case of United States v. Tilley, No. 1:19-cv-00626 (M.D.N.C. 2022) purports to resolve a case or controversy between the IRS and a group of counties with local real estate taxes but is really just the court memorializing an assertion of lien priority by the counties and an acknowledgement by the IRS of their priority.  It wasn’t always this way.  Prior to 1966 and the enactment of 26 U.S.C. § 6323(b)(6), lien priority questions between the IRS and local taxing authorities too often ended up with a circular priority problem.  That provided one of the big reasons for passage of the Tax Lien Act.  The love fest exhibited in this case shows how the Tax Lien Act fixed the problem.

read more...

Mr. Tilley got in a heap of trouble.  For readers old enough to have watched the TV series the Andy Griffith Show, I picture Mr. Tilley providing material for one of the episodes of that show, based in rural North Carolina in the central part of the state, as one of the occasional scallywags that Sheriff Griffith had to navigate.  While Sheriff Griffith did not deal with too many “elaborate scheme[s] of sham trusts, fake corporations, and other nominee entities,” perhaps the character on the episode Bailey’s Bad Boy grew up to bigger problems.

Mr. Tilley defrauded the IRS through his schemes and ultimately pled guilty to a crime under IRC 7212(a) which is not one of the tax crimes you see prosecuted very often.  To be convicted of this crime you need to forcibly interfere with tax administration.  He interfered enough to draw a restitution order as part of his sentence of $7,676,757.00.  Not bad for a country boy.  At the time the IRS brought suit to foreclose on 35 properties he was holding through nominees, he still owed over $6 million.

Most of the people and entities involved in the holding of these properties did not respond to the suit that the IRS brought to foreclose, but a passel of counties and townships in central North Carolina raised their hands and said, “We want ours.”  Not surprisingly in a scheme of this type, lots of real estate taxes remained unpaid and that’s where the lien priority issue between the IRS and the counties comes into play.

The general rule of lien priority is first in time, first in right and that rule is reflected in IRC 6323(a) as well as in the Supreme Court’s decision in United States v. City of New Britain, 347 U.S. 81 (1954).  This is where the circular priority problem comes into play.  In real property the first lien is usually the mortgage.  If the IRS then files a lien it comes behind the mortgage.  If the owner doesn’t pay his real estate taxes after the IRS has filed its lien, the real estate taxes come after the federal tax lien in a first in time situation but come ahead of the mortgage under local law.  That’s why mortgage companies often require borrowers to escrow their local real estate taxes so that no local tax lien comes ahead of them.  The mortgage beats the IRS because it was first in time, the IRS beats the local taxes because it was filed first, and the local taxes beat the mortgage because of local law, but the local law cannot trump the federal law, thus creating the circle and the problem.

To fix the problem, Congress passed 6323(b)(6).  While 6323(a) sets up the first in time rule of law, 6323(b) provides 10 exceptions which allow a party to defeat the filed federal tax lien even if they come later in time.  Number 6 in that list is local property taxes.  Here, the liens of the counties and the townships clearly fit within the statutory language and the IRS acknowledged that fact in its concession.  The court states:

Although only one taxing authority, the City of Durham, has moved for summary judgment, this court finds judgment may be entered in favor of all taxing authorities similar to the relief requested by the City of Durham. The Government concedes that its interests are not superior to local property tax authorities. … Pursuant to 26 U.S.C. § 6323(b)(6) and 18 U.S.C. § 3613(c), property tax liens held by local property tax authorities have priority over the liens the Government seeks to enforce here. (See Doc. 175.) The City of Lenoir, (Doc. 176), County of Chatham, (Doc. 178), City of Durham, (Doc. 179), County of Harnett, (Doc. 180), County of Wake, (Doc. 181), County of Ashe, (Doc. 182), County of Orange, (Doc. 183), County of Granville, (Doc. 184), County of Durham, (Doc. 185), and County of Alamance, (Doc. 186), all agree with the Government’s position and consent to entry of an order resolving this case as to all property tax authorities which have filed answers.

This doesn’t stop the IRS from foreclosing on the property.  It just means that the proceeds from the sale will go first to satisfy the local taxes, then to satisfy any mortgage or other creditor, if they exist, listed in IRC 6323(a) who filed before the IRS perfected its lien interest and then, after those parties are satisfied, the IRS will take the rest up to the amount of the outstanding liability. It was not clear from the opinion whether the sale of all of the properties Mr. Tilley held through his nominees would satisfy his large liability to the IRS.  If not, there could be more cases involving Mr. Tilley in the future.  What would Andy Griffith say?

Transcript of Boechler Oral Argument

For those unable to listen to the Boechler hearing or unwilling to devote that much time to it, here is a link to the transcript of the argument.  I tried to listen to the argument, but it was a windy day on the farm causing me to catch bits and pieces but not the whole thing.  I am very thankful for the bill that passed in the fall that will bring upgraded internet to rural communities.

If you want to totally waste your time, you can read about my prior trips to the court below.

read more...

Visiting the Supreme Court in Normal Times

I have had the good fortune to visit the Supreme Court on multiple occasions and based on those visits can suggest different ways to visit an argument once the pandemic allows the Court to return to normal or the next version of normal.

As a first-year law school student, I was obliged to participate in a moot court argument as part of the curriculum at my school.  The 80 students in my section all made an argument in front of a panel of professors, volunteer lawyers, or upper-class members.  Out of that group, I was one of 16 selected to move into the non-mandatory round leading to a champion.  The selected 16 were paired with a random class member.  I was fortunate to be paired with a friend and high school classmate, Faye Ehrenstamm, who has gone on to a distinguished career at the Department of Justice.  Faye and I made it to the finals where we lost to one of my good friends at the law school who deserved to win. 

I mention this story because it led to my first trip to the Supreme Court.  The mock case we argued in the winter of 1975 was based on Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975).  Our final moot court argument occurred shortly before the real case was argued before the Supreme Court on March 25, 1975.  It arose out of Virginia and concerned the then-enforced mandatory fee schedules for legal services.  The lawyers for each side were on the bench at the law school for our argument in the final round, which made for a mighty engaged bench.  The friend who defeated me in the finals had a contact at the Supreme Court who was able to get us guest seats.  We drove up to DC and got to see our moot court judges argue a case before the Supreme Court with which we were intimately familiar.  It was a magical experience for a first-year law student and one I had hoped to create for my students who worked on the tax clinic’s amicus brief in Boechler.  Alas, the pandemic strikes again.

The guest seats in which I sat in 1975 provide a springboard for talking about how you can get to watch the Supreme Court in normal times or at least pre-pandemic normal times.  It’s been a couple decades since I last went to visit the Supreme Court so I could be a little dated on my knowledge. 

Most people who visit the Supreme Court in session do so by standing in line and coming in the front door of the court on their way to a seat in the public gallery.  Depending on the importance of the case, the weather, and the time of year, the line might be quite long or relatively short.  Once you get in, I think you can stay until the end of the day’s arguments or leave when tired of listening to an arcane discussion of some narrow point of law.  It’s also possible to watch the Court for three minutes if you just want to say that you have been by standing in a separate line that moves much faster. 

If you are a member of the bar of a state for three years and in good standing, you can become a member of the Supreme Court bar, which entitles you to sit in front of the “bar” at the Court in a section reserved for bar members.  You stand in line for this privilege as well, though the line is shorter and the possibility of getting in also depends on the popularity of the case being argued.  When you join the Supreme Court bar, you have the option to get admitted remotely or to do it during a session.  If you choose to do it during a session, there is usually a short ceremony at the beginning of each session in which your sponsor tells the Court your name and the Chief Judge welcomes you.  This would be a way to get into the Court and bypass the line on the day of your admission.  I think you get to stay after you are admitted.

If you happen to know someone on the Court or know someone who knows someone, you can watch the sessions as a guest as I did as a law student.  This is how I have typically seen cases because I have never joined the Supreme Court bar.  I do not remember whose guest I was in 1975, but I have subsequently been the guest of the Solicitor General, the Librarian of the Supreme Court and the Chief Justice of the Supreme Court.  If you come to the Court as a guest, you get to enter through a different portal than the public or the bar and sit in a chair on the side of the Court near the front.  When I worked for IRS Chief Counsel as a Branch Chief in the National Office, I worked in the development and perhaps in discussions in the Room of Lies on several cases that went to the Supreme Court.  These were the cases I went to watch.  Other than arriving early for an argument that preceded the case in which I was interested, I have had the good fortune to always watch a case in which I was intimately familiar with the facts and the law.

Of course, another path to watching a Supreme Court case is to be a member of the press.  Perhaps one day I will enter through that door, but I am not holding my breath for that to happen.

Who Qualifies as Press and the Boechler Supreme Court Argument Today

When Les and I went to the last Tax Court judicial conference, we were told that we needed to follow the rules of the press at the conference which involved, inter alia, not attributing comments to specific speakers so everyone felt comfortable in the space.  It felt funny to be treated as part of the press, but there can be advantages.  Recently, a FOIA request was made in which PT asked to be treated as the press to obtain expedited treatment.  A request was also made by PT regarding early receipt of the National Taxpayer Advocate’s annual report.  The IRS agreed to both requests.  With thousands of subscribers, millions of page views, and a body of posts, I think it is fair to say that we qualify as the press and there is some court precedent supporting bloggers as members of the press as well as blog posts suggesting bloggers are members of the press.

Today, the Boechler case is being argued in the Supreme Court.  The issue is one the Harvard Tax Clinic has been working on for six years, and I wanted to attend the hearing.  The problem with attending the hearing is that because of the pandemic the justices would just as soon not sit in a room filled with hundreds of strangers, so the hearings before the Supreme Court at present are ones in which only essential Court personnel, the litigants and the press can attend. 

read more...

Press Passes

A nice Tax Court judge who heard me talk about my desire to watch the Boechler oral argument suggested to me that perhaps I should seek to attend the hearing as a member of the press.  After all, no news outlet has provided more coverage of this case than PT, even if our audience may not be as large as some news vendors.  So I thought why not ask.  It turns out the Supreme Court has two categories of press passes – day passes and hard passes.  There’s a reason they are called hard passes.  They are definitely hard to come by.  Here is a list of the persons holding hard passes.  No bloggers on there, not even someone from the SCOTUSblog. For a SCOTUSblog post on the case, look here.

I thought I might have a shot at a day pass, and maybe I did; you can see the requirements here with additional details here, and I had a need to report from the Court for all of you – our faithful readers, but unfortunately the current restrictions only allow members of the press with hard passes and not day passes.  When I spoke to the friendly person at the Supreme Court about attendance, I did not get warm fuzzy feelings that she was interested in having me attend, but she did point me to the broadcast of the argument.  I pass along to any of you who have not listened to Supreme Court arguments but who might be interested in listening to this morning’s argument that same possibility.

The Argument

If you go to this link at 10:00 AM ET this morning, you should be able to hear the oral argument.  Melissa Sherry of Latham & Watkins is making the argument for the petitioner.  She and her team of Caroline Flynn and Amy Feinberg, a former student of the Harvard Tax Clinic who argued this issue before the 4th Circuit while a student and this case before the 8th Circuit remotely during the pandemic, have done an outstanding job of briefing the case.  I anticipate Melissa will make an excellent argument.  When I have had the opportunity to go to the Supreme Court in person in the past and see oral arguments, the person arguing for the Solicitor General’s office has always done an excellent job.  I expect no less today.

I provided links to the opening brief by the petitioner and the amicus briefs in this post.  Here are the answering brief of the government and the reply brief of the petitioner for those of you interested in a complete set.  At the ABA Tax Section mid-year meeting which starts at the end of this month, I will join Bryan Camp, Kandyce Korotky and Amy Feinberg on a panel taking place on February 2, 2022, from 12:30 – 2:00 PM ET to discuss the case and its possible impact.  You can register for the meeting here.

“But I’ve Always Done It That Way!” Practitioner Considerations on Subsequent Year Exams

Stop me if you’ve heard this one. A taxpayer and a tax attorney walk into a room. The taxpayer pulls out an IRS examination letter and says, “I’ve always filed my returns this way, and the IRS has never cared in the other years. Why is the IRS suddenly out to get me?” The tax attorney looks at the return and the letter. “Ah. The answer is simple: You’ve always filed your returns wrong. This is just the first time the IRS has noticed.”

And everyone in the room shares a good laugh.

Or, more likely, the tax attorney begins shifting uncomfortably in their seat the moment they see the problem -specifically, that there are a lot of erroneous returns filed by your client that have not been caught and may realistically never be. The obligation (or lack thereof) to file an amended return to fix errors has previously been covered by Keith (co-author: Calvin Johnson) in an article here. In a different context, I have written about when you do or do not have an obligation to correct IRS mistakes here and here.

In this post I’d like to take the conversation in a slightly different direction. Specifically, I want to wrestle with the issue of advising clients on exposure to future audits -a thorny topic in the tax community.  

read more…

In my most recent post I covered a TIGTA report suggesting improvements to correspondence examinations, prompting my own suggestions to focus more on high-income earners and non-filers. That same TIGTA report included a raft of recommendations for examining taxpayers that appear to have the same tax issue over multiple years (“subsequent year exams”). Those recommendations are what caught my eye and inspired this post.

TIGTA’s concerns were that the IRS didn’t appear to be initiating as many subsequent year exams as it should, and the IRS could increase efficiency by considering subsequent year returns as part of the already open exam. In a nutshell, TIGTA’s recommendations hinged on the idea that if a taxpayer erroneously claimed a deduction/took a credit in one year, there is a good chance that the same deduction/credit is erroneous in the next year as well. And I’d say that is a fair assumption. But it carries some interesting considerations that I believe tax practitioners should be aware of.

The recommendations put forth by TIGTA were more narrowly focused than just increasing audits on those that have been audited already. For one, it pertained only to subsequent returns with the same issue identified as in the year audited (the same “project code”). Second, it focused on taxpayers that actually resulted in an increased assessment of tax, thereby filtering out those who were selected for exam but ultimately demonstrated that their return was correct. Third, and importantly, TIGTA particularly keyed-in on subsequent returns where the taxpayer defaulted – that is, where they never responded to the exam in the open year and had similar identified issues in subsequent years.

“Silence is Violence”

A key takeaway from this may be that when the IRS selects you for examination, generally the worst thing you can do is to do nothing at all. The TIGTA recommendation (which IRS management agreed with) is to “change the subsequent return process to address only subsequent year returns in which the taxpayer did not respond to the [Initial Contact Letter] for the current examination.” Page 12 of the TIGTA Report (emphasis added).

In other words, if you don’t do anything (or don’t respond to the very first letter) it may carry worse consequences than if you respond with a full concession owning up to your error. Apart from just doing the “right thing,” it may be in your self-interest to proactively agree with the IRS rather than just letting things run their course.

Note also that the IRS also has internal policies against “repetitive” audits. They are a bit narrow (I covered an unsuccessful attempt to raise the policy in court here) and don’t apply to Schedule C returns (even though the prohibition is explicitly mentioned on the IRS Publication for Schedule C Filers: Pub. 334, page 45). However, whatever protections the policy does offer are more likely to apply when the taxpayer actually responds to the audit. See IRM 4.10.2.13.2.

All of this taken together, I think, should factor into any advice that is given to a client. I think it is important to impart the wisdom you’ve gleaned as a practitioner on the black-box of audit: “if you don’t respond to the IRS letter, there may be a heightened possibility that you will be audited on subsequent years.” If I was the average taxpayer that is definitely something I’d want to know and take into consideration.

The Audit Lottery

And now, the backlash.

“You can’t advise your client on the likelihood of audit!” Chants of “audit lottery!” and “Circular 230!” drum in the background as the torches are lit. My demise (the stripping of my ability to practice before the Service) is nigh.

Or so it would seem. But only based on a misunderstanding of what prohibited advice about audit likelihood actually entails. When I talk to (or test) my students about the “audit lottery” some take that it to mean you cannot talk to a client about audit risks. Period. In this understanding, when a tax lawyer reads the (publicly available) IRS Stat Book and sees the (abysmal) exam rate, that knowledge is forbidden fruit. One must never utter a word of it to the innocent, untainted client.

This misunderstanding of the audit lottery is not limited to students. There is, in fact, enough confusion about the topic that Professors Michael Lang and Jay Soled wrote a helpful article in the Virginia Tax Review on it here.

To be clear, there is no blanket prohibition on telling clients about audit rates and general likelihoods of audit. Consider the absurdity and inability to effectively counsel or communicate, while meeting the requirements of the MPRC (specifically MRPC 1.4) if such a blanket prohibition did apply. As an example:

I frequently have clients where the problem is that their ex claimed a child of theirs. The client is the custodial parent and has the right to claim their child under IRC § 152. However, the ex was first in the race to the e-file button. Because of this, any subsequent attempt to claim the child (generally through a paper return) will very likely trigger an exam. I know this both from experience as a tax practitioner and because of my familiarity with “whipsaw” and “correlative US Taxpayer” procedures. See IRM 4.10.13.5.

Am I not allowed to tell my client that if they do file a paper return claiming the child they are at a high risk of audit?

Believe it or not, audit exposure is something that matters to clients even when they are 100% substantively right on the return position. Some of my clients simply would rather not deal with the IRS or, importantly, the ire of their ex. Similarly, I know of a few people that claim a smaller charitable deduction than they actually are entitled to solely because of their (inflated, inaccurate) fear of audit. It is wholly within these taxpayers’ right to make that determination, since they are not legally required to claim the child or the charitable contribution, but only have the right to do so. For a discussion on that point, see the law review article, “No Thanks, Uncle Sam, You Can Keep Your Tax Break.”

So in advising the client with a previously claimed child, what must I do? As a lawyer and as a counselor, I would go so far as to say under the Model Rules I must disclose the risk of audit to the client in that situation, rather than keep it stored away as secret knowledge. To me, a lawyer in that situation should advise the client that on the information they have: the client is entitled to claim their child if they wish, but they are at a heightened risk if they do so. The lawyer should then calm the client down and explain what an audit would actually look like in these circumstances (a few letters back and forth), so that they can make an informed decision about what they’d like to do. To me, getting the client to a more-fully informed decision considering the myriad legal and non-legal issues at hand is the bedrock of being a counselor. See MPRC 2.1.

All of this is to say that one does not “play” the audit lottery simply by speaking of or considering audit likelihood. The prohibition is on advising individuals to take a return position based on the likelihood that it might be “caught” in audit. You play a lottery hoping you win, not simply for the fun of playing. Winning, in the prohibited sense, is having a questionable (or crazy) return position pass by the IRS because of their low audit rates rather than the merits. And you cannot let your knowledge of the odds of success (in this case, the perversely high chance of winning the lottery) color your responsibilities towards the IRS. See, e.g. Circ. 230 § 10.22, 10.34 and 10.37.

Now, rant completed, let’s bring this back to advising someone as to whether they should respond to an IRS letter after an audit has been initiated. In this case you are not counseling them on prospectively taking a return position at all. If they’ve made that same mistake year-over-year, the position has already been taken before they even came to you. What you are doing is simply letting them know that failing to respond to an IRS audit might make future audits more likely. If that is true (and there is reason to believe it is), it is unclear to me how keeping that important information to yourself doesn’t run afoul of your many responsibilities to the client under the MPRC (loyalty and communication, foremost among them).

I want to close with a note to those feeling squeamish about the preceding paragraphs: I feel your pain. If someone has previously taken an incorrect tax position I counsel them to change it. I want them, genuinely, to change it, because I believe we all have an obligation to pay the correct amount of tax. However, I cannot tell them that they must change it, because that would be my imposing my own personal morality on a legal question that has different considerations. (Note that this all changes if and when there is an actual controversy for that tax year before the IRS.)

But there is more to this than just hand wringing and pleading that someone do the right thing while acknowledging they don’t technically have to. Once the taxpayer knows (through the counseling of their tax attorney) their position is untenable they cannot freely take that position in as-yet unfiled tax years. Now, your advice changes: “Look, you should fix the back years, but you don’t technically have to. However, now that you know those positions are wrong, you cannot take them moving forwards and if you do there could be criminal exposure.”

Thus, the tax attorney sleeps at night.