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.

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.

 

Offers in Compromise and Tax Refunds – Part One

Taxpayers often fail to grasp the relationship between offers in compromise and tax refunds. Based on recent email list queries, tax season is a good time for a refresher.

Before we get to tax refunds, a brief overview of OICs will set the stage. Guest blogger Marilyn Ames explained in a previous post that “section 7122 and its predecessors give the IRS the authority to compromise any civil or criminal case arising under the internal revenue laws.” (Read her post for a discussion of the permanent nature of a compromise.) There are three grounds for a compromise with the IRS: Doubt as to Liability (DATL), Doubt as to Collectibility (DATC), and Effective Tax Administration (ETA). 26 C.F.R. 301.7122-1. Revenue Procedure 2003-71 describes the three types of offers as well as the process for submitting and resolving offers.

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Doubt as to Liability means what it says. An OIC-DATL is an alternative to an audit reconsideration for taxpayers who can demonstrate that the assessment is likely erroneous either wholly or partially. Under Rev. Proc. 2003-71, the taxpayer’s offer must “reasonably reflect[] the amount the Service would expect to collect through litigation,” if the underlying liability were litigated.

Effective Tax Administration is less obvious. It originates from a Congressional directive in the legislative history of the IRS Restructuring and Reform Act of 1998. The implementing regulation at § 301.7122-1(b)(3) provides in part:

(i) A compromise may be entered into to promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of § 301.6343-1.

(ii) If there are no [other] grounds for compromise …, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. …

The regulation goes on to give helpful examples of appropriate ETA offers. There are three hardship examples:

Example 1.

The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer’s overall compliance history does not weigh against compromise.

Example 2.

The taxpayer is retired and his only income is from a pension. The taxpayer’s only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer’s overall compliance history does not weigh against compromise.

Example 3.

The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer’s equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer’s home has been specially equipped to accommodate his disability, forced sale of the taxpayer’s residence would create severe adverse consequences for the taxpayer. The taxpayer’s overall compliance history does not weigh against compromise.

However, most offers are submitted and accepted on Doubt as To Collectability grounds. That is also fairly obvious, although the devil is in the details of the minimum acceptable offer. Rev. Proc. 2003-71 explains,

An offer to compromise based on doubt as to collectibility generally will be considered acceptable if it is unlikely that the tax can be collected in full and the offer reasonably reflects the amount the Service could collect through other means, including administrative and judicial collection remedies. …This amount is the reasonable collection potential of a case. In determining the reasonable collection potential of a case, the Service will take into account the taxpayer’s reasonable basic living expenses. In some cases, the Service may accept an offer of less than the total reasonable collection potential of a case if there are special circumstances.

That last sentence is important – doubt as to liability with special circumstances (DATC-SC) can be considered the fourth type of offer, although it does not appear in the regulation. The distinction matters when it comes to tax refund issues, as we will see below. I.R.M. 8.23.3.1 explains that “an offer based upon doubt as to collectibility with ‘special circumstances’ will be evaluated using the same criteria as an ETA offer.” Those considering a “special circumstances” offer should review the examples in the regulation at § 301.7122-1(c)(3).

To summarize, the four OIC flavors are:

  1. Doubt as to liability – I should not owe this; I am offering or what I’d likely owe if the liability were litigated (or at least $1).
  2. Doubt as to collectibility – I can’t pay this; I am offering to pay my “reasonable collection potential” (or at least $1).
  3. Doubt as to collectibility with special circumstances – I can’t pay this, and I am offering less than my “reasonable collection potential” for hardship or public policy reasons.
  4. Effective Tax Administration – my “reasonable collection potential” is more than I owe, but I am offering less for hardship or public policy reasons.

With that background, we will move on to refund issues in the next post.

Agenda Announced for the 4th International Conference on Taxpayer Rights “Taxpayer Rights in the Digital Age: Implications for Transparency, Certainty, and Privacy”

The National Taxpayer Advocate asked us to announce that registration is now open for the 4th International Conference on Taxpayer Rights at the University of Minnesota Law School on May 23-24, 2019. This groundbreaking annual conference brings together government officials, scholars, and practitioners (including Keith and Les who are presenting a paper). It is an excellent opportunity to hear about efforts to protect and improve taxpayer rights around the world. Readers interested in taxpayer rights will find a rich archive of papersvideos, and other materials online from the previous International Conferences on Taxpayer Rights. If you are interested in attending the 4th Annual conference, note that past conferences have filled up. Registration is available at www.TaxpayerRightsConference.com 

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The registration flyer summarizes the agenda: 

The 2019 conference will explore the role of taxpayer rights in the digital age, and the implications of the expanding digital environment for transparency, certainty, and privacy in tax administration. Panel discussions will focus on the following and more:  

  • Taxpayer bills of rights around the world, and the foundation of taxpayer rights in human rights  
  • Taxpayer rights and establishing global common standards  
  • Big data, privacy and tax administration  
  • Impact of administrative guidance on taxpayers  
  • The role of “whistleblowers” in tax administration 

The full agenda may be viewed here (pdf version here). 

The National Taxpayer Advocate, in her blog post announcing the 4th Conference, explained: 

Since November 2015, I’ve convened three international conferences with the purpose of bringing together government officials, scholars, and practitioners from around the world, and providing a forum for a multi-disciplinary discussion of the operation of taxpayer rights in theory and practice.  … 

Taxpayer rights serve as the foundation for effective tax administration. Whether expressed through a charter or taxpayer bill of rights, or a declaration of human rights, governments have long recognized that providing taxpayers with assurances of fair treatment and respect, and protections against government overreaching, further voluntary compliance. Please don’t miss your chance to be a part of this global taxpayer rights discussion. 

We at PT wholeheartedly agree.  

 

Information Letter Shows Need for Broader Guidance on Difficulty of Care Exclusion

At the Low-Income Taxpayer Clinic Grantee conference in December, I presented on the tax treatment of state payments for in-home care, alongside Daniel Kempland of Washington University and Sarah Lora of Legal Aid Services of Oregon. The topic will also be discussed at the Pro Bono and Tax Clinics Committee meeting during the ABA Tax Section’s May Meeting. So a related item in February 5th’s Tax Notes caught my eye. IRS Information Letter 2018-0034 responds to questions about “difficulty of care” payments under section 131(c). The letter must have gotten caught by the shutdown on its way out the door; its official release date is 12/28/18. 

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Difficulty of Care 

Section 131 promotes community care for severely disabled adults by excluding certain state payments from caregivers’ gross income. Specifically, section 131 excludes from gross income any “qualified foster care payments” and “difficulty of care” payments received by a foster care provider from a state or from a qualified foster care placement agency.  

There are multiple tax questions that arise in this context. When in-home care is provided to adults with disabilities, one question is whether the “difficulty of care” exclusion applies to any of the caregiver’s income. Difficulty of care payments are defined in 131(c) as

payments to individuals which are not [qualified foster care payments], and which— 

(A) are compensation for providing the additional care of a qualified foster individual which is— 

(i) required by reason of a physical, mental, or emotional handicap of such individual with respect to which the State has determined that there is a need for additional compensation, and 

(ii) provided in the home of the foster care provider, and 

(B) are designated by the payor as [difficulty of care payments] 

In health care, community or home care is contrasted with institutional care, e.g. in a nursing home. Government programs that pay for care at home allow people with disabilities to continue living in their communities, where they may enjoy greater “family relations, social contacts, work options, economic independence, educational advancement, and cultural enrichment.” (Olmstead v. L.C., 527 U.S. 581 (1999)) 

For caregivers who are family members or low-wage workers, the gross income exclusion can make a significant difference by freeing up funds for other living expenses. (At certain income levels caregivers may be better off with taxable income for the Earned Income Credit; the tax impact is not uniform.) Also, under the Affordable Care Act adults can qualify for Medicaid based on their modified AGI. Sec. 131 is not one of the modifications, so the difficulty of care exclusion gives some caregivers access to nearly free health care. This is a big deal. 

In several cases in the 1990s and 2000s, the Service challenged the applicability of section 131 to family members who cared for disabled relatives. The general theory was that a biological parent cannot be a “foster parent” within the meaning of the statute. However, in 2014 it reversed this position in Notice 2014-7. For unclear reasons, Notice 2014-7 only addresses one specific type of Medicaid waiver program. It also does not address FICA or FUTA treatment of qualifying payments. Since then, the IRS has not issued any regulations or other guidance under section 131 besides website FAQ and a PLR.  

Unfortunately, the wide variety of state programs, a lack of general reliable guidance from the IRS, and differing levels of state responsiveness to caregiver groups have led to disparate treatment of caregivers’ income depending on where they live. There is much more to say on this topic. For more on Notice 2014-7 and the FAQ, the National Health Law Program has an excellent summary written for health care advocates.

Information Letter 2018-0034  

On September 25, 2018, a requester wrote to the IRS on behalf of  

business clients who provide “Alzheimer, dementia, adult and family care and mental health and residential support services.” Specifically, you asked about the tax treatment of “social security personal care services funding” and “Medicaid waiver payments” received by these clients under a program by the “Division of Social Services via a network of oversight groups.” 

The IRS’s answer is quite short.

Notice 2014-7 specifically addresses payments made under § 1915(c) of the Social Security Act (Act), relating to Home and Community-Based Services waivers, and does not specifically address the tax treatment of other state Medicaid programs. Whether the Internal Revenue Service (IRS) will treat payments received under a state program other than a program under of § 1915(c) of the Act as difficulty of care payments depends on the nature of the payments and the purpose and design of the program. See Q&A1 at www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income. 

If your clients would like the IRS to address whether payments described in your letter or other similar payments are excludible from gross income under § 131 of the Code, they may request a private letter ruling. Revenue Procedure 2018-1, 2018-1 I.R.B. 1, (and the first revenue procedure of each year), provides the procedures and fees for a taxpayer to request a private letter ruling. 

This response is likely frustrating for the requester, but it was to be expected.

An Information Letter “provides general statements of well-defined law without applying them to a specific set of facts.” There is no user fee to request one, but the advice given is not binding on the IRS, so it does not protect the taxpayer from audit or penalty. For binding and reliable advice, taxpayers must pay a hefty user fee to get a Private Letter Ruling (PLR). The parties who requested Information Letter 2018-0034 would likely need to pay $30,000 if they wanted a PLR. There are reduced fees for taxpayers with gross income less than $250,000 (a fee of $2,800) and for taxpayers with gross income less than $1 million (a fee of $7,600). One can understand why the requesters tried the free option first.  

In the wake of Notice 2014-7, the State of California paid for a PLR (PLR-127776-15), and it now has guidance on the applicability of section 131 to its four programs that support in-home care for disabled adults. But not every state or company can afford $30,000. For many individual caregivers, the reduced fee of $2,800 may as well be $30,000. Also, technically only the requester can rely on a PLR. The letter to the State of California posted by the IRS is redacted so the public cannot see which specific programs were at issue. If the state had not posted an unredacted version, California families would not be able to tell whether the guidance applied to their program.

The analysis in California’s PLR has uniform application to thousands of individual taxpayers. Yet in order to rely on it, each caregiver needs to request their own PLR. This is an inefficient system; the PLR is simply not the right tool for issues that have broad, relatively uniform application to third party taxpayers.

It is not clear why the 2014 guidance was so narrow in scope. While caregiver programs do vary by state, the IRS has identified principles in its FAQ that could provide a basis for broad national guidance. I hope the IRS will develop a regulation project or a broader guidance project on the difficulty of care exclusion. IRS and Treasury Department resources are stretched thin and have been for many years. However, the government should prioritize guidance for issues that have a deep impact on thousands of low-income taxpayers and that are not suitable for individual guidance through the PLR process.

NTA Issues 2018 Annual Report to Congress

Yesterday, National Taxpayer Advocate Nina Olson released the 2018 Annual Report to Congress. In an accompanying news release and in the report’s preface, she highlights the impact of the government shutdown on taxpayer rights, and also emphasizes the crucial need for IT modernization to replace antiquated systems at the IRS.

We will be highlighting issues of interest to readers in forthcoming posts. I look forward to reading the report.

Will the IRS Take My Home?

LITC practitioners hear recurring worries from taxpayers with IRS problems: will I go to jail? will the IRS take my home? For the vast majority of people who owe taxes, the answer to both questions is no. Someone who simply owes a tax debt usually does not need to worry about going to jail or having their home taken by the IRS. However, this is not to say it never happens. There are perhaps one or two cases per month reported on daily tax news services, and the National Taxpayer Advocate’s 2017 Annual Report to Congress identified 60 opinions in that fiscal year involving section 7403Recent cases illustrate the steps the government must take and the factors courts consider when evaluating a request to foreclose. 

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The government has two separate legal mechanisms to seize a taxpayer’s home in order to collect a tax debt. The National Taxpayer Advocate explains in her 2017 ARC Purple Book: 

The IRS has two options, which cannot be used concurrently, to collect against the principal residence of a taxpayer or a residence that is owned by the taxpayer but occupied by the taxpayer’s spouse, former spouse, or minor child. One option is to obtain a court order allowing administrative seizure of a principal residence under IRC § 6334(e)(1). … The other option is a suit to foreclose the federal tax lien against a principal residence under IRC § 7403.

The IRS makes use of both options, by way of making a recommendation and referral to the Department of Justice Tax Division, which represents the IRS in Federal District Court. The IRM explains that  

[s]uits should still be brought to foreclose the federal tax lien and reduce the tax liability to judgment in lieu of bringing a section 6334(e)(1) proceeding whenever it is determined that such suits would be optimal. A lien foreclosure suit may be preferable to a section 6334(e)(1) proceeding when there are questions regarding title or lien priority that create an unfavorable market for administrative sale. See 35.6.3.2 for discussion of lien foreclosure suits. A lien foreclosure suit may also be a specific option when the collection statute of limitations is about to run.  

34.6.2.5.1 (06-12-2012), Procedures for Instituting a 6334(e)(1) Proceeding.  So, taxpayer representatives should be familiar with the requirements for both actions.

Administrative seizure with judicial approval 

In August of 2018, Keith blogged about an Eighth Circuit decision under section 6334United States v. Brabant-Scribner, No. 17-2825 (8th Cir. Aug. 17, 2018). Keith explains: 

The 1998 Restructuring and Reform Act added IRC 6334(e)(1)(A) to require that prior to seizing a taxpayer’s principal residence the IRS must obtain the approval of a federal district court judge or magistrate in writing. Before the passage of this provision, the IRS could seize a taxpayer’s home with the same amount of prior approval needed to seize any other asset owned by the taxpayer. No approval was necessary to seize any asset of the taxpayer.

The government has adopted Treasury Regulation 301.6334-1(d) incorporating additional procedures and standards. Keith summarizes: 

To convince the court to allow the sale of a personal residence, the IRS must show compliance with all legal and procedural requirements, show the debt remains unpaid and show that “no reasonable alternative” for collection of the debt exists. 

… the taxpayer has a right to object after the IRS makes its initial showing and “will be granted a hearing to rebut the Government’s prima facie case if the taxpayer … rais[es] a genuine issue of material fact demonstrating … other assets from which the liability can be satisfied.”  

Also, the regulation provides for written notice to family members and occupants of the property.  

Unfortunately for taxpayers, judicial approval may not be difficult for the IRS to obtain despite the above standards and procedures. In Brabant-Scribner, the court reasoned that an alternative “for collection” must provide for payment of the debt; therefore, it held that the IRS was not required to consider the taxpayer’s offer in compromise. Similar reasoning has been followed by other courts. E.g. United States v. Gower, No. 3:16-cv-01247 (M.D. FlaJul. 10, 2018). Nevertheless, the administrative collection statutes and regulations provide some procedural protections for the taxpayer and certain family members living in a home owned by the taxpayer. IRM procedures also provide significant safeguards, which the National Taxpayer Advocate has recommended that Congress codify in section 7403

Suit to foreclose judgment lien 

The government’s second option, if it seeks to seize a taxpayer’s home, is to foreclose the federal tax lien by filing suit pursuant to section 7403Les has discussed section 7403 previously, and I will borrow his summary:

Under Section 7403, a federal district court can “determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property,…, and a distribution of the proceeds of such sale according to the findings of the court. 

Yet that power to force a sale and distribution of the proceeds is limited. In the 1983 case US v Rodgers the Supreme Court said that while the government has broad discretion to force a sale, “Section 7403 does not require a district court to authorize a forced sale under absolutely all circumstances, and that some limited room is left in the statute for the exercise of reasoned discretion.” Keith has discussed the application of Rodgers in prior posts here and here. 

To assist courts in exercising that discretion, Rodgers identifies factors: 

1) “the extent to which the Government’s financial interests would be prejudiced if it were relegated to a forced sale of the partial interest actually liable for the delinquent taxes[;]” 

(2) “whether the third party with a nonliable separate interest in the property would, in the normal course of events (leaving aside § 7403 and eminent domain proceedings, of course), have a legally recognized expectation that that separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors[;]” 

(3) “the likely prejudice to the third party, both in personal dislocation costs and … practical undercompensation [;]” and 

(4) “the relative character and value of the nonliable and liable interests held in the property ….”

Once the government has decided to sue for foreclosure, the taxpayer and others hoping to prevent that outcome face an uphill battle. The government prevailed in 58 of the 60 cases identified by TAS in the 2017 Annual Report to Congress, and one case resulted in a split decision. The taxpayer prevailed in only one case. These lopsided statistics are consistent with prior years’ reports.  

At times courts’ analysis of the Rodgers factors is cursory or nonexistent, but sometimes the factors do make a difference and judicial discretion is exercised. In United States v. Kwitney, No. 6:18-cv-1366-Orl-37TBS (M.D. Fla. Feb. 8, 2019), the district court rejected a magistrate’s recommendation in favor of foreclosure, because the interests of a third party had not yet been adjudicated.  

A less happy outcome for the interested third party occurred on January 30 in United States v. Jackson, No. 3:16-cv-05096 (W.D. Mo. Jan. 30, 2019). Mr. Jackson’s wife jointly owned properties with him, but she was not liable for the tax debt. Unfortunately for her, Mrs. Jackson came to the court with unclean hands, having previously collaborated with Mr. Jackson in what the court found were fraudulent transfers of the property. The court nevertheless examined the Rodgers factors: 

With respect to the first factor, the Court finds Plaintiff’s financial interests would be prejudiced if it were relegated to the forced sale of only Phil Jackson’s interest in the Properties. As a practical matter, if Plaintiff foreclosed on Phil Jackson’s interests only, Sharon Jackson retains her interests in the Properties. Thus, the sale of Phil Jackson’s interests would not decrease the judgment amount Phil Jackson owes to Plaintiff. 

Translation: it will be hard, perhaps impossible, to find a buyer for Mr. Jackson’s half-interest in the property. The government is likely to collect nothing under this alternative.  

With respect to the second factor, Sharon Jackson lacks an expectation that the Properties would not be subject to sale. Sharon Jackson, as owner with Phil Jackson, participated in the fraudulent transfers (since disclaimed) of the Properties. In the Court’s view, this conduct “tilts the balance of legal expectation against” her under this factor. United States v. Bierbrauer, 936 F.2d 373, 376 (8th Cir. 1991). 

With respect to the third factor, Sharon Jackson will receive full compensation for her interests in the Properties. … 

Finally, with respect to the fourth factor, because Phil Jackson’s and Sharon Jackson’s interests in the Properties are equal, forced sale could net Plaintiff as much as half the value of each of the properties to apply to the tax judgment against Phil Jackson. Under these circumstances, the Plaintiff is likely to recover more than “a fraction of the value of the property.” Bierbrauer, 936 F.2d at 375. 

Mrs. Jackson also argued that if the properties were sold, she should receive half of the sale price before any of the sale expenses were deducted and before certain property tax liens were paid. The Court held against her on both counts. As co-owner Mrs. Jackson was equally liable for the property taxes, and the court reasoned that her legal interest in the property is subject to those liens. Regarding the administrative costs of sale,  

[The Jacksons] cite no legal authority for the premise that the sale costs for the Properties should be borne by Plaintiff. Thus, the Court relies on “the Government’s paramount interest in prompt and certain collection of delinquent taxes” to conclude that Plaintiff net proceeds from the sale of the Properties should be distributed to PALS first. Rodgers, 461 U.S. at 712. 

The government’s “paramount interest” certainly makes these cases very difficult for taxpayers and their family members to win.

The bottom line 

The case numbers are low: the government probably won’t try to seize your home for back taxes. However, it’s in taxpayers’ interests to resolve their collection disputes rather than ignore the IRS. And certainly, don’t try any funny business with fraudulent transfers.

The Taxpayer Advocate Service’s Role During an IRS Shutdown

The ongoing lapse in federal government appropriations is now the longest in modern history. On January 15, the IRS released an updated shutdown plan which substantially alters how the ongoing shutdown impacts taxpayers. Regular PT contributor Bob Kamman described the updated plan here; he summarized the original shutdown plan here. The biggest change of plan is the recall of about half the IRS workforce primarily to process tax returns and ensure that refunds will be paid this filing season. But the plan also calls for expanded operations in another important arena: collections. And automated notices of intent to levy are still being issued. Meanwhile, Taxpayer Advocate Service (TAS) employees are largely furloughed and those who are excepted are not permitted to work on individual taxpayer cases. This situation raises important questions about the IRS and Treasury’s interpretation of the Anti-Deficiency Act. What should be TAS’s role in a shutdown, and who will protect taxpayer rights if TAS is not permitted to engage in those activities?  

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In a February 2018 PT post, guest bloggeStuart J. Bassin explained the legal framework around a shutdown:

Spending and taxation authority reside in Congress under Article I, Section 8 of the Constitution; the Executive has no independent taxation or spending power. Separately, Article I Section 9 prevents unauthorized spending, providing that “No Money shall be drawn from the Treasury, but in consequence of appropriations made by law.” When a lapse in appropriations occurs, the government necessarily shuts down. Neither the President nor Congress decides to shut down the Government; it happens automatically under the Constitution. 

Statutory law develops the constitutional prohibitions and invokes the criminal law to enforce the prohibition. Under Section 1341(a) to Title 31 of the U.S. Code, federal employees “may not make or authorize an expenditure or obligation” or involve the “government in a contract or obligation” absent a lawful appropriation. Similarly, under Section 1342, federal employees “may not accept voluntary services for the government … except for emergencies involving the safety of human life or the protection of property.” The “emergency” exception is narrowly defined to exclude “ongoing, regular functions of government the suspension of which would not imminently threaten the safety of human life or the protection of property.” Section 1350 makes a knowing violation of either provision a felony punishable by up to two years in prison. 

So, when there is no Congressional appropriation funding the IRS, the Anti-Deficiency Act allows the agency to continue limited operations only “for emergencies involving the safety of human life or the protection of property, albeit with “volunteer” labor.  

This brings us to the Taxpayer Advocate Service. Given the substantial expansion of IRS operations reflected in the revised shutdown plan, it was disappointing to see the role of the Taxpayer Advocate Service remain the same. Bob Kamman notes: 

There are now two “excepted” Category B employees allowed in each local office: The local TA, and either a group manager or a “lead case advocate.”  Their jobs are to “Check mail to comply with the IRS’s requirement to open and process checks during a shutdown while also complying with the statutory requirements that TAS maintain confidential and separate communications with taxpayers and that TAS operate independently of any other IRS office . . .Screen the mail for incoming requests for Taxpayer Assistance Orders and notify the appropriate Business Unit that a request has been made tolling any statute of limitations.” 

It doesn’t sound like they are allowed to answer the phone or work cases.  Protecting IRS integrity doesn’t extend this far? 

Apparently it doesn’t, at least not in the eyes of the IRS. Multiple TAS employees have privately confirmed that they are not permitted to work on taxpayer cases during the shutdown, even where a hardship is present.

TAS plays a crucial role in the tax collection system, as a backstop protecting taxpayers from serious financial hardship. As such, one might think that TAS activities related to taxpayer hardships would be excepted. Certainly taxpayers threatened with homelessness or living without heat or water view their situations as “emergencies involving the safety of human life or the protection of property”. However, the IRS Office of Chief Counsel has interpreted the “protection of property” prong to refer only to government property (Exception Category B of the shutdown plan: “Necessary for the Safety of Human Life or Protection of Government Property”). The NTA strongly disagrees with this interpretation, and she has called on Congress to clarify the statute.  

In her Fiscal Year 2015 Objectives Report to Congress (June 30, 2014), Nina Olson analyzed the Anti-Deficiency Act and raised several concerns with the IRS’s interpretation of its exceptions as applied to TAS. She also compared the IRS’s 2013 shutdown policy to its prior shutdown contingency plan and to the interpretations of other federal agencies and the OMB. It’s illuminating to revisit that report now in light of the original and revised shutdown plans for 2018/2019. I recommend reading the report for the full background and detailed analysis.  

The good news is that the IRS has addressed or partially addressed some of the NTA’s previous concerns. The January 2019 shutdown plan provides for the recall of 1,989 SBSE collection representatives whose duties include releasing liens and levies as required by law. Shockingly, release of levies was not a function performed at all during the 2013 shutdown. The current plan also preserves TAS’s independence by permitting TAS employees to open their own mail, which also was not allowed in 2013. However, the IRS has not changed its interpretation of the “protection of property” exception and it has not conceded that TAS plays an integral role in protecting the integrity of tax collection and in preventing taxpayers from experiencing irreparable harm.  

The limited IRS telephone service provided for in the new shutdown plan has only been open since January 22, and it is not clear yet whether the current operations plan will be sufficient to protect taxpayers against serious harm from unlawful collection actions. Anecdotal reports on the ABA Tax Section’s Low-Income Taxpayer email list suggest that taxpayers and representatives may experience inconsistent treatment when calling in, with some IRS representatives able to accept faxed authorizations and some not, and some representatives claiming they have no ability to address the caller’s hardship. Problems with front-line collection employees are nothing new to taxpayer representatives. One could argue that the sufficiency of the new shutdown plan is not open to debate, as Congress has already determined in enacting sections 7803(c) and 7811 that the NTA and TAS are a necessary safeguard within the system to protect taxpayers from unlawful collection action.  

When the shutdown ends, I anticipate the NTA forcefully renewing her legislative recommendation that Congress 

Clarify that the emergency exception to the Anti-Deficiency Act for the protection of property includes taxpayer property as well as government property. Alternatively, clarify that the National Taxpayer Advocate may incur obligations in advance of appropriations for purposes of assisting taxpayers experiencing an economic hardship within the meaning of IRC § 6343(a)(1)(D) due to an IRS action or inaction, and that the IRS may incur obligations in advance of appropriations for purposes of complying with any Taxpayer Assistance Order issued pursuant to IRC § 7811.

Such clarification would be a relief for taxpayers in a world in which future shutdowns seem inevitable.  

IRS Updates “EZ Answer” Test Procedures for S Cases

At the recent Low-Income Taxpayer Clinic grantee conference, Keith and I were fortunate to hear from a distinguished panel of Tax Court judges discussing practice before the Court. During the panel, Special Trial Judge Leyden was asked about the most surprising thing she has learned since her 2016 transition from practitioner to judge. She commented that she has been dismayed by the sheer volume of cases that are dismissed for the petitioner’s failure to prosecute, and she encouraged participants in the Tax Court’s clinic program to suggest solutions that the Court might consider. The IRS “EZ Answer Test” may be one step towards ameliorating the problem.  

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In October of 2017, the IRS began a pilot program called EZ Answer Test. (AP-08-1017-0018, 10/20/17.) This test program allows IRS Counsel in certain offices to answer an S case without waiting to receive the Administrative File, if Counsel believes it does not need the administrative file to answer the petition. (The pilot does not apply to CDP cases.) The filing of an EZ Answer automatically transfers jurisdiction of the case to Appeals. Recently the IRS updated its EZ Answer Test procedures, tightening one of the timeframes and specifying additional procedures. (AP-08-1218-0016, 12/12/18).  

We have discussed issues relating to answers in Tax Court on PT before. In August Keith discussed updated guidance on handling premature petitions, which Bob Kamman had previously highlighted. 

The Court and IRS Chief Counsel would prefer to resolve cases on their merits. Unfortunately, the problem of nonresponsive petitioners stubbornly persists despite the combined efforts of the Court, IRS, and LITCs. As Judge Leyden noted, it is all too common for self-represented petitioners to drop out of their Tax Court cases and become nonresponsive at some point before trial. Sometimes previously-nonresponsive petitioners appear at Calendar Call if the case is not dismissed before that date, but other times petitioners seem to take no action at all after filing their petition.  

One notion that has gained some stakeholder support is that petitioners stand a better chance of remaining engaged if they are contacted early and often after filing their petition. Petitioners who do not hear anything about their case for several months at a time may give up or they may run into problems that make it difficult to remain engaged. For example, in many jurisdictions tenants can be evicted with very little notice. In Pennsylvania the law allows residential leases to provide for zero notice before an eviction action is filed in court. For someone facing a crisis like eviction with very little time to respond, the problem of keeping warm and safe may understandably occupy all of their time and energy. If the tenant has to move, documents may be lost or the taxpayer may not remember to update their address with the Court when they are able to find new housing. In other cases, taxpayers say that they  temporarily dropped off the radar due to health problems which consumed all of their attention. There are many other reasons.  

One of the main reasons for pretrial delays in S cases (between the filing of a petition and the IRS answer, and again from the filing of the answer to when Appeals contacts the taxpayer, and again from the time Appeals sends the case back to Counsel and when Counsel contacts the taxpayer) is that the IRS administrative file on the case must be physically moved from one office to another. Counsel needs the administrative file to Answer the petition. Then, most pro se cases are transferred to the Office of Appeals to attempt settlement. If the case does not settle in Appeals, the file is sent back to Counsel to prepare for trial. I do not know why the process of transferring the administrative file takes as long as it does, but I believe IRS Counsel when they say that they simply cannot get the file quickly. The IRM even has procedures for creating dummy files when the administrative file cannot reach Counsel in time to answer the case. (See IRM 8.4.1.8.1 (08-09-2011), Dummy File Procedures.)  

I doubt that increased taxpayer engagement was the only motivation behind the IRS’s “EZ Answer Test” program, but I hope the IRS will study taxpayer engagement in conjunction with the program to see if there is any improvement. Whatever the motivation, it is laudable that the IRS is attempting to reduce the time from when a case is filed to when an Appeals employee contacts the taxpayer and substantively engages them in an attempt to settle the case. Faster pretrial timeframes generally help to keep pro se taxpayers engaged, promoting several of the rights in the Taxpayer Bill of Rights including the Right to Quality Service, the Right to Challenge the IRS’s Position and Be Heard, and the Right to Appeal an IRS Decision in an Independent Forum, not to mention (perhaps most important) the Right to Pay No More than the Correct Amount of Tax.