Property Tax Strict Foreclosure – A Final Update

Guest blogger Anna Gooch of the Center for Taxpayer Rights follows up on prior posts and discusses the Supreme Court’s decision in Tyler v Henepin County. Anna was an early and prescient commentator on how a state’s use of strict foreclosure raises significant constitutional issues. Les

I have twice written (here and here) on strict foreclosure by state and local governments. Strict foreclosure allows the creditor to obtain both the legal and equitable title to the property upon foreclosure, meaning that the owner-debtor never receives any amount received in excess of the amount of debt owed. In my last post, I wrote about several cases, including Tyler v. Hennepin County. On Thursday, May 25, the Supreme Court rendered its decision in Tyler. In a unanimous opinion, the Court delivered a victory for property owners and for taxpayer rights.


A summary of the facts and lower court proceedings is necessary before delving into the Supreme Court’s opinion. Geraldine Tyler, who is currently 94 years old, purchased a condo unit in 1999 in Hennepin County, Minnesota. She lived there by herself until 2010, when she and her family agreed that it would be best for her to move into a senior living community. She retained ownership of her condo, but neither she nor anyone in her family made any property tax payments once she moved out.  By 2015, the amount of unpaid property tax, including penalties and interest, was about $15,000. In that year, pursuant to both Minnesota and Hennepin County law, the county began foreclosure proceedings against Ms. Tyler’s condo to recover the unpaid balance. The county sold the condo for about $40,000. Ms. Tyler never received the difference between the sale proceeds and the unpaid debt, nor did she have an opportunity to request that it be returned to her.


Minnesota, along with several other states, authorizes counties to pursue strict foreclosure to recover unpaid property tax. This means that in the event of default, the county can take both legal and equitable title to the property. There is no opportunity for the property owner to recover the equity that remained after the sale. Strict foreclosure transfers to the creditor any property interest that the owner had in the property before the foreclosure.

Ms. Tyler sued the county, arguing that strict foreclosure violates both the state and federal constitutions. Specifically, she argued that the practice violated the Fifth Amendment’s Takings Clause and the Eighth Amendment’s Excessive Fines Clause. The District Court and the Court of Appeals both agreed with the county. The Eighth Circuit Court of Appeals affirmed the District Court’s holding that Ms. Tyler failed to state a claim upon which relief could be granted. They agreed that Ms. Tyler no longer had a property interest that could be protected by the Takings Clause. Neither court discussed the Eighth Amendment issue. Ms. Tyler, the named plaintiff in this class action, then appealed to the Supreme Court.

The Supreme Court Opinions – Standing

The unanimous opinion, written by Chief Justice Roberts, first addresses the threshold question of standing and whether Ms. Tyler plausibly stated a claim. The Court quite plainly states that Hennepin County’s refusal to refund to Ms. Tyler the equity that remained after the satisfaction of her property debt “is a classic pocketbook injury sufficient to give her standing.” The Court also addresses a new claim from the County that had not been raised previously. The County now argues that there was a mortgage remaining on the condo, so even if it wanted to, the County could not return the excess proceeds to Ms. Tyler because it would be required to apply those proceeds to the mortgage. The Court rejects this argument on two grounds. First, the County never provided any evidence of any encumbrances to any Court. Second, Minnesota law extinguishes any encumbrances after a tax sale.

The Supreme Court Opinion – Takings Clause

Having determined that Ms. Tyler had standing and that she properly stated a claim, the Court discusses whether the harm that Ms. Tyler suffered was a result of Hennepin County’s violation of the Takings Clause.

Just as the court did in a similar case called Hall, which I blogged about in February, the Supreme Court here focuses on the history of the concept of property and of takings. The Fifth Amendment and the Takings Clause do not define “property.” However, centuries of English and American support the position that an equity interest in property cannot be extinguished without compensation. Indeed, many states have taken affirmative steps to overturn historical practices of strict foreclosure. States cannot legislate around this history, and many have not. Over thirty states and the federal government do not permit strict foreclosure. Similarly, the Court’s precedent indicates that even in extreme circumstances, excess proceeds from tax sales must be returned to the owner. The Court has long held that even when a statute governing tax sales is silent as to the requirement of the return of excess proceeds, it is assumed that proceeds should be returned to the owner, absent an opportunity to request that the proceeds be returned.

The Court also discusses the fact that Minnesota law only allows for strict foreclosure when the government is the creditor; no other creditor is permitted to retain equity remaining after a sale. The Court rejects this exceptionalism, stating, “Minnesota may not extinguish a property interest that it recognizes everywhere else to avoid paying just compensation when it is the one doing the taking.”

Finally, the Court addresses the County’s allegation that even if a property owner does not lose their ownership in the equity of the property by the initiation of a foreclosure, Ms. Tyler had long abandoned her interest by not paying property tax. Consequently, the County argues, Ms. Tyler had lost her property interest before the County initiated any proceeding against her. The Court readily rejects this proposition, stating that “the County cites no case suggesting that failing to pay property taxes is itself sufficient for abandonment.” Moreover, “Minnesota’s forfeiture scheme is not about abandonment at all. It gives no weight to the taxpayer’s use of the property.”

The Court easily concludes that Ms. Tyler retained an equity interest in her home when Hennepin County began foreclosure proceedings – the County was not permitted to destroy it by legislation, to alter it by excepting itself, or to deem it abandoned.

The Gorsuch/Jackson Concurrence

Just as we saw in Bittner, Justices Gorsuch and Jackson joined together. Their concurrence addressed Ms. Tyler’s 8th Amendment Excessive Fines claim, which had been addressed by neither the lower courts nor the Supreme Court’s majority. The County argued and the District Court agreed that its strict foreclosure practice did not violate the Excessive Fines Clause because the practice was not punitive. They provided three justifications for this position, all of which the concurrence rejects. First, they asserted that the “primary purpose” of the strict foreclosure law was remedial rather than punitive. The concurrence emphatically responds, “This primary-purpose test finds no support in our law.” Second, the County argued that the law is not punitive because a property owner might end up in a positive position if the County is only able to recover less than the amount of tax owed at the foreclosure sale. The Court responds, “Not has this Court ever held that a scheme producing fines that punishes some individ­uals can escape constitutional scrutiny merely because it does not punish others.” Finally, the District Court held that the law was not punitive because it did not turn on the property owner’s culpability, but rather serves as a deterrent to property owners. The Court responds that it has “never endorsed” such an interpretation. Though merely informative, this concurrence serves as a signal to the state courts that they “should not be quick to emulate” the analysis of the District Court in Tyler.


As the Court points out, strict foreclosure is not common. Neither the federal government nor a majority of states allow the practice. However, the fact that 14 states that did authorize strict foreclosure (before this opinion) is not insignificant. The Court’s unanimous decision in Tyler not only effectively ends the practice of strict foreclosure for unpaid property tax, but it also suggests that the Court is dedicating itself to the protection of taxpayer rights, at the federal, state, and local levels.

The D.C. Circuit Strikes Back: The Court Affirms Its 2014 Holding That The Tax Court Is In The Executive Branch

We welcome back guest blogger, Ben Chanenson, who writes again on the location of the Tax Court within our system of government. As I mentioned when he wrote his first guest post in March, Ben has his hand in almost every blog post. He is my wonderful research assistant and has almost finished his first year at the University of Chicago Law School. Keith

As the great Yogi Berra once said, “it’s tough to make predictions, especially about the future.” Perhaps a qualifier should be added to this “Yogi-ism”: except on Procedurally Taxing. Eight years ago, Professor Bryan Camp predicted that the congressional amendment to 26 U.S.C § 7441 clarifying that the “Tax Court is not an agency of, and shall be independent of, the executive branch of the Government” would not change anything. This month, Professor Camp’s prediction was confirmed in Crim v. Comm’r of Internal Revenue, No. 21-1260 (D.C. Cir. May 2, 2023).


There were two issues in Crim. First, whether the “presidential power to remove Tax Court judges, 26 U.S.C. § 7443(f), violates the separation of powers.” Second, whether “assessment of Section 6700 penalties [are] time-barred by 26 U.S.C. § 6501(a) or by 28 U.S.C. § 2462.” Judge Rogers, writing for herself and Judge Wilkins, held that the answer to both questions is no. In his dissent, Judge Walker argued that the answers should have been no and yes, respectively.

Separation of Powers

Put simply, Crim argued that the President’s power to remove Tax Court judges constitutes impermissible interbranch removal because the Tax Court is not in the executive branch.

The Tax Court’s location has been a subject of debate and we have discussed the debate previously. On one side is the D.C. Circuit, which held in Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014) that the Tax Court is an independent executive branch agency. On the other side are Congress and the Tax Court, who both believe that the Tax Court is not in the executive branch but decline to say what branch the court calls home. In Crim, the D.C. Circuit sided with the D.C. Circuit.

Of course, this result is unsurprising given that Kuretski is binding precedent in the D.C. Circuit. Like its sister circuits, the D.C. Circuit follows the law of the circuit doctrine and will not overturn its precedent outside of an en banc proceeding. See Davis v. Peerless Ins. Co., 255 F.2d 534, 536 (D.C. Cir. 1958) (“This division of the court is not free to overrule so recent a decision as that in the Barnard case, for only by action of the entire court, sitting en banc, will such a step be taken.”)

The majority’s analysis of the separation of powers issue is only two paragraphs and does not engage with the reasoning in Battat v. Commissioner, 148 T.C. 32 (2017). After rehashing Kuretski, Judge Rodgers writes:

In 2015, Congress amended Section 7441 to provide that “[t]he Tax Court is not an agency of[] and shall be independent of, the executive branch of the Government.” Consolidated Appropriations Act, Pub. L. No. 114-113, § 441, 129 Stat. 2242, 3126 (2015). Of course, the Supreme Court has cautioned that “congressional pronouncements are not dispositive” of the status of a “governmental entity for purposes of separation of powers analysis under the Constitution.” Dep’t of Transp. v. Ass’n of Am. R.R., 575 U.S. 43, 51 (2015). Here Congress sought only to “ensure that there is no appearance of institutional bias” when the Tax Court adjudicates disputes between the IRS and taxpayers. S. Rep. No. 114-14, at 10. Crim has not demonstrated that congressional action has undermined the separation of powers analysis adopted in Kuretski.

In his dissent, Judge Walker devotes four paragraphs to the issue and concludes that the Tax Court is in the executive branch. In order to change that reality, Judge Walker writes that Congress “must do more than simply tell the judiciary that the Tax Court is outside the executive branch.” Instead, Congress must “alter the court’s substantive features by amending, for instance, the powers it exercises and who controls it.” Finally, Judge Walker notes that he expresses “no opinion about whether tax judges’ removal protection is constitutional.”

Statute of Limitations

The majority “join[s] the Second, Fifth, and Eighth Circuits in holding that Section 6501(a) is inapplicable to assessment of Section 6700 penalties” and concludes that “the statute of limitations is triggered only when a ‘return [i]s filed.’” The majority explains that:

Section 6700 penalties are assessed against individuals who represent, with reason to know such representation is false, that there will be a tax benefit for participating in or purchasing an interest in an arrangement the individual assisted in organizing. 26 U.S.C. § 6700(a). The conduct penalizable “do[es] not pertain to any particular tax return or tax year.” Sage, 908 F.2d at 24. Instead liability turns on the promoter’s activities or gross income derived by the promoter, not on whether a promoter’s client decides to claim such benefit on a tax return. See id. Were Section 6501(a) applicable to Section 6700 penalties, the limitations period on assessment would begin to run in view of factors unrelated to the source and scope of penalty liability.

The dissent responds:

True, the limitations clock for tax assessments starts to run “after [a tax] return [is] filed,” and tax-shelter-promotion penalties may be levied even if no tax return is ever filed. 26 U.S.C. § 6501(a). But that proves only that in some tax-shelter-promotion penalty cases, the statute of limitations never starts running because no return ever triggers it. It does not prove that the statute of limitations does not apply at all. For example, a statute of limitations applies to fraud, but it is not triggered “until after . . . discover[y] . . . [of] the alleged deception.” Holmberg v. Armbrecht, 327 U.S. 392, 397 (1946).

For the IRS’s theory to persuade, it would have to be true that no tax return could ever trigger the statute of limitations for assessments in a tax-shelter-promotion case. But that is not self-evident. Why couldn’t the statute of limitations be triggered by a return filed by a tax shelter’s client? Oral Arg. Tr. 9-10 (giving hypotheticals). Other statutes of limitations in the tax code are triggered when returns are filed by someone other than the penalized person. See, e.g., 26 U.S.C. § 6696 (setting out the statute of limitations for tax-preparer penalties).

Instead of determining that “no return can ever trigger § 6501(a)’s statute of limitations in a tax-shelter-promotion case,” Judge Walker “would let the Tax Court determine, on a case-by-case basis, whether a tax return has triggered the limitations clock.”


Ultimately, Crim v. Comm’r of Internal Revenue did not break any new ground. Nevertheless, the majority and dissent’s analysis of the separation of powers issue raises new questions.  The majority concluded that “Congress sought only to ‘ensure that there is no appearance of institutional bias’ when the Tax Court adjudicates disputes between the IRS and taxpayers.” But was that really Congress’ objective? I doubt Congress thinks that the average taxpayer reads 26 U.S.C § 7441, but admittedly the average taxpayer probably also does not read about Kuretski.

Moreover, the dissent concluded that to change the Tax Court’s location, Congress has to “alter the court’s substantive features by amending, for instance, the powers it exercises and who controls it.” This seems like a daunting task. Would any substantive alternations be sufficient for the judiciary and consistent with Congress’ vision for the Tax Court?

Inspired by Professor Camp’s accurate prediction, I predict this will not be the end of the debate over the proper location of the Tax Court.

Serious Warnings for Frivolous Positions

In conjunction with the University of San Diego School of Law, RJS Law is also hosting the 8th Annual USD School of Law-RJS Law Tax Controversy Institute at the University of San Diego School of Law Campus in San Diego, California on July 28, 2023. You may find out more about the institute here

Today’s guest blogger is Joseph Cole, LL.M.  He is an Senior Associate Attorney at RJS Law in San Diego, California.  His practice includes federal and state tax controversy.  He discusses frivolous position penalties that Tax Court may impose under IRC 6673.  We have had a number of posts discussing the 6673 penalty including many of our designated order posts.  Joseph talks about the warnings issued by the Court prior to the imposition of this penalty.  Multiple warnings have long been part of this landscape even though not dictated by the IRC.  A few years ago, I looked at the frequency of the imposition of the 6673 penalty and you can find that article here.  Keith

The Tax Court may impose penalties under IRC §6673 of up to $25,000 for positions that are “frivolous and groundless.”  IRS Notice 2010-33 lists many of the positions that the Tax Court deems frivolous.  These positions include arguments such as the Tax Code being unconstitutional or participation in the tax system being voluntary.  Anybody who regularly reads Tax Court cases will notice when frivolous position issues come across the Tax Court (and these issues are surprisingly common). In the opinions I have read, the Tax Court gives the taxpayer a warning before issuing a §6673 penalty.  This blog post will address why the Tax Court issues a warning in these cases and whether a warning is a substantive legal right.


The frivolous position penalty statute gives the Tax Court discretion as to whether it will impose a §6673 penalty.  The statute reads the Tax Court “may require the taxpayer to pay to the United States a penalty.” (Emphasis added.)  The statute gives Tax Court judges a cudgel they may use to impose order and decorum in their court room and to discourage litigants from wasting the court’s time.  Other penalty statutes in the Internal Revenue Code have mandatory language.  For example, the late filing penalty statute (IRC §6651(a)(1)) states penalties “shall be added” (emphasis added) when a taxpayer violates the statutory provisions.  The frivolous tax return penalty statute (IRC §6702) states a taxpayer “shall pay a penalty”(emphasis added) if a taxpayer files a frivolous tax return. 

As a matter of practice, the Tax Court gives petitioners a warning before issuing a §6673 penalty.  A couple recent Tax Court cases illustrate this practice.  In Luniw v. Comm’r, TC Memo 2023-49, the Taxpayer is let off with a warning when the court discusses §6673 penalties because the Taxpayer had not made similar frivolous claims in previous cases.  In Luniw, the Service assessed §6702 frivolous return penalties against the taxpayer.  The Tax Court does not discuss whether the petitioner received a warning regarding §6702 frivolous return penalties; however, the lack of a discussion regarding the §6702 frivolous return penalties makes sense because the Court did not have jurisdiction over those assessable penalties.  (For a recent example of a taxpayer that did not heed the Tax Court’s warnings regarding the 6673 penalty, see  Golditch v. Comm’r, TC Memo. 2022-26.)

In Englert v. Comm’r, TC Memo 2023-38 the taxpayer had a deficiency in income taxes but also faced  §6702 frivolous return penalties assessed prior to the deficiency proceeding.  He made frivolous arguments before the Tax Court in addition to the frivolous positions he had taken before the IRS.  The Tax Court did not address the §6702 frivolous argument penalties because it lacked deficiency jurisdiction over these assessable penalties. The Englert court then imposed a $1,000 penalty under §6673 for post-trial submissions containing frivolous arguments.  The Tax Court did not address the §6702 frivolous return penalties because it lacked deficiency jurisdiction.  Therefore, the Court does not address whether the IRS gave a warning to the taxpayer before the §6702 frivolous return assessment. 

IRM § provides that Taxpayers should be issued a warning letter before a §6702 assessment giving the taxpayers 30 days to correct the submission. The statute does not require this warning which the IRS has imposed upon itself.  No cases have addressed whether the failure to issue this warning would provide a basis for setting aside this penalty.

Similarly, the question arises as to whether there is a substantive right to a judicial warning before a §6673 frivolous position assessment.  While the Tax Court has no equivalent to the IRM, Tax Court judges have issued warnings in numerous cases making the use of the warning something akin to the IRS administrative requirement in the penalty it can impose for similar taxpayer behavior. It is not clear whether these warnings are a mere courtesy, a prophylactic measure, or whether the number and consistency of the opinions issuing warnings prior to the imposition of the frivolous position penalty have amounted to Stare Decisis.  While a warning from the bench may not be a substantive right for taxpayer, a warning does make a §6673 assessment virtually bullet-proof. 

Appeals courts review the Tax Court’s §6673 penalty determination for abuse of discretion.  In Wolf v. Comm’r, 4 F.3d. 709 (9th Cir. 1993) the Ninth Circuit determined that the Tax Court did not abuse its discretion when it put the taxpayer on notice that the taxpayer may face sanctions and the taxpayer proceeds with frivolous despite the court’s warning.   The Wolf opinion demonstrates the benefit of issuing a warning.  Even without a warning from the bench, if a taxpayer asserts frivolous arguments that in the past have resulted in §6673 penalties on other taxpayers, it would be difficult for a taxpayer that made patently frivolous arguments to argue that the Tax Court abused its discretion by issuing §6673 penalties.

Frivolous positions at the Tax Court and the frivolous position penalty may unfortunately become more of an issue in the years to come.  People are being exposed to more disinformation and charlatanism through social media.  Flat earth theories (both literal and figurative) are receiving a surprising level of popular acceptance today.  As a recent Procedurally Taxing post pointed out, many taxpayers are relying on social media for tax advice.  The Tax Law equivalents of flat earth theories are finding increasing levels of popularity The frivolous position jurisprudence and statutes will hopefully evolve to rise to the challenge of this new age of disinformation. 

Extension of Time for Payment of Tax Due to Undue Hardship: Part 2

This is the second post based on the writings of Frank Agostino, Young Kim, and Yiwei Chen in an article in the Journal of Tax Controversy, a newsletter regularly published by Agostino and Associates. Part 1 can be found here. Keith

Form 1127 Overview

In order for a taxpayer to find relief from undue hardship, they must file a Form 1127. According to I.R.M. for the IRS to grant relief on the basis of undue hardship, the taxpayer must prove that a payment on the original due date will cause “ a substantial financial loss” to the that taxpayer “more than an inconvenience.” I.R.M. clarifies that taxpayers can use a Form 1127 to request relief to pay taxes classified as a deficiency, “providing the deficiency is not the result of negligence, intentional disregard of the rules and regulations, or fraud with intent to evade tax.”


When the taxpayer files a Form 1127, in part 1 of the form they must indicated whether they are requesting an extension for the total amount calculated as deficiency, or the tax shown. In part 2, the taxpayer must provide “a detailed explanation of the undue hardship that will result” if their application is denied.

Part 3 of the form is where the applicant provides supporting documents to the IRS to support their claim for extension based on undue hardship. The taxpayer must provide a statement of both liabilities and assets at the end of the last month. The statement must show “book and market values of assets and whether securities are listed or unlisted.” In addition, the taxpayer must provide an itemized list of their income and expenses for each of the three months preceding the due date of the tax.

When completing a Form 1127, the goal of the taxpayer is to provide a convincing and compelling story as to why they are unable to pay their taxes on time due to their financial circumstances. This takes on the same tone as the cover letter a taxpayer should write when submitting an offer in compromise.  Taxpayers should explain unexpected events that may have occurred that resulted in their financial hardship such as the medical emergency or loss of a job. They must explain the current financial situation including all assets, income, and expenses. Critically, taxpayers should explain their effort to pay all of their taxes by the due date. For example, they may include in their explanation an attempt to set up a payment plan with the IRS. They must also include an explanation of their individual efforts (unique person to person) to improve their own financial circumstances. Taxpayers should explain that they understand the importance of paying their taxes on time, and how they plan to pay the full amount of their tax debt going forward. In addition, the taxpayer should provide any official documents which provide evidence of financial hardship. Some of these documents could include a job loss notice from their former workplace or medical bills that show unexpected expenses.

Form 1127: Part 1

When the taxpayer files a request for an extension, they must indicate the specific length of time they would need to pay their tax debt. As stated in I.R.C. §  6161(a) , an extension request should be “for a reasonable period not to exceed 6 months… from the date fixed from the payment thereof.” The IRS could consider a longer extension for longer than 6 months if a person is living abroad. This means that according to I.R.C. § 6072, if a person is requesting for the maximum extension, they should request it from the filing and payment due date. Under I.R.C. §  6161(b), a taxpayer can receive an extension of up to 18-months on a deficiency. As such, if a taxpayer needs the maximum amount of an extension on a deficiency, they should request from the date of the payment notice and demand up until the day which would mark 18 months. In certain “exceptional cases,” the IRS can grant another extension for a period of up to 12 months after the first extension.

The taxpayer must specify the amount for which they want the payment extension for. According to I.R.C. § 6161 it should be the “amount of the tax shown or required to be shown” on a tax return or to postpone a deficiency “any amount determined as a deficiency.” The general instructions of the Form 1127 instructs the taxpayer to file the form if they are trying to “postpone the full amount of tax shown or required to be shown… or an amount determined as deficiency.”

Form 1127: Part 2

The undue hardship burden is not an easy burden to meet because a general statement of hardship alone is not enough to satisfy. This means that the IRS can deny an extension on the basis of undue hardship unless that taxpayer could show undue hardship if they had to pay their taxes by the original due date. The instructions on the form state, “to establish undue hardship, you must show that you would sustain a substantial financial loss if forced to pay a tax of deficiency on the due date.” So, taxpayers planning to submit a form 1127 should not only to write a statement, but also submit supporting documents to provide evidence of their hardship.

Form 1127: Part 3

According to the instructions, the taxpayer must submit both a statement of their liabilities and assets at the end of the last month and an itemized list of their income and expenses for each of the three months preceding the tax due date. If this information is not included, the IRS will consider the form incomplete and will not consider extension for the taxpayer. Some other items to include as evidence would according to the article would be:

the total amount of liquid assets that the petitioner claimed would be available to pay the tax once the bank had approved the release of funds;

• whether any assets were available to pay some of the tax when it was due;

• when the petitioner expected that sufficient assets would become available; or

• whether the petitioner had explored other ways to obtain the funds, such as selling the real property before the payment due date

In addition, taxpayers are required to include the following documents in order to have the form processed properly. Should a taxpayer fail to provide such documents, the IRS would not be able to process the request extension. According to I.R.M. the documents include:

• taxpayer’s name, address, and Tax Identification Number (TIN);

• whether the extension is being requested for a tax shown or required to be on a return, or for an amount determined as a deficiency;

• the due date of the return or the due date for paying the deficiency;

• the extension date proposed by the taxpayer;

• the tax liability for which an extension to pay is being requested;

• the form number relating to the tax;

• the calendar year or fiscal year of the tax;

• an explanation of the undue hardship that will result to the taxpayer if the extension is denied (see the discussion above);

 • a statement of the taxpayer’s assets and liabilities

Filing Form 1127

According to Treas. Reg. §§ 1.6091-2 when filing a Form 1127, an individual taxpayer should file it at a local IRS office which “serves the legal residence or principal place of business of the person required to make the return.” For a corporation, the form should be filed at the IRS office “that serves the principal place of business or principal office or agency of the corporation.”  This does not mean the taxpayer should send the form to the general attention of the closest IRS office.  The taxpayer needs to locate the address for the Collection Division Advisory Group that services their area of residence. You can find addresses and contact information for those offices in Publication 4235. The Advisory Group handles a host of discrete collection issues.  This is a logical place for the IRS to have the form filed since the Service Centers are not equipped to make the type of collection decisions necessary to grant a waiver.

The required documents must be filed by the due date for the tax returns in order to be considered timely filed, if not the IRS cannot process the form. According to I.R.M., the post mark date of the application will be how the IRS determines whether or not the form was timely. This means that the form must be postmarked by the U.S. postal service either before or on the due date of their tax liability.

When the IRS considers whether or not the taxpayer has a case for undue hardship, they should approve or deny the request within 30 days according to Treas. Reg. § 1.6161(c). If the taxpayer is denied the request for extension on the basis of undue hardship, they will get a notice in writing stating the reasons for the denial (I.R.M. Taxpayers wishing to dispute the decision must file an appeal within 10 calendar days of their denial.  Th request for an appeal must be in writing and submitted to the member of the advisory group that denied the request.

It is important to note that according to I.R.C. § 6601, if granted an extension of time for a taxpayer to file their tax returns, it still will not stop the accrual of interest on those unpaid taxes.


Taxpayers seeking relief on the basis of undue hardship must file a Form 1127, in a timely manner based on the tax return due date. When filing, they must indicate how long of an extension they are seeking as well as the amount of money they want the extension to be for. In order to have the form processed, taxpayers must provide a written statement of undue hardship that would be caused if they were to pay their taxes by the original due date, as well as number of supporting documents that support their claim. Taxpayers should receive a decision within 30 days of filing. If given a denial decision, the IRS will provide the taxpayer with a written explanation as to the reason for the denial and the taxpayer will have 10 calendar days from when the denial is mailed to file an appeal to that decision.

In The Room Where It Happens, It Doesn’t Always Happen Exactly Right

Today we continue our series highlighting the recent publication of the Pittsburgh Tax Review edition focusing on the Restructuring & Reform Act of 1998 a quarter century after enactment.  Guest bloggers Leila Carney and Chris Rizek wrote one of the articles as well as today’s post.  Both practice with Caplin & Drysdale in Washington, DC.  Leila focuses on tax disputes and tax litigation.  Like me, she has her undergraduate degree from William and Mary.  Chris was a trial attorney in the Tax Division of the Department of Justice early in his career.  His service as Associate Tax Legislative Counsel with the Treasury Department’s Office of Tax Legislative Counsel in the mid to late 1990s provides the background for today’s post and offered me the first opportunity to meet him.  In that meeting, which took place in another of the rooms where it happened, he discussed the 25 legislative proposals that Chris Sterner and I had drafted.  I remember Chris (Rizek) rejected one of the proposals which sought to codify the reach of the federal tax lien to tenancy by the entireties property because he thought it was an issue for the courts to decide.  His rejection of that proposal seemed prescient when the Supreme Court held the federal tax lien reached T by E property a few years later in United States v. Craft, 535 U.S. 274 (2002).  His practice focuses on tax disputes and tax litigation.  He is well known in the tax procedure community and an early guest blogger for PT

This post was originally posted on May 3rd, but has been updated on May 8th to correct a reference in the original post that had identified the jurisdictional parenthetical in Section 6015(e)(1)(A) as originating in Conference; the House had inserted that provision in its earlier proposed legislation.


Keith Fogg’s article in the Pittsburgh Tax Review’s recent issue, The IRS Restructuring and Reform Act [“RRA”] Twenty-Five Years Later,Vol. 20, No. 1 (2022), is entitled “In the Rooms Where it Happened,” and several authors of posts on this blog have likewise discussed how exciting, and even fun, it can be to be involved in the legislative or regulatory decision-making process.  So, since we’re on that subject, I have a story to relate as well.  The very last items resolved in the conference held to reconcile the House and Senate versions of the RRA were the competing provisions for “innocent spouse” reform.  I was in the room(s) where that happened, and here’s how it happened.


A bit of background first.  Under a provision in the Taxpayer Bill of Right II (1996), Congress had required the Treasury to study proposals to amend the statute governing relief from joint and several liability for “innocent spouses.”  That study, which was finished in early 1998, recommended changes in the existing law to broaden the criteria to qualify for relief, but it did not endorse complete “separation of liability,” due to several perceived conceptual difficulties in correctly allocating liability that had been identified.  See Report to the Congress on Joint Liability and Innocent Spouse Issues (U.S. Treasury Dept., February 1998) at 24-29, 53-55, 57.  Buried at the end in a few brief sentences, the Treasury study also recommended that “Congress expand the Tax Court’s jurisdiction to allow it to review any denial (or failure to rule) by the IRS regarding an application for innocent spouse status.”  Id. at 55.

As described in the article Leila Carney and I co-authored for the same Pittsburgh Tax Review, the House version of the taxpayer rights title of RRA consisted primarily of consensus items, mostly improvements to existing provisions in the Internal Revenue Code that were acceptable both to Treasury and the IRS and to members of the House who wanted strong reforms.  The House bill thus included several agreed-upon changes to the existing innocent spouse rules in section 6013, generally making it easier to obtain relief.  The Senate bill, by contrast, included an entirely new elective scheme of separation of liability.  Innocent spouse reform was the last open item in the conference, due in part to Treasury’s opposition to complete separation of liability and to the perceived incompatibility of the two schemes for relief. 

Senator Roth, Chairman of the Senate Finance Committee, and Rep. Archer, Chairman of the House Ways and Means Committee, were also chairing the conference committees for their two houses.  At the conference, staffers from both committees, as well as the Joint Committee on Taxation, the offices of some other principals, and Treasury (including me) were as usual not sitting right at the table with the members but were scattered around in chairs against the walls.  As the conference was finishing successfully, with hardly any controversy or even hard decisions, the two chairmen’s bonhomie increased, and they began cheerfully calling each other by their first names – Bill and Bill.  So, with only one item remaining – the innocent spouse provision – one Bill suggested to the other Bill, “Bill, why don’t we just do both, put the House version and the Senate version together somehow?”  And the other Bill responded that he thought that was “a splendid idea, Bill,” and they promptly agreed they would just do that.  

And then they looked around the room at the staff – who were exchanging nervous glances with each other and even recoiling in horror.  It had taken months to draft the Senate’s separation of liability provision and work out the problems with successive editions, and it still wasn’t perfect; and now the members wanted the staff to put the two versions together, with no real instructions on how to do it.  And the bill was expected to go to the floors of both houses in less than a week!

As usual after a conference, there ensued several long days of furious drafting and revising of the whole bill, with the pen being held by the Legislative Counsel’s office(s), and drafts of the conference provisions being commented on by the various interested staffers on a daily basis.  Not surprisingly there was a lot of discussion of the innocent spouse revisions (especially new section 6015), which had been joined by keeping separation of liability elective but adding a number of restrictions to it.  In particular, I and some other staffers expressed concerns over the provision granting judicial review of appeals from full or partial denials of separation of liability (placed in section 6015(e)),  with the parenthetical, “(and the Tax Court shall have jurisdiction).”  But the drafters left it that way.

The drafters took a similar approach to granting the Tax Court jurisdiction over another brainchild of the RRA, collection due process (“CDP”) determinations, employing much the same parenthetical: “(and the Tax Court shall have jurisdiction with respect to such matter).”  Code §§ 6330(d)(1) (initially 6330(d)(1)(A)).  Et voilà: ever since, a taxpayer may petition the Tax Court no later than 30 days after a final CDP determination and no later than 90 days after a final determination regarding relief from joint liability including innocent spouse status.

These 30- and 90-day deadlines were taken at face value for a long time, being generally understood to carry the weight of jurisdiction—the deadlines each being in the same sentence as the parenthetical granting jurisdiction.  See Code §§ 6330(d)(1), 6015(e)(1)(A).  But I was reminded of this drafting issue while discussing with Ms. Carney a recent CDP case, Boechler, P.C. v. Commissioner, 142 S.Ct. 1493 (2022), in which the Supreme Court opened the door for applying equitable doctrines to entertain untimely petitions in extreme cases.  In Boechler, the Supreme Court put significant weight on the syntax of the jurisdictional grant in section 6330(d)(1) and the additional phrase “with respect to such matter,” which is present in section 6330(d)(1) but not in section 6015(e)(1)(A).  Boechler, 142 S.Ct. at 1498-99.  In holding that the CDP petition deadline is not jurisdictional, but merely procedural and therefore may be equitably tolled, the Supreme Court contrasted the two parentheticals, hinting that the text of section 6015(e)(1)(A) is more clearly jurisdictional and would not allow for equitable tolling.  Id.  

This somewhat surprising holding drew the attention of the National Taxpayer Advocate, whose 2023 legislative recommendations report (the “Purple Book”) offers the critique that interpreting certain deadlines as jurisdictional and others as merely procedural, without a substantive justification, can result in “harsh and unfair results.”  The Purple Book thus recommends that Congress enact an entirely new section that clarifies that court filing deadlines are not jurisdictional.  Id. (Legislative Recommendation #45). 

While such legislation could create its own set of issues, arguably it would at least be in keeping with the impetus behind section 6015, which itself contains an equitable relief provision in section 6015(f).  In fact, the grant of jurisdiction in section 6015(e)(1) spells out that “an individual who requests equitable relief . . . may petition the Tax Court . . . .”  It certainly is odd that a person may be entitled to equitable relief under the substance of section 6015 but could be denied relief because the Tax Court’s jurisdictional grant precludes equitable tolling.  And while I and perhaps some other staffers were not overly enthusiastic about the ad hoc approach to Tax Court jurisdiction taken in the RRA, we all know that Congress’s goal was to expand, not limit, jurisdiction to review IRS determinations.  Even if it only helps a few individuals in extreme cases—after all, equitable relief is rarely granted—interpreting the deadlines as nonjurisdictional for both sections 6330 and 6015 would at least treat with consistency provisions enacted at the same time for the same reasons (and with about the same amount of forethought). 

What is the moral of the story?  Casual drafting sometimes causes years’ worth of problems.  A more egregious recent example is shown by the Tax Court’s ruling in Farhy v. Commissioner, 160 T.C. No. 6 (April 3, 2023), which held that section 6038(b) penalties are not assessable because they were put in the wrong part of the Code—chapter 61 of subtitle F rather than with the assessable penalties contained in chapter 68.  The Tax Court pointed out that unlike other penalty provisions in other areas of the Code, no separate provision was made for assessing section 6038(b) penalties, nor was there even a cross-reference to chapter 68.  Id. at *4.  My best guess is that when this penalty was being drafted, no one asked, how will that be assessed?  The Congressional habit of rushing legislation through and drafting provisions hurriedly sometimes yields weird and inconsistent results.  Certainly I could not have imagined that tax practitioners and courts, including even the Supreme Court, would spend twenty-five years and hundreds of pages parsing parentheticals that were drafted with little scrutiny.  Put differently, the excitement of being in the room where it happens may be long gone (for me), but the “fun” sometimes continues for years.

Extension of Time for Payment of Tax Due to Undue Hardship: Part 1

Frank Agostino, Young Kim, and Yiwei Chen published an article in the Journal of Tax Controversy, a newsletter regularly published by Agostino and Associates.  Agostino and Associates is a law firm in Hackensack, New Jersey that has been representing taxpayers facing tax controversies with federal, state, and local authorities in civil and criminal litigation for more than 25 years. Most readers of this blog know Frank because he gets into the middle of so many procedural matters.  Although the Graev issue may be his most famous issue at the present, Frank and his firm handle most of the issues discussed in this blog and handle them in ways that continually push the envelope finding or creating tax procedure issues overlooked by others.  Because we have never written about today’s topic and because it’s a timely topic for tax season, I asked Frank for permission to slightly modify and publish it here and he graciously granted permission.  Keith

Tax Day is the day on which tax returns are supposed to be submitted for most Americans; however, many taxpayers may seek an extension of time to file their taxes. The IRS still expects taxpayers to pay the taxes owed by Tax Day and those who do not pay by the date through withholding, estimated tax payments or specific payments should expect to receive a penalty for late payment. Though taxpayers are expected to pay their taxes by the original due date, there are penalty free extensions which the IRS can grant. Today’s post explores the less well-known extension to pay provisions which differ from and are in addition to installment agreements.  Tomorrow’s post will provide more detailed guidance on how to make the request for an extension of time to pay.


First, the IRS has the general authority to grant an extension of time to pay tax liability according to 6161(a)(1) of the Internal Revenue Code.

The Secretary, except as otherwise provided in this title, may extend the time for payment of the amount of the tax shown, or required to be shown, on any return or declaration required under authority of this title (or any installment thereof), for a reasonable period not to exceed 6 months (12 months in the case of estate tax) from the date fixed for payment thereof.

Section 6161(a)(1) also provides that a viable exception when an extension can exceed 6 months is when a person lives abroad.

Under section 6161(b), unless a deficiency is due to negligence, intent to disregard or fraud, the IRS can extend the payment of a tax deficiency if the payment would result in the taxpayer facing undue hardship. In other words, 6161(b)(1) allows the IRS the ability to grant a longer extension to taxpayers who pay an incorrectly calculated amount of their taxes but who actually owe more based on IRS calculations.

Section 6161(b)(1) states:

Under regulations prescribed by the Secretary, the Secretary may extend the time for the payment of the amount determined as a deficiency of a tax imposed by chapter 1, 12, 41, 42, 43, or 44 for a period not to exceed 18 months from the date fixed for the payment of the deficiency, and in exceptional cases, for a further period not to exceed 12 months. An extension under this paragraph may be granted only where it is shown to the satisfaction of the Secretary that payment of a deficiency upon the date fixed for the payment thereof will result in undue hardship to the taxpayer in the case of a tax imposed by chapter 1, 41, 42, 43, or 44, or to the donor in the case of a tax imposed by chapter 12.

Second, most taxpayers can request an installment agreement if they are unable to pay their taxes by the original filing deadline. This would allow the individual taxpayer to pay their tax debt through a series of monthly payments, with interest on the unpaid balance.

Third, section 7508A of the Internal Revenue Code allows the IRS the ability to extend the time to pay in the event of certain disasters. Taxpayers should check to see if they qualify for an extension due to a disaster before trying to set up installments or seeking relief because of undue hardship.

Undue Hardship

If granted an extension by the IRS due to undue hardship, the taxpayer would receive an extension both for the amount a taxpayer voluntarily assesses, and any deficiency arising from IRS compliance, such as an audit or adjustment from say the IRS’s automated underreporter program. In other words, the taxpayer is granted the extension based on whether paying the whole amount calculated by the IRS would result in an undue hardship to that taxpayer. 26 CFR § 1.6161-1(b) does not provide an exact definition for undue hardship, however, it does state an extension “will not be granted upon a general statement of hardship.” In addition, 26 CFR § 1.6161-1(b) states that the term undue hardship, “means more than an inconvenience to the taxpayer”. For the IRS to recognize undue hardship, it must be evident that a “substantial financial loss” will occur were the taxpayer to pay the tax liability on the original due date without extension. For example, 26 CFR § 1.6161-1(b) shows, that the IRS will not force a taxpayer to sell property below its value just to make the taxpayer have enough funds to pay the tax liability on time. What specific circumstances would the IRS consider enough to qualify a taxpayer for a relief due undue hardship?

Though neither the Code nor Regulations previously mentioned give a definition of undue hardship, 26 CFR § 1.6161-1 et. suggests that the IRS will consider specific circumstances when evaluating. The IRS may consider:

1) serious illness or medical condition affecting the taxpayer or an immediate family member;

2) unemployment or a significant loss of income;

3) natural disaster or other unforeseeable events beyond the taxpayer’s control that have a significant impact on their financial situation;

4) divorce or separation, particularly if the taxpayer is responsible for paying support or alimony;

5) significant business hardship or a decline in the value of assets.

In evaluating undue hardship claims, courts have not adopted a uniform test and evaluate based on the facts and circumstances of each situation. In Estate of LeMeres v. Commissioner, 98 T.C. 294 (1992) the court ruled that the taxpayer faced undue hardship because “most of its assets were tied up in a closely held business” and that “sufficient funds with which to pay the estate tax…were not readily available.” In addition, the taxpayer acted “in good faith” in following their attorney’s erroneous advice that more than one six-month extension could be obtained. In addition, the court acknowledged the declining value of the petitioner’s assets due to the current economic situation. Based on the erroneous legal counsel, lack of liquid funds, and declining asset values, the court believed the case had enough evidence that undue hardship would befall the petitioner should they not be granted another extension.

In Babcock Center, Inc. v. United States, 111 A.F.T.R.2d 2013-1865 (D. S.C. 2013), the court rejected the taxpayer’s undue hardship case because if a taxpayer enjoyed a luxurious lifestyle in a way that the spending causes the “remainder of his assets and anticipated income will be insufficient to pay his tax” then that taxpayer cannot reasonably argue that he failed to pay the tax due to an undue hardship.


The IRS can grant penalty free extensions to the tax payment deadline due to certain disasters, through installment agreements, and due to proof of undue hardship to the taxpayer if the taxpayer were to pay the taxes owed. Undue hardship must be “more than an inconvenience to the taxpayer” but is granted by the IRS based on individual circumstances. For many taxpayers the process of seeking a payment waiver due to hardship requires filing of filing a form 1127, an extension based on undue hardship.  The preparation and filing of that form will be the basis for tomorrow’s post.


We welcome back guest blogger Megan L. Brackney who is a partner in the New York City Office of Kostelanetz.  We also welcome as her co-author first time guest blogger Melina Watson who is an intern at Kostelanetz and a student at Spelman College.  After graduation in May, Melina will return to Kostelanetz as a paralegal and will be attending Columbia Law School in 2025.  Megan would like to thank Prof. Tom Weninger, Jessica L. Jeane, Travis W. Thompson, Jonathan T. Amitrano, and the other members of the Individual and Family Income Tax Committee of the American Bar Association Tax Section who gave her the idea for this post during their excellent presentation, “Combatting Misinformation on Social Media” at the ABA Tax Section meeting in San Diego on February 10, 2023. Les

Given the popularity of TikTok, it is not surprising that there are numerous TikTok videos relating to tax.  Some of these videos contain useful and accurate information for people seeking tax advice, some are obviously not trustworthy, and others fall in between and may seem dependable to a layperson, but not actually provide accurate advice.

At right, Taxes with AJ @vidaincometax accurately warns against shady tax preparers

A woman in a polka dot blouse and long straight hair looks straight at the viewer and speaks into the camera. She is sitting on a leather office chair.

As people rely more on social media sources, such as TikTok, for news and information, and the number of qualified, affordable, and available tax professionals continues to decrease, have we reached a point where reliance on tax advice from TikTok could be reasonable cause?  When I have asked this question, the reaction of my fellow tax practitioners has been, “no way!”  Instead, they say, taxpayers should obtain advice from tax professionals.  This is great advice, in theory, but it is becoming more difficult for taxpayers of limited financial means to find affordable and qualified tax professionals who will provide any better advice than what they can get for free on TikTok. 


TikTok is one of the many social media platforms that have attracted people seeking free financial advice. This tax season, the hashtag “#taxes” has received increased engagement on TikTok, and according to the platform’s analytics has over 500 million views and 44,000 posts. Posters on TikTok range from CPAs and other tax practitioners to scammers, and while there is quality advice available on TikTok, scams, hacks, and “secret techniques” are being posted, promising higher returns or fewer taxes owed, which may appeal to lower income taxpayers and those who cannot consult a credentialed paid tax preparer or expert. The IRS has even included social media tax advice on its “Dirty Dozen” list for 2023, as this Tax Notes (paywall) article from a few weeks ago discusses.

We can see from statistics from the National Taxpayer Advocate that obtaining quality tax return preparation services and advice is a huge problem for lower income taxpayers.  Looking at the statistics related to taxpayers who claim the Earned Income Tax Credit (“EITC”) in 2021, paid return preparers prepared just 53% of those returns, but of those returns, non-credentialed return preparers prepared approximately 58%. see e.g., the NTA 2022 annual report to Congress, at pg. 129. And, in case you wonder whether it matters if a tax return preparer has credentials, i.e., whether a tax authority requires them to have some training and competence, we see that with respect to EITC’s, about 92% of the total amount of dollars in audit adjustments made on 2020 returns occurred on returns prepared by non-credentialed return preparers. see e.g. , the NTA 2022 annual report to Congress, at  pg. 128.

And even if you can afford to pay a credential preparer, good luck finding one.  There is a shortage of tax return preparers creating difficulties for people of all income levels from getting assistance.  Between 2020 and 2022, the Wall Street Journal reports (paywall) that more than 300,000 U.S. accountants and auditors have left their jobs, amounting to a 17% decline. This “exodus” of qualified tax professionals is part of an ongoing and larger economic trend, coupled with fewer people pursuing degrees in accounting.  

The Volunteer Income Tax Assistance (VITA) grant program, a service provided by the IRS, is experiencing shortages in volunteers, especially in rural and low-income communities in which those taxpayers have the greatest need. The number of tax filing assistance programs dropped considerably during the pandemic, and the rate of growth has slowed in recent years. The livelihood of low-income tax return preparation services like VITA is mainly dependent on the number of qualified volunteers to assist with these returns. As NewAmerica discusses, a lack of professionals and volunteers means that taxpayers of all incomes, especially low-income taxpayers, will have limited resources.

Where does this leave someone without the resources or ability to find and hire a credentialed and competent return preparer?  It leads them to do their own research. is full of great resources and information, but it can be difficult to find the answer you are looking for, and, if you have limited time, education, or English language skills, it can be even more challenging.  Many taxpayers will look for answers to question on the internet, and this may take them to TikTok. 

And what do we find when we go there?

First, we actually see legitimate advice.  This poster also provides basic, but also accurate and useful, information about standard deductions, tax brackets, and home mortgage deductions, and some slightly more sophisticated advice on topics like “tax loss harvesting,” i.e., selling some stocks at a loss to offset your gains before ethe end of the tax year. And, the same poster, Eric Powell, also posted a video countering the bad advice (see below) that you can hire your children from birth to get a tax write-off.   

In How to pay less in taxes, understand how the tax code works and work… this poster talks about IRC § 1031 exchanges as if they are a secret, illicit strategy, but the advice is accurate  This post contains a skit about paying a family member for providing childcare to get the credit for child and dependent care. In the skit, the grandmother is actually providing child care, and the son is actually paying her.  The idea is to get a tax benefit and keep the money in their family, which is not a bad idea so long as they comply with the rules.  See IRC § 21; and a summary here in IRS pub 503 on the topic.

But, we also see really bad advice.  This clip was featured during the ABA Tax Section program, “Combatting Misinformation on Social Media.”  In Clothing is not tax-deductible, but UNIFORMS are 🤓 #Taxtiptuesday  the poster correctly states that clothing is usually not deductible, but then goes on to say that if you print your name on your clothing, it becomes a uniform, and it is then a valid deduction. 

The responses to the tax posts could be an article in themselves, but my favorite response here is:  “welcome to your audit.”  In any event, what this poster neglects to mention is that uniform expenses are deductible under IRC § 162(a) if the uniforms are “(1) of a type specifically required as a condition of employment, (2) not adaptable to general use as ordinary clothing, and (3) not so worn.”  Patitz v. Comm’r, T.C. Memo. 2022-99, at *8 (citing Yeomans v. Comm’r, 30 T.C. 757, 767 (1958)).  

In This is how you can legally write-off your travel #taxwriteoff this TikTocker crosses the line on business travel. He explains that business travel expenses are deductible, which may be true depending on the circumstances, but then goes on to claim that as long as you do some work on vacation, you can deduct the cost of basically any travel.  The video begins by stating: “You can take your kids to Disneyland and write that trip off if you do work while you’re at Disneyland!”     The video does not mention, however, that this trip to Disneyland itself must be “reasonable and necessary in the conduct of the taxpayer’s business and directly attributable to it.”  Treas. Reg. § 162-2(a).  And moreover, if a taxpayer is engaging in both business and personal activities when they travel, for the travel costs to be deductible, the regulations provide that “traveling expenses to and from such destination are deductible only if the trip is related primarily to the taxpayer’s trade or business.”  If the trip is “primarily personal in nature, the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination.”

Another TikTocker advises viewers to pay their children “from birth” up to $12,000 per year and deduct it as a business expenses.  Obviously, if the children are not providing services to the business, they cannot be treated as employees.

There are also a lot of videos about the IRC § 179 bonus depreciation for vehicles that way over 6,000 pounds.  This post is typical. In this video, the poster actually does mention that the deduction has to be proportional to the business use of the vehicle, although that is a quick note at the end.

Now that you have a sense of what is out there, we return the question  –  If a taxpayer relies on advice from TikTok that turns out not to be correct, and ends up with an adjustment of their tax liability, can the taxpayers rely on that advice as a reasonable cause defense to accuracy penalties?

The baseline for reasonable cause as a defense to accuracy penalties in IRC § 6662 (and fraud penalties in IRC § 6663) is in Treasury Regulation 1.6664-4(b)(1), which states that this facts and circumstances determination “made on a case-by-case basis.”  [Note that there is a different articulation of reasonable cause for failure to file and failure to pay penalties.  Also, fraud penalties raise other issues that are outside of the scope of this post]. The key factor is “is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.”  The Regulation goes on to say that circumstances that indicate a good faith effort to assess the proper liability include:  “the experience, knowledge, and education of the taxpayer.”  Id.

One of the most effective reasonable cause defenses to accuracy penalties is reliance on a tax professional.  The regulations state that the minimum requirements for this defense are that the taxpayer provided all of the pertinent facts to the advisor, the advice is not based on unreasonable factual or legal assumption, and the taxpayer relies in good faith on the advice.  Treas. Reg. § 1.6664-4(c)(1).  The advice does not have to be in any particular form and can be “any communication. . . provided to (or for the benefit of) the taxpayer and on which the taxpayer relies, directly or indirectly.”  Treas. Reg. § 1.6664-4(c)(2). 

Courts have articulated similar tests for reasonable cause, most notably in Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 98-99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002), in which the Tax Court and Court of Appeals explained that good faith reliance on an independent, competent professional as to the tax treatment of an item may constitute reasonable cause.  Reasonable cause and good faith are present where:  (1) the taxpayer reasonably believes that the professional upon whom the reliance is placed is a competent tax adviser who has sufficient expertise to justify reliance; (2) the taxpayer provides necessary and accurate information to the adviser; and (3) the taxpayer actually relies in good faith on the adviser’s judgment.   See Internal Revenue Manual  Neonatology, 115 T.C. at 99.  Similarly, in United States v. Boyle, 469 U.S. 241 (1985), a case that concerned reliance on a tax advisor to meet a filing deadline, the Supreme Court explained that reliance on a tax advisor establishes reasonable cause where the issue was substantive, and the taxpayer provided all of the information to a competent tax advisor.  As stated in Boyle:

When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.  Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney.  To require the taxpayer to challenge the attorney, to seek a “second opinion,” or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place.

Id. at 251. 

The obvious problem with trying to fit the TikTok advice into reasonable cause based on reliance on professionals is that the communication is one-directional – the taxpayer receives general advice but has not provided the factual information about their situation to the tax advisor. 

Given the lack of access to tax professionals and the complexity of some Code provisions that impact low income taxpayers, the Neonatology/Boyle iterations of reasonable cause are insufficient for current times.  Instead, the IRS should adopt a more expansive view of reasonable cause that includes information from advisors on social media, along with taxpayer’s own study of the issue. What the IRS and courts should not do is determine that a taxpayer does not have reasonable cause merely because they did not consult a tax professional.  In that regard, the case of Reiff v. Comm’r, T.C. Summ.Op. 2013-40, at *6, is troubling.  There, the Tax Court sustained accuracy penalties, noting that although the taxpayer conducted online research regarding deductions on his self-prepared return, he “did not consult or otherwise seek the advice of a tax professional in preparing their return.”   There is simply no requirement in the Treasury Regulations that a taxpayer consult a tax professional. Of course, in some circumstances, it might be appropriate in the reasonable cause analysis to require a high net worth taxpayer who can afford competent tax advisors to seek professional tax advice, but this requirement should not be imposed without analysis of the taxpayer’s ability to hire a tax professional.

Taxpayers with limited resources should not be shut out of penalty relief because they were not able to hire a tax professional and instead looked to advice that seemed reasonable to them, recalling the Supreme Court’s statement in Boyle that most taxpayers are not competent to discern errors in tax advice. As one of the facts and circumstances, the IRS should consider the taxpayer’s access to a tax professional, and, whether the taxpayer was not able to hire a tax professional, either because of lack of resources or lack of availability.

There is a basis for this approach already recognized by the IRS and the courts.  In Internal Revenue Manual (“IRM”), the IRS states that reasonable cause can include ignorance of the law, and looks to the taxpayer’s education, whether the taxpayer has previously been subject to the tax, if the taxpayer has been penalized before, if there were recent changes in the tax forms or law that a taxpayer could not reasonably be expected to know, and the level of complexity of the issue.

In Pemberton v. Comm’r, T.C. Summ. Op. 2017-91, at *7–8, where the taxpayer deducted undergraduate education expenses.  This was incorrect, but the Court found that the taxpayer had consulted an IRS publication and believed that his education expenses were deductible under its guidance.  The Tax Court noted that “[a]lthough petitioner had some undergraduate education at the time he prepared his . .. Form 1040, he is not a tax professional. The determination of whether education expenses are deductible as ordinary and necessary business expenses under section 162 is a fact-intensive analysis and requires a reference to and analysis of caselaw as more fully discussed in this opinion.”   

In contrast, in Remy v. Comm’r, T.C. Memo. 1997-72, at *8, the Tax Court found that “it is evident that he attempted to research the tax law to find authority for his position,” but because there was such a weight of authority against the position (that he could reduce his taxable income by deducted the value of uncompensated services to clients), the Tax Court found that that there was no reasonable case.  The lesson from this case is that the taxpayer should double-check the advice on TikTok to confirm it has not been previously rejected by the IRS or the courts. 

A taxpayer who is relying on TikTok or other social media, or internet searches for tax information should maintain these sources. In Woodard v. Comm’r,  T.C. Summ.Op. 2009-150, at *3-4, the Tax Court seems open to the idea that internet research could provide reasonable cause, but the taxpayer was not able to provide any information about the sources he relied on.  “From the record, it is not clear that he questioned the provenance or accuracy of the information he found through the Google search engine. Without knowing the sources of the information, it is impossible for the Court to determine that those sources were competent to provide tax advice. Accordingly, we cannot conclude that [the taxpayer] exercised ordinary business care and prudence in selecting and relying upon the information he found on line.”

TikTok videos remain online indefinitely (unless the poster or the site removes them), but there is no guarantee that a particular video will be there in two or three years when the return is being audited. This is true for other internet sources as well.  In order to successfully raise a “TikTok Defense,” the taxpayer will need to preserve the video along with other tax records. 

Applying these standards to our examples here, a taxpayer who attempts to deduct a personal vacation is unlikely to avoid penalties by relying on the TikTok post above.  The poster is not a CPA or other tax professional, and the comments from other users should raise skepticism.  Also, this is not a new, obscure, or complex question, and other basic internet research, including, provides accurate information in a user-friendly format.  See e.g., IRS discussions here and here.

In contrast, the TikToks on the IRC § 179 deduction may provide a reasonable cause defense.  There are hundreds if not thousands of people claiming to use it or endorse it, many of whom appear to be tax professionals.  If taxpayers try to do their own internet research, the IRS’s guidance does not even appear on the first page of an internet search for “Section 179 heavy vehicle deduction.” When you find it, the IRS guidance contains terms like “depreciation,” and “MACR’s” that may not be familiar to the average taxpayer, see e.g., IRS Pub 946 and instructions for Form 4562. It is not surprising that instead of trying to find information about IRC § 179 from the IRS, that a taxpayer would return to quick and easy explanations on TikTok.   

Before closing out this post, I’d like to recognize a couple of TikTockers trying to bring some order to the chaos.  Nick Krop, “Nick the CPA,” very quickly knocks down the five worst tax ideas on TikTok including the purported IRC § 179 deduction for heavy vehicles. He has many other videos cutting through the nonsense of other posters that are worth checking out. 

Also, Alisha Rodriguez, a CPA at AJ’s Tax, provides a spot-on explanation of how to identify unscrupulous return preparers and why you should avoid them and hire credentialed tax professionals. And she even provides a version of this video in Spanish!

These posters show that just because information is on TikTok, rather than published by the IRS or in a more formal, academic or professional journal, does not mean that it is not reliable and cannot form the basis of a reasonable cause defense.

Refund Claims and Section 7508A – Progress!

We welcome back Bob Probasco as today’s guest blogger.  Bob has written several guest posts parsing the code with a particular emphasis on issues involving interest.  He teaches at Texas A&M Law School where he is a Senior Lecturer and Director of the Tax Dispute Resolution Clinic.  Today, he parses the IRS guidance on when a taxpayer can successfully file a refund claim three years after COVID changed normal tax return filing deadlines.  Keith

Relax – you have more time to file a refund claim for the 2019 tax year.  For many taxpayers, April 15, 2023, is no longer a hard deadline.  But you still need to pay attention to exactly what relief the IRS offered; there are some situations in which taxpayers may assume they have more time than they do.

The IRS issued Notice 2023-21 on February 27, protecting taxpayers from falling into an inadvertent trap that might have precluded recovery for some refund claims.  The IRS website tells us that it has this effect for 2019 income tax returns:

  • If taxpayers filed their 2019 return after April 15, 2000, but on or before July 15, 2020, they can recover the maximum amount if they file their claim within 3 years of the date the original return was filed.
  • If taxpayers filed their 2019 return after July 15, 2020, they can recover the maximum amount if they file their refund claim by July 17, 2023.

The Notice also adjusts the date by which refund claims for the 2020 tax year must be filed to ensure full recovery.  For this blog post, though, I’m focusing on the 2019 tax year, and income tax returns for individuals, for simplicity.

This is welcome relief although short of a complete solution.  The National Taxpayer Advocate’s blog had some observations, praising the Notice and pointing out what more still has to be accomplished.  I have a few thoughts as well.



Why was this a problem?  Because of the COVID emergency declaration and IRS responses, most taxpayers had until July 15, 2020, to file their 2019 tax returns and until May 17, 2021, to file their 2020 tax returns.  And most taxpayers have been conditioned to assume, from multiple reminders over the years, a general rule that they must file refund claims (including filing an original return claiming a refund) within three years of the original filing due date to receive that refund.  Thus, some were likely to assume that they had until July 15, 2023, to file refund claims for the 2019 tax year.  Before Notice 2023-21 was issued, that was not a safe assumption, and still isn’t for some taxpayers.

This problem was identified more than a year ago.  The National Taxpayer Advocate submitted her 2021 Annual Report on January 12, 2022.  The Purple Book included a legislative recommendation (starting at page 30) to address problems with the interaction between section 7508A and refund claims.  Notice 2020-23 allowed taxpayers with 2019 tax returns due on April 15, 2020, to be filed as late as July 15, 2020.  As a result, refund claims for 2019 would satisfy the section 6511(a) deadline if filed within three years after the return was filed, potentially (I’ll come back to this adverb later) as late as July 15, 2023. 

Unfortunately, even when a refund claim is filed by the section 6511(a) deadline, section 6511(b)(2)(A) limits the amount of the recovery to the amounts paid within “3 years plus the period of any extension of time for filing the return.”  Section 7508A doesn’t extend the deadline for filing returns.  It suspends or postpones it.  Thus, a refund claim for 2019 filed on July 15, 2023, could only recover amounts paid by the taxpayer (including refundable credits) by July 15, 2020. Most payments (including income tax withholding and estimated tax payments) and refund credits for the 2019 tax year are deemed to have been paid as of April 15, 2020.  As a result, that timely filed refund claim might result in no recovery.  In effect, we would be forcing taxpayers to file the refund claim earlier than the section 6511(a) deadline and most taxpayers wouldn’t realize that.

I looked at the Purple Book suggestion back in January 2022 and concluded that there were some arguments, even before Notice 2023-21, to protect the unwary taxpayer.  TL;DR summary: section 7508A(a)(3) arguably provided the IRS the authority to provide relief regarding the lookback rule, and Regulation § 301.7508A-1(f), Example 5 provided an example where the suspension period was disregarded in determining the lookback period.  But that example was of a situation in which the section 7508A suspension period included the section 6511(a) deadline; it didn’t address situations in which the suspension period under section 7508A included the deadline for filing the original return.  Could you make an argument for the latter even without legislative or regulatory change?  Sure, but it might not succeed and taxpayers without representation wouldn’t even know to make that argument if their refund claim were denied.

Notice 2023-21 – details

The new Notice takes a straightforward approach to solving the problem.  As with the previous COVID questions, it defines Affected Taxpayers and then specifies the relief.  Affected Taxpayers are:

  • “any person with a Federal tax return filing or payment obligation that was postponed by Notice 2020-23 to July 15, 2020”
  • “any person with a Federal tax return filing or payment obligation that was postponed by Notice 2021-21 to May 17, 2021”

Notice 2020-23 applied to filing and payment obligations due, including as a result of a valid extension, on or after April 1, 2020, and before July 15, 2020; Notice 2021-21 was more narrowly focused on filing and payment obligations normally due on April 15, 2021, or June 1, 2021, but didn’t take into account extensions.  (This is a vast over-simplification; it’s always best to carefully parse any such notices.)

Essentially, under Notice 2023-21, all individual taxpayers for both years are Affected Taxpayers and some entities are Affected Taxpayers with respect to the 2019 tax returns.  The relief granted was to disregard the two different suspension periods in determining the beginning of the lookback period.  But the two different suspension periods were stated in separate sentences and the relief granted was qualified as “relating to the tax for which the return filing or payment due date was postponed.”

That last phrase, I assume, was because the lookback period for individual taxpayers filing a refund claim for the 2019 tax year included both suspension periods.  The IRS apparently decided that they should be allowed to disregard the first suspension period (4/1/2020 – 7/15/2020) but not the second suspension period (4/15/2021 – 5/17/2021).

I was particularly interested in how this relief affected a couple of our clients who had not yet filed their original 2019 tax returns, which would show overpayments.  The only example in Notice 2023-21 wasn’t very helpful, as it involved a taxpayer who filed the 2019 tax return on June 22, 2020.  The notice doesn’t specify anywhere that relief was not available who had not filed their original returns by the postponed due date, but the absence of “no” doesn’t always mean “yes.”  But the description on the IRS website did say “yes” to this question.

Some observations

I began looking at this with a vague impression that the interaction of Notice 2020-23 (suspending the period for filing and payment obligations for the 2019 tax year) and Notice 2023-21 (disregarding the suspension period for purposes of determining the lookback period for refund claims) might lead to some strange results.  After close reading of Notice 2023-21, it seems to have been very well drafted.  I think it achieves the IRS’s immediate goals, in terms of resolving issues of a specific, nationwide emergency that affects imminent (normal) deadlines for refund claims.  The NTA is still advocating for a solution that is statutory, permanent, and inclusive of all section 7508A relief.  Tax professionals would like the same thing.  But Notice 2023-21, if nothing more, has been a useful exercise in starting to work through the complexity.

However, I still have a few concerns.

Policy choice leading to (somewhat) strange results?

A suspension of the section 6511(a) deadline for filing refund claims – such as was included in Notice 2020-23 for the 2016 tax year, normally due 4/15/2020 – automatically results in disregarding the suspension period when determining the lookback period.  That’s in the regulation above, which relies on language that mirrors section 7508A(a)(3).  That keeps the two deadlines in sync, so that a timely filed return followed by a timely filed refund claim will always be able to recover the maximum amount.

A suspension of the deadline for filing the tax return would – once the principles of Notice 2023-21 are implemented more broadly by regulation or legislation – automatically result in disregarding the suspension period when determining the lookback period.  A suspension of the deadline for filing the tax return, however, would not change the section 6511(a) deadline.  The two deadlines would not be in sync. 

You can see that in looking at the effect on three different hypothetical taxpayers.  Consider A, B, and C, all of whom are Affected Taxpayers for purposes of Notice 2023-21.  A filed his 2019 return on 4/15/2020; B filed her 2019 return on 6/1/2020; and C filed his 2019 return on 7/15/2020.  All three returns were filed timely because of Notice 2020-23.  For all three returns, the lookback rule allows a refund claim filed by 7/15/2023 to reach all payments and refundable credits.  Yet section 6511(a) requires that A must file his refund claim by 4/15/2023; B must file her refund claim by 6/1/2023; and C can file his refund claim as late as 7/15/2023.  In effect, C is rewarded for filing his return later than A and B filed theirs.

The Code includes several provisions to ensure that a timely filed refund claim, following a timely filed return, can recover all payments and refundable credits:

  • Amounts paid before the filing due date are deemed to have been paid as of the filing due date.
  • An extension of the filing due date results in an extension of the deadline for filing a refund claim and of the lookback period.
  • The lookback period is also adjusted for several special circumstances leading to a later deadline for filing a refund claim – e.g., section 6511(d)(1)(B), (2)(A), (3)(B), and (4)(A).

Notice 2023-21 does not do the same thing, because it disregards the suspension period with respect to section 6511(b) but not with respect to section 6511(a).  This leads to a relatively rare situation in which section 6511(b) would not limit the amount of a refund, but section 6511(a) would preclude any refund at all.

I assume this was a deliberate choice; the example in Notice 2023-21, as well as the description on the IRS website, both state that refund claims must be filed within three years of the date they filed the original return, with an outer limit of July 15, 2023.  The argument for the IRS choice here may be that, in the example above, taxpayers A and B evidently didn’t need the postponed due date.  The counter-argument might be that we don’t apply the same principle with respect to the original due date.  For the 2022 tax year, for example, taxpayers could file returns as early as January 23, 2023, but would still have until April 15, 2026, to file refund claims.

I perhaps would have preferred a different policy choice here.  In part to treat taxpayers equally with respect to COVID relief that was made available to everyone, not just those who needed extra time.  In part because of the potential for misunderstanding.  Let’s turn to that topic.

Communicating to taxpayers

I commend the IRS for their efforts to publicize the effects of Notice 2023-21, as well as many others who have been spreading the word.  But I still have some concerns about whether that message will be received by taxpayers, particularly since most of them do not read the IRS website, let alone Notice 2023-21.  They get their information (condensed and simplified) from other sources and don’t always read closely for the details.

For example, one of our clients – with a more sophisticated understanding than most taxpayers – heard about the postponement of the filing date for 2019 tax returns to July 15, 2020.  Unfortunately, he did not catch the qualification, that the postponement was for acts due between Apri1 1, 2020, and July 15, 2020.  That took care of his personal tax return but he and his wife also had a small partnership.  The partnership return was still due March 15, 2020, and he filed late.  There was no partnership activity or taxable income to pass through to their Form 1040 but the partnership was hit with a $1,640 penalty under section 6698(a)(1).  (The IRS refused to abate the penalty but there was still a happy ending when the IRS eventually issued Notice 2022-36, a general abatement of penalties for late filing.)

We will almost certainly have similar misunderstandings with some aspects of this relief that may not be intuitively clear for some taxpayers, despite all of our best efforts.  If they reach out to tax professionals, we can explain in the context of their particular facts, but some won’t until it’s too late.