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.

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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.

 

 

 

 

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.

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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.

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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. 

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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.

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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…

Welcome To Tax Court, Now Go Home (Unless a Lawyer Volunteers)

We welcome back commenter in chief and occasional blogger Bob Kamman for another post with insights on matters otherwise missed.  Today, Bob’s post discusses interesting case outcomes but also the people who made it possible – the amazing volunteers at the calendar calls in New York City.  Frank Agostino has organized the local tax bar at calendar calls in NYC for many years and helped many taxpayers who had no expectation of such assistance when they showed up in court.  For his efforts at the NYC calendar calls and other pro bono work he does, the ABA recognized Frank with the Janet Spragens award in 2012.  Keith

If you’re looking for trouble, consider showing up at Tax Court trial sessions in Manhattan once they resume.  Just ask New Jersey tax attorney Frank Agostino, who keeps going back for more – and that’s a good thing.  His recent examples are cases decided the week of May 18, 2020: Peacock and Pope.  In Peacock, Judge Vasquez notes:

When this case was called from the calendar, Mr. Agostino and Mr. Colasanto were present in the courtroom as volunteer lawyers. They entered appearances on behalf of petitioner husband for purposes of arguing the motion before us, and we are thankful for their pro bono service.

(Phillip Colasanto is an associate in Mr. Agostino’s firm.  Brooklyn lawyer Alec B. Schwartz also appeared, later.)

What is most remarkable about these two cases, aside from the question of what would have happened without last-minute volunteer legal help, is that both involve an IRS notice of deficiency followed by a delayed IRS defense that the Tax Court lacks jurisdiction to review it.  If the notice is the ticket to Tax Court, Chief Counsel is the bouncer who shows up much later to deny petitioner’s entry.

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Peacock Case: Timeline and Result

March 11, 2016:  IRS revenue agent issues a 30-day letter proposing full disallowance of $52,376 in expenses.

April 7, 2016: Taxpayer meets with revenue agent, who issues a “corrected report” disallowing all expenses but removing the accuracy-related penalty. Bottom line is $6,761 tax and $431 interest.

April 8, 2016: Taxpayer hands revenue agent a check for $7,192 with a four-page cover letter.  The last page states,

Because our meeting yesterday was cut short due to time constraints, I request a follow-up meeting to discuss how I may amend my 2013 US Tax Return to better and more accurately reflect the . . . expenses that I claimed on Schedule C.  In the meantime, please find enclosed check no. 5324 dated today, April 8, 2016, in the amount reflected in your revised Form 4549-A. . . .I do, however, respectfully disagree completely with your determination.   I am working on completing IRS Form 12203 – Request for Appeals Review, and will submit it to you under separate cover.

April 8, 2016:  An IRS transcript shows that this payment is recorded with a transaction code 640 as an “advance payment of tax owed.”  With no corresponding assessment, the account will continue to show a credit balance in the same amount. 

October 16, 2016:  Taxpayer, having submitted the form six months earlier, writes to the Appeals office:

I have yet to hear from the IRS regarding my request for Appeals Review.  On April 8, 2016, I hand delivered . . .check number 5324 in the amount of $7,192 along with my letter dated April 8, 2016.  In that letter, I made it crystal clear that this payment was made in protest, and that I completely disagreed with the IRS determination.

March 27, 2017:  Appeals issues a notice of deficiency for $6,544, slightly less than the $6,761 proposed in the revenue agent report.

May 24, 2017:  Petition is filed with Tax Court. IRS answers June 23, 2017.

November 16, 2017:  Trial is set for April 9, 2018.

March 15, 2018: Less than four weeks before trial, IRS files a motion to dismiss for lack of jurisdiction.  It contends that the April 2016 payment extinguished the deficiency before the notice was issued.

March 28, 2018:  Taxpayer responds that the remittance was not a payment but a deposit, preserving his right to petition.

April 9, 2018, continued to April 13, 2018:  At Tax Court hearing, Frank Agostino enters his appearance for taxpayer.  Simultaneous opening briefs ordered for June 27, 2018.  These are filed, and simultaneous answering briefs are filed August 13, 2018.

Twenty-one months later, the 17-page Tax Court opinion by Judge Vasquez walks the parties through:

  • Code Section 6211 and cases decided under it, holding that if a deficiency is paid before a notice of deficiency is issued, then there is no deficiency and the Tax Court has no jurisdiction.
  • Code Section 6603, which nevertheless allows a taxpayer to make a cash deposit to pay any tax not yet assessed.  IRS guidance on how to do this is provided in Rev. Proc. 2005-18. Such a payment stops interest from accruing but preserves the right to petition Tax Court.

According to a footnote, IRS does not contend that the taxpayer’s letter with his April 2016 check fails to satisfy the Rev. Proc. 2005-18 requirements.

The Court then cites in detail various provisions of the Internal Revenue Manual regarding such deposits.  The opinion reminds us (citations omitted),

To be sure, the IRM does not have the force of law . . . Nevertheless, the IRM can be persuasive authority . . . and a review of relevant IRM provisions is instructive in ascertaining the procedures the IRS expects its employees to follow . . .

The April 2016 check, on its memo line, contained the taxpayer’s SSN and the words “payment 2013 Federal Income Tax.” IRS contends that the word “payment” was enough to remove it from the category of “deposit.”  Also, it claims he loses because he used the word “payment” in his October 2016 letter to Appeals.

Five pages later, after further references to the Internal Revenue Manual, the Regulations under Section 6213, and Rev. Proc. 2005-18, the Court finds “Petitioner husband properly designated the remittance as a deposit, respondent treated it as such, and the deficiency was never extinguished by a payment.”

The taxpayer may eventually lose his case, but he has won the right to keep it in Tax Court.  Inoculated against attempts by IRS to deny him a trial less than a month before its first scheduled date, he may have a decision by 2021, regarding how much tax he owes for 2013.

 Pope Case:  Timeline and Result

2018:  Petitioner files a timely Form 1040 return reporting $42,163 in wages and $8,929 in federal income tax withheld. After child tax credit and child care credit, his tax is zero.

October 10, 2018:  IRS sends petitioner a “Letter 4800C, Questionable Credit 30 Day Contact Letter,” informing him that $7,856 of his withholding had been disallowed.  IRS has records of only $2,448 in wages received, and $1,073 in tax withheld. 

November 20, 2018:  After no response, IRS sends a notice of deficiency, which the Court describes:

 …explaining that it had been unable to verify his reported wages and withholding.  The first page of the notice stated that his deficiency for 2017 was “$.00,” . . .The “tax deficiency computation” at the end of the letter shows the “change in tax shown on return” as zero, the “decrease to refundable credits” as zero, and the “tax deficiency” as zero.  The only adjustments appearing in this computation are a $26,407 downward adjustment to petitioner’s AGI and a $7,856 reduction in withholding credits.

February 13, 2019:  Tax Court petition filed.  IRS answers on April 29 (more than 60 days, but the government had been closed for 35 days, ending January 25). 

March 15, 2019:  IRS issues a refund for $1,273: Tax withholding of $1,073; $142 refundable child tax credit; and $58 interest.

August 27, 2019:  Trial set for January 13, 2020.

January 3, 2020:  IRS files a motion to dismiss for failure to properly prosecute.

January 13, 2020:  Petitioner appears for trial.  IRS withdraws its motion to dismiss for failure to prosecute, then moves to dismiss for lack of jurisdiction.  Frank Agostino and Phillip Colasanto enter appearances.  Petitioner is ordered to respond to IRS motion by February 12, 2020.

February 12, 2020:  Petitioner’s response is filed.  A footnote to the decision tells us he attached “a pay stub and a pair of Forms W-2, Wage and Tax Statement, that purport to show tax withholding in excess of the amounts that the IRS verified through third-party reporting.”

Unfortunately, those exhibits don’t matter.  Judge Lauber explains why Sections 6201 and 6211 do not grant Tax Court jurisdiction in cases where the only dispute concerns the credit for income tax withheld.  “Because we lack jurisdiction to redetermine the adjustments to petitioners’ 2017 liability, we do not consider these documents or his assertion that he did not actually overstate his withholding credits.”

What may have happened here is that the taxpayer’s withholding seemed to IRS algorithms far higher than needed for a single parent.  The withholding he claimed was 21% of wages.  Nevertheless, what IRS verified as withholding was 44% of wages.  Employers can make mistakes, and it may take years for them to file corrected W-2 forms.  IRS assumes the employer is correct, and expects the employee to promptly prove otherwise.  The taxpayer may have been using tax withholding as a savings account.  Or, he might have expected his annual income to be four times as great, but then was not employed for nine months. 

The Tax Court might at least have suggested that IRS allow an audit reconsideration.  That could avoid a District Court refund suit.  Pro bono can do only so much.  If Congress intended to remove withholding disputes from Tax Court jurisdiction, it could at least allow them when the issue is not raised by IRS until the day of trial. 

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While cases that result in Tax Court opinions contribute to a practitioner’s highlight reel, those that are settled with no fanfare deserve some attention also.  So we should note the case of Marie Lucien, whose trial in a small-tax case before Judge Guy was set for December 9, 2019.  Mr. Agostino entered a limited appearance and made an oral motion for continuance.  IRS Counsel agreed. Less than three months later and just weeks before the Court closed its doors, a stipulated decision was entered for petitioner, agreeing that she owed no tax for 2016.  Two other lawyers were also there to help out: Jonathan A. Zandi of New York, and Bimal K. Gupta of Parsipanny, N.J. 

Plea for Guidance on Emergency Sick Leave Credit

In this post, guest blogger Bob Rubin identifies guidance urgently needed under the Families First Coronavirus Response Act (FFCRA). Christine

This is a plea for guidance on a national issue for which the rubber hits the road on April 1.

Before I beg, I observe that likely it is only people who read this blog, and Service employees, who understand what a burden the FFCRA and the CARES Act place on the Service.  The entire federal tax deposit system needs to be redesigned, and at the same time the Service has to be ready to process FFCRA “accelerated payment requests” within two weeks, while short-staffed and working remotely.  How do “accelerated payment requests” fit within section 6511?  My hat is off to the Service for undertaking this task while under duress.  We all need to be patient with the Service.  We all need to do what we can to lessen the burdens of the Service, for example by dampening client expectations based upon press reports on the speed at which the Service can act. 

Despite my understanding of the need for patience, I beg for guidance on an issue of immediate importance. 

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Governor Newsom issued an Order ordering “all individuals living in the State of California to stay home or at their place of residence, except as needed to maintain continuity of operation of the federal critical infrastructure sectors” on March 19, 2020.  Critical infrastructure includes, “Professional services, such as legal or accounting services, when necessary to assist in compliance with legally mandated activities and critical sector services.”

In response to the Order, we furloughed much of our staff and directed all attorneys to work at home.  If the Order qualifies as a “Federal, State, or local quarantine or isolation order related to COVID-19,” pursuant to section 5102(a)(1) of the Emergency Paid Sick Leave Act (part of FFCRA), then starting on April 1, we are mandated to pay our staff, who cannot work from home, 10 days of emergency sick at a maximum of $511 per day for 10 days, and pursuant to the Tax Credit for Paid Sick and Paid Family and Medical Leave Act, we will get a dollar-for-dollar FICA tax credit for the emergency sick leave wages we pay.  If the credit is in excess of the employer’s share of the tax due in a federal tax deposit, a “request for an accelerated payment” can be made immediately, and the Service “will process these requests in two weeks or less.”  IR-2020-57, March 20, 2020.  I hope my friends in the National Office did not have a severe medical emergency when they read the Information Release. 

There is no guidance on whether the Order is a “Federal, State, or local quarantine or isolation order related to COVID-19.”  The Order is probably very similar to the orders issued in New York, Washington and other states.  So, this is a national issue.

My non-tax partners, based upon the “plain meaning of the Order,” think I am crazy for thinking the Order does not qualify as a “Federal, State, or local quarantine or isolation order related to COVID-19.”  However, there has been no guidance from the Government, the words quarantine or isolation do not appear in the Order and, since lawyers are a part of the critical infrastructure, the Order provisions “to stay home or at their place of residence” do not apply to our employees. 

There are tons of policy reasons for the Government to take the position the Order is a “Federal, State, or local quarantine or isolation order related to COVID-19.”  There is a serious fiscal reason to take a contrary position.  What did Congress intend?  I do not blame the Service for the lack of guidance. The Service probably is awaiting a decision by Treasury.  Please, Treasury, provide guidance to the Service on whether Governor Newsom’s Order is a “Federal, State, or local quarantine or isolation order related to COVID-19.”  Time is critical since the first emergency sick leave wages are payable April 1.  I hope my friends in the National Office can help. 

Assessment Statute Extension under 6501(c)(8); Changes of Address; and Lessons for Counsel – Designated Orders: December 9 – 13, 2019

My apologies for this delayed post; I had my head so buried in the Designated Orders statistics from our panel at the ABA Tax Section’s Midyear Meeting that I neglected the substantive orders from December. Worry no longer: here are the orders from December 9 – 13. Not discussed in depth is an order from Judge Guy granting Respondent’s motion for summary judgment in a routine CDP case, along with an order from Judge Gustafson sorting out various discovery disputes in Lamprecht, Docket No. 14410-15, which has appeared in designated orders now for the seventh time. Bill and Caleb covered earlier orders here and here.

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As I mentioned during the panel, Designated Orders often resolve difficult, substantive issues on the merits. These orders are no exception. There were two cases that dealt with the deductibility of conservation easements. (Really, there were four dockets resulting in an order disposing of petitioner’s motion for summary judgment from Judge Buch, and one case resulting in a bench opinion from Judge Gustafson.) I’m not going to get into the substance of conservation easements, as clients in a low income taxpayer clinic seldom run afoul of these rules. Interestingly, this is also the first time we’ve seen a bench opinion in a TEFRA case—at least one that was also a designated order.

I must wonder, however, whether the Court strikes the appropriate balance in resolving substantively complex cases, on the merits, in either manner. While neither Judge Buch’s order nor Judge Gustafson’s bench opinion could have been entered as a Tax Court division opinion—as far as I can tell, they do not break any new ground—they could both easily qualify as memorandum opinions. As a practitioner, I find value in the ability to research cases that appear in reporters—precedential or otherwise. Relegating these cases to the relatively unsophisticated search functions found on the Tax Court’s website often makes it quite difficult to efficiently conduct case research.

Perhaps the Court’s new electronic system in July will remedy some of these issues. Nevertheless, any solution that doesn’t integrate with the systems that practitioners utilize to conduct case research—namely, reporters and the third-party services that catalogue and analyze the cases issued in those reporters—strikes me as inferior.

I fully understand and appreciate the value that the Court and individual judges place on efficiently resolving cases; that is no minor concern. I’ve been informed that issuing a memorandum opinion, as opposed to resolving a case through an order or bench opinion, can tack on months to the case.

But individual judges and the Court as an institution ought to carefully consider (1) whether the Court suffers from systemic problems in efficiently issuing memorandum opinions (and whether anything can be done to remedy these problems) and (2) whether the efficiency concern outweighs practitioners’ and the public’s interest in effective access to the Court’s opinions. 

More to come on this point in future posts. But for now, let’s turn to this week’s orders.

Docket No. 13400-18, Fairbank v. C.I.R. (Order Here)

First, a foray into the world of foreign account reporting responsibilities, which Megan Brackney ably covered in this three part series in January. Here, the focus lies not on the penalties themselves, but on another consequence of failing to comply with foreign account reporting requirements: the extension to the assessment statute of limitations under section 6501(c)(8).

Petitioner filed a motion for summary judgment in this deficiency case, on the grounds that the statute of limitations on assessment had long since passed. Petitioners timely filed returns for all of the tax years at issue, but the Service issued a Notice of Deficiency for tax years 2003 to 2011 on April 12, 2018—long after the usual 3 year statute of limitations under section 6501(a).

But this case involves allegations that the Petitioners hid their income in unreported foreign bank accounts. And section 6501(c)(8) provides an exception to the general assessment statute where a taxpayer must report information to the IRS under a litany of sections relating to foreign assets, income, or transfers. If applicable, the assessment statute will not expire until 3 years after the taxpayer properly reports such information to the IRS.

The statute applies to “any tax imposed by this title with respect to any tax return, event, or period to which such information relates . . . .” This appears to be the same sort of broad authority in the 6 year statute of limitations (“the tax may be assessed . . . .”) that the Tax Court found to allow the Service to assess additional tax for the year in question, even if it didn’t relate to the underlying item that caused the statute extension. See Colestock v. Commissioner, 102 T.C. 380 (1994). While the Tax Court hasn’t explicitly ruled on this question, it is likely that it would reach a similar conclusion for this statute.  

Respondent claimed that Ms. Fairbank was a beneficial owner of a foreign trust, Xavana Establishment, from 2003 to 2009, and thus had a reporting requirement under section 6048—one of the operative sections to which 6501(c)(8) applies. Further, for 2009 and 2011, Respondent claimed that Ms. Fairbank was a shareholder of a foreign corporation, Xong Services, Inc.—again triggering a reporting requirement under section 6038 and a potential statute extension under 6501(c)(8). Respondent finally claimed that Ms. Fairbank didn’t satisfy these reporting requirements for Xong Services until June 18, 2015—thus the April 12, 2018 notice would have been timely. Moreover, Respondent claimed, Ms. Fairbank hadn’t satisfied the reporting requirements for Xavana Establishment at all.

It’s important to pause here to note that the reporting requirements under sections 6048 and 6038 are separate from the FBAR reports required under Title 31. While the Petitioners filed an FBAR report for Xong Services, they seem to argue that this filing alone satisfies their general reporting requirements for this interest. That’s just not true; foreign trusts and foreign corporations have independent reporting requirements under the Code, under sections 6048 and 6038, respectively. Specifically, Petitioners needed to file Form 3520 or 3520-A for their foreign trust; they needed to file Form 5471 for their interest in a foreign corporation. And it is failure to comply with these reporting requirements that triggers the assessment statute extension under section 6501(c)(8)—not the failure to file an FBAR (which, of course, would have its own consequences). 

Petitioners claimed that they had, in fact, satisfied all reporting requirements for Xavana Establishment at a meeting with a Revenue Agent on July 18, 2012. But it seems that the Petitioner’s didn’t submit any documentation, such as a submitted Form 3520, to substantiate this. As noted above, they further claim the FBAR filed for Xong Services in 2014 satisfied their reporting requirements. Respondent disagreed, but did allow that the reporting requirements were satisfied later in 2015 when Petitioners filed the Form 5471. 

Because Petitioner couldn’t show that they had complied with the 6038 and 6048 reporting requirements quickly enough to cause the assessment statute to expire, they likewise couldn’t show on summary judgment that the undisputed material facts entitled them to judgment as a matter of law. Indeed, many of the operative facts here remain disputed. Thus, Judge Buch denies summary judgment for the Fairbanks, and the case will proceed towards trial.

Docket No. 9469-16L, Marineau v. C.I.R. (Order Here)

This case is a blast from the past, hailing from the early days of our Designated Orders project in 2017. Both Bill Schmidt and I covered this case previously (here and here). Presently, this CDP case was submitted to Judge Buch on cross motions for summary judgment. Ultimately, Judge Buch rules for Respondent and allows the Service to proceed with collection of this 2012 income tax liability. 

They say that 80% of life is simply showing up. Petitioner had many chances to show up, but failed to take advantage of them here. Petitioner didn’t file a return for 2012; the Service sent him a notice of deficiency. While Petitioner stated in Tax Court that he didn’t receive the notice, he didn’t raise this issue (or any issue) at his first CDP hearing.

Nonetheless, the Tax Court remanded the case so he could raise underlying liability, on the theory that he didn’t receive the notice of deficiency and could therefore raise the underlying liability under IRC § 6330(c)(2)(B)—but Petitioner didn’t participate in that supplemental hearing either!

Back at the Tax Court again, Petitioner argued that not only did he not receive the notice of deficiency, but that it was not sent to his last known address. This would invalidate the notice and Respondent’s assessment. The validity of the notice also isn’t an issue relating to the underlying liability; rather, this is a verification requirement under IRC § 6330(c)(1). So, if the Settlement Officer failed to verify this fact, the Tax Court can step in and fix this mistake under its abuse of discretion standard of review.

Petitioner changed his address via a Form 8822 in 2014 to his address in Pensacola. On June 8, 2015, he submitted a letter to the IRS national office in Washington, D.C., which purported to change his address to Fraser, Michigan. The letter contained his old address, new address, his name, and his signature—but did not include his middle name or taxpayer identification number. The IRS received that letter on June 15.

The Tax Court recently issued Judge Buch’s opinion in Gregory v. Commissioner, which held that neither an IRS power of attorney (Form 2848) nor an automatic extension of time to file (Form 4868) were effective to change a taxpayer’s last known address. We covered Gregory here. (Keith notes that the Harvard clinic has taken the Gregory case on appeal.  The briefing is now done and the case will be argued in the 3rd Circuit the week of April 14 by one of the Harvard clinic’s students.) Similarly, Judge Buch deals in this order with what constitutes “clear and concise” notification to the Service of a taxpayer’s change of address.

Judge Buch held that Petitioner didn’t effectively change his address. Under Revenue Procedure 2010-16, a taxpayer must list their full name, old address, new address, and taxpayer identification number on a signed request to change address. Taxpayers do not have to use Form 8822 in order to change their address, but this form contains all the required information to do so under the Rev. Proc. Because Petitioner failed to include his middle name and taxpayer identification number, the letter was ineffective.

Judge Buch ultimately holds that the letter was ineffective because the IRS received the letter on June 15—three days before the NOD was issued. The Rev. Proc. provides that a taxpayer’s address only changes 45 days after the proper IRS offices receives a proper change of address request. The national office is not the proper office; even if it was, the IRS only had three days to process the request prior to sending out the NOD. The lesson here is that if you know a NOD is coming, you can’t quickly trick the IRS into sending it to the wrong

If that wasn’t enough, Petitioner argued that because the USPS rerouted the NOD to a forwarding address in Roseville, Michigan, the NOD should be invalidated. However, the NOD was valid because Respondent send it, in the first instance, to Petitioner’s last known address prior to any subsequent rerouting.

There being no issue with the NOD’s validity—and because Petitioner didn’t participate in the supplemental hearing—Judge Buch granted Respondent’s motion and allowed the Service to proceed with collections.

Docket Nos. 12357-16, 16168-17, Provitola v. C.I.R. (Orders Here & Here)

The Court seems a little frustrated with Respondent’s counsel in this case. These orders highlight a few foot-faults that counsel—whether for Respondent or Petitioner—ought to be careful not to make.

This case is also a repeat player in designated orders; previous order include Petitioners’ motion for summary judgment from Judge Leyden here and Petitioners’ motion for a protective order here, which I made passing mention of in a prior designated order post.

Regarding the present orders, the first order addresses Respondent’s motion in limine, which asked that the Court “exclude all facts, evidence, and testimony not related to the circular flow of funds between petitioners, their Schedule C entity, and petitioner Anthony I. Provitola’s law practice.” Judge Buch characterizes this as a motion to preclude evidence inconsistent with Respondent’s theory of the case—i.e., that the Schedule C entity constituted a legitimate, for profit business. That doesn’t fly for Judge Buch, and he accordingly denies the motion.

He then takes Respondent to task for suggesting that “The Court ordinarily declines to consider and rely on self-serving testimony.” I’m just going to quote Judge Buch in full, as his response speaks for itself:

The canard that Courts disregard self-serving testimony is simply false. We disregard self-serving testimony when there is some demonstrable flaw or when the witness does not appear credible. If we were to disregard testimony merely because it is self-serving, we would disregard the testimony of every petitioner who testifies in furtherance of their own case and of all the revenue agents or collections officers who testify that they do their jobs properly, because that testimony would also be self-serving.

Ouch. In general though, I appreciate Judge Buch’s statement.  I recall being mildly annoyed reading court opinions that disregard a witness’s testimony because it was “self-serving.” For all the reasons Judge Buch notes, quite a lot of testimony will be self-serving. That’s not, without more, a reason to diminish the value of the testimony. It’s certainly not a reason to prohibit the testimony through a motion in limine. 

The second motion was entitled Respondent’s “unopposed motion to use electronic equipment in the courtroom.” (emphasis added). Apparently, the courthouse in Jacksonville has some systemic issues in allowing courts and counsel access to electronic equipment. Of what kind, the order does not make clear, though many district courts or courts of appeals where the Tax Court sits limit electronic equipment such as cell phones, tape recorders, and other devices that litigants may wish to bring as evidence to court. IRS counsel is likely the best source of knowledge on such restrictions; here, Judge Buch notes that the Court’s already taken care of these matters on a systemic basis for the upcoming trial session.

But Respondent’s counsel again makes a foot-fault here that draws an avoidable rebuke from Judge Buch. Respondent noted in his motion that he “called petitioners to determine their views on this motion, and left a voicemail message. Petitioners did not return this call as of the date of the motion, and as a result, petitioners’ views on this motion are unknown.” 

That’s not an unopposed motion! In Judge Buch’s words again, “The title of the motion (characterizing [it] as “unopposed”) is either misleading or false. . . . Consistent with Rule 50(a), we will treat the motion as opposed.”

Of course, because the Court had already resolved the issue with electronic equipment, Judge Buch denies the motion as moot.

Trial was held on 12/16 and 12/17. Judge Buch issued a bench opinion that held for Respondent, and designated the order transmitting the bench opinion on January 27. That’s Caleb’s week, so I’ll leave it to him to cover the underlying opinion.