About Caleb Smith

Caleb Smith is Visiting 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.

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

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

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

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

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The EIP As A Rebate

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

So what is a rebate?

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

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

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

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

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

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

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

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

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

EIP: A 2019 or 2020 Animal?

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

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

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

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

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

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

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

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

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

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

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

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

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

Can the IRS Ever Collect on Erroneous EIPs?

The IRS sent out a lot of EIPs this summer, and at a pretty quick clip. While there were certainly issues with people failing to receive the payments that should have (see posts on injured spouse issues here, domestic violence survivors here, and incarcerated individuals here), there were also undoubtedly people that received EIPs who shouldn’t have. The question this post sets out to answer is simply this: for those who shouldn’t have received an EIP what if anything can the IRS do to get the money back? No doubt taxpayers will want to know what to expect on these issues and will expect tax professionals to have a clear answer… you’ll have to read on to determine if there is one.

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If I were to survey the room, I’d bet most people have already made up their minds that there is an easy answer to the title question of this post: “No, the IRS cannot collect on erroneous EIP. Haven’t you read IRC § 6428(e)(1)? If you received too much EIP you just reduce the amount of credit on your 2020 return, but not below zero.”

My dear friends, I’m here to tell you that nothing in life is easy -least of all parsing the language of IRC § 6428. Further, I’m sorry to say, in my opinion IRC § 6428(e)(1) is actually irrelevant to the question of whether the IRS can collect on erroneous EIPs. Lastly, and again with sincere apologies, I regret to inform that if the EIP is a rebate (a big “if”) the IRS can collect on it through the deficiency procedures.

Gasps all around, I’m sure. Let me explain myself.

First off, it is critically important that we are clear what we’re talking about when we talk about EIPs. The term EIP (for our purposes) only refers to the “advanced” payments made in 2020 pursuant to IRC § 6428(f). The payments that people will be claiming on their 2020 returns are not “EIPs” but instead are Recovery Rebate Credits (“RRC”) under IRC § 6428(a). They are separate and distinct credits. Conceptually, you aren’t claiming the “remainder” of your EIP when you file your tax return: you are claiming an entirely different credit that is simply reduced by any EIP you received.

To me, that IRC § 6428 creates two separate credits (and not simply staggered payments of the “same” credit) is uncontroversial despite the unhelpful language on the IRS website. But because it is critical to my analysis I want to drive the point home. I also think it will help lay bare why the IRC § 6428(e)(1) provision has no relevancy to the IRS ability to collect on erroneous EIPs.

Two Credits, One Code Section

We can all agree (I hope) that eligibility for the EIP is based on your 2019 (or 18) information. IRC § 6428(f) makes that pretty explicit, and that is also how the IRS administered the payments. That is in part why people rushed to file 2019 tax returns.

Yet some analyze the EIP as if 2019/18 isn’t the determinant for eligibility, but rather some expedient way of delivering the EIP. In this mistaken conceptualization the IRS just administered a 2020 tax credit based on 2019/18 information because that’s all they had (2020 not being even half-way done when the CARES Act was passed). This mistaken view reads IRC § 6428(f) as paying out some sort of “tentative” credit that the taxpayer then has to reconcile on their 2020 tax return with the “true” credit, since 2020 is the information we really cared about all along. I believe this is why so many people read the “good news” in IRC § 6428(e)(1) to be that if we got too much “tentative” credit we don’t have to pay any back when we claim our “true” credit on the 2020 tax return.

But that’s not how the law is written, and not how the credits work. The EIP is a 2019/18 animal. That is the year it looks at. That is the year it applies to. Allow me to illustrate.

Imagine you weren’t making much money in 2019. Maybe most of the year you were in law school and only after passing the bar in September did you begin making big-law money. Your AGI for 2019 is only $65,000, but by March 2020 you are already way over the AGI threshold for IRC § 6428(a). Nevertheless, you get a full EIP of $1,200 in May 2020. Common wisdom says you “got too much” EIP and will need to reconcile on your 2020 return. You aren’t too worried though, because the reconciliation provision at IRC § 6428(e)(1) protects you from paying back this excess EIP. If not for IRC § 6428(e)(1) you’d be in a bind…

Ah, my dear friend, can’t you see that no reconciliation is even necessary? You received exactly the right amount of EIP (assuming your 2019/18 return was accurate… more on that later). You don’t need to do anything on your 2020 tax return, because the 2020 tax return is only for claiming a wholly different credit -the RCC. Note that the IRS worksheet for the RCC supports this: the moment you determine you are ineligible for the credit based on 2020 information, you stop and do nothing more. Your EIP simply doesn’t matter at that point. See IRS Form 1040 Instructions at page 59.

It might be instructive to compare this to another tax credit where reconciliation actually does occur: the “Premium Tax Credit” at IRC § 36B. Because health insurance premiums are incurred on a monthly basis, the Premium Tax Credit is paid “in advance” as each monthly payment is due. The Premium Tax Credit looks at only one year for eligibility determinations: the tax year you are receiving the payments. Obviously, you cannot know exactly what your AGI (or even filing status) will be at the beginning of 2020, so you provide an estimate and then “reconcile” with the year-end numbers. This is exactly what you would expect with a “tentative” credit that looks at the same tax year for eligibility and advance payments… and this is not at all what happens with IRC § 6428.

So we agree that the law student doesn’t owe any EIP back, not because of IRC § 6428(e)(1), but because you don’t owe money “back” when you get the right amount of it in the first place. But imagine the IRS screwed up and didn’t send this law student their EIP. Can they claim it on their 2020 return? Obviously not, because the 2020 return is (again) for a wholly separate credit (the RCC) that they are not eligible for. The RCC looks at 2020 for eligibility determinations whereas the EIP looks at 2019/18. IRC § 6428(e)(1) only functions to make sure you don’t double-up on the RCC credit if you received an EIP payment (the italicized words will matter more in a moment). The “not below zero” reduction language just makes sure that if your (correct) EIP payment is larger than your (correct) RRC credit you get the full value of the larger of the two.

The RCC is a 2020 tax credit and the EIP, to beat this dead horse, is not.

Great, so the EIP is a Different Credit: Why Does that Matter?

The RCC is a remarkably conventional refundable credit. The RCC can be offset -just like any other tax credit (see Les’ post here). It is subject to math error procedures for certain “math-like” mistakes -just like many other refundable credits listed at IRC § 6213(g)(2). And it is explicitly made part of the definition of a deficiency as a negative tax -just like other refundable credits (see IRC § 6211(b)(4)(A)). Oh, and just like most tax credits it is something you affirmatively claim on your return.

The EIP, on the other hand, is metaphysically a tax-chimera. I have spent many a sleepless night trying to pin down exactly what it is, because “what it is” will drive how or if it can be collected.

First off, it isn’t entirely clear that the EIP is a “refundable tax credit.” Yes, IRC § 6428(b) refers to the refundable credits portion of the Internal Revenue Code. But note that the language of IRC § 6428(b) refers to the credit “allowed by subsection (a).” It does not refer to the credit “allowed by subsection (f)” (the advanced credit) or more broadly the credit “allowed by this section.”

Things get more difficult. The RCC provision (IRC § 6428(a)) provides a “credit” against the tax of 2020. The EIP provision (IRC § 6428(f)) treats the taxpayer as if they made a “payment” against tax for 2019/18…

This tricky distinction between “credit” and “payment” could matter. A lot. It could be the determinant on if the EIP is a “rebate.” That distinction directly touches on the assessment and collection procedures the IRS will need to follow. I will go into it in more detail on a subsequent post. For now, let’s just pretend the EIP is a rebate and go into why that would matter.

Here’s the fun thing about rebates: erroneous ones can be collected through deficiency procedures. Don’t believe me? Look to the definition of “deficiency” for yourself -specifically IRC § 6211(a) and (b)(2). Have Kleenex handy for the tears that statutory language is sure to inspire. But the critical take-away is that you can have a tax return that doesn’t (necessarily) understate tax and still have a deficiency if the IRS were to issue a “rebate” they shouldn’t have. This could happen, for example, if the IRS give you an EITC that you never really claimed and weren’t actually entitled to. In fact, that is the exact example used by the IRM at 21.4.5.5.2(1) (10-01-2020). If the IRS noticed the mistake in time they could issue a notice of deficiency… the rest is well-trodden tax history.

No one claimed the EIP on their 2019/18 return, and yet some may well have received the EIP when they shouldn’t have based on mistakes from their 2019/18 returns. But if EIPs are rebates (again, a big “if”) made by the IRS, the recognition of these mistakes is exactly how they could be subject to the deficiency procedures and assessed like any other tax. And with exactly the same administrative collection options thereafter.

Uh oh…

But maybe it isn’t that bad. Recall, to begin with, the only people to worry would be those that had inaccurate 2019/18 returns resulting in EIPs they shouldn’t have received. If you were eligible based on 2019/18 information you have nothing to worry about. Also, as I will discuss in detail in another post, there are arguments that in some instances the erroneous EIP is not a “rebate” at all, which seriously limits the IRS collection options. Lastly, and importantly, there is the very real possibility that the IRS will simply make the decision not to go after EIPs at all as an administrative matter.

Those are all questions I’ll explore in my follow up post. For now, I’ll be content if only I have convinced you that the answer “the IRS cannot collect EIP because you just reduce it on your tax return” is 100% wrong. I’m afraid nothing in life is that simple.

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

The first two installments of this trilogy covered arguments that you are likely to raise in the hearing itself (the underlying liability), then moved to issues you might not be aware of until after the notice of determination is issued (procedural defects in assessment, or at least defects in the Appeals Officer verifying that the “applicable law or administrative procedures have been met.” IRC § 6330(c)(1). We end with an issue that is really only relevant after the hearing and in litigation: the record the Court will be able to review.

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Issue Three: The Administrative Record is Incomplete (Mitich v. C.I.R., Dkt. # 4489-19W (here))

Full disclosure: this order is not a CDP case (it’s a whistleblower case). But the admin record is critical for CDP cases. (And whistleblower cases. And innocent spouse cases.) So questions on the completeness of the administrative record are worth focusing on.

In cases where the reviewing court is confined to the administrative record, the agency is the party that submits that record. But that doesn’t mean the agency gets to dictate everything that is or should be in it. Still, the agency does have a fair amount of control over that record. And perhaps (though perhaps not -more on that later) the agency has even more control over what constitutes the administrative record in the first place when they promulgate regulations specifically defining the contents of administrative record.

It just so happens that whistleblower cases (like CDP cases) have a regulation on point for what comprises the administrative record. For whistleblower cases, the regulation is at Treas. Reg. § 301.7623-3(e) which provides in relevant part that the administrative record is comprised of “all information contained in the administrative claim file that is relevant to the award determination and not protected by one or more common law or statutory privileges.” In turn, the “administrative claim file” includes pretty much everything the Whistleblower Office reviews, as well as a final, catch-all category of all “other information considered by the official making the award determination.”

In the Mitich order, the whistleblower-petitioner thinks the tax return of the person they “blew the whistle” on should be in the administrative record. The IRS thinks that the return is not part of the administrative record, because the return was “not considered” in denying the whistleblower’s request. That may appear to be something of a head-scratcher, because in this instance the IRS clearly looked at the return (and the whistleblower’s information pertaining to it) before deciding not to pursue the tip. Indeed, the initial notes recommending denying pursuing the tip state “Rejecting claim as speculative after reviewing the taxpayers returns.” [emphasis added.]

There is nuance to the IRS’s position, however. The IRS argues that the official making the award determination didn’t rely on the return but rather relied on the initial employee (the “classifier”). Yes, the classifier relied on the return, but the classifier isn’t the official that made the determination, and in this case isn’t even a member of the IRS Whistleblower Office.

Judge Halpern isn’t entirely sold on that rationale, which leads to this order: that the parties provide a legal memo on why the return is or is not a part of the administrative record. This isn’t the first time the Tax Court has grappled with these sorts of issues. I was reminded of a previous order I covered in Whistleblower 6388-17W v. C.I.R. There, Judge Guy assigned extra homework to the parties (again, legal memos) on the tensions between IRC § 6103 and the parties’ (specifically, the whistleblowers) need to see the administrative file. Obviously, the IRS does not want to disclose any protected, confidential information, which may also provide some reason for them pushing so hard on why the tax return is not part of the administrative record here.

In any event, I somewhat doubt that whether the return is part of the record will have any bearing on Ms. Mitich getting any money. If the IRS never acted on her tip, and no proceeds were ever recovered, I am at a loss for how the tax returns help her. Yet looking at the order more broadly one can draw some other important lessons relevant beyond just the whistleblower context.

And this is where I return to the question, teased earlier: how much (legal) control does an agency have to restrict the administrative record? Because judicial review of whistleblower cases is limited by the “record rule,” exactly what the administrative record is and contains carries great importance. Two issues come to mind on that.

First, there is the issue of what should be in the record when both parties agree on the types of information that comprise the record rule but disagree on the contents. When problems arise under this category, the dispute is usually about the “completeness” of the record, and not the sorts of things that properly should be in it. For example, if both parties agree that all communications between the taxpayer and Appeals should be part of the record but a fax that the taxpayer sent to Appeals is not included, that would be an argument about completeness. This can be more fraught than it would otherwise appear.

One reason for discord is that the agency is generally the custodian of the administrative record. Taxpayers should be vigilant and keep their own “mirror” file and be ready to challenge the IRS’s version. And the Tax Court will likely entertain these challenges: in whistleblower cases, the Tax Court has held that “the Commissioner cannot unilaterally decide what constitutes an administrative record.” (T.C. 145 No. 8 (2015)) Problem (basically) solved.

But there is a second issue that I think is worth exploring: when the parties dispute the scope of the administrative record. Specifically, my concern is whether an agency can shield information from court review through promulgation of regulations narrowly defining the administrative record. Because I am more familiar with CDP than whistleblower cases, I will use CDP as the example.

The applicable regulation (Treas. Reg. § 301.6330-1(f)(2)(A-F4)), defines the administrative record in CDP cases pretty broadly, so arguments about its scope would likely be rare. Further, even where the “record rule” is in effect, it doesn’t render the administrative record unassailable: a petitioner can supplement the record where something needs to be explained. This, I believe, is most common with “call notes” from Appeals. Whatever notes Appeals takes during a call are part of the administrative record. Notes from the petitioner… not so much (at least not under the regulation). As a matter of course, my tax clinic always sends a fax to Appeals memorializing the conversation after a call so that it becomes “written communication […] submitted in connection with the CDP hearing.”

To be sure, I don’t have serious problems with the definition of the administrative record as provided by the regulation. But it isn’t impossible for me to imagine things I’d like to have as part of the administrative record which, by a strict reading of the regulation, might not be. One that comes to mind are communications made with Appeals after the Notice of Determination. On this point you may say, “well those conversations are plainly irrelevant since the Court is only looking at the Notice of Determination. Also, didn’t you write something about the Chenery doctrine before?”

I have. Also, it is entirely plausible to read the regulation such that those conversations would be part of the administrative file. My cause for concern is that when you’re dealing with a genuine abuse of discretion from IRS Appeals, you are often dealing with a constellation of questionable behaviors that does not end with the Notice of Determination. When IRS Appeals is being unreasonable I want every incidence of their unreasonable behavior to be in the administrative record. “Abuse of discretion” is a mushy and extremely difficult standard for the Tax Court (or practitioners) to work with. I would argue that demonstrating a pattern of IRS Appeals behavior, even if some if it occurs after the Notice of Determination is written, is relevant to that determination. I also think that regulations limiting court review, absent pretty explicit Congressional language supporting it, raises separation of powers concerns and arguably could be subject to being stricken down (see Carl Smith’s post on a related matter, here.)

Perhaps I am making a big deal of nothing in the CDP context, given the expansive language of the regulation. But what about in Innocent Spouse cases?

Recall that the Taxpayer First Act changed the scope of review in Innocent Spouse cases to “the administrative record established at the time of the [IRS] determination.” (IRC § 6015(e)(7)(A)) What does that administrative record entail?

Bad news for those who look to the regulations: they haven’t been updated since 2002. At numerous points, the regulations do not apply present law and are essentially obsolete. The regulation specifically dealing with Tax Court review (Treas. Reg. § 1.6015-7) provides one such example, taking the position that collection activity need not be suspended while requests are pending for equitable relief under IRC § 6015(f). This is not the case under the law as it currently stands (see IRC § 6015(e)(1)(B)(i)).

But apart from getting the law wrong, the regulation is also completely silent on the issue of what comprises the administrative record. Perhaps after the IRS crawls out from the heap of CARES Act and other guidance projects it has been tasked with, updates to that regulation may also be in order (it isn’t presently on the IRS priority guidance plan). But what is the Tax Court to do until then? What should be in the administrative record?

The Supreme Court has provided a little guidance on that topic. Judge Halpern cites to Citizens to Protect Overton Park v. Volpe, 401 U.S. 402, 420 (1971) for the proposition that “the record amassed by the agency consists of ‘the full administrative record’ before the agency.” Judge Halpern emphasizes the word “full” and notes that lower courts have interpreted that “fullness” to entail “all documents and materials that the agency directly or indirectly considered.” That seems pretty expansive. But I suppose we’ll have to wait and see… the issue is likely to come up sooner than later now that petitions being filed are subject to this record rule (see Christine’s post here).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

My tax clinic has had a run of Collection Due Process (CDP) hearings lately -four in two weeks- after months of basically no action. I’ve found that historically my workload increases significantly this time of year, where cases that were long dormant suddenly spring to life with tight deadlines just before the holiday season.

Most of these “hearings” end up being a 2-minute phone call confirming that the Appeals officer received our Offer in Compromise and will wait for the Offer unit to make their preliminary determination before checking in again. Because most of my Offer cases are clear winners, the next step is usually just insisting on a Determination Letter (I am wary of waiving my rights to Court review for reasons detailed here) from Appeals months later when the Offer is accepted.

But there are times when my Clinic and Appeals doesn’t see eye-to-eye in the hearing, and we file a tax court petition (in addition to our four hearings, we’ve also filed two petitions under CDP jurisdiction in the last month). I’ve found that drafting these petitions is a bit more difficult for my students than the traditional deficiency petitions are, mainly because the assignments of error are not as straightforward as when you are reading off a Notice of Deficiency. But if you don’t raise an issue, you potentially concede it (Tax Court Rule 331(b)(4)) so we want to cover all of our bases -especially when we think the conduct of Appeals was objectionable in myriad ways, and want to highlight all of the relevant facts showing that.

Often my students want to argue two things: (1) the IRS abused their discretion by [whatever specific thing they failed to consider] rejecting the Offer, and (2) Something else. But they’re not really sure what that something else is, so it often starts out as some version of “and Appeals was mean when they did it.” Three of the designated orders for the week of August 10, 2020 provide something of a checklist for what arguments you may want to raise in CDP litigation -a way to supplement or supplant the “something else” assignment of error. (The remaining fourth order of the week is not substantive but can be found here.)

Let’s take a look at the three, and the issues they raise, in something close to a chronological order of when the issue would come about.

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Issue One: The IRS Should Have Let Me Argue the Underlying Tax! (Iaco v. C.I.R., Dkt. # 19694-18L (here))

Metaphorical barrels of metaphorical ink have been spilled on this blog about when taxpayers are entitled to argue the underlying tax in a CDP hearing under IRC § 6330(c)(2)(B). The thorny issue centers on what comprises a “prior opportunity” to contest the tax. Some of the blog’s coverage can be found here, here, and here.

In my humble opinion, the Tax Court has taken an overly broad view of what comprises a “prior opportunity” precluding taxpayers from raising the underlying tax. Thus, a taxpayer that wants to raise that argument (like Iaco in the above order) already has an uphill battle. For Iaco it is perhaps less of a hill and more of a wall.

The taxes at issue are excise (a tax on wagers under IRC § 4401(a)(2), which I’ll confess I was wholly ignorant of prior to now) which are not subject to deficiency procedures. Where a Notice of Deficiency is not required, under Lewis v. C.I.R., 128 T.C. 48 (2007), the inquiry is usually “did you already take your shot with IRS Appeals before the CDP hearing?” Here, Mr. Iaco did indeed take that shot, and now wants to take it again with a new Appeals officer in the CDP hearing.

(For those interested, the Iaco order could also provide a good lesson on the importance of record keeping. It appears Mr. Iaco ran an illegal gambling operation, busted in part because of a one-day wiretap. The IRS used the information from that one-day tap and extrapolated additional wagers based on it. Mr. Iaco said, “no way is that accurate!” but refused to provide any actual records of what the right amount of wagers was. In other words, Mr. Iaco failed to keep records like he is required to (see Treas. Reg. § 1.6001-1). This puts the ball firmly in the IRS’s court. And while they can’t just pick a random number, there is case law that allows the IRS to multiply the amount of wagers documented for one day by the likely period of wagering.)  

If your argument boils down to “I want to argue the tax with Appeals again because I don’t like what Appeals decided the first time,” you aren’t going to get very far. But there is perhaps a sliver of a kernel of an argument that you can still make: instead of arguing with the outcome of the first Appeals hearing, you argue with the process.

Mr. Iaco wants to argue that he never really had a prior opportunity, because the first Appeals conference was not a “fair and impartial hearing.” IRS Appeals is supposed to be independent and there is at least some statutory authority geared at ensuring that impartiality (see IRC § 7803(e)). Might there be a baseline standard of conduct from Appeals for the hearing to qualify as an “opportunity?” If so, how do we determine that baseline?

Judge Halpern has some thoughts on that question and looks to Supreme Court precedent to guide his analysis -specifically, Mathews v. Eldridge, 424 U.S. 319 (1976).

Mathews is one of the handful of name cases I recall from law school and it is all about “procedural” due process. If I were to dredge up my old flash cards, my bet is they would have something to the effect of “Issue: how much process is due?” The other side of the flash card would (hopefully) lay out this abridged three factor test: (1) what’s the private interest being affected, (2) what’s the risk of the current procedures erroneously depriving that interest, and (3) weigh those considerations against the government’s interest/costs were the procedures changed. Swirl those factors around and you will get an idea for the amount of process (for example, providing an evidentiary hearing) that is due before the deprivation of the private interest (in Mathews, the denial of social security disability payments).

Constitutional procedural due process does not require that the IRS provide a “Collection Due Process” hearing before depriving an individual of their property (i.e. levying) to pay back tax. Indeed, the IRS did not provide CDP hearings prior to 1998 and their collection methods certainly weren’t unconstitutional up to that point. So what value does Mathews have here, when a facial attack on the constitutionality of the IRS’s collection procedures would be sure to fail?

Remember, Mr. Iaco’s issue is mostly with the first Appeals hearing he received, where he argued against the IRS calculation of wagers and didn’t feel as if he were being heard. There is a specific line in Mathews which Judge Halpern quotes: “The fundamental requirement of due process is the opportunity to be heard at a meaningful time and in a meaningful manner.” Mathews at 333 [internal quotes omitted]. This gets at the issue of looking beyond procedures broadly to how they are applied individual specifically. Yes, these procedures exist and meet the requirements of constitutional due process, but were they properly administered? Mr. Iaco says Appeals was just a rubber-stamp for the initial tax determination. The question is, did Mr. Iaco have a meaningful opportunity to explain himself and be heard by the Appeals Officer?

The Tax Court finds Mr. Iaco did, so he is out of luck. Other taxpayers, however, may have better facts, which is why I think this order is worth considering in the constitutional dimension that Judge Halpern raises. As I’ve noted before, I think the Tax Court has narrowed taxpayers’ opportunity to argue the underlying tax in a CDP hearing beyond what the statutory language requires or Congress intended. The current state of the law is such that if you had a hearing with Appeals arguing the tax (even through audit reconsideration), you have now blown your chance to raise it in a CDP hearing and get Tax Court review. I think this creates a massive trap for the unwary, and perversely incentivizes waiting until CDP to argue your tax rather than dealing with it at an earlier stage. My hope is that circuit courts will take up the issue and reverse the Tax Court interpretation of the statute.

For now, an opportunity with Appeals essentially always equals a “prior opportunity” to dispute the tax under IRC § 6330(c)(2). The only (possible) way around it that I can see is to argue that the first opportunity with Appeals wasn’t an opportunity at all, because it wasn’t meaningful. At the very least, Judge Halpern appears to contemplate that as a precondition under Mathews. I imagine you’ll need a lot of facts for that heavy lift, showing any number of IRS Appeals abuses, to make that showing.

Until that happens, we have to look for a new argument in our CDP petition…

Hazards of Litigation and IRS Mail Processing: A Way to Argue Late Filing Penalties? Designated Orders: July 13 – 17, 2020

The pandemic has caused a number of mail problems for the IRS. Perhaps the most frequently covered on this blog has been the IRS mailing backdated letters see posts here and here. On the flip side is the much more forgivable backlog of unopened letters (and especially tax returns) received by the IRS. I have multiple clients that allege, just prior to the pandemic, they sent things to the IRS by paper which have since gone lost in the ether. I suspect this issue will ripple out into many spheres of tax procedure. In this post I’ll go into depth on one designated order (Perimeter Protective Systems, Inc. v. C.I.R., Dkt. # 255-18SL (here)) that touches on some potential issues the IRS may be facing when those claims of unopened mail arise: the failure to file penalty as well as issues in trying to get attorney’s fees where you prevail on those matters.

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One of the most immediate and obvious complications of the IRS failing to promptly (or accurately) process mail involves the possibility of incorrect late filing and late payment penalties. Hopefully, most of those issues will be quickly resolved with the IRS on the administrative level. Where they aren’t, the Perimeter order provides some insights on what to argue and how to argue it with IRS Appeals.

Perimeter deals mostly with whether the petitioner (an S-Corporation) should be liable for failure to file penalties. From the outset, it should be noted that the petitioner “loses” in this order, but mostly just because the petitioner already “won” with IRS Appeals (i.e. had the penalties largely abated) much earlier and wanted things that are unreasonable thereafter. One of those things is compensation (the Court charitably defines as “administrative costs”) for the time petitioner and an accountant spent squabbling with the IRS over the late filing fees. More on the claim for fees in a bit.

For now, let’s look at the failure to file penalty and the lessons it may provide for practitioners. 

The IRS claimed that they did not receive Perimeter’s 2010 and 2012 tax returns until months after their respective due dates. Accordingly, the IRS assessed late filing penalties of $2,070 and $1,560, respectively. Petitioner requested abatement of the penalties thereafter.

In arguing for abatement Perimeter maintained that, while they had filed the returns late, they had mailed them months earlier than the IRS penalty calculations would provide. As evidence of this, Perimeter offered copies of the original returns bearing a signature well-before the date the IRS treated the returns as being effectively filed. 

Reading this order, I saw that as pretty weak evidence. For one, because a late-filed return is effective the date it is received and not the date it is mailed, I wasn’t so sure a fact (suggesting) when the return was mailed was too helpful. For two, and probably more obviously, just because you signed a return on a particular day doesn’t mean you also mailed it that day. I’m not even sure that is particularly strong circumstantial evidence. But as an advocate you take what you can get.

And here, Perimeter got quite a lot of mileage with that argument. Although the IRS denied the original request for abatement, Perimeter got a favorable determination from IRS Appeals: abating the 2010 penalty from $2,340 to $270, and the 2012 penalty from $1,560 to $540. That’s a total reduction of $3,090 based on rather flimsy evidence. Why was IRS Appeals so generous? Inquiry on that point, I believe, is where we find a lesson for practitioners.

The IRS Appeals Officer agreed to abate the penalties based on a “hazards of litigation” analysis. What hazards? Shouldn’t the IRS be able to say, “our records show the return came in on [x] day, and you have no compelling evidence otherwise?” Is the signature date on the return really that powerful?

Probably not, but my bet is the IRS doesn’t actually have good records for when the return was received, only when it was “processed.” And as we know from the trailers of unopened mail the IRS has accumulated during the pandemic, there can be something of a lag between those two dates. Note that IRS Appeals (but not the first level of examination) will consider these “hazards of litigation” arguments even when the route to litigation isn’t immediately clear. See IRM 8.11.1.2.7.5

Second, note that this is not a simple application of the “statutory” mailbox rule of IRC § 7502. That rule comes into play only if you place something in the mail at or before the deadline and the IRS receives it after the deadline, which did not occur here. The mailbox rule contains somewhat constrained evidentiary rules embodied in the regulations for determining the mailing date (see Treas. Reg. § 301.7502-1).  Those aren’t what we are dealing with here, or at least not directly. If timeliness was the issue Appeals would probably not have settled on hazards of litigation grounds, because Appeals could have simply sat back and waited for the taxpayer to produce evidence they likely didn’t have (i.e. a certified mailing receipt or the envelope with the stamp date). 

And therein lay the recurring, increasingly relevant lesson: if you can put IRS recordkeeping at issue you can create very real hazards. Nowhere is this truer than when it comes to the IRS handling of the mail. Usually both the burden of production and the burden of persuasion is on the taxpayer (and rightfully so, since usually the information imbalance favors the taxpayer on questions of whether they ought to be entitled to deductions, credits, etc.). This is not the case for most penalties as applied to individuals (see IRC § 7491(c)), where the burden of production is on the IRS, making their position all the more (potentially) precarious in litigation. There are times when the IRS would be the custodian of the necessary records, and it is on them to come forward with the proof. I was once at a presentation where an IRS employee said “we aren’t in the business of ‘taking your word for it.’” I heartily agree. And neither are taxpayers -especially after the IRS has admitted to sending letters with erroneous dates as referenced in the posts above. 

Coupled with the holding in Fowler (pertaining to e-filed returns) covered here, late-filing penalties may be more subject to successful challenges than they ever have been in the past. The new rationale being “mistaken identity” (i.e. my return wasn’t late) rather than “reasonable cause” which is often prohibitively difficult to show for purposes of IRC § 6651(a)(1) (though perhaps a window is opening there as well… see Les’s post here).

Did the IRS’s Conduct Warrant an Award of Attorney’s Fees?

So the petitioner in this case was able to get out of the lions-share of their late filing penalties. Why is this still before the Tax Court? It is because the taxpayer was not content with just having the penalties abated… and also because the petitioner apparently still hadn’t paid the underlying tax. That little issue seems to go by the wayside, however, as the petitioner continues to grind his axe for the IRS having the audacity to have taken more time than they should have to abate those penalties. 

Boiled to its essence, the case before the court is all about the petitioner wanting money. Petitioner wants money (1) for the time he personally spent on the case, and (2) for the fees he paid to an accountant in helping with the matter. Petitioner styles this as a request for “restitution” under the Federal Torts Claims Act, 28 U.S.C. 1346. That isn’t going to work for a range of reasons. Let’s focus on why it won’t work under IRC § 7430 either. 

It may be a surprise to some, but you don’t necessarily need to spend money to be entitled to attorney’s fees under IRC § 7430. Notably, where a taxpayer is represented by pro bono attorneys an award may still follow. See IRC § 7430(c)(3)(B). Half-a-decade ago I was involved in one such case (blast-from-the-past story here) argued before the 9th Circuit, and these attorney fees can really add up -especially if you end up in an appellate court arguing about why you should have received fees in Tax Court (“fees for fees” litigation). I’d note that the time law students spend in these pro bono cases may be eligible for fees. This is because law students at clinics have special authorization to practice before the IRS (and generally the Tax Court and Circuit courts), thus meeting the statutory language of IRC § 7430(c)(3)(A). More on that provision later.

I’d also snarkily note that shortly after my law school’s victory in getting (a lot of) attorney fees the IRS issued Rev. Proc. 2016-17 seriously cutting the rate at which we value law students time. Since I graduated, student hours have declined to being worth essentially 35% that of a full-attorney. I guess they don’t make ‘em (law students) like they used to. 

Ok, enough reminiscing. Back to the task at hand: trying to argue that Perimeter may have a facially legitimate claim for attorney’s fees. We’ve established that you don’t need to actually spend money to get attorney’s fees, which is a good thing for Mr. Hantman (the president of Perimeter) because he only spent time (not money) on himself when arguing with the IRS. 

However, there is a pretty obvious difference between engaging a pro bono attorney to represent you and simply representing yourself. Namely, that the pro bono attorney is not the same person as the petitioner. As Judge Copeland notes, the “courts have consistently held that under section 7430 pro se taxpayers may not be awarded an amount reflecting the value of their personal time in handling the litigation, even though the fees taxpayers pay to attorneys to handle the litigation would be recoverable.” Dunaway v. C.I.R., 124 T.C. 80 (2005). This seems consistent with the statutory language governing fees for pro bono services: it can only be awarded if paid out to the pro bono attorney or the pro bono attorney’s employer (i.e. not paid out to the individual the pro bono attorney is representing). IRC § 7430(c)(3)(B). 

But, for the sake of argument, could one argue in this case that the petitioner and the individual seeking fees are separate? After all, the petitioner in this case is Perimeter Protective Services, Inc. and the individual seeking fees is one Mr. Hantman. Can Mr. Hantman argue that what he is asking for is, essentially, pro bono services of a third party (however strained that argument may be)?

There might be some fact patterns where that argument presents a slightly more difficult question. Fortunately, this isn’t one of them and can be disposed of fairly easily. Mr. Hantman is not an attorney and is not “authorized to practice before the Tax Court or [IRS],” which the statute requires. The only capacity in which he is able to practice before the Tax Court in this case is essentially as a pro se litigant (i.e. as Perimeter). Note also that under Frisch v. C.I.R., 87 T.C. 838 (1986) the Tax Court disallowed fees to a pro se taxpayer that also was an attorney. Note that the Frisch opinion dealt mostly with the definition of “attorney” (as acting for another) and whether fees were incurred. It did not address the provision pertaining to pro bono services. Still, the takeaway is that you have to be representing someone other than yourself to get the attorneys fees award. 

That said, I do think the entity issue could present factual situations where you could get attorney’s fees while in a sense representing yourself. For example, what if some friends and I started an LLC selling widgets (because I’m not entrepreneurial enough to actually think of a real reason why I’d be involved in an LLC), and the LLC ran into tax problems. If I agree to represent the LLC in my personal capacity, free-of-charge, am I disallowed from otherwise getting attorney’s fees because of my ownership interest in the entity? Of course, those aren’t the facts here. Just a free, quarantine-inspired tax procedure hypo for anyone interested.   

Yet there is a potential second argument here: fees for the costs attributable to his accountant. A 3rd party accountant would be eligible for an award of attorney’s fees, if they are authorized to practice before the IRS. Petitioner doesn’t properly raise this issue, so the Tax Court doesn’t really go into it (recall that this was all stylized as a restitution claim under the Federal Torts Claim Act). Nonetheless, it too would be doomed to fail. The main reason has to do with the fact that the determination of IRS Appeals was not the problem: it was the earlier, lower-level processing problems that caused Mr. Hantman to accrue costs. Assuming (as I think we would be) that we’re dealing with administrative costs, the time when he was engaging his accountant aren’t going to be covered under the statute (IRC § 7430(c)(2) flush language). 

Professor Camp has a recent post that goes into more depth on that issue here. As that post (and court case it pertains to) make clear, it isn’t easy to get fees in a CDP context. So, despite our most valiant efforts to argue for Mr. Hantman, no dice in this instance.

Other Orders of the Week:

Oakhill Woods LLC v. C.I.R., Dkt. # 26557-17 (here)

Another easement case… another taxpayer loss. No real new ground to cover here, just clean-up of easement arguments that have been recently set aside in Tax Court opinions (in this case, an APA argument that the offending regulation is invalid -see Oakbrook Land Holdings, 154 T.C. No. 10 (2020)).

Strashny v. C.I.R., Dkt. # 13836-19L (here)

A last-ditch motion to reconsider the Tax Court’s opinion that the IRS did not abuse its discretion in denying an installment agreement. You’re already dealing with an uphill battle when you have to ask the Tax Court to essentially reverse itself (see my post here). The “hill” might as well be Everest when you have cryptocurrency assets between $3.3 and $7 million on a tax debt of “only” $1.1 million. Not surprisingly, the Tax Court denies the motion to reconsider whether $3.3 million is enough to full pay a $1.1 million debt. 

Designated Orders June 15 – 19 2020 Part II of II: Tax Procedure Final Exams!

The prior designated order post focused heavily on a new issue in the procedural world: whether the Tax Court has jurisdiction to issue a writ of mandamus ordering the IRS to issue a Notice of Determination in a whistleblower case. The remaining orders of that week don’t break such new ground, but do bring up a lot of fun procedural issues. Indeed, one of the orders reads like a potential Tax Procedure Final exam and provides helpful refreshers to practitioners as well.

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Tax Liens and Tax Procedure: A Game of Inches. O’Nan v. C.I.R., Dkt. # 5115-17 (here

Convoluted fact patterns and the importance of dates/timing are hallmarks of law school exams. I still recall my exact thoughts after reading through the prompt for my Wills and Trusts exam: that would never happen. No one in history has ever written their “will” on a cocktail napkin, stepped outside the bar and been hit by a car. [Note: I may be misremembering the exact facts of my final exam, but it wasn’t far off from that.] The facts in O’Nan are not quite so far-fetched, and since it actually happened may serve as a useful template (or rebuke) to stressed out law students complaining about endless hypos. 

In O’Nan, husband and wife had joint liabilities for 2012 and 2013, which were assessed by the IRS on November 18, 2013 and November 17, 2014 respectively. The order doesn’t specify what avenue the IRS took to get to assessment (e.g. deficiency procedures or summary assessment of amounts listed on the returns), but judging from how quickly after the filing deadline these assessments took place, I’d be willing to bet on “summary” assessment. That little implicit fact might just matter… But more on that later.

Anyway, the O’Nans had liabilities assessed for both 2012 and 2013 as of November 17, 2014. On that same day the IRS mailed a CP14 letter to the O’Nans for 2013 demanding payment. It is unclear when the 2012 demand for payment was mailed, though one would assume it was earlier than that: the remainder of the order focuses predominantly on 2013. 

Sadly, only eight days after the notice and demand letter was sent (November 25, 2014) Mr. O’Nan passed away. Months pass, and people focus on things more important than taxes for the remainder of 2014.

On March 11, 2015, Ms. O’Nan records a “Survivorship Affidavit” in the county where the marital home is located. This effectively means that she has an undivided property interest in the home, whereas before it was a joint tenancy. Shortly thereafter (April 28, 2015), the IRS filed a Notice of Federal Tax Lien in that same county, though the order does not specify for which tax year (i.e. 2012, 2013, or both) or for which taxpayer (i.e. Ms. O’Nan, Mr. O’Nan, or both). More facts a discerning student may underline.

Possibly spooked by that Notice of Federal Tax lien, Ms. O’Nan filed an Innocent Spouse request on May 6, 2015. A little over a month after filing the Innocent Spouse request, Ms. O’Nan sold the marital home for (at least) a gain of $123,200… which promptly goes to the IRS in full satisfaction of the 2012 and 2013 joint liabilities.

An unhappy result for Ms. O’Nan I’m sure, but (maybe?) not the end of the story. After all, the Innocent Spouse request is still outstanding, and a couple years later (February 2017) the IRS issues the following determination: “Good news: you are granted full relief for 2013 and partial relief for 2012! Bad news: you are entitled to $0 in refund for either of those years.”

Apparently Ms. O’Nan wasn’t happy with a piece of paper from the IRS effectively saying “We’ve relieved you from the joint tax debt that was paid through the sale of your home, but you aren’t getting any of it back.” So she filed in Tax Court, bringing us to the present day and this order. And, just to add a little more procedure in the mix, this order is only on a motion for partial summary judgment by the IRS on the question of when the federal tax lien (FTL) arose under IRC § 6321.

That narrow question actually has a pretty easy answer. The broad (“secret”) federal tax lien arises at the date of assessment, so long as notice and demand for payment is made within 60 days of assessment. See IRC § 6303. If the notice and demand is properly made within those 60 days, the effective FTL date “relates back” to the date of assessment. 

Looking only at the 2013 tax year (the order is mostly silent about 2012) the assessment took place on November 17, 2014 and the notice and demand for payment was mailed on the same day. Accordingly, in this instance there isn’t even the need to “relate back” to the assessment date from a later-mailed notice and demand. The federal tax lien arose on November 17, 2014. Easy answer on the main issue, I’d say, but let’s look at some wrinkles:

Bonus points to students for those who advised putting the IRS mailing of the Notice and Demand at issue. If the Notice and Demand for payment were severely defective (or never actually mailed), it is possible (but by no means guaranteed) that in certain circuits the federal tax lien would not arise on November 17, 2014. Frankly, I think you could write a whole test question just on what the effects of failing to properly mail a Notice and Demand for payment are. It isn’t always clear or consistent.

Extra-special bonus points to students (or practitioners) that note potential evidentiary issues with the Notice and Demand for payment. The IRS provided transcripts as proof of proper mailing, but the IRS gets things wrong all the time -particularly with dates on notices (see Keith’s post here for an instance where the IRS effectively decided it was OK to send notices with bad dates). Judge Panuthos notes, however, that petitioners did not raise any arguments challenging the presumptively correct mailing record, so the argument essentially falls by the wayside. 

Note, however, that in this instance the Petitioner actually does raise an argument about the Notice and Demand. But it is a purely legal argument about the notice being untimely because it was issued too early after assessment. This legal argument is quickly and correctly dismissed as being a strained and improper reading of the statute. In my experience, I would say that a law student is more likely to raise that (doomed) legal argument than the more promising factual one: law school tends to focus on laws more than facts, after all.

Ok, so we’ve solved the narrow issue before Judge Panuthos here, which is when as a matter of law the federal tax lien came into existence. (It just so happens that Judge Panuthos worked extensively on collection matters as an attorney with Chief Counsel before becoming a Tax Court Judge, so he is likely better suited than most to wade through these tricky lien issues. Thanks to Keith for alerting me to this bit of information.) Partial summary judgment granted. But what remains to be disposed of in this case? What other Federal Tax Procedure Final Exam prompts might we take from this order? 

First off, consider whether and why the precise date of the federal tax lien even matters in this instance. Recall that the IRS filed a Notice of Federal Tax Lien (NFTL) before the property was sold, and also that Ms. O’Nan was liable for the entire 2012 and 2013 debt. Recall that unlike a “secret” tax lien, an NFTL takes priority over a for-value purchaser. See IRC § 6323(a). Wouldn’t the IRS be entitled to the proceeds regardless of the notice and demand issue?

I think the answer is “yes,” but a little more analysis is helpful to tie up potential loose ends. Those loose ends only really exist since the IRS granted innocent spouse relief, effectively cutting ties that otherwise bind Ms. O’Nan to joint and several liability.

As is frequently mentioned on this blog and elsewhere, the reach of the federal tax lien (FTL) is exceedingly broad. It is certainly broad enough to attach to Mr. O’Nan’s interest in the marital home before he passed away… so long as it arose before he passed away (i.e. when he still had an interest). Just as important as the breadth of the FTL is its resilience -that it sticks with real property that changes ownership through gift or, in this case inheritances. (See IRC 6323(h)(6), defining “purchaser” (one of the categories that otherwise defeats an FTL) but would not include a conveyance by inheritance.) 

Putting it all together, Ms. O’Nan needs to show that at the time the FTL came to exist her late-spouse had no interest in the marital property that the FTL could “attach” to. If that is the case, Ms. O’Nan still owes the tax liabilities but (critically) when the home is sold the proceeds going to the tax debts could only be attributable to her. That sets us up for her innocent spouse claim: the payments are solely attributable to Ms. O’Nan, who the IRS concedes doesn’t owe the tax (i.e. granted relief from liability). Unless the IRS can say “actually, the payments that fully eliminated the (previously) joint tax debt were attributable to the lien from your late spouse” it certainly seems like a refund would be in order.

Which gets to the final prompt: the circumstances for getting refunds in innocent spouse cases. For ultra-special-bonus-points we go all the way back to why the method of assessment matters. If the liability was from a summary assessment (i.e. tax reported on the return) then the only “type” of innocent spouse relief available under IRC § 6015 is “equitable” relief (IRC § 6015(f)) because it must be an “underpayment” and not an “understatement.” If it is an understatement you (potentially) get into other factually thorny issues about whether (b) or (c) relief is available.

This matters mostly in the context of getting a refund. You can only get 6015(f) relief if you are not entitled to relief under 6015(b) or (c). This is important because refunds are available under (f), whereas they are not available under (c) which is generally the easiest variety of relief to get. And if the only reason you can’t get (c) is because you want a refund, the Treasury Regulations provide that you are out of luck (see Treas. Reg. § 1.6015-4(b)). As blogged on previously here, the IRS also sometimes appears to default to “c” relief causing exactly these sorts of problems (it doesn’t appear to me that simply checking the “I’d like a refund” box on Form 8857 fixes the problem)

The IRS used to take a much stingier line on when you could get a refund under IRC 6015(f). Current IRS guidance (Rev. Proc. 2013-34), however, has liberalized such that refunds are generally available if there is a timely claim and the amounts paid are attributable to the requesting spouse. Which neatly brings us all the way back to why the FTL timing matters so much… determining which spouse the payment could be attributable to. After all, both spouses legitimately owed the tax at the time the IRS swooped in on the sale proceeds.

There are, undoubtedly, other questions and prompts one can pull from this scenario. In particular, the order provides look at the intersection of state law for determining “property rights” and federal law for how the FTL attaches to those rights. But those are prompts for another day.  

Theft Loss Issues with a Side of Tax Procedure. Bruno v. C.I.R., Dkt. # 15525-18 (here)

The fact-intensive nature of “theft losses,” as well as its interplay with other code sections (itemized deduction limitations, net operating losses, etc.) tends to make for good Federal Income Tax test prompts. And this order is no different, involving an alleged theft loss of roughly $2.5 million(!). The facts in this case are also sordid enough to keep students interested: the “theft” at issue arises from a divorce and supposed conspiracy of the ex-husband to hide assets from petitioner through a series of entities owned by the ex-husband’s family. 

Plenty of interesting stuff on the substantive question of whether (and critically, when) a theft loss may have occurred. But since this is a Tax Procedure blog, it seems fitting to focus on the procedural issue at play giving rise to the order at hand. 

The order from Judge Lauber tells the parties to file a supplemental stipulation of facts. Why not just parse out the facts that are needed in trial, you ask? Because the parties filed a motion to submit the case under Tax Court Rule 122 (i.e. “fully stipulated”). Judge Lauber is basically saying “What you’ve stipulated to isn’t enough for me to know if/when the theft loss is appropriate. Give me more.”

And here is where we get to tax procedure. Recall that the burden of proof is generally on petitioner, challenging the Notice of Deficiency, to prove that she is entitled to the theft loss. (See Welsh v. Helvering, 290 U.S. 111 (1933)) This does not change under Rule 122 submissions: subparagraph (b) of Rule 122 pretty specifically states as much. If the stipulations aren’t enough to show one way or another if the theft loss deduction is appropriate, shouldn’t the default be “petitioner loses?” 

Probably yes, but that doesn’t mean the Tax Court has to jump to that conclusion. And power to Judge Lauber for not doing so. As noted before (see post here), the Tax Court generally wants to get things right, and not to decide based on foot faults. Ruling based on insufficient stipulated facts, particularly where the parties may well end up agreeing on the facts that matter, may not quite be a foot-fault, but certainly seems unfair without first giving the parties a chance to fix the issue. If they don’t agree to the stipulated facts, however, I think there are problems for Petitioner. Until then, however, Judge Lauber seems to take the best approach. (Also (in my humble opinion) I think the Tax Court may be more willing than usual to accept and work with Rule 122 cases during this time of “virtual trials.”) 

Remaining Designated Orders – Conservation Easements That Sound Too Good to be True (Little Horse Creek Property, LLC v. C.I.R., Dkt. # 7421-19 (here) and Coal Property Holdings, LLC v. C.I.R., Dkt. # 27778-16 (here)

Finally a brief note on a couple of designated orders that arose from conservation easement cases. I recall at one of the first tax conferences I ever attended in 2012, practitioners (focusing on tax planning, not controversy) crowing about conservation easements. Now, interestingly enough, these years later conservation easements are still a topic frequently being discussed in the tax world, though now mostly by litigators… usually a bad sign for the planners. 

Coal Property Holdings pretty well illustrates the general state of affairs, with the taxpayers now arguing only over whether they should get hit with a 40% penalty for gross valuation misstatement under IRC § 6662(h). Post-script: in the time since this order was issued, the Tax Court entered a stipulated decision (here) where the parties agreed to the 40% penalty, and reducing the charitable contribution from $155,558,162 (on the return) to a slightly-less-magnanimous $58,162. Ouch.

Designated Orders, June 15 – 19, 2020: Whistleblower Week! Part I of II

It was a fairly busy week at the Tax Court June 15, with seven designated orders of which three involved whistleblower actions. The lessons that can be gleaned from them go beyond just the whistleblower statute (IRC § 7623). They touch on two issues of increasing importance in non-deficiency cases: the administrative record and delays in the IRS reaching a “determination.” Let’s start by looking at the determination issue.

read more…

Can A Writ of Mandamus Get You Into Tax Court? Whistleblower 3425-19W v. C.I.R., Dkt. # 3425-19W (here)

Usually, the “ticket” someone needs to get into Tax Court entails a “determination” by the IRS of some variety -for example a Notice of Deficiency (determining, believe it or not, a deficiency) or a Notice of Determination in a Collection Due Process case (which can determine any number of things, but usually whether to sustain a levy or lien). There are, however, some tickets to Tax Court that jump past requiring a determination from the IRS, particularly when the IRS has taken a while to conclusively respond.

One such ticket is Innocent Spouse relief with jurisdiction invoked under 6015(e)(1)(A)(I)(ii). Because of the Taxpayer First Act’s changes to the Tax Court’s scope of review (See IRC 6015(e)(7)(A)), there remain some unresolved issues for how the Court is supposed to review claims that come in without a determination being reached. PT has covered these issues here and here, among others.

This order raises a very interesting question about whether a Whistleblower action may also get into Tax Court without a determination being reached, albeit in a very different manner than the Innocent Spouse avenue. Unlike IRC § 6015, the Whistleblower statute does not expressly provide that the Tax Court has jurisdiction at a set point of time after filing a whistleblower claim. In fact, the statute could be read as saying that the Tax Court only has jurisdiction after a final determination is reached by the IRS (see IRC § 7623(b)(4)). “Whistleblower 3425-19W” had not received a determination by the time the petition was filed… easy “Dismiss for Lack of Jurisdiction” win by IRS, right?

Not quite.

In many instances, petitioners might not care that much about the IRS dragging their feet on reaching a determination. Almost uniformly if you have a chance of getting money from the government there is a limit on how long the IRS can delay reaching a decision before you have access to Court (this would be true, for example, in the aforementioned Innocent Spouse cases, but also in a claim for refund in federal court: see IRC § 6532(a)(1)). In collection actions the best you can really do is not owe since the Tax Court has held that it doesn’t have refund jurisdiction (see Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006)), so there is (generally) less of an issue with the IRS failing to reach a timely determination.

But what about whistleblower actions? Whistleblowers want a cut of the proceeds they helped the IRS to collect: could the IRS just let the whistleblower claim languish forever, without reaching a determination of any variety -essentially a de facto denial of an award, but without court review? I have no idea how long it has been since “Whistleblower 3425-19W” made a claim for a whistleblower award, but let’s assume it has been years since the IRS has made a determination one way or another. What recourse does this individual have?

Creatively, perhaps, the individual in limbo can have the Tax Court order the IRS to reach a determination through a writ of mandamus. At least, that’s what Whistleblower 3425-19W is trying to do here. It isn’t clear (yet) if that will work out, for a number of reasons. Two that come to mind are (1) the general requirements for a writ of mandamus, and (2) the ever-looming metaphysical issue of exactly what jurisdictional limits are imposed on the Tax Court.

A refresher may be helpful for those that only dimly remember the phrase “writ of mandamus” from Marbury v. Madison. At its simplest, a writ of mandamus is a court order that (in this context) an agency take or refrain from taking a particular action. It isn’t something you see frequently in the tax context: it is an “extraordinary” remedy that has separation of power concerns written all over it. At least three threshold conditions must be met for a court to even considering issuing a writ of mandamus: (1) no other means to relief without the writ, (2) petitioner demonstrates clear and indisputable right to the writ, and (3) even when those two conditions are met, the Court has to think that a writ is appropriate under the given circumstances. See Cheney v. U.S. Dist. Court for D.C., 542 U.S. 367, 380 (2004)

This to my mind, these conditions rule out most Tax Court cases.

(As an aside, I have actually been counsel on a tax case in federal district court where the complaint sought a writ of mandamus. If nothing else, it appears to kick the DOJ into action. Our case settled favorably without ever getting anywhere even close to the merits.)   

But even if there is a good argument that a writ of mandamus would generally be appropriate, you run into a second issue if your forum is the Tax Court: does the Tax Court have the power to issue a writ for the matter at hand? The All Writs Act, (28 U.S.C. 1651(a)) is really short. Go ahead and read it for yourself. And it seems straightforward: when a Court needs to issue a writ, it can do so. The Act applies to (1) the Supreme Court, and (2) all Courts established by Acts of Congress (generally referred to as Article I Courts). The Tax Court is an Article I court, established by Congress, so one would think that solves the issue of whether the Tax Court can issue writs.

Here, however, we may have something of a Catch-22. The Tax Court (maybe) doesn’t have jurisdiction over the underlying Whistleblower action until a final determination is issued. So in this instance, unless there is some variety of quasi stand-alone jurisdiction under the All Writs Act, you (arguably) never could set foot in the door of the Tax Court to ask that they issue such a writ without the determination (that you are arguing should be issued) in the first place.

Judge Toro’s order is short (essentially a page) and is largely just asking for the parties to address this question by looking at the All Writs Act and, especially, Telecommunications Research and Action Center [TRAC] v. F.C.C., 750 F.2d. 70 (D.C. Cir. 1984).

TRAC appears to provide some guidance on this issue, though in a different and somewhat confusing context. TRAC involved the lack of a final order from the FCC. Apparently by statute the Court of Appeals has original jurisdiction over final orders from the FCC in these matters (see 28 U.S.C. 2342(1)). Without such a final order, did the Court of Appeals have jurisdiction to issue a writ (such writ producing a final order, and thus essentially enabling jurisdiction)? TRAC didn’t end up conclusively answering the question, because the Court never ended up having to issue a writ or deciding it didn’t have the power to: the FCC basically promised it would reach a determination sooner rather than later, and the Court kept things in a holding pattern until it happened.

However, TRAC did provide a wealth of analysis, replete with Supreme Court citations, on why it likely had jurisdiction to issue such a writ. Some of the key quotes from the TRAC decision that petitioners may want to consider include:

“Lack of finality [i.e. a final FCC order] however, does not automatically preclude our jurisdiction.” (Referencing Abbot Laboratories v. Gardner, 387 U.S. 136, 149-50, (1967) for the proposition that the finality doctrine should be flexibly applied).

And

“In other words, [the All Writs Act] empowers a federal court to issue writs of mandamus necessary to protect its prospective jurisdiction.” (In the context of an appellate court issuing writs in district court cases where appeal has not yet been perfected.)

Finally, TRAC also finds support for the proposition that it has jurisdiction to issue a writ of mandamus because the Court of Appeals has “exclusive” jurisdiction over these FCC final orders… which is arguably the same as the Tax Court in whistleblower actions.

The Tax Court has something of a reputation for taking a narrow view of its jurisdiction, and the jurisdictional barriers to entry. We’ll see if the whistleblower arena breaks some new ground.

Admin Record Issues: Vallee v. C.I.R., Dkt. # 13513-16W (here) and Doyle & Moynihan v. C.I.R., Dkt. # 4865-19W (here)

While Judge Toro’s order in Whistleblower 3425-19W was short but brought up a lot of questions, Vallee is long (20 pages) but likely not worth as much detailed analysis. However, it is worth mentioning for those who want to get a glimpse into the inner workings of the IRS, and how different areas of the IRS might collaborate on complicated cases. As a practitioner, Vallee may be helpful in determining what to ask for in discovery (or possibly a FOIA request), where particularity is important.

Vallee also highlights the importance of closely reading the IRS administrative record, noting potential inconsistencies, and putting them at issue (in this instance, mostly having to do with emails). In Vallee the petitioner’s close reading of the administrative record doesn’t ultimately lead to a winning case, only a delay of losing. Nevertheless it stands for the proposition that the need to keep good records can cut both ways in some tax contexts, and practitioners shouldn’t let the IRS off the hook when their records can be put at issue (see designated orders covered here).

Doyle & Moynihan provides another important practical lesson: how to actually raise the issue of the administrative record in motion practice. In Doyle & Moynihan, the petitioners think the IRS has omitted certain information from the administrative record that should be in it (from personal experience I know this can certainly happen). Petitioners try two different methods to bring this to the Tax Court’s attention: (1) a motion to strike the declaration of the IRS Whistleblower Officer certification, and (2) a request for a pretrial conference. Neither are (in this instance) the proper way to go.

The motion to strike (which Judge Gustafson characterizes as, in fact, a sur-reply to an IRS motion of summary judgment) fails because the correct approach is not to strike the IRS certification of the record, but to propose a supplement of the record with the allegedly missing material. So really, at this point, the motion isn’t asking the Court to do what you want it to do. And it isn’t time to ask the Court for what you actually want it to do either, because there is an outstanding summary judgment motion to be decided.

The second approach (a pretrial conference) also is shot down – though as a general rule Judge Gustafson appears to welcome the approach of requesting a pretrial conference. In this instance, however, the issues that petitioners want to raise in the pretrial conference go beyond the pleadings and the issues that the Tax Court is currently dealing with. Take it one day and one issue at a time (it is possible the case will/can be resolved without getting at the issues petitioner wants to discuss). Valuable advice we can all use right now…