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.

Boilerplate Provisions in Stipulated Decisions May Have “Interesting” Consequences

In my last post, I ran through the arguments a taxpayer may have against interest accruing when the IRS is “dilatory” in assessing tax that was assessed through a Tax Court decision. It was a fun and exciting jaunt through IRC § 6404(e) marred by a rather unfulfilling conclusion: IRC § 6404(e) interest abatement for “dilatory” IRS assessment might not get you where you want to go if your client is poor.

That seems unfair. But as my parents undoubtedly told me when I was a child, life is unfair.

Still, as lawyers we like to believe that we can mitigate some of that cosmic unfairness. Or, failing that, we like to believe we are just cleverer than we really are. I’ll let you be the judge which of those two buckets my following argument falls into…


Let’s get away from IRC § 6404 for a moment. As Professor Bryan Camp recently detailed, there are a lot of different ways to lose on IRC § 6404 arguments.

Instead of the rocky, uninviting terrain of IRC § 6404(e), let us turn to the lush paradise that is IRC § 6601. Specifically, let us gaze upon IRC § 6601(c).

The provisions of IRC § 6404(e) were full of mushy terms like “ministerial or managerial act,” and “dilatory performance.” IRC § 6601(c), however, gives us nice, bright lines to work with. If the taxpayer waives the restrictions to assessment under IRC § 6213(d), the interest on the deficiency is suspended when the IRS fails to send “Notice and Demand for payment” within 30 days of the waiver.

Note that this code section generally comes up in examination, and not in litigation. In fact, the waiver of interest is commonly referred to as an “870 Waiver” by those in the know (i.e., Bob Probasco, to whom I am indebted on all issues relating to interest), because it is traditionally done through Form 870.

But we’re dealing with people that have decisions entered in Tax Court, not administratively with the IRS. Is there any way to get to IRC § 6601(c) without Form 870?

Maybe. Bear with me on this one.

One of the standard, boilerplate (and IRS insisted upon) provisions on the stipulated Tax Court decisions I enter into reads as follows:

“It is stipulated that, effective upon the entry of this decision by the Court, petitioner waives the restrictions contained in IRC § 6213(a) prohibiting assessment and collection of the deficiency (plus statutory interest) until the decision of the Tax Court becomes final.”

In other words, my Tax Court decisions enter into a section 6213(a) waiver. Am I out of luck because IRC § 6601(c) requires a waiver “under section 6213(d)” and my waiver occurs a mere three sub-paragraphs above that?

We should probably look at IRC § 6213(d) to get an idea. It is a short and fairly straightforward code provision:

“The taxpayer shall at any time (whether or not a notice of deficiency has been issued) have the right, by a signed notice in writing filed with the Secretary, to waive the restrictions provided in subsection (a) on the assessment and collection of the whole or any part of the deficiency.”

Arguments For and Against Tax Court IRC 6213(a) Waiver as IRC 6213(d) Waiver

IRC § 6213(d) really just asks two things:

(1) did the taxpayer waive the restrictions on assessment and collection in IRC § 6213(a), and

(2) did the taxpayer sign and file that waiver with the IRS?

The answer to the first question is an unequivocal “yes” in my Tax Court decision documents. The answer to the second question is not so clear.

Any time I enter into a stipulated decision to some degree I “sign and file” a document with the IRS. I definitely “sign” the document. But I much-less-definitely “file it” with the IRS. As an agreement (a signed stipulation between the parties) it is always countersigned by the IRS. So, I always “send” it to the IRS for them to take further action. Nonetheless, it is debatable whether I’m “filing” it with the IRS. Some would say I am only “filing it” with the Tax Court. But that term is not particularly well defined.

One other wrinkle. I somewhat-subtly substituted “IRS” for the word “Secretary” in the statute (e.g., “file with the Secretary”). Does that matter?

Generally, “Secretary” means the actual secretary of the Treasury (presently Janet Yellen), or their “delegate.” A delegate, in turn, means “any officer, employee, or agency of the Treasury Department duly authorized by the Secretary of the Treasury directly, or indirectly by one or more redelegations of authority[.]” See IRC § 7701(a)(11)(B).

In other words, the word “Secretary” refers to a really broad group of people within the IRS. That’s good news for my argument.

Bad news for my argument (maybe) is the Treasury Regulation on point: Treas. Reg. § 301.6601-1(d). That regulation provides that the suspension occurs after a “district director” determines a deficiency and the taxpayer files an agreement “with such internal revenue officer.” Those may well be more restrictive terms. At the very least, they seem to imply that the waiver must be filed in the administrative proceeding, since it is requiring that I file “with such internal revenue officer” (i.e., those involved in determining a deficiency). IRS Counsel is definitely not involved in determining the deficiency for my taxpayers. They come into play only after I’ve filed a petition challenging that prior determination.

What is one to do when the statutory language and regulations leave wiggle room? Look to the case law.

While contemplating the merits of my argument, one case in particular caught my attention: Corson v. C.I.R., T.C. Memo. 2009-95. In Corson the taxpayer apparently executed a section 6213(d) waiver as part of a stipulated settlement in litigation. The Tax Court found that this waiver, which was part of a stipulated settlement, did indeed suspend interest when the IRS took half-a-year to get around to sending a Notice and Demand letter.

That seems pretty much on all-fours with my argument, right?


It isn’t immediately clear to me how the waiver was executed. Was it just in the stipulated decision document? Was it an added Form 870 filed with the decision documents? Does that matter? I’d say it is at least enough of an opening to make an argument. And that opening expands in reading other cases on the topic. For example, in a later case the Tax Court specifically references Corson for the proposition “[g]enerally, the waiver is executed by filing a designated form, but the restrictions on assessment may be waived in other ways.” Hull v. C.I.R., T.C. Memo. 2014-36. So maybe no “designated form” was filed in Corson. Maybe the generic (but explicit) waiver of restrictions in IRC § 6213(a) is enough…

The Takeaways

I referred to the IRC § 6213(a) waiver as “boilerplate” and, in the title of this post, alluded to them being something of an afterthought for most practitioners. But what does the waiver really do?

The most obvious consequence of the waiver is that it speeds up the process for the IRS to assess and collect, by speeding up the “finality” of the Tax Court decision. Usually, the decision is not final until appeal rights have passed or been exhausted. See IRC § 7481. Since I don’t plan on appealing stipulated settlements, I have no problem bumping up the “finality” date of a Tax Court decision by waiving IRC § 6213(a) restrictions.

But shouldn’t there be some trade-off for this waiver of restrictions? What does the taxpayer get by letting the IRS assess and collect more quickly? Conceptually, it seems to me like the IRC § 6213(a) waiver filed in Tax Court is doing basically the same thing the Form 870 waiver is doing in examinations: speeding things up for the IRS. And when the IRS doesn’t act in a (remotely) timely manner on that taxpayer concession, it seems to me that the consequence should mirror that of the Form 870 waiver: a suspension of the accrual of interest for the IRS’s dilatory behavior.

The beauty of the argument, as I see it, is that I no longer have to prove “causation” when I import IRC § 6601(c) as my means for interest abatement: if the IRS doesn’t send the Notice and Demand on time, interest should be suspended, full-stop. This helps low-income taxpayers that can’t afford to just send blind-interest payments to the IRS. Maybe it will also help the IRS in getting those payments more quickly, too.

Losing Interest: Delayed IRS Assessments

Over the last two years I cannot count the number of times I’ve had to give extraordinarily unsatisfying advice to my clients. That advice being, “please wait.” Wait for the IRS to process your return. Wait for the refund to be issued. Wait for your Collection Due Process hearing.

Of course, waiting can carry a price. I’ve previously posted a bit about the time-value of money, and (especially for low-income taxpayers) the opportunity costs of waiting on a refund. Here, I’ll write about the potential costs to the government and potential arguments taxpayers may have against paying interest. To keep things (relatively) simple, I will be focusing only on IRS delays after Tax Court decisions.


I’ve come across a lot of practitioners voicing concern about IRS delays in issuing refunds after a Tax Court decision. In those instances, practitioners are well-advised to review Tax Court Rule 260.

Less common (though not unheard of) is the complaint for those that end up owing after their trip to Tax Court. What happens when the parties settle on a deficiency, but the IRS never gets around to actually assessing that (agreed upon) amount? Bob Kamman experienced and posted on something close to this phenomenon (with a bit of a twist), giving the advice to reach out to the IRS counsel’s office to sort things out. In terms of getting the IRS to actually take action, that advice likely still holds, but what about a remedy for all the time you spent waiting?

From the outset, some may see this all as a non-issue. Regardless of the IRS delay in assessment, you can still send payment for the deficiency and maybe throw a little extra on top for the interest accrual you estimate to be due.

But it is important to remember how many people out there don’t have that “little extra” to throw on top. In 2016, approximately 63% of Americans couldn’t cover a $500 emergency. This is not just a problem in the abstract: I have clients that are living on such tight margins that the accrual of interest makes a big difference in their lives. This is all the more true given inflation and the (slight, but real) uptick in interest rates for tax. Perhaps there should also be some relief from the interest that accrues during a delay in assessment…

And perhaps there is…

Rule 260 Redux?

A quick note on where you won’t find relief.

Mere paragraphs above, I advised practitioners to review Tax Court Rule 260 when their clients are waiting on refunds from a Tax Court decision. Some of you no doubt found that Rule so engrossing that you read on to Rule 261… which deals directly with “proceedings to redetermine interest.” Is that where we should look for relief from interest where the IRS fails to assess and send a notice and demand for payment in a timely fashion?

Probably not.

Rule 261 pertains to cases where the Tax Court decision found an overpayment. Imagine two different taxpayers: one we’ll call “Flush” and one we’ll call “Strapped.” Both have identical tax issues, and both bring identical cases to Tax Court. Eventually, both Flush and Strapped reach a settlement with the IRS, agreeing to a deficiency amount less than what was in the Notice of Deficiency.

But here is where things diverge.

Prior to filing the petition, Flush sent in a deposit under IRC § 6603 for the amount listed on the Notice of Deficiency. Strapped, on the other hand, did not. In their stipulated decision documents, Flush will agree to both a deficiency and an overpayment (i.e., the amount by which the deposit for the original deficiency exceeds the agreed upon deficiency). Strapped, on the other hand, will only agree to a deficiency.

It is for taxpayers like Flush that Rule 261 (and IRC § 7481(c)) applies (you can see that situation in action in Hill v. C.I.R., T.C. Memo. 2021-121). But I am concerned with taxpayers like Strapped. What interest-related arguments might Strapped have?

Unreasonable Delay: The Seemingly Obvious Argument

When the Tax Court redetermines a deficiency, the IRS has to assess it. This seems pretty uncontroversial and is enshrined in IRC § 6215(a). If you double-checked my code citation, please note and underline the phrase “shall be assessed.”

If the IRS takes literally over a year to get around to assessing the tax after a final Tax Court decision, it has followed the statutory mandate… but in a sluggish way that perhaps ought to carry consequences. And a fitting consequence for wasting time would be forgoing the time-value of money during that wasteful period. In other words, abating interest.

And it so happens there is a code provision exactly on point for those sorts of issues: IRC § 6404(e), “Abatement of Interest Attributable to Unreasonable Errors and Delays by the Internal Revenue Service.” That sounds promising, particularly the provisions at IRC § 6404(e)(1)(B). What exactly do they entail?

First, the “unreasonable error or delay” has to involve an IRS employee “in performing a ministerial or managerial act.” Since we’re only focusing on assessing tax, let’s call this the “non-discretionary act” test.

Second, the delay in payment has to be “attributable” to the IRS employee being “dilatory” or erroneous. Let’s call this test the “causation” test.

Third, the taxpayer can’t have played a “significant” role in the error or delay. Let’s call this the “clean-hands” test.

Lastly, the period of abatement must come after the IRS has contacted the taxpayer, in writing, with respect to the deficiency. This is mostly a computational test that we don’t really need to worry about here. It will always be met where the interest at issue has accrued after a Tax Court decision finding a deficiency.

“Non-Discretionary Act” Test

The Treasury Regulations define a “ministerial act” as an act that “does not involve the exercise of judgment or discretion, and that occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and review by supervisors, have taken place.” Treas. Reg. § 301.6404-2(b)(2). I’d say inputting the assessment of a deficiency, after a Tax Court decision has found that deficiency and is final, meets that test. This is especially true since the IRS is mandated to enter the assessment (the “shall be assessed” language of IRC § 6215(a)).

First test = passed.

“Clean-Hands” Test

What does it mean for a taxpayer (or someone sufficiently related to the taxpayer) to play a “significant role” in the delay? Most of the cases I found involved taxpayers filing incorrect forms or taking other actions that would make the IRS “ministerial or managerial” acts more difficult. There are also some cases where the taxpayers renege (or attempt to renege) on settlements, and generally contradict themselves while trying to vie for interest abatement. In other words, cases where the taxpayer did not have clean hands. See Mitchell v. C.I.R., T.C. Memo. 2004-277.

Assuming the taxpayer has done everything right up to the point of the Tax Court entering the decision document, they probably meet this test too…

“Causation” Test

Here is where things get tricky. The biggest obstacle is something that was alluded to earlier: arguably, you could have paid the tax (and stopped the interest) even without the IRS taking the ministerial acts to assess it. In other words, it was not the failure to perform a ministerial act that caused the interest accrual. It was simply the taxpayers’ failure to send in money.

There are at least a few cases that look at the causation issue and cut against the taxpayer. The worst (and in my opinion, least fair) line of Tax Court cases provide that there will be no abatement if there is no evidence that an earlier payment would have been made… for example, because the taxpayer is cash-strapped.

The Tax Court has expressly found that the IRS has the “discretion” not to abate tax if the taxpayer fails “to establish that he had the financial resources to satisfy the tax liability when the claimed error occurred.” See Hancock v. C.I.R., T.C. Memo. 2012-31, listing off cases supporting this proposition. In other words, extremely low-income taxpayers may be the least able to get interest abatement under this line of argument.

This may not always be the case and would likely be fact specific. But it is enough for me to have serious concerns about arguing under IRC § 6404(e) for interest abatement when the IRS delays in assessing tax for my clients.

Fortunately, there may be different line of argument that will get my clients relief. My next post will cover that proposition.

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire (Part Two)

Lately I’ve been obsessing over how to remedy “bad answers” from the IRS). In my last post, I detailed how IRS counsel’s failure to “reasonably inquire” under Rule 33 before filing a “bad answer” may make them more susceptible to awards of litigation costs under IRC § 7430. Of course, litigation costs come at the end of the ligation process, so that might not seem like a useful remedy for more quickly resolving a case when the IRS files a “bad answer.”

Fortunately, the consequences for failing to reasonably inquire before filing an answer include more than just the heightened possibility of litigation costs. Indeed, far more immediate consequences may ensue. Read on for two more examples, from two more Tax Court orders.


Remedies for Bad Answers: Motion for More Definite Statement

There are a great many lessons that can be gleaned from the case of Patrick McCabe and Zine Magubane v. C.I.R. (Dkt. # 23862-05). I sincerely hope that the Tax Court considers returning to the practice of issuing “designated orders” at some time in the future. I have no idea if the order I am about to cover in detail was “designated” by Judge Panuthos when he issued it in 2006… but it is exactly the sort of order that practitioners would benefit from reading.

For everyone else, the Readers Digest version is as follows:

Petitioners were audited for Schedule C income and deduction issues. The petitioners engaged in the audit process, providing (they allege) adequate substantiation for each issue that ended up on the Notice of Deficiency. Importantly, they alleged that they had adequately substantiated everything and complied with the audit as part of their petition to the Tax Court. Keep my earlier discourse on the limits of burden shifting under IRC § 7491 in the back of your mind…

IRS Counsel asked for more time to file its answer because they didn’t have the administrative file. No one objected, and more time was granted.

Days passed. Again, the IRS can’t find a way to get the administrative file to IRS Counsel. At this point the facts are fairly similar to Vermouth v. C.I.R., 88 T.C. 1488 (1987).

Only now the parties diverge. Rather than file another motion asking for additional time to answer, IRS Counsel decides they’ll just file a “bad answer” instead. In response to all the facts alleged by petitioner, IRS Counsel “denies for lack of sufficient information or knowledge.”

Judge Panuthos and the petitioner are not impressed. Everything from my prior two posts now comes full circle… The interplay of Vermouth and responsive pleadings under Rule 36, as well as the post on reasonable inquiry requirements under Rule 33(b). What a payoff!

Petitioners file a “Motion for More Definite Statement” under Tax Court Rule 51. In that motion, they argue that the IRS’s answer is too vague to allow a reply and that the burden of proof should shift under IRC § 7491.

Note that this burden shift is critical to the Rule 51 motion. You really can’t argue “I need more clarity in order to reply!” (i.e., Rule 51) if a reply doesn’t make sense in the first place, because the burden is on you to prove something you affirmatively alleged. That is your prototypical deficiency case: petitioner alleges facts needed to show no deficiency, etc. When IRS Counsel denies those facts, you do not have to (indeed, shouldn’t) file a “reply.” If there was something more at play than IRS Counsel just saying, “we deny those facts, please uphold the deficiency,” however, Rule 51 might come in handy. From my look over the Tax Court orders, this most often arises with the assertion of fraud, but it could be any number of things (see, e.g., Rule 39). Here, it appears that the only way petitioners can get to Rule 51 is if there is a burden shift for the deficiency.

Whether or not a Rule 51 motion is appropriate in the McCabe/Magubane case isn’t really touched on – though Judge Panuthos seems to think Rule 51 isn’t the way to go in a footnote (that is, no “reply” is needed in this case). In any event, Judge Panuthos is willing to entertain the general notion that the IRS’s answer is deficient. And IRS Counsel’s argument for why the answer is fine is… not impressive. 

In a nutshell, IRS Counsel thinks they should be able to deny everything for lack of sufficient information because they still can’t find the administrative file. Not their fault that someone else at the IRS isn’t doing their job. And this mistake from some other person at the IRS is the reason they (truthfully) don’t have “sufficient information or knowledge.” Things should just be left at that.

But Judge Panuthos doesn’t leave things at that. Instead, he (literally) underscores the requirement of Rule 33(b) that provides the signer’s knowledge or belief should be “formed after a reasonable inquiry.”

And here things go an important step further. It isn’t enough to just say “I don’t have the file, and it’s not my fault it can’t be found.” Judge Panuthos writes:

“The Commissioner’s knowledge includes that of the revenue agent and other IRS personnel involved in the examination in this case. Thus, although the absences of the administrative file may be a direct impediment to the filing of a proper answer, counsel for respondent must avail himself of the other sources of information that would allow him to prepare a proper responsive pleading.”


This is, I think, a fair position to take. Note that it isn’t quite “imputing” full knowledge from one disparate wing of the IRS to another. Rather, it is something of a middle road: if you know that some other wing of the IRS has information/knowledge of the issues at hand, you have to reasonably inquire of those sources.

Similarly, I’d say Judge Panuthos’s ultimate ruling on the motion is also a fair position. He grants the motion, but with (for the time being at least) a less severe remedy than what was asked for by petitioner: the burden doesn’t shift, but the IRS has to file an amended (better) answer in less than a month.

Note that Judge Panuthos’s analysis was squarely on Rule 33, the violation of which allows for a range of sanctions. In other words, you need not go the route of “Motion for More Definite Statement” if the IRS answer has the type of shortfalls outlined above. More thoughts on other options at the conclusion of this post.

So How Far Does an Inquiry Need to Be for it to be Reasonable?

Ultimately, and perhaps unhelpfully, the “test” of reasonable inquiry is one of facts and circumstances. The Supreme Court has said as much with regards to FRCP 11, which is very similar to TC Rule 33. (For the Supreme Court take on Rule 11, see Business Guides, Inc. v. Chromatic Communications Enterprises, Inc., 498 U.S. 533 (1991).

At one extreme, IRS counsel failing to do much of any inquiry after failing to timely receive the administrative file is not good enough. To see something of the opposite extreme, it may be instructive to review the case of Wilmington Partners, L.P., v. C.I.R., Dkt. # 15098-06.

Wilmington was a TEFRA case involving a 65-page petition and 48-page IRS answer. The attorneys in Wilmington didn’t much appreciate that the IRS frequently denied portions of their meticulously laid-out petition for “lack of sufficient information or knowledge.” In particular, they were of the opinion that many of the facts were known to the Commissioner in some capacity or another, over the lifespan of the many exams and hours spent on the myriad partners comprising the case. Since IRS Counsel would have known these facts if they “reasonably inquired,” their denials (“lack of sufficient information”) should be stricken… or perhaps less dramatically, IRS Counsel should have to provide a more definite response.

To this, Judge Carluzzo said “no.” IRS Counsel contended that it reviewed literally thousands of pages contained in the administrative file before filing its 48-page answer. This might be enough to be considered a “reasonable inquiry,” but Judge Carluzzo doesn’t want to go too far down the road of defining that term (and resolves the matter without doing so).

Nonetheless, wading through over a thousand pages of administrative file is likely to be a reasonable inquiry – or at least enough to keep the Tax Court from imposing tough sanctions like striking an allegation. But simply throwing up your hands when the administrative file doesn’t come your way is not.

Moving Forward: Lessons Learned

I hope you’ve enjoyed these last few posts at least as much as I’ve enjoyed writing them during my spring break… We’ve covered a lot of ground, to the extent that I think some recap is in order. For me, the lessons I’ve pulled and plan on incorporating in my practice are as follows:

First and foremost, engage with the IRS during the administrative phase (i.e., exam), even if you are not sanguine on your prospects for success at that level. You cannot expect IRS Counsel to have knowledge of information you allege in your (eventual) petition if you haven’t sent it to the IRS exam or Appeals previously. You also can’t possibly expect to either burden shift or get attorney’s fees if you come late to the game.

Second, and relatedly, think strategically in crafting the facts portion of your petition. Can you allege facts that the IRS should be well aware of from information previously provided? Can you make a case for a burden shift? Can you phrase things in a way that would make it awkward for the IRS to “deny for lack of sufficient information?”

In deficiency cases, there are times where I allege and reference facts that should clearly be in the administrative file (e.g., “Taxpayer responded to the IRS CP2000 Notice on [x] date by sending a letter.”) But these are generally relevant to penalty issues only. (In the above example, it is relevant under IRC § 6751 and Walquist’s take on IRC § 6662 as being “automated” which I take issue with.) I have yet to argue for a burden shift in the petition, though that may change someday soon.

Third, emphasize when the administrative file is directly relevant (perhaps dispositive) to the issue at play in the petition. This is very easily done in most collection cases. Frankly, in my opinion the IRS shouldn’t file an answer to an “abuse of discretion” collection issue before at least reviewing the administrative file. I am almost certain to push back on any answer that denies for “lack of sufficient information” facts that are (1) directly relevant to the merits of the case and (2) necessarily found in the administrative file. The IRS has (indeed, created and maintains) the administrative file that is directly on point for those issues. It really just delays dispositive motion practice to answer a petition before reviewing that file.

Fourth, and finally, genuinely try to work with IRS Counsel before filing some sort of motion in response to a “bad answer.” It is important to keep things collegial before burning bridges, and moving for sanctions is a great way to poison the well (please hold all your “mixed metaphor” comments until the end). Respecting the things that are truly beyond IRS Counsel’s control means suggesting (and freely agreeing to) motions for additional time to file an answer. And although the Tax Court frowns on submitting “exhibits in the nature of evidence” with a petition, there is no reason why you cannot send documents directly to IRS Counsel supporting your petition after you’ve filed and they’ve been served. This isn’t to say that area Counsel will accept those documents… but it can’t hurt.

There are ways to be pro-active, and ways to have a “bad-answer” haunt the IRS. The increased chance of an attorney’s fees award is certainly one negative incentive for the IRS to do better. But another thought is to speed up the discovery process. Petitioners can be the ones to send (and initiate) the Branerton conference. Informally asking IRS Counsel to admit to the obvious facts previously listed on the petition can put them in an awkward space: do they deny and then deal with more formal admissions requests thereafter? Or do they admit to the facts alleged in the petition, thereby essentially conceding that they should have never denied in their answer to begin with?  (Note that this would not come after the IRS had received additional information not already available to them at the answer stage.)

The point of all of this isn’t to catch IRS Counsel on a technicality or punish them for other branches of the IRS failing to send them the administrative file. The point is to make litigation more efficient. The pleading stage should narrow down issues and agree on facts to the greatest extent possible. Presently, at least in low-income cases, it is little more than a perfunctory “I Allege” and “We Deny” dance.

While many low-income cases involve thorny questions of fact, just as often they resolve on documentary evidence that both parties would agree to, if only they looked it over. I have had precious few cases where I’ve ultimately relied on the finder of fact (i.e., Tax Court judge) to make a determination based on testimony. I dream of a day that one of my deficiency cases may be ripe for summary judgment because both parties properly engaged before the case was set for trial…

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire

In my last post, I piqued your interest by mentioning ways to remedy “bad answers” from the IRS – the sorts of answers where IRS Counsel blandly denies every factual allegation for lack of sufficient information. Then, I proceeded to discuss instances where the IRS either doesn’t answer at all or doesn’t answer sufficiently on instances where it has the burden of proof.

What gives?

I maintain that it wasn’t a bait-and-switch, but rather a delectable and necessary build-up to today’s post. In particular, it was important to showcase the need for the administrative file (that is, facts IRS Counsel should have access to) and the distaste the Tax Court has shown for “bureaucratic inertia” as an excuse for Counsel failing to ascertain facts known by the IRS more broadly. Today, I promise to (actually) discuss remedies to the ubiquitous “deny for lack of sufficient information” answers plaguing the low-income taxpayer docket.


When I file a petition, Tax Court Rule 33 ensures that I can’t just allege facts without reasonably inquiring into their veracity. It stands to reason that if I am bound by Rule 33 in alleging facts, the IRS is bound by Rule 33 in denying knowledge of those same facts. Of course, as the taxpayer/petitioner, I generally have both the burden of proof and better access to the “facts alleged” than the IRS. And because the IRS (usually) need only respond to my factual allegations, they usually deny and move on.

The question is how much of a “reasonable inquiry” IRS Counsel needs to do before they can throw up their hands and say, “we deny that fact for lack of sufficient knowledge or information.” For example, can IRS Counsel in Minnesota “deny for lack of sufficient knowledge” what IRS Appeals in Utah knows fully well about the case?

It is an issue of how much knowledge should be imputed from one area of the IRS to another. But it is also an issue of how much effort IRS Counsel must expend in actually trying to learn what IRS Appeals or Exam already knows. The first issue is with regards to knowledge. The second issue is with regards to effort.

Knowledge and Effort: You’ve Got to Try to Learn the Facts

Let’s begin with the lesson from my last post. IRS Counsel cannot just blame the “bureaucratic inertia” of other IRS functions (e.g., Appeals) for its failures to act in a timely manner. Recall the case of Vermouth v. C.I.R., 88 T.C. 1488 (1987). While Vermouth dealt with the IRS’s failure to timely file an answer (rather than timely filing a “bad” answer) under Tax Court Rule 36, it should remain relevant under Rule 33 concerns.

Exactly how hard IRS Counsel needs to try for the effort to be a “reasonable inquiry” may be subject to debate. At a minimum, I’d say that if the IRS (somewhere) has access to the facts alleged, IRS Counsel can’t (or shouldn’t) be able to just lamely deny for “lack of sufficient knowledge” because that other function hasn’t been on the ball in sending the information to IRS Counsel.

But you don’t have to take my word for it…

The Importance of the Answer: Litigation Costs

In perusing the US Tax Court’s orders, I came across the interesting case of Dudley Joseph & Myrna Dupuy Callahan v. C.I.R., Dkt. # 6999-09. One particular order caught my eye, which granted the pro se petitioners litigation costs for their troubles… generally a sign that the IRS didn’t do a great job in the case.

My suspicions proved correct.

In this case, the petitioners received a CP2000 Notice for their 2006 taxes for (allegedly) failing to report gambling winnings, social security, and $27 in interest. The problem was that the petitioners did, in fact, report all those things (except the interest, which they denied receiving altogether). They just didn’t report all those things in exactly the place the IRS AUR computer wanted them to.

Most of the confusion boiled down to the treatment of the gambling winnings. Petitioners did, in fact, report their winnings, but as Schedule C (i.e., self-employment/business) income. Generally, one could dispute that tax treatment, but in petitioner’s case they had already been audited on exactly that issue in the past, and apparently the IRS had agreed it was Schedule C income.

After being unable to resolve the issue by responding to the CP2000 (surprise!) petitioners received a Notice of Deficiency (NOD). They took the belt-and-suspenders approach by both petitioning the tax court and replying (again) to the IRS office in Philadelphia that had issued the CP2000.

Somewhat surprisingly, this time the CP2000 response worked. The IRS issued a “CP2005” closing letter agreeing with the return as filed. The closing letter went so far as to say, “If you have already filed a petition, the Office of the District Counsel will contact you on the final closing of this case.”

And yet, here we are in Tax Court. What went wrong?

Basically, IRS Counsel didn’t really look into things. Rather than conceding the case, they filed an answer that continued to assert the full deficiency as well as an accuracy penalty for good measure. When they were (eventually) presented with the CP2005 closing letter the IRS conceded… but by then significant time and effort had been wasted. Enough so that the Tax Court found that the petitioners should be awarded the costs of their tax court filing fee and mileage for driving to court.

For present purposes I want to focus on whether the IRS’s position (as framed in its answer) was substantially justified. If it was, then under IRC § 7430(c)(4)(B) no award of fees would be forthcoming. Here is where Judge Gale hits on that Rule 33 requirement I began with:

“Respondent has not asserted, and there is no evidence to support, the proposition that respondent undertook any investigation before filing his answer of petitioners’ claim that the disputed gambling and social security income had in fact been reported. We believe that only a modest amount of investigation of the averments in the petition would have confirmed petitioners’ claims and/or revealed the existence of the Closing Notice, issued more than 3 months before the answer.” (Emphasis added.)

Judge Gale then drops a footnote to Rule 33(b). It is in no small part because of the failure to really investigate the facts that the position of the IRS was not, in this case, substantially justified. 

Of course, this was all in an order and is not part of a precedential opinion. Nonetheless, it is worth noting that Judge Gale’s position could open up a lot of opportunity for litigation costs if the IRS doesn’t start doing a better job with its answers. Usually, practitioners need to rely on the “qualified offer rule” (IRC § 7430(g)) to get fees because the “substantially justified” exception is such a low bar for the IRS to meet. But maybe not, if the IRS doesn’t meet its Rule 33(b) requirements when filing an answer.

As far as remedies go, my bet is that the awarding of litigation costs would be enough to get IRS Counsel’s attention next time they have to file an answer. But the fun doesn’t stop with the greater potential for litigation costs. In my next post, I’ll cover still more possible remedies for answers that do not appear to meet the requirements of Rule 33(b).

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

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

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


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

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

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

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

The Answer and the Administrative File

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

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

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

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

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

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

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

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

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

Lessons and Broader Applicability: Burden Shifts

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

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

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

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

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

Answers and the Burden of Production

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

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

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

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

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

Lessons and Broader Applicability: The Primacy of the Administrative File

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

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

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

The Taxpayer First Act’s Legacy: What Comes Next

For the last few years, I’ve asked my students whether they’ve heard of the “Tax Cuts and Jobs Act” before. Many raise their hand. Because I’m insufferable, my first order of business is to tell them that there is really no such thing as the “Tax Cuts and Jobs Act” (or TCJA). What they refer to as the TCJA could only pass under budget reconciliation, thus eliminating the superfluous provision of a “short title.” This pedantic foray serves the dual roles of proving my academic bona fides and of alienating my students.

More seriously, when I ask students about their knowledge of the TCJA it is really to make a point for the next question: how many of those students have heard of the “Taxpayer First Act.” I’d note that to date I have yet to meet a student that had heard of the bipartisan, magnanimously (and actually) titled “Taxpayer First Act.

There are a few things I usually emphasize from this little exercise:

(1) that we are going to be learning about federal tax procedure, which is not much covered in the “federal income tax” courses,

(2) that “substantive” tax bills like TCJA tend to be highly partisan whereas procedural or administrative bills like the TFA are not (note that RRA 98 also had bipartisan support), and

(3) that students may be forgiven for not knowing much about the TFA because, frankly, it didn’t really end up making that many big changes that I can think of.

Only perhaps in the future I may have to rethink that final point. In Section 1101 of the TFA Congress required the IRS to provide a “Comprehensive customer service strategy.” That report is here. And for you, loyal reader, I have waded through the pages of MBA-corporate speak to highlight some actual changes that may be coming down the road…

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In this post I will be focusing on the IRS’s “Taxpayer Experience Strategy” as detailed in their report to Congress. The IRS’s approach was to “reimagin[e] the taxpayer experience across six areas of focus.” Those six areas are:

  1. expanded digital services,
  2. seamless experience,
  3. proactive outreach and education,
  4. community of partners,
  5. focused strategies for reaching underserved communities, and
  6. enterprise data management and advanced analytics.

Describing this further, the report provides “[t]his strategy is not a series of discrete approaches, but rather integrated strategies that build on each other to create the best holistic experience for the greatest number of taxpayers.”

To me, this reads like a lot of buzzwords beloved by business schools but largely meaningless to tax practitioners. So I’m going to abridge much of the report and try to provide a list of specifics and highlights that practitioners should be aware of. Here is a list of what I found to be the most interesting goals and projects:

Expanded Tax Professional Accounts

There are a range of different online account functionalities that the IRS appears to be working on as part of the Taxpayer Experience Strategy. Some are fairly simple and greeted with a “how has it taken this long?” sigh. For example, allowing e-signatures on Form 2848, and expanding digital signatures more broadly. Others are vague and call to mind some sort of IRS Frequent Flyer Rewards program. (One goal is “Practitioner Premium Access.”)

Overall, however, the goal appears to be digitizing the power of attorney process from cradle-to-grave. Indeed, one bullet point includes the phrase “Fully Digital CAF.” This, in turn, should allow practitioners to more quickly access client account information.

Issues with processing Form 2848 are a cause of near constant concern in the tax world. Fixing POA problems is, in my opinion, one of the easier ways to increase downstream efficiencies for practitioners, the IRS, and taxpayers alike. Dare to dream of a future world in which no one would think to read or comment on a post about Form 2848 processing issues…

“Omni-Channel” Communication

Basically, the IRS wants to do a better job at the front-end of steering (“channeling”) people based on their personal preferences. For example, if you hate waiting on the phone the IRS seeks to introduce expanded automated callback. If you don’t mind waiting, but just want to have a better sense of how long you’re going to wait, the IRS is proposing better “wait time transparency.”

To some degree, these are things the IRS already does (“we estimate your wait time to be between 15 and 30 minutes”). Perhaps they will just start doing it better (“we estimate your wait time to be 12 minutes and 27 seconds”).

One proposal that did appear new is that the IRS employee is supposed to “remain engaged” with the taxpayer during a call transfer to ensure that the transfer actually goes through. So when you spend 30 minutes waiting and then have an IRS employee inform you “I can’t help, let me transfer you to collections,” the transfer is more likely to actually happen.

Hopefully, however, fewer of those transfers will be necessary to begin with. First, as part of the “concierge navigation support,” the IRS is looking to better ensure that calls go to the right subject-matter expert picking up. Second, and to me vastly more important, the IRS is looking to significantly upgrade the functionality of its “Enterprise Case Management” (ECM) system so that IRS employees have a “360-degree view” of taxpayer accounts. Presumably, in non-MBA speak, this will mean that IRS employees can say with better certainty if/when a letter was sent to a taxpayer when you call.

The Rise of AI… For Answering Tax Questions

There are three new artificial intelligence (AI) features the IRS is looking to showcase: (1) AI powered web-chat, (2) AI powered appointments, and (3) AI tax question assistance for IRS employees. What will this look like?

With regards to the first AI feature, we’ll likely begin seeing the “Can I Help You?” pop-up boxes (“chat-bots”) on IRS webpages that are already ubiquitous as customer-service stand-ins elsewhere. Second, if the chat bots don’t fix the problem, they can help schedule an appointment with an actual human that might be able to. Lastly, when you get an actual human at the IRS, that human being will have an “AI-powered” assistant.

More Translated Forms!

Last but not least, we shift to the lower-tech world of text. The IRS is planning on translating Form 1040 into Chinese, Korean, Russian and Vietnamese (note the IRS has already translated to Spanish, as noted here). But beyond Form 1040, the IRS is also planning on translating Pub 17 and (eventually) notices that are sent to taxpayers.

Steps in the right direction. But will it make a significant difference in the “taxpayer experience?” Are there more fundamental changes that need to happen? What would an improved taxpayer experience really look like? My further thoughts in a future post…

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

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

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

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

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

The Wins:

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

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

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

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

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

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

The Obstacles:

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

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

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

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

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

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

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

My Progress Report: Big Picture Thoughts

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

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

Think about that.

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

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

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

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

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

“But I’ve Always Done It That Way!” Practitioner Considerations on Subsequent Year Exams

Stop me if you’ve heard this one. A taxpayer and a tax attorney walk into a room. The taxpayer pulls out an IRS examination letter and says, “I’ve always filed my returns this way, and the IRS has never cared in the other years. Why is the IRS suddenly out to get me?” The tax attorney looks at the return and the letter. “Ah. The answer is simple: You’ve always filed your returns wrong. This is just the first time the IRS has noticed.”

And everyone in the room shares a good laugh.

Or, more likely, the tax attorney begins shifting uncomfortably in their seat the moment they see the problem -specifically, that there are a lot of erroneous returns filed by your client that have not been caught and may realistically never be. The obligation (or lack thereof) to file an amended return to fix errors has previously been covered by Keith (co-author: Calvin Johnson) in an article here. In a different context, I have written about when you do or do not have an obligation to correct IRS mistakes here and here.

In this post I’d like to take the conversation in a slightly different direction. Specifically, I want to wrestle with the issue of advising clients on exposure to future audits -a thorny topic in the tax community.  

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In my most recent post I covered a TIGTA report suggesting improvements to correspondence examinations, prompting my own suggestions to focus more on high-income earners and non-filers. That same TIGTA report included a raft of recommendations for examining taxpayers that appear to have the same tax issue over multiple years (“subsequent year exams”). Those recommendations are what caught my eye and inspired this post.

TIGTA’s concerns were that the IRS didn’t appear to be initiating as many subsequent year exams as it should, and the IRS could increase efficiency by considering subsequent year returns as part of the already open exam. In a nutshell, TIGTA’s recommendations hinged on the idea that if a taxpayer erroneously claimed a deduction/took a credit in one year, there is a good chance that the same deduction/credit is erroneous in the next year as well. And I’d say that is a fair assumption. But it carries some interesting considerations that I believe tax practitioners should be aware of.

The recommendations put forth by TIGTA were more narrowly focused than just increasing audits on those that have been audited already. For one, it pertained only to subsequent returns with the same issue identified as in the year audited (the same “project code”). Second, it focused on taxpayers that actually resulted in an increased assessment of tax, thereby filtering out those who were selected for exam but ultimately demonstrated that their return was correct. Third, and importantly, TIGTA particularly keyed-in on subsequent returns where the taxpayer defaulted – that is, where they never responded to the exam in the open year and had similar identified issues in subsequent years.

“Silence is Violence”

A key takeaway from this may be that when the IRS selects you for examination, generally the worst thing you can do is to do nothing at all. The TIGTA recommendation (which IRS management agreed with) is to “change the subsequent return process to address only subsequent year returns in which the taxpayer did not respond to the [Initial Contact Letter] for the current examination.” Page 12 of the TIGTA Report (emphasis added).

In other words, if you don’t do anything (or don’t respond to the very first letter) it may carry worse consequences than if you respond with a full concession owning up to your error. Apart from just doing the “right thing,” it may be in your self-interest to proactively agree with the IRS rather than just letting things run their course.

Note also that the IRS also has internal policies against “repetitive” audits. They are a bit narrow (I covered an unsuccessful attempt to raise the policy in court here) and don’t apply to Schedule C returns (even though the prohibition is explicitly mentioned on the IRS Publication for Schedule C Filers: Pub. 334, page 45). However, whatever protections the policy does offer are more likely to apply when the taxpayer actually responds to the audit. See IRM

All of this taken together, I think, should factor into any advice that is given to a client. I think it is important to impart the wisdom you’ve gleaned as a practitioner on the black-box of audit: “if you don’t respond to the IRS letter, there may be a heightened possibility that you will be audited on subsequent years.” If I was the average taxpayer that is definitely something I’d want to know and take into consideration.

The Audit Lottery

And now, the backlash.

“You can’t advise your client on the likelihood of audit!” Chants of “audit lottery!” and “Circular 230!” drum in the background as the torches are lit. My demise (the stripping of my ability to practice before the Service) is nigh.

Or so it would seem. But only based on a misunderstanding of what prohibited advice about audit likelihood actually entails. When I talk to (or test) my students about the “audit lottery” some take that it to mean you cannot talk to a client about audit risks. Period. In this understanding, when a tax lawyer reads the (publicly available) IRS Stat Book and sees the (abysmal) exam rate, that knowledge is forbidden fruit. One must never utter a word of it to the innocent, untainted client.

This misunderstanding of the audit lottery is not limited to students. There is, in fact, enough confusion about the topic that Professors Michael Lang and Jay Soled wrote a helpful article in the Virginia Tax Review on it here.

To be clear, there is no blanket prohibition on telling clients about audit rates and general likelihoods of audit. Consider the absurdity and inability to effectively counsel or communicate, while meeting the requirements of the MPRC (specifically MRPC 1.4) if such a blanket prohibition did apply. As an example:

I frequently have clients where the problem is that their ex claimed a child of theirs. The client is the custodial parent and has the right to claim their child under IRC § 152. However, the ex was first in the race to the e-file button. Because of this, any subsequent attempt to claim the child (generally through a paper return) will very likely trigger an exam. I know this both from experience as a tax practitioner and because of my familiarity with “whipsaw” and “correlative US Taxpayer” procedures. See IRM

Am I not allowed to tell my client that if they do file a paper return claiming the child they are at a high risk of audit?

Believe it or not, audit exposure is something that matters to clients even when they are 100% substantively right on the return position. Some of my clients simply would rather not deal with the IRS or, importantly, the ire of their ex. Similarly, I know of a few people that claim a smaller charitable deduction than they actually are entitled to solely because of their (inflated, inaccurate) fear of audit. It is wholly within these taxpayers’ right to make that determination, since they are not legally required to claim the child or the charitable contribution, but only have the right to do so. For a discussion on that point, see the law review article, “No Thanks, Uncle Sam, You Can Keep Your Tax Break.”

So in advising the client with a previously claimed child, what must I do? As a lawyer and as a counselor, I would go so far as to say under the Model Rules I must disclose the risk of audit to the client in that situation, rather than keep it stored away as secret knowledge. To me, a lawyer in that situation should advise the client that on the information they have: the client is entitled to claim their child if they wish, but they are at a heightened risk if they do so. The lawyer should then calm the client down and explain what an audit would actually look like in these circumstances (a few letters back and forth), so that they can make an informed decision about what they’d like to do. To me, getting the client to a more-fully informed decision considering the myriad legal and non-legal issues at hand is the bedrock of being a counselor. See MPRC 2.1.

All of this is to say that one does not “play” the audit lottery simply by speaking of or considering audit likelihood. The prohibition is on advising individuals to take a return position based on the likelihood that it might be “caught” in audit. You play a lottery hoping you win, not simply for the fun of playing. Winning, in the prohibited sense, is having a questionable (or crazy) return position pass by the IRS because of their low audit rates rather than the merits. And you cannot let your knowledge of the odds of success (in this case, the perversely high chance of winning the lottery) color your responsibilities towards the IRS. See, e.g. Circ. 230 § 10.22, 10.34 and 10.37.

Now, rant completed, let’s bring this back to advising someone as to whether they should respond to an IRS letter after an audit has been initiated. In this case you are not counseling them on prospectively taking a return position at all. If they’ve made that same mistake year-over-year, the position has already been taken before they even came to you. What you are doing is simply letting them know that failing to respond to an IRS audit might make future audits more likely. If that is true (and there is reason to believe it is), it is unclear to me how keeping that important information to yourself doesn’t run afoul of your many responsibilities to the client under the MPRC (loyalty and communication, foremost among them).

I want to close with a note to those feeling squeamish about the preceding paragraphs: I feel your pain. If someone has previously taken an incorrect tax position I counsel them to change it. I want them, genuinely, to change it, because I believe we all have an obligation to pay the correct amount of tax. However, I cannot tell them that they must change it, because that would be my imposing my own personal morality on a legal question that has different considerations. (Note that this all changes if and when there is an actual controversy for that tax year before the IRS.)

But there is more to this than just hand wringing and pleading that someone do the right thing while acknowledging they don’t technically have to. Once the taxpayer knows (through the counseling of their tax attorney) their position is untenable they cannot freely take that position in as-yet unfiled tax years. Now, your advice changes: “Look, you should fix the back years, but you don’t technically have to. However, now that you know those positions are wrong, you cannot take them moving forwards and if you do there could be criminal exposure.”

Thus, the tax attorney sleeps at night.