Search Results for: 6201

Proving a Negative – The Use of IRC 6201(d)

It has only been a short period of time since I wrote about IRC 6201(d) in a post about cash for keys but I return to it as we enter the filing season for a couple of reasons.  First, I have observed the importance of 6201(d) on a high percentage of the pro se cases heading to litigation in the Tax Court and second, a relatively easy fix at a lower level seems possible.


On the Tuesday after Christmas I drove one of my sons back to DC from Richmond.  He works only a few blocks from the Tax Court.  After dropping him off, I spent the day in the Tax Court clerk’s office looking up the cases on two Tax Court calendars scheduled for Boston this spring so that I could identify cases I thought would benefit from the services of a clinic and personally reach out to those individuals.  Both the Tax Court and the Boston Chief Counsel’s office send notices to pro se taxpayers informing them of the existence of the potential for free legal services for pro se petitioners seeking to have their case heard in Boston; however, I find that the number of petitioners who respond to these notices is quite low.  I wanted to obtain data about their cases that would allow me to send them a personal letter from the clinic that addressed their specific tax problem to ascertain if that approach would increase the number of individuals who sought the services of our clinic.  Because the information about a Tax Court case is public, including the petition and the notice of deficiency which provide the taxpayer’s address, phone number and the issues in the case, obtaining the data in order to pursue the study proved no problem as long as I was willing to travel to DC to the Tax Court clerk’s office and look at the information there.

I provide this background because spending the day looking at all of the cases on a Tax Court calendar allows you to see how the IRS spends its resources.  Tax Court cases directly correlate to audit activity.  Some years ago when I fought a losing battle with the examination division in Richmond over the need to provide better descriptions in notices of deficiency, the data showed that only 3% of notices resulted in a Tax Court petition.  I doubt the percentage has changed much over the years.  That low percentage fostered the belief of the examination manager that spending extra time to provide a better description of the issue did not make sense.  Time has proven him correct and cases like QinetiQ support the decision of the IRS not to devote excessive energy to making the notice something which carefully details the issues; however, I began my time representing the IRS when review staffs reviewed every notice of deficiency and insured that they met certain standards.  Losing the high standards of hand-crafted notices provides an example of the same type of progress that exists in many other fields of endeavor where mass production overtook the more expensive means of producing a product.  Still, the loss of the hand-crafted notice still hurts if you had grown accustomed to a better product.

In my review of pro se cases on both a small and regular calendar, I expected a relatively heavy dose of earned income tax credit (EITC) cases since the IRS audit numbers for that type of case has held steady at relatively high numbers for many years.  To my surprise, I found far fewer EITC cases than anticipated.  Instead, I found far more cases involving taxpayers petitioning because they did not agree that the Form 1099 issued to them correctly reported their income.  Finding Form 1099 cases did not surprise me but the percentage did.  The percentage suggested to me that cases coming out of the automated underreporter unit (AUR) of the IRS where the IRS computer matches the data on the return with the date coming in from third parties has become perhaps the most common type of “examination” that the IRS performs and results in the most common type of Tax Court case for pro se individuals.

The current IRS strategy when the information on a return does not match the third party reporting information on a Form 1099 is to have the AUR unit send the taxpayer a letter informing the taxpayer of the mismatch and instructing the taxpayer to sign the consent form agreeing to an additional assessment based on the third party data or to provide the IRS with proof of the incorrectness of the data.  For the majority of taxpayers receiving this notice, the third party data probably correctly states the tax character of a source of income that the taxpayer either left off the return or reported in a manner that masked the income from the view of the computer.  In these cases, resolving the discrepancy proves relatively simple.

For a smaller percentage but still a high raw number, the taxpayer truly disagrees with the information on the Form 1099.  The disagreement could take several forms.  In the Bobo case blogged recently, the disagreement centered on the characterization of the income and not the amount.  Sometimes, the disagreement focuses on the amount reported and sometimes on the very existence of the transaction as it relates to the taxpayer.  In the clinic we regularly have clients who dispute correctness of the existence of the Form 1099 usually because the client became the victim of identity theft.  For these individuals, the position in the IRS letter essentially requests that they prove a negative.  We also have clients in the clinic who deny the correctness of a Form 1099 only to have an “ah ha” moment when additional data supports its correctness.  I do not mean to suggest that taxpayers always know the correct answer regarding Form 1099 or that the IRS should stop questioning them; however, a better way of resolving these cases may exist.  The current system seems to push too many down the road where higher resolution costs exist.

In response to the recent post, frequent commenter Bob Kamman suggested the following:

A successful strategy at the return-filing stage would involve IRS providing a disclosure form for taxpayers to dispute a 1099. IRS would then be required to include with Notices CP-2000 an admission that the dispute had been reviewed and either is rejected, or requires further information. This, of course, requires more resources at the first contact level, where it is so much easier to kick the problem up to a higher pay grade.

This suggestion provides a good option for resolving the issue at the lowest level and for providing the person preparing the return with an easy way to flag the problem with the Form 1099.  It would keep return preparers from forcing the data onto the return in an effort to save the taxpayer the grief of AUR correspondence and clearly alert the IRS to the problem with the Form 1099.  Taxpayers often have little or no leverage over the issuer of the Form 1099 and cannot get the person issuing the form to fix it or, in some cases, to even provide an explanation of the basis for issuing it.  Of course, in those instances in which a third party victimizes both the taxpayer and the issuer through identity theft, neither the taxpayer nor the issuer may have the facts necessary to understand what has happened.  The IRS has a better chance of getting information from the issuer of a Form 1099 than the taxpayer and could write regulations requiring the issuer to provide the backup data to the IRS upon request.

Assuming that the IRS does not leap to accept Bob’s suggestion and adopt a process that would seek to resolve the disputed Forms 1099 at the earliest stage, what should you do when trying to prove the negative?  This is where IRC 6201(d) comes into play and where a qualified offer can provide a benefit.  Section 6201(d) provides:

(d)Required reasonable verification of information returns

In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary under subpart B or C of part III of subchapter A of chapter 61 by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.

One of the problems with 6201(d) concerns its focus on court proceedings, but knowing that the burden of production will shift at the court level should provide the IRS with adequate incentive to appropriate the burden of production into its administrative process.  When contesting the Form 1099 which the taxpayer states is wrong, the taxpayer must bring this to the attention of the IRS during the audit phase of the case.  If the taxpayer knows nothing about the Form 1099, as will frequently occur in an identity theft context, the taxpayer will have nothing to give to the IRS about the circumstance except the statement that they know nothing.  That statement should spur the IRS to seek data from the issuer.

If the case passes the stage of the 30-day letter and if the taxpayer expresses confidence in the incorrectness of the Form 1099, the case becomes a good one for the issuance of a qualified offer.  The qualified offer will give the IRS a relatively short period of time to gather data from the third party and make a decision whether to continue forward with the matter in a situation in which it will face potential attorney’s fees if it cannot meet its burden of production.  The failure to resolve Form 1099 disputes at the initial stages of return processing can put an expensive burden on taxpayers who become caught up in the controversy system.  If the IRS does not decide to create a verification system to help avoid legitimate contests regarding the correctness of Form 1099, taxpayers should utilize IRC 6201(d) to set the case up for a shift in the burden of production at the court stage and utilize the qualified offer process to provide incentives for the IRS to get the data from the third party as quickly as possible.





Making the IRS Answer to Taxpayers…By Making the IRS Answer

Teachers will sometimes say there is no such thing as a bad (or “stupid”) question. I’d say the jury is out on that one.

Everyone, however, can agree that there is such a thing as a bad answer (see Keith’s recent post here). My next few posts will detail a particular kind of “bad answer” and propose ways of addressing it. Specifically, I will address IRS “answers” in Tax Court that appear to put absolutely no effort into investigating the facts alleged before denying them all “for lack of sufficient information.”


When my students draft a petition, it goes through multiple rounds of revision and mark-up, even on the very straightforward cases. Apart from making sure our “facts” are not just legal conclusions, I stress US Tax Court Rule 33 and its requirement to make a “reasonable inquiry.”

So it is, shall we say, a poor learning experience for my students to spend so much time on a petition only to have a pro-forma and frankly worthless answer filed in response. It has become something of a running joke in my Clinic when describing the process to clients: “we’ll file the petition, and in about 60 days the IRS will answer saying they deny literally everything because they don’t have sufficient information. The case will then sit for about five or six months until, maybe, Appeals looks at it. The wheels of tax justice grind slowly.”

But recently, I’ve been inspired to say, “no more!” I credit this inspiration to a student that has spent the better part of this academic year wondering why one of her cases still hasn’t settled, despite the obvious merits if only someone would look for a moment at the facts. (It is an instance of the IRS proposing “zero basis” on stock sales from an Automated Under-Reporter (AUR) Exam…)

I no longer have the heart to tell her, “This is simply the way things go in the tax world.” Because it need not be this way… and the administrative file may be one step towards salvation.

The Answer and the Administrative File

From time to time, I’ve gotten the feeling that the IRS has just ignored information in the administrative file when writing their answers. This is especially the case when I allege something like “the IRS issued a CP2000 Notice on [date]…” and the IRS denies for lack of sufficient information. I got to wondering whether there were any cases that looked at the importance of the administrative file during the pleading stages of litigation.

In my brief research, a case that caught my eye was Vermouth v. C.I.R., 88 T.C. 1488 (1987). Note that it is a precedential opinion.

Most of the events of Vermouth take place in the mid-1980s. For context, at the end of the 1985 fiscal year (9/30/85), I was a few months old. More relevantly, at that time the Tax Court had 72,836 cases pending. The tax shelter sweepstakes of the time undoubtedly kept IRS Counsel busy for the same 14 hours a day I spent sleeping.

And so, with that backdrop, it would not be unreasonable for IRS Counsel to move for additional time to file an answer. So it was in the case of Vermouth, where IRS Counsel had yet to receive the administrative file by the close of the first 60 days after being served with the petition. Both parties and the Tax Court agreed to give IRS Counsel another 60 days to file the answer – a third of a year from the date of being served the petition, for those keeping count.

At the end of those 120 days, however, the petitioner (and Tax Court) were no longer so amenable. Again, IRS Counsel moved for an extension to file an answer on the grounds that they still did not have the administrative file. But this time petitioner’s counsel objected, seeking sanctions.

You may be tempted to ask why it was so important to IRS Counsel that they had the administrative file in the first place. Frequently we receive answers to our petitions where counsel doesn’t yet have the administrative file. Why didn’t they just follow the common practice of “denying for lack of sufficient information?” Was it just a particularly diligent attorney?

In this case it was because the IRS had alleged an addition to tax for fraud, for which the IRS had the burden of proof. (More on that later.) You can’t deny for lack of information something that you have to affirmatively allege facts about to begin with. As Tax Court Rule 36(b) makes clear, the IRS has to provide a “clear and concise statement of every ground, together with the facts in support thereof on which the Commissioner relies and has the burden of proof.”

In Vermouth, petitioner argued that IRS Counsel couldn’t properly allege the facts it needed to support fraud, and it shouldn’t be given 180 days to do so. The Tax Court agreed and precluded the IRS from raising the issue. In other words, petitioner won on a significant issue at the answer stage. Imagine that.

Importantly, the Tax Court found that it wasn’t enough that the IRS Counsel had “asked” (apparently multiple times) for the administrative file from IRS Appeals. Diligence required more, especially as the second extension deadline neared. The money-phrase was that respondent wouldn’t be let off the hook for “bureaucratic inertia.” IRS Counsel can’t just say “I’ve asked IRS Appeals… not my fault they haven’t responded.” A bit more diligence is required. I wonder if that still applies today…

Lessons and Broader Applicability: Burden Shifts

Ok, great. Where the IRS delays in filing an answer, you might be able to get some sanctions. But what does that have to do with the IRS filing bad answers on time?

A lot, I think. But first let me talk about where it probably doesn’t help.

The general rule is that the petitioner has the burden of proof (see Tax Court Rule 142(a)(1)). Furthermore, the notice of deficiency is presumed to be correct (see Welch v. Helvering, 290 U.S. 111 (1933)). However, the burden can shift (and the presumption of correctness can be removed) where the IRS engages in a “naked” assessment (see Prof. Camp’s article here). Though likely rare in most deficiency cases outside of the penalty context, if and when the burden is properly on the IRS a “bad” answer can result in a finding of no deficiency. See, for example, C.I.R. v. Licavoli, 252 F.2d 268 (6th Cir., 1958). These cases, however, are fairly rare.

Note that the Vermouth case was decided in 1987. This predates IRC § 7491, which was enacted in 1998 and shifts the burden of proof for certain issues where the taxpayer has introduced credible evidence. However, if you look up cases referencing IRC § 7491(a), you will find a string of opinions saying, “the burden has not shifted to the IRS in this case.” This is for many reasons, including (1) taxpayers failing to actually allege that the burden has shifted, (2) taxpayers failing to maintain required records, and (3) taxpayers failing to fully cooperate with the IRS on the issue.

Most importantly, however, I am not so sure that the burden could shift under IRC § 7491 at the answer stage of litigation anyway… But that, perhaps, is still to be tested. The few cases I found where the burden did shift under IRC § 7491(a) appear to have happened after trial occurred (Murphy v. C.I.R, T.C. Memo. 2006-243 and Struck v. C.I.R., T.C. Memo. 2007-42).

Answers and the Burden of Production

Usually when I reference IRC § 7491 it is with regards to penalties (IRC § 7491(c)) since that provision automatically shifts the burden without requiring the taxpayer to introduce evidence first. This would seem to present a gold-mine to petitioners arguing against “bad answers,” since there are so many IRC § 6662 penalties asserted on the Notice of Deficiency that just go forgotten on the answer. However, the burden shift for penalties is on the burden of production, not on the burden of proof.

Arguably (I am happy to be second-guessed on this), this means that IRS Counsel does not need to affirmatively plead facts in their answer on burden of production issues, since Rule 36(b) only requires pleading specific facts where the IRS has the burden of proof. The oft-cited penalty case of Higbee v. C.I.R., 116 T.C. 438 (2001), provides an explanation of the difference between the burden of production and the burden of proof and why it might matter.

In Higbee, Judge Vasquez clearly sees a difference between the two burdens. First, Judge Vasquez describes IRC § 7491(c) as placing “only the burden of production” (emphasis added) on the IRS with regards to penalties. Judge Vasquez further reasons that Congress intentionally decided not to place the more general “burden of proof” on the IRS in choosing the “burden of production” language. All the IRS needs to do is put forth some evidence supporting the penalty: the taxpayer still needs to persuade the Tax Court that the penalty is wrong. There are simply different considerations at play for burden of production vs. burden of proof issues. If the IRS has the burden of proof it makes sense that they should have to lay out (with some specificity) the facts they are relying on because the opposing party could prevail solely by responding to those facts – that is, by holding persuasion in equipoise. Not so if the IRS only has the burden of production.

(At least, that is my argument for why there is a meaningful difference. I welcome other’s thoughts.)

Note that the same is arguably true for contested information returns under IRC § 6201(d). That section provides that the IRS will have the “burden of producing reasonable and probative information” pertaining to the deficiency, beyond just the information return it was premised on. That sounds a lot like burden of production at play, rather than burden of proof.

Lessons and Broader Applicability: The Primacy of the Administrative File

Perhaps more important than burden shifting provisions are cases where the administrative file is or will be directly at issue before the Tax Court. I deal with this most often in IRC § 6330 Collection Due Process cases (residing in Minnesota, I am in a “Robinette/Record Rule” jurisdiction). But the administrative file is also critical in Whistleblower cases (see post here) and, more recently under IRC § 6015(e)(7) innocent spouse cases (see post here). These are the sorts of cases where you are likely to raise facts in your petition that refer to or are contained in the administrative file. Unlike deficiency cases, where the administrative file is mostly useful for penalty issues, collection cases put the administrative file front-and-center for the merits.

In collection cases where you raise facts contained in the administrative file in your petition it isn’t “burden-shift” that should require a more detailed answer from IRS Counsel. Rather, instead of Tax Court Rule 36 doing the legwork, we shift to Tax Court Rule 33 and the requirement that the IRS “reasonably inquire” before signing a pleading.

In my next post I’ll go into depth on why.

IRS Pronouncements on Representative Capacity, Restitution Assessments and E-Signatures

A few IRS documents, two of which are internal facing and two of which are public facing, deserve mention.  The internal facing documents are copies of advice from Chief Counsel National Office to a field office.  This type of advice is advice that Chief Counsel’s office must make public but that does not bind the agency.  The field attorneys, who might see an issue once in their career, regularly seek advice from the National Office where a subject matter expert might regularly come across the issue.


Representative Capacity

The first advisory opinion appears related to a Tax Court case and the concern of the field attorney whether the person who filed the petition on behalf of an estate has the capacity to do so.  The advice was rendered on August 6, 2021 in CCA 2021080609223250 and provides:

We have reviewed this matter, as well as received the input of our colleagues in Branch 4. Our conclusion is that the best course of action here is to have the * * * appointed by a Florida court as the estate’s personal representative. I am attaching here a CCA that was brought to my attention by Branch 4 with some similarities to the present fact pattern.

As you noted in your initial analysis, the rules of the Tax Court provide that the capacity of a fiduciary or other representative to litigate is determined in accordance with the law of the jurisdiction at issue, in this case Florida. In keeping with PA policy, we defer to your own interpretation of the substance of Florida law. Given your conclusion that there are likely no provisions of Florida law authorizing a trustee to act in this manner, and given Branch 4’s conclusion that when an individual has not been appointed as the personal representative of the estate, Form 56 should be rejected absent authority under local law, attaining personal representative status from the Florida court would be the logical conclusion.

This issue regularly presents itself in estate cases if someone contests the tax liability without first getting appointed as the executor or personal representative of the estate.  The government looks carefully in any case that does not involve an individual bringing the case on their own behalf to make sure that the person instituting the proceeding has the capacity to do so.

Restitution Assessment

We have written several posts on various issues regarding restitution assessments.  The IRS can make an assessment prior to going through the deficiency procedures if the district court handling a criminal tax matter takes certain prescribed acts.  Here the National Office gives advice to the field office on July 21, 2021 in CCA 2021072113061244 that a restitution based assessment should not occur in a case because the district court failed to enter the type of order that would support such an assessment:

This is not an assessable order of restitution under section 6201(a)(4). While the court imposes upon the defendant a duty to pay taxes during the period of supervised release, the court does not specify a sum certain due as restitution to the United States. Courts often impose conditions of supervised release requiring a taxpayer to cooperate with the IRS or pay taxes, but we do not treat these as assessable orders of restitution unless a sum certain is imposed by the court. Here, no such amount is specified either in the court’s judgment, in the transcript of the sentencing hearing, or in any separate order of restitution. There is some discussion in the sentencing hearing transcript about restitution, but no sum certain is ever imposed as restitution against the defendant.

While short, the CCA does provide valuable information regarding the type of order in a criminal case that will not support a restitution based assessment.  This provides another reminder to look closely at the actions of the criminal court in reviewing the IRS administrative actions following prosecution.

Electronic Signatures

The pandemic has become the mother of invention in a number of areas including signatures.  Because of the difficulty and potential danger in requiring actual signatures on many documents, the IRS has created lists of documents on which it will accept electronic signatures.  On November 18, 2021, the IRS updated its list of documents on which it would accept an electronic signature.  The list approves electronic signatures through October 31, 2023 – maybe the IRS knows something about how long the pandemic will last.


Douglas W. O’Donnell
Deputy Commissioner for Services and Enforcement

Temporary Deviation from Handwritten Signature
Requirement for Limited List of Tax Forms

This memorandum revises the memorandum issued on April 15, 2021 (Control Number NHQ-10-0421-0002).

As part of our response to the COVID-19 situation, we have taken steps to protect employees, taxpayers and their representatives by minimizing the need for in-person contact. Taxpayer representatives have expressed concerns with securing handwritten signatures during these times for forms that are required to be filed or maintained on paper. To alleviate these concerns while promoting timely filing, we are implementing a deviation with this memorandum that allows taxpayers and representatives to use electronic or digital signatures1 when signing certain forms that currently require a handwritten signature. The forms to which this flexibility applies can be found in the attachment to this memo. Such forms must be signed and postmarked on August 28, 2020 or later. The attachment may be updated from time to time to either add or remove applicable forms as appropriate.


Form 11-C, Occupational Tax and Registration Return for Wagering;

Form 637, Application for Registration (For Certain Excise Tax Activities);

Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

Form 706-A, U.S. Additional Estate Tax Return;

Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions;

Form 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust;

Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations;

Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts;

Form 706 Schedule R-1, Generation Skipping Transfer Tax;

Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;

Form 730, Monthly Tax Return for Wagers;

Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons;

Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;

Form 1120-C, U.S. Income Tax Return for Cooperative Associations;

Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation;

Form 1120-H, U.S. Income Tax Return for Homeowners Associations;

Form 1120-IC DISC, Interest Charge Domestic International Sales — Corporation Return;

Form 1120-L, U.S. Life Insurance Company Income Tax Return;

Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;

Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;

Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;

Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;

Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);

Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;

Form 1128, Application to Adopt, Change or Retain a Tax Year;

Form 2678, Employer/Payer Appointment of Agent;

Form 3115, Application for Change in Accounting Method;

Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts;

Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner;

Form 4421, Declaration — Executor’s Commissions and Attorney’s Fees;

Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;

Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues;

Form 8038-G, Information Return for Tax-Exempt Governmental Bonds;

Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales;

Form 8283, Noncash Charitable Contributions;

Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms;

Form 8802, Application for U.S. Residency Certification;

Form 8832, Entity Classification Election;

Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent;

Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement; and Elections made pursuant to Internal Revenue Code section 83(b).


1Electronic and digital signatures appear in many forms when printed and may be created by many different technologies. No specific technology is required for this purpose during this temporary deviation.

I decided that copying the list of documents here was easier than sending you to a link.  It’s interesting what the IRS finds acceptable for an e-signature.  The memorandum does not provide an explanation of the criteria used for making the selection of forms.  This list relates to forms leading to a determination of liability. 

On the same date, the IRS issued a list of forms taxpayers can e-sign that relate to the collection of tax:


Douglas W. O’Donnell
Deputy Commissioner for Services and Enforcement

(1) Approval to accept images of signatures and digital signatures
(2) Approval to receive documents and transmit encrypted documents by email

This memorandum supersedes the April 15, 2021, memorandum (Control Number NHQ-01-0421-0001) to provide additional employee guidance and an extended expiration date.

In response to the COVID-19 situation and stakeholder requests, we are taking steps to protect employees and taxpayers while still delivering on our mission-critical functions. We are maximizing the ability to execute on critical duties in a remote working environment where employees, taxpayers and their representatives are working from alternate locations. In accordance with IRM, When Procedures Deviate from the IRM, this memorandum extends temporary deviations that allow IRS employees (1) to accept images of signatures and digital signatures on documents related to the determination or collection of tax liability and (2) to send or receive documents to or from taxpayers using email with encrypted attachments when no other approved electronic alternative is available. These deviations apply to any statement or form traditionally exchanged between IRS personnel and taxpayers during a compliance interaction outside of standard filing procedures. Refer to Attachment 1, Procedures, for additional guidance.

This memorandum is effective upon issuance through October 31, 2023. The signature and email exceptions permitted under this memorandum do not establish a precedent for acceptable use of alternative signatures or email in other circumstances.

The collection forms impacted by this notice are described as follows:

This guidance covers interactions between IRS employees and taxpayers related to the determination or collection of tax liability (“compliance interactions”). The scope of documents affected include any statement or form traditionally exchanged between IRS personnel and taxpayers during a compliance interaction and outside of standard filing procedures, including but not limited to:

Document CategoryExamples
Extensions of statute of limitations on assessment or collectionForms 872 and 921 series, Forms 900, 952, 977, 2750, 4016, SS-10
Waivers of statutory notices of deficiency and consents to assessmentForms 870, 890, 2504, 4089-B, 4549, 5564-A, 13449
Agreements to specific tax matters or tax liabilities (closing agreements)Forms 866, 906, 14490, 14491, 14492
Prior-year (delinquent) tax returns secured through an examination or collection interaction   Caution: Returns which are not yet due to be filed, including extensions, should be filed in accordance with the instructions for the respective form.Forms 940/941, 1040, 1120, 1065  
Other statements or forms needing the signature of a taxpayer or representative traditionally collected outside of standard filing proceduresForms 433-A/B/D, 2159, 2297, 3363, 4669, 4670, 8626, 12153  
Other statements or documents relevant to development of a case, not limited to IRS forms or signed documents 

So You Want to Raise an IRC § 7602(e) Issue…

Previously, I wrote about why it is IRC § 7602(e) wouldn’t keep the IRS from using information returns from banks to audit taxpayers. Let’s now suppose my analysis from the prior post is completely and entirely wrong and the IRS can’t use information returns in the way I suggest. What happens if the IRS still does?

“Well, they’d be violating the law,” you (and my idealistic students) say.

Yes, they would be. But what are the consequences? How would that ever come before a court? And perhaps more importantly, what remedies would individual taxpayers have that are caught up in this process?

Not much, I’d suggest. Let me explain why…

Apologies for making you click the “read more” button and then abruptly pausing, but I think some important context needs to be laid before going further. To wit, I want to emphasize two important points:

First, I strongly believe that the IRS wouldn’t actually be violating IRC § 7602(e) by using information returns from banks in the ways they are most likely to actually use the data. At the very least, I strongly believe that the IRS would have a strong argument that they were not violating IRC § 7602(e) in most cases.

Second, I do not believe for a moment that the IRS would knowingly violate IRC § 7602(e) as a matter of policy if they believed it did constrain them vis a vis bank information returns. In other words, while individual employees might violate IRC § 7602(e), I fully trust the IRS to set official policies that would abide by the law in determining how to use any bank information returns that come their way.

I don’t make these points just to score some sympathy with the government readers of the blog. I make them because I believe them, and because they are important for understanding the substantive analysis that follows. Even when and if a wayward IRS employee were to violate IRC § 7602(e) the remedies of the taxpayer are extremely limited.

Avenues of Argument: Where to Raise IRC § 7602(e) Concerns

When Prof. Breen wrote his PT post (here) about IRC § 7602(e) he remarked that it did not appear practitioners were raising IRC § 7602(e) issues very often. Prof. Breen found only one Tax Court opinion that cross-referenced IRC § 7602(e), and that particular case found the statute inapplicable. Prof. Breen’s post was published back in October 2016. How much has changed in the past half-decade?

Not much.

There is still only one Tax Court opinion that I found referencing IRC § 7602(e) -the very one Prof. Breen referred to. However, in expanding my search to include opinions in other federal courts the number of opinions referencing IRC § 7602(e) skyrocketed to… nine. Well, eight if you want to look at separate cases. Actually, more like six if you also filter out the absolute nonsense arguments (tax protestors and family law cases).

So in 23 years we’ve had about six cases where IRC § 7602(e) has been raised and a court has given an opinion on its application. And of those six cases the court has found the IRS in violation of IRC § 7602(e)… zero times. In fact, I can’t find a single opinion where IRC § 7602(e) has played a role in yielding an IRS-averse outcome.

It should be noted here, very importantly, that this doesn’t mean that IRC § 7602(e) is meaningless. Indeed, there could be a trove of court orders (rather than opinions) where IRC § 7602(e) comes into play. Similarly, it could be that IRC § 7602(e) comes into play in administrative and behind-the-scenes posturing between the IRS and taxpayers, none of which gets reported on Westlaw. Lastly, and again importantly, IRC § 7602(e) did have a change on IRS policy.

Indeed, an optimist could say “we don’t see IRC § 7602(e) issues in court because the IRS follows it in the first place.” I’ll genuinely reserve judgment on that, since I rarely deal with financial status audits (I can think of once in my career where they’ve come up). But let’s assume we were to see a massive increase in IRC § 7602(e) violations spurred by new bank reporting requirements. How can taxpayers fight against this abuse?

As far as I can tell, there would be three likely ways to get into court and argue that the IRS’s use of bank reporting violated IRC § 7602(e): (1) moving to quash a summons, (2) deficiency proceedings, and (3) collection due process hearings. Let’s take each in turn.

Motion to Quash a Summons

The most straightforward and appropriate way to challenge a perceived IRC § 7602(e) abuse is while the IRS examination is still on-going. Unfortunately, there aren’t a lot of ways to get into a federal court (and virtually no way to get into Tax Court) before the IRS has actually determined a deficiency. However, if you stonewall the IRS requests for information in audit long enough you just might get your wish when the IRS stops playing around and issues a summons.

Indeed, bringing suit against summons appears to be the most natural way to enforce IRC § 7602(e). In the words of one court:

[We] can find no precedent indicating citizens can bring a cause of action against the United States to enforce this section [IRC § 7602(e)], and the statute itself provides no waiver of sovereign immunity. Instead, the context in which this section typically arises is a suit by the IRS to enforce a summons issued under 26 U.S.C. § 7602 or a suit by a taxpayer to quash such a summons.

Mortland v. I.R.S., 2003 WL 21791249, at *3 (W.D. Tex. June 24, 2003)

There is a fairly obvious problem with bringing a suit to quash a summons as it relates to a bank information return. Namely, that the bank information return would not be issued pursuant to a summons. Presumably, the taxpayer argument would be that the (later) summons stems from an inappropriately initiated examination -i.e. one where the IRS is using financial status audit techniques without first having a reasonable indication that you have unreported income. The problem is that the bank information return is prior to the summons and (presumably) would give the IRS exactly the “reasonable indication” it needs. Again, as I raised in my first post, contrary to the Forbes/Brookings article’s contentions, the increased bank reporting would actually reduce the scope of IRC § 7602(e) rather than the other way around.

The horse has left the barn by the time you’re trying to quash a summons based on a bank information return. You’re out of luck in challenging the legality of the information return in this venue, since the only thing at issue is the summons itself. If you want to challenge the information returns prior to the summons you are going to run into the two-headed hydra of sovereign immunity and the Anti-Injunction Act.

Furthermore, the track record of the arguments on quashing summons on IRC § 7602(e) is… not great. At least in the opinions I found. Again, there could be a million court orders out there where the summonses are indeed quashed, and which have flown under the radar of my search (which only covers opinions). But the opinions that can be found on Westlaw don’t paint an optimistic picture for taxpayers. Of the cases I reviewed, literally none of them resulted in a quashed summons and all of them supported my contention that increased bank reporting would actually neuter IRC § 7602(e) arguments.

Many of the cases raising IRC § 7602(e) arguments failed on procedural grounds such that the court didn’t even need to reach the merits. Nonetheless, the courts made a point of saying that “even if they would have” considered the merits, the taxpayers would have lost because the IRS had a reasonable indication of unreported income allowing such financial status exams in the first place. Examples for the requisite reasonable indication of unreported income included:

(1) a tip from someone to the IRS about unreported income (United States v. Abramson-Schmeiler, 2010 WL 11537887 (D. Colo. Oct. 14, 2010));

(2) previous bank records sent by the taxpayer being mysteriously incomplete (Chapin v. IRS); and

(3) tax protestors sending a letter to the IRS declaring they “removing themselves from the income tax system.” (Billheimer v. United States, 2003 WL 22284193 (S.D. Ohio July 31, 2003) It is hard to imagine that the additional information provided to the IRS by bank information reporting would make it harder for them to meet the “reasonable indication” standard.

It is hard to imagine that the additional information provided to the IRS by bank information reporting would make it harder for them to meet the “reasonable indication” standard.

I suppose one could make a long-shot argument that the IRS can’t summons for bank account records under Powell because, if the bank information returns show inflows and outflows, the IRS already has the information requested in the summons. But that argument is pretty much self-defeating. If the banks are really going to be reporting so much information that the actual bank account statements are superfluous I don’t think the IRS is going to waste time issuing summonses for the records. More likely, the information will give a “suggestion” of unreported income (again, ruining IRC § 7602(e) arguments) which could be augmented by a fuller picture of the bank accounts at issue.

The verdict? Challenging a summons isn’t the way to contest the legality of any new bank information reporting requirement. On to the next potential argument…

Raising IRC § 7602(e) Concerns in a Deficiency Proceeding

Generally speaking, if you’re raising concerns about the audit process to the Tax Court you are setting yourself up for failure. The role of the Tax Court is to determine the deficiency, which it does on a de novo review. If you’re arguing about the way you were treated in the steps leading to the notice of deficiency you will get, at absolute best, a “Sorry, but we’re a court of limited jurisdiction” response from the Tax Court. You will also likely get a citation to Greenberg’s Express.

There are, however, some instances where the processes leading to the notice of deficiency matter. And those instances just so happen to be those that involve unreported income and financial status (or “indirect proof”) methods of audit. If you can show that the IRS didn’t really do its homework in determining unreported income, you can remove the “presumption of correctness” that usually attaches to a notice of deficiency determination. Professor Camp has an excellent post on these so-called “naked assessments” which can be found here.

If all the IRS did was look at the information report from the bank and then, without anything more, said “looks like [x] amount of unreported income to me,” there could be an argument that the deficiency determination was a naked assessment unworthy of the cloak of “correctness” that it is usually clothed in. If the IRS didn’t do literally anything other than take the information return at face value, I think that would render it naked. How far of an investigation beyond “nothing at all” that the IRS would need to take, however, is debatable. Note, however, that such a determination would at least appear to violate the IRS’s understanding of IRC § 7602(e) as reflected in the memo I cited to in my previous post.

There also is a twist here, since the information return might (but might not) implicate IRC § 6201(d). There are too many unknowns as to whether the actual information returns from the bank would implicate IRC § 6201(d), both because it might not really be considered an “item of income” and because Congress could put the reporting requirements from banks somewhere other than “under subpart B or C of part III of subchapter A of chapter 61” (i.e. the returns that IRC § 6201(d) covers). However, if the information return does fall under the purview of that section, by putting the information return at issue you could shift the burden of proof to the IRS.

The verdict on arguing against bank information returns in a deficiency proceeding is… maybe. But you may have noticed that I didn’t actually use IRC § 7602(e) in any of my analysis above. That’s because I think it likely would be irrelevant to the Tax Court, even if violated. There are no cases that have found that an IRC § 7602(e) violation would ruin the presumption of correctness, or otherwise have any effect on the deficiency proceeding. I fairly doubt the Tax Court has an appetite for creating any such rule.

IRC § 7602(e) and Collection Due Process

Lastly, we have Collection Due Process jurisdiction. This is the most convoluted route to raising IRC § 7602(e) arguments, but in some ways the best venue for its success. This is because it is the only venue where you have the court empowered to review IRS conduct -something largely absent from deficiency proceedings. The IRS failing to conduct itself in accordance with the law is certainly something the Tax Court would care about in a CDP hearing. The question is how a fundamentally examination issue could ever come up in what is (typically) a collection venue.

I have strained to think of the ways in which you could raise examination issues in a CDP hearing. I have failed. The best argument I can think of is admittedly strained, but I’ll put it out there for those aspiring to make a name for themselves with creative arguments.

As part of a CDP hearing, IRS Appeals is required to verify that “the requirements of any applicable law or administrative procedure have been met.” IRC § 6330(c)(1). Might a taxpayer raise the issue that the audit leading to the deficiency (now in collection) did not meet the applicable law?


But even if they showed such a violation why would it matter and what could the Tax Court do? Again, we run headlong into the issue of remedy, which was the whole impetus for my writing this post. If the relief you’re asking for is the Tax Court to invalidate the assessment… well, I wish you luck. And if you’re not asking the Tax Court to invalidate the assessment, what exactly would you be asking for? A chance to argue the underlying tax anew? Unless you meet one of the Tax Court’s unduly narrow avenues for raising that issue (covered here and here, among others) I doubt they’ll create a new one not directly linked to existing statutory language. Perhaps if you do meet the requirements to raise the underlying liability you could argue for a burden shift in a similar way to the “naked assessments” argument detailed above. However, since I’m doubtful that the IRS will rely solely on bank information returns for omitted income cases, I am doubtful this tactic would get very far.

The verdict on prevailing on IRC § 7602(e) issues in CDP hearings… highly unlikely.

And so the individual taxpayer is largely without recourse when and if that code section was ever violated by the IRS using these new-fangled bank information reports. I didn’t discuss but likewise doubt that any Administrative Procedure Act style argument would prevail, though I am open to being second-guessed on that. To the extent that recent cases have chipped a bit off of the Anti-Injunction Act, I believe more than enough remains to preclude suits based solely on IRS examination tactics.

Jeopardy Assessments

Jeopardy assessments are relatively unusual and have not been heavily covered on PT, with the exception of the District Court and Tax Court cases of former Pennsylvania state Senator Vincent J. Fumo. I first wrote about the government’s attempted jeopardy assessment against Mr. Fumo early in the life of this blog, here and here, with the second link containing links to even earlier discussions of the case and of jeopardy assessment.  Caleb Smith wrote a more recent post about the case.  Mr. Fumo is a former powerful state senator in Pennsylvania who was convicted of abusing his position and spent time in prison as a result.  His tax liability relates to his use and alleged abuse of a tax exempt organization for personal gain.  In May 2021, only eight years after the filing of the Tax Court petition following the denial of a jeopardy assessment against him, the Tax Court granted partial summary judgment to the IRS, leaving the balance of the issues to be decided after a trial to be held at a future date.  This is not the normal time trajectory for a jeopardy assessment case.  The blog posts above provide background regarding the denial of the jeopardy assessment. 

A recent jeopardy decision in the case of Kalkhoven v. United States, No. 2:21-cv-01440 provides a much more normal case for taking another look at jeopardy assessment for those readers who did not follow PT in 2013 when I provided an earlier explanation of the provision.


Jeopardy stands as an exception to the normal path of making an assessment. The IRS’s authority to make assessments is set out in the Code. In our income tax system, described as a self-assessment system, the vast majority of assessments made by the IRS result from the filing of a tax return on which the taxpayer tells the IRS the amount of tax owed and grants permission thereby for the IRS to make the assessment. IRC section 6201(a)(1).

In cases in which the IRS challenges the amount of tax reported on the return, the person auditing the return seeks the taxpayer’s permission to assess additional tax by asking the taxpayer to sign a form consenting to an additional assessment.  If the taxpayer does not consent to the additional assessment, the statute provides for the IRS to send a notice of deficiency giving the taxpayer the chance to contest the additional taxes prior to assessment, resulting in statutory permission for the IRS to make the additional assessment either because of default of the taxpayer in petitioning the Tax Court or a Tax Court decision document entered after settlement or judicial opinion.  (Math error assessments are another part of this path to assessment; they involve consent by default or the opportunity for a notice of deficiency.) See IRC sections 6212 and 6213.

Standing outside this normal path to assessment is jeopardy assessment.  Congress recognized that the ability of the IRS to assess additional taxes could take time.  It may not have envisioned the amount of time the Fumo case is taking, but it knew that the taxpayer could delay assessment by slowing down the audit and by going to Tax Court, and that the delay of assessment could create opportunities for dissipation of assets which would ultimately prevent the IRS from collecting the correct amount of tax.  So, in extraordinary circumstances, it permits the IRS to assess the additional income taxes (or other taxes subject to the deficiency procedure) first and only later give the taxpayer a chance to contest the correctness of the assessment. (See sections 6851, 6852, 6861, and 6862.) The IRS employed this procedure successfully in the Kalkhoven case.

Mr. Kalkhoven participated in tax shelters, held money in offshore accounts and controlled businesses that sold valuable real estate.  The IRS calculated he owed about $350 million in taxes, penalties, and interest.  As in the Fumo case, he brought suit in district court seeking a review of the jeopardy assessment.  This type of case is usually fast moving because the IRS has tied up the taxpayer’s assets without the normal formality of permission or a Tax Court case.

a taxpayer may seek judicial review of a jeopardy assessment. See id. § 7429(b)(1)(2) (“[T]he taxpayer may bring a civil action against the United States for a determination under this subsection — district courts of the United States shall have exclusive jurisdiction over any civil action for a determination under this subsection). The court’s review is de novo. Olbres, 837 F. Supp. at 21; Fumo v. United States, No. 13-3313, 2014 WL 2547797, at *16 (E.D. Pa. June 5, 2014) (“The district court’s review . . . gives the IRS’s administrative determination regarding the jeopardy assessment no deference whatsoever.”). The district court’s consideration is limited to determining only 1) whether the jeopardy assessment was reasonable under the circumstances, and 2) whether the amount assessed was appropriate. 26 U.S.C. § 7429(b)(3); Olbres, 837 F. Supp. at 21. The government bears the burden on the first issue, while the taxpayer bears the burden of proof on the second. 26 U.S.C. § 7429(g)(1)(2).

Mr. Kalkhoven did not challenge the amount of the assessment.  He only challenged the appropriateness of using the jeopardy process.  The court noted that the standard of reasonableness of the IRS actions requires it to show that collection might be jeopardized by a delay caused by using the normal procedures for assessment and collection and not that collection would actually be jeopardized.  It also noted that because of the nature of the proceeding it can hear information that might not come into evidence in a trial on the merits and that parties can present affidavits.  The object here is to have the court make a swift decision on the basic correctness of allowing the IRS to bypass the ordinary assessment and collection process.  (The taxpayer will still get the opportunity to go to Tax Court to contest the amount of the assessment, but the Tax Court’s review will be post-assessment and possibly post-collection.)  The district court must make this decision within 20 days after the suit contesting the jeopardy assessment is brought (unless the taxpayer requests an extension), and the decision of the district court, like the decision of the Tax Court in a small tax case proceeding, is final and not reviewable.

The court first addressed a jurisdictional issue raised by the IRS that Mr. Kalkhoven failed to exhaust administrative remedies prior to bringing the jeopardy action.  The IRS argued that he needed to make an administrative request to undo the jeopardy assessment before he could jump into court.  The court skirts the issue, finding that it has jurisdiction to decide if the jeopardy assessment was reasonable.  It points out that Mr. Kalkhoven did send correspondence to the IRS prior to bringing suit and did have a virtual conference with Appeals days before filing suit.  Perhaps the court did not want to fully address this issue because of the way it intended to rule in the case.  Holding against the taxpayer on this issue might allow an appeal and delay the process.  Courts have allowed an appeal of the denial of jurisdiction in this context.  The Tax Clinic at Harvard cited to the allowance of an appeal in this context, discussed here, in its failed attempt to appeal the denial of jurisdiction in the small tax case context.  The circumstances seem parallel.

In looking at the reasonableness of the IRS actions, the court noted that some disagreement among reviewing courts existed regarding reviewing for reasonableness or reviewing based on the preponderance of the evidence. It sided with the majority on this issue, reviewing for reasonableness.  Citing the Fumo decision at the district court, the court stated that it looks to see if one of three conditions exist:

(i) The taxpayer is or appears to be designing quickly to depart from the United States or to conceal himself or herself.

(ii) The taxpayer is or appears to be designing quickly to place his, her, or its property beyond the reach of the Government either by removing it from the United States, by concealing it, by dissipating it, or by transferring it to other persons.

(iii) The taxpayer’s financial solvency is or appears to be imperiled.

The court also noted that finding one of those three conditions does not serve as a precondition to sustaining the jeopardy assessment and that other actions by the taxpayer could also support a finding that the jeopardy assessment was reasonable:

“[p]ossession of, or dealing in, large amounts of cash,” “[p]ossession of . . . evidence of other illegal activities,” “[p]rior tax returns reporting little or no income despite the taxpayer’s possession of large amounts of cash,” “[d]issipation of assets through forfeiture, expenditures for attorneys’ fees, appearance bonds, and other expenses,” “[t]he lack of assets from which potential tax liability can be collected,” “[u]se of aliases,” “[f]ailure to supply appropriate financial information when requested,” and “[m]ultiple addresses”) (citations omitted)). Several courts have considered additional factors such as whether:

the taxpayer travels abroad frequently, . . . the taxpayer is leaving or may be expected to leave the country, . . . the taxpayer has recently conveyed real estate, . . . or discussed such conveyance, . . . the taxpayer controls bank accounts containing liquid funds, . . . the taxpayer has not supplied public agencies with appropriate forms or documents when requested to do so, . . . the taxpayer controls numerous business entities, . . . the taxpayer attempts to make sizable bank account withdrawals at the time of the assessment, . . . the taxpayer maintains foreign bank accounts, . . . the taxpayer takes large amounts of money offshore, . . . the taxpayer has many business entities which can be used to hide his assets.

Bean v. United States, 618 F. Supp. 652, 658 (N.D. Ga. 1985)

Here, the court finds that the IRS met the second test.  Mr. Kalkhoven argued that he was not removing his assets quickly.  I guess, without looking at his brief, that he argued he was doing so with all deliberate speed but not quickly.  The court found his actions to warrant concern by the IRS and support the reasonableness of its jeopardy assessment.  It then spent several paragraphs detailing his actions and how they appeared designed to place his assets beyond the reach of the IRS despite his large outstanding liability.  It contrasted Mr. Kalkhoven’s case with the Fumo case in a footnote:

Kalkhoven argues he disclosed the existence of all his assets on his tax returns and the fact of disclosure also renders the assessment unreasonable. However, it is unclear what underlying assets were disclosed. Gov. Suppl. Br at 4; compare Fumo, 2014 WL 2547797, at *21 (“Defendant knows the location and amount of the proceeds from [p]laintiff’s real estate sales. . . . Moreover, the IRS was able to trace the transfers using only public records, which does not tend to show an appearance of trying to hide assets from the government”). Although Kalkhoven may have disclosed the entities that hold certain assets “the mere disclosure of entity names does not negate the added complexity and collection difficulty that attends such schemes. To find otherwise would reward those who engage the most sophisticated advisors and encourage taxpayers to establish complex asset-holding schemes that they can disclose on the surface to escape potential jeopardy assessment or collection.”   

Certainly, the size of his liability also matters in a case like this, although the court does not expressly mention it.

In the Fumo case, the IRS lost the jeopardy hearing, throwing it into the “normal” deficiency process, though eight years into its Tax Court proceeding I am not sure that this would be called the normal process.  Whether normal or not, the deficiency process does not provide the IRS with the immediate opportunity to seize assets to satisfy a liability.  In essence, the district court in the Fumo case felt that the assets would still be around to satisfy the tax at the end of the deficiency process, where the district court in the Kalkhoven case was concerned that they would not.  This abbreviated proceeding takes on great significance when you contrast the difference in outcomes between the two cases and see the IRS standing on the sidelines unable to take any collection action against Mr. Fumo for almost a decade while it has immediately taken possession of Mr. Kalkhoven’s assets and has the green light to go after any others it can locate.

Imposing Penalties After Restitution Assessment

The recent case of Ervin v. Commissioner, T.C. Memo 2021-75 affirms the ability of the IRS to impose penalties after it makes a restitution assessment.  This case does not create precedent or cover new ground but does provide a reminder of how the restitution based assessments work.  We have previously written about restitution based assessments most of which are collected in this post.  TIGTA issued a report on restitution based assessments earlier this month which I plan to discuss in a future post.


Mr. Ervin and his wife owned a real estate management company in Alabama and apparently received cash payments for many of the properties.  They were indicted in 2011 not only on tax evasion, IRC 7201, but also on title 18 charges of conspiracy to defraud the United States and aiding and abetting.  The conspiracy charge appears to stem from their efforts to avoid reporting of cash deposits by structuring the deposits to keep them under $10,000.  A jury convicted them on most counts, including tax evasion, for the years 2004-2006. 

A couple of things are a little unusual about their criminal case.  First, they were convicted of evasion even though they did not file tax returns from 2000-2009.  Proving evasion based on non-filing can be difficult.  No doubt the structuring aspect of the case was crucial to this proof.  The second thing I found a bit unusual was the ten-year length of their sentence.  As we discussed in the post describing the sentence of former Tax Court Judge Kroupa, sentencing in tax cases primarily turns on the dollars lost to the government.  Here, the IRS could calculate the loss not only over the years of the conviction but the other years of non-filing causing a total of over $1.4 million.  Because they went to trial, the Ervins would not have received any positive points in the sentencing calculation for acceptance of responsibility.  This is a substantial sentence for a financial crime of this type but not necessarily an inappropriate sentence under the guidelines or otherwise.

In addition to the sentence of time in prison, the court ordered restitution to the government of $1,436,508 for the estimated tax loss to the government for the ten years of unfiled returns.  The IRS made restitution based assessments and actually collected the full amount of the liability; however, it did not stop there.  In 2014, it sent petitioner Monty Ervin two notices of deficiency – one for 2002-2004 and one for 2005-2007.  These notices were based on penalties, additions to tax, the IRS felt he owed for these tax years.  The IRS imposed four separate penalties, though not for each period.  The penalties were for failure to file, failure to pay, failure to pay estimated tax and fraudulent failure to file.  The penalties total another several hundred thousand dollars.

From prison Mr. Ervin contested the imposition of the penalties, making two arguments: 1) the IRS could not impose penalties after making the restitution based assessments and 2) the IRS had already determined he could not pay so it should not impose the penalties and make assessments in this situation. 

The Court provided a brief overview of the applicable law which foretells the outcome of the case:

Section 6201(a)(4)(A) provides that “[t]he Secretary shall assess and collect the amount of restitution * * * [ordered by a sentencing court] for failure to pay any tax imposed under this title in the same manner as if such amount were such tax.” The IRS may not make such an assessment until the defendant has exhausted all appeals and the restitution order has become final. See sec. 6201(a)(4)(B). The restrictions on assessment imposed by section 6213 do not apply to restitution-based assessments. See sec. 6213(b)(5). The IRS therefore is not required to send the taxpayer a notice of deficiency before making an assessment of this kind.

[*9] In Klein v. Commissioner, 149 T.C. 341, 362 (2017), we held that “additions to tax do not arise on amounts assessed under section 6201(a)(4).” That is because a defendant’s restitution obligation “is not a civil tax liability,” id. at 361, or a “tax required to be shown on a return,” ibid. (quoting section 6651(a)(3)). Rather, restitution is assessed “in the same manner as if such amount were such tax.” Sec. 6201(a)(4)(A) (emphasis added). But we explained that the IRS was not thereby disabled from collecting such sums. “If the IRS wishes to collect * * * additions to tax, it is free to commence a civil examination of * * * [the taxpayer’s] returns at any time.” Klein, 149 T.C. at 362.

The IRS properly followed that procedure here. It made the assessment after the restitution order became final. It subsequently commenced a civil examination of petitioner’s individual liabilities for 2002-2007 and prepared SFRs, allocating him a portion of the relevant income and deductions. See supra ap. 4-5. It then calculated additions to tax based on the deficiencies so determined.

While the Court’s explanation of the law signals the ability of the IRS to follow a restitution based assessment with proposed penalty assessments, the Court analyzed each proposed penalty to determine if the imposition of the penalty appropriately matched the facts of the case.  After finding that the IRS appropriately applied the penalties, the Court granted summary judgment.

Petitioner may never pay this amount, as collection from someone coming off of 10 years of incarceration will be extremely difficult, but the legal principle here follows from prior determinations of the manner in which restitution based assessments work.  The design seeks to allow the IRS to make an assessment of the core amount of the tax determined in the criminal proceeding without having to wait many years for the end of the tax merits process to come to a conclusion.  The way this case played out demonstrates the benefit to the IRS of the restitution based assessment.  The criminal case essentially ended with the sentencing in June of 2012.  Now it is nine years later before the Tax Court case ends.  Prior to the restitution based assessment provisions, the IRS would have had to sit on its hands regarding collection until the end of the Tax Court case which would have allowed it to assess.  By making the restitution based assessment shortly after the end of the criminal case, the IRS stands a much better chance of collecting, and here it appears to have collected all of the tax.  The delay caused by the deficiency process and six years in the Tax Court may make its chances to collect the penalty portion of the case difficult, but the core of the liability in this case was recovered.  That’s a victory for the process.

Is the IRC § 6428 “2020 Recovery Rebate” Really a Rebate?

In my previous post I challenged the conventional wisdom that the IRS cannot collect on EIPs – the “Economic Impact Payments” taxpayers received under IRC § 6428(f) in calendar year 2020. I argued that the provision in the law reducing your Recovery Rebate Credit (RCC) by the amount of EIP received (“but not below zero”) is irrelevant to the collection options of the EIP. Which by the way is a separate credit from the RCC altogether.

And millions of readers spit out their morning coffee in response to my blasphemy (I imagine).

With this post you may again want to set your coffee to the side. This time, instead of challenging conventional wisdom I challenge the very title of the code section itself: that is, whether IRC § 6428 really created a “2020 rebate” at all -at least as far as the EIP is concerned. I promise this is not merely an academic exercise: whether the EIP is a rebate (and for what year) matters profoundly in determining how the IRS could collect on erroneous payments. Since literally millions of these payments were issued, even a relatively small percentage of erroneous payments would yield a rather large absolute number of effected individuals. Further, newfound Congressional concern for the federal budget deficit and more narrowly targeting any future payments may presage an interest in collecting from those who shouldn’t have received the EIP in the first place. To roughly paraphrase former Senator Everett Dirksen, add a few million here and a few million there, and soon enough you’re talking about real money. 

read more…

The EIP As A Rebate

Without rehashing my prior post too much, the most important aspect of a “rebate” is that it falls into the definition of a “deficiency.” See IRC § 6211(a) and (b)(2). Accordingly, an erroneous rebate could be assessed through the deficiency procedures and collected via administrative lien and levy.

So what is a rebate?

On this point, the statute (and in my opinion, case law) is not particularly straight forward. The statute defines a rebate as “so much of an abatement, credit, refund, or other repayment, as was made on the ground that the tax […] was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made.” Let’s unpack that.

“so much of an abatement, credit, refund, or other repayment…” 

A rebate can be a lot of things: an abatement (that is administrative reduction of tax on the books), a credit, a refund, or just any other “repayment.” So basically any action that says you owe less, you owe nothing, or you get money back. But only in certain circumstances…

“made on the ground that the tax […] was less than the excess of…”

So the credit, refund, etc. has to result from a determination that the tax imposed is less than… something. Specifically:

the amount specified in subsection (a)(1) over the rebates previously made.

In the least helpful way imaginable, subsection (a)(1) is basically referring to the amount of tax shown on your return, plus any other amounts the IRS has already assessed. (And then of course, you have to subtract out any other rebates previously made… But that creates an infinite loop in our quest to define rebate, so we’ll ignore it for now.) Bringing it all together, this means a rebate is a payment etc. made because the tax imposed is actually less than the tax shown on the return plus any other amounts assessed.

In this definition the taxpayer really only has control over one thing: the tax as shown on the return. Every other part hinges on IRS action. At its simplest, it is the IRS determining that the right amount of tax is less than the taxpayer actually thought, thus culminating in a credit, refund, payment, etc.

But is that what’s happening with the EIP? Maybe. I think the step-by-step administration of the EIP can be conceptualized in different ways, but that there is a sync the actual disbursal of the EIP with the treatment of it as a 2019 rebate. Of course, I also think the statutory language (and proper tax administration) necessitates that the EIP be treated as applying to 2019 as a rebate.

EIP: A 2019 or 2020 Animal?

Consider if the EIP were a credit attributable to 2019 -as I’ve argued and as the statutory language seems to say. In that case, the IRS would reduce the amount of tax shown (or previously assessed) by the amount of EIP. This is an amount the which the taxpayer clearly did not claim (they couldn’t), so it is an adjustment by the IRS… Classic rebate.

It would result in a direct payment to the individual because it is refundable (treated as a “payment” under IRC § 6428(f)(1)) and, critically, it is completely free from being offset or reduced “by other assessed Federal taxes” under Sec. 2201(d) of the CARES Act (see Les’s post on the importance of that section here). Those “other assessed Federal taxes” being exactly the ones on the 2019 tax return that would otherwise cut into the check being sent out.

That is at least one way of conceptualizing the EIP that would result in it being subject to deficiency procedures… for 2019. But even if I think that’s how the statute is written, that might not be how the IRS is treating the EIP. The IRS appears to be using 2019 for EIP eligibility determinations but is treating the EIP as a 2020 credit (or payment, or…). My understanding is that IRS account transcripts verify this treatment.

But that doesn’t make it right. The closest thing to a court opinion on point (dealing with the nearly identical statutory language for the 2008 “recovery rebate credits”) strongly backs up the argument that any EIP payment is applicable to 2019.

As covered in Carl Smith’s posts here and here, we can look to the past (the 2008 “recovery rebate” credit, which were also codified at IRC § 6428) to better understand the present. The bill creating the 2008 recovery rebate credit was passed in early 2008, and the checks went out over the course of 2008 -much like the EIP, with 2020 replacing 2008. So we have basically identical circumstances for the credit’s issuance, as well as nearly identical statutory language (where relevant). What has the court said on which year the “advanced” refund applies to?

Here is the money quote from the 2nd Circuit: “the basic credit available under subsections (a) and (b) grants eligible taxpayers a refund applicable to the 2008 tax year, whereas the “advance refunds” available under subsection (g) grants eligible taxpayers a refund applicable to the 2007 tax year.” Sarmiento v. United States, 678 F.3d 147 (2d Cir. 2012). The 2nd Circuit goes on to disagree with the district court decision treating 2007 only as “measuring” how much credit someone should get, but 2008 as the year the payment actually applies to.

My thoughts exactly. Bringing it to the current iteration, IRC § 6428(f) does indeed measure how much EIP you should get based on 2019. But after measuring how much EIP you get based on 2019, the statute then applies the payment to that same tax year. You know, like a consistent statute would.  

Consider what it would mean if the EIP (IRC § 6428(f)) was applicable to 2020 instead. Under this conceptualization the IRS simply gave people a credit on their 2020 tax return and paid out the value of that credit in advance. 2019 only matters because it gave the IRS some indication of who would be eligible for the credit.

If the EIP is a 2020 credit that is merely measured by referenced to 2019 the deficiency procedures cannot apply to it. Literally no taxpayer “claimed” the EIP on their 2020 tax return, so it cannot possibly be a deficiency on the basis of the taxpayer showing the wrong amount of tax on their return. Further, the EIP wouldn’t meet the statutory definition of a rebate because it wouldn’t be issued based on an IRS determination that the amount of tax shown on the return (or otherwise assessed) was too much. There was no tax 2020 return or tax assessed at the time of the EIP, so there is nothing for the IRS to adjust in the first place. Crazier things have happened, but this would mean that the statute entitled “2020 Recovery rebates for individuals” did not actually pay out rebates in 2020 at all.

Let’s continue to investigate what happens if the EIP is applicable to 2020, and therefore is not a rebate. As far as collection goes, we know that it would not be subject to the deficiency procedures. But after that things get messy.

Is the IRS completely barred from assessment and thus administrative levy and lien? That isn’t clear, because the IRS can assess in certain circumstances without the deficiency procedures. Withholding and estimated tax payments are good examples: if I claim more than I actually paid on my tax return the IRS gets to assess without deficiency procedures. Which is necessary, because both withholding and estimated tax are disregarded in the definition of a deficiency. See IRC § 6211(b)(1). But the IRS is only able to assess without deficiency procedures in that instance because Congress has explicitly said it can under IRC § 6201(a)(3). I don’t see any other provision granting the IRS a method of assessment for recouping erroneous EIPs… though maybe they could use their regulatory authority (see IRC § 6202).

Note that the IRS can still collect from individuals without assessment… it just has extremely limited means of doing so. The IRS can recoup money that shouldn’t have gone out in three ways: politely asking you pay it back, offsetting other tax refunds or bringing a civil suit. In further bad news for the IRS, two of those three options might be effectively out of the question in the case of EIPs. Offset might be barred as a method of collecting erroneously paid EIPs based on the language of Sec. 2201(d), though I think that is an open question. Civil suits would be allowed, but as a matter of practicality would almost certainly not be pursued since they would cost far more than the amount of money being brought in. We are talking about (possibly) millions of relatively small erroneous payments cumulatively making up a large dollar value. A million individual cases is not practical. This means all the IRS could do to collect on erroneous EIPs is to politely ask for it back. I’m not even positive the IRS would go through the effort to do that.

If these three methods of collection look familiar it is because they are what the IRS is forced to resort to when trying to recover money resulting from a clerical or other computing error -for example, sending duplicate refund checks to a single taxpayer. Such payments are referred to as “erroneous nonrebate refunds.” Functionally, if not actually, this is how tax administration would be classifying all erroneous EIPs. But unlike traditional nonrebate refunds this treatment would result even if the mistake was entirely the taxpayer’s fault -say for grossly understating income on their 2019 return. And while that may be how things end up, I don’t think that’s what the statute requires.

Making All Your Arguments in Collection Due Process Cases. Designated Orders, August 10 – 14, 2020 (Part Two)

Welcome back to second of this three-part installment of “Making All Your Arguments in Collection Due Process Cases.” In Part One, we looked at a threshold question of when you are entitled to even raise certain arguments to begin with. The statute (IRC § 6330) precludes taxpayers from getting “two bites at the apple” in certain circumstances. These include arguing the underlying tax if you received a Notice of Deficiency or otherwise had an opportunity to argue the tax (IRC § 6330(c)(2)(B)). Note that while you do not have the right argue the underlying liability in those circumstances, you still can raise the issue and hope that the IRS Appeals officer decides to address it. See Treas. Reg. § 301.6330-1(e)(3)(A-E11). But it is in the “sole-discretion” of IRS Appeals whether to consider the issue in that case, and the decision (so the Treasury says) is not reviewable by the Tax Court.

Today, instead of relying on the goodness of the IRS Appeals Officer’s heart, we’ll dive into issues that the taxpayer almost always has the right to raise.

read more…

Issue Two: The IRS Screwed Up (Procedurally) In Assessing the Tax (Mirken v. C.I.R., Dkt. # 18972-17L (here))

In a Collection Due Process hearing, if you focus on issues in the tax process the Tax Court will usually hear them out (go figure). If it was even remotely catchy, I’d suggest the following mnemonic device: In CDP, Subtitle F Gets You A’s and Subtitle A Gets You F’s. Feel free to never, ever think of that phrase again.

The Mirken order highlights the importance of CDP as a way to check the processes in assessment and collection. It also is worth giving Judge Copeland kudos for ensuring that justice is done where the pro se taxpayers may not have used the precise tax jargon a practitioner would.

As noted before, if you don’t raise issues in your petition you run the risk of conceding them. Sometimes you have a way out by arguing that the issues were tried by consent under Rule 41(b), but you don’t want to have to rely on this. You also need to allege facts supporting your assignments of error if you are the party with the burden of proof on them. On the rare occasion that you (petitioner) don’t have the burden of proof, you only need to raise the issue.

In CDP, one area where the IRS has the burden of proof is in verifying that all applicable law or administrative procedures have been met (IRC § 6330(c)(1)). Note again that you still have to raise that issue in your petition in the first place. Here, the unrepresented taxpayers did not raise this issue in their petition, but arguably did in their objection to the IRS’s summary judgment motion. Judge Copeland finds this to be sufficient to amend the pleadings under Rule 41(a), and then takes a look at the IRS’s records on the issue.

As is so often the case, the IRS records do not inspire confidence. A testament (again) to putting IRS records at issue at.

There are three assessments leading to liabilities here: (1) taxes assessed on the original return, (2) assessable penalties relating to the original return, and (3) taxes assessed through the deficiency procedures -in this case through the IRS Automated Under Reporter (AUR) program. In the Notice of Determination, the IRS Settlement Officer stated that she had “verified through transcript analysis that the assessment was properly made per [section] 6201 for each tax[.]”

This is something of a twist on the usual boilerplate I receive in my Notice of Determinations, which are extraordinarily unhelpful and usually just say, “I have verified that all procedures were met.” But even this twist (referring to transcript analysis and an actual code section!) won’t save the IRS. Being slightly more specific isn’t enough for the Tax Court to simply “trust” the determination.

For one, Judge Copeland notes that the taxes assessed under the deficiency procedures would not be assessed under IRC § 6201, but rather the deficiency proceedings (see IRC § 6201(e)). The most important component of deficiency proceedings is the Notice of Deficiency (again, go figure). With regards to the Notice of Deficiency, validity depends on the taxpayer actually receiving the notice with time to petition the court or the notice being properly mailed to the taxpayer’s “last known address” even absent actual receipt. See IRC § 6212(b).

There does not appear to be a record of the IRS Settlement Officer looking up if or where the Notice of Deficiency was mailed. In fact, as Judge Copeland notes, it doesn’t appear that the Settlement Officer knows what the taxpayers “last known address” would even be in determining the validity of a Notice of Deficiency. Should we just trust that the IRS did it right?

No, we should not. Especially not on a summary judgment motion from the IRS. And especially not when, as in this case, the Settlement Officer already sent a letter to the petitioners at the wrong address for this hearing.

Accordingly, Judge Copeland has no problem finding there to be a “genuine issue of material fact” that precludes summary judgment. And that is surely the correct outcome.

But before ending the lessons of Mirken I want to bring practitioners back to a threshold problem, and something I began this post on: raising issues in your petition. Frequently, in my experience, at a CDP hearing you are really only discussing the appropriateness of collection alternatives. A best practice would be to raise the procedural issues of assessment in the hearing, but when that doesn’t happen is it still acceptable to assign error to it in a petition? Can you do that under Tax Court Rule 33 when you don’t actually have a concrete reason (just general history and skepticism) to question that the IRS properly followed procedures?

I have two thoughts on that. My first thought is to amend the petition after getting the admin file. Hopefully that will happen soon enough that you can amend as is a matter of right, but often I doubt that will be the case. Fortunately, even if it takes a while to receive the administrative file my bet is that the Tax Court would freely allow an amended pleading if you are only able to learn of the problem later (I also doubt most IRS attorneys would object in those circumstances).

My second thought is that your standard practice should always be to request the administrative file as it exists in advance of the hearing. It is always a good idea to have as full a picture as possible on what information the IRS is working off. But beyond that, because of the Taxpayer First Act, you have a statutory right to the admin file in conferences with Appeals (see IRC § 7803(e)(7)(A)).

The most recent letters from Appeals I have received setting CDP hearings have specifically referenced the right of the taxpayer to request the file. It is always wrong (and not even an “abuse of discretion”) for the IRS not to follow a statute, and failure to send information you are legally entitled to certainly could be part of a Tax Court CDP petition. This isn’t an attempt to “set a trap” for IRS Appeals, but information that would be critically important for us to raise all potential issues at the CDP hearing. I know that I’ve made such requests to IRS Appeals and am still waiting…