Caleb Smith

About Caleb Smith

Caleb Smith is Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today.

Play It Again, Sam: The Perils of (Incorrectly) Established Court Analysis

April 28, 2023 by 3 Comments

According to the American Film Institute, Casablanca has the most memorable quotes of any film in the 20th Century. Among the ones I can remember are: “Here’s looking at you, kid,” “We’ll always have Paris,” and, of course, “Play it again, Sam.”

Except, as many people know, no one in Casablanca actually says, “Play it again, Sam.” One of the film’s more famous and repeated quotes is, in fact, not one of the film’s quotes. It’s catchy and it’s close to what the characters actually say, but it’s not quite accurate.

Nonetheless, it has been essentially incorporated into Casablanca’s lore, and is part of its enduring appeal. I think that something very similar happens in the law sometimes. A court repeats a (close, but inaccurate) statement enough that it just becomes accepted. Only unlike apocryphal film quotes, which carry little consequence and can be fairly easily corrected, getting a court to revisit an “accepted” truth is a very tall order.

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As you’ve possibly guessed, I’m talking about the Tax Court’s (mis)understanding of TIPRA payments. But it surely matters in many more contexts. When one case sets bad precedent or one court mischaracterizes the legislative history, undoing the damage gets successively harder each time the original error is repeated. At some point it may just become implacable.

As quick background, in 2006 Congress amended the Offer in Compromise statute (IRC § 7122) to require that a partial payment be included with most Offers. These partial payments are commonly referred to as “TIPRA” payments after the law (Tax Increase Prevention and Reconciliation Act) that created them.

In a series of posts, I laid out why I thought there was a good argument to be made that TIPRA payments were refundable deposits. Those arguments included (1) the ambiguous statutory language, (2) the equally ambiguous legislative history, and (3) the plain language of the Treasury Regulations. So imagine my surprise when, after having spent all that time, I come to learn that:

“The law is clear that a TIPRA payments are not refundable deposits but rather are non-refundable payments of tax.” So says the 9th Circuit in Brown v. Commissioner, 58 F.4th 1064, 1066 (9th Cir., 2023)). 

But you don’t have to just take the 9th Circuit judges’ word for it. In fact, they cite to (1) a precedential case, (2) the statute, and (3) the legislative Conference Report on point, all saying that the TIPRA payments are non-refundable payments of tax. You don’t get clearer than that!

Until, that is, you actually look at each of the sources. Let’s start with the Conference Report.  

Actually… let’s not start with the Conference Report, because Brown doesn’t quote the Conference Report, but rather to a case that cited to the Conference Report. So let’s start by looking at that case, Isley v. Commissioner, 141 T.C. 349 (2013) and its analysis.

In Isley, the Tax Court directly addresses whether the taxpayer (famous musician Ron Isley) is entitled to a refund of his TIPRA payment on a rejected Offer. The Tax Court found that Mr. Isley was not entitled to a refund of the TIPRA payment because it was a payment towards the underlying tax liability, rather than a deposit. To reach this conclusion, the Tax Court draws on the TIPRA Conference Report, and goes on to say:

“The report’s explanation of the new provision refers to the 20% payment as a ‘partial payment’ or ‘down payment’ of the taxpayer’s liability.”

Case closed, as they say on TV. Except…

What the Conference Report Actually Says

The good news is that the words the Tax Court put in quotes (“partial payment” and “down payment”) are, in fact, words used in the Senate Amendment. The bad news is that the Conference Report doesn’t refer to those as being “applied to the taxpayer’s liability.” Which of course is exactly what the Tax Court is using the Conference Report to argue for.

Maybe a less selective quote from the Conference Report would be helpful:

Senate Amendment:

“The provision requires a taxpayer to make partial payments to the IRS while the taxpayer’s offer is being considered by the IRS. For lump-sum offers, taxpayers must make a down payment of 20 percent of the amount of the offer with any application. […] The provision eliminates the user fee requirement for offers submitted with the appropriate partial payment.” [Emphasis added]

Conference Agreement:

“The conference agreement includes the Senate amendment provision, with the following modifications. Under the conference agreement, any user fee imposed by the IRS for participation in the offer-in-compromise program must be submitted with the appropriate partial payment. The user fee is applied to the taxpayer’s outstanding tax liability.” [Emphasis added.]

It is important to note that a “user fee” is undeniably separate from the partial (i.e. “TIPRA”) payment. The Senate Amendment originally proposed getting rid of the user fee so long as there was a TIPRA payment. The Conference Agreement said, “no, let’s keep the user fee in addition to the TIPRA payment.” Treating the user fee and TIPRA payment distinct is also how the statute operates.

So the Conference Report only makes clear that the user fee must be applied to the outstanding tax. But the Conference Report says absolutely nothing about whether the TIPRA payment must be applied to the outstanding tax. (Somewhat perversely, the IRS has since decided that it will refund the user fee but not the TIPRA payment if the Offer isn’t processed: see Offer terms of Form 656 Section 7 provision (c).)

What about the “down-payment” language that the Tax Court quotes? To me, understood in its proper context, describing TIPRA payments as a “down-payment” makes much more sense if it is thought of as a “down-payment” on the Offer and not on the underlying tax (as Isley claims the report requires). You don’t make “down payments” on tax that is already assessed and owed for prior years. You make a “down payment” on the proposed Offer settling that underlying tax for a lower amount. If I was making a “down payment” on the underlying liability, I would not be making an Offer at all: I’d be fully paying the tax.

But wait, there’s more. Let’s take a look at how the Conference Report characterizes the “Present Law” (i.e. the law prior to TIPRA):

Present Law:

“Taxpayers are permitted (but not required) to make a deposit with their offer; if the offer is rejected, the deposit is generally returned to the taxpayer.” [Emphasis added]

What TIPRA changed from the present law was that it required a partial payment rather than just “permitting” one. That’s it. It did not say a word about changing the character of that partial payment from a refundable deposit to a non-refundable payment of tax. Indeed, since the law prior to TIPRA was “optional deposit” and the only explicit change was to remove the word “optional,” I’d argue that the Conference Report supports a reading that it remains a deposit. Note also IRC § 7809(b), reinforcing the general understanding that Offer payments are deposits.  

Of course, the 9th Circuit in Brown also says the statutory language is clear, and courts focus on the text of the statute rather than a Conference Report. So just how clear is the statute?

Apparently clear enough that the Court doesn’t need to analyze it. Brown doesn’t quote the language of the statute, but parenthetically describes IRC § 7122(c)(2)(A – C) as “establishing that any TIPRA payment goes to the taxpayers liabilities.”

We’ll see if that is a fair characterization in a moment. But note that the same lack of statutory analysis is apparent in Isley. Further, in a twist of fate, petitioner’s counsel in Isley is the same as petitioner’s counsel in Brown, and never appears to have raised the issue of the ambiguous statutory language in either case. Per Isley:

“Thus, it is clear that, in the normal circumstances of a taxpayer’s submission of an OIC to the IRS, the section 7122(c) payment constitutes a nonrefundable, partial payment of the taxpayer’s liability, and petitioner does not argue to the contrary.” 141 T.C. 349, 372. [Emphasis added.]

What the Statute Actually Says

We are told in Brown that IRC § 7122(c)(2)(A – C) establishes “that any TIPRA payment goes to the taxpayers liabilities.” Maybe. But just for fun, let’s look at what the statutory language actually says:

(A) Use of payment

The application of any payment made under this subsection to the assessed tax or other amounts imposed under this title with respect to such tax may be specified by the taxpayer.

(B) Application of user fee

In the case of any assessed tax or other amounts imposed under this title with respect to such tax which is the subject of an offer-in-compromise to which this subsection applies, such tax or other amounts shall be reduced by any user fee imposed under this title with respect to such offer-in-compromise.

(For present purposes, Subparagraph (C) is mostly irrelevant and gives the Treasury the authority to waive the TIPRA payment requirement via regulation. Why that might matter in a different context will be discussed in my next post, which deals with admin law.)

The statute breaks down two different types of payments: (1) Subparagraph A pertaining to TIPRA payments and (2) Subparagraph B pertaining to user fees. They are distinct, and clearly lay out different standards: (A) sets out flexibility for taxpayers on TIPRA payments, whereas (B) gives no flexibility. Subsection (A) never says a word about TIPRA payments being nonrefundable, or otherwise required to be applied to taxpayer liabilities.

So while the statute (like the Conference Report) is clear on user fees, it is decidedly ambiguous on TIPRA payments. All it really says is that the taxpayer can specify how TIPRA payments are applied if they want to.

If I wanted to go further down the statutory interpretation rabbit-hole, I’d note that the Supreme Court has said that when “Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.” Russello v. United States, 464 U.S. 16, 23 (1983). The Tax Court has frequently quoted this language approvingly in precedential decisions. See, e.g., Whistleblower 21276-13W v. Commissioner, 147 T.C. 111 (2016); Grajales v. Commissioner, 156 T.C. 55 (2021); and most recently, Thomas v. Commissioner, 160 T.C. No. 4 (2023). Applied here, one might argue that Congress specifically said underlying tax is reduced by user fees but did then omits that language with regards to TIPRA payments.

Interesting…

Play It Again, Sam

So the statute doesn’t clearly say, “TIPRA is non-refundable payment towards the liability.” Nor does the Conference Report. And yet here we are, told again and again that both the statute and Conference Report make “clear” that TIPRA is non-refundable. Play it again, Sam: if we just say it enough, it becomes part of the lore.

But for posterity’s sake, let’s be clear: the law is not clear that TIPRA payments are non-refundable payments of tax. And the 9th Circuit and Tax Court are, I think, clearly wrong about that. Changing that understanding, however, will not come easy.

Filed Under: Collection Due Process, refund claim

How Much Does Brown Limit Tax Court Refund Jurisdiction in CDP?

April 26, 2023 by Leave a Comment

In my previous post, I discussed how the 9th Circuit appears dismissive of the notion that Boechler affects “refund jurisdiction” in Tax Court CDP cases. However, because the 9th Circuit didn’t directly address Boechler (despite the taxpayer’s urging), we don’t know exactly how or if Boechler interfaces with the Tax Court’s determination that it “lacks jurisdiction” to issue refunds in CDP cases.

Even disregarding Boechler, I have argued that the Tax Court may have jurisdiction to order some types of refunds. Summarizing my prior posts in a nutshell, I argued that the Tax Court could/should order money be returned to petitioners so long as the money was not a “rebate” refund resulting from an overpayment of tax. See IRC § 6401(a). As something of an oversimplification, a non-rebate refund is one that does not result from an “overpayment” of tax.

A good example of a “non-rebate” refund would be returning the “TIPRA” payment, which can be thought of as a “down payment” sent in by a taxpayer on an Offer in Compromise. And it just so happens that refunding TIPRA payments is exactly what the Tax Court said it lacks the jurisdiction to do in Brown. So much for my theory.

Or perhaps there is still hope… Indeed, perhaps Brown actually strengthens my theory! Read on to see for yourself if I am delusional.

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At this point, there are four separate Brown opinions from the Tax Court and 9th Circuit, so it may be helpful to reorient ourselves with the procedural posture. That should also help us to determine exactly what is (or should be) at issue on the jurisdictional question.

In Brown I (T.C. Memo. 2019-121), the Tax Court found that there was no abuse of discretion in the IRS’s refusal to return a TIPRA payment on a rejected/returned Offer. The 9th Circuit affirmed that there was no abuse of discretion in Brown II (826 Fed. Appx. 673, (9th Cir., 2020)), but remanded the case to the Tax Court solely on the question of “whether it has jurisdiction over Brown’s TIPRA payment.” Apparently, the Tax Court hadn’t “meaningfully” addressed the foundational, jurisdictional question so the 9th Circuit wanted to know.

Which brings us to Brown III, where the Tax Court (in T.C. Memo. 2021-112) “shockingly” determining that it is a “court of limited jurisdiction.” Accordingly, the Tax Court found that it had no jurisdiction over the TIPRA issue. The 9th Circuit blessed this determination in Brown IV (58 F.4th 1064 (9th Cir. 2023)) and in a sentence that made me cringe, approvingly reiterated that the Tax Court “is a court of limited jurisdiction.”

Ok. So the question addressed on remand (“is there Tax Court CDP jurisdiction over the TIPRA payment”) was answered with a resounding “no.” How is that possibly a win in my “Tax Court might have jurisdiction over some refunds” argument?

It is a (possible) win because of the analysis leading to the conclusion, and the fact that the courts thought it necessary to analyze exactly what a TIPRA payment “is.” Allow me to explain…

Questions Presented, Answers Provided

Both the 9th Circuit and Tax Court frame the issue solely on jurisdictional grounds: does the Tax Court have jurisdiction to order a refund of a TIPRA payment? This is not a merits issue (i.e. “Should Mr. Brown get his TIPRA payment back?”) because that was already decided “no” in Brown I. Thus, it is a question of whether the Tax Court ever has the power to order a TIPRA payment be refunded.

If Greene-Thapedi were interpreted broadly (as it all too often is), it wouldn’t really matter what the “character” of a TIPRA payment is. All that would matter is that the taxpayer is asking for “money back” in a CDP hearing. The TIPRA payment could be a deposit, it could be a non-rebate refund, it could be, well anything and the Tax Court would say “no jurisdiction” if Greene-Thapedi is interpreted expansively enough.

But here, the parties wrestle with that exact issue (“what is a TIPRA payment?”) in their briefing, and the courts continue to wrestle with that issue in their opinion. That the courts find that question to be relevant to their jurisdictional inquiry is (I’d say) a win for team “Tax Court can sometimes issue refunds in CDP.”
I’ve argued that the character of the payment you’re asking for back (and the reason for its return) does or should matter to CDP “refund” jurisdiction questions. Arguably, Brown could be seen as support for that proposition, for the very reason that the court thinks the character of TIPRA payments matters to its jurisdictional inquiry. Or I could just be engaging in wishful thinking.

Tightening the Jurisdictional Straitjacket?

In my previous post I lamented how the Tax Court seems to read its jurisdictional grant in CDP cases as a straitjacket, preventing it from doing essentially anything to remedy an abusive IRS action if that remedy that isn’t explicitly stated in the statute. Since the statute just says that a person can petition the Tax Court to “review” CDP determinations (see IRC § 6330(d)(1)), any step beyond “reviewing” the action (say, ordering the IRS to remedy the problem identified) would fly in the face of the jurisdictional mandate. End snarky depiction of Greene-Thapedi.

Still, on occasion the Tax Court will subtly move beyond the role of observer in the sky to actual arbiter of outcomes in CDP cases. For example, we saw in Schwartz that the Tax Court may determine that there were overpayments that, via “credit elects,” wipe out other liabilities. In other words, the Tax Court may functionally determine an overpayment, and even functionally apply that overpayment to a back year… just don’t ask them to take one further leap and put that money in the petitioner’s pocket.

I worry that Brown may represent further needless tightening of the straitjacket because the decision can (and probably will) be cited as another example of how little the Tax Court will do when “getting money back” is at issue in CDP. Undeniably, the Tax Court holds that does not have the jurisdiction to return TIPRA payments. To some degree, that must be a tightening of the jurisdictional straitjacket, since a TIPRA payment is not your traditional “overpayment/refund” case. And yet, to conclude the straitjacket metaphor, there may yet be some wiggle room due to how the Tax Court characterizes TIPRA payments in reaching its determination.

The Tax Court characterizes TIPRA payments as “non-refundable payments” that must be applied to the “underlying tax liability.” On this understanding, the ability to get TIPRA payments is more restrictive than writing a general check to the IRS on a potential underpayment (in a deficiency proceeding), because under normal circumstances you could designate the payment as a “deposit.” See IRC § 6603. Not so with TIPRA payments.

Brown may require that I narrow my suggestion from “Tax Court can order non-rebate refunds in CDP,” to “Tax Court can order return of deposits in CDP.” That would be really cold comfort: I’d bet deposits are very rare in CDP contexts.

Oddly enough, however, one of the few collection statutes that deals directly with deposits strongly suggests that a TIPRA payment would be a deposit and that, on rejection of an Offer, the deposit should be returned to the taxpayer. See IRC § 7809(b)(1) and the hanging paragraph at the end of 7809(b). In any event, if the Tax Court can’t at the very least order the return of deposits in CDP jurisdiction I have no idea why it had to explain that a TIPRA payment isn’t a deposit before determining it lacked jurisdiction to refund it.

Perhaps, however, I can also read Brown in a more optimistic (perhaps delusional) way. On my optimistic reading, the reason the Tax Court can’t refund TIPRA payments is because they are explicitly “nonrefundable payments on the underlying liability.” Surely there are other nonrebate refunds that are not explicitly “nonrefundable,” such that the Tax Court wouldn’t be thumbing its nose at Congress if it ordered that they be refunded. At least one can hope.

Of course, I’ve saved the badnews for last: the Tax Court (and 9th Circuit) analysis of what TIPRA payments “are” is extremely weak. Why is that bad news? I guess you’ll just have to read my next post.

Filed Under: Collection Due Process, refund claim

Does Boechler Change Tax Court Refund Jurisdiction in CDP?

April 21, 2023 by Leave a Comment

I’ve written quite a bit (posts here, here and here) about how I think you should be able to get some “refunds” in CDP cases, despite the holding of Greene-Thapedi and its progeny. One thing I didn’t touch on in those posts was whether the Supreme Court decision in Boechler changed the jurisdictional equation.

Fortunately, that argument was recently raised. Unfortunately, it was effectively ignored by the 9th Circuit. More unfortunate still, it was raised in the Brown v. Commissioner saga, which has yielded a well-spring of taxpayer adverse decisions. And the hits keep coming…

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They say bad facts make bad law, and I’d say something similar about “bad taxpayers.” I don’t know who exactly this particular Michael D. Brown is but owing approximately $50 million in back taxes usually doesn’t play well. I can’t help but see that as a backdrop to some of the opinions that have been rendered in his line of cases… but more on that later.

As a brief refresher, Mr. Brown submitted an Offer in Compromise (Offer) to settle his back taxes for a lump-sum payment of $400,000. Because he is over 250% of the Federal Poverty Line, his Offer had to be accompanied with a 20% payment -commonly referred to as a “TIPRA” payment, after the bill that enacted it.

The IRS “rejected” (or “returned,” his Offer… maybe the distinction matters?) but pocketed the 20% TIPRA payment. Now Mr. Brown wants his $80K back. The Tax Court had already found that the return/rejection of the Offer was not an abuse of discretion, and the 9th Circuit agreed. But there was still an open question as to whether the Tax Court had jurisdiction to order a refund of the TIPRA payment. The 9th Circuit remanded to the Tax Court on exactly that issue.

Of course, on that question the Tax Court found that it is “a court of limited jurisdiction.” (T.C. Memo. 2021-112.) Hence, no jurisdiction over refunding the TIPRA payment. Everyone can mark that off on their bingo sheet.

As an aside, I’d note that the Tax Court also makes a determination about the character of the TIPRA payment (i.e. “not a deposit”) and whether on the merits it should be refunded. The 9th Circuit blesses that determination as well, which I take issue with and will go into more detail on in my next post.

For now, let’s focus on how heavily Boechler, a decision explicitly covering jurisdictional statutes issued five months prior to the Tax Court ruling in Brown figured into the equation. How did the Tax Court address this monumental Supreme Court decision explicitly dealing with the Tax Court’s CDP jurisdiction in its opinion regarding the Tax Court’s CDP jurisdiction?

[Alec Trebek Voice]: “Answer: Not at all.”

Well, you might say, maybe the issue wasn’t raised. And indeed it wasn’t. The brief for Brown had already been submitted prior to Boechler. You can’t fault the Tax Court for not considering an issue that wasn’t raised.

But what about with the 9th Circuit on appeal?

Brown explicitly did raise the Boechler issue in its briefing with the 9th Circuit via FRAP Rule 28j and also as part of oral arguments. How much did the 9th Circuit address this monumental Supreme Court decision explicitly dealing with the Tax Court’s CDP jurisdiction in its opinion regarding the Tax Court’s CDP jurisdiction?

[Alec Trebek Voice]: “Answer: Not at all.” Daily double!

Thus, the request for an en banc hearing to revisit the issue. And the rather terse shut-down of that request: a one-page denial noting that of the entire bench “no judge has requested a vote on whether to rehear the matter en banc.”

So we don’t really know how the 9th Circuit thinks Boechler applies to the question of the Tax Court’s refund jurisdiction. Though I suppose we can infer that the 9th Circuit simply thinks that Boechler doesn’t apply at all. Is that the correct reading of Boechler?

Read narrowly, Boechler looks at the distinction between claims processing rules and jurisdictional rules. It deals with procedural questions of jurisdiction: when you can get into court, not what powers a court can exercise once you’re there. On this reading, it is fair to say that Boechler is wholly irrelevant to the issues in Brown.

That is my Cliff’s Notes version of Boechler and jurisdiction. It would likely get you a D- on any law school exam. You’d be better off reading the actual opinion (it isn’t that long), or better yet Carl’s multiple posts on the topic.

Counsel for Brown urges a broader reading. Per the motion for rehearing, Brown argues that Boechler “changed the jurisdictional inquiry. The old platitude stated that Tax Court lacked jurisdiction over a matter unless some statute expressly granted it. Boechler establishes the new standard that Tax Court has jurisdiction if a predicate notice has been issued unless some statute eliminates that jurisdiction.”

Maybe. I’m not sure I agree that Boechler goes that far. But I do think that the Tax Court genuinely needs to wrestle with Boechler in ways it does not yet appear ready to. At the very least, I’d ask the Tax Court to look at jurisdictional issues with fresh eyes and retire the opening sentence of so many opinions: “We are a court of limited jurisdiction.” This favorite refrain of the Tax Court has never really done any legwork because, as Judge Posner aptly remarked in Flight Attendants v. Commissioner, 165 F.3d 572, 578 (7th Cir. 1999) “All federal courts are courts of limited jurisdiction.” (Hat tip to Bryan Camp’s article for highlighting that quote.) The inquiry is to the scope of that jurisdiction.

On that note, it genuinely confounds me that that Tax Court continues to interpret the scope of its CDP jurisdiction as if Congress placed it in a straitjacket. CDP was created by Congress precisely as a judicial check against IRS abuse. Thus, it rings a bit hollow when the petitioner demonstrates in a CDP case that the IRS did something abusive (like keep money it shouldn’t) and the Tax Court retorts, “We’re an Article I Court. If only Congress gave us power to remedy such abuses… alas.”

But the Tax Court decision in Brown (upheld by the 9th Circuit) is even worse than being just one more notch on the Thapedi-Thumper’s belt. As I’ll discuss in my next posts, Brown potentially represents the Tax Court tightening the straitjacket even further.

Filed Under: Collection Due Process

Getting Refunds in Collection Proceedings: Why CDP Matters

January 27, 2023 by 2 Comments

In my last two posts (see here and here) I have tried to put into perspective how a taxpayer is and isn’t constrained by the Tax Court’s lack of “refund” jurisdiction in CDP cases. In my posts I have tried to explain that the Tax Court may (1) functionally determine an “overpayment,” so long as it pertains to the propriety of a collection action, and (2) order the IRS to return money to the petitioner, so long as it is not a “rebate” refund (i.e. money representing an overpayment).

In this post I want to expand on the ability to get a refund in CDP a bit more, with a focus on how even if what you’re really after is the determination of an overpayment with a (rebate) refund, CDP may still be of use. To get there, we need to think a bit more holistically about how the CDP process really works, rather than just focusing on the (occasional) end-product of a Tax Court order.

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So you think the IRS should give you money and you have the opportunity for a CDP hearing… Returning to my wrongful state tax levy example may help illustrate the problems with throwing up one’s hands and cursing Greene-Thapedi for CDP’s futility.

As a refresher, in my earlier post I stated that if I had a case where the IRS took a state tax refund without giving the (legally required) prior notice, I would demand that money back in a CDP hearing. In the comments, Carl noted that every court thus far has found that the Tax Court does not have refund jurisdiction. Carl also compared the statutory language of Tax Court CDP jurisdiction (IRC § 6330(e)(1)) with that of the Tax Court’s refund jurisdiction in deficiency cases (IRC § 6213(a)). On his reading (and having no small amount of knowledge on the area of all things jurisdictional), Carl speculated that the Tax Court also likely wouldn’t find it had the injunctive grant of power to return the improperly levied state refund.

Perhaps.

In my prior two posts I think I’ve explained why I don’t think that’s the case. But let’s leave that alone for now. Instead, let’s focus on everything that would happen before actually getting to the Tax Court.

How CDP Cases Actually Play Out – Multiple Chances for Remedy

If the facts are abundantly clear that the IRS did not send the proper, legally required notice prior to levying on my state tax refund, it is possible that the CDP hearing will end without ever needing Tax Court involvement. Perhaps you get a reasonable Settlement Officer who takes seriously their statutory obligation to investigate that “the requirements of any applicable law or administrative procedure have been met.” IRC § 6330(c)(1). Clearly, they were not followed in my hypo.

Admittedly, it is an open question of whether the IRS should necessarily have to give back the state tax refund just because the applicable rules were not followed. Perhaps the IRS could make some sort of harmless error argument, if I really don’t have a good alternative to levy. But it is also pretty easy to come up with facts where the IRS’s own policies would suggest that they shouldn’t have levied -for example, if the levy would cause (or exacerbated) economic hardship.

Importantly, it is also clear that the IRS “can” give a state refund back to the taxpayer. The IRM suggests that there are a number of situations where it may be appropriate to return a state tax refund levy (see IRM 5.19.9.3.7). The IRM also suggests returning the refund if there was a finding of economic hardship. See IRM 5.1.9.3.5.1(8).

So with the right facts and a reasonable Settlement Officer the IRS just might agree to give you back the improperly levied proceeds in their (favorable) determination letter. Obviously, being provided the relief you sought, you would petition the Tax Court thereafter, and no Tax Court involvement would ever take place.

The system (in this case, buoyed by a truly “Independent Office of Appeals”) works!

Indeed, this is precisely what I suggested in my post on the CP504 Notice, where I mentioned the value of CDP while also (in the same sentence) mentioning the limitations on refund jurisdiction in Tax Court. Simply put, you can get a refund in an administrative CDP hearing that you may never get “ordered” in CDP litigation.

But what if the Settlement Officer issues an unfavorable notice of determination? Good news: you still don’t (yet) need the Tax Court to order a refund. You just need reasonable IRS Counsel after your petition.

Believe it or not, even huge bureaucracies like the IRS are ultimately made up of people -most of whom want to do the right thing. I’ve had multiple petitions on CDP determinations where there is a plain error made by IRS Appeals. On the egregious cases I’ve had, when IRS Counsel gets the petition they ask me, “what can we do to fix it?” Sometimes IRS proposes a fix that the Tax Court would not be able to order on its own. As an example, I had a CDP case where IRS Counsel proposed removing penalties as a fix, even though (in our posture) there was no possible way of the Tax Court providing that remedy.

Of course, the obvious next question is “but what if IRS Counsel doesn’t agree with you?” Well, then you just may get to a Tax Court order. But even still, I think the Tax Court can play an important role without directly ordering a refund.

Doing the Right Thing, With the Right Motivation

Back to the Schwartz opinion from my first post…

In Schwartz the Tax Court found that the petitioner didn’t owe for two years (2006 and 2007) but did owe for others. Accordingly, the conclusion of the opinion states that the Tax Court does “not sustain the proposed levy for those years.” What are the consequences of this opinion?

I suppose you could read it extremely narrowly: the IRS cannot levy for 2006 and 2007. That’s it.

Or you could read it more accurately: the IRS cannot levy and should adjust their accounts to show no balance due for those years.

There is a subtle difference between the two.

Theoretically, if the order didn’t require the IRS to adjust the account balance but only said “the IRS cannot levy” for 2006 and 2007 the IRS could still maintain that there is a balance due, and even offset against it, effectively collecting while not running afoul of the Tax Court order. This would read an opinion (and order) as only pertaining to the propriety of a levy, and not addressing the underlying rationale.   

But it is unthinkable to me that the IRS would fail to adjust the accounts, not least of all because the opinion makes explicit that the Tax Court has found no balance due. So it shouldn’t really matter if the ensuing order tacks that on… but therein lies the rub.

As I said before, Tax Court opinions matter. And this is why remands aren’t a useless remedy. I ended my first post with the hypo where the Tax Court finds that the IRS erred in failing to credit the taxpayer’s account with $5,000 on a $3,000 liability. Conceptually, not that different from Schwartz or even the issue in Melasky… albeit in my hypo, the Tax Court has a favorable finding for the taxpayer.

What happens next?

The Tax Court opinion finds that the IRS erred in failing to credit money to the taxpayer’s account. But the Tax Court order only remands the case to IRS Appeals to address this error in a supplemental hearing: it does not “order” a refund.

The opinion, frankly, should be enough to get you where you want to go. When the Tax Court kicks the case back to Appeals, the IRS should get the (literal and figurative) memo. It will either make the adjustments required of the opinion’s reasoning or be stuck in a doom-loop of remands for errors of law in its supplemental determinations.

In my experience, this is actually a pretty non-controversial understanding of how the Tax Court works in CDP, even on “vanilla” collection issues. The Tax Court almost never “orders” specific relief (e.g. “the IRS must accept this Offer,”), but rather remands solely on abuse of discretion (e.g. “the IRS abused its discretion in rejecting this Offer,”). Where taxpayers ask for more, they usually don’t get it, even when they clearly win on abuse of discretion. See, for example, Antioco v. Commissioner, T.C. Memo. 2013-35 (Judge Holmes finding abuse of discretion, but not ordering the IRS to enter into an installment agreement).

Conclusion: Maybe You Don’t Need an Order of Refund, or Even Refund “Jurisdiction”

The IRS’s mission isn’t to cling tightly to as much money as it can that comes through its doors. And the IRS attorneys I’ve worked with likewise don’t tend to see this as their job. I am confident that if I had a court opinion saying “IRS you were wrong to take this money,” the IRS wouldn’t say “But we’re keeping it until you can find a judge to specifically order us to give it back.”

It is, perhaps, a hassle that the Tax Court can’t or won’t act as a one-stop shop to order these refunds, and that a particularly recalcitrant IRS employee could force the taxpayer to seek redress in federal district court. But I don’t think this is what happens in most instances.

At the administrative level, the IRS can surely make the changes to its accounts “behind the scenes” in CDP, and without the Tax Court expressly ordering them to do so. I expect that’s how most CDP cases resolve.

But even at the Tax Court level, it is important to recognize that the parties can enter decisions that provide more detail and more protection than just “the Notice of Determination is (or is not) sustained” without running into jurisdictional traps. Indeed, going beyond the limited jurisdictional issues before the Tax Court judge is what negotiating “below the signature” stipulations is all about (PT posted a helpful IRS guide on that issue here).

And while it might not be a Tax Court “order,” having stipulations dealing with the future actions of the parties (e.g. “the IRS will credit Petitioner’s account with $x”) is not too shabby.  

Filed Under: Qualified Offer

Getting a Refund in CDP: Don’t Call it a (Rebate) Refund

January 26, 2023 by Leave a Comment

In my previous post I discussed how the Tax Court can effectively find there was an “overpayment” in CDP jurisdiction, even if it doesn’t (or can’t) order a “refund” thereafter. This, I argued, is essentially what happened in the recent case of Schwartz v. Commissioner. In this post I’ll take things a step further by arguing that the Tax Court can (effectively) order a refund in CDP, even if it can’t quite use those exact words.

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Imagine that the IRS levied on your state tax refund when it has not properly followed the procedures (that is, the law) prior to doing so. Fortunately, under IRC § 6330(f) you are provided a CDP hearing after the levy. You are pretty upset: indeed, you want the money back for the IRS’s improper levy.

Months ago, I wrote about this exact scenario with the IRS CP504 “Notice of Intent to Levy.” I argued if the IRS does not properly send the CP504 (for example, it isn’t sent to the “last known address”), the IRS should have to return the levied proceeds to the taxpayer. I suggested that this be done at the CDP hearing.

Carl Smith noted in the comments section that you probably wouldn’t be able to get these proceeds returned in CDP because the Tax Court does not (believe itself to) have “refund jurisdiction.” See Greene-Thapedi. And I completely agree with Carl that if you ask the Tax Court to “order” a “refund” in CDP it isn’t going to happen.

But I don’t think that ends the inquiry or addresses the actual hypothetical I laid out. And it is important to understand why.

It is fair to say that the Tax Court has tended to take a rather narrow view of its ability to order refunds in CDP litigation. The posts here and here detail multiple cases where the Tax Court (and affirming appellate courts) say “sorry, but if you’re asking for a refund you’re in the wrong place.”

One could therefore be excused for looking at these decisions and saying “if you’re asking for money back, it isn’t going to happen in CDP.” In a likely ill-advised effort of providing a mnemonic device, I’m going to refer to this approach as being a “Thapedi-Thumper,” since a broad reading of Greene-Thapedi really forms the backbone of this belief.

I see two fundamental problems with the Thaepdi-Thumper approach. The first problem is focusing too much on the need for the Tax Court’s jurisdictional power to order a refund. The second, related problem, is a failure to focus on the actual people and actual processes that resolve the bulk of CDP controversies.

I will cover the second problem in my next post. For now, let’s look at if and when you really need “refund jurisdiction” in CDP to get the remedy you’re asking for.

Overpayments and Refunds – Keep Them Separate

In my previous post I noted the distinction between an “overpayment” and a “refund.” Namely, that an “overpayment” is what happens when you have more credits/payments than tax, and a “refund” is when the IRS actually sends that excess money to you. It is important to keep those notions separate.

Let’s start with the Tax Court and overpayments in CDP. I think it’s clear that the Tax Court is actually less averse to making determinations about the existence or amount of overpayments than Thapedi-Thumpers may believe. Indeed, Greene-Thapedi itself suggests this in the oft-cited and tantalizing “Footnote 19,” which provides:

We do not mean to suggest that this Court is foreclosed from considering whether the taxpayer has paid more than was owed, where such a determination is necessary for a correct and complete determination of whether the proposed collection action should proceed. Conceivably, there could be a collection action review proceeding where (unlike the instant case) the proposed collection action is not moot and where pursuant to sec. 6330(c)(2)(B), the taxpayer is entitled to challenge “the existence or amount of the underlying tax liability”. In such a case, the validity of the proposed collection action might depend upon whether the taxpayer has any unpaid balance, which might implicate the question of whether the taxpayer has paid more than was owed.

To me, the footnote suggests that the Tax Court may consider overpayments when relevant to a proposed (i.e. not mooted) collection action. The Schwartz case is consistent with this: there was still outstanding tax on multiple years (i.e. no refund would result), but the “validity of the proposed collection action” on the years where there was an overpayment would obviously not be upheld. That’s why Judge Vasquez said it didn’t matter if he looked at the issue from abuse of discretion or de novo: the levy wouldn’t be sustained either way.

The problem is that so many taxpayers (understandably) want to take it a step further: they have an overpayment, so why not also order a refund? That’s what the taxpayer in McLane v. Commissioner (T.C. Memo. 2018-149) wanted, and that’s what the Tax Court resisted. As far as collection went, the “overpayment” tax year at issue (2008) was already fixed by the parties, with the IRS abating the assessment.

So let’s move to when, if ever, you might get a refund in CDP litigation. On that question I’d say that it is clear the Tax Court will not order a refund of an overpayment. But the Tax Court may order a refund of other ill-gotten funds.

What does that mean? It means that if you are saying you “paid more tax” than you have due (i.e. an overpayment) you are out of luck in CDP litigation. But if instead you are saying the IRS took money they shouldn’t have (say, by failing to follow proper procedures), you may just get your money back.

If you want to put a technical spin on it, I’d say that the Tax Court is averse to ordering “rebate refunds,” and perhaps less averse to “non-rebate refunds.” Again, I commend Professor Camp’s article to those who want to learn more about the distinction between the two. For present purposes (and possibly in contravention of what Professor Camp himself would agree to), I’m going to classify any disbursement of money to the taxpayer that doesn’t result from an overpayment as a “non-rebate refund.”

You may say I’m a dreamer, but I’m not the only one: Chocallo v. C.I.R., T.C. Memo. 2004-152.

The Chocallo opinion involves a disgruntled pro se petitioner asking the Tax Court to exercise all sorts of powers it does not have in CDP: namely, criminal prosecution of IRS employees and other monetary compensation. The Tax Court pretty easily determines it doesn’t have jurisdiction to do so. But you might ask why the petitioner was so upset in the first place…

And that’s where things get interesting.

The Tax Court found that the IRS had levied on Chocallo’s bank account (for approx. $23,000) prior to offering her a statutorily required CDP hearing. (The IRS later discovered that the underlying assessment was invalid too… oops.) Because the levy improperly occurred prior to being offered a CDP hearing the Tax Court, in Judge Ruwe’s words, “ordered that the amount collected by levy be returned to petitioner with interest.”

Wow. Ordering money being returned in a CDP hearing… How are we to unpack this?

The Chocallo opinion was issued before Greene-Thapedi, which is important. The Tax Court was aware of Chocallo when it gave its opinion… and in approximately three paragraphs discussing Chocallo, gave no indication that it disagreed with the return of the improperly levied proceeds. Indeed, the court thought it an important distinction that Chocallo dealt with an improper levy rather than offset, as was the case in Greene-Thapedi.

This is all to suggest that Chocallo is in fact consistent with Greene-Thapedi. The Court doesn’t find it necessary to explain why Chocallo is consistent, but I can think of a couple reasons it might have latched on to.

First, one could argue that what the Tax Court did in Chocallo was not to order a “refund” or even to determine an “overpayment.” Instead, it ordered the IRS to “return” certain levy proceeds. Note, importantly, that as I define it, these would be “non-rebate refunds.” The return of money in this case has nothing to do with whether there was an “overpayment” or not: it just has to do with the propriety of the collection action.

(As an aside, note that this is exactly the remedy I’d be asking for in the hypothetical involving an invalid CP504 Notice and levy on state tax refund I posted on, which Carl seemed to disagree with me about. Because I can’t let it go, more on why, regardless of Chocallo, I think I’d have a good chance of getting the levied proceeds back in CDP in my next post.)

Second, one could read Chocallo as merely addressing a procedural wrong (levy prior to CDP hearing), that in a very real sense has nothing to do with the “underlying liability” of the tax, and everything to do with the levy action itself. And what exactly is the Tax Court given jurisdiction over if not a review of the propriety of levy actions?

Indeed, PT has covered something quite similar before in Cosner v. Commissioner. Strangely enough, the Tax Court seems to care when the IRS improperly levies in CDP litigation reviewing the propriety of levy actions…

Reasons to Doubt My Optimism

Yet despite everything I’ve written, one could still be excused for wondering how much a “non-precedential” (reasons for scare quotes in this post) memorandum opinion from 2004 can really open the door to getting money back in CDP. Similarly, is the Tax Court really going to be swayed by arcane (and questionable) distinctions between “rebate” and “non-rebate” refunds?

I think the issue has yet to be determined. The case that actually worries me the most isn’t Greene-Thapedi or any of the other “please give me a refund of overpayment” cases. Rather, it is the much-maligned Brown v. Commissioner saga (as written about here, here and here among other places).

It appears that the litigious Mr. Brown asked the Tax Court to provide a refund of his TIPRA payment on his returned Offer in Compromise… and the Tax Court said it has no such jurisdiction. That would very plainly be a “non-rebate” refund. A big strike against the distinction I’ve attempted to draw, albeit in a non-precedential opinion. I’ve also previously complained about the Brown’s case failure to raise administrative law arguments, and I seriously doubt that it raised the rebate/non-rebate distinction here, so perhaps the argument could still persuade a judge. But the existence of this opinion makes the fight a little more uphill.

Nonetheless, I’d note that Brown had relatively bad facts for the taxpayer. I’d also note that Greene-Thapedi, McLane, and others tend to have extremely convoluted fact patterns. It is possible that when the issue is a bit more clear-cut (IRS didn’t follow proper procedures) the Tax Court may be willing to order appropriate relief, short of a “rebate refund.” The Tax Court does, I believe, want to fix obvious wrongs so long as it has the jurisdictional “power” to do so.

So long as there is an obvious inequity and the remedy doesn’t violate refund jurisdiction, the Tax Court can help. Note that Greene-Thapdedi references (without criticizing) Chocallo’s return of the improperly levied proceeds as an exercise of the “Tax Court’s inherent equitable powers.” The precedential case Zapara v. Commissioner (126 T.C. 215 (2006)) is also a very clear exercise of inherent equitable powers. And again in 2006 (albeit in the non-precedential Sampson-Gray v. Commissioner, T.C. Summ. Op. 2006-19), the Tax Court (1) references its inherent equitable powers, (2) cares about whether there was a procedural defect to be remedied, and (3) “expects” the IRS to do the right thing and credit the taxpayer with the money that is due to them (see footnote 5).

Put together, this means that you may not be out of luck in Tax Court during CDP litigation when you’re asking for money back, so long as you aren’t asking for an “order” of a (rebate) “refund.” But beyond that, as I’ll detail in my next post, even if what you want is undeniably a rebate refund, CDP may still help get you where you want to go.

Filed Under: Collection Due Process

“Refunds” and CDP Review

January 25, 2023 by 2 Comments

In a post months ago, I wrote that if the IRS improperly levied on a state tax refund by failing to give required notice, I would ask for the money back in the CDP hearing. In the comments to my post, I was promptly reminded of the Tax Court’s lack of “refund jurisdiction” as well as its (possible) lack of injunctive power to order a return of the improperly levied funds.

In response, I started writing about why I don’t think that the lack of refund jurisdiction or lack of injunctive power ends the conversation or dooms my argument: in other words, that even without a Tax Court order, I still think I’d have a decent chance of getting my money back if the IRS (clearly) improperly levied and I raised that issue in a CDP hearing. Then life happened and the post got put on the back burner. In the interim, however, another CDP case caught my eye: Schwartz v. Commissioner, T.C. Memo. 2022-125. The opinion is interesting for a number of reasons, but for me it really drives home two points: the power of framing the issue, and the functional ability of the Tax Court to fix problems in CDP even if it cannot “order” certain relief from the IRS. More below the fold:

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The Power of Framing

In CDP review, quite a lot hinges on how you frame the issue (and your proposed relief) to the Tax Court. Frequently this comes up in the context of disputing the underlying liability. Depending on exactly how you frame your issue (more accurately, how the Tax Court interprets the issue), you may get de novo review instead of abuse of discretion: that’s the crux of the precedential Melasky case covered here (with links to additional coverage therein). (Note also that if it is a pure merits issue you may not even be able to raise it at all (see, for example posts here and here).

Context matters in determining the proper way to frame an issue. I’ve posted on this previously, with regards to summary judgment motions. But I’ve also posted about how in CDP the seemingly straightforward argument “I don’t owe the tax” can be framed in different ways. The Tax Court could look at that as a “merits” argument (disagreeing with the calculation of the tax) or a “procedure” argument (disagreeing with the IRS books for continuing to show an outstanding liability).

Which brings us to Schwartz, which is something of a hybrid between the two.

In Schwartz, the taxpayer (led by estimable counsel Karen Lapekas) essentially argued that they “don’t owe” for the years at issue because they had a credit-elect under IRC § 6402(b) that would wipe out each liability. For more on the many nuances of credit-elects, see posts here, here, and here. For our purposes, all that you need to know is that the taxpayer claimed they overpaid for 2005, applied that overpayment to the next year (i.e. the “credit elect”), and that resulting overpayment for 2006 was applied to the next year… and so on and so on in a cascade, that effectively resulted in no balance due for any of the years before the Tax Court.

I highly recommend reading the opinion for details both on the metaphysics of credit-elects, and the “informal claim doctrine” (see posts here and here). Those were the substantive issues that Judge Vasquez spent most of his time wrestling with. I’m going to largely ignore them to focus on a procedural issue that Judge Vasquez… didn’t quite ignore, but definitely sidestepped.

When a taxpayer says “I don’t owe” in a CDP case, and the reason they “don’t owe” is a credit elect, what is the standard of review? There are definite undertones of merits issues/challenges to the liability (it is a “credit” that is claimed on a tax return after all) and procedure (that “credit” happens to be in Subtitle F, which covers procedure and it really is just the application of a payment).

The Tax Court hasn’t quite made up its mind on how that works with credit-elects. Judge Vasquez notes that in one case (Landry v. Commissioner, 116 T.C. 60 (2001)) the Tax Court applied de novo review to a credit elect issue. However, later in the aforementioned Melasky case, the Tax Court applied abuse of discretion review to the dispute over whether a payment was properly credited to the taxpayers account -which is pretty fundamentally similar to a credit elect. What to do here…

Fortunately, Judge Vasquez determined that he didn’t need to reach that question because the IRS would lose on abuse of discretion or de novo review… that tends to happen, I suppose, where the judge finds that IRS Appeals erred on a consequential matter of law.

Ultimately, Judge Vasquez finds that Mr. Schwartz had a valid credit-elect for some years (2006 and 2007) but that the record wasn’t sufficient to show that the carryforward “cascaded” to later years (2010 – 2012). Because of this, the IRS proposed levy action is “not sustained” for 2006 and 2007, but is for 2010 – 2012.

Why Schwartz Matters: A Refund By Any Other Name?

I think it is important to consider what the Tax Court functionally did in this case. Effectively, it determined an overpayment for multiple years. I really don’t think you can get around that conclusion for the concept of a cascading credit-elect to make any sense.


Maybe that’s no big deal: the Tax Court even hinted as much in Greene-Thaepedi that it might determine overpayments in some circumstances (see footnote 19). Also, one could say that in Schwartz the Tax Court was only looking at the timing of an overpayment, and didn’t determine the amount. Further, in Schwartz, the Tax Court didn’t order a “refund,” which is what we really care about.

(It’s also worth highlighting that it was Judge Vasquez (with Judge Swift joining) who dissented in Greene-Thapedi, believing that the Tax Court did, in fact, have something akin to refund jurisdiction. In that regard, Schwartz may have had had a “good draw” on the judge deciding his case.)

But Schwartz definitely doesn’t conflict with Greene-Thapedi, and I’d suggest the most important reason why is this: a refund is different from a determination of overpayment. An “overpayment” is a determination that the taxpayer had more credits/payments than tax. A “refund” occurs when the excess is sent to the taxpayer. See IRC § 6402(a). A lot of people have “overpayments” but still don’t end up with “refunds.” That’s because they owe other back taxes, child support, student loans… or perhaps choose a credit-elect rather than a refund.

(For more on the contours of overpayments and refunds, I would recommend an older article from Professor Bryan Camp found here. I have returned to it again and again when dealing with the metaphysics of refunds, assessments, and all other forms of tax procedure geekery ordinary people dare not dream of.)

But even if there was only the determination of an “overpayment” and not the order of a “refund,” in Schwartz, I think it holds another important lesson. And that lesson is this:

Court opinions have consequences.


Well duh, you reply. But what I’m getting at is that an “opinion” can carry consequences even if it isn’t followed by a particularly useful “order.”  In other words, even if the Tax Court doesn’t have “refund jurisdiction” in CDP to “order” refunds, it may nonetheless have a functionally equivalent power when it determines that the IRS erred as a matter of law.

To illustrate, imagine that the Tax Court issues an opinion finding that the IRS erred in failing to credit $5,000 to a taxpayer’s $2,000 liability. As we’ve seen in Schwartz, even in CDP cases the Tax Court can clearly make such a determination. What the Tax Court (arguably) cannot do is follow that opinion with an order that the IRS refund the taxpayer $3,000. But the Tax Court can remand for abuse of discretion on proposed collection of a non-existent liability.

And what happens next?

In my next two posts I’ll explore that question and dive again into just how close to getting a “refund” you can get in CDP even without “refund jurisdiction” in Tax Court.

Filed Under: Collection Due Process

Consequences of the (Fake) Notice of Intent to Levy

November 7, 2022 by 5 Comments

At the recent Fall ABA meeting there was a panel discussing Collection Appeals (which Christine was a panelist on). A discussion arose about the purpose of the CP504 “Notice of Intent to Levy,” since it is not a “real” notice of intent to levy for IRC § 6330 purposes. It is, however, a “real” notice of intent to levy for IRC § 6331(d) purposes… but what is the distinction, and when does it matter?

I have historically looked at the CP504 as little more than an IRS scare tactic strongly encouraging voluntary payment. My view has since changed, thanks in part to the ABA meeting. In this post, I’ll talk about the importance of the CP504 and why the language on the notice does such a bad job of explaining what actual legal consequence it carries that it almost shouldn’t carry legal consequence at all.

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This is not the first time Procedurally Taxing or the tax community at large has weighed in on the problems of the CP504. Keith posted about how misleading the notice is back in 2016. The main issue Keith raised was that the CP504 misleads people into thinking that if you don’t respond to the CP504 Notice the IRS can levy on things that it cannot levy on (yet).

In other words, it misleads people.

The IRS heard Keith’s complaint, and admirably took some steps to remedy the issue by changing the language of the CP504 Notice a few years later. Keith posted about this small step forward with a copy of the new CP504 Notice back in 2018.

Flash forward to present day, and a newly formatted CP504 Notice…

I don’t exactly know what decisions were made, but we appear to be back in the bad old days Keith had originally lamented. My clients routinely receive CP504 Notices like the one here. The offending language is exactly what Keith had highlighted before:

Consequences If You Don’t Pay Immediately

We may levy your income and bank accounts, as well as seize your property or rights to property if you fail to comply. Property includes wages and other income, bank accounts, business assets, personal assets (including your car and home), Social Security benefits, Alaska Permanent Fund dividends, or state tax refunds. [Emphasis in original]

Now I am but a humble tax lawyer and professor, but in reading this I can imagine someone concluding that failing to pay the IRS immediately upon receiving the CP504 means that the IRS could levy their income and bank account. Those are the bolded terms, after all. However, because I also know that to be untrue (the IRS cannot levy on my bank account and wages if I don’t respond to the CP504), I have tended to read the notice as being little more than a scare tactic and carrying no real legal consequence. My misunderstanding about the CP504’s consequences are in no small part because the consequences the CP504 focuses on so boldly are incorrect.

Actual Legal Consequences

But the CP504 actually does carry important consequences, such that it is a letter you should actually pay close attention to. The consequences it carries are so simple, it is a shame that the letter doesn’t really highlight them:

First, the CP504 is the notice that allows the IRS to levy on certain property prior to offering a CDP hearing. For my clients that is almost exclusively their state tax refunds. The CP504 mentions this in very small print at the bottom of page 2. The full list of pre-CDP Notice levy property is at IRC § 6330(f). I always knew the IRS could levy on state tax refunds prior to giving a CDP hearing, but admittedly never really considered the CP504’s role in that process.

Second, and generally less importantly, the CP504 notice bumps up the “failure to pay” rate from 0.5% per month up to 1%. See IRC § 6651(d). This is generally less important for my clients because the maximum amount of penalty cannot exceed 25% in the aggregate, and a lot of very late tax years hit that mark quickly. Also, most of my clients are able to settle their tax debts with an Offer in Compromise, such that penalties are irrelevant.

With Legal Consequences Comes… Legal Consequences

So now, despite the CP504 Notices best efforts, we have a clearer idea of what the CP504 Notice actually does. But what happens if the CP504 Notice is defective? Because it serves an actual, legal purpose, defects may carry actual legal consequences.

As Keith noted in his prior post, the IRS used to combine the IRC § 6331(d) notice and IRC § 6330 CDP opportunity into a single letter. Now those two statutorily required notices are “spread” across two letters. This may be a self-inflicted wound by the IRS. For one, an extra letter adds real costs to the IRS: both the 6331(d) and 6330 notices are supposed to be sent certified. Arguably having two (required) letters instead of one essentially doubles the IRS’s chances of screwing up.

Possibly, the IRS could argue that the current IRC § 6330 letter (usually, the LT11) also meets and incorporates the IRC § 6331(d) requirements, such that it current practice is really a belt-and-suspenders approach. In other words, a bad CP504 letter would be “fixed” by the later LT11 letter. I don’t know that this argument has ever been raised. But even if it was, it would certainly not prevail for levies that precede the LT11 (for example, state tax refunds). Accordingly, the issuance of the CP504 Notice remains worth looking into.

For a CP504 Notice to meet the IRC § 6331(d) requirements it must be sent (by registered or certified mail) to the taxpayers last known address no less than 30 days before the levy. I somewhat doubt that any such letter that isn’t sent certified/registered would be considered invalid. (I couldn’t find any freely available cases, but U.S. v. MPM Financial Group, Inc. (2005 WL 1322801, at *4 (E.D. Ky. May 27, 2005) aff’d, 215 F. App’x 476 (6th Cir. 2007) makes that point. The real issues are timing and address concerns.

Beginning with the last known address: this has primarily been an important topic on deficiency notices for some time (see posts here and here, among others). There is always a chance (perhaps a significant chance, given the IRS’s IT infrastructure) that the IRS will send a notice to the wrong last-known address. In such a case if the taxpayer doesn’t otherwise have actual knowledge of the notice, it should invalidate the CP504 Notice from serving its IRC § 6331(d) “notice” function.

What happens after a defective CP504 Notice has been mailed may be interesting. If the IRS levies on your state tax refund you will thereafter get a “Notice of Intent to Levy” under IRC § 6330. In my experience, a lot of time the IRS will send a CP504 Notice well in advance of actually taking any other collection actions, such that they may have had the wrong address in their file for the CP504 Notice, and then have corrected it by the time of the actual state tax levy.

If the state tax refund levy was improper because there was no valid IRC § 6331(d) notice preceding it, arguably you should be returned the state tax refund proceeds. That, at least, is the argument I’d make in the CDP hearing: the IRS plainly did not follow “the requirements of any applicable law or administrative procedure” in taking the refund. Accordingly, you should get it back: a very important potential remedy, given the limitations on refund jurisdiction in Tax Court. This matters enough to many of my clients (Minnesota income tax returns have some lucrative refundable credits) that a detailed review of the CP504 Notice validity is warranted.

My Plea: Make the Letter Useful

Again, the CP504 really only carries two legal consequences: (1) precursor to levy on very specific property (that might not matter at all to people in states without an income tax) and (2) increase the failure to pay penalty rate. If the goal of the notice is to inform people about the legal consequences of being issued a CP504 notice it does a tremendously bad job of it. Instead it reads like a scare tactic.

Perhaps this serves a useful function for the IRS in getting some people to voluntarily pay, but I think it comes at a reputational cost, and scares people into sub-optimal resolutions. A lot of my clients receive state tax refunds each year (particularly state property tax refunds) which they count on. A lot of my clients also are very clearly “can’t pay” candidates for an Offer in Compromise or Currently Not Collectible status.

The IRS’s mission isn’t simply to “get the most money” out of people. If it was, then the CP504 Notice would probably be justified. Rather, the IRS’s purported mission is to “Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities[.]” It is hard to see a misleading letter as “helping them to understand,” and I’d say the CP504 is an example of straying from that mission.

Filed Under: Collection Activity, Collection policy Tagged With:

When Regulatory and Sub-Regulatory Guidance Collides… (Part Two)

September 7, 2022 by 3 Comments

My previous post covered the curious case of IRS Notice 2006-68 and it’s (seemingly) direct contradiction of Treasury Regulation § 301.7122-1(h). As I’ve covered before (here, here and here), IRS Notice 2006-68 takes an extremely taxpayer unfriendly (and I believe substantively wrong) interpretation of the “deemed acceptance” rule of IRC § 7122(f).

It turns out IRS Notice 2006-68 also takes a rather taxpayer unfriendly interpretation of whether taxpayers may be entitled to a return of payments they submit with an Offer in Compromise that is returned or rejected. The rule used to be “you get the money back, because it is a deposit.” Indeed, that is arguably still the rule under the Treasury Regulation… but not under the Notice that came later, when the underlying statute was changed in TIPRA. What controls?

I would say a very strong case exists for challenging Notice 2006-68, should someone find their way into court on it (which as a jurisdictional matter would be done most easily through Collection Due Process, as I’ve suggested here). Let’s look at why it is susceptible to challenge…

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Three Reasons Why Notice 2006-68 Is Unpersuasive Under Admin Law Principles

First Reason: An Agency Can Only Amend a Final Regulation Through Proper Procedures

As far as I can tell, it is an uncontroversial proposition that an agency can only amend a final rule through new rulemaking. See Columbia Falls Aluminum Co. v. E.P.A., 139 F.3d 914, 919 (D.C. Cir. 1998) and Sierra Club v. E.P.A., 755 F.3d 968, 977 (D.C. Cir. 2014).

In this instance, there is a final rule (specifically, the Treasury Regulation) that unambiguously says payments made with an Offer that is withdrawn or returned are refundable deposits. If the Treasury wants to change this rule they are free to do so… but only if they follow the proper procedures. This flows pretty clearly from the APA: specifically, 5 § 551(5) which includes “amending or repealing” a rule as an act of “rule-making” and 5 § 553 which requires notice and comment for the rulemaking at issue here.

As it stands, it appears that the final rule (Treas Reg. § 301.7122-1(h)) was amended through Notice 2006-68 -how else to explain the direct contradiction in treatment of payments sent with Offers? But Notice 2006-68 did not go through notice and comment… if anything, it acted as the notice for comments and never did anything after that.

This is a problem for Notice 2006-68. But perhaps not an insurmountable one. Maybe, the argument goes, Notice 2006-68 isn’t amending the Treasury Regulation because it is addressing an entirely different issue -the TIPRA payments are qualitatively different than the “sums submitted with an Offer in Compromise” referred to in the regulation…

Second Reason: The IRS Is Bound to Its Regulations

Hopefully I didn’t set up a straw-man argument, but the idea that Notice 2006-68 can ignore the regulation because the TIPRA language came after the regulation is a tough one for me to swallow. Yes, the Treasury Regulations predate the specific TIPRA language. But does that change the fact that the Treasury Regulations unambiguously addresses “sums submitted with an offer in compromise,” which is exactly what TIPRA payments are?

I don’t think the IRS can just ignore its regulation on that point. Note that the TIPRA statute is ambiguous, and could reasonably allow for TIPRA payments to be treated as deposits. This isn’t an instance of a later statute directly changing the law underpinning an earlier regulation. There is an argument that under the “Accardi Doctrine” (so named for the Supreme Court case) the IRS has to follow the regulation.

Judge Holmes has discussed the Accardi Doctrine in an interesting order I blogged on before, and frankly I think the time is nigh for it to step into the limelight in (non-criminal) tax controversy.

The crux of Accardi is that agencies have to follow their own “rules” when individual rights would be affected if they deviated from them. The rules the agency must follow sometimes include sub-regulatory guidance, but always include “legislative” regulations. Which, as a matter of fact, Treas. Reg. § 301.7122-1(h) would be. Sounds to me like the IRS has to follow the Treasury Regulation, at least so long as it can be said to “affect individual rights” by failing to return the TIPRA payments on non-processed Offers.

I’ve also read some Accardi adjacent (non-tax cases) that quote the Supreme Court case of Morton v. Ruiz, 415 U.S. 199 (1974) for the proposition that where “the rights of individuals are affected, it is incumbent upon agencies to follow their own procedures.” That case is particularly interesting in the context of Notice 2006-68, since it involved an agency (the Bureau of Indian Affairs) trying to restrict payments to certain individuals through sub-regulatory guidance (an internal manual) rather than publishing in the Federal Register (which was supposed to be their practice). The Supreme Court was not impressed with this attempted end-run around the APA…

Third Reason: No Deference Under Auer/Seminole Rock

At the end of the day, practitioners just want to know how much the Court is going to persuaded or “bound” by the agency interpretation. (At least in litigation… but litigation isn’t easy to come by in tax collection issues. I will cover more on that and why Notice 2006-68 is so toxic as a non-litigated issue in a following post.)

Should a challenge to Notice 2006-68 ever actually make it to a judge, the court should find that it’s interpretations of the statute are not entitled to much, if any, real deference. The general rule is that sub-regulatory guidance gets Skidmore deference. (A point made in the Feigh case I argued and blogged on.) I often call this “worthless” deference, because it frequently isn’t much more than the deference that IRS Counsel gets for making a good point on a brief -the court isn’t really “deferring” to that good point, it is just being persuaded by its own force of reasoning.

To the extent that the IRS would want to “shoehorn” Notice 2006-68 into some level of deference “above” Skidmore, its only real option is Auer deference: the level of deference agencies can sometimes be given on their interpretation of their own regulations. But even if the IRS changed course and decided to actually argue for Auer deference (it has a policy of not doing so) that wouldn’t work in this instance.

The Supreme Court does not defer to an agency interpretation of a regulation when the regulation itself is not ambiguous. The reason why makes good sense, so I’ll go ahead and quote the Supreme Court on it: “To defer to the agency’s position would be to permit the agency, under the guise of interpreting a regulation, to create de facto a new regulation.” Christensen v. Harris County, 529 U.S. 576, 588 (2000). In other words, it would give the agency an end-run around their need to go through notice and comment to amend a final regulation.

The regulation on point is blessedly unambiguous. There is no way the IRS could argue that Notice 2006-68 is merely an interpretation of it. So no Auer deference. And probably no deference at all.

…And Yet It Persisted.

I’ve laid out a lot of reasons why Notice 2006-68 is susceptible to serious challenges, both for its interpretation of IRC § 7122(f) and its denial of TIPRA payments as deposits. I think it is largely indefensible on its interpretation of the statutory language, and clearly problematic as sub-regulatory guidance masquerading as a legislative rule.

Yet the fact remains that Notice 2006-68 is celebrating its 16th birthday, essentially unscathed, after affecting likely tens-of-thousands of taxpayers. Why might that be? Are my arguments just nonsense?

Perhaps. Nonetheless, in an eventual follow-up post I’ll go into why I really think Notice 2006-68 has survived without challenge, why it is a problem we need to fix, and why it is a good example of the checks we need on agency rulemaking in the tax world.

Filed Under: Offer in Compromise, Regulations
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