Search Results for: public reading room

Correction on Making Offers in Compromise Public

On February 21, 2022, I wrote a post because of the FOIA case involving EPIC v. IRS, 128 AFTR 2d 2021-6808 (DDC 2021).  My description of the EPIC case was accurate and my conclusion on how to get information about offers in compromise from the IRS was accurate – use FOIA; however, my description of the IRS method for delivering information about accepted offers in compromise was outdated.  I thank Steve Bauman of IRS SB/SE Collection for setting me straight.

In the earlier post I wrote about the system the IRS had devised for allowing public inspection of accepted offers.  The system did not make sense to me and was criticized in a TIGTA report in 2016 to which I cited in the post.  The IRS took the criticism from TIGTA to heart and revamped the system for accessing accepted offers.  I cannot say that I find the new system very user friendly for reasons I will describe further below, but it is not a system which will cost $100,000 per offer viewed which is what TIGTA calculated was the per view cost of the prior system.


The IRS closed the public reading rooms as the depository of accepted offers back in 2018 and now keeps all accepted offers in a computer database that inquiring persons can access through the process described below:

Public Inspection files contain limited information regarding accepted Offers in Compromise such as the taxpayer name, city/state/zip, liability amount, and offer terms. View a sample Form 7249, Offer Acceptance Report PDF, to see the information you will receive by requesting a copy of a public inspection file.

The IRS makes available for public inspection a copy of Form 7249, Offer Acceptance Report, for one year after the date of acceptance.

If you wish to submit a request, complete and send the Offer in Compromise Public Inspection File Form PDF [aka Form 15086.] We will respond in 15 business days. Fax is the preferred method; if mailing, allow an additional 5 business days for a response.

If you link to the Offer Acceptance Report, you will see that you obtain very little information about the person or the offer.  As I mentioned in my original post several years ago about making offers public, I don’t find the information the IRS chooses to make public particularly helpful for stopping the type of abuse and scandal that caused offers to be made public in the first place.  Here’s my brief discussion of the history behind making offers public:

In the early 1950s, a scandal came to light in which an IRS employee used the compromise provisions to write off the liabilities of members of the criminal element.  The employee was prosecuted (see page 148 for a brief discussion of the events) and President Truman issued an executive order requiring that the IRS make accepted offers public.  Subsequently, Congress passed IRC 6103(K)(1) which provides for public inspection and copying of accepted OICs. 

You can look at the information provided on Form 7249 and decide for yourself if that information will assist in ferreting out inappropriate offers that might cause a scandal.

Moving past the information on the publicly available form which has not changed, I need to explain how the IRS has made its offer disclosure system better.  I think it is better but still not what it should be.  Gone are the remote reading rooms.  In their place the IRS has digitized its system for storing and retrieving Forms 7249.  Now, you send a request to the IRS via fax using the inspection file form linked above.  The problem with this form is that it will only cause the IRS to send you information about offers you already know about.  The first box on the form requests you to

Identify the Accepted Offer in Compromise (e.g. offer number, name, state) as specifically as possible below.

You can only do that if you already know about the offer.  How many people are looking for offers who already know an offer exists.  Maybe lots of people but I am unconvinced.  There is now way to browse through accepted offers to try to get a sense of what was accepted.  You must make a targeted request to use the new system.

The new system eliminates the wasteful reading room.  For that it is to be applauded.  If the goal is to prevent another scandal like the one in the 1950s, I think more information needs to be provided on Form 7249 and the accepted forms need to be browsed.

The IRM was updated in December of 2019 and provides the following guidance: (12-17-2019)

Public Inspection File

1. Public inspection of certain information regarding all offers accepted under IRC § 7122 is authorized by IRC § 6103(k)(1).

2. Treasury Reg. § 601.702 (d) (8) requires that for one year after the date of execution, a copy of Form 7249 Offer Acceptance Report, for each accepted offer with respect to any liability for a tax imposed by Title 26, shall be made available for inspection and copying. A separate file of accepted offer records will be maintained for this purpose and made available to the public for a period of one year.


Revenue Ruling 117, 1953-1 C.B. 498 complements Treasury Reg. § 601.702(d)(8) and explains that Form 7249 serves two different purposes. First, it provides the format for public inspection, which is mandated by Executive Order 10386. Second, it satisfies the filing requirement and other criteria arising under section 7122(b).

3. For each accepted offer, a copy of the Form 7249 should be uploaded to the PIF SharePoint site. Form 7249 must be free of any PII.

4. The office that has accepted the offer will be responsible for providing the Form 7249. The PIFs should be uploaded, without delay, to the PIF SharePoint site after acceptance.

5. The PIF must be:

– Maintained for one-year.

– Uploaded in the appropriate monthly folder and designated location based on the taxpayer’s entity address at the time of acceptance.

– Created with the established naming convention for uploading documents to the PIF SharePoint site.(Offer number. Name Control. Date Accepted) i.e. (1234567890.ABCD.MMDDYY)

– If within one year of acceptance a Form 7249 needs to be corrected (e.g. to remove periods that were discharged in bankruptcy, compromise of a compromise, or to obtain the signatures required in Delegation Order 5-1), the original Form 7249 should be deleted from the PIF SharePoint site, and the corrected Form 7249 uploaded with the same naming convention

6. Due to the potential disclosure of Personal Identifiable Information (PII) the Form 7249 will be reviewed and any PII will be redacted.

7. Memphis COIC will be the centralized PIF site which will monitor and track all Form 15086 PIF requests. Requests for OIC PIF will be provided by mail or fax per the instructions on, the taxpayer will complete and submit Form 15086. If a request is received to copy more than 100 pages, contact OIC Collection Policy.


A visitors log with the Form 15086 information will be retained on the PIF Sharepoint site. The visitor log book and the Form 15086 will be maintained by Memphis COIC.

I asked Steve how someone would make a broad request.  He said that for those seeking large volumes of data that would point to trends such as numbers of offer accepted, submitting a FOIA request would be necessary.  That’s why I said at the outset that although I wrongly described the continued existence of the reading rooms, the bottom line is that FOIA may be the only way to obtain meaningful information about accepted offers (as meaningful as you can get with the information provided on Form 7249) is by making a FOIA request.  I didn’t ask and it’s not clear to me if a FOIA request can allow someone to obtain information about offers going back past one year

Aside from my continued disappointment at the amount of information available and the process for getting the information, I want to thank Steve for taking the time to set me straight.  He disclosed useful information to me about the process of obtaining information about offers.

Public Policy and Not in the Best Interest of the Government Offer in Compromise Rejections

In the first year of this blog, I wrote a post on the case of Anderson v. Commissioner, 2013-261, questioning why the Settlement Officer (SO) in Appeals did not reject a taxpayer’s offer by citing public policy grounds.  In that case the Tax Court remanded a Collection Due Process (CDP) determination because the SO’s basis for rejecting an offer of a very sick taxpayer did not provide sufficient reasoning.  I pointed out in my post that the SO could have rejected the offer based on public policy grounds, and I thought it unlikely the Tax Court would second guess such a determination by the SO on the facts of that case since the taxpayer had criminal tax convictions.

Today, I write about a case in which the IRS rejected the taxpayer’s offer as not in the best interest of the government (NIBIG), a policy-based decision but one separate from public policy rejection according to the Internal Revenue Manual as discussed below.  The Tax Court sustains the determination in a CDP case.  The case of O’Donnell v. Commissioner, T.C. Memo 2021-134, does not involve an individual convicted of a tax crime, which I think provides a strong cover for the IRS in a challenge to a NIBIG or public policy rejection, but does involve someone with a long history of bad tax behavior.  Since many offer candidates come hat in hand seeking an offer after long periods of bad tax behavior, I found today’s case interesting.  The relative ease with which the Tax Court sustained the NIBIG rejection suggests to me that it will rarely second guess such a determination by the IRS.


I don’t know how many offers get rejected each year on NIBIG or public policy grounds.  As discussed in my recent post on the EPIC case, and the post to which it links discussing a TIGTA report with a suggestion to put this information online, public information about offers is hard to come by, making it difficult, if not impossible, to ascertain this type of information without trying a FOIA request.  Even if you get to the publicly available information, all you find is the rather sparse set of information on Form 7249 (Rev. 3-2017) (

No information is publicly available on rejected offers.  So, much of the information about IRS offer practice is passed from practitioner to practitioner by word of mouth.  Practices that handle large volumes of offers will have a better sense of what the IRS will accept but the information available reminds me a bit of the situation with private letter rulings.  While a prior post discusses the history behind making offers public through IRC 6103(k), that code section came into existence long before the modern offer practice at the IRS, which did not develop until 1990.  It might be time to take another look at not only how the IRS makes the information public but what information should be public.  Should the act of making an offer be public?

I mentioned in the Anderson post that at the time I wrote that post in 2013 I had recently represented an individual with a history of very bad tax behavior including a criminal tax conviction and the SO in that case had raised the specter of a public policy rejection.  Though the Villanova and Harvard tax clinics I have directed over the past decade have submitted a couple dozen offers each year, I have not since had an offer examiner or SO raise public policy as a basis for rejecting an offer.  I thought a few of the cases might have drawn such an objection based on the client’s history.  When with Chief Counsel’s Office, I reviewed hundreds of offers over a period of 15 years prior to retirement, suggested to collection that it consider a public policy rejection a few times, but rarely witnessed the IRS using public policy as a stated basis for rejection.   

So, based on my limited experience representing taxpayers, the IRS does not play the public policy rejection card very often.  Whether it formally states this as a basis for rejection, I believe that a taxpayer’s behavior giving rise to the liability for which a compromise is sought does factor into the offer examiner’s and SO’s position in unstated ways.  In the O’Donnell case, however, we have an explicit statement from the IRS rejecting his offer because of his bad behavior, allowing us to look at the reasoning behind the public policy rejection as well as the level of scrutiny the Tax Court applies in reviewing that decision.

Treas. Reg. 301.7122-1(c)(3)(ii)(A) provides that a “history of noncompliance with the filing and payment requirements of the Internal Revenue Code” indicates that acceptance of the offer would tend to undermine compliance with the tax laws.  The IRS signals that it does not want its offer examiners using this basis for rejection lightly by requiring the approval of the second level manager if the examiner seeks to reject an offer as NIBIG or on public policy grounds. 

IRM gives details about offer rejections.  Since over half of submitted offers that pass the processability review get rejected, this IRM provision gets a fair amount of use.  IRM details the basis for a NIBIG rejection while IRM details the basis for public policy rejections.  I confess some confusion on the reason the IRS would choose a NIBIG rejection over a public policy rejection.  In the first paragraph describing NIBIG rejections the manual cites to Rev. Proc. 2003-71 and states:

The decision whether and when to accept an offer to compromise a liability is within the discretion of the Service. In keeping with IRM, Policy Statement P-5-100, an offer will only be accepted if it is determined to be in the best interest of both the taxpayer and the Service. In addition to the criteria discussed in Section 4.02, the Service may take into account public policy and tax administration concerns in determining whether an offer to compromise is acceptable.

This seems like public policy to me, but the manual clearly distinguishes between the two types of rejections.  While I mentioned above that a criminal tax conviction could provide an easy basis for a public policy rejection, the manual provision dealing with public policy rejections, IRM provides

(4) An offer will not be rejected on public policy grounds solely because:

– It would generate considerable public interest, some of it critical.

– A taxpayer was criminally prosecuted for a tax or non-tax violation.

You should definitely read the manual provisions if you have a client facing a potential NIBIG or public policy rejection.  Because case law on offers only occurs in the context of CDP, the decisional law remains sparse, making the O’Donnell case all the more important for the potential insight into this type of decision that it provides.

Judge Lauber describes Mr. O’Donnell’s tax behavior in his opinion:

Petitioner failed to comply with his Federal income tax obligations for a very long time. For two decades (if not longer) he failed to file returns and failed to pay the tax shown on substitutes for return (SFRs) that the IRS prepared for him. Among the years for which he failed to meet his obligations were 2006, 2010, 2011, 2013, and 2014. The IRS for those years assessed deficiencies, additions to tax, and interest totaling more than $430,000. As of May 2016 petitioner’s outstanding liabilities for all open years exceeded $2 million.

Pretty bad but not so bad that the IRS sought to bring a criminal case against him for failure to file or evasion of payment.  As the manual suggests the IRS need not have a criminal case in order to reject based on NIBIG or public policy and a criminal conviction does not automatically result in such a rejection.

When Mr. O’Donnell submitted his offer, the IRS first rejected it because he had not paid his estimated taxes for the year of the submission.  Offer examiners love this type of rejection because it requires little effort in order to move a case off of their desk.  Unfortunately, Mr. O’Donnell’s representative wrote back and pointed out he did not have an obligation to make estimated tax payments during the year at issue, sending the offer examiner back to the drawing board.  Despite his long-term bad tax behavior, Mr. O’Donnell offered the IRS $280,000, which is not chump change and the IRS calculated that his reasonable collection potential (RCP) was $286,744.  So, his offered amount closely fit the IRS criteria.  Mr. O’Donnell’s licenses related to his insurance and financial business had been revoked so his representative argued that his future earnings potential was not at all clear. 

Upon reconsideration, the offer examiner, presumably having gotten the higher level approvals required by the manual, rejected the offer on a NIBIG basis.  Because a notice of federal tax lien (NFTL) had been filed while the offer was pending (raising serious questions why the NFTL had not been previously filed with an outstanding liability of this amount), Mr. O’Donnell took the opportunity to bring a CDP case.  The SO reviewing his case sustained the determination to reject the offer, stating:

acceptance of his offer was not in the Government’s best interest given his history of “blatant disregard for voluntary compliance.” Because offer acceptance reports are available to the public under section 6103(k)(1), the Appeals Office concluded that acceptance of petitioner’s OIC would “diminish future voluntary compliance.”

Apparently, the SO had not read my prior blog post or the TIGTA report and did not realize how few people actually read offer acceptance reports and how little those reports could possibly diminish the public’s view of voluntary compliance, but it’s hard to argue with the conclusion that Mr. O’Donnell had exhibited a blatant disregard for voluntary compliance.  Despite the determination, the SO offered a partial pay installment agreement that seemed pretty reasonable.  While orally agreeing to this offer, Mr. O’Donnell did not follow through to sign the agreement, resulting in the determination letter sustaining the filing of the NFTL.

In the Tax Court, the IRS filed a motion for summary judgment.  The Tax Court notes that it is only looking to see if the decision to reject the offer was “arbitrary, capricious, or without sound basis in fact or law.”  Mr. O’Donnell argued that he offered an amount equal to 97.6% of the RCP.  The Court cites to the NIBIG manual provisions discussed above and to Mr. O’Donnell’s long history of non-compliance while he ran a successful insurance and finance business in finding that the decision to reject the offer was “well within the guidelines set forth in the IRM. We have repeatedly held that an SO does not abuse his discretion when he adheres to published IRM collection guidelines.”

The decision does not surprise me.  I think the hardest thing for the IRS was having an offer examiner willing to get the necessary approvals for the NIBIG rejection but after that, with these facts, the result was hard for Appeals or the Tax Court to second guess.  Although the IRS’ abysmal practices in the public display of offer information makes it impossible to easily know how many times it makes a NIBIG or public policy rejection, my experience tells me it does not do so very often.  When it does, the taxpayer will struggle to overcome the determination even when offering an amount equal to the RCP.  To get this offer accepted, I think Mr. O’Donnell may have needed to have offered something high enough above the RCP to make it an offer the IRS could not refuse.

Making Offers in Compromise Public

I wrote a post several years ago about the public reading rooms that exist in a few cities around the country where the IRS makes public, for one year, the offers in compromise for the region covered by the city which houses the reading room.  I would be curious to learn how accessible those reading rooms have been during the pandemic considering they were not very accessible prior to the pandemic.  Because I believe very few people visited these reading rooms prior to the pandemic, I doubt that much has been lost if they have been relatively inaccessible the past couple years.  Back in 2016 when I wrote that post, TIGTA estimated that it cost the IRS about $100,000 per public viewing to maintain its Rube Goldberg system of publicly disclosing accepted offers.

TIGTA suggested that putting accepted offers online would provide a meaningful method for making offers public.  To my knowledge nothing has been done to implement TIGTA’s suggestion even though it would potentially save the IRS money while granting the public access.  Perhaps if the IRS had accepted TIGTA’s proposal, the case discussed in this post would not exist.

If you want to know more about accepted offers and are unwilling to seek to visit the public reading rooms, a better path may exist as suggested by a recent case.  This better path, if that accurately describes multi-year litigation, is not better than TIGTA’s suggestion to put this information online but may be better than cross-country travel to the well-hidden reading rooms.  Read on.


The recent case of EPIC v. IRS, 128 AFTR 2d 2021-6808 (DDC 2021) provides another way to learn about offers in compromise – the Freedom of Information Act (FOIA).  EPIC is an acronym for Electronic Privacy Information Center.  It sent a FOIA request to the IRS seeking, inter alia, certain tax records related to offers in compromise (OICs) involving former President Donald Trump and business entities associated with him.  As you might expect, the IRS opposed this request but before it opposed the request in court it failed to respond to the FOIA request, causing EPIC to bring a suit in order to seek to have a district court order the IRS to turn over this information, some of which might have been available in the OIC reading room in Buffalo, N.Y. based on the discussion in the prior blog post and where the former President lived.

EPIC requested:

((1)) All accepted offers-in-compromise relating to any past or present tax liability of Donald John Trump, the current President of the United States.

((2)) All other “return information…necessary to permit inspection of [the] accepted offer[s]-in-compromise” described in Category 1 of this request. Records responsive to Category 2 include, but are not limited to, “income, excess profits, declared value excess profits, capital stock, and estate or gift tax returns for any taxable year,” as applicable.

Similarly, with respect to the records of business entities associated with the former President, EPIC requested:

((3)) All accepted offers-in-compromise relating to any past or present tax liability of any entity identified in Appendix A [a fifteen-page list of the business entities associated with President Trump] of this request.

((4)) All other “return information…necessary to permit inspection of [the] accepted offer[s]-in-compromise” described in Category 3 of this request. Records responsive to Category 4 include, but are not limited to, “income, excess profits, declared value excess profits, capital stock, and estate or gift tax returns for any taxable year,” as applicable.

The IRS seeks to dismiss the suit, arguing that the FOIA request fails because it falls within Exemption 3 which “allows an agency to withhold records `specifically exempted from disclosure by statute’ if the statute meets certain criteria.”  The court notes that the parties agree that the requested records would fall within the ambit of FOIA but for the exception.  It states:

Thus, whether EPIC has stated a claim turns on whether the records at issue are covered by any of the thirteen exceptions such that the IRS must disclose them, which would in turn subject them to EPIC’s FOIA request. EPIC relies on § 6103(k)(1), which provides that “[r]eturn information shall be disclosed to members of the general public to the extent necessary to permit inspection of any accepted offer-in-compromise under section 7122 relating to the liability for a tax imposed by this title.” 26 U.S.C. §§ 6103(k)(1).

The IRS argues that the exception applies because EPIC lacks the taxpayer’s consent to receive these records and has no qualifying material interest in the records as described in § 6103(e).  EPIC says it doesn’t need consent or a qualifying material interest because of the requirement to make OICs public.  The court states:

There is no basis in the statute’s text or structure to import these requirements into § 6103(k)(1), which, after all, permits disclosure to “members of the general public.”

So, the IRS next argues that (k)(1) does not create a disclosure obligation to produce records to EPIC but the court quotes from the statute that Section 6103(k)(1) states that return information “shall be disclosed to the extent necessary to permit inspection of any accepted offer-in-compromise.”

Next the IRS argues:

that the phrase “to the extent necessary to permit inspection” gives it discretion to decide both the records it must disclose and the means necessary to disclose them. The Court agrees that phrase limits the records the IRS must disclose to those necessary to permit inspection of any accepted offer-in-compromise. But the IRS’s interpretation goes further. In its view, because the Secretary of the Treasury has by regulation established Public Inspection Files and a related non-FOIA in person inspection process—and determined that nothing more is “necessary” under § 6103(k)(1)—the exception does not afford EPIC any disclosure rights under FOIA.

The court disagrees.  It sees nothing in the statute that prohibits disclosure to EPIC and finds also that case law does not support the position that the IRS has no disclosure obligations to EPIC under (k)(1).  It finds that the IRS must disclose information to EPIC “to the extent that information is necessary to permit inspection of an accepted offer-in-compromise.”  The court does, however, make it clear that EPIC cannot receive former President Trump’s tax returns as part of this request.

I don’t know if EPIC received anything in the end.  I would think that if it did we would have learned about it in the popular press.  The case is not important to me as a way to learn the former President’s tax information but as a way of opening a window to offers in compromise generally.  The court does not seem to limit the time frame of the requirement to respond to the request.  So, FOIA might allow a party to obtain offer information beyond the information for only one year provided in the remote and relatively inaccessible reading rooms.  It might allow targeted requests for OIC information regarding individuals or entities but also might allow for broad based information requests that could save someone the time and effort of getting to one of the reading rooms. 

I do not have any projects going where I want to learn about offers the IRS has accepted.  If I did, EPIC seems to have laid out a path for using FOIA to bypass the remote and inaccessible reading rooms.  Hope springs eternal that the IRS might adopt TIGTA’s suggestion to put this information online, but until it does FOIA seems a better path than frequent flier miles.

Making Offers in Compromise Really Public

The IRS must publicly display accepted offers in compromise (OIC). In the early 1950s, a scandal came to light in which an IRS employee used the compromise provisions to write off the liabilities of members of the criminal element.  The employee was prosecuted (see page 148 for a brief discussion of the events) and President Truman issued an executive order requiring that the IRS make accepted offers public.  Subsequently, Congress passed IRC 6103(K)(1) which provides for public inspection and copying of accepted OICs.  Prior to 2000, these public inspection sites existed in each IRS district and districts generally followed state lines.  At some point the IRS consolidated the inspection sites into seven “conveniently” located sites around the country. These sites are depicted in Figure 1 of the recent Treasury Inspector General of Tax Administration (TIGTA) report entitled “The Offer in Compromise Public Inspection Files Should Be Modernized.”  For example, if I want to view the publicly available OIC records for someone in Boston, all I need to do is head over to Buffalo within a year after the offer becomes public and find the IRS public reading room.

In the 1950s when the IRS first started making OICs public and up until about 1992, the IRS only approved a handful of offers each year. I do not know if it was the prosecution of the IRS official for accepting offers or a general feeling that offers were not worth the trouble but the IRS did not like to accept OICs.  In the Richmond district during the 1980s, one revenue officer had the duty of examining offers.  From my observation, he would carefully research all of the finances of the person or business submitting an OIC before saying no.  The taxpayer seeking the OIC received plenty of attention but had a very low chance of the revenue officer accepting the offer.  For the one offer a year that was accepted in the Richmond District, the procedure was cumbersome and led to a document that was then usually ignored in many respects.  I provide some additional background on why the IRS decided to begin accepting OICs in an earlier post.  As TIGTA notes in its report, though without explaining the reason for the significant increase, the number of offers accepted today greatly exceeds the number of offers accepted at the time of the creation of the current system.  The dramatic increase occurred because in the early 1990s the IRS was trying to combat the large uncollected receivables on its books and to counter the impact of the increase in the statute of limitations on collection from six to ten years.  To do this, the IRS decided to begin accepted OICs on a grand scale.  Yet, little has changed since the public display of OICs began.  It is a labor intensive, costly process that leads to public views of OICs by almost no one.  I picture these seven reading rooms as having lots of cobwebs.

TIGTA proposes to change the system of making offers public. It proposes to put them online.  I fully support their suggestion.  I have made a similar proposal previously with respect to the notice of federal tax lien (NFTL) and Tax Court filings.  Both of my suggestions raise significant policy questions about what can, because of identity issues with NFTLs, and should, because of privacy issues with Tax Court filings, be public.  TIGTA does not get into policy considerations of how putting OICs online will change the very private nature of the current nominally public process of displaying OICs.  For the reasons I discuss below, I think it will have little impact on the individuals but may have an impact of our view of the system.


TIGTA’s report first finds a number of flaws in the way the IRS administers the current system. In the normal style of a TIGTA report it reviews how the IRS handles the public inspection of offers and bangs the IRS for its mistakes.  One common mistake concerns whether the OIC gets publicly displayed at all.  TIGTA found a number of OICs that never made it to the allegedly public reading rooms.  I was not surprised by this news and it does point to a significant flaw in a system even if it is a system that no one cared about anyway because of the way it operates.

Another mistake TIGTA found concerned the public display of the OIC in the wrong regional reading room. This type of mistake occurred regularly with the largest example cited involving almost 300 OICs that were intended for display in California which instead were displayed in Colorado.  The more serious mistake concerns the display of un-redacted information.  TIGTA found numerous instances of information being displayed that should not have.  Since almost no one goes to these reading rooms, I do not think that the taxpayers had their information compromised, but the concern is legitimate and correction appropriate.  The most interesting of the flaws TIGTA found concerns the lack of guidance to IRS employees about the public display of OICs.  It cites several examples.  The one I liked the best was the rules employees at the reading rooms imposed upon individuals looking to read the public OICs.  Some let visitors look at the entire year of OIC acceptances, some a few months and one employee limited visitors to looking at the public OICs only if they could give “a specific taxpayer’s name.”  This view changes the nature of public even more than locating the files in seven places around the country.

After going through the obligatory litany of IRS failures, the TIGTA report gets to the meat of the report where it points out that “we believe that the infrequent inspections could be the results of the combination of inconvenient file locations, limited information available in the files, and the unsearchable paper based format.” Yes, Yes and Yes.  In December, 2009, the Office of Management and Budget issued the Open Government Directive.  The directive “instructs agencies to respect the presumption of openness by publishing information online in order to increase accountability and to promote informed participation by the public.”  TIGTA also cites internal IRS directives with a similar bent.  It points to the significant cost of running the little used paper system.  In this section, it uses a cost per viewing that surprises me and I think the viewings are very low.  It says that “it costs approximately $455,000 annually to administer the program, equating to around $15 per offer and more than $100,000 per viewing.”  I interpret that as saying only four OICs were viewed in the average year.  Wow.

The report does not talk about what you would actually view if you drove or flew to Buffalo on a fine winter’s day. It would have been helpful to the discussion to see a sample of a publicly displayed OIC.  It has been a long time since I saw a publicly displayed OIC but, if the IRS properly does the redactions it is instructed to do, I do not think you get to see much more than the taxpayer’s name and the accepted amount of the OIC.  You do not get to see how much was written off, how old the taxes were, whether the fraud or other penalties existed as a part of the forgiven liability, etc.  The dearth of information on the publicly displayed OIC not only protects the privacy of the individual but it protects the IRS from criticism since it is hard to criticize what you do not know.  I think a useful part of the discussion about publicly displaying OICs during the discussion of how should a system change that has been frozen in time for a long period, is what information should be public in order to allow it to make an informed decision on whether an OIC was appropriate. The file contains redacted Forms 7249 and a related redacted transcript(s) of account. Several provisions of the Internal Revenue Manual (IRM) address the public display of offers and provide good background for anyone embarking on a quest for information from accepted offer.  Before you go, look at IRM (describing a host of public tax information and IRM for OICs specifically) and  IRM (describing what the IRS displays publicly from the OIC file).   Notice that if you try to take a picture of the offer displayed for public inspection, the on-site IRS employee is directed to call local security or the police.  So bring a pencil and paper if you want to take notes.  If President Truman wanted to make this information public in order to avoid another instance of bad taxpayers getting OICs from bad IRS employees, his idea is totally frustrated by the current amount of information made available.

TIGTA’s suggestion to put the information online deserves attention. The IRS apparently agrees with the suggestion.  Congratulations to them both.  Now, talk about what you are going to put online in the spirit of President Truman and the whole idea anyway.

The APA Is Not A Hammer

Professor Bryan Camp follows up from his post yesterday, as he explores the history of the APA and tax regulations to support his view that all tax regulations are not legislative rules under the APA. For Professor Hickman’s post, see It’s Time To Let Go: Treasury Regulations Are Not Interpretative Rules. While this issue may seem a bit academic, it is important, as litigants increasingly challenge the procedural validity of tax guidance in cases like Oakbrook Land Holdings v Comm’r and Hewitt v Comm’r. Les

Kristin Hickman loves the APA.  To channel Jed Rakoff, it’s her Stradivarius, her Colt 45, her Louisville Slugger, her Cuisinart, and her True Love.  It’s her Hammer, her righteous Mjölnir

And when you have a hammer, everything looks like a nail.  Including ALL Treasury regulations.  This is a follow-up post from yesterday to explain why I disagree with Kristin’s contention that ALL Treasury regulations are “legislative” for APA purposes. 


To recap: we are concerned with the question of how must Treasury regulations be promulgated to be in conformity with the APA.  To answer that question, Kristin starts her analysis with the APA text.  All agencies must conform to the APA.  It’s a hammer.  Kristin has spent her academic career looking for a unified theory of administrative law and she views the APA as the enforcement mechanism to whack all the governmental agencies that pop up their unruly heads.  Agencies that do not conform to a strict reading of the APA must be claiming to be “exceptional” from the law.  That’s the Myth of Tax Exceptionalism I discussed yesterday.

To achieve this trans-agency uniformity, Kristen looks at the words in the APA and gives them a strict, but abstract, meaning:  “legislative” means “force of law.”  She then applies that meaning to various agencies to whack them into conformity.  When she applies it to the Treasury Department she concludes that ALL Treasury regulations have the “force of law” and are, therefore, legislative for issuance purposes under the APA.  For that proposition she looks to the Supreme Court’s decision in Mayo as imbuing all Treasury regulations with that magic “force of law.” 

I certainly agree there are certain uniform principles of law that apply to all agencies.  The biggest one is “do what Congress tells you to do.”  I just disagree that the APA is the right place to start.  I believe one should start with the agency’s organic statute and the case law about that agency.  I start there because no lawyer actually practices something called “administrative law.”  Lawyers practice environmental law, or securities law, or SSA disability law….or tax law.  While Kristin and I might study “administrative law” in the abstract, that’s not how it works in the real world. 

I think the history of the APA shows that it was not intended to be a hammer.  It was not enacted to override or intrude on specific laws applicable to specific agencies.  I think the history of the APA supports reading and applying it not so much as a hammer as a safety net, providing a set of legal principles that agencies should follow.  But there are many ways to obey those principles.  Thus, it’s entirely possible that the APA applies differently to different agencies, depending on the agency’s organic statute.  You need to look at the history. That is particularly true for the Treasury Department. 

Kristin seems to say APA history does not matter, for two reasons.  First, she appears to believe that the APA wiped out all prior agency rules and practices.  It hammered out all that came before.  Second, as to tax administration, she appears to believe that the nature and function of tax administration has dramatically changed since the APA’s enactment.  The 1940’s and 1950’s are no longer relevant.  Specifically, she believes that the tax regulations are now more “oriented away” from revenue raising and “oriented towards” using tax laws to serve non-revenue social policies. She writes “Although the tax system has always served multiple goals, recent decades have seen a dramatic escalation in tax programs and provisions serving purposes other than traditional revenue raising.” “Administering the Tax System We Have,” 63 Duke L.J. 1717, 1728 (2014). 

I disagree with Kristin on both counts.   It’s part of what I call the “Myth of Change”  that I mentioned yesterday.  First, I think it is critical to understand that Treasury was promulgating regulations long, long before the APA was enacted.  The APA was enacted on top of an existing tax guidance structure.  Second,I think tax administration has always been an exercise in balancing revenue raising needs with social policies.  To be sure, the particular social policies that Congress wants to affect through taxation have changed over time, but not the use of the tax laws to do more than raise revenue.   I have not seen convincing evidence that Congress is using the tax laws now more than ever for social policy as opposed to revenue raising.  That’s the Myth of Change.

1. Tax Regulations Came Before The APA

The APA, 60 Stat. 237 was enacted June 11, 1946.  It resulted from the Attorney General Office’s monumental study of federal agencies, published in a famous 1941 Final Report.  That Report is still highly influential on how courts apply the APA. see Joanna Grisinger,  Law in Action: The Attorney General’s Committee on Administrative Procedure, 20 J. of Policy History 379 (2008) (reviewing the influence of the Final Report on the APA).  The Final Report, in turn, grew out of a detailed study of then-existing agencies, a study contained in 27 Monographs written by staff, each running hundreds of pages.  Each one is a book.  Monograph 22 focused on the tax administration, back at a time when the IRS was called the Bureau of Internal Revenue (BIR).

Our understanding how the APA applies to tax regulations should thus start in the 1940’s because unlike chicken and eggs, we actually know what came first: tax regulations!  And then, yes indeedy, we need to see whether tax administration or general principles of administrative law have changed so much as to require a change in that relationship. 

What lessons do we learn from this history? 

(a) The APA was not intended to be a hammer. 

The AG’s Committee “had initially hoped to be able to suggest uniform rules for agency practice” similar to the Walter-Logan bill that Congress had passed and President Roosevelt had vetoed. Final Report at 22 (emphasis supplied).  That’s what Kristin wants.  In light of the information produced in the 27 monographs, however, the Final Report backed away considerably from that aspiration and instead prescribed a general framework for balancing the goals of agency efficiency and autonomy with the goals of agency transparency and protection of individuals from arbitrary agency actions.  See generally, Roni A. Elias, The Legislative History of the Administrative Procedure Act, 27 Fordham Envtl. L. Rev. 207 (2008)(nice short student note). 

That is why the resulting APA was widely understood as standing for the proposition that “procedural uniformity was not well suited to the administrative process.” Grisinger, supra, at 402.  That is, the APA provided generalized standards for controlling administrative actions rather than detailed and strict prescriptions.  

As enacted, the APA incorporated broad conceptual principles of administrative law.  Fundamentally was the binary notion of what agencies did.  Agency action was either an “adjudication” or a “rulemaking.”  Roughly speaking, rulemaking was forward-looking, the process of creating some kind of general statement that would apply to a broad set of situations in the future.  In contrast, adjudication was backwards-looking, the process of applying the law to an existing set of facts. 

As to rulemaking, the APA created large conceptual baskets for types of rules, with associated procedures for their issuance.  Again, as Jack Townsend properly noted and as I discussed yesterday, the APA says nothing about what weight various types of rules should carry with the courts.  The default issuance procedure was notice-and-comment.  Some regulations had to go through a more formal process, but only when Congress specified by using the magic language “on the record after a hearing.”  United States v. Florida East Coast Ry., 410 U.S. 224 (1973).  And other regulations could be issued with less formal process if they were either “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice” or if the issuing agency had “good cause” to find that “notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”  5 U.S.C. §553(b).  These foundational concepts were roomy enough to accommodate a wide variety of guidance modalities. 

Let’s see what lesson we can find about tax guidance.

(b) Treasury Regulations were not believed to require notice and comment for issuance. 

The contemporary view in the 1940’s was that existing issuance procedures were consistent with this new “constitution” of administrative law.  The concerns expressed in the Final Report related mostly to the new agencies created by the New Deal, agencies that “have been devised by Congress under the pressure of events for the exercise of new powers in new fields.” Final Report at 213 (emphasis supplied).  Thus, nothing in either Monograph 22 nor the Committee’s Final Report suggests there were concerns with Treasury regulations.  Far from it.  Monograph 22 acknowledged that the “considerable history” behind the BIR made it a very different subject from other agencies “which are working in areas only recently occupied by the Federal Government.” Monograph 22 at 146.

The writers of Monograph 22 discuss in some detail the issuance of a variety of tax guidance documents.  They were fine with the then current process.  Public hearings?  That “would probably be of small practical value, since the problems to be studied are of a highly technical or “legal” character…” Id. at p 147.  Moreover, “time…is often a problem.”  Id. at 146.  Well, Duh!  The writers suggested notice and comment would be appropriate “when time allowed.”  Id.  Thus, the vision was that Treasury Regulations would normally be issued without notice and comment unless time allowed or other circumstances required.  When the writers did express concerns about agency guidance, it was with sub-Treasury guidance being too prolific and de-centralized. Id. at 150-156.  Anyone reading Monograph 22 today will find it very familiar: what was true then is largely still true today. 

Given this history, it is not surprising that the common view was that the APA did not require Treasury to issue most regulations through notice-and-comment process.   That, perforce, meant the rules should be classified as interpretive.  The great administrative law scholar Kenneth Culp Davis reflected this general understanding.  Writing in 1959 for law students, he explained that “the great bulk of Treasury Regulations under the tax laws clearly are interpretative rules, not legislative rules, despite the provision of §7805….  Without the grant of power by §7805, the power of the Secretary or his delegate would be the same…” Administrative Law Text (Foundation Press Hornbook Series) (1959) at 87.   

Again, to reiterate Jack’s point: the APA is notoriously silent on the extent to which a court must follow agency rules when deciding a dispute.  While §706 instructs the reviewing court to “decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action,” that directive is silent on the effect of agency guidance on the court’s task.  The general understanding in 1946—expressed in the influential Attorney General’s Manual as well as elsewhere—was that the APA neither added to nor subtracted from the law of judicial review as it had developed to that point, but instead was only a restatement of existing law.

Into this silence post-APA tax cases continued the pre-APA approach of evaluating tax guidance depending on the level of authority behind its issuance.  Under that view, pre-APA case law had long of distinguished between Treasury and sub-Treasury guidance.  The post-APA case law continued that distinction, with no discussion of how the Treasury regulations were issued.  For example, in 1948 the Supreme Court considered the validity of a regulation that required taxpayers using the installment sale rules to compute deductions consistently with income.  In its opinion, the Court said nothing about whether the recently enacted APA now required changes in how regulations were issued.  Instead, it just went ahead and explained the proper level of deference to be given, proposing this standard: “Treasury regulations must be sustained unless unreasonable and plainly inconsistent with the revenue statutes and…should not be overruled except for weighty reasons.” Commissioner v. South Texas Lumber Co. 333 U.S. 496, 501 (1948).  Hmmm.  Sounds a lot like Chevron!  And Mayo.  And just as in those opinions, the Court’s South Texas Lumber opinion makes no linkage between how the Treasury regulations were issued and the level of deference accorded them.  ‘Cause that was a different issue.

Lower courts as well continued to distinguish Treasury guidance from sub-Treasury guidance, just as they did in pre-APA.  Post APA decisions repeatedly follow the pre-APA approach that sub-Treasury guidance “not promulgated by Secretary” did not have the same weight with courts as Treasury regulations in interpreting tax statutes.  See, e.g. Biddle v. Commissioner, 302 U.S. 573 (1938), 383  (1938); Helvering v. New York Trust Co., 292 U.S. 455, 468 (1934).  But again, these cases do not turn on how the guidance was issued.  They turned on who was issuing it: Treasury or IRS. 

The proper application of the APA to tax administration must therefore start with the recognition that, at the time of its enactment, tax administration was generally considered to be obedient to the APA’s restatement of basic administrative principles.  The APA’s statutory language did not require any changes to how tax guidance was issued or how it was evaluated by courts when adjudicating tax disputes. 

2.  Tax Administration Is Same As It Ever Was

Kristin properly pushes back that the analysis cannot end there.  The next step in the analysis, is to see what post-APA events might have changed this relationship between the APA and tax administration.  Hmmm.  Well….certainly the language of the APA has not changed. The concepts are still broadly defined.  They still do not imagine that only documents titled “regulations” are agency rules subject to the APA, nor do they imagine that every agency document titled “regulation” is a rule that must either be issued in the same way as all other agency rules or that ought to receive the same kind of judicial deference as all other similarly-titled guidance.  These are roomy concepts.  So the inquiry is whether either tax administration or judicial interpretation of the APA, or both, have changed in a way that creates a different relationship between the APA and tax administration. 

We’ll save that inquiry for a different post, next week. 

Tax Court Inconsistent on Economic Hardship

Before I embark on a discussion of this innocent spouse case, I want to pause for a brief commercial interlude.  My fellow blogger, Christine Speidel, and my colleague at Harvard, Audrey Patten, have just published, through the ABA Tax Section, the third edition of “A Practitioner’s Guide to Innocent Spouse Relief.”  I read the book and it is excellent.  Here is a link to the ABA announcement about the book which contains a link you could use to purchase it if desired.  Keith

The case of Pocock v. Commissioner, T.C. Memo 2022-55 holds that payment of the tax liability at issue would create an economic hardship for Ms. Pocock.  I agree with the decision in the Pocock case but find it at odds with an earlier TC Memo decision, Sleeth v. Commissioner, my clinic appealed to the 11th Circuit where the Tax Court found in similar circumstances that equity in property precluded a determination of economic hardship. For a discussion of the Sleeth case look here

The situation in Pocock and Sleeth arises when a spouse with limited income owns property in which equity exists.  This fact pattern arises with some regularity and a consistent position from the Court would assist in resolving these cases at the administrative stage.  In the typical case, the requesting spouse could sell the property with equity, their home, and satisfy a portion of the outstanding liability; however, selling the house would generally create hardship for the requesting spouse who would then need to move, probably to a rental unit of lesser quality with little or no future prospect of purchasing a home.  The requesting spouse in these cases generally has no ability to extract the equity through borrowing because of low income stream to support loan repayment.  Is it economic hardship to require sale of the home to partially satisfy the outstanding joint liability or should the requesting spouse eliminate their equity in assets before basing their economic hardship request on available income?


Fascinating Facts

The facts in Pocock interest me and should greatly concern the IRS and the public in general.  Mr. Pocock tried his hand at several income producing activities without success until he settled on an annual scheme of obtaining a six figure income by grossly inflating his withholding credits.  The Court describes in some detail his efforts to produce income the honest way before embarking on a “money brokering business.”  For reasons described in the opinion, the requesting spouse could not get her husband to discuss his business ventures without fear of physical and verbal reprisal.  She learned to avoid the topic.  He also controlled the mailbox cutting off another avenue of information that might have been available to her.

Here’s the Court’s description of his money brokering scheme:

For taxable years 1995 through 2005, Mr. Pocock fraudulently claimed large refunds on his and petitioner’s joint returns by overstating his income and federal income tax withholdings. Because the IRS did not examine or otherwise correct those returns, respondent’s account transcripts for those years show balances of zero.

On the joint returns for 1995 through 2005, Mr. Pocock reported federal income tax and withholding as follows:

Tax year        Filing date    Total tax       Withholding  Overpayment
1995              9/4/1997      $26,593        $80,674        $54,081
1996              9/8/1997      58,768           98,523           39,755
1997              2/3/1999     61,475           172,406         110,931
1998              12/10/1999 56,158           169,968         113,810
1999              5/4/2001      58,745           174,898         116,153
2000              8/29/2002    51,244           194,170         142,926
2001              12/30/2002 55,060           208,836         153,776
2002              1/11/2005    52,803           219,628         166,825
2003              1/14/2005    47,488           184,828         137,340
2004              10/21/2005 35,253           193,627         158,104
2005              1/17/2008    53,435           149,012         95,577

After receiving the above-described joint returns, the IRS issued Mr. Pocock and petitioner the following refund checks comprising the reported overpayments and, for some years, interest:

Tax year        Issue date     Amount
1997              4/30/1999    $112,621
1998              2/13/2000    115,137
2000              9/27/2002    142,926
2001              3/21/2003    153,776
2002              4/8/2005      168,594
2003              4/1/2005      138,243
2004              7/14/2006    166,077
2005              2/15/2008    95,577

Petitioner, who believed that Mr. Pocock was earning periodic commissions from his “money brokering” business, endorsed the refund checks for 1997 and 2004. Occasionally she asked about the status of their tax filings, but he never gave her a clear answer. When he showed petitioner the 2004 refund check, Mr. Pocock explained that it was part of his compensation for the closing of a deal.

I would like to believe that the fraud filters at the IRS work better than Mr. Pocock’s case suggests.  His scheme succeeded for a long time.  Eventually, the IRS caught on but not for three more years.  He essentially got the same amounts of refunds based on overclaiming withholding for 2006 and 2007 before his 2008 return finally caused the IRS computer or someone at the IRS to wake up.

Mr. Pocock then had the chutzpah to file a CDP request regarding the liability triggered as the IRS refused to give him credit for his bogus overpayment claim.  Only 16 years after his scheme started, criminal investigators appeared on his doorstep.  They eventually recommended prosecution of Mr. Pocock but not of petitioner.  The U.S. Attorney’s office declined to prosecute.  A footnote in the opinion suggests the declination resulted from concerns about the statute of limitations.  I wonder if extreme embarrassment over the IRS’s inability to detect the scheme also played a part in the decision.

I apologize for taking you on a long journey through facts that really have nothing to do with the issue causing me to write this post, but I was so fascinated that Mr. Pocock could use a scheme of overclaiming withholding credits for over a decade that I could not help myself from writing about it.  If you have my same voyeuristic tendencies, I recommend reading the 27 page opinion.

Innocent Spouse Claim

Not that it especially matters but it is worth noting that petitioner filed her innocent spouse request almost a decade ago in January of 2013.  By that point the IRS had established liabilities against the couple of almost $500,000 and it could have been higher.  She petitioned the Tax Court in November of 2016 so it only had her case for five and one half years before rendering an opinion.

At the time of the trial, petitioner was 68 years old.  She had total assets of slightly over $190K almost all of which came from equity in her home.  Her monthly income totaled, $1,855 resulting from social security, wages and rental income from Mr. Pocock, her ex-husband, whom she rented space to in the house.  His presence in the house did continue to cause difficulty as discussed below.

She sought relief under IRC 6015(f) and the Court cited the requirements set out in Rev. Proc. 2013-34.  The Court looked to see if she met the threshold requirements for streamlined relief.  The IRS raised concerns about three elements of the bases for relief.  First, it expressed concern about the transfer of assets from Mr. Pocock to petitioner.  After he stole from the estate of his mother, he transferred his interest in their Florida home to petitioner and her mother (a joint owner of the home.)  The Court finds that the transfer did not occur as part of a fraudulent transfer but rather as compensation for damages resulting from his mishandling of the estate case.

Next the IRS raised an objection concerning her knowledge of the scheme.  The Court found her testimony credible that she did not know what he did each year.  The returns looked proper on their face and he had told her the money resulted from his money brokering business.  The Court was also impressed with the testimony regarding why petitioner would not question him about finances.  As a result, the Court finds she had no knowledge of the overstated withholding and no reason to know the returns were incorrect.

Lastly, the Court found the liabilities resulted from Mr. Pocock’s actions and not hers meaning that the liabilities all met the test of resulting from items attributable to the non-requesting spouse.

The Court then turned its attention to the elements of a streamlined determination.

The requesting spouse is eligible for a streamlined determination by the Commissioner only in cases in which the requesting spouse establishes that she (1) is no longer married to the nonrequesting spouse (marital status requirement), (2) would suffer economic hardship if not granted relief (economic hardship requirement), and (3) did not know or have reason to know that the nonrequesting spouse would not or could not pay the underpayment of tax reported on the joint income tax return, or did not know or have reason to know that there was an understatement or deficiency on the joint income tax return (lack of knowledge requirement). The requesting spouse must establish that she satisfies each of the three elements to receive a streamlined determination granting relief. 

The IRS challenged the marital status element because they still lived in the same house; however, the Court determined that they had become roommates.  The Court did not find that the divorce served as a ruse.

The IRS challenged the economic hardship element because she had substantial equity in the house.  The Court finds:

we doubt petitioner could access the equity in the property without selling it. The record includes a statement of credit denial from a credit union, and petitioner credibly testified that her work prospects were diminishing on account of physical ailments. Given these circumstances, we do not believe petitioner could liquidate her assets to make even a partial payment of the liabilities and still meet her reasonable basic living expenses. She therefore satisfies the second prong of the economic hardship test.

Almost identical facts to Sleeth and the opposite result.  Ms. Sleeth had even less income and no real work history.  She was also in her 60s.  Maybe the Court in Pocock was influenced by a concession by the IRS and maybe the inconsistency is in the approach of the IRS and not the Court.  In footnote 20 the Court states:

Respondent does not contend that petitioner could sell the home and still meet her reasonable basic living expenses. To the contrary, respondent states on brief: “Respondent is not arguing that petitioner should have to sell the home in order to pay the tax liability.”

She did put on evidence that should could not borrow on the equity in the house because she did not have the income to support repayment of any loan.

Finally, the Court looks again at knowledge and determines that she did not have knowledge of the scheme.  It states that Mr. Pocock had proved to petitioner that he was untrustworthy putting her on constructive notice warranting an inquiry by her.  Because he became violent when questioned about finances, her failure to question him in this situation is excused based on the totality of the circumstances.


As a result, the Court determines she qualifies for streamlined relief.  As I mentioned at the outset, I agree with the opinion but find the result here with respect to economic hardship difficult to square with at least one prior opinion from the Court.  Because of the importance of that issue in innocent spouse cases, it deserves more attention at the IRS and the Court.

“Empowering” Taxpayers: Reflections on the IRS Strategic Plan Annual Review

I’ll forgive you if the IRS’s report on “Putting Taxpayers First” has fallen through the cracks of your reading list. The National Taxpayer Advocate’s report (recently covered here and here), the onset of the filing season, and the raft of legislative tax changes over the last year have left me feeling somewhat behind in my tax knowledge. And I get the feeling I’m not alone in that sentiment.

Yes, times are busy for us in the tax world. But that doesn’t mean we shouldn’t take a moment from our busy schedules to reflect on our larger goals. For the IRS, one way this is done is through their Strategic Plan Annual Review and mapping their progress to the myriad goals therein. In this post I’ll take a look at the first of those ten goals: To “empower and enable all taxpayers to meet their tax obligations.”

read more…

A first step in mapping your progress towards a goal may be to clearly define what that goal really is. For example, what does it mean (or look like) to “empower and enable all taxpayers to meet their tax obligations?” I found the report a bit lacking on defining the goal, and even in discussing if the IRS has met it. Instead, the report mostly just discussed what 2021 looked like for taxpayers, and let you, the reader, draw your own conclusions about whether that meant the IRS was “empowering and enabling” taxpayers.

This reader would say that, towards the goal of empowering taxpayers, the IRS had some wins but also some pretty big losses (I will call them “obstacles”) that likely outstrip the wins. I’ll discuss both in turn.

The Wins:

It is hard for a taxpayer to be “empowered” to meet their tax obligations if they don’t understand what those tax obligations are. One way this might happen is if the taxpayer doesn’t speak English. On that front (making tax resources accessible to ESL taxpayers) the IRS deserves kudos.

For one, it was the first year the IRS made Form 1040 available in Spanish. Admittedly, I thought this already was the case but apparently that was only for certain Puerto Rico returns.

But an even bigger (and I think more consequential) change made by the IRS was the creation of “Schedule LEP.” Filing this with the IRS allows the taxpayer to choose from among 20 different languages to receive written communications from the IRS in. For those working with immigrant communities in particular, I’d be sure to take note of this. I commend the IRS for making it available. The next step forward, however, would be for the IRS to do more than just allow taxpayers to make their language preference known to the IRS… It would be to actually communicate with the taxpayer in their preferred language. According to this TIGTA report that is not yet happening. Instead, all Schedule LEP does at the moment is put a notation on the taxpayer’s account for their preferred language. One hopes the actually translated letters will be coming soon.

Another win for the IRS was the popularity of Fiscal year 2021 saw 11.5 billion page views, which was a 24% increase from 2020. There were also 16.8 million people using the IRS2Go app at least once in FY 2021.

Maybe this is only “kind-of” a win for empowering taxpayers, since it is entirely possible that people had to rely on the website largely because they couldn’t get through on the phone (more on that in a bit). But like it or not, the IRS is going to have to rely on a greater online presence and online capabilities as a medium for connecting with taxpayers. Further, the IRS is statutorily required to “improve the digital experience for government customers” under something called the “21st Century IDEA Act” (which I just learned of and will now reference to my students as if it is common knowledge). There are some definite caveats to this “win,” but for now let’s chalk it up as “greater online presence = progress towards empowering taxpayers.”

Lastly, and really more as a matter of statistics rather than evidence of “empowering taxpayers,” the IRS notes that more taxpayers received more good news (i.e. refunds) last filing season. The refunds were both larger and more frequent than the prior year: an 8.6% increase in the number of refunds issued over 2019 returns, and a 2% increase in the dollar refund amount.

The Obstacles:

Let’s start with the obvious. A lot of people wanted to contact the IRS and a lot of people weren’t able to. I’ll list as “obstacles” the sheer demand of taxpayers as well as actions of Congress in late-season changes to the tax code. It is clear that these were impediments to the IRS “empowering” taxpayers with information on their filing obligations.

The report notes that “individual taxpayer telephone demand” (the report isn’t clear on exactly what this entails) was 24 million, a 456% increase over the prior year. That’s a pretty big number. But the number I really found jaw-dropping was this: 2,000%. As in, there was a 2,000% increase in disconnects over the prior year. See page 19 of the report. I note the specific page because this statistic was presented in a way that made it difficult to parse exactly what sort of “disconnects” were being referred to. In any event it is not a statistic that suggests the IRS is “empowering and enabling taxpayers to meet their obligations.”

Another issue is that more people than ever are filing returns. Makes sense since more people than ever have a filing requirement or are eligible for refunds when they weren’t before. But still there are some numbers I can’t quite make sense of. In particular, I’m hoping someone can explain why the IRS would see a 17.7% increase in the number of business returns filed from CY 2021 over CY 2020. One thought I have is that this could be a product of the “start-up boom” and that 2020 apparently saw more than 4.4. million new businesses created. But I would have thought the vast majority of those would be Schedule C filers… In any event, the jump in business returns has created a ton of additional work for an understaffed IRS and is greatly exacerbated by the fact that a huge number of those returns are on paper (20.7 million of the approximately 53 million filed).

A final obstacle worth mentioning is inherent to tax: it just doesn’t translate to other languages well. As the report notes:

Automated translation of languages remains a significant challenge, even for the most sophisticated software. The level of complexity of tax terms and the need for surrounding context means that automated translation tools need to be carefully evaluated to ensure that translations reach a consistently acceptable level of accuracy for users of the translated content. This portion of the project will be ongoing for the next several years.

It’s hard work empowering taxpayers. It’s even harder when you’re trying to empower them in a different language. But my concern has less to do with translating complex English to other languages. Rather, I’m worried about the first step of translating technical tax provisions to plain English -or any language other than tax, really.

The pandemic has augmented my belief that the more people try to self-research complex issues online, the more problems arise. I cynically believe that this is unavoidable until or unless the tax code is drastically simplified -which I have no real (or politically palatable) recommendations on how to achieve. I’m sure there is value to the IRS online resources (like the “Interactive Tax Assistant”). But there are limitations and on efforts to put in simple language things that are inherently complicated -the concept of “Simplexity” comes to mind. 

My Progress Report: Big Picture Thoughts

I’m not here to pile on the IRS. In fact, until the IRS receives some modicum of the funding it needs I am not sure that I really can criticize its customer service. That the IRS is woefully underfunded is perhaps the worst-kept secret in the tax world. The Congressional Budget Office has reported on it. The National Taxpayer Advocate has reported on it. Even HBO (via John Oliver) has reported on it… way back in 2015. And it has only gotten worse.

Without a doubt, there are areas that the IRS is performing sub-optimally even given their funding problems. But for now, I’m not going to focus on them. I think it is more important to keep a focus on the elephant in the room: the IRS had fewer permanent workers in 2021 than it did in 2010.

Think about that.

Among other things, in 2010 the IRS didn’t have to worry about (1) the Premium Tax Credit, (2) the Advanced Child Tax Credit, or (3) the Recovery Rebate Credits. Each of these credits vastly expands the population of individuals that now interact with the IRS. Each of these credits also becomes very confusing very quickly -particularly with their “reconciliation” processes. Further, in my unscientific opinion, each of these credits tend to implicate demographics that are most likely to need customer service (or “empowering”) by the IRS. This is going to require a serious reimagining of the IRS and its priorities if it is a road we continue down.

Increasingly, I conceive of our Internal Revenue Code as an unholy Frankenstein (or “Frankenstein’s Monster,” to the literary buffs/pretentious readers out there). There is some vestige of the original structure and purpose, but over the years we have tacked on appendage after appendage to the point that it really isn’t one “thing” anymore. And we should probably stop pretending that it is.

Scholars sometimes talk about the historical transition of American taxation from “Class Tax” to “Mass Tax” during World War II. We are living in something akin to a third phase now. It isn’t that more people have to pay federal income taxes (“Mass Tax II”). It’s that more people than ever have to file federal income tax returns. (I tried to find something that rhymes with either “Class/Mass” or “Tax” to cleverly anoint this third phase. I failed.)

The stated goal of the IRS was to “empower and enable all taxpayers to meet their tax obligations.” I think that goal, in itself, reflects part of the problem. In this third phase, I would bet so many of the phone calls the IRS gets have nothing to do with trying to “meet their tax obligations.” They have to do with receiving their tax benefits. The IRS (and perhaps Congress) needs to begin conceptually separating “delivering tax benefits” as distinct from “meeting tax obligations.” See Nina Olson’s post, walking through some of her advocacy efforts on that sort of reorganization.

Frankly, I have some reservations about the choice to go down that road with the tax code. But at this point one must acknowledge that we’ve already taken so many steps down it to begin with.

IRS Correspondence Exams: Doing Less with Less

I’m not a huge fan of the suggestion to “do more with less.” To me, it tastes like a corporate-sugar coat to otherwise clearly insipid advice: “be more efficient.” During the pandemic more than ever it should be clear that there are actual bandwidth limitations: sometimes you legitimately need more (time, resources, staff, etc.) to do more.

But that isn’t to say we should ignore inefficiencies, particularly when cuts (to budgets, staffing, etc.) all but force us to confront them. Recently Anna Gooch posted on a TIGTA report that covered some of those inefficiencies in EITC exams. Here, I will discuss another TIGTA report on the inefficiencies of non-EITC correspondence exams. As will be seen, the numbers are pretty shocking in terms of how much “less” the IRS has in terms of resources, but also in terms of how much less the IRS is doing with those resources. In a subsequent post I will drill into some more practitioner-oriented insights that can be gleaned from the report. For now, I will focus on what can be gleaned from the report on tax administration writ large.

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The TIGTA report contains three recommendations to the IRS on how to improve the (non-EITC) correspondence exam process. To me, however, those recommendations are the least interesting and least consequential aspects of the report. They largely boil down to minor recommendations on how the IRS change their selection criteria taxpayers based on prior exams. I’ll touch a bit on that in my practitioner-focused later post.

But what I found more important, and more eye-opening, are the numbers that the TIGTA report lays out. The numbers show just how much less the IRS is working with (in terms of employees) and just how much less the IRS is bringing in (in terms of tax assessments). But they also suggest that the IRS is doing “less with less” at least in part because of inefficient resource allocations. Let’s take a look at some of the statistics…

Doing Less with Less: Massive Drop in IRS Compliance Personnel

One number that jumps out is the Compliance Personnel reductions the IRS has had to contend with. By the numbers, there are 15,000 fewer enforcement employees (a drop of over 25%) from 2010 to 2018, resulting in a 40% reduction in exams.

This mind-blowing statistic largely serves as the impetus for the TIGTA report. We should take as a given right now that the IRS is stretched extraordinarily thin. Accordingly, the focus shifts to the best use of these preciously limited resources. And there is certainly room for improvement.

Over a quarter of the IRS correspondence exams closed between 2017 and 2019 had “no impact on net dollars recommended.” This means that the audit resulted in either “no-change” (i.e. the return was correct) or “no-pay” (that is, the return was wrong but the taxpayer hasn’t made payments on it).

Assuming, as is historically accurate, that a large percentage of the “no-pay” taxpayers stay no-pay, you are looking at a sizeable waste of exam resources going towards returns that will never bring any money into the fisc. Yes, I know there are important reasons to audit beyond just bringing in money like encouraging voluntary compliance. But perhaps, given the resource allocation constraints alluded to above, we should focus our attention on auditing returns that do both: encourage compliance and bring in money. They just might exist…

Doing Less with Less: Trending Towards More Low-Income Exams

Looking at the trends from 2017 to 2019, the numbers are either baffling or appalling. In 2017 the very rich (total positive income (TPI) of $1 million or more) comprised 3% of all non-EITC Correspondence Exams. That same year, the merely well-to-do (TPI of $200K to $1 million) comprised 10% of those exams. The less-fortunate (TPI less than $200K) comprised 86% of those exams. By 2019 the less-fortunate comprised 91% of non-EITC correspondence exams while the very rich only comprised 1% and the well-to-do 8%.

From a pure collectability standpoint this doesn’t make much sense. As noted in the TIGTA report, “despite a lower level of collectability for lower income taxpayers, the relative percentage of non-EITC correspondence examinations [for lower income taxpayers] continues to increase.” But there are other reasons this surprised me.

I talk to my students about why it is our clients are at a significantly higher risk of audit than, say, the students themselves are likely to be when they presumably become upper-middle income lawyers. The answer generally hinges on the Earned Income Tax Credit. I generally bring up the Pro Publica articles here and here. I also recommend as further reading (that is to say, something that maybe one of my students would be interested in but doesn’t have the time to read) the excellent Lawrence Zelenak law review article here. The simple bullet points, as far as I’m concerned, is that low-income EITC returns get audited more because (1) the method of audit is inexpensive and (2) the EITC is sometimes conceptualized as a quasi-welfare-style benefit (that is, a cash transfer) which flares up a greater sense of cheater-detection. Of course, the PT team has also dug into these exact issues here. And the problem of EITC as being an improper payment here.   

This TIGTA report, however, adds an unfortunate wrinkle to my explanation. How do I explain that the trend is to audit relatively low-income taxpayers at a higher rate than high-income earners when (1) the method of audit is the same for both groups (correspondence exam) and (2) there are no “welfare-style benefits” at issue?

There may be some innocuous explanations for this trend. It is possible that high income returns raise fewer flags because they tend to have better tax return preparers. That is obviously just speculation on my part, but I do tend to see middle-income earners falling in the “donut hole” of tax preparation where they don’t qualify for free services and it economically doesn’t make sense to hire someone (competent).

Another, more testable explanation is that the types of issues that are likely to be subject to correspondence exams are, again, simply more likely to be found on low-and-moderate income taxpayer returns. Itemized deductions are highly audited and may not be an issue for high-income because of the AMT. Similarly, Schedule C expenses from sole-proprietors are highly audited (in fact, “Form 1040 Schedule C Issues” were the second most audited project code in the report. They can also be quite time consuming…). However, they may not be an issue for high-income because wealthy (sophisticated) taxpayers are more likely to have a partnership or other entity for their business income. I would think that the wealthier taxpayers are more likely to file the Schedules that come after C… specifically, Schedule D, Schedule E, and Schedule K-1. Those schedules do not appear in the list of top correspondence exam project codes, possibly because there just are few returns listing them or possibly because they don’t lend themselves to correspondence exams. It is also possible that these issue would require more training and time than the IRS invests in examiners, which is a paradigm shift in itself.

Doing Less with Less: Assessing Much, Much, Much Less Tax…

Let’s let the numbers speak for themselves: the value of correspondence exam assessments decreased 52% from 2015 – 2019.

Read that again, please, after your brain has pieced itself back together.

In 2015 the IRS had proposed assessments of $7.3 billion from correspondence exams. In 2019, the proposed assessment value declined to $3.5 billion. Yes, you may recall that there has been a 40% decrease in total correspondence exams from 2010 as compared to 2018, but that is over a longer time-period than 2015 – 2019 and can’t explain the full difference. I think this number is the best indication that there are some inefficiencies factoring into the IRS doing less with less.

Going Deeper into the TIGTA Report

The TIGTA report implies that there are two different ways the IRS could more efficiently run its exam resources. First, the IRS should emphasize certain sources of selected exam cases. Second, the IRS should emphasize certain types of issues. Presently, the IRS does not (by TIGTA’s estimation) emphasize the most efficient sources of exams or the most efficient issues.  

What correspondence exams take the least amount of time and result in the highest value assessments? Perhaps as no shock to those in the tax community it is far-and-away exams on “non-filers.” The average assessment for non-filer exams from 2017 – 2019 is a shocking $28,102. By contrast, the average assessment for Schedule C Issues was only $4,576 and also took significantly more time than non-filer exams did.

It is impossible to determine how much income the average non-filer would have to result in an assessment of $28,102. But for frame of reference in 2018 a single individual with no dependents would have to earn over $140,000 in wages to have that type of income tax due (granted they would need significantly less self-employment income to hit that same assessed tax number). Anecdotally, that amount of wage income is consistent with the tax-protestors I come into contact with. They are rarely low-income.

TIGTA does not specifically “recommend” more exams of nonfilers but does note that “Schedule C issues were less productive than other issues, such as nonfiler issues.” I imagine (and sincerely hope) that the IRS would be quick to examine more nonfiler issues, but that there is simply a smaller pipeline of nonfiler cases. Perhaps that is something increased information reporting from banks could have fixed were it properly focused on upper-income earners.

It should be noted that PT has written about the nonfiler issue multiple times in the past, including the IRS’s essential abandonment of the “Automated Substitute for Return Program.” There is nuance to the issue, including how much how is actually collected from nonfilers (here).  

Which gets to the second issue: the source of return examination selections. Some sources are more productive (in terms of assessed dollars) than others. The IRS has multiple different methods of selecting returns for correspondence exam. There are the “Compliance Data Environment (“CDE”) filters. There are the Dependent Database (“DDB”) and Discretionary Exam Business Rules (“DEBR”) filters. And there are also “referrals” from other, non-Exam IRS functions. Guess which brings in the highest average assessment?  

Far and away, it is from referrals. And it isn’t even close.

Referrals brought in an average assessment of $16,941 as compared to $3,132 from DDB/DEBR and $4,195 from CDE. Oh, and referrals take significantly less time, too: 0.74 hours as opposed to 2.09 from DDB/DEBR and 1.79 from CDE.

On seeing these discrepancies my first thought was that referrals must comprise a small amount of correspondence exams. But that is not so. In fact, referrals are the second most common source of case selection: 33% of the total cases (244,269) from 2017 – 2019 were referrals. The most common source (CDE) was 353,064.

Conclusion: Opportunities for Doing (A Little) More with Less

From the outside looking in it seems clear that the IRS should (1) focus more on non-filer issues and (2) rely more on referrals for case selection. But the outside looking in usually distorts the true picture, so I will reserve at least some of my judgment on the grounds that there are likely many factors I am not privy to.

That said, the IRS does not, in my opinion, have a great record when it comes to efficient use of its resources. Let me close with an example from a recent conference.

During a presentation from the IRS, the speaker said that Collection Statutory Expiration Dates (CSEDs) are listed on taxpayer transcripts, and that she’d “show us where.” CSEDs are an issue of frequent concern to tax practitioners, particularly since the IRS often (systemically) makes mistakes in its calculations. Keith has written (here) about these mistakes and how unhelpful the IRS sometimes is when you ask for a CSED (here). Tantalized at the words of this IRS presenter, I picked up my pen, ready to learn something new and amazed that I hadn’t already known that the CSED was on the account transcript…

So my expression was not unlike a child tearing the wrapping paper off a box of new socks when I saw the presenter’s slide. Yes, the CSED is on the transcript (along with the ASED and RSED). Only not the transcript that is made available to practitioners pulling them online. The proposed solution was to call the IRS for the CSED or make a FOIA request.

Let me repeat that: instead of giving practitioners the information upfront, the IRS adds an extra step that (1) ties up an IRS employee and (2) wastes the taxpayer/practitioner’s time. Why? If the IRS is willing to give out their calculation of the CSED, why not do it upfront? What I hear from the IRS when they explain their decision is: “Well, we could give you this information and save everyone time and improve customer service but… what if instead we just didn’t?”

Perhaps there is something behind the scenes that I just don’t appreciate (yes, IRS technology is not great). But to an outsider it certainly appears sometimes that the IRS shoots itself in the foot to make bad situations worse -in audit selection no less than in customer service decisions. Hopefully their resource constraints may force a re-evaluation of some of these decisions, so that they may “do more with less.”