Inside a Virtual Settlement Day

Today guest blogger Bob Probasco returns with a detailed account of his recent Virtual Settlement Day experiences in Texas. Bob also offers some advice for those participating in future VSD events. Christine

Virtual Settlement Days are the new craze, as IRS Counsel and the Tax Court press for making progress on cases even under our current difficult circumstances.  Several of you likely have already participated in one or more VSD; many others at least have heard about them from others who have participated.  Counsel put a team together to establish a general process and issued a “Best Practices” guide.  But the VSDs are organized by local offices, and likely there is some degree of variety from place to place.  So I thought there might be some benefit to PT readers from additional sharing of experiences by those of us who have already been through this.  I hope to hear more from others.

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The Pre-COVID History

Some of my comments may make more sense if I start out with a brief overview of what Texas was doing, for both calendar calls and settlement days, before the coronavirus.  The environment within which we operated influenced how VSDs were organized and operated and may have resulted in some differences (good and bad?) from VSDs elsewhere.

Texas has five different cities where the Tax Court holds trial sessions – Dallas, El Paso, Houston, Lubbock, and San Antonio.  The IRS Counsel office in Dallas handles Dallas and Lubbock trials; their office in Austin handles San Antonio and El Paso trials; their office in Houston handles Houston trials.  Texas has eight LITCs and our state bar Tax Section has a long-established calendar call program, created by Elizabeth Copeland back in 2008.  The state bar program has coordinators for Dallas, Houston, and San Antonio; the coordinators generally have a small group of volunteers they rely on regularly. 

Texas’s experience with in-person settlement days dates to 2014, with the first one in San Antonio.  Rachael Rubenstein, when she directed the LITC at St. Mary’s University School of Law, brought the idea back to Texas from an LITC conference and helped organize it with Counsel.  It was a successful trial, although only one IRS attorney came down from Austin.  (The need to travel is usually a complication for the IRS.)  Dallas started its settlement days in 2016, normally on a Saturday morning at one of the local clinics.  They’ve been very successful.  Houston and San Antonio started more recently.

Enter the VSDs

Texas was not the first location to have a VSD, but Counsel quickly scheduled three this summer.  The first, organized by Counsel’s Dallas office, for cases in Dallas and Lubbock, was scheduled over three days, Thursday 6/25 through Saturday 6/27.  Counsel sent out 96 invitation letters; 26 petitioners replied to make an appointment.  We were ultimately only able to hold meetings with 18 of them, as we ran low on volunteers.  More about that later.  I took four appointments, the SMU clinic took three, we had eight state bar volunteers who took nine appointments, and two petitioners had other representation and didn’t ask to meet with a pro bono volunteer.  Three petitioners cancelled or no-showed and one settled in advance of the appointment.  All told, nine cases settled and another five moved toward settlement.  This was a very successful event, with better turnout than we usually had in Dallas for in-person settlement days.

The Houston and Austin offices of Counsel scheduled their VSDs for the week of July 20th.  Houston had about twelve appointments; Austin had five.  I haven’t heard yet as much about how those events went, other than one appointment I had, but my impression was that those also were very successful.

That’s the high-level summary; what follows are my specific experiences.

Thursday, June 25:  Dallas Counsel sent out the invitation letters and scheduled appointments as petitioners contacted them.  Counsel then emailed a link to the WebEx meeting to petitioners with confirmed appointments a couple of days in advance of the meeting.  The email asked the petitioners whether they wanted to talk with the pro bono volunteer in advance.  My first appointment was an EITC substantiation case and talking in advance and sharing documents might have been very helpful.  But the petitioner didn’t ask to talk with me in advance and I met her only at the beginning of the virtual session.  My understanding of WebEx is that the host can allow any participant to share their screen.  Depending on how tech-savvy the petitioner was, she might have been able to share her documentation with us during the meeting and we might have been able to settle.

But we ran into a snag.  Two WebEx servers crashed that morning and the meeting had to be rescheduled as an IRS telephone conference call.  The petitioner had documents but couldn’t share them over the phone.  The IRS attorney had virtually nothing; the petitioner had submitted documents to Appeals last fall, but they hadn’t been uploaded and the physical administrative file was of course not available to Counsel.  In a situation like that, you can discuss generalities, but you may not be able to settle until later.  My clinic later took on the petitioner as a client and I’m hopeful we’ll settle soon.

Friday, June 26:  This petitioner, whose case was for Lubbock, did send me a lot of documents in advance.  My schedule precluded a telephone or Zoom meeting before the appointment, but I was able to evaluate his situation and we communicated by email.  The actual WebEx meeting ran into another snag.  There were still some potential problems with the WebEx servers, I think related to capacity, so Counsel came up with a workaround.  We used WebEx for video only and a telephone conference call for audio. 

I had already provided him with substantial advice by email Wednesday and Thursday nights, but we talked through the issues more.  I had concluded earlier that this CDP case would likely not settle; it seemed to be almost entirely based on strongly held but very different interpretations of tax law, rather than factual disputes.  When I’ve encountered such cases in the past, they never seem to settle.  Sure enough, on Friday there was some discussion but no settlement.  However, we did clarify some of the petitioner’s arguments and gained additional information.  I also communicated with the petitioner by email Friday night to answer some additional questions he had and clarify some aspects of court procedure.  It’s unfortunate when you’re unable to progress toward settlement in a Virtual Settlement Day, but perhaps the meeting at least contributed to resolution of the case.

I had a second appointment on Friday, but that petitioner did not show up.

Saturday, June 27:  This petitioner’s case was also for Lubbock, and he also sent me quite a few documents in advance.  And again, my schedule was busy so it wasn’t until late Friday night that I had an opportunity to review everything and email him with my preliminary evaluation.  The meeting proceeded similarly to the one the day before.  And this appeared also to be an instance of strongly held but very different interpretations of tax law. 

Although I understand that WebEx does have “breakout room” functionality, the original plan was for the IRS attorney to make the pro bono volunteer a co-host, and then leave the WebEx meeting to allow a private conversation.  But once again we were using WebEx for video only and an IRS conference call for audio.  There was no way for the IRS attorney to leave the conference call without terminating it.  So instead, the petitioner and I left the WebEx meeting and the IRS conference call; then I called the petitioner for a private conversation.  After that, we returned to WebEx and the conference call.

Although we weren’t able to reach a settlement, I was able to provide information to the petitioner about the strength of his case and answer some questions about court procedure.  Since there apparently was no dispute concerning the material facts, I suggested a submission without trial under Rule 122 would be appropriate and more convenient than appearing for trial.  I think both petitioner and the IRS attorney were satisfied with that approach and will cooperate in stipulating the facts, so this case seems headed toward resolution.

That was it for the Dallas event.  We had enough state bar volunteers, along with the clinics, for the Houston and Austin event, after some balancing between the two.  But the Austin event got a last-minute email from a petitioner on Wednesday asking for an appointment on Thursday, so I volunteered to take that one.

Thursday, July 23:  Another CDP case.  For the Dallas VSD, Counsel copied the applicable volunteer when emailing a petitioner with a link for the WebEx meeting.  I didn’t know who the petitioner was on this case until the virtual meeting began.  I’m not sure if that was a conscious decision by Austin Counsel to delay the communication of the petitioner’s name as long as possible or just a result of this being a last-minute appointment.  I don’t know if he was offered an opportunity to talk with me in advance, but if he was, he didn’t pursue it.

We were able to use WebEx for both video and audio this time, and I had an opportunity to experience sharing documents within WebEx.  The IRS Attorney showed us the Notice of Determination.  It’s a little bit awkward when someone else is at the controls (I’m gaining sympathy for what my students in a virtual class go through) and I didn’t capture in my notes all of the important information for reference later when we had a private conversation.  But the process works.

We ran into problems when transitioning to a private meeting between me and the petitioner.  The IRS attorney left the WebEx meeting, as planned, but that unexpectedly kicked all of us out the meeting and the IRS attorney had to schedule a new WebEx meeting and invite us.  None of us were absolutely sure if that would happen again, so the petitioner and I decided to have our private conversation outside of WebEx.  The IRS attorney kept the WebEx meeting going, the petitioner and I exited, and then he and I had a Zoom meeting.  (You’re probably wondering why I didn’t use Zoom for private conversations with petitioners during the Dallas VSDs.  So am I.  IRS Counsel only uses WebEx for videoconferencing but that restriction wouldn’t apply to a meeting that IRS Counsel does not attend.  It should have occurred to me earlier as it would have been easier than a cellphone call.)

After we returned to the WebEx meeting to discuss the case with the IRS attorney, there were a couple of times that the petitioner wanted to speak with me privately again.  The discussions were likely to be brief, so we came up with a workaround rather than returning to Zoom.  The IRS attorney left the WebEx meeting going but left his office so he couldn’t hear us, then came back in five minutes.  A little inconvenient for him but, unlike my other VSD cases, we were able to reach a settlement.  Hurray!

Takeaways

Compared to the in-person settlement days, there were some noticeable differences – some better, some worse.  Overall, I thought the VSDs went well.  Counsel is to be commended for their efforts in trying to make progress on the cases even under today’s difficult circumstances.  In reflecting over it, there were also some things to consider the next time around.

Choice of cases to invite.  Our Dallas in-person settlement days usually invited petitioners whose cases were scheduled for trial in the next 2-3 months, and sometimes Counsel limited the invitations to cases they considered good candidates for settlement.  For the VSDs, it seems as though the invitation list was crafted more broadly.  Of the four cases I assisted with, three were in the very early stages and had not yet been set for trial.  (The fourth had been set for trial in May, before the Tax Court cancelled those trial sessions.)  I was somewhat surprised by that, as often at that stage Appeals has jurisdiction.  But if we can settle cases earlier, bring them on.  It seemed to work well overall.

I think there’s an argument for only inviting cases for which Counsel thinks progress is likely.  I’ve heard in the past about in-person settlement days where that approach was taken but here it seems Counsel may have not focused as much on that.  Progress seemed unlikely for two of my four appointments.  I understand that Counsel may have difficulties with a case and hope that a volunteer will persuade a petitioner that a proposed resolution is reasonable.  And that happens sometimes even if the proposed settlement is a full concession by the petitioner; the petitioner may believe a volunteer who tells her that she should concede, but not trust Counsel who says the same thing.  Even though the petitioner isn’t any better off, the judicial process is.  The Court and Counsel both appreciate any intervention that results in resolution before trial. 

On the other hand, there are some cases for which it seems extremely unlikely from the very beginning that a volunteer will change either party’s point of view.  Is it worthwhile to invite those petitioners to a settlement day, whether in-person or virtual?  I didn’t think it would be in those two cases I assisted with, and I was surprised that they wound up at the VSD.  But in retrospect there was some movement (very slight) toward resolution, even if the cases would not settle.  And the petitioners hopefully got some useful information from me, even if not what they may have hoped for.  I wonder whether the petitioners and Counsel thought the VSD was beneficial for those cases.

Time:  Our Dallas settlement days were always held on Saturday mornings.  Several IRS attorneys and several pro bono volunteers would show up for the entire morning.  We could get through 10 – 15 meetings easily and typically no one was committed for more than four hours.  The VSDs were mostly held during the week and spread over several days.  That is probably more convenient for Counsel and LITCs, as this is part of their day job and most meetings were during our normal work hours.  The total time set aside was much more than the four hours for our Dallas in-person settlement days, but IRS attorneys and pro bono volunteers alike only had to be there for their meetings, rather than the whole time, so the total time commitment may have been similar.  It also seemed to be better for petitioners, at least if there was a Saturday option.  And no one had travel time to get there.

There is a possible downside for state bar pro bono volunteers, as most of the meetings were during the work week when they often have other commitments, rather than on the weekend.  Perhaps as a result, the volunteers may have been more likely to volunteer for only one or two appointments instead of handling four at an in-person settlement day.  Part of that may also be a result of more time set aside for VSD appointments and in-person, as the process can be a little bit slower. 

This is a balancing act and the plan for our VSDs may be the right one for VSDs going forward, but it’s something to think about.  Most importantly, the organizers for the pro bono volunteers may need to consider that more than the normal number of volunteers may be needed when moving from in-person to virtual.

Location:  This was a huge advantage of the VSDs.  The obvious advantage is eliminating travel time for everyone but there are two other aspects.  First, VSDs allowed Counsel to combine cases from more than one trial location.  We had done in-person settlement days for Dallas trial sessions.  But Dallas Counsel also handles Lubbock trial sessions.  Even if they organized an in-person Lubbock settlement day, travel costs for the Dallas IRS attorneys would have limited participation.  With a VSD, however, it was easy to invite petitioners with cases for both cities.  The second advantage of a VSD is that it facilitates getting pro bono volunteers.

Soliciting volunteers:  We had started to cast our net wider for the state bar volunteers even before COVID.  Last year, the Texas Tax Section started sending out blast emails to the entire membership inviting them to sign up as volunteers for calendar calls or settlement days or Adopt-a-Base training sessions.  (Rachael Rubenstein implemented this initiative for soliciting volunteers for us.)  It’s part of a balancing act between asking our “regulars” to stay involved and diversifying our volunteer base (expanding base, involving younger attorneys, etc.). 

When we switched from in-person settlement days to VSDs, though, that had an even greater reach.  Our Dallas VSD had eight state bar pro bono volunteers, of whom three were from Houston.  Our Houston and Austin VSDs in turn drew volunteers from Dallas.  We even got an out-of-state volunteer from D.C., who happened to be a member of the Texas bar.  (Thank you!)

We turned out to have more petitioners wanting to participant in the Dallas event than the volunteers could cover, and some never made it off the waitlist.  But that was primarily because we got a later start than for the Houston and Austin events.  The next time we do this, I think we’ll be able to get more volunteers.

It takes effort to solicit intrastate volunteers but the ability to serve more petitioners is worth it.  The program that Rachael started in Texas gave us a head start in that, although she also had to put in a lot of effort connecting the volunteers to the petitioners.  The time slots the volunteers asked for didn’t match exactly with the petitioner appointments.  I doubt if we would have had as many volunteers without that program already in place.  Other state bars may want to investigate something similar if they’re not doing it already. 

This advantage of a VSD in attracting volunteers who do not live in the area will also apply to calendar calls as the Tax Court starts its remote trial sessions.  We tend to need fewer volunteers at calendar calls then at settlement days, but the potential for interstate assistance can greatly help locations that do not have clinics or an established state bar program.  It will be more difficult to coordinate than intrastate volunteers, but Meg Newman at the ABA Tax Section is already doing some of this.  The Texas bar will be helping with a VSD, and possibly a calendar call, for Las Vegas later this year.

Technology:  We had some issues with WebEx during the Dallas VSD, although most of that may have been just temporary glitches rather than recurring problems.  However, I suspect many of the pro bono volunteers mostly use Zoom and are unfamiliar with WebEx; I know I was.  Even some of the individual IRS attorneys may not have been familiar with the full range of functionality used in a VSD – sharing documents, selecting a co-host, etc.  For that matter, petitioners might also struggle with sharing documents if they were unfamiliar with the technology.

We did get an instruction guide for signing in and a video tutorial in advance of the VSD.  That was helpful.  In retrospect, it might have been beneficial to have a live run-through to acclimate to the software.  But it’s hard to find time for this in everyone’s busy schedule.  This will get better over time, though, as everyone gains more familiarity.

Sharing information.  This is a disadvantage of VSDs, compared to in-person.  At the in-person events, petitioners and Counsel both often bring documents to the event and it’s easy to give them to the volunteers to look at those throughout the meeting with petitioners.  That’s harder to do through videoconferencing.  Petitioners may not have the documents in electronic format, for screen sharing, and holding a document up to the camera may not work well.  It can be awkward for the volunteer to refer back to documents during the discussion if petitioner or Counsel are sharing them through the screen.  And after Counsel leaves the meeting, any documents shared by them are – I assume – not available during the private conversation between volunteer and petitioner.

For the Dallas event, the invitation letter invited petitioners to send documents to Counsel in advance; a couple of days before the meeting, Counsel offered to put petitioner and volunteer in touch to discuss the case before the meeting.  I think there was little, if any, information shared ahead of time, though.  Maybe a more assertive approach, earlier in the process, would change that.  Perhaps when the petitioners respond to the invitation letter to schedule an appointment Counsel could: (a) explain the benefits of talking with the volunteer in advance; (b) strongly suggest that it would be beneficial to send documents to Counsel in advance and ask whether those could be shared with the volunteer; and (c) ask the petitioner if documents already filed with the court (e.g., petition/notice of deficiency, any pending motions, etc.) could be shared with the volunteer in advance.

At some VSDs, cases were “recalled” for later in the week or a subsequent week.  That can be a good solution for this issue and would likely work well for Counsel and clinic volunteers.  But it might be harder for state bar volunteers to squeeze a second meeting into an already busy schedule.  For clinic volunteers, there is also the option of entering an appearance in the case and continuing through resolution; state bar volunteers do that less rarely.  Of my three VSD cases that did not settle, I did that for one but chose not to for the other two.

This is certainly not a big issue.  We can get documents and information from the petitioner and Counsel during the virtual meeting, which is essentially what typically happens at an in-person settlement day or a calendar call.  But virtual seems slower than in-person and anything that helps speed up the process might help.

Parting thought

VSDs will take some getting used to, and they have some obvious challenges.  But they also offer significant advantages.  My experiences were definitely positive.  If you’ve been hesitant about participating in one, don’t be.  I think it would also make sense to continue offering at least some VSDs or virtual trial sessions even after COVID is long behind us.  Just like so many other things, the result of the pandemic may be a permanent and substantial change in how we work.

Scheduled Relief for Injured Spouses Whose Stimulus Payments Were Sent Elsewhere for Past Due Child Support

When the IRS hastily set up the program for making the stimulus payments authorized by the CARES Act, it did not carefully program its computers to distinguish the cases in which one spouse on a joint return claimed injured spouse status.  If you are not familiar with injured spouse status, find an explanation here.

Given the haste with which the IRS worked to accomplish the task it was given, this oversight is understandable, but it has created a lot of pain among those whose stimulus payments were diverted to pay past due child support of their current spouse.  As a reminder past due child support was the only liability for which the stimulus payments were offset.  We have written about this issue previously here, here and here.  We have received more comments on this issue than any issue on which we have blogged.

In a blog post on Monday, August 10, the National Taxpayer Advocate provides a chart of problems with the stimulus payments that the IRS is fixing or is not fixing.  The problem of wrongly diverting the stimulus payments of injured spouses is one that the IRS is working to fix.  The chart provided by the NTA indicates that the IRS anticipates fixing this problem by the end of August and getting the wrongly diverted checks to these individuals by that time.  It also indicates that individuals who have not received their checks by that point can come into TAS for assistance.

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There is still a distinction between individuals who filed the injured spouse form with their return and those who did not.  Many individuals who know that their spouse has an outstanding liability such as child support or a student loan that will cause the offset of their refund year after year, routinely file the injured spouse form with the return so that the refund due to the non-liable spouse will flow through unimpeded by the offset provisions.  In normal circumstances the filing of the injured spouse form with the return keeps the offset from occurring.  Here it did not and that’s what the IRS is working to fix.  For individuals who did not file the injured spouse form with the return perhaps because this is the first year of the joint return, they do not claim a refund or for some other reason, it will be necessary for those individuals to file the injured spouse form in order to obtain the release of their stimulus payment.

TAS has not been accepting cases involving many of the problems created by stimulus payments because it viewed that it had no ability to assist taxpayers with many of those problems.  On an individual case level, there was little or nothing it could do to fix their problems if the IRS had not developed a fix.  On a systemic basis, it could have filed a broader taxpayer directive.  Whether such an act would have sped up the fixing of the problems is unknown.  The chart shows the cases on which the IRS is creating fixes, the time frames and the cases TAS will now accept.  As mentioned above, it also shows the cases that the IRS is not fixing and that TAS will not accept.  Some of those cases are the subject of litigation that we are covering with other post.  Some of those cases are not mentioned in the chart such as the cases of deceased individuals and prisoners.

The chart is helpful both in providing timeframes and in setting a marker for the fixes the IRS is not undertaking.  It’s wonderful that the NTA is giving out this information and providing it in an easy to digest format.  The IRS might consider doing the same in a prominent place on its website since not everyone receives the NTA blog posts.

A Family Court Spin on Whistleblowing, Supervisory Approval, and Trial Scheduling: Designated Orders 7/6/20 to 7/10/20

Even though there were only three orders for the week I monitored in July, there wound up being enough interesting topics to write about.  The longest order is interesting because it puts a different spin on whistleblower cases before the Tax Court.  The next case focuses on timely written supervisory approval for IRS penalties.  Finally, there is another case dealing with trial scheduling issues due to the COVID-19 pandemic.

A Nevada Whistleblower in Family Court

Docket No. 20287-18W, Monique Epperson v. C.I.R., Order and Decision available here.

Most often we think of whistleblower claims in a certain way.  It might be that the whistleblower was an employee who learned of misdeeds with regard to taxes or it might be that a person finds out through business dealings of foul play concerning tax reporting.  I doubt Family Court would be in the top answers concerning whistleblowing, but that is the topic of today’s case.

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You see, Ms. Epperson is a Nevada resident who was involved in a child custody dispute in her local family law court system in years 2016 and 2017.  Both her and her ex-husband were ordered to retain the services of various attorney, physician and psychology service providers from a list of court-approved outsource service providers.  She independently contracted with those providers and paid by cash, check or credit card during those 2 tax years.

It seems that Ms. Epperson had a bone to pick with how things went in family law court, but she was creative since most people do not think about the IRS when it comes to getting even.  Ms. Epperson is different because she chose to contact the IRS Whistleblower Office.  In December 2017, the IRS Whistleblower Office received five Forms 211, Application for Award for Original Information, from Ms. Epperson – all dated November 28, 2017.  The targets of those Forms were the Family Court and four independent contractors paid by her or her ex-husband during their court proceedings.

Her claim against the Family Court is that it should have issued Forms 1099-MISC to the various service providers because of the IRS requirement that when a business pays an independent contractor $600 or more over the course of a tax year, it should report those payments on a Form 1099-MISC issued to the independent contractor.  Her claim against the contractors is that they underreported income during the tax year, which would be easier to conceal in connection with child custody matters because they are usually sealed and unavailable for public viewing.

When the IRS Whistleblower Office reviewed the claims, they combined all five whistleblower claims into one group and applied a common decision.  The decision was based on the fact that the Family Court did not make payments to the independent contractors and the litigants (such as Ms. Epperson and her ex-husband) made the payments instead.  As none of those individual litigants are a business, they were not required to report payments by Form 1099-MISC.  The conclusion was there was no credible tax issue and the whistleblower claims were denied.

Ms. Epperson next timely filed her Tax Court petition.  Over time, the IRS filed a motion for summary judgment and Ms. Epperson filed her opposition to the motion, each with unsworn declarations under penalty of perjury in support of the motions.

This Tax Court filing comes about because Congress gave whistleblowers the ability to seek judicial review of their award determinations, but that review is limited to award determinations made under IRC section 7623(b), not 7623(a).  As a result, judicial review is only available for claims where the proceeds in dispute exceed $2,000,000 and an individual target taxpayer has gross income of at least $200,000 for the tax year(s) at issue. 

Ms. Epperson’s claim?  Unknown as to amounts paid to the Family Court, and, taken in the light most favorable to her, could have exceeded $2,000,000.  The claim against the contractors was fairly small (the $13,055 paid by her and her ex-husband to the contractors).  The contractors were three individuals and a corporation but nothing in the court pleadings or exhibits provides the gross income of those contractors.  Again, in the light most favorable to her, their gross income could have exceeded $200,000.  However, the proceeds in dispute for the contractors fell below the $2,000,000 threshold of IRC section 7623(b)(5)(B).

That threshold limitation is not jurisdictional, but it is an affirmative defense that must be raised and proven by the IRS.  In this case, the IRS did not raise that defense in their answer, but raised it in their motion for summary judgment.  An affirmative defense cannot be raised for the first time in a motion for summary judgment.  Since that defense was raised in the motion and not the answer, it will not be considered by the Court.  The fact that the contractor claims fell below the $2 million threshold was not fatal to Ms. Epperson’s petition for judicial review.

In reviewing the administrative record, there is explanation as to the determination regarding the Family Court but not explanation regarding the determination for the contractors.  The evidence indicates that there was a determination regarding the Family Court and the claims against the contractors were sent along in conjunction with that determination.  In the Court’s conclusion, there was no abuse of discretion regarding the Whistleblower Office determination regarding the Family Court but the IRS did not satisfy the burden of showing entitlement to summary judgment regarding the contractors.

The IRS motion for summary judgment with respect to the Family Court claim was granted while the motion for summary judgment with respect to the contractor claims was denied without prejudice.  The IRS Whistleblower Office determination with respect to the Family Court claim was sustained.

Supervisory Approval for IRS Penalties

Docket No. 15309-15, Jesus R. Oropeza, v. C.I.R., Order available here.

There are pending cross-motions for partial summary judgment in this case on the issue of whether the IRS secured timely written supervisory approval subject to IRC section 6751(b)(1) for the notice of deficiency.

In January 2015 – the revenue agent assigned to this case sent the petitioner a Letter 5153 and attached a revenue agent report asserting a 20% accuracy-related penalty attributable to one or more of the options under IRC section 6662(b)(1), (2), (3), or (6).  In the report, the agent stated that that the underpayment application is zero where a 40% penalty under 6662(h), (i), or (j) would be applied.  Two weeks later, the revenue agent’s immediate supervisor signed a civil penalty form approving a 20% penalty for substantial understatement [6662(b)(2)].  The penalty form did not cite any of the other three grounds or a 40% penalty.

In May 2015 – the revenue agent and someone who is potentially his immediate supervisor prepared a joint memo for IRS Chief Counsel.  The memo, signed by both, recommends the penalty be increased from 20% to 40% under 6662(i) on the ground that the petitioner engaged in a “nondisclosed noneconomic substance transaction.”  Five days later, the IRS issued a notice of deficiency asserting a 40% penalty for a “nondisclosed noneconomic substance transaction” but said it was a 40% 6662(b)(6) penalty.  In the alternative, the notice determined a 20% penalty attributable to negligence or substantial understatement of income tax.

The Court asks for the parties to submit briefs on the following issues by August 7: Assuming, for the purpose of argument, that the IRS did not secure timely supervisory approval for the penalty or penalties asserted in the revenue agent report –

  • Should the report be regarded as asserting all four types of 20% penalty, including the 20% penalty for engaging in a noneconomic substance transaction under section 6662(b)(6)?, and
  • If the 6662(b)(6) penalty was asserted in the report but not timely approved, can the IRS urge there was secured approval for a “40% section 6662(b)(6) penalty under 6662(i) even though the latter subsection operates only to increase the 6662(b)(6) penalty, which hypothetically was not timely approved?

I would make an argument in this case under the Taxpayer Bill of Rights about right # 10, the right to a fair and just tax system.  It seems to me there is a bit of a whipsaw effect going on here because of the quick movement between a 20% penalty and a 40% penalty.  First, the petitioner learns of a 20% penalty.  Later, the IRS stance is that it is a 40% penalty or, in the alternative, a 20% penalty.  Where is the finality for a taxpayer in those kind of changes?

Trial Scheduling Issues in the Pandemic

Docket No. 14546-15, 28751-15 (consolidated), YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, et al. v. C.I.R., Order available here.

In November 2019, these consolidated cases were set for trial to commence September 14, 2020 in New York, New York.  Because of COVID-19 concerns, an order issued in April 2020 cancelled the Special Trial Session and struck the cases from the calendar.  The parties later agreed to have a Special Trial Session commencing Tuesday, October 13, by remote trial proceeding.  This order gives instructions regarding the trial and amends the pretrial schedule so that the pretrial schedule spans the end of July through the end of September 2020.

I did have a thought that maybe this was not meant to be a designated order.  Usually, all cases that are consolidated are listed in the daily designated orders.  In this case, there was only one of the two consolidated cases that were included in the designated orders.  I am not entirely convinced either way, though this case does lay out the pretrial schedule and addresses other concerns in the COVID-19 trial scheduling era so it may be useful reference.

 

Can The IRS Even Implement Payroll Deferral?

Guest blogger Professor Bryan Camp provides an analysis of the President’s recent Executive Order on payroll taxes, which suggests that the IRS may lack the authority to implement the EO. Christine

Carl’s post yesterday inspired me to look at §7508A and the regulations more closely.  It is not clear to me how the IRS will be able to implement Executive Order (“EO”) “Deferring Payroll Tax Obligations.”   

Section 7508A gives the IRS broad discretion.  Subsection (a) provides that “the Secretary may specify a period of up to 1 year that may be disregarded in determining, under the internal revenue laws, in respect of any tax liability of such taxpayer.” 

When a tax statute gives the IRS broad discretion to do something, you need to look to regulations to see how the Treasury Department has limited or cabined that discretion.  It is no different here.  Treas. Reg. 301.7508A-1(a) explicitly says “This section provides rules by which the Internal Revenue Service (IRS) may postpone deadlines for performing certain acts with respect to taxes….” 

So what are those rules?  Well, subsection (b) sets out the rules for what periods of time will be postponed.  Subsection (c) then explains the rules for which acts are eligible for postponement.   Subsection (d) defines which taxpayers are eligible to be covered by any postponements the IRS gives out. 

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It’s subsection (c) which creates the problem here for the IRS to implement the EO.  Specifically, Treas. Reg. 301.7508A-1(c)(1) provides that any postponement “applies to the following acts performed by affected taxpayers” and then lists several acts.  Paragraph (c)(1)(i) says this:

Paying any income tax, estate tax, gift tax, generation-skipping transfer tax, excise tax (other than firearms tax (chapter 32, section 4181); harbor maintenance tax (chapter 36, section 4461); and alcohol and tobacco taxes (subtitle E)), employment tax (including income tax withheld at source and income tax imposed by subtitle C or any law superseded thereby), any installment of those taxes (including payment under section 6159 relating to installment agreements), or of any other liability to the United States in respect thereof, but not including deposits of taxes pursuant to section 6302 and the regulations under section 6302;

You see the emphasized language?  It limits the IRS discretion under §7508A.  It says the IRS cannot postpone the time for making “deposits of taxes pursuant to section 6302.”

So let’s go look at §6302.  Subsection (a) says what the purpose of this statute is: “If the mode or time for collecting any tax is not provided for by this title, the Secretary may establish the same by regulations.”

Remember that the taxes the EO directs the IRS to postpone are the taxes imposed by §3101(a) (and the equivalent portion of employment taxes imposed under the Railroad Retirement Act at section 3201).  Section 3101(a) imposes a 6.2 % Social Security tax on employees, which is withheld from their wages under the rules in §3102.  But §3102 says nothing about timing.  Therefore, you have to look at the rules under §6302 and its regulation to find the rules for timing.

You find the timing rules in Treas. Reg. 31.6302-1.  Subsection (a) gives the basic timing rules and subsection (e) explicitly ties those rules to the employment taxes imposed by §3101.

Do you see the problem for the IRS?  The EO says “postpone withholding of employee’s share of employment taxes.”  But §7508A, as implemented by the regulations, does not permit the IRS to postpone the deposits required by §6302 which, under it’s regulations, include all the amounts withheld from employee’s paychecks under §3102 to satisfy the tax imposed by §3101.

Alert readers will notice that the blockage occurs in a regulation.  That means that Treasury could modify that regulation.  But the IRS certainly cannot do this on its own via a Notice or any other guidance document.  It would have to go through Treasury and, most likely, go out as a Temp. Reg. 

Whoever wrote that EO should have checked with a tax advisor.   As usual, it may be me who is missing something, so I would love to hear others’ thinking on this.

Charging Fees, Changing Rules and Providing Videos

Several electronic filing/electronic access items emerged last week and this post will talk about three of these items.  First, the Federal Circuit ruled on the PACER litigation which we have discussed before and which has a tangential impact on the fee structure at the Tax Court.  Second, the Tax Court issued a press release providing additional information regarding remote practice procedures.  Third, the Tax Court issued videos depicting the manner in which calendar calls and trials will proceed in the remote environment.

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Pacer

On June 2, 2020, I wrote a post about public access to Tax Court documents. That post was written in part to provide a link to a longer article on the subject I wrote with Maggie Goff and published in Tax Notes on May 4. It was also written to celebrate the new fee schedule adopted by the Tax Court for document requests. The article that Maggie and I wrote had its origins, at least in part, in litigation pending in the Federal Circuit on the amount charged for access to documents in the PACER system. The case in the Federal Circuit resulted from a decision by the Court of Federal Claims that some of the uses of the money the Administrative Office of the Courts made from PACER were appropriate and some were not. This left both parties unhappy as discussed in a post from The Hill here. On August 6, 2020, the Federal Circuit upheld the Court of Federal Claims determining that it got the decision just right. For those interested in understanding PACER and its history, understanding the Little Tucker Act and understanding the nuances of how the federal judiciary spends unappropriated money, the decision is worth reading.

Press Release

On August 6, 2020, the court issued a press release with links to several documents designed to guide practitioners as the Court shifts to remote practice. With all of the material in the links, there is a lot to read and digest as the Court makes this shift. Included in the links are a Practitioner’s Guide, a Petitioner’s Guide, a presentation of documentary evidence guide, a guide for subpoenaing witnesses and a revised Administrative Order.

In the past parties were required to exchange documents in advance of trial and the failure to do so provided a theoretical basis for excluding documents not properly and timely exchanged. Now, the Court wants these non-stipulated documents marked as trial exhibits with exhibit numbers. For a court with 70% pro se petitioners this presents an even greater challenge than the prior rule regarding exhibits. The guidance not only provides information about timing and labeling but also format and size. Practitioners need to be prepared well in advance of trial for these rules governing documents to which the parties cannot stipulate. Getting all documents into stipulations becomes even more important.

Tax Court Videos

Thanks to Amy Spivey the relatively new clinic director at the relatively new clinic at Hastings Law School in San Francisco, I learned that the Tax Court put new videos up on its web site. You can access the videos here. I was a bit disappointed when I saw the new Tax Court web site a couple weeks ago and noticed that the previous video it had for pro se taxpayers was missing. One of the first things I did back in 2007 as a new clinician at Villanova was to write the script for that video. If you listened closely to that video you learned that the fictional taxpayer lived in Villanova. So, I had a soft spot for it. The new videos take the viewers through the Tax Court’s virtual calendar call and trial. Unlike the prior video which was performed by professional actors, these are performed by Tax Court personnel. The videos are a little clunky but I expect the experience of virtual calendar calls and trials to be a little clunky. So, they seemed perfect to me.

Conclusion

The Federal Circuit’s decision upholds the lower court decision placing limits on the use of funds from PACER. The fact that the Administrative Office of the Courts spent some of the PACER funds on inappropriate items does not necessarily mean the fees are too high. PACER could be improved to allow for a better search function. Other permissible expenditures also exist. If the Administrative Office spends the money correctly, it need not lower the fees, though lowering the fees would be welcomed. The Tax Court’s press release provides needed guidance as we head into the fall trial sessions next month. We would welcome posts from readers who encounter the early electronic trial and calendar provisions. Adjusting to remote practice will take effort from all sides. Kudos to the Tax Court for putting up this video and giving us a chance to see what will happen when the Court starts trying cases again. It will be an interesting adventure.

Trump Authorizes Mnuchin to Use Section 7508A to Extend Time to Pay Certain Employment Taxes Through End of Year

On August 8, President Trump issued a document entitled “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.” Despite the impression of sloppy reporters in the non-tax press, the memorandum actually does not do anything yet.  In fact, the memorandum merely instructs Treasury Secretary Mnuchin to exercise his authority under section 7508A to extend certain tax deadlines for up to one year on account of Presidentially-declared disasters with respect to certain employees’ Social Security taxes.

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The operative part of the memorandum’s instructions read as follows:

Sec. 2.  Deferring Certain Payroll Tax Obligations.  The Secretary of the Treasury is hereby directed to use his authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the tax imposed by 26 U.S.C. 3101(a), and so much of the tax imposed by 26 U.S.C. 3201 as is attributable to the rate in effect under 26 U.S.C. 3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020, subject to the following conditions:

(a)  The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.

(b)  Amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax.

As you can see, the President is asking Secretary Mnuchin essentially to provide an extension to pay for the compensation period from September 1 to December 31 of this year, but the instructions do not provide for a date by which those taxes must be paid.  That is being left to the IRS. 

Obviously, the statute prevents Secretary Mnuchin from providing for a deferral of more than one year.  However, the President is asking the Secretary to try to figure out a legal way that the taxes can simply be forgiven.  Section 4 of the memorandum states: “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

The extensions will only apply to taxes imposed by section 3101(a) (and the equivalent portion of employment taxes imposed under the Railroad Retirement Act at section 3201).  Section 3101(a) imposes a 6.2 % Social Security tax on employees, which is withheld from their wages.  Thus, the extension does not apply to any amount of taxes imposed by section 3101(b) – the 1.45% Medicare taxes imposed on employees – or to any employment taxes normally imposed on employers under section 3301. 

Equivalent self-employment taxes under section 1401 are usually paid by the self-employed as part of their quarterly estimated tax payments.  Note that the extension will not apply to any portion of self-employment taxes.

Not to mislead anyone, in section 2302 of the CARES Act, Congress already extended, for the period from the date of enactment through the end of 2020, the times for (1) employers to pay the employer share of Social Security taxes and (2) self-employed taxpayers to pay 50% of self-employment taxes related to funding Social Security.  The deferred amounts are payable, instead, 50% on December 31, 2021 and 50% on December 31, 2022.

The IRS may also need to provide some detail as to how to apply the provision that the extension is only with respect to employees “the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period is generally less than $4,000, calculated on a pre-tax basis”.  I can see a whole host of complicated issues that the IRS and employers must face in interpreting the word “generally”.  For example, what if an employee gets a regular salary plus commissions, so that the employee’s compensation varies considerably each pay period?  If the IRS instructs to take an average of pay, what will be the testing period for the average?  Year to date during 2020 (when many employees had their incomes plunge starting in March)?  Or will it be the average earnings for a one-year period ending in February 29, 2020, before the country largely shut down?  I am sure others can come up with many other interpretive issues. 

Then, will employers even be able to figure out who are the employees to whom the extensions applies?  Employers don’t currently have software to deal with compliance with any formula that Secretary Mnuchin will come up with.  And presumably, Secretary Mnuchin needs to figure this all out and issue an IRS Notice sufficiently prior to September 1 so that employer computers can be reprogrammed (if they can be) to do appropriate paycheck withholding. 

I would not be surprised if it takes employers months to figure out the correct amount of the reduced employment tax that they are required to withhold and pay over to the IRS in each pay period. However, the memorandum contemplates that the IRS Notice will provide that nothing be withheld of the 6.2% taxes during the deferral period.  The memorandum contemplates not just an extension for the employers to pay the tax, but deferral of “withholding”.

Assuming that employers are not allowed to withhold these taxes during the deferral period, how are employers later going to collect these taxes so that they can be paid over sometime in 2021?  The Notice will have to deal with this, though the President has indicated he doesn’t believe that any employer will eventually have to pay over these taxes.  Politically, he may be right.  But, what if he is wrong because Congress doesn’t forgive the taxes – worrying about the financial stability of the Social Security trust fund?

One former IRS employee (who will remain nameless) speculated to me that, perhaps, the amounts to make the employer whole (so that funds could be paid over) could be withheld from the first paycheck of 2021.  I don’t know if that is a good idea or even possible for all employees.  For example, assume an employee worked for all of the last four months of 2020.  She was in 2020 and will in 2021 be paid $3,500 per bi-weekly pay period.  The deferral would be $217 per pay period (6.2% of $3,500).  The deferral would apply to approximately 9 pay periods, so the total deferral would be $1,953 (9 x $217).  That first paycheck of 2021 will have to reflect current income tax withholding (federal and state) and 7.65% current employee employment tax obligations.  Current 7.65% withholding would be $268.  State and local income tax withholding could eat up more than the rest of the $3,500 gross pay.

And, of course, what happens when an employee leaves between September 1, 2020 and December 31, 2020?  Say, an employee left in October and her last paycheck was October 20?  There won’t be any paychecks in 2021.  Can the employer take the money out of her last paycheck, anyway, even if that paycheck is during the extension period?

Finally, remember that failure to pay over the right amount of employment taxes could result in very large failure to deposit and failure to pay penalties, if the employers are wrong in their calculations.

Court Rules Against Government in CARES Litigation Challenging Statute’s Denial of Payments to Mixed Status Couples

Earlier this year MALDEF filed a lawsuit in federal district court in Maryland on behalf of US citizens who were denied the COVID stimulus benefits under Section 6428 because they filed a joint return with spouses who use an ITIN. In response to a government motion to dismiss the suit, earlier this week in Amador v Mnuchin a federal district court in Maryland ruled against the government and allowed the suit to proceed to the merits.

The case is one of a handful of lawsuits that is challenging CARES’ failure to benefit mixed status couples and one of a number of other legal challenges to the CARES legislation. [Disclosure: I am co-counsel on two such cases, one challenging the IRS’s failure to rapidly and effectively distribute economic impact payments to the eligible children of parents and caretakers who do not file federal income tax returns and the other challenging the  exclusion of U.S. citizen children from the benefits of emergency cash assistance based solely on the fact that one or both of their parents are undocumented immigrants.] 

All of the cases raise interesting tax procedure issues, and many raise important constitutional law issues. In this post, I will discuss the tax procedure issue relating to sovereign immunity that Amador implicates, and save for another day the standing and the constitutional issues.

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The Amador suit targets CARES identification requirements that effectively deny any EIP or later 6428(a) credit to taxpayers who file a joint return and are married to someone with an ITIN rather than a social security number. The complaint alleges that CARES discriminates against mixed-status couples because it treats them differently than other married couples, in violation of the Constitution, including the Fifth Amendment guarantees of equal protection and due process. The government filed a preliminary motion to dismiss the lawsuit on a number of grounds, including that 1) the government had not waived sovereign immunity, 2) the plaintiffs failed to establish standing, and 3) the plaintiffs’ constitutional arguments failed to state valid claims for relief. The district court ordered an abbreviated and accelerated briefing on the government’s motion.

In Amador, of most immediate relevance for tax procedure was the government’s argument that the plaintiffs’ suit should be dismissed because it failed to establish a waiver of sovereign immunity. Absent a waiver, sovereign immunity shields the federal government and its agencies from suit. In a nutshell the government argued that the plaintiffs had to wait until the filing of a 2020 tax return or separate refund claim and the passage of six months or the denial of the refund claim before bringing suit to challenge Congress’ decision to not allow payments under Section 6428 to US citizens who are married to undocumented immigrants. In other words, the placement of Section 6428 in the Code meant, according to the government, that the taxpayers had to exhaust through normal refund procedures after or with the filing of a 2020 tax return to get a court to pass on the merits of the constitutional challenge. 

In response, the plaintiffs argued that they were not seeking a tax refund, and as a result they did not need to go through the typical refund process. Instead, they argued that their suit seeks injunctive and declaratory relief, with the APA serving as the source for the waiver of sovereign immunity.

Where in the APA is the source for a waiver? 5 U.S.C. § 702 provides that  “[a]n action in a court of the United States seeking relief other than money damages and stating a claim that an agency . . . acted or failed to act . . . shall not be dismissed nor relief therein be denied on the ground that it is against the United States or that the United States is an indispensable party.” 

The government in response argued that 5 USC § 704 provides a backstop against using the APA as a source for challenging the CARES provisions because it authorizes review of agency action under the APA only if “there is no other adequate remedy in a court.”  In other words, what 5 USC § 704 provides is that the APA does not generally displace procedures that provide a specific means to challenge a particular agency action. This, along with the Anti-Injunction Act, is why most challenges to tax law, including allegations that IRS/Treasury failed to comply with APA procedural requirements in rulemaking, have traditionally been shoehorned into the normal baskets of deficiency cases or refund cases (though as we have discussed in PT the Supreme Court in CIC will likely be addressing the AIA’s role in insulating IRS practice from pre-enforcement scrutiny). 

This gets us back to the government’s view in Amador that the individuals had an alternate remedy that served to defeat the APA’s separate source of jurisdiction for the suit. The court disagreed with the government and held that the APA did serve as a waiver of sovereign immunity, looking to the nature of the EIP and the absurdity of requiring exhaustion for a benefit that Congress sought to deliver as rapidly as possible:

Forcing plaintiffs to exhaust their administrative remedies would be an “arduous, expensive, and long” process, Hawkes, 136 S. Ct. at 1815-16, that serves none of the goals underlying § 7422. Before plaintiffs could challenge § 6428(g)(1)(B), they would first have file a 2020 tax return, which they cannot do until 2021. Then, plaintiffs would have to wait until the IRS invariably denies their request for a refund in the amount of the CARES Act payment, because they are ineligible per § 6428(g)(1)(B). Once that happens, plaintiffs would have to file an administrative claim with the IRS, asking it to reconsider its position. But, here too, the IRS will reject plaintiffs’ claim, citing § 6428. Thus, administrative exhaustion under § 7422 is guaranteed to be an exercise in futility because there is no possibility that it could provide plaintiffs with relief. See Cohen v. United States, 650 F.3d 717, 732 (D.C. Cir. 2011) (en banc) (concluding that the § 7422 was not an adequate alternative to APA where administrative exhaustion could not remedy plaintiff’s complaint). This Kafkaesque scenario is at odds with the very purpose of the impact payments—to assist Americans grappling with the economic fallout of a public health catastrophe. (emphasis added)

In addition, the court held Congress did not explicitly create a separate path to challenge the payment of EIP, given that Section 7422 presupposes a recovery of tax that had been previously collected or assessed:

Plaintiffs do not seek the recovery of any monies wrongfully “assessed” because they do not allege that the IRS improperly calculated their tax liability. See Hibbs v. Winn, 542 U.S. 88, 100 (2004) (“As used in the Internal Revenue Code (IRC), the term ‘assessment’ involves a ‘recording’ of the amount the taxpayer owes the Government.”). Nor do plaintiffs complain of taxes wrongfully “collected.” Instead, they challenge the discriminatory effect of a refundable tax credit under the First and Fifth Amendments.

In finding that there was no previous assessment or collection, the court suggested that refund procedures for the EIP itself were likely inappropriate in the first instance:

Certainly, the mismatch between the plain language of § 7422 and the nature of plaintiffs’ suit does not support the finding that Congress intended § 7422 to replace the APA. In fact, if anything, it leaves the Court “doubtful,” Bowen, 487 U.S. at 901, that § 7422 can serve as a statutory basis for plaintiffs to challenge § 6428(g)(1)(B). (citation omitted).

Conclusion

Amador now proceeds to the merits, though the opinion notes that due to the accelerated briefing on the preliminary issues the government may re-raise the procedural challenges later, including at the likely next summary judgment stage.

While this is a preliminary decision and not directly addressing the merits, the Amador district court’s discussion of the relationship between Section 6428(g), Section 7422 and the APA is significant. It reflects a growing judicial recognition that the mere placement of a benefit in the tax code does not mean that procedures ill-designed to accommodate the financial reality of Americans and the actual nature of the Code-based emergency benefits should serve to bar a court’s review of good faith constitutional challenges. The issues that the Amador suit raises are serious and the stakes are very high. Traditional paths for challenges to tax statutes should not serve as a bar to effectively shield suspect legislation from judicial review.

Failing to Keep Current After Obtaining an Offer in Compromise

Thanks to Jack Townsend for alerting me to the case of Sadjadi v. Commissioner, No. 19-60663 (5th Cir. 2020) in which the court affirms the decision of the Tax Court revoking taxpayers’ offer in compromise and allowing the IRS to levy to collect the liability.  Nothing about the case surprises me but it does serve as a reminder of what happens when you fail to keep current after obtaining an offer in compromise.  It also serves as a reminder that the OIC produces a contract, and the terms of that contract clearly obligate the taxpayers to timely file and timely pay for five years after the acceptance of the offer.

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Mr. and Mrs. Sadjadi owed taxes for 2008 and 2009 based both on their filed returns and subsequent audits.  They worked with the OIC unit and had an offer accepted.  The offer required payment over time which they did; however, while making the offer payments they failed to pay their 2015 liability.  As a result, the IRS revoked their offer acceptance and sent them a CDP notice which they responded to by requesting a hearing.  At the hearing they requested an Installment Agreement to pay off 2015 but wanted the IRS to recognize the OIC rather than to bring back the liabilities compromised in the agreement.

They offered a rather meager Installment Agreement payment compared to the amount the Settlement Officer calculated they could pay.  Ultimately, the Settlement Officer rejected their proposal and sent the determination letter.  The Tax Court sustained the decision of the IRS and they appealed to the 5th Circuit.  Although the 5th Circuit designated its opinion as non-precedential, it wrote a seven-page opinion analyzing the facts and the offer agreement itself.  In that regard it provides a rare glimpse at offers in compromise from the perspective of a circuit court.

First, the court referred to the OIC form which provides:

The parties used the standard offer-in-compromise form. The left-hand column of the form contained the following statement: “I must comply with my future tax obligations and understand I remain liable for the full amount of my tax debt until all terms and conditions of this offer have been met.” On the opposite side of that statement, the form states, “I will file tax returns and pay required taxes for the five[-]year period beginning with the date of acceptance of this offer.” The left-hand column also contains the following statement: “I understand what will happen if I fail to meet the terms of my offer (e.g., default).” On the opposite side of this statement, the form states, “If I fail to meet any of the terms of this offer, the IRS may levy or sue me to collect any amount ranging from the unpaid balance of the offer to the original amount of the tax debt without further notice of any kind.”

The taxpayers made a simple argument regarding their compliance with the OIC.  They took the position that:

The petitioners now appeal the Tax Court’s judgment, claiming that they complied with all the terms and conditions of the offer-in-compromise because they paid the agreed amount.

The IRS agreed with the taxpayers that they had paid the offer amount but said that was only part of the agreement.  The IRS argued that the OIC required the taxpayers to keep current in their filing and payment obligations for five years after the OIC.  The circuit court agreed, finding the language of the OIC clear.

[T]he offer-in-compromise in this case contains clear and unambiguous language that explains the consequences of default. The form states that the petitioners would “file tax returns and pay required taxes for the five[-]year period beginning with the date of acceptance of this offer.” The form further explains that the petitioners would “comply with [their] future tax obligations and . . . remain liable for the full amount of [their] tax debt until all terms and conditions of this offer have been met.”

The 5th Circuit’s decision here provides a simple straightforward interpretation of language in the contract, which seems simple and straightforward.  Had the court decided any other way, the decision would have been quite surprising.  Our clinic, like all clinics of which I am aware, spends a fair amount of time talking to clients about the need to keep current in filing and paying for five years.  We vet clients concerning this point, since no benefit to the client comes from obtaining an OIC only to see it destroyed by failure to make payments during the five-year period.  Clients who have a history of filing non-compliance sometimes get turned away, because we fear their ability to comply with the OIC terms does not exist. 

Neither the Villanova nor the Harvard clinics where I have worked go to this extreme, but I remember that when Special Trial Judge Leyden ran the clinic at University of Connecticut, she would keep her OIC cases open for the entire five-year period and work with the taxpayer during those five years to make sure that the taxpayer timely filed and paid.  I was impressed with that level of client service though unwilling to offer it myself.  The clinic administrator who worked with me when I first arrived at Villanova would call the clients each year to provide a reminder.  The IRS will give taxpayers a second chance, at least that has been my experience, by notifying them of a failure to file or pay and giving a short curative period.  Such a period is not required by the terms of the offer but does put the clinic, if not the client, into high alert mode to try to fix the problem.  Our clinic has had individuals who fell off the wagon and either lost their offer or worked with us to scramble and cure the default.

Future compliance is one of the reasons the IRS enters into OICs.  Getting people back in the system of timely filing their returns and timely making payments provides the incentive for the IRS to write down the past due liabilities.  The taxpayers’ arguments here essentially attacked the core of the OIC contract.  They failed at the Tax Court and the 5th Circuit, but their failure provides instruction that the courts read the contract in the same manner as practitioners who work with the OIC agreement every day.