Christine Speidel

About Christine Speidel

Christine Speidel is Assistant Professor and Director of the Federal Tax Clinic at Villanova University Charles Widger School of Law. Prior to her appointment at Villanova she practiced law at Vermont Legal Aid, Inc. At Vermont Legal Aid Christine directed the Vermont Low-Income Taxpayer Clinic and was a staff attorney for Vermont Legal Aid's Office of the Health Care Advocate.

Questioning the Portal: Why the Beard Test Matters

A few months ago, Nina Olson wrote What is this thing called portal?, in which she analyzed the IRS non-filer portal under the Beard test for determining when a submission to the IRS is considered a tax return.

After that post was published, the IRS confirmed what the screenshots in Nina’s post show – that functionally, the portal e-files a 2019 federal income tax return reporting $1 of interest income. Because many people who used the portal actually should have filed a full tax return instead, the IRS created a process for people to file their real 2019 tax return and signal to the IRS that they had mistakenly used the portal, via a submission which the IRS calls an “Amended EIP Return”. The IRS website states:

Tax Professionals please note that returns labeled “Amended EIP Return” will be processed as superseding returns if submitted before July 15 or, with a valid extension, before Oct. 15.

So we know that practically, the IRS computer system is treating a portal submission as a 2019 tax return. But is the legal question settled? A recent post by Gina Ahn on the ABA Tax Section’s listserv for the Pro Bono & Tax Clinics community highlights one taxpayer’s predicament and reminds us why the legal question matters.

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The facts presented are roughly as follows:

A domestic violence survivor fled her husband to live in a shelter, where among other services she connected with an LITC with the goal of seeking innocent spouse relief for her 2018 joint tax debt. The client’s husband runs a sole proprietorship and the 2018 joint liability consists of his unpaid self-employment taxes.

The husband and wife are both in touch with the tax professional who prepared their past joint tax returns and had been hired to prepare their 2019 tax returns. The spouses had arranged with the preparer to file Married Filing Separate returns for both of them for 2019.

At some point after the CARES Act passed, the tax preparer told the spouses that he could use the nonfiler portal for them to “get the stimulus checks faster,” and they all agreed he should do this.

The preparer later tried to e-file the wife’s MFS tax return for 2019, but the IRS rejected the e-file submission as a duplicate, due to the previous nonfiler portal submission.

The LITC attorney learns these facts in August. 

What advice would you give?

Before we go further, remember that Treasury Regulation § 1.6013-1(a)(1) provides:

For any taxable year with respect to which a joint return has been filed, separate returns shall not be made by the spouses after the time for filing the return of either has expired.

The IRS interprets “the time for filing the return” to mean the due date of the return without regard to any extension of time to file. (See e.g. PMTA 2020-17.) So, although we do not know if an extension was filed for either spouse, it probably does not matter.

If a valid joint return was filed before July 15, the spouses in our scenario are stuck with a joint tax return for 2019. They would need to file an amended return if they wanted to report their actual 2019 income and tax liability. This likely means that at some point down the road, the wife will be requesting innocent spouse relief from the husband’s 2019 self-employment tax liability.

However, if the portal submission was not a joint return, then the spouses are free to file separate returns for 2019 as they had originally planned. These would need to be submitted on paper, but they would be legally valid separate returns.

Was the Portal Filing a Valid Joint Return?

As Nina explained, “In Beard v. Commissioner, the Tax Court outlined the basic requirements of what constitutes a valid return for statute of limitations purposes:

First, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.”

Nina then applied the Beard test to the portal, and concluded that the test is probably met. “If it walks like a duck, and quacks like a duck, maybe it actually is a duck.” I recommend viewing the screenshots in her post to see what she means.

If the nonfiler portal could be a return when completed by the taxpayer, does it still qualify as a return given that the taxpayers here never laid eyes on the portal or their purported joint return?

It’s worth mentioning that the nonfiler portal is not set up for tax preparers or any other assister to use on behalf of an individual. There is no option to enter your PTIN. In fact, the Form 1040 generated by the portal specifically says “Not for use by paid preparer” and “self-prepared” on the second page.

It seems to me that the analysis should come out differently in this case, than in Nina’s hypothetical case of a taxpayer using the portal for himself. The wife (and maybe also the husband) in our scenario always intended to file a separate tax return for 2019. She did not know that allowing the tax preparer to use the portal meant that, practically speaking in the e-filing system of the IRS, she was filing a joint 2019 tax return. She did not use the portal herself, see the jurat or the final 1040 that the portal generated, or have any basis to question whether the preparer’s suggestion was appropriate.

A tax administrator might not like that subjective analysis, but it’s not too far off from the analysis employed when one spouse contests the joint status of a return filed by the other. For example, in a 2017 summary opinion Judge Wherry explained:

Whether an income tax return is a joint return or a separate return of the other spouse is a question of fact. Harrington v. Commissioner, at *8 (citing Heim v. Commissioner, 27 T.C. 270 (1956), aff’d, 251 F.2d 44 (8th Cir. 1958)). The focus of our inquiry is whether [the nonsigning spouse] intended to file and be bound by the return in question. See Shea v. Commissioner, 780 F.2d 561 (6th Cir. 1986), aff’g in part, rev’g in part T.C. Memo. 1984-310.

The courts have considered various factors in determining whether a nonsigning spouse intended to file a joint return, including (1) whether the returns were prepared pursuant to an established practice of preparing and filing a joint return, (2) whether the nonsigning spouse failed to object to the filing of a joint return, (3) whether an affirmative act was taken indicating an intention to file other than jointly, (4) whether one spouse entirely relied on the other spouse to file returns, (5) whether the spouse examined returns presented for a signature, (6) whether separate returns were filed, (7) whether the returns included the income and deductions of the nonsigning spouse, and (8) and whether the nonsigning spouse was aware of the contents of the purported returns. See, e.g., Estate of Campbell v. Commissioner, 56 T.C. at 12-13; Howell v. Commissioner, 10 T.C. 859 (1948), aff’d per curiam, 175 F.2d 240 (6th Cir. 1949); Boyle v. Commissioner, T.C. Memo. 1994-294; Evans v. Commissioner, T.C. Memo. 1982- 700; Crew v. Commissioner, T.C. Memo. 1982-535.

Here, the tax preparer essentially played the role of the signing spouse. The tax preparer in this case should have known better than to use the portal for taxpayers who had 2019 filing requirements. We do not have enough facts to understand why the preparer thought this would cause the EIP to arrive sooner.

This case also highlights another pitfall of the nonfiler portal – the only filing statuses allowed are Single and Married Filing Jointly. If Married Filing Separately had been available, this taxpayer’s dilemma might have been avoided.

Treasury Response to Congress Further Increases Confusion Regarding Missing Stimulus Payments

Congress continues to negotiate another stimulus package. Meanwhile, although the IRS accomplished a Herculean task in delivering stimulus payments to millions of Americans in April and May, uncertainties and problems stubbornly linger for some people. Most recently, Nina Olson and Caleb Smith highlighted some of these issues here, here, and here.

The U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis recently published a July 22 letter from the Treasury Department responding to its requests sent on July 8, 2020. The Treasury response was puzzling to me in a few respects.

This blog post also discusses recent IRS website updates, which I noticed after William Hoffman of Tax Notes asked whether the IRS is changing its tune on non-filer federal beneficiaries who missed the deadline to claim an EIP for their dependents. Bottom line – it’s too soon to tell, but it can’t hurt to complete the non-filer portal.

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Treasury Correspondence with the House Select Subcommittee on the Coronavirus Crisis

Nearly a month ago, on July 8, Representative James E. Clyburn, as Chairman of the House of Representatives Select Subcommittee on the Coronavirus Crisis, wrote to Secretary Mnuchin and Commissioner Rettig asking detailed questions regarding the Economic Impact Payments (EIPs) authorized by the CARES Act. Representative Clyburn emphasized that “the intent of these payments was to swiftly put money in the pockets of struggling Americans to help them meet their essential needs while supporting the nation’s economy” and expressed concern that “the eligible recipients still awaiting these payments are disproportionately low-income.” Among other questions, the letter asks Treasury, “What is your anticipated schedule to complete payment of EIPs to all eligible recipients?”

Perhaps due to the fairly short response timeframe, the Treasury Department’s response is a bit less detailed. The letter rightly touts the speed of the government’s response, compared to the 2008 stimulus payments. But it paints a pretty rosy picture that leaves out important details. For example, the Treasury letter states:

At this time, EIPs have been distributed to all eligible Americans for whom the IRS has sufficient information to make a payment. The CARES Act allows the IRS to issue EIPs through December 31, 2020. The IRS will continue to issue EIPs to eligible individuals through that date so long as it receives sufficient payment information in time to compute the EIP and certify it to Fiscal Service for issuance.

… The IRS encourages taxpayers who have not received their EIP and are not required to file a tax return to input their payment information into the “Non-Filers: Enter Payment Info Here” tool. To date, 6.8 million people have used this tool, which is still available.

But…  what about the federal disability and retirement beneficiaries who were cut off from the nonfiler portal, who the IRS said had only until April 22 or May 5th to use the tool? The July 22 Treasury letter to Rep. Clyburn was called to my attention on August 3. As of that morning, the Non-Filer Tool website still contained this warning:

Reminder for SSA, VA, SSI and RRB Benefit Recipients with Dependents

The IRS has already scheduled payments to taxpayers based on Social Security retirement, disability (SSDI), or survivor benefits, Railroad Retirement benefits. Supplemental Security Income (SSI) and Veterans Affairs (C&P) benefit payments will be scheduled shortly for payment in mid-May. However, the window has closed to use this tool for these recipients who have a child and don’t normally file a tax return. These recipients who do not receive a payment that includes up to $500 for any qualifying children can file a tax return next year to determine their payment based on 2020 and claim any additional amount they weren’t paid this year.

This “reminder” had been posted on the non-filer tool since the deadlines passed May 5. Understandably, many non-filing federal beneficiaries did not use the tool if they found out about it after the deadlines – they understood from the IRS that it was closed to them. Some representatives assisted their federal beneficiary clients with the non-filer portal after that deadline, but I have not heard that any of those individuals received their full EIP for their dependents.  This is a group of eligible Americans for whom the IRS has, or could easily have, information upon which to base a payment.  Yet, contrary to the language in the Treasury letter stating that all have been paid, the IRS, presumably with the knowledge of the Treasury Department, has explicitly declined to pay these individuals.

One other point in the July 22 Treasury letter stood out to me. As to individuals without internet access, the letter says,

As an alternative to using [the non-filer] internet-based tool, the IRS has also provided a streamlined paper-filing procedure for individuals who have no requirement to file a 2019 return to submit information to the IRS in order to receive their EIP.

What is this? Has the IRS created a new form? No, sadly. There is no separate “simple” EIP form; it’s just a regular paper 2019 tax return, Form 1040 or 1040-SR, with “EIP2020” written on the top. Rev. Proc. 2020-28 (section 3, starting on page 6). The IRS has never said that federal beneficiaries can paper file to get their $500/child EIP. There is no fax number or special address to send the EIP return; it gets mailed to the regular address for filing the tax return.  That paper return will join the pile of other paper returns waiting to be processed.

The Rev. Proc. also assumes that anyone who qualifies to use the “simple” return under section 3 could use the nonfiler portal instead, and pushes that option.

The allegation that IRS developed a “simple form” is undercut by the total lack of taxpayer-facing publicity for that option. No social services provider or SS/SSI beneficiary will know about the revenue procedure. The taxpayer-facing messaging is about using the nonfiler tool (if you qualify) or filing a 2019 tax return. That’s because the “simplified paper procedure” is not really any faster or simpler than filing a 2019 tax return. It’s not even mentioned as an option in the extensive EIP FAQ.

So, this part of the Treasury letter to Rep. Clyburn is misleading. To be sure, the letter does offer some important information, including an enclosure with some data on payments, which has the following chart showing payments as of July 17, 2020:

IRS EIP Website Updates

This brings me to the IRS website updates. On August 5, Tax Notes reporter William Hoffman alerted me to a change in EIP FAQ # 53, and asked what it meant for non-filer federal beneficiaries. The updated FAQ reads, in part

The IRS will automatically issue the additional $500 EIP per qualifying child to affected individuals in early August for those who used the Non-Filers tool before May 17, 2020.   Direct deposit payments are scheduled for August 5, 2020, and paper checks or debit cards are scheduled to be mailed August 7, 2020. … If you used the Non-Filers tool on or after May 17, 2020, your EIP included $500 per qualifying child.

The immediate question in my mind was, does this FAQ even apply to federal beneficiaries? While IRS confirmation would be helpful, my impression is that this does not change anything for retirees and disabled individuals receiving SS, SSI, or VA benefits. The very next EIP FAQ, # 54, continues to read

You should not use the Non-Filers: Enter Payment Info Here tool if any of the following apply: …

● You are not required to file a return and already received your Payment based on your 2019 Social Security retirement, survivor or disability benefits (SSDI), Railroad Retirement benefits, Supplemental Security Income (SSI) and Veterans Affairs benefits even if you think you did not receive the full amount.

FAQ #56 also has not changed.

However, Mr. Hoffman’s inquiry also led me to check the non-filer portal website. Lo and behold, the IRS has removed the “reminder” that the portal is “closed” to federal beneficiaries. The portal page also contains the updated FAQ 53 language referencing the May 17 date.

At this time it is unclear whether this signals any real change in the IRS policy towards the SSA/SSI/VA beneficiary population. The IRS has not said that it would actually process dependent EIP claims received through the portal from federal beneficiaries who received a payment for themselves automatically.  In fact, FAQ #54  continues to say the opposite. It’s possible that the IRS removed the “reminder” language simply to prepare for the next round of stimulus payments. FAQ #54 clearly states retired and disabled federal beneficiaries who have income below the filing threshold and have already received their EIPs should not use the non-filer portal to claim additional benefits, e.g., for dependents.  Even if federal beneficiaries are no longer prohibited from using the non-filer portal, as long as the IRS refuses to process dependent EIP claims, disabled federal beneficiaries are functionally stuck in the same situation as in May, when the IRS announced that their window to use the portal had closed. By removing the language prohibiting use of the portal, the IRS is giving these low income persons false hope.  In the context of the pandemic, that is just cruel and contrary to Congress’ intent to deliver the EIP rapidly into the hands of those that need the funds.

Coronavirus Cancels March Tax Court Sessions; New IRS Coronavirus Webpage

COVID-19 has hit the United States and developments are coming fast and furious. As the federal government seeks to reach a deal on a coronavirus aid package today, the IRS has created a webpage for coronavirus announcements and guidance, barred employees’ nonessential travel, federal tax filing deadlines might be extended, and much more. Bloomberg Tax reported today that the National Treasury Employees Union is concerned for employees and seeking to limit in-person help at Taxpayer Assistance Centers (link requires subscription). Meanwhile, tax professionals are struggling to find safe and effective ways to serve their clients who face serious hardships, or whose cases have deadlines that cannot be tolled or that have not yet been extended. Some VITA clinics have closed, and many firms and academic tax clinics have moved work online.

State and federal courts are taking measures as well, but policies vary widely from asking sick folks to stay home, to canceling all in-person court appearances. The U.S. Tax Court canceled its remaining March trial sessions, but so far April and May sessions remain scheduled. And, as long as the court is open for business, filing deadlines remain in force.

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Many of the tax administration and procedure problems we saw during the 2019 shutdown (discussed in many posts here) could be relevant again very soon. Last summer Keith reviewed the law on Tax Court filing deadlines looking back at the shutdown, linking to several excellent posts by Bryan Camp and others. We have also covered cases pushing (generally unsuccessfully) to expand equitable tolling in tax cases, in myriad situations.

Since the Tax Court process already takes a long time, and the cumulative effects of cancelling trial sessions are substantial, it would make sense for the Court to follow the lead of universities and law firms and conduct as much business remotely as possible during the COVID-19 epidemic.

The Tax Court is in a difficult situation, because the vast majority of its hearings and trials are held in person. Unlike some other courts, the Tax Court does not routinely hear testimony by telephone or other means. However, the Tax Court could expand this practice under Rule 143:

(b) Testimony: The testimony of a witness generally must be taken in open court except as otherwise provided by the Court or these Rules. For good cause in compelling circumstances and with appropriate safeguards, the Court may permit testimony in open court by contemporaneous transmission from a different location.

This rule seems perfectly reasonable, but it is quite broad and open to very different interpretations. Is the standard to be applied individually, based on one’s fear of the coronavirus or vulnerability to it? Or, can the court take a public health approach and determine that flattening the curve is good cause and a compelling reason to permit remote testimony no matter how young or healthy the litigant? Surely the court could take that position.

The next question is what appropriate safeguards should exist. Several years ago I was on a rules committee of the Vermont Supreme Court while the committee debated, drafted, and ultimately recommended a rule for telephone testimony in family court, which the Supreme Court adopted. (I looked up the date and was surprised to see that the rule was adopted in 2009 – time flies.) We were concerned about verifying the identity of the witness and about getting clear testimony from the witness for the record. There was no technology for video appearance so it was all done by speaker phone, on sometimes very patchy connections. (Vermont has notoriously spotty cell phone service, even on interstate freeways.) Despite some frustrating situations involving poor phone service, the rule worked fairly well and it allowed time-sensitive matters to go forward when witnesses had trouble getting to court. Last year the Vermont Supreme Court adopted a uniform rule on remote appearances in civil actions, including family court. Vermont’s procedures and standards are quite detailed and provide significant guidance to attorneys, litigants, and judges.

Several other courts allow remote appearances under various conditions. The Self-Represented Litigation Network issued a report on remote appearances in 2017, which

presents the author’s conclusions about the current state of remote appearances in the United States based on his review of existing state statutes and federal, state and local court rules on the topic and discussions with knowledgeable persons throughout the country. The report has two appendices – a compendium of all the statutes and rules …, and a technology assessment …

The Federal Judicial Center likewise issued a 2017 report on Remote Participation in Bankruptcy Proceedings. Perhaps the issue will gather additional interest and we will see updated reports on remote access to justice.

Erin M. Collins Appointed National Taxpayer Advocate

The Treasury Department and the IRS announced today that Attorney Erin M. Collins has been appointed to serve as the National Taxpayer Advocate.

Ms. Collins’ extensive background in the tax community includes twenty years as a Managing Director of KPMG’s Tax Controversy Services practice for the Western Area.  Prior to that, she was an attorney in the Office of Chief Counsel for the IRS for 15 years.  Throughout her career, she represented individuals, partnerships and corporate taxpayers on technical and procedural tax matters, and has also provided pro bono services to taxpayers to resolve disputes with the IRS.

For the past decade, Ms. Collins has dedicated significant time and energy to inspire professional women to work with teen girls from under resourced communities through after-school and weekend mentorship programs.  The programs focus on helping the girls fulfill their potential by empowering them to build confidence to pursue higher education and professional careers.  She also donated her time to non-profit boards focusing on underserved communities where English is typically the second language spoken at home. 

The full announcement is here.

Taxpayer Wins Rare Reversal in CDP Lien Appeal

Last week we covered Collection Due Process in the Federal Tax Clinic seminar at Villanova. Each student had to find a CDP opinion authored by a judge coming to Philadelphia this spring, and present the opinion to the class. I like this exercise, but it is somewhat discouraging. In all the cases presented this semester (and most semesters), the taxpayers were self-represented, and they all lost their appeals. As one student after another explains why the IRS did not abuse its discretion in their case, the exercise shows the wide discretion that the IRS enjoys in the collection domain, and the Tax Court’s deferential standard of review.

Collection Due Process is not always a futile exercise, however. Carl Smith alerted the PT team to an interesting bench opinion posted in December 2019, Cue v. Comm’r, where the Tax Court flatly rejected the IRS’s lien determination. The Cue opinion is unusual not just because the Court found abuse of discretion on a lien determination, but also because the Court did not remand the case to Appeals.

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The Secret Lien, the NFTL, and Collection Due Process

Before we get to the Cue case, a brief reminder of the lay of the land. The Notice of Federal Tax Lien is a powerful compliance tool. While a “secret lien” in favor of the government arises by operation of law, the Notice of Federal Tax Lien (NFTL) perfects this lien and alerts the world (and the taxpayer’s other creditors) to the government’s claim on the taxpayer’s property. The unperfected “secret” lien can be defeated by creditors who would have to fall in line behind a perfected lien.

So when a taxpayer fails to pay the government, it makes sense that the government would protect its priority against other creditors by filing an NFTL. However, this can cause a hardship for taxpayers, as prospective landlords, lenders, suppliers, and customers may see the lien and decline to do business with the taxpayer. Taxpayers without stable housing are particularly vulnerable. The NFTL also seems excessively punitive where the taxpayer has no significant assets and no realistic chance of acquiring any. NFTLs are filed against taxpayers, not against particular pieces of property, and there is no requirement that a taxpayer own real estate or significant assets before the government can perfect its lien. Keith wrote about the problems caused by systematic lien filings in low-dollar cases here. Since Keith’s article was published, the IRS Fresh Start Initiative raised the filing threshold from $5,000 to $10,000. Still, NFTL filing remains a concern for low-income taxpayers, and it is still a tool wielded systemically by the IRS’s automated collection system.

Collection Due Process acts as a check on the juggernaut of automated collections by requiring Appeals to engage in a balancing test, finding that the IRS’s proposed collection action “balances the need for efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” IRC 6330(c)(2)(A).

One might think, at least for taxpayers who own little to no property, that the balancing test would favor restraint. But where IRS policy requires a lien determination, the taxpayer faces an uphill battle to prove that the NFTL will cause a specific serious hardship or impair their ability to pay the tax debt. And the Tax Court reviews the IRS’s determination for abuse of discretion. This leads to cases like Richards v. Commissioner, T.C. Memo. 2019-89, in which Judge Vasquez held that it was not abuse of discretion for Appeals to sustain an NFTL filing against taxpayers in Currently Not Collectible status whose only income was from Social Security.

Mr. Richards pointed out that the NFTL was doing the government no good, whereas on his side of the balancing test it hurt his credit rating and he feared it would hurt his chances of getting a car loan. Unfortunately, the Court found this “bare assertion is insufficient to establish that lien withdrawal would facilitate collection or would be in the United States’ best interests.” Regarding the balancing test, the Court noted,

petitioners do not contend that [Settlement Officer] Piro misinterpreted the IRM in making her determination. Nor did petitioners present any concrete evidence during the CDP hearing to demonstrate how the NFTL would negatively affect their financial circumstances and credit standing.

…SO Piro actually considered Mr. Richards’ argument about petitioners’ credit standing and pursued a followup inquiry. Specifically, SO Piro asked whether the NFTL would affect petitioners’ ability to earn income. After learning from Mr. Richards that their only income source was Social Security, SO Piro determined that the NFTL was not overly intrusive and was necessary to protect the Government’s interest. This determination was well within her discretion.

So the first hurdle a taxpayer faces in fighting a NFTL determination is proving that there is a specific harm caused by the public lien filing, and this should be a harm which impedes collectability of the tax debt. Carl Smith gave a good example in an email:

At Cardozo, I once got a lien withdrawn at a CDP hearing for a person who had virtually no money, but had been working on a screenplay with a big Hollywood producer. I got a letter from the producer saying that he could not have my taxpayer listed among the creative team (or paid) if he was going to seek financing for the film, since investors do tax lien searches on creative teams before investing money. In order to help her possibly earn money from her screenplay work, the SO agreed to remove the filed lien (she had no other property the lien would secure) and leave her in CNC. But, I almost never hear of anyone else successfully getting a lien withdrawn.

Eberto Cue v. Commissioner

Finally we get to today’s case and taxpayer Eberto Cue. Carl Smith described the case:

There was a pro se CDP case on Judge Goeke’s Nov. 12 calendar involving a banker who owed money for taxes reported on two older returns.  The debt had gone into CNC.  Then, the IRS filed a tax lien.  (He owns a condo.)  It appears he had recently gotten a job as a banker that, like many in the financial industry, prohibits his having a notice of federal tax lien filed against him.  In his Form 12153, he asked for the lien filing to be withdrawn, explaining that he would lose his license and his job if the lien notice were not withdrawn. 

Mr. Cue did not propose any collection alternatives. The Appeals settlement officer (SO) offered him three options under which she would withdraw the NFTL:

  1. a direct debit installment agreement under which the total liability would be paid off within 60 months;
  2. immediate full payment; or
  3. documentation that Mr. Cue would lose his job if the notice was not withdrawn.

Not surprisingly, Mr. Cue chose Option 3. On 8/14/18 Mr. Cue sent the SO a letter with information about his banking license. This showed that federal tax liens “would be noted by the licensing officials adversely to his request to renew his license, which he had to renew every year…”

The SO then essentially reneged on her offer. She found that Mr. Cue “was already in breach of the licensing requirements, apart from the Notice of Federal Tax Lien filing,” because he “owed the federal government, and [his] home was foreclosed.” Therefore, she disregarded his documentation and his argument. In a Notice of Determination dated 9/26/18, the SO determined that the account would remain in CNC status, but the lien filing was sustained. Mr. Cue filed a timely petition to the Tax Court.

The Court’s opinion notes that during the CDP appeal, Mr. Cue discussed the NFTL with his employer as required by his banking license. On 8/19/18 he was advised, “You are ineligible to remain in your current position due to your outstanding tax lien.” It is unclear from the opinion whether the SO had this evidence to consider before the Notice of Determination.

Carl Smith:

…the SO did not withdraw the lien notice, and the taxpayer thereafter lost both the job he had at the bank requiring the license and any other job at the bank.  He has been unemployed ever since, relying on being supported by his wife.  So, ultimately, the IRS got nothing by its collection efforts (except possibly priority if the condo gets sold, assuming there is any equity in it).

The IRS had moved for summary judgment exactly 60 days before the calendar call.  Judge Goeke set the motion to be argued at the calendar call. 

At the calendar call on November 12, Attorney Karen Lapekas entered a limited entry of appearance for Mr. Cue. Judge Goeke denied the IRS’s motion for summary judgment and held the trial that same day.

If one goal of CDP is to find an appropriate collection alternative benefiting both the taxpayer and the Treasury, it seems odd that neither petitioner nor the SO in this case proposed an affordable monthly payment as a way to avoid a NFTL. To Judge Goeke, the SO’s reasoning (Mr. Cue was already exposed to losing his license, so the NFTL would not matter) “overlooked the fact that the petitioner had been employed for some time, and was in a position to generate income…”

…it was unreasonable for the settlement officer to overlook the impact of the lien and its public filing on the petitioner’s employment. Her failure to seriously consider the petitioner’s assertions that he would lose his position demonstrates that the settlement officer did not seriously intend to act on the third condition that she provided the petitioner in the telephonic hearing. …the fact that the settlement officer did not seek a reasonable payment from the petition[er] demonstrates that the settlement officer was not actually interested in generating collection from the petitioner, but merely wished to sustain the Notice of Federal Tax Lien.

The Court went on to hold

Given these circumstances, we believe the settlement officer’s actions were arbitrary and capricious, and we sustain the petitioner’s argument that the Notice of Federal Tax Lien should be withdrawn. … We do not look at his current situation [and re-weigh the balancing test]. Rather, we look at the actual analysis of the settlement officer, contemporaneous with the determination, … [and] that analysis we find to be arbitrary and capricious.

Reverse or Remand?

Generally, where abuse of discretion is found the Court will remand the case to Appeals for a supplemental hearing. The lien determination cases of Budish v. Comm’r and Loveland v. Comm’r (blogged by Keith here) and the levy case Dang v. Commissioner (blogged by Keith here) are all good examples of this practice. Keith wrote about the frustration that can result from repeated remands in CDP cases here.

In Mr. Cue’s case however, Judge Goeke simply reversed the Settlement Officer and declined to sustain the Notice of Determination. Under the circumstances, this seems appropriate. The NFTL clearly had cost Mr. Cue his ability to work in banking and had destroyed his ability to make payments towards his tax debts. Under these facts, no reasonable settlement officer could sustain the notice of federal tax lien.

 

Taxpayer First Act Update: Innocent Spouse Tangles Begin

Last week many of the PT bloggers spoke at the ABA Tax Section Fall Meeting. One of sessions discussed recent developments relating to innocent spouse relief. This post provides a brief update on how the IRS and the Tax Court are grappling with the Taxpayer First Act’s changes to the innocent spouse provisions.

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We have blogged before about the Taxpayer First Act’s changes to the innocent spouse provisions. After the TFA was enacted on July 1, 2019, Steve Milgrom and Carl Smith flagged many questions raised by the legislation. Carl Smith discussed his concerns about the proposed innocent spouse legislation in the Taxpayer First Act here and here back in April before it became law. 

The changes discussed at the ABA meeting affect how the Tax Court reviews IRS decisions on innocent spouse relief. Steve Milgrom explained:

On July 1, 2019 President Trump signed the Taxpayer First Act  (TFA) into law. One provision of the TFA, section 1203, makes procedural amendments to the innocent spouse rules …. The new provision defines the scope and standard of review that govern the Tax Court’s review of an IRS determination. Basically, “scope of review” deals with what the court will consider in making its decision, what evidence it will look at. A court’s “standard of review” defines how much deference to give to the decision (determination) made by, in tax cases, the Commissioner.

The Taxpayer First Act added a new paragraph to section 6015(e):

(7) STANDARD AND SCOPE OF REVIEW. — Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon —
(A) the administrative record established at the time of the determination, and
(B) any additional newly discovered or previously unavailable evidence.

This new standard applies “to petitions or requests filed or pending on or after the date of the enactment” of the Act, which was July 1, 2019. At the ABA meeting, IRS speaker Julie Payne reported that between 300 and 350 standalone innocent spouse cases are generally pending in U.S. Tax Court at any given moment. All of those cases are now subject to the new standard. The question of how the new language applies is an immediate one for the Court and the Service. The Tax Court must decide not only how it will conduct trials, but how to address cases that have already been tried but are pending the court’s decision.

I will not repeat the points made and questions identified by Carl and Steve but I encourage readers to review the PT post of July 9 and the comments on that post for an understanding of the many ways in which the new statutory language is problematic.

Several Tax Court judges have responded to the Taxpayer First Act by issuing orders to the parties, asking the parties to address the effect of the Act on their case. William Schmidt links to one of these orders by Judge Copeland in a recent Designated Order post. Similar orders were issued by Special Trial Judge Leyden and by Judge Thornton, and there are likely others by now.

Judge Leyden issued the first of these orders on July 24 in Grady v. Commissioner, Docket No. 016411-17S, and the first IRS response was filed in that case on September 23. (Ms. Grady is self-represented.) Additional filings were due in other cases on October 4 and October 10. I do not have copies of those submissions but would welcome them if any enterprising readers would like to order them from the Tax Court. Thanks to Sheri Dillon and Francesca Robbins of Morgan Lewis for obtaining the Grady filing at short notice last week, in time for discussion at the Tax Section Meeting. The other cases are:

  • Rubin v. Comm’r, Docket No. 26604-14 (J. Thornton) – response due 10/4.
  • Bargeron v. Comm’r, Docket No. 019828-17 (J. Thornton) – response due 10/4.
  • Robinson v. Comm’r, Docket No. 12498-16, (J. Copeland) – response due 10/4.
  • Morales v. Comm’r, Docket No. 25380-18S (J. Leyden) – response due 10/10.

The IRS speakers at the Tax Section meeting did not discuss the Taxpayer First Act submissions, as the matter is the subject of ongoing litigation, and the Service has not formalized its position. However, Respondent’s submission in Grady is instructive of the Service’s current litigating position. I recommend reading the full response, but are the highlights.

Respondent’s Position in Grady

On the standard of review, Respondent agrees that the Taxpayer First Act is clear: the standard of review is de novo in all cases brought under 6015(e). The Tax Court does not review the IRS’s determination for abuse of discretion but instead reaches its own determination of the appropriate relief. This applies to all avenues for relief under 6015, including traditional innocent spouse relief under 6015(b), separation of liability under 6015(c), and equitable relief under 6015(f).

The scope of review is the tricky part. Even though the Tax Court is to come to its own conclusions, the new statutory language appears to limit the evidence that the Tax Court can consider in making its determination. New 6015(e)(7) says the Tax Court’s de novo review “shall be based upon (A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence.” Respondent’s filing takes each in turn.

The administrative record

Congress did not define what it means by the administrative record here. In Grady, Respondent submits that the term should have essentially the same meaning as it does in Collection Due Process cases. The Treasury regulations at section 301.6330-1(f)(2) Q&A-F4 define administrative record as

The case file, including the taxpayer’s request for hearing, any other written communications and information from the taxpayer or the taxpayer’s authorized representative submitted in connection with the CDP hearing, notes made by an Appeals officer or employee of any oral communications with the taxpayer or the taxpayer’s authorized representative, memoranda created by the Appeals officer or employee in connection with the CDP hearing, and any other documents or materials relied upon by the Appeals officer or employee in making the determination under section 6330(c)(3) …

In applying this definition to the innocent spouse context, Respondent notes

Obvious changes might include substituting “IRS or IRS employee” for “Appeals Officer or employee” and removing references to section 6330, as appropriate. Relevant documents could include: tax returns; notice of deficiency; documents where petitioner acknowledges deficiency (e.g., form 4549, statement of income tax changes); account transcripts; Form 8857 and any attachments; any documents submitted by petitioner; any documents submitted by [the] non-requesting spouse; CCISO’s or Appeal’s final determination; allocation/attribution worksheets; any statement of disagreement by petitioner and/or non-requesting spouse; CCISO’s or Appeal’s workpapers; Integrated Collection System (ICS) history, or financial information.

Newly discovered or previously unavailable evidence

Respondent turns to the dictionary to interpret the terms “additional” “newly discovered” and “previously unavailable.”

Combining these various dictionary definitions suggests the scope of review should encompass supplementary evidence of which a party was recently made aware, but could not get or use before. Applied specifically to innocent spouse claims, the plain meaning suggests that the scope of review is limited to evidence not already provided or existing in the administrative record, of which the party introducing the evidence became aware since the administrative determination, and which the party introducing the evidence could not have obtained and provided before the administrative determination.

In a footnote, Respondent further suggests

As to words of the statute that denote timing, i.e. “newly” and “previously,” (e)(7)(B), these are perhaps best understood with reference to the administrative determination. Accordingly, “newly” would cover the period of time after the administrative determination, whereas “previously” would encompass the time period before the determination.

Next steps

What does all this mean for Ms. Grady, in Respondent’s view?

As to the specific case in issue here, as a result of the amendment, it may be necessary for the parties to either agree what constitutes the administrative file and whether other evidence presented at trial was newly discovered or previously unavailable, or if the parties cannot agree, to hold a supplementary hearing to determine whether the Court is in full possession of the administrative record, and whether any evidence presented to the Court was not newly discovered or previously unavailable under section 6015(e)(7)(B).

This will not be welcome news to Ms. Grady.

Initial Thoughts

As others have commented, limiting the Court’s scope of review while setting a de novo standard of review makes very little sense, particularly in equitable relief cases and cases in which abuse is a factor. Unfortunately, taxpayers seeking relief will be caught up in delays and litigation over these provisions.

At the Tax Section meeting, attendees suggested that the parties simply waive any evidentiary objections under the Taxpayer First Act, at least as to cases that have already been tried. The Robinson trial took place over a year and a half ago, in February 2018. The Grady case was tried a year ago. In the interests of the efficient resolution of cases, and in fairness to the self-represented petitioners for whom further proceedings could pose a hardship, the parties could agree to have the Court decide the case based on the evidence submitted.

The administrative record was another topic of discussion. In many cases, the administrative record is simply poor, and it is not possible for the court to reach a de novo determination without fleshing out what happened in the administrative proceedings. Innocent spouse cases are fact-intensive and involve taxpayers telling nearly their entire life story to the examiner. Unfortunately, phone calls between the spouses and IRS and Appeals employees are not recorded and there is no reliable transcript of what was said. IRS employees’ case notes vary in quality, and taxpayers are not allowed to record these calls themselves.

Les recently noted that “last year’s Tax Court’s discussion of exceptions to the record rule in Kasper (the whistleblower case) will be even more important” in the context of the Taxpayer First Act. In a post on Kasper last year, he discusses the issue in the context of general administrative law principles. Les noted:

What makes Kasper one of the most significant tax procedure cases of the new year is that in reaching those conclusions it walks us through and synthesizes scope and standard of review and Chenery principles in other areas, such as spousal relief under Section 6015 and CDP cases under Section 6220 and 6330.

In what I believe is potentially even more significant is its discussion of exceptions within the record rule that allow parties to supplement the record at trial. To that end the opinion lists DC Circuit (which it notes in an early footnote would likely be the venue for an appeal even though the whistleblower lived in AZ ) summary of those exceptions:

• when agency action is not adequately explained in the record;
• when the agency failed to consider relevant factors;
• when the agency considered evidence which it failed to include in the record;
• when a case is so complex that a court needs more evidence to enable it to understand the issues clearly;
• where there is evidence that arose after the agency action showing whether the decision was correct or not; and
• where the agency’s failure to take action is under review

Established exceptions to the record rule in other contexts may provide some relief in cases where the administrative record falls short of what is reasonably necessary for a de novo determination. For example, where it is clear from the record that a specific contention was made during the administrative process, but the IRS case notes do not adequately describe the testimony given, the Tax Court may be able to take testimony on that specific point.

This post has barely scratched the surface of the Taxpayer First Act issues the Tax Court will grapple with in pending innocent spouse cases. We will continue to blog about developments in this area as they unfold.

MAGI Challenge Fails to Save Premium Tax Credit; Last Minute Adjustments for 2018 Returns

The Premium Tax Credit can make health insurance affordable for people without other options, but its structure of advance estimated payments combined with a sheer eligibility cliff when the advance payments are reconciled inevitably leads to harsh outcomes in some cases. (A few were discussed on this blog here.) The Tax Court’s recent decision in Johnson v. Commissioner, 152 T.C. No. 6, is another example of the uphill battle taxpayers face in fighting harsh reconciliation outcomes. However, for some taxpayers reconciling 2018 advance payments, it may still be possible to nudge their modified adjusted gross income (MAGI) beneath the eligibility threshold.

According to CMS’s 2019 Open Enrollment Report, 11.4 million people signed up for Marketplace insurance for 2019 during the open enrollment period. The average premium before application of tax credits was $612; but, 87% of customers received advance premium tax credits (APTC) to lower their premiums. For the nearly 10 million people receiving APTC, the average premium is $87/month. That’s an expensive benefit to repay if you are found ineligible at tax time.

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In a previous post, I explained the safety valves in Marketplace regulations that may help taxpayers facing tax deficiencies. Unfortunately, these safety valves are quite narrow. Many taxpayers face APTC repayment because of unanticipated income, including gambling income, retirement account withdrawals, a new job, or unexpected business profits. There is no exception to reconciliation for unexpected income, even if the taxpayer could not have controlled or anticipated the income. If the taxpayer’s annual income turns out to be over the PTC eligibility limit, all APTC must be repaid.

The problem of lump-sum Social Security payments

One of the most sympathetic examples of unanticipated income is lump-sum Social Security Disability. Some people who apply for disability benefits are approved right away based on their initial application, but many are first denied and only receive benefits after a hearing before an Administrative Law Judge. In 2017, the average processing time for an appeal was 602 days, nearly two years. The wait time between an appeal and a hearing varies, but can easily take over a year. It’s very hard for applicants to predict when they will receive benefits. If benefits are approved after an appeal, the initial award often includes payments for earlier years, depending on the date of onset determined by the ALJ. This can result in an initial lump sum payment in the five figures.

An unexpected five-figure jump in income has drastic effects on a taxpayer’s eligibility for the PTC. National Taxpayer Advocate Nina Olson identified this as a serious problem for affected taxpayers in her 2015 Annual Report to Congress and again in her 2017 Objectives Report to Congress. She explains:

When taxpayers receive lump sum Social Security Disability Insurance (SSDI) payments, the additional income may push their household income above 400 percent of the federal poverty line (FPL) for the applicable family size, which will make them ineligible for the PTC. For those taxpayers who received APTC during the tax year, they will need to repay the entire amount because the repayment limitations do not apply if household income is above the 400 percent FPL threshold. … Individuals have little control over how quickly the Social Security Administration will process their disability applications and may even wait years to receive the determination and benefits. Therefore, it is reasonable that many taxpayers did not project to receive the lump sum when applying for the APTC.

(citations omitted). TAS, VITA sites, and LITCs regularly see cases where lump sum SSDI recipients are required to repay large APTC amounts, resulting in significant financial hardship.

In 2016 the NTA asked the IRS Office of Chief Counsel to provide administrative guidance relief for lump sum SSD payments. Senator Angus S. King (I-Maine) also raised the issue to the Secretary of Treasury and the IRS Commissioner. However, in August of 2016

the Office of Legislative Affairs in the Department of Treasury responded to the aforementioned letter from Senator King and indicated that it cannot identify an administrative basis to exclude retroactive lump sum SSDI payments from the calculation of modified adjusted gross income for purposes of the PTC and APTC.

The taxpayer in Johnson v. Commissioner challenged this position with a statutory interpretation argument that income for PTC purposes should not include lump-sump Social Security payments attributable to earlier calendar years. This idea is intuitively appealing on fairness grounds; one of the most frequent PTC questions I see is whether the lump-sum election under section 86(e) can save a taxpayer’s PTC. Unfortunately for affected taxpayers, the Tax Court has now agreed with the Department of Treasury and the IRS on the question: the lump sum election does not help taxpayers.

Johnson v. Commissioner

Mr. Johnson enrolled in a Marketplace plan with premiums subsidized by APTC. Sometime during 2014, he received a lump-sum Social Security payment which included nearly $12,000 in retroactive benefits for calendar year 2013. The IRS argued that the entire Social Security payment counted as MAGI for Mr. Johnson’s 2014 PTC eligibility, putting Mr. Johnson over the 400% FPL cutoff. Mr. Johnson would have been eligible for some PTC if the 2013 benefits were not counted, and his liability to repay excess APTC would have been limited.

Taxation of Social Security payments is determined under IRC 86. Section 86 sets out a formula to determine how much of a Social Security payment will be included in the taxpayer’s gross income. When a taxpayer receives a lump-sum payment, an election under section 86(e) can reduce the taxable portion of the payment. Under the election, the taxability of the funds attributable to earlier calendar years is calculated based on those years’ income rather than normal method of calculating taxability based on the taxpayer’s income in the year of receipt. This is done via worksheets in Publication 915; the taxpayer does not actually amend the prior year’s tax return.

The question in Johnson was whether the definition of Modified Adjusted Gross Income (MAGI) for PTC eligibility includes prior-year SSD payments when the taxpayer makes an election under section 86(e). The Court had to interpret Section 36B:

The term “modified adjusted gross income” means adjusted gross income increased by– … (iii) an amount equal to the portion of the taxpayer’s social security benefits (as defined in section 86(d)) which is not included in gross income under section 86 for the taxable year.

Mr. Johnson argued that section 36B was sufficiently ambiguous to permit the Court to consider the purpose of the Affordable Care Act as expressed by Congress, other legislative history, and public policy consequences of the IRS position. Despite a valiant effort by PT guest blogger Ted Afield who represented Mr. Johnson, the Court finds that the statute unambiguously includes the entire SSD payment received by petitioner.

The textual fight is about the phrase “under section 86 for the taxable year.” Petitioner argues that his taxable year = the calendar year (see section 441), and therefore the payments for the 2013 calendar year are not payments “for the [2014] taxable year.” The Court rejects this argument as contrary to the “established legal principle that a cash method individual generally reports income in the year it is received, even if the benefits are attributable to a prior year,” citing section 451(a) and sec. 1.451-1(a), Income Tax Regs. The Court goes on:

Petitioner’s section 86(e) election simply determined which amount of the lump-sum payment attributable to 2013 should be included in his gross income for 2014. We find that the phrase “under section 86” is not ambiguous and the cross-reference requires the consideration of section 86 in its entirety, including section 86(e).

Mr. Johnson also argued that the legislative history and purpose of the ACA supported his position, and that the IRS’s interpretation leads to an absurd and unintended result, denying an important benefit to someone who was eligible when he applied for APTC and who could not have foreseen the lump sum income. In response, the Court notes that section 36B’s definition of MAGI did not originally include nontaxable Social Security benefits. In 2011 the statute was amended to specifically include nontaxable Social Security. This is undeniable; unfortunately Congress did not address lump-sum payments or the 86(e) election specifically. Certainly the legislative history shows Congress’s intent to include nontaxable SSD that was paid for the tax year, but it is not clear that Congress considered the lump-sum election. Regardless of what Congress considered or didn’t consider, the Court finds the statute clear and thus finds it cannot consider the taxpayer’s equitable and policy arguments, citing Commissioner v. McCoy, 484 U.S. 3 (1987) and McGuire v. Commissioner, 149 T.C. 254.

Taxpayers in Mr. Johnson’s situation are left to hope that Congress will amend the definition of MAGI. Senator King proposed legislation to do this in August of 2018 (S. 3326), but unfortunately his bill died in committee. It will need to be reintroduced to move forward.

MAGI hacks

For taxpayers with unexpected gross income, not all is lost. Some taxpayers can adjust their MAGI to avoid the PTC eligibility cliff, or simply to increase their PTC.

One strategy is to look for adjustments that will lower AGI. Up to April 15, 2019, qualifying taxpayers can make IRA and HSA contributions for 2018, which will lower 2018 MAGI if deductible. With a lower MAGI, taxpayers will be eligible for higher PTC. The IRS issued a Tax Time Guide on IRAs which may be helpful. Taxpayers who established HSAs and who had qualifying high deductible health insurance in 2018 (which can include Marketplace plans) may want to maximize their contributions now. Earlier this week I received a helpful reminder email from my HSA company, letting me know that their deadline for 2018 contributions is 1pm on April 15th.

The financial savings can be very much worth the hassle of a last-minute contribution. The exact calculations will vary depending on the taxpayer’s available Marketplace plans. The following examples use Vermont, since its statewide community rating makes the calculations easy.

Example: Melanie is single with no dependents. Her 2018 MAGI was $48,300. That’s $60 over the income limit for a premium tax credit. Melanie will have to pay back any advance premium tax credits she got from the Marketplace.

Solution: If Melanie contributes $60 for 2018 to a traditional IRA, her MAGI is now $48,240, the maximum to receive a PTC. She now qualifies for a maximum PTC of $1,454, a net gain of nearly $1,400. In addition, she has increased her retirement savings by $60.

For couples and families, the numbers are even more drastic, because of how the credit is calculated. (A family’s expected contribution is smaller relative to the cost of insurance, than is the case for a single person.)

Example: A married couple with MAGI exactly at the 2018 limit of $64,960 (for a household of 2) has a maximum PTC of $5,922. If the couple’s MAGI were even one dollar over the limit, their PTC is zero and they must repay all APTC received.

Even if the couple is income-eligible, it may be advantageous to minimize their MAGI to the extent possible because the PTC is income-sensitive, even at higher levels.

Example: If one spouse in the last example makes an IRA contribution of $5,000, the couple’s maximum PTC becomes $6,400. That’s $478 in “free money” for making an IRA contribution.

Of course, not all taxpayers will be eligible to make a deductible IRA contribution and not all taxpayers will qualify to make an HSA contribution. Also, this strategy is only possible if the taxpayer is below or within spitting distance of the 400% FPL cutoff. The maximum IRA or HSA contribution is not always high enough to bring MAGI under the cutoff. However, these options are worth fully exploring when your client is facing the prospect of repaying APTC.

Offers in Compromise and Tax Refunds – Part Two

In this post I will review which refunds the IRS will seize to when a taxpayer seeks an OIC, and discuss when the taxpayer has options to keep their refund.  

The rules depend on the type of offer. At the end of Part One, I summarized the four types of offers that a taxpayer can make the IRS to settle their tax debt. This background is important because the danger to the client’s refund depends on the type of offer they are seeking. The possible offers to the IRS are: 

  1. Doubt as to liability (DATL) 
  2. Doubt as to collectibility (DATC) 
  3. Doubt as to collectibility with special circumstances (DATC-SC) 
  4. Effective Tax Administration (ETA) 

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A compromise is a binding contract between the government and a taxpayer. The terms of the contract for DATC, DATC-SC, and ETA offers can be found in the IRS’s Form 656 booklet. For doubt as to liability offers, the terms are in Form 656-L 

Refund Considerations: Pre-Offer 

When a taxpayer owes a debt to the IRS or to certain other agencies, the taxpayer’s refund may be applied to that debt pursuant to IRC 6402. Some taxpayers decide to stop filing as a result. This is generally counter-productive. If a taxpayer waits too long to file, they will lose the refund to the statute of limitations anyway, without receiving any reduction in their debt. Also, the IRS generally requires filing compliance before it will consider any proposal by the taxpayer for a collection process other than full payment or enforced collection.  

Many potential clients call LITCs seeking an Offer in Compromise even though they have unfiled returns. So, the first hurdle is getting the tax returns filed.  

A taxpayer should not have to be in filing compliance for a Doubt as to Liability offer to be processable. Alternatives to DATL – including audit reconsideration and Form 843 claims for refund or abatement – do not require filing compliance. A DATL offer is solely concerned with the correct liability for the tax period in question. Form 656-L lacks language on filing compliance which is present in the general 656 booklet, and a DATL offer does not include a 5-year compliance period post-acceptance. However, Rev. Proc. 2003-71 section 5.04 says that an offer can be returned if the taxpayer fails to file a return, and it does not appear to limit this statement by type of offer. I also found the IRM sections on offer processability unclear on this point. Perhaps I missed the relevant IRM provision, but it appears to me that IRM 5.8.2 could use clarification. Disagreements over processability of an offer are some of the most frustrating in tax representation, since the Service takes the position that its processability decision is not subject to appeal. Rev. Proc. 2003-71, sec. 5.05. I recall LITC reports a few years ago about centralized OIC processors refusing to forward an offer to the specialized DATL unit. If that is still a problem, it would be helpful to have a specific IRM provision on processability of DATL offers. I invite readers to comment on their recent experiences with this. 

Refunds generally don’t “count” towards the taxpayer’s offer 

If refunds are due for any unfiled years, our clients naturally would like the balances to count towards their offer. Taxpayers frequently ask whether they can just offer the IRS their next tax refund, or their refund from an unfiled year. Unfortunately for them, Congress in IRC 7122(d)(1) said that IRS gets to make the rules for the OIC program, and the IRS has decided that offset tax refunds don’t count as payments towards a DATC offer, nor do they reduce the taxpayer’s minimum offer amount for DATC, DATC-SC, or ETA offers. IRM 5.8.1.13.3, Amount Offered states 

The total amount of money offered must be indicated and must be more than zero. The amount offered may not include money already paid, expected future refunds, funds attached by levy, or anticipated benefits from capital/net operating losses. 

This is mirrored in the Form 656 booklet, p. 3.  

However, doubt as to liability offers are different – if IRS agrees that the correct liability should be lower, it will adjust the assessment and refund any excess payments that are within the refund statute of limitations. This is noted in the Form 656-L terms. So in that sense, refunds that have been offset will “count” as payment for DATL offers.  

The policy on not considering refunds as payments for DATC offers seems extremely unfair to most of my clients, but it is a logical policy. When the IRS is accepting less money than it is owed based on “doubt as to collectability,” it naturally wants to consider that refunds should be coming in to the Treasury anyway under section 6402. Taxpayers have filing obligations, and as mentioned above the IRS will not consider making a deal unless those obligations are being met. The taxpayer needs to offer more than that to make a compromise worthwhile for the IRS.  

This policy makes less logical sense when it comes to effective tax administration and DATC-SC. One could incorporate past or imminent refund offsets into the taxpayer’s economic hardship or public policy argument, and propose a lower offer due to the hardship or public policy implications of the offsets. However, this argument needs to be couched in the language of ETA hardship or public policy justifications. (See Part One.) It will not work to simply ask for past refunds to be credited towards the offer.  

There is one exception to the rule that seized refunds don’t count as payments towards an offer (DATC, DATC-SC, or ETA). If a taxpayer would receive their refund in the normal course of events (i.e. it is not due to be offset under the terms of the OIC or for any other reason), they can ask the IRS in writing to apply it to an outstanding offer amount. (IRM 5.19.7.2.21.3, Applying Refunds for Non Recoupment Tax Years.) As we’ll see below, this will mostly be applicable to DATC-SC and ETA offers 

Tax refunds while an OIC is under consideration 

The IRS will offset tax refunds while an offer is under consideration. This applies to all types of offers per the Procedure & Administration Regulations, sec. 301.7122-1(g)(5). This is business as usual for the Service under section 6402.  

Keith has written about circumstances where the IRS will not exercise its right of offset. If a taxpayer is facing serious economic hardship, it may be possible to receive an offset bypass refund (OBR). Taxpayers often ask if this is a possibility when an offer is pending.  

The question then arises whether requesting an OBR might violate the terms of the contract that the IRS requires for an OIC, in which case requesting an OBR could cause the IRS to reject the offer. Form 656-L does not contain any provisions regarding refund offsets. The DATC contract terms regarding offsets are: 

The IRS will keep any refund, including interest, that I might be due for tax periods extending through the calendar year in which the IRS accepts my offer. I cannot designate that the refund be applied to estimated tax payments for the following year or the accepted offer amount. If I receive a refund after I submit this offer for any tax period extending through the calendar year in which the IRS accepts my offer, I will return the refund within 30 days of notification.  

Thankfully the contract goes on to exclude DATC-SC and ETA offers from those terms: 

The refund offset does not apply to offers accepted under the provisions of Effective Tax Administration or Doubt as to Collectibility with special circumstances based on public policy/equity considerations. 

So taxpayers seeking offers based on doubt as to liability, doubt as to collectibility with special circumstances, or effective tax administration are free to request an OBR to save their refund while an offer is pending. For DATC the question is more complicated and is discussed below under planning concerns and uncertainties 

Tax refunds after an OIC is accepted 

Refund offsets should stop for taxpayers with DATC-SC and ETA offers when the offer is accepted.  Offsets will stop for taxpayers with accepted DATL offers after the agreed-upon correct liability is paid.  

For regular DATC offers, unfortunately, the OIC offset terms extend to the calendar year in which the offer is accepted. The 656 booklet explains on page 1 that  

The IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts the offer. For example, if your offer is accepted in 2018 and you file your 2018 Form 1040 on April 15, 2019 showing a refund, IRS will apply your refund to your tax debt. The refund is not considered as a payment toward your offer. 

This can come as a surprise to taxpayers, and it can cause serious hardships. (As we saw above, the DATC offset terms do not apply to ETA or DATC-SC offers.)  

The National Taxpayer Advocate has recognized that multiple refund offsets can cause hardships for low-income taxpayers who rely on refunds to pay basic living expenses. In her 2018 Annual Report to Congress, she designated problems with the OIC program as a Most Serious Problem facing taxpayers. This is particularly concerning where additional refunds are lost because of the time it takes the IRS to process the offer. If an offer is rejected and appealed, Office of Appeals consideration adds an average of 6.5 months in processing time. This can easily push the taxpayer into the next calendar year. To solve this problem as a matter of fairness and to prevent hardship, the NTA recommends that the IRS change its policy to only seize one tax refund while an offer is pending.  

DATC Offer Planning Considerations and Uncertainties  

One way to avoid the standard offset provisions of Form 656 would be to request a “special circumstances” offer. If the offer can be so categorized, you avoid the need to reform or change the OIC contract. As we saw in Part One, an offer for DATC-SC technically requires the taxpayer to offer less than their reasonable collection potential, and to justify this on hardship or public policy grounds. Since calculating RCP involves judgment calls on the value of assets, and can involve judgment calls as to appropriate household income and living expense figures, there may be cases in a gray area between “regular” DATC and DATC-SC. The offset provisions could weigh towards making a DATC-SC offer, depending on the taxpayer’s circumstances.  

Keith gave this very good advice to a commenter on his OBR post: 

One of the “preprinted” provisions of the standard offer in compromise is that the IRS will keep the refund, if any, for the year in which the offer was approved. Because the refund comes months, or sometimes even a year, later the retention of this refund comes as an unpleasant surprise to many who have received relief through an offer. The existence of this provision requires discussion and planning with the client at the time of acceptance to ensure that withholding in the year of offer acceptance carefully matches the anticipated liability. If the client can claim the EITC or other refundable credits, it is usually not possible to adjust withholding in order to prevent a refund yet the money provided by the EITC refund could be critical to the financial success of the individual. Although I have never done it, I am told that it is possible to negotiate concerning this provision when entering into the offer. So, if you anticipate a big refund in the year of offer acceptance and if the refund will be critical to the financial success of the individuals obtaining the offer try at that point to negotiate out of the offer contract the provision allowing the IRS to offset the refund for the year of the offer. If you cannot do that or if it was not done, you can request offset bypass at the time you file the return for the year of offer acceptance but you are asking for something different than offset bypass under the IRS’ ability to waive offset under 6502 you are asking to reform the contract. I have never done this and do not know the chances of success. I expect the IRS would treat it similar to a regular bypass request but am unsure. Consult the IRM.  

I followed that advice and consulted the IRM. Unfortunately, it is not clear to me that it will be possible to reform the DATC contract to allow a refund to reach the taxpayer. Perhaps I missed a relevant provision; if so please let me know in the comments. It should not hurt to call the offer examiner, or call TAS, and inquire.

A taxpayer cannot alter the preprinted DATC conditions up front. IRM 5.8.1.13.5 (05-05-2017) Standard Conditions provides that

If the taxpayer submitted the Form 656 altering any of the provisions of Form 656, Section 7, the offer should be immediately deemed not processable based on an altered Form 656.

In some cases it is possible to make a collateral agreement to an offer. However, the IRM section on collateral agreements appears to foreclose the possibility of using a collateral agreement to get around the refund provisions:

Form 656 contains a term which waives refunds and overpayments for all tax years through the year the offer in compromise is accepted. This waiver is a standard term, which cannot be altered. 

IRM 5.8.6.4 (10-04-2017) Waiver of Refunds 

I also checked the IRM sections on offset bypass refunds, IRM 21.4.6.5.11 (05-07-2018) Hardship Manual Refunds and 21.4.6.5.11.1 (11-08-2017) Offset Bypass Refund (OBR). These do not mention OICs. If you have experience with obtaining a refund through the OBR or another process while a DATC offer was pending or accepted, please share your experience with us in the comments. It is an important issue for affected taxpayers who may be faced with choosing between an OBR to avoid eviction and maintaining their DATC compromise.