Undesignated Orders: All in a Day’s Work for a Tax Court Judge

Today frequent guest blogger Bob Kamman takes us through a day in the life of a Tax Court judge, as viewed through the non-designated orders that occupy much of the Court’s day-to-day time. Christine

Much can be learned from the Designated Orders selected by Tax Court judges as noteworthy among the hundreds of orders issued each day. But sometimes we may learn just as much from those that are not designated. For examples, let’s shadow Judge David Gustafson for one day, as he works through his in-box to move cases along.

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These are all lessons from May 2, 2019. They include:

  1. A taxpayer (Augustine) hopes to get help from a Low-Income Taxpayer Clinic.
  2. A taxpayer (Pendse) wants a trial later this month because she will be out of the country for more than a year.
  3. Taxpayers (Emanouil) whose co-counsel wants to withdraw, but forgets to sign the motion.
  4. A taxpayer (Miruru) whose case was dismissed with tax deficiency upheld after failure to appear at trial and to respond to an IRS motion.
  5. A taxpayer (Baba) gets a second chance from IRS Appeals but has not confirmed he wants it.
  6. Taxpayers (Reuter and Stovall) have not returned proposed decision documents to IRS after a settlement seems to have been reached.
  7. A partnership (Cross Refined Coal) in whose case IRS has filed a motion to compel.
  8. A taxpayer (Insinga) in a 2013 whistleblower case, whose latest filing needs to be sealed without redactions.
  9. Taxpayers (Houchin) whose 2013 case will be continued again, as they and IRS requested, but not on Judge Gustafson’s calendar. (The docket shows a bankruptcy filing.)
  10. Taxpayers in two cases (Lugo, and Abdu-Shahid) in which IRS Counsel misfiled documents.

Darline Augustine, Docket 12248-18

Pro Se, New York

The Commissioner filed a motion for summary judgment (Doc. 7) in this “collection due process” (“CDP”) case. We ordered petitioner Darline Augustine to file a response by March 1, 2019, and we did our best to explain the nature of the IRS’s motion and what she should state in a response. (See Doc. 9.)

Ms. Augustine requested more time to submit her response (see Doc. 13), so we gave her until April 15, 2019 (see Doc. 14). On that date she filed a one sentence letter (Doc. 15) that did not respond substantively to the motion. By order of April 22, 2019 (Doc. 17), we allowed her to file a supplemental response by no later than May 6, 2019. On April 29, 2019, we received from Ms. Augustine another letter (Doc. 18), which informed us that she is getting the help of a Low Income Tax Clinic, and which states: “With regard to the reply to the summary judgment, I will have to get assistance from a low income legal service. I am not an attorney and legal language is quite opaque to me.” No attorney from an LITC has filed an entry of appearance in this case.

Ms. Augustine’s letters have asserted that she wants to appear before the Tax Court. Trials are conducted, however, to resolve disputes of fact. If there are no material facts that are disputed, then there is no need for a trial. The Commissioner’s motion purports to show that no trial is needed in this case because (the motion says) the undisputed facts show that the IRS is entitled to prevail. To preserve her opportunity for a trial, Ms. Augustine must show why we should not grant the Commissioner’s motion. We will give her one more opportunity to do so. It is

ORDERED that, no later than June 3, 2019, Ms. Augustine shall file any supplemental response to the Commissioner’s motion that she wishes to file. If she intends to obtain the assistance of an LITC, then she will need to obtain it in time to meet that deadline. In the absence of the entry of an appearance by an attorney representing Ms. Augustine, we would not expect to grant her any further extension of this deadline. It is further

ORDERED that, no later than June 24, 2019, the Commissioner shall file a reply to Ms. Augustine’s supplemental response, if she files one; or, if she does not file a supplemental response, then the Commissioner shall file a status report so stating.

Shona Pendse, Docket 25665-17

(Pro Se, Boston before taxpayer relocated)

Now before the Court is petitioner’s motion to calendar this case for trial this month. We will deny the motion.

This case was scheduled to be tried at a Boston session of this Court on April 1, 2019, but at the joint request of the parties, it was continued. The place of trial was changed to Washington, D.C., and the case was thereafter scheduled to be tried at a trial session beginning September 16, 2019. Petitioner wants a more prompt trial, and she says that she must be out of the country from June 2019 through August 2020. She therefore requested that the case be set for trial at a special trial session in Washington beginning May 21, 2019, at which the undersigned judge will coincidentally be presiding. Respondent objects. Counsel states that he received information from petitioner in April that prompted an inquiry by which he learned of a related refund case that is pending in U.S. district court, that involves a different taxpayer, and that is being handled by the U.S. Department of Justice. Counsel states that it is necessary to coordinate the two cases and that he cannot be ready for trial in this case in May 2019. Petitioner does not dispute the relatedness of the cases but maintains that respondent should have known about the related case already and should now be ready to proceed.

Even if we were otherwise inclined to grant petitioner’s motion, it might not be practical to try to fit this case into the special trial session beginning May 21, 2019. A special trial session is set based upon the anticipated situation and needs of the case being scheduled, and in this instance the other case set for that session is likely to use all of the available time in that session. Moreover, respondent’s counsel’s expressed need to coordinate this case with the refund case is plausible, and while perfect coordination of information between Chief Counsel and the various units of the IRS–and between Chief Counsel and the Department of Justice–might bring efficiencies, it would do so at a sometimes great cost, so we do not fault Chief Counsel nor his client agency for counsel’s unawareness of the related case before petitioner disclosed it to him.

Because we will deny the motion to calendar, this case remains on the calendar for the regular trial session in Washington, D.C., beginning September 16, 2019. However, we do not overlook petitioner’s scheduling difficulty with that trial session, and this order is without prejudice to any motion petitioner might make to continue this case from that trial session. We would consider any such motion on its merits. It is

ORDERED that petitioner’s motion to calendar is denied.

Peter C. & Pascale Emanouil, Docket 5089-17

(2-Day Trial in Boston, October 2018)

On April 25, 2019, an unopposed motion to withdraw as counsel of record was filed on behalf of Nicholas F. Casolaro. The motion states that co-counsel Richard M. Stone and Peter D. Anderson will continue as counsel for petitioners in this case. That motion, however, was not signed by Mr. Casolaro in compliance with Tax Court Rule 24(c), which requires that counsel seeking to withdraw his appearance must file a motion with the Court requesting leave to do so. It is therefore

ORDERED that, no later than May 7, 2019, counsel for petitioners shall file an amendment to the unopposed motion to withdraw bearing the signature of Mr. Casolaro in compliance with Rule 24(c).

Mbugua J. Miruru, Docket 25168-17

(New Hampshire, Pro Se)

When this case was called from the calendar for the Court’s March 11, 2019, Boston, Massachusetts, trial session, there was no appearance by or on behalf of petitioner Mbugua J. Miruru. Counsel for the Commissioner appeared and filed a motion to dismiss for lack of prosecution. In that motion, the Commissioner moves the Court to enter a decision with respect to Mr. Miruru in the amount for the tax year 2015 set forth therein. By order dated March 11, 2019 (served March 18, 2019), the Court directed Mr. Miruru to file a response to the Commissioner’s motion to dismiss on or before April 10, 2019. As of this date, the Court has received no response from Mr. Miruru. It is therefore

ORDERED that in addition to regular service, the Clerk of the Court shall serve a copy of this Order of Dismissal and Decision on Mr. Miruru at the additional address (in Bristol, New Hampshire) that appears on the certificate of service attached to the Commissioner’s motion. It is further

ORDERED that the Commissioner’s motion to dismiss for lack of prosecution is granted, and this case is dismissed for lack of prosecution. It is further

ORDERED AND DECIDED that there is a deficiency in income tax due from petitioner Mbugua J. Miruru for the tax year 2015 in the amount of $4,538.

Abu Baba, Docket 13186-18

(Virginia, Pro Se)

On April 26, 2019, the Commissioner filed two motions: (1) a motion for continuance [i.e., for a postponement] of the trial of this case, and (2) a motion for remand, in which it asks the Court to remand the case to the IRS’s Office of Appeals for further consideration. A continuance and remand would be welcome to many petitioners in a case such as this one, but the motions state that the Commissioner does not know whether petitioner Abu Baba objects to the motions. It is therefore

ORDERED that, no later than May 14, 2019, Mr. Baba shall file with the Court and serve on the Commissioner a response to the Commissioner’s two motions filed April 26, 2019.

Janet Ann Reuter & David Stovall, Docket 15641-17

(New York, Pro Se)

On May 1, 2019, the Commissioner filed a motion for entry of decision. The motion alleges that the parties have reached a basis of settlement and that counsel for the Commissioner sent to petitioners a proposed decision document effectuating that settlement, but indicates that petitioners have failed to return the decision document to counsel for the Commissioner. It is therefore

ORDERED that, if petitioners objects to the Commissioner’s motion for entry of decision, then on or before May 15, 2019, petitioners shall file with the Court and serve on the Commissioner a response to the motion, explaining why that motion should not be granted and a decision entered in this case.

Cross Refined Coal, LLC, Docket 19502-17

(Counsel for Both Parties in Chicago; Boston Trial Request)

On April 26, 2019, respondent filed a motion to compel (Doc. 50). It is

ORDERED that petitioner shall file a response by May 10, 2019, and that respondent shall file a reply by May 23, 2019.

Robert J. & Linda C. Houchin, Docket 27654-13

(Nevada; Counsel for Both Parties and Trial in Los Angeles)

In accordance with the parties’ joint recommendation in their status report filed April 29, 2019, it is

ORDERED that the undersigned judge no longer retains jurisdiction over this case and that this case is continued generally.

Joseph A. Insinga, Docket. 9011-13W

(New Jersey; Washington DC Trial)

(Petitioner Counsel in Memphis; IRS Counsel in Detroit)

 On April 26, 2019, petitioner filed a first amended reference list of redacted information (Doc. # 258). It is therefore

ORDERED petitioner’s first amended reference list of redacted information (Doc. 258), is sealed. It is further

ORDERED that the Clerk of the Court shall remove from the Court’s public record the first amended reference list of redacted information (Doc. 258), and that these documents shall be retained by the Court in a sealed file which shall not be inspected by any person or entity except by an Order of the Court.

Wanda M. Lugo, Docket 15028-18

(New York; Pro Se)

On May 1, 2019, the Commissioner mis-filed in this case a motion for extension of time (Doc. 10) that was obviously intended to be filed in another case. It is therefore

ORDERED that the Commissioner’s motion filed May 1, 2019 (Doc. 10), is stricken from the Court’s record in this case and shall not be viewable as part of this case.

Abdu-Shahid May, Docket 11654-18

(New York; Pro Se)

On May 1, 2019, the Commissioner mis-filed in this case a motion for extension of time (Doc. 12) that was obviously intended to be filed in another case. It is therefore

ORDERED that the Commissioner’s motion filed May 1, 2019 (Doc. 12), is stricken from the Court’s record in this case and shall not be viewable as part of this case.

What sort of day was it? “A day like all days, filled with those events that alter and illuminate our times… all things are as they were then, and you were there.” (If you were not a television viewer before 1972, you may not recognize that quotation from Walter Cronkite.) As this review demonstrates, a Tax Court judge in just one day may make a wide range of decisions –- for individuals and businesses disputing large amounts of tax and small ones; in collection due process matters; and even in whistleblower cases. Most of this work will not be found in published opinions and designated orders. What all of the cases have in common, though, is that each is the most important one before the Court, for the petitioner (and counsel, if any) involved.

Seeking Clarity from the IRS for Foreign Entities

Today we welcome first-time guest blogger R. D. David Young of RDDY Consulting LLC. David specializes in transaction structuring and global tax planning. Here David explains IRS’s planned changes to the EIN application process, and proposes clarifications that would be helpful for foreign entities in need of an EIN. Christine

As the IRS prepares to update its Employer Identification Number (EIN) application process to enhance security, it should also update the process to add some needed clarity for foreign entities.

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The IRS announced on March 27, 2019 that it is revising its EIN application process to enhance security. As part of that process, the IRS indicated that starting May 13 only individuals with tax identification numbers may request an EIN. The announcement indicated that the change will provide greater security to the EIN application process by prohibiting entities from being “responsible parties” and using their own EINs to obtain additional EINs. Interestingly, since December 2017, the only entities that have been permitted to utilize their own EIN to obtain additional EINs are government entities, so it is unclear what security issue the IRS is seeking to address.

Clarification for Responsible Parties Ineligible to Obtain SSN or ITIN

While the details of the specific changes to the EIN application process aren’t yet available, if the revised process will truly allow only individuals with tax identification numbers to request an EIN as the responsible party, the revised process could make obtaining EIN’s more challenging for many foreign entities. Under the current EIN application process, if a responsible party of an entity does not have and is ineligible to obtain a social security number (SSN) or individual taxpayer identification number (ITIN), as is the case for responsible parties of many foreign entities, the instructions provide that they should leave line 7b (which requests the SSN, ITIN, or EIN of the responsible party) blank. It is possible that the IRS will continue to allow a responsible party that does not have and is ineligible to obtain an SSN or ITIN to leave line 7b blank, but clarification on this point would be welcomed.

Clarification of “Foreign Equivalent” of a Limited Liability Company

While the IRS is revising the EIN application process, another clarification that would be welcomed is with respect to the definition “foreign equivalent” of a limited liability company. Line 8a of Form SS-4 asks the question, “Is this application for a limited liability company (LLC) (or a foreign equivalent)?” The term “foreign equivalent” is not defined in the instructions to Form SS-4 and an applicant is instructed to “see Form 8832 and its instructions.” Unfortunately, instructions to Form 8832 are no more enlightening.

The instructions to Form 8832 correctly provide that a foreign eligible entity’s default characterization is an association taxable as a corporation if all members have limited liability, and either a disregarded entity or a partnership if the single owner, or at least one member, does not have limited liability, respectively. However, the term “foreign equivalent” does not appear in the instructions to Form 8832, leaving one to divine what the IRS means by its use of the term “foreign equivalent” on Line 8a of Form SS-4.

Since the hallmark of an LLC formed in the United States is generally that no member is obligated personally for any liability of the LLC solely by reason of being a member of the LLC, one would be reasonable in concluding that the “foreign equivalent” of a domestic LLC must be a foreign entity in which no member is obligated personally for any liability of the foreign entity solely by reason of being a member of the foreign entity.  Applying the default classification rules to such an entity results in such “foreign equivalent” being treated as an association taxable as a corporation. However, where such a foreign entity (such as a Cayman Islands LLC or a UK Private Limited Company) intuitively answers “yes” to Line 8a and identifies the appropriate default classification of such an entity as a corporation on Line 9a, such entity will be surprised to receive an EIN acceptance letter indicating that the IRS has assigned the entity an EIN as a disregarded entity or a partnership depending on the number of members.

Surprisingly, when processing Forms SS-4, the IRS interprets the term “foreign equivalent” to refer to a foreign eligible entity in which the single owner or at least one member does NOT have limited liability (precisely not the “equivalent” to a domestic LLC). The IRS appears to interpret “foreign equivalent” to mean a foreign eligible entity that has a default classification that is equivalent to the default classification of a domestic LLC. This interpretation ignores the fact that the default classification of a foreign eligible entity in which all members have limited liability is not equivalent to the default classification of a domestic LLC in which all members have limited liability.

Given that the IRS applies such a strained and counterintuitive interpretation of the term “foreign equivalent” to processing applications for EINs, the IRS should update the instructions for Form SS-4 to clearly explain that the IRS interprets the term “foreign equivalent” to mean a foreign eligible entity in which the single owner or at least one member does NOT have limited liability.

When A Promise to Pay Is Not A Debt

In this post, frequent guest blogger Bob Kamman provocatively explores possible links between the Thrift Savings Plan, tax refunds, and the federal debt limit. Christine

An army of accountants and lawyers is standing by while its employer cooks the books of their pension plan, but it’s nothing you should expect a special prosecutor to investigate.

That’s because their employer is the federal government, and the consent of IRS professionals along with all of their colleagues in other agencies and the military who participate in the Thrift Savings Plan was never requested. Like a shutdown with mandatory work hours, they have to take it or leave.

This situation arose when the federal debt limit returned on March 2, after being suspended for a year. Congress has told the Treasury not to borrow any more money. However, Congress has also told the government to spend more money than it collects. Treasury has a solution to this paradox, at least for the short term. It makes a side deal, off the books, with the employees who pay into the federal equivalent of a 401(k) retirement savings plan.

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The Thrift Savings Plan (TSP), created in 1986, allows investments in several funds based on the stock or bond markets. The most popular is the “G” fund, which invests in a special variable-rate United States Treasury bond. Last year its rate of return was 2.91%. Today it earns 2.50%.

What could be safer than Treasury bonds, right? But right now the Treasury can’t issue those bonds, because of the pesky debt limit. So Treasury simply promises to sell them to TSP just as soon as Congress allows. Meanwhile, accounts are credited with interest as if these phantom bonds really existed. For those who want to withdraw their funds or take out an allowable loan, the account value includes this phantom interest.

On March 5, the Thrift Savings Plan assured federal employees that the TSP money in their “G” spot was safe. It issued a statement:

As of Tuesday, March 5, 2019, the U.S. Treasury was unable to fully invest the Government Securities Investment (G) Fund due to the statutory ceiling on the federal debt. However, G Fund investors remain fully protected and G Fund earnings are fully guaranteed by the federal government. This statutory guarantee has effectively protected G Fund investors many times over the past 30 years. G Fund account balances will continue to accrue earnings and will be updated each business day, and loans and withdrawals will be unaffected.

Further details on this scheme are provided in an article on the Govsmith website.

Why does this matter to tax law practitioners? Maybe it doesn’t. But in my mind, it’s a useful reminder that federal government employees, including those at IRS with whom we occasionally interact, face different challenges from many of the rest of us.

More importantly, the future of the IRS depends on recruiting qualified professionals to protect the Treasury’s revenue without violating taxpayer rights. The IRS “brain drain” is a real problem. The GAO recently reported that attrition is causing a serious risk to the IRS mission:

IRS officials told GAO that resource constraints and fewer staff with strategic workforce planning skills due to attrition required IRS to largely abandon strategic workforce planning activities. …

IRS staffing has declined each year since 2011, and declines have been uneven across different mission areas. GAO found the reductions have been most significant among those who performed enforcement activities, where staffing declined by around 27 percent (fiscal years 2011 through 2017). IRS attributed staffing declines primarily to a policy decision to strictly limit hiring. Agency officials told GAO that declining staffing was a key contributor in decisions to scale back activities in a number of program and operational areas, particularly in enforcement, where the number of individual returns audited from fiscal years 2011 through 2017 declined by nearly 40 percent.

While reduced budgets and government shutdowns bear most of the responsibility for the IRS brain drain, underfunding the Thrift Savings Plan can only make matters worse. Imagine a Chief Counsel recruiter at a law school campus, trying to answer questions about this make-believe bookkeeping.

On the other hand, the Thrift Savings Plan might be easier to sell because it is guided by BlackRock, one of the world’s largest money managers with nearly $6 trillion of assets under supervision. BlackRock recently disclosed  that its funds have an $11 million stake in Curaleaf Holdings, a Massachusetts-based medical cannabis company.

TSP does not yet have a W fund, for investments in the marijuana industry. But to my knowledge, no one has yet ruled it out.

Meanwhile, I am still wondering whether a record $45 billion in tax refunds was paid out on February 27, as I reported here, because the new debt limit was based on how much the federal government owed on March 1. Did Treasury tell IRS to clean out the bank account because the balance sheet needed to show as little cash as possible?

My suspicions grew when I saw the refund check my clients received that was dated March 1, based on an amended return they had filed in August. The explanation for the refund (“this is what you asked for with the amended return”) was not dated and mailed until March 11. Checks seldom arrive at the same time as the notices that explain them, but a ten-day lag seems unusual.

But I digress. At some point federal employees’ tolerance for TSP shenanigans may grow thin. Congress cannot afford to worsen the already critical brain drain at our nation’s revenue collection agency.

Sixth Circuit Remands Wrongful Levy SOL Dispute: Did IRS’s 2012 Levy Attach to 2016 Payments?

Today we welcome first-time guest blogger Matthew Hutchens. Hutch has several years’ experience as a low-income tax clinic attorney with Indiana Legal Services. He is now a lecturer of accountancy at the University of Illinois Gies College of Business. With co-author Erin Stearns, Hutch is currently updating the lien and levy chapters of Effectively Representing Your Client Before the IRS.  Today he discusses a recent Sixth Circuit opinion analyzing the timeframe for filing a wrongful levy action, in a dispute over whether a past levy attached to recent payments owed to the taxpayer by their alleged alter ego. Guest blogger Lavar Taylor has explained the procedural barriers that alleged nominees and alter egos face in contesting IRS levies. In this case the Sixth Circuit declined to increase those barriers. Christine

Plaintiffs often face difficulties in meeting the statute of limitation deadlines in civil suits against the United States for improper tax collection action. But recently, the Sixth Circuit, in Gold Forever Music, Inc. v. United States, landed a third party a victory on the statute of limitations for an IRC Section 7426(a)(1) claim, which is the Code provision that allows innocent third parties to seek a return of property wrongfully levied to satisfy the tax debts of another taxpayer. Here, the third party, Gold Forever Music (Gold Forever), persuaded the court to vacate a district court’s dismissal based on the limitations period having expired prior to filing of the lawsuit. 

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Wrongful Levy Suits Background

In fiscal year 2017, the IRS served almost 600,000 levy requests according to the IRS Data Book. While this number has decreased substantially in recent years (there were over 1.4 million such levy requests in FY2015), the levy power does provide many opportunities for the IRS to seize property not owned by the liable taxpayer, but instead by an innocent third party.

In the event the innocent third party is aware of the potential issuance of a notice of levy, that party can attempt to convince a Revenue Officer that such property does not belong to the taxpayer. However, until the issuance of a notice of levy, the innocent third party likely has no advance knowledge of the IRS’s plans. 

Then, at the point the notice of levy is issued, it is likely fruitless for the innocent third party to attempt to convince the recipient of the levy to not turn over property to the government because Section 6332(d)(1) imposes personal liability on individuals who fail to remit property pursuant to a levy. As an additional incentive, Section 6332(e) provides the party surrendering the property with immunity against liability from any other party.

When a levy is issued, it attaches to a taxpayer’s entire interest in property unless the property is exempt. For payments that will arise after the issuance of the levy, the levy attaches to all amounts that are fixed and determinable at the time of levy. Examples of future payment streams that are potentially fixed and determinable include retirement benefits, pensions, interest payments, and—as in Gold Forever—royalty payments.

Once the levy is issued—regardless of whether property is actually surrendered—the third party has the option to file an administrative claim for wrongful levy with the IRS. Such a written request is required if damages beyond just a return of the levied property are sought. If the claim is unsuccessful or no claim is filed, the third party can bring a civil suit against the United States. For innocent third parties who have property levied by the IRS to satisfy another taxpayer’s liability, a suit against the United States under Section 7426(a) is the only judicial remedy available.

Prior to the 2017 tax act (a.k.a. TCJA), the limitations period (found in Section 6532(c)) for a return of wrongfully levied property action was a mere nine months from the date of the levy, which is the period applicable in Gold Forever. The TCJA extended this period to two years for new levies and for levies where the nine month period had not expired as of the date of the TCJA’s enactment. In cases where the third party makes a timely administrative claim for a return of levied property, the limitations period is extended until the earlier of twelve months from the date of filing the claim or six months from the IRS’s notice of disallowance.

Facts of the Case

Gold Forever is a music publisher owned by Edward Holland, Jr. Holland is famous for being a member of the Holland-Dozier-Holland songwriting and production team responsible for several hits from Motown’s top artists. Mr. Holland also owed the government over $19 million in unpaid taxes.

Gold Forever licensed its music catalog to Broadcast Music, Inc. (BMI) and Universal Music Publishing (Universal) and in exchange, received royalty payments. Due to this arrangement, the IRS issued notices of levy to BMI and Universal in August 2012 under the theory that Gold Forever was either the alter ego or nominee of Edward Holland. Soon after the notices of levy were issued, BMI and Universal began remitting payments to the IRS and this apparently continued for several years without any action by Gold Forever (although there was some dispute about the extent to which payments were made during this period).

In the present litigation, Gold Forever has denied ever being an alter ego or nominee of Mr. Holland and claimed that the majority of levied royalty payments were meant for other artists and not Mr. Holland. In addition, at oral argument before the Sixth Circuit, the attorney for Gold Forever speculated that the inaction on the levy from Gold Forever was due to a belief that the amounts due to it under the contracts with BMI and Universal were not worth litigating over.  

However, by 2016 and 2017, when BMI and Universal made additional royalty payments totaling almost $1 million to the IRS pursuant to the levy, Gold Forever decided to bring the Section 7426(a)(1) challenge in the Eastern District of Michigan seeking a return of those 2016 and 2017 payments.

District Court Proceedings

In district court, Gold Forever alleged that the 2016 and 2017 royalty payments were not amounts that were fixed and determinable as of August 2012 levies. Thus, the 2012 notices of levy could not have attached to these payments. Therefore, the IRS’s seizure of the 2016 and 2017 royalty payments could not have been pursuant to the 2012 notices of levy. Instead, the seizure of these payments should be viewed as a new, constructive levy, starting the limitations period for a wrongful levy claim anew and making Gold Forever’s action timely (although this argument was framed in the somewhat confusing context of what is “the meaning of the word levy”). Gold Forever also noted the due process issues that would arise if the government were able to seize after-acquired property with no post-deprivation opportunity to dispute the taking.

In response, the government’s argument was very straightforward. The notices of levy occurred in August 2012. Thus, because an administrative claim was not filed during the months after the notice of levy, the limitations expired nine months later in mid-2013. The code and regulations are quite clear that a notice of levy starts the limitations period. Section 6532(c) calculates the limitations period from “the date of the levy” and Treas. Reg. Section 301.6331-1(c) provides that the date of the levy is the date on which a mailed notice of levy is delivered. Section 7426(a)(1) itself notes that a wrongful levy action may be brought “whether such property has been surrendered.”

The government also contended that whether the 2012 levy notices actually attached to the 2016 or 2017 royalties was irrelevant. According to the government, because the royalty payments were surrendered pursuant to the 2012 notices of levy, those notices of levy started the limitations period.

The district court appears to have missed the underlying substance of Gold Forever’s argument that the 2012 notices of levy did not attach to the 2016 and 2017 payments and the later seizure of those funds should be viewed as a separate levy distinct from the 2012 notices of levy. Instead, the district court summarized Gold Forever’s position as one that revolved around word meanings, stating “Plaintiff argues that ‘the date of the levy’ may also refer to the date of a seizure, namely the funds paid in 2016 and 2017.” Based on this understanding, the court easily found for the government and determined that a notice of levy, not the actual seizure, starts the limitations period. The court did not discuss whether the 2012 levies attached to the 2016 and 2017 payments and whether the remittance of those funds—if not reached by the 2012 levies—could constitute a new constructive levy.    

Sixth Circuit

At the appellate level, it appears the government began to appreciate that whether the 2012 levy attached to the 2016 and 2017 payments could actually matter. At oral argument, counsel for the government acknowledged that there was insufficient information in the record below to determine whether the 2016 and 2017 royalty payments were fixed and determinable at the time of the 2012 levies.

Nonetheless, the government contended that Gold Forever could have filed a wrongful levy suit within nine months of the 2012 notices of levy to determine “whether the levy attached to its royalty rights.” Gold Forever, quite rightly in my opinion, pointed out the problems of the government’s argument that taxpayers should litigate the scope of a notice of levy to avoid the possibility of the IRS wrongfully using that levy to seize property in the future to which the government was not entitled.  

Alternatively, the government argued that if the levy did not reach the 2016 and 2017 payments to the government, then those amounts remitted to the IRS “were voluntary payments that cannot be recovered in a wrongful levy suit.” Instead of a wrongful levy suit, the government suggested Gold Forever’s only judicial remedy would be a third party civil action for release of an erroneous lien under Section 7426(a)(4), which would require a deposit by the taxpayer, contains much tighter deadlines, and – conveniently for the government in this case—would preclude the recovery of payments already made.

Again, this second argument from the government is quite troubling. Section 7426(h) authorizes additional damages in cases where an IRS employee negligently, recklessly, or intentionally takes a collection action in violation of the IRC. It would be an odd result if an IRS employee could knowingly demand after-acquired property be turned over pursuant to a notice of levy and then deprive the third party from being able to bring a suit for the return of the property because such payment was actually “voluntary.” It is further problematic in that the IRS would likely be using the carrot and stick provisions of immunity and personal liability under Section 6332 to convince parties to turn over property pursuant to a notice of levy and then later flip-flopping to argue it was not a levy at all.

In ruling for Gold Forever, the Sixth Circuit held that there was insufficient evidence in the record to determine whether the 2016 and 2017 royalties were fixed and determinable, and that whether they were would determine the outcome of the statute of limitations issue. The court explained:

Determining whether the 2012 levies attached to royalties acquired after the notices of levy is necessary to finding when the limitations period began to run for a wrongful levy action on those royalties. The government insists, without explanation, that determining the scope of the 2012 levies affects only the relief that could be awarded in the wrongful levy action and that considering the scope of the levies conflates “the statute of limitations with the merits of the claim.” The government’s concern is misplaced. Whether the levy attached to property is not part of the merits of a wrongful levy action—i.e., that the levy was made on property or a right to property in which the non-taxpayer has an interest. See Nat’l Bank of Commerce, 472 U.S. at 739 (quoting United States v. Rodgers, 461 U.S. 677, 695 (1983)). A levy attaching to property or the right to property is necessarily antecedent for the statute of limitations to begin running on a wrongful levy action concerning that property.

As for the government’s alternative argument that there could have been no levy if the 2012 notices did not attach to the 2016 and 2017 royalties, the court declined review since it was raised on appeal for the first time.

Final Thoughts

On remand, it will be interesting to see whether Gold Forever can convince the Court that the 2016 and 2017 royalty payments were not fixed and determinable at the time of the 2012 notices of levy. Nevertheless, it seems this is an issue a third party should have the opportunity to litigate. Otherwise, the possibility of improper IRS collection action pursuant to previously issued notices of levies would go potentially unchecked.

This case stands as good reminder for anyone who has a stream of payments currently being levied (and who might believe the applicable limitations period has passed) to take a closer look to confirm whether property levied today was a fixed and determinable amount at the date of the notice of levy. 

Additionally, when the IRS issues a notice of levy, parties should carefully evaluate what property is fixed and determinable at the time of the levy. And Gold Forever’s current litigation should cause third parties to at least consider proactive litigation under Section 7426(a)(1), even when the monetary amounts at stake appear small, if there is a possibility of increased payments at a future date. After all, if Gold Forever had prevailed in a suit in 2012 or 2013 under the theory that it was not an alter ego or nominee of Mr. Holland, the company would have avoided the after-acquired property issue of the 2016 and 2017 payments altogether.

Finally, if you happen to find yourself streaming Motown classics on your favorite streaming service, you can feel a little extra patriotic knowing that—at least for the time being—some of those royalties payments are going to help put a dent in those ever-increasing annual federal deficits.

How Will IRS and Taxpayers Deal with the Administration’s Newfound View that the Entire ACA Is Unconstitutional?

Today we welcome back guest poster Tom Greenaway. Tom is a principal in KPMG’s Tax Controversy Services practice. Tom raises a question about a potential collateral consequence of the Administration’s new litigating position in the ongoing Affordable Care Act litigation. For background on the case and additional implications, I recommend Katie Keith’s Health Affairs blog post. Christine

Last week the Department of Justice signaled that the United States now thinks that the entire Affordable Care Act (Obamacare) is unconstitutional, in a filing in the Texas v. United States case. Eventually that position will be tested and decided by the appellate courts–again–but in the meantime, what will federal agencies like the IRS do?

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For instance, the 3.8 percent tax on net investment income was added to the Internal Revenue Code by the ACA. It generates about $20 billion in revenue each year. Will IRS put out guidance saying that taxpayers don’t need to pay that tax anymore? Doubtful.

Generally, both practitioners and the IRS dismiss, as frivolous, arguments that the federal tax laws are unconstitutional.

Nevertheless, some taxpayers may take the view that if both a district court and DOJ think the entire ACA is unconstitutional, there must be at least a reasonable basis, if not substantial authority, for that position. If so, taxpayers who decline to pay net investment income tax this filing season may avoid penalties in the event that they (and the administration) are proven wrong on the constitutional question.

Does it seem fair for the IRS to impose accuracy-related penalties on taxpayers who take the exact same position on an issue as DOJ?

______________________________________________________________________________

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

©2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Damages for Lost Tax Documents = Refund Claim?

We welcome back guest blogger Sarah Lora, Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon. Today Sarah (with the help of 3L Katelynn Clements of Lewis and Clark Law School) examines a recent federal district court decision from Colorado. She argues that the court wrongly categorized a tort claim against the Transportation Security Administration as a tax refund claim, and so should not have dismissed the case for lack of jurisdiction. As we have discussed before on PT, the prerequisites to a successful tax refund suit are insurmountable for many taxpayers. Sarah points out that the taxpayer here may actually have a chance with the IRS. The record does not tell us if he’s tried that route yet. Christine

If the TSA removes from luggage and negligently misplaces tax papers that are essential to prove your claim for refund, sorry friend, you are out of luck. This, according to the federal district court in Schlieker v. Transportation Safety Administration, is the state of the law.

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On February 17, 2016, Mr. John Schlieker flew from Phoenix to Denver on Southwest Airlines. According to his complaint and documents attached to it, Mr. Schlieker checked luggage that contained “a multitude of green hanging files containing manila folders filled with documenting receipts, paperwork, check registers, charitable contribution receipts, medical and dental receipts, property interest confirmation; all the things needed to appropriately file [his 2015] tax return.” When he arrived in Denver, instead of those documents, Mr. Schlieker found a TSA notice of bag inspection stating that his bag “was among those selected for physical inspection.”

On May 19, 2016, Mr. Schlieker filed a claim for damage with the TSA for $5,000, representing the amount of refund he estimated he could have obtained had the TSA not misplaced his papers. TSA sent Mr. Schlieker a letter on December 1, 2016 denying his claim “after careful evaluation of all the evidence” and directing him to file a lawsuit in U.S. District Court if he was dissatisfied with the denial. Mr. Schlieker was dissatisfied. He then filed a lawsuit in the U.S. District Court for the District of Colorado against the TSA under the Federal Tort Claims Act for $5,000.

The court dismissed the lawsuit holding it lacked subject matter jurisdiction because Mr. Schlieker did not claim the refund with the IRS first. Assuming that the allegations in his complaint are true, as the law requires when considering a motion to dismiss, the papers that the TSA lost were necessary to file a claim for refund. Mr. Schlieker stated in his complaint that he could not “completely, honestly, and truthfully” sign a return claiming the refund without the papers the TSA took. How could he file a claim for tax refund when the TSA took the very documents he needed to assert the claim?

Mr. Shlieker’s actions are not unique. In many cases, even for sole proprietorships, a taxpayer may not keep any “books” detailing their profits, losses, or expenses. Instead, the taxpayer will save receipts and other records throughout the year which they then give to their tax preparer every April. This is not ideal, but it happens routinely.

Citing I.R.C. § 7422(a) and a long list of cases dismissing suits based on that statute, the court reasoned that Mr. Schlieker’s lawsuit was really a claim for a tax refund and should therefore be dismissed. The statute reads:

No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary [of the Treasury], according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

The cases the court cites, which cite this statute as the reason for their decision to dismiss, fall into two inapposite categories. The first are cases in which a third party, either an employer or an airline, is acting as an agent of the IRS to collect and pay over taxes. In those cases, the courts have held that § 7422(a) protects those agents, who are required by statute to collect taxes for the government under threat of criminal penalty for failure to do so, from civil lawsuits relating to the collection of those taxes. Sigmon v. Southwest Airlines (dismissing class action against Southwest for improperly charging excise taxes to passengers); see also Kaucky v. Southwest Airlines (same); Chalfin v. St. Joseph’s Healthcare Sys. (dismissing case against employer who improperly withheld FICA from medical residents working at a hospital).

In Mr. Schlieker’s case, the TSA was not acting as an agent of the IRS to collect and pay over taxes. It did not confiscate Mr. Schlieker’s documents in order to perform some duty it believed it owed to the IRS. Assuming the allegations in the complaint are true, the TSA committed a tort, plain and simple, when it took Mr. Schlieker’s documents out of his luggage and did not return them. For that reason, those agency cases are not persuasive.

The second group of cases hold that plaintiff must timely exhaust administrative remedies, by filing a claim for refund, prior to filing suit for the refund of taxes. See United States v. Clintwood Elkhorn Mining Co; United States v. Dalm; Strategic Hous. Fin. Corp. v. United States. The court misses the mark with this line of cases as well. TSA, by means of tortious conduct, took the means for filing a claim for refund away from Mr. Schlieker. To require Mr. Schlieker to file a return without supporting documents violates the letter of IRC §7206(1):

any person who . . . [w]illfully makes and subscribes any return, statement or other document which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe true and correct as to every material matter . . . shall be guilty of a felony. . . .

In reality, even if Mr. Schlieker’s claim survived the initial motion to dismiss, he still might have lost or received only limited damages. In a case like this, TSA may argue that its seizure of the records was not the proximate cause of Mr. Schlieker’s loss. After all, with today’s technology, could he not have reconstructed his records well enough to file his tax return? Copies of bank records, dental and medical bills, mortgage interest paid, etc. are likely readily available online. I do not see much in the multitude of green hanging files that he could not replace with some headache and hassle. It is possible he could still get those documents and file his claim for refund before April 15, 2019. Perhaps the damages in a case like this should be measured by the cost to replace the documents, a reasonable estimate of the lost refund attributable to any irreplaceable documents, and perhaps any non-economic damages such as emotional distress.

Refund checks, and other “news” inspired by the IRS

We welcome back guest blogger Bob Kamman. Today Bob delves into the “real-time” tax return statistics available during the filing season. Christine

You might remember February 27, 2019 as the day of a House committee hearing in Washington, or a summit meeting in Hanoi. But for millions of Americans, it was Jackpot Wednesday, when the Treasury made, in one day, seventeen percent of the Form 1040-related payments it will issue all filing season.

The news media have been fascinated more than usual this year by IRS refund checks. They simply disregard that in many cases they are not refunds, and in most cases they are not checks.

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So let’s agree that when we read about “refund checks,” we know what the journalists and IRS itself mean are largely electronic deposits to individual bank accounts, often representing credits claimed by people who pay no federal income tax.

For actual taxpayers, 2019 refund amounts may be more or less than those of previous years because of changes both to tax law, and to the way that wage and pension withholding is calculated. There is anecdotal evidence, and nothing else, that many are receiving smaller amounts.

But for those whose annual budget relies on the earned income credit or the child tax credit, the annual concern is whether IRS will question eligibility and sequester payments until it is sure that there is no fraud or mistake involved. That’s why the February 27 mass payout of $45 billion was good news for the poor and for those who help them with tax procedure.

Last filing season, IRS paid out about $265 billion in “refunds” through April 20. IRS will tell you once a week, how many returns it had processed cumulatively through the previous week. But Treasury will tell you by this afternoon, how much tax money it collected and how much in IRS payouts it made yesterday; so far this month; and to date this fiscal year. The data can be found online in the Daily Treasury Statement.

There is a lag between when IRS counts a refund return, and when Treasury makes the payment. That’s why the IRS weekly report for Friday, February 22, showed a huge increase in refunds, while the Treasury report for February 22 still showed a lag. The following week’s $45-billion payout explained the IRS calculation.

Treasury does not report the number of payments, just the amount. So we must rely on IRS for the “average refund” figure, which answers the question: “Of those who get refunds, what is the average amount?” This figure does not attempt to answer the question: “Of those who file returns, how many owe nothing or must pay?”

However, the March 1, 2019 IRS report shows that the number of refunds was 81.6% of the total returns processed. This was down slightly from 82.1% in the comparable report from March 2, 2018. Half a percentage point is not that much unless you filed one of the 650,000 or so returns which that number represents. Elections have been decided by smaller margins.

IRS does not tell us, until much later this year or next, how many returns showed no tax owed. Nor does it report the average payment with balance-due returns. What we do know from the Daily Treasury Statement is how much money was deposited into its account at the Federal Reserve. (This number also includes employment taxes not paid through the “Federal Tax Deposit” system, but those are mostly from small employers.)

Through March 7, the total “individual income and employment taxes, not withheld” for the fiscal year that began October 1 was $125.3 billion. The comparable amount for the previous year was $123.7 billion. But keep in mind that IRS offers a “file now, pay later” option for electronic filers. Taxpayers can request the balance due be withdrawn from their account on a certain date – for example, April 15. Last year, tax returns were due on Tuesday, April 17. The one-day count on that date for this category was $28.1 billion. The next three days, the checks continued falling out of the envelopes: $11.6 billion on Wednesday, $11.8 billion on Thursday, and $15.2 billion on Friday.

While the weekly IRS reports shed little light on collections, they raise a couple of interesting questions about tax administration. For example:

1) Where have all the practitioners gone?

Through March 1, 2019, the returns prepared by tax professionals had dropped by 1.7 million, or 5.8%. Meanwhile, self-prepared returns had increased by about 371,000. Does this mean the new 1040 forms, and higher standard deduction, have made do-it-yourself an option for more people? Are improvements in commercial software responsible? Are more kitchen-table preparers just refusing to sign off on their work because of the Form 8867 “due diligence checklist” interrogatories?

2) Why did direct-deposit become so popular?

Last year, about 84% of refunds were deposited directly to taxpayer accounts. So far this year, the rate is about 93%. Do Americans trust the financial-services industry more, or the Post Office less?

The Daily Treasury Statement provides some interesting information about tax-related issues, as well. For example:

  • Customs “and certain excise taxes” collected for the fiscal year through March 7 were $35.3 billion, up from $20.3 billion for the same period last year. What could the Treasury do with an extra $15 billion? Well, corporation income tax FTD receipts were down from $94.1 billion to $73.5 billion.
  • FTD’s for “withheld income and employment taxes” are holding steady at $1.108 trillion through March 7, about the same as $1.120 trillion last year.
  • The “Treasury Offset Program” collected nearly $3 million in February from tax refunds that would otherwise have been paid to people who owe federal, state or child-support debts. The amount for February 2018 was $2.4 million.
  • Social Security benefit payments increased from $72.35 billion in February 2018 to $76.83 billion in February 2019. Some of that 6.2% growth can be explained by the 2.8% “cost of living adjustment” this year.
  • “Business” tax refunds so far this fiscal year total $28.9 million, and more than half of them were paid by check, not direct deposit. The comparable amount for FY 2018 is $35.4 million.

How reliable are any of these reports? My confidence was somewhat shaken by the Daily Treasury Statement for Friday, March 8, which showed a negative $32 million for “IRS Tax Refunds Individual (EFT).” A footnote explained, “reported as a negative amount due to a return/reversal of $32 million.”

Well, I suppose if some economists can advocate a negative income tax, others can support a negative income tax refund.

TIGTA’s Report on the Growing Gig Economy

Today we welcome guest blogger Joseph C. Dugan. Joseph is a 2015 graduate of Indiana University Maurer School of Law. During law school, he coordinated IU’s IRS VITA program and worked part-time at a Low-Income Taxpayer Clinic. After graduating, Joseph clerked on the U.S. District Court for the District of Maryland and the U.S. Court of Appeals for the Seventh Circuit before assuming his present position as a trial attorney with the Federal Programs Branch of the Department of Justice, Civil Division. Joseph lives in Maryland with his wife and four-month-old son. Joseph writes in his individual capacity and does not purport to represent the views of the Department of Justice or any of its components.

 This post originally appeared here on the Surly Subgroup blog. We highly recommend adding it to your regular blog reads. Christine

On February 14, 2019, the Treasury Inspector General for Tax Administration (TIGTA) released a Valentine’s Day treat: a comprehensive report following a TIGTA audit concerning self-employment tax compliance by taxpayers in the emerging “gig economy.”

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As Forbes noted last year, over one-third of American workers participate in the gig economy, doing freelance or part-time work to supplement their regular incomes or stringing together a series of “gigs” to displace traditional employment. Popular gig services include ride-sharing giants Uber and Lyft; arts-and-crafts hub Etsy; food delivery services GrubHub and Postmates; and domestic support networks Care.com and TaskRabbit. Even Amazon.com, the second-largest retailer in the world and a traditional employer to many thousands of workers in Seattle and at Amazon distribution centers worldwide, has gotten in on the gig economy with its Amazon Flex service. And for those interested in more professional work experience to pad their resumes, Fiverr connects businesses with freelance copywriters, marketers, and graphic designers. The power of smartphones and social media, coupled with flat wage growth in recent years, makes the digital side hustle appealing and, for many households, necessary.

From a tax revenue perspective, the gig economy is great: it is creating billions of dollars of additional wealth and helping to replenish government coffers that the so-called Tax Cuts and Jobs Act (TCJA) has left a little emptier than usual. From a tax compliance perspective, however, the gig economy presents new challenges. Gig payers generally treat their workers as independent contractors, which means that the payers do not withhold income tax and do not pay the employer portion of FICA. Instead, the contractor is required to remit quarterly estimated income tax payments to the IRS and to pay the regressive self-employment tax, which works out to 15.3% on the first $128,400 in net earnings during TY2018, and 2.9% to 3.8% on additional net earnings. That self-employment tax applies even for low-income freelancers (i.e., it cannot be canceled out by the standard deduction or nonrefundable credits).

While the proper classification of gig workers is a legal question subject to some debate, platforms hiring these workers generally treat them as independent contractors. Taxpayers new to the gig economy and unfamiliar with Schedules C and SE may not be aware of their self-employment tax obligations. If they are aware, they may not be too eager to pay, especially if back-of-the-envelope planning during the tax year failed to account for this additional, costly tax.

In light of this emerging economic narrative and evidence that the portion of the Tax Gap attributable to self-employment tax underreporting is on the rise, TIGTA undertook an audit. TIGTA identified a population of 3,779,329 taxpayers who received a Form 1099-K (an information return commonly used by gig economy payers, as discussed below) from one of nine major payers between TY2012 and TY2016. The audit found that 25% of those taxpayers did not report income on either Schedule C (where self-employment income should be reported) or Form 1040 line 21 (where self-employment income is often incorrectly reported). The TIGTA audit further found that, after adjusting for taxpayers who filed Schedule C with a profit of less than $400 (who may not owe self-employment tax) and taxpayers who earned less than $400 on combined Forms 1099-K received by the IRS, 13% of taxpayers did not file a Schedule SE and did not pay self-employment taxes.

These TIGTA findings are revealing. As Leandra Lederman and I discuss in a forthcoming article, Information Matters in Tax Enforcement, there is a host of evidence that information reporting increases tax compliance. As a suggestive starting point, according to IRS statistics, the voluntary individual compliance rate for income subject to substantial information reporting is 93%, while the voluntary individual compliance rate for income subject to little or no reporting is under 37%. TIGTA’s report does not provide percentages that permit a direct comparison with overall IRS compliance estimates. However, the high rates of complete failure to report income tax and employment tax by gig workers receiving a 1099-K seem to suggest that the 1099-K requirement is not as effective as its drafters hoped. Given the transparency of the earnings to the IRS, a likely explanation for this failure is that some gig workers simply do not understand their tax obligations.

But there’s another problem: a substantial amount of gig income is not clearly subject to an information reporting requirement at all. Back in the day, if a payer hired an independent contractor and paid the contractor over $600 during the tax year, the payer was required under Code section 6041(a) and IRS guidance to file Form 1099-MISC, an information return that put both the IRS and the taxpayer on notice of the income. In 2008, however, Congress enacted Code section 6050W, which, upon its effective date in 2011, required “third-party settlement organizations” (TPSOs) to report payments on what is now Form 1099-K, subject to a generous $20,000/200 transaction threshold. A tiebreaker rule set forth in Treas. Reg. § 1.6041-1(a)(1)(iv) provides that a payer subject to reporting requirements under both Code section 6050W and Code section 6041(a) should comply with the former provision only. As a practical matter, this means that payers who consider themselves to be TPSOs (the definition of which is ambiguous and obviously drafted without reference to the emerging gig economy) can report payments for their higher-earning contractors while leaving contractors with under $20,000 or under 200 transactions invisible to the IRS. What are the chances that an Uber driver who earns a few hundred bucks a month in compensation for rides might genuinely, or conveniently, forget to report those receipts come tax time if she hasn’t received a 1099? Pretty good, if prior Tax Gap research is any indication.

My coauthor, Leandra Lederman, presaged some of the problems with Code section 6050W and Form 1099-K reporting in a 2010 article, in which she identified factors that inform the determination whether additional information reporting might be successful. As Leandra and I observe in Information Matters, Form 1099-K held little promise from the outset. And the problems inherent in the TPSO reporting regime have only worsened as the worker economy has transitioned more and more toward lean, diversified gigs.

As if all of this weren’t concerning enough, TIGTA also found serious problems with the way the IRS goes about assessing self-employment tax compliance. Due to resource constraints, the IRS’s Automated Underreporter (AUR) program, the first line of offense against noncompliant taxpayers subject to information reporting, only selects and works a fraction of returns flagged for discrepancies by the Information Reporting and Document Matching Case Inventory Selection and Analytics (IRDM CISA) system (an acronym that only a bureaucrat could love). The idea is for AUR examiners to focus on cases that may yield the highest assessments while also pursuing repeat offenders and providing balanced coverage across AUR inventories. Yet, even as the discrepancy rate involving Forms 1099-K issued by the nine gig economy companies at the center of the TIGTA study increased by 237% between 2012 and 2015, the AUR program selected just 41% of these cases for review.

That review is not necessarily robust. TIGTA found that, for TY2011 through TY2013, 57 percent of all self-employment cases selected to be worked by AUR examiners were screened out—that is, closed without further action. Yet for cases not screened out, 45% were assessed additional self-employment tax; and TIGTA estimates that about $44 million in further self-employment tax could have been assessed during TY2013 alone if the screened-out cases had been worked and resolved similarly to those that were not screened out.

TIGTA also found that, while the IRS has implemented several tiers of quality review within the AUR program, little action is being taken to identify and correct error trends, and the review processes themselves are prone to error and mismanagement due in part to a lack of centralized coordination. One unfortunate consequence of these shortcomings in the AUR program is that gig workers who are already confused about their obligations are receiving inaccurate CP 2000 notices (the standard notice that informs a taxpayer of an error detected through AUR). In fact, TIGTA estimates that the AUR program sent taxpayers 23,481 inaccurate CP 2000 notices about their self-employment taxes in FY2017. That error rate is not only bad for taxpayers, it is bad for the government: if self-employment tax is inadvertently omitted from a CP 2000 notice, as a matter of policy the IRS is generally unable to correct that omission even if the IRS later detects the mistake. That additional revenue is simply forfeited.

So, despite all its wonderful potential to increase both economic opportunity for hard-working Americans and access to valuable services for those willing to pay for them, the gig economy has created some new challenges for tax administration. Gig workers are unsure of (or noncompliant with) their self-employment tax obligations; gig payers are unsure of (or taking advantage of) their status as TPSOs; and the AUR program is not keeping up with the changing times. TIGTA proposes a host of corrective actions in the February 14 report, most of which the IRS has endorsed. Among these corrective actions, three that strike me as particularly important are Recommendation 3 (revise the Internal Revenue Manual to clarify those circumstances in which an AUR examiner should enter a note justifying a screen-out decision); Recommendation 10 (develop IRS guidance on how taxpayers should classify themselves under Code section 6050W); and Recommendation 11 (work with Treasury to pursue regulatory or legislative change regarding the Code section 6050W reporting thresholds). The IRS disagrees with Recommendation 10, asserting that the problem is better addressed through a Treasury Regulation than IRS guidance and complaining that the IRS is preoccupied with issuing guidance under the TCJA and reducing regulatory burdens pursuant to E.O. 13,789. That may well be the case, but revenues are being lost every year that gig payers and workers misunderstand, or misapply, their reporting and payment obligations. There is no reason to suppose that the gig economy will start contracting any time soon, so it would be prudent for the IRS and Treasury to allocate resources to address this problem expeditiously. (Yes, I appreciate that the IRS is chronically underfunded and forced to make very difficult choices about how to staff projects. This is a problem that Congress largely created and Congress alone can fix.)

Ultimately, the best course here might be for Congress either to tailor the definition of TPSOs to a narrower subset of payers for whom the higher thresholds actually make sense (e.g., platforms like eBay, whose casual sellers may not net any income through their online rummage sales) or to lower those thresholds to make gig earnings more transparent to the IRS. So long as we maintain the regressive self-employment tax, we ought to ensure that all taxpayers liable for the tax—even tech-savvy taxpayers Ubering their way through the emerging economy—pay their fare share.