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.

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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.

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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.

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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.

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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.

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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. 

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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.  

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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.

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return

We welcome back my colleague, Audrey Patten for a discussion of a recent case providing an expansive view of the tacit consent doctrine.  Audrey has developed a significant docket of innocent spouse cases and is currently working with Christine to write the third edition of A Practitioner’s Guide to Innocent Spouse Relief.  Look for their book coming out later this year.  Keith 

For those of us with many innocent spouse cases, it is common for clients to point out that they may not have actually signed a joint return.  Such clients’ position is that they should therefore be absolved of any joint liability derived from the return.  It is well established case law, however, that a missing spousal signature does not automatically negate the validity of a joint return.  While the burden will be on the IRS to prove a return with a missing signature is valid, the doctrine of tacit consent holds that if the facts and circumstances show that a non-signing spouse intended to file a joint return, a return the taxpayer did not actually sign can still meet the criteria for a valid joint return.  But how far can the doctrine of tacit consent go? On December 1, 2021, the Tax Court issued a memorandum opinion in Soni v. Commissioner that extends the tacit consent doctrine beyond the joint tax return context to encompass tax matters handled by the other spouse, including powers of attorney and extensions of the statute of limitations. The application of tacit consent in areas beyond the validity of a joint return is what makes the Soni case significant.

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Soni is not an innocent spouse case.  Rather, Om Soni and his wife, Anjali Soni, filed a tax court petition that challenged the validity of a Notice of Deficiency issued on a joint return they filed for tax year 2004 (for clarity, the parties’ first names will be used throughout).  Two questions presented in the case were whether the joint return was valid and whether the limitations period for assessment of tax had expired before the notice issued.  (The other two questions were challenges to the imposition of penalties under I.R.C. §6501 and §6651 and are beyond the scope of this discussion). The Court found that tacit consent on the part of Anjali was dispositive of both issues.

Om was a businessman who engaged in a variety of ventures.  Anjali was a homemaker and, aside from some marginal passive income, did not make any money.  By her own testimony, the marriage was very traditional and she expected her husband to handle all financial matters, including the couple’s taxes.  She lived an affluent lifestyle.  There were no allegations of any domestic abuse. Om for his part, often delegated personal business, including handling IRS related mail, to his employees.  The couple also had a grown son who would discuss his parents’ tax matters with his father and assist with preparing documents.  Anjali, again by her own testimony, never reviewed any tax returns because such documents made her nervous.  She also never signed any returns herself.  She even testified that she left documents “for days and days. Because I don’t feel like reading papers like this.”  She also testified, regarding her husband, that “I trust him with everything…whatever he does, I do trust him. I never discuss his business with him.”  Anjali would sometimes collect mail left at the house, but only sort out her magazines.  Any IRS correspondence she would immediately pass to Om or her son without opening it.

For the 1999 through 2004 tax years, an accounting firm prepared all of the couple’s joint income tax returns. Om would review the returns, but not Anjali.  For the 2004 return, the couple’s son physically signed his mother’s name onto the return, without first showing her the return.

Om’s businesses suffered losses during 2004. In 2006, the IRS began auditing the 2004 return.  In 2008, the IRS received a Form 2848, authorizing a representative named Mr. Grossman to act on behalf of the Sonis.  The signatures on the form were dated in 2006.  Anjali did not sign the Form 2848 authorizing Mr. Grossman to represent her, but her signature was present.  It later turned out that Mr. Grossman was in the habit of signing his clients’ names onto Forms 2848 for them.  In 2015, the IRS received a set of two Forms 2848, authorizing the couple’s son to represent Om and Anjali.  Om signed his Form 2848.  Anjali did not personally sign her Form 2848.

Over the next several years, a total of eight Forms 872 (including one Form 872-I), “Consent to Extend Time to Assess Tax,” were filed with the IRS.  The first two were signed by Mr. Grossman as the representative.  The remaining six were signed by Om for himself and by the son on behalf of Anjali.  Neither Om nor his son ever discussed Form 872 or 872-I with Anjali.   The extensions ultimately extended the period of limitations for assessment of tax to December 31, 2015.  As a result of the extensions, the IRS argued it was still within its limitations period when in March 2015 it mailed a Notice of Deficiency of $642,629 for tax year 2004.

The first argument raised by the Sonis was that the 2004 tax return itself was invalid as a joint return because, not only did Anjali not sign the return, but her signature was placed on the return by her son.  The Court provides a useful review of the rules for establishing the validity of a joint return.  First, it points out that if a spouse does not sign a return, the burden is on the IRS to prove it was valid.  However, the lack of signature can be overcome by showing that the parties intended to sign a joint return.  Even if the non-signing spouse did not explicitly state that she wanted to file a joint return, the facts and circumstances can lead to a finding of validity under the tacit consent doctrine.  Since tacit consent is a facts and circumstances analysis, the fact that the signature was written by the son also does not, by itself, negate the validity of the return.  Common factors in the tacit consent doctrine include whether the non-signing spouse had filed a separate return, whether there was a prior history of filing joint returns, whether the non-signing spouse had objected to the return after it was filed, and whether there was a pattern of one spouse handling the financial matters.

All of these factors weighed in favor of tacit consent in this case.  Anjali repeatedly testified that she did not review the returns by choice because she expected her husband to handle them.  She did not file any returns on her own and there is no record of her contacting the IRS to object to the joint filing.  The couple had also been consistently filing joint returns for the prior five years. These facts were supplemented by Anjali’s admissions that she chose not to review the returns.  The Court was able to confidently find that the 2004 joint return was valid via the tacit consent doctrine.

However, the opinion moves into more complicated territory when determining whether the extended time periods for the IRS to assess the return were valid.  To do this, the Court first reviews whether the Form 2848 appointing Mr. Grossman as a representative was valid as to each of the Sonis and then it discusses whether the eight Forms 872 were also valid as to each spouse.  As the Court acknowledges, “[t]he Code treats married taxpayers who file jointly as one taxable unit; however, it does not convert two spouses into one single taxpayer.  Spouses filing a joint return are separate taxpayers, and each spouse has an absolute right to extend or not extend the time within which to assess…A waiver to extend the period to assess a deficiency is valid only as to the spouse who signs the waiver.”

The Court first finds that Om’s signature on the Form 2848 was valid.  It then uses common law agency principles to find that, as to the first two extensions signed by Mr. Grossman, Om had delegated that authority because he treated Mr. Grossman as his representative throughout the time period in question.

But how does this extend to Anjali?  Common law agency principles would not work here because there is no evidence of Anjali directing Mr. Grossman to act as her representative.  Instead, the Court states, because Anjali gave Om “tacit consent to handle tax matters…we might be able to rely on that authority to conclude Om authorized Mr. Grossman’s representation of Anjali.”  The only further analysis the Court makes on this point is to note that Anjali remained silent as to the representation, thus allowing the IRS the impression that Mr. Grossman represented both parties, and therefore making his signatures on the first two Forms 872 valid. The Court’s conclusion is that “[b]ecause Om authorized Mr. Grossman’s representation, Anjali also tacitly consented, through Om’s agency.”

The Court takes this position a step further by then finding that the next six Forms 872 signed by Om and by his son signing on behalf of Anjali, without her direct knowledge, were also valid on the basis that Anjali had tacitly consented to letting Om handle all financial matters and that she never showed any due diligence in becoming involved in resolving the couple’s tax matters.  The Court found that “[w]hile Anjali may not have expressly given her husband authority to sign specific forms, it was well understood that Anjali gave him implied authority to act on her behalf.”

The specific facts in this case, particularly Anjali’s own testimony that she did not want to deal with any tax matters and trusted her husband to handle them, convinced the Court that she had given Om a blank check for any decisions made regarding taxes.  In doing so, however, the Court took the specific doctrine of tacit consent as applied to confirming the validity of joint returns and converted it into a general concept of “tacit consent to handle tax matters,” with only limited further analysis.  This expansion of the doctrine raises concerns, especially as to cases that may not have such clear spousal testimony as to the consent.  If a spouse has indeed given tacit consent to a joint return, it does not automatically follow that they have tacitly consented to each and every decision the other spouse later makes regarding that return.  The consequences of a broad reading of the tacit consent doctrine could be quite severe to a taxpayer’s individual rights and rigorous analysis should be required to justify such conclusions.

A reason that does support this decision concerns the impact of the documents on the IRS.  The IRS relied on the signed document to extend the statute and, in the case of the return, to assess the liability.  If one taxpayer can come back later after the statute has expired and say I did not sign this and did not consent to filing this, then the IRS is put in a bad position.  Here, the Court seemed to find that the burden to undo the potential harm of having the statute extended should fall on Anjali.  That does not necessarily seem wrong on the facts in the Soni case, but this presents a difficult situation that can also come up in other contexts, such as the filing of joint Tax Court petitions in situations where one spouse is claiming they have the other spouse’s authority to file a joint petition. 

It thus remains an open question as to how far the tacit consent doctrine can be expanded in future cases.  Specifically, if one party is passive in the circumstances surrounding a tax liability, how far should the IRS or the Tax Court go to make sure that the other party is on board?  In the interim, the major takeaway from this case is that spouses will not get very far in arguing that they are absolved by having taken a head in the sand approach to joint tax matters.