Filing the Notice of Federal Tax Lien during the Automatic Stay

Once the IRS makes an assessment, it sends the taxpayer a notice and demand letter as required by IRC 6303. If the taxpayer fails to pay the full amount in the notice and demand letter within time period set out in the letter, usually 10 days, then a federal tax lien arises and relates back to the moment of assessment. This lien sometimes goes by the name of assessment lien or secret lien but whatever name it may receive, this lien is the federal tax lien and it exists in essentially every case in which the taxpayer has an outstanding liability even if few taxpayers appreciate that a lien exists and has attached to all of their property and rights to property. The existence of the federal tax lien allows the IRS to file a notice of that lien alerting the world to the person’s tax debt. Filing the notice of lien serves as a disclosure of a person’s tax situation which IRC 6103 normally prevents but Congress permits the disclosure in this circumstance in order to allow the IRS to perfect its lien vis à vis the four parties listed in IRC 6323(a).

The IRS normally has total control over the decision to file the notice and the timing of the filing of the notice; however, the filing of a bankruptcy petition by the taxpayer limits that unfettered ability to decide when to file the notice. The automatic stay found in BC 362(a) prohibits creditors from, inter alia, filing liens and taking other actions to collect. I cannot recall seeing a case in which the IRS filed a motion to lift the stay to allow it to file a notice of federal tax lien after the filing of a bankruptcy petition; however, in In re Gorokhovsky, No. 17-28901 (Bankr. E.D. Wis. 2018) the IRS did exactly that and the court granted the IRS request. For that reason the case deserves some attention.

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The debtor owned three separate pieces of property at the time of filing the bankruptcy petition, none titled in his name:

  • A house in Ozaukee County, Wisconsin titled in the name of his ex-wife but awarded to him in a 2011 divorce;
  • A condo in Cook County, Illinois titled in the name of his ex-wife but awarded to him in the divorce; and
  • A condo in Milwaukee County, Wisconsin titled in the name of a defunct LLC owned by the debtor.

At the time of the filing of his bankruptcy chapter 7 proceeding he owed the IRS over $450,000. The IRS filed a notice of federal tax lien in Ozaukee County, Wisconsin but not in Cook County, Illinois or Milwaukee County, Wisconsin. In his bankruptcy schedules, Mr. Gorokhovsky acknowledged ownership of all the properties and acknowledged the tax debt. The chapter 7 trustee abandoned the three properties after determining that they had inconsequential value to the bankruptcy estate. Chapter 7 trustees routinely abandon property after researching the value of the property and outstanding liens attached to it since the job of the chapter 7 trustee involves recovering value for the unsecured creditors of the bankruptcy estate. Property that the trustee cannot turn into value for unsecured creditors has no benefit to the estate since all of the value will go to the secured creditors.

The IRS wanted to pursue collection against the properties. It asked the court to lift the stay so it could do so. The abandonment of the property removed it from the estate; however, the opinion did not say whether the stay was lifted against the debtor by the granting of the discharge or some other means of lifting the stay. The debtor opposed the lifting of the stay. The IRS first showed that the debtor had no equity in the property. The IRS could show that the debtor did not need the property in order to reorganize since the debtor filed a liquidating bankruptcy case. The IRS argued that its interests were not adequately protected and it could be harmed by maintaining the stay. The court concluded that lifting the stay would not interfere with the bankruptcy case and that the harm the IRS might suffer outweighs any harm to the debtor.

Because the bankruptcy case is a no asset chapter 7 case and because the trustee had already determined that the property had no value for the bankruptcy estate, the result here naturally flows from the facts. In most no asset chapter 7 cases, the debtor will already have received a discharge as an individual by the time the trustee abandons the property. The stay applies to actions regarding individuals and actions regarding property of the estate. Here, it appears the IRS needs the stay lifted because the stay on the individual remained in effect. The granting of the stay relief requests now clears the deck for the IRS to file the notice of federal tax lien it should have filed previously in order to perfect its interest in two of the properties and to bring suit. If it brings suit quickly enough, it can avoid the need to file the notice. While the case seemed odd to me at first glance, the timing of the request to lift the stay makes sense if the stay regarding the individual remained in effect.

 

 

Fighting a Form 1099 with Which You Disagree

We have written about cases involving Form 1099 previously on several occasions including one post early last year that provides approaches both the IRS and the taxpayer might take to the problems created by a Form 1099. I also wrote a post yesterday discussing how to approach a Form 1099-C contest. An order entered in the case of Horejs v. Commissioner, Dk. No. 4035-17 shows that, no surprise, the problem continues and that at least one petitioner was pretty upset about the trouble it took to fix the problem. A bad information return is costly to the IRS and to the taxpayer as Horejs demonstrates. Just as it is critical to the system to do everything possible to get tax returns correct at the outset it is critical to get information returns correct as well. The preparer of a bad information return, however, usually does not pay the price inflicted on the taxpayer and the IRS to unwind the bad information provided.

The Horejs case also raises an interesting jurisdictional issue regarding a refund to an intervenor.

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Citibank sent a Form 1099-C to Mr. Horejs, his wife Mary Baldwin and the IRS indicating that Mr. Horejs and Ms. Baldwin had income resulting from the cancellation of debt. Mr. Horejs told the IRS, presumably during the audit phase though the description of the timing is not perfectly clear, that the “Form 1099-C was incorrect, referring respondent (the IRS) to litigation between petitioner (Mr. Horejs) and Citibank.” The IRS asked for more information about the dispute which Mr. Horejs did not provide. Specifically, the IRS asked him to contact Citibank to obtain a corrected Form 1099-C and send it a copy.

While it would be nice if Citibank would oblige, in situations like this Citibank and the taxpayer usually have a broken relationship. The fact that Mr. Horejs sued Citibank about the debt suggests that he will probably struggle to convince Citibank to send him a new form. Mr. Horejs alleges in his case with the IRS that it was wrong for the IRS to ask him to do this and wrong for the IRS to rely on the Form 1099-C sent to it by Citibank. I sympathize with Mr. Horejs and I also sympathize with the IRS because it’s trying to resolve a problem it did not directly create. Because of the impasse regarding the Form 1099-C at the audit stage, the IRS issued a notice of deficiency. This is an easy way for the correspondence auditors to kick the problem upstairs.

Of course, sending the notice of deficiency not only prolongs the problems for the taxpayer and the IRS but also brings another innocent party into the situation, the Tax Court. The parties before the court and the court itself generally do not possess the information necessary to resolve the case and the system does not create a mechanism to make the issuer of the Form 1099 a party to the case over which the court would have power to issue orders and over which it could impose sanctions. Perhaps we should build a better mousetrap with respect to information return cases and make the issuer of the information return a party, get everyone in front of the court at the same time and assign “blame”, including the imposition of penalties against the issuer of a bad information return or against the taxpayer. If the information return issuer were a party to the litigation, the IRS would have almost no work to do because it would be up to the information return issuer to come forward with information to support the basis for issuing the information return and up to the taxpayer to respond when the information return issuer came forward with solid evidence to support the issuance.

But that’s not the system we have.

When the IRS sent the notice of deficiency, Mr. Horejs filed a Tax Court petition. Mary Baldwin did not. Since she did not file a petition, the IRS assessed the proposed deficiency against her. She paid the liability while Mr. Horejs’ Tax Court case was still pending. Then she filed Notice of Intervention and the Court issued an order amending the caption and allowing her to intervene. I do not recall seeing this before but maybe I just have not paid enough attention to parties trying to intervene.

Meanwhile, the IRS made contact with Citibank to request support for the information return it issued. Citibank responded by sending the IRS a corrected Form 1099-C reporting that petitioner had not received cancellation of indebtedness income in 2014. Based on this change of heart by the issuer of the information return, the IRS prepared a decision document conceding the deficiency in the case. The order indicates that Mr. Horejs and Mary Baldwin signed the decision document as did the IRS attorney; however, neither Mr. Horejs nor Ms. Baldwin were happy.

Mr. Horejs filed a motion for summary judgment asking for his $60 filing fee, $500 for time and expenses dealing with the matter, a refund of the money paid by Ms. Baldwin, a letter of apology from the IRS and damages from Citibank for issuing a false document. At the hearing on the motion, the Court explained it did not have jurisdiction to order the IRS to apologize or to order damages against Citibank. The IRS stated at the hearing that it would issue a refund to Ms. Baldwin at the conclusion of the case and the parties filed a stipulation showing her statement of account.

Steve wrote a two part post last fall on 7434 generally for anyone interested in the relief available there.

So, Mr. Horejs wins his case. Does not receive an apology, does not receive compensation for his time and effort or his outlay of funds for the filing fee, does not receive, at least in the Tax Court, a recovery of damages from Citibank and may feel pretty empty as a winner since winning in Tax Court is often not as much winning as avoiding losing. I am sure he is still unhappy and frustrated. Still, an interesting thing happens in this case in that Ms. Baldwin, who did not timely file a Tax Court petition and now comes into the case as an intervenor, gets all of her money back (plus interest). The result shows that intervenors can obtain a recovery of an overpayment in a Tax Court case and creates an interesting aspect of Tax Court jurisdiction of which I was previously unaware. Hat tip to Carl Smith for noticing this unusual wrinkle in a Tax Court case. Maybe more non-petitioning spouses will come into the Tax Court after being assessed and use this refund forum.

 

 

 

What to Do if You Receive a Form 1099-C with Which You Disagree

Guest bloggers and I have written before about issues created by “bad” Forms 1099. A post exists on Faulty Information Returns written by my former colleague at the Legal Services Center Caleb Smith; on Offset of a Tax Refund to Pay Student Loans written by my current colleague at the Legal Services Center Toby Merrill who heads the Project on Predatory Student Lending; on Proving a Negative and Cash for Keys by me. These posts generally deal with the situation of someone receiving a Form 1099 that may not be accurate and trying to deal with the consequences of the issuance of the form.

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As Caleb discussed in the post about faulty information returns, this issue creates a significant burden in situations in which a class of individuals have their loans forgiven as a result of government enforcement litigation or private class action litigation attacking the debt provider or a debt buyer. In these situations, several hundred thousand people may have their debt forgiven as a result of litigation but the lender may feel compelled to issue a Form 1099-C to all of the members of the group or class obtaining relief. Frequently, the information return comes to low-income individuals not well equipped to cope with the tax consequences of receiving a Form 1099-C. The issuance of the Form 1099-C to hundreds of thousands of people who may have one or more defenses to the inclusion of the amount on the form as income also puts a strain on the IRS, which must cope with the resolution of the issue on an individual basis with each of the recipients rather than with the class.

In a couple of cases, the IRS issued guidance essentially telling the lender not to issue the Form 1099-C because the IRS could see that the issuance would create a train wreck for the individuals and the system; however, the IRS does not have an easy mechanism for issuing rulings that will stop the issuance of the Form 1099-C to a group or class of individuals. Several recent cases, including Corinthian, ITT, and Aequitas, involving student loan disputes highlight the circumstances that can lead to the issuance of massive numbers of Form 1099-C.

If the Form 1099-C goes out, then the IRS computers react like Pavlov’s dog. They scour the taxpayer’s account for a return reporting the amount on the information return. If the computers do not find the income from the information reported on a return filed by the taxpayer, the computers spit out an automated underreporter notice and the controversy is off to the races.

What to do on your tax return

One of the tough situations for low income taxpayers receiving a Form 1099-C is that the existence of this form places their returns “out of scope” for free income tax assistance at a Volunteer Income Tax Assistance (VITA) site. The tax clinic at Harvard refers qualifying individuals to VITA sites to have their returns prepared because the VITA volunteers generally do a great job and because they prepare the return for free. The combination of good quality and free makes these sites the perfect place to refer our clients; however, on this issue it does not help. Low income taxpayer clinics do not prepare current year returns because they focus on tax controversy, and return filing is not controversy. So, free assistance in preparing the return may be difficult or impossible to obtain. This is an issue, however, where paying money to get it right at the outset could save a lot of headaches (and money) in the future, so find a good professional to assist with the return if you can afford it and are not totally confident.

The guide discussed below helps people to understand how they can report the characterization of the amount on the Form 1099-C on their return. Because it’s hard to stop the issuance of Form 1099-C in most of the cases involving a class of individuals contesting the validity of a debt, and because no good way yet exists to warn individuals receiving the form who disagree with the amount on the form, the Legal Services Center created a brief guide for individuals who find themselves in this situation. The guide is not legal advice and is no substitute for professional advice on how to treat an item on a return, but might assist individuals struggling to come to a basic understanding of what the receipt of a Form 1099-C requires of them if they do not simply agree with the amount and characterization of the debt forgiveness. There can be more than one basis for excluding from income an amount reported on a Form 1099-C, which is why they are outside the scope of VITA volunteers’ services. So, using the guide should help a taxpayer start the process of reporting the information on a Form 1099-C but should not necessarily be the ending point. Having the return professionally prepared may save many downstream problems. The guide offers up two primary bases for taking the position that the debt is excluded – disputed debt and insolvency of the individual at the time of forgiveness. Others may exist and not all preparers may be equipped to make a proper evaluation. So, choose the preparer wisely.

What to do if the return gets audited

Even individuals who follow the guide to report information from a 1099-C may wind up in the correspondence audit process. The guide does not instruct individuals who wind up in the correspondence audit process on what to do, but for many individuals who file a return that the computer identifies as deficient in reporting the information on the Form 1099-C, understanding what to do in audit can also be important. Again, the information in this post is no substitute for professional advice, and low income taxpayer clinics can assist qualified individuals in the audit process to respond to the correspondence received from the IRS. The critical action in the correspondence audit is alerting the IRS to the dispute over the amount and characterization of the event on the Form 1099-C so that the individual can invoke IRC 6201(d) if the matter moves from the examination phase to the Tax Court.

If the individual who has received a Form 1099-C that they believe is mistaken as to the amount or characterization of the debt, and if that individual notifies the IRS during the examination, then it is possible to reverse the normal burden of producing evidence. That burden normally rests with the taxpayer because the taxpayer normally controls the evidence. Form 1099-C, however, is generated by a third party and not by the taxpayer. Therefore, Congress has provided in IRC 6201(d) that when the taxpayer has alerted the IRS to a problem with a Form 1099-C and has cooperated during the examination phase of the case, the burden of production concerning the accuracy of the Form 1099-C shifts to the IRS. So, responding to the notice of examination of the return can prove critical in an information return case.

Conclusion

It appears that large numbers of individuals are poised to receive Forms 1099-C. Addressing the form when filing the tax return could head off additional problems. If addressing the form on the return does not solve the problem, the taxpayer must respond to the notice of examination and alert the IRS to the dispute regarding the information on the form sent to the taxpayer.

Follow up on TBOR and CDP

In an earlier post, I wrote about an order in the case of Dang v. Commissioner remanding a Collection Due Process (CDP) case back to Appeals. Taxpayer opposed the remand requested by the IRS arguing that the Tax Court should just grant the taxpayer’s request for relief without the need of a remand. In a recent order, it looks like the Appeals employee took little time after the remand to reach the conclusion proposed by the taxpayer although the matter is not quite finally settled.

At issue in this case was the taxpayer’s request that the IRS levy on his retirement account in order to satisfy the outstanding tax debt. The revenue officer refused to do so and the Appeals employee said that the CDP hearing did not provide such a remedy. The taxpayer requested that the IRS levy on the retirement account because he was not yet 59 and 1/2. If he pulled the money out of the retirement account as requested by the RO and the SO, he would have to pay tax on the money withdrawn and a 10% excise tax under IRC 72(t)(1). If the IRS levies on the retirement account, the 10% excise tax does not apply because of IRC 72(t)(2)(A)(vii).

Among other arguments, the taxpayer argued that requiring him to pull the money out violated the Taxpayer Bill of Rights since it would cause him to pay more than the correct amount of tax. Requiring him to pull out the money just seemed downright stupid and unfair which no doubt motivated the Chief Counsel attorney to request the remand at the outset of the case. The second time around, Appeals seems to get the concept. The case suggests that some training might be needed and maybe a change in the IRM to make it easier for ROs to levy on a retirement account when requested to do so by the taxpayer. Without such a request, ROs must seek high level approval to levy on a retirement account. Removing the layers of approval when the taxpayer seeks the levy would make it easier for ROs to acquiesce to such a request.

The approval levels provide a barrier that explains why the employees would not readily acquiesce in what seems like a reasonable request by the taxpayer and why their behavior was grounded in logic twisted by the approval levels. The approvals levels necessary to levy on retirement accounts were created to protect taxpayers. So, Mr. Dang’s problem in getting the IRS to levy finds its roots in a procedure designed by the IRS to help but when coupled with the elimination of the penalty offered by IRC 72(t)(2)(A)(vii) ends up hurting certain taxpayers. It’s good to see that the IRS was able to work though the problem in the remand.

Because the case appears on a path to agreement, we will not have the opportunity to see what the Tax Court would do with the TBOR argument made by the taxpayer and whether the use of TBOR in this context might provide a path to remedy.

When Does an Offer in Compromise Extend the Statute of Limitations on Collection?

United States v. Kenny, No. 1:16-cv-02149 (N.D. Ohio June 6, 2018) involves a spectacularly non-compliant taxpayer against whom the IRS seeks both the reduction of assessments to judgment and an injunction. The court grants both. Mr. Kenny’s defense relied upon the statute of limitation on collection and the failure of his three OICs to extend it. The issue arises regularly because of the handling of OICs by the offer groups in Brookhaven and Memphis.

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Mr. Kenny failed to pay taxes voluntarily for about 25 years. He receives income as an independent contractor or a business owner and not as a wage earner. The court described in some detail his failure to voluntarily comply with his tax obligations and his expenditures which included almost $5,000 in monthly rent, almost $2,000 each month in meals and gas, extensive travel, payment of his son’s student loans and his daughter’s tuition. As with almost any case of this type, the described behavior would appear to have the facts needed in order to pursue prosecution under IRC 7201 for evasion of payment; however, for reasons not explained in the opinion, the government seeks other remedies against Mr. Kenny.

In addition to obtaining a judgment against him for the outstanding balance of the taxes, the IRS also sought an injunction to “to comply with his on-going tax obligations.” In addition to the almost $1.5 million in income taxes he also owes about $10,000 in trust fund recovery penalty. I have seen injunction cases to keep taxpayers from pyramiding trust fund taxes, but his case appears to be an injunction directed at complying with the income tax laws.

The court starts out stating that it generally disfavors injunctions “that do no more than require on-going compliance with the law.” The court goes on, however, to state that the unique facts here support the use of injunction as a tool to promote compliance. It cites to five factors developed by the 6th Circuit for determining whether to issue an injunction:

  • The gravity of the offence
  • Extent of participation
  • Scienter
  • Recurrent nature of offense
  • Likelihood that his business activities will involve him in some offense again

The court spends a long paragraph explaining how Mr. Kenny fits into all of the categories set out by its circuit. The paragraph ends with the notation that the IRS withdrew the request for the appointment of a receiver to handle the business affairs of Mr. Kenny. The appointment of a receiver is a remedy even more extraordinary than an injunction.

Statute of Limitations

Mr. Kenny’s defense to the effort to obtain a judgment against him focuses on the statute of limitations and the impact on the statute on the three offer in compromise (OIC) requests that he filed with the IRS. Essentially, he argues that the IRS rejected the OICs as non-processable returning them without consideration. Further, he argues that because each of the offers were returned as non-processable his submission of the OICs would not extend the statute of limitations on collection and that the IRS needs the extra time it argues results from his submission of the OICs in order for the suit against him reducing the liability to judgment to be considered timely. The applicable IRM provision (IRM 5.8.7.2) provides “An offer can be returned as either a “not processable return” or a “processable return”. It is important to note the distinction because when there is a not processable return the collection statute is not suspended…”  The court does not provide the detail needed to reveal exactly what happened when Mr. Kenny submitted his OIC requests; however, it appears that the IRS rejected the OICs at some time after the processability point thereby triggering the statute of limitations extension needed by the IRS.

The issue of when the IRS rejects an OIC has significance not always noted when the OIC gets returned to the taxpayer. Just as a taxpayer should not submit an OIC without thinking about the statute of limitations implications, a taxpayer should carefully note the basis for the IRS returning an OIC without acceptance. Many things can cause the IRS to return an OIC as non-processable and a detailed description of the circumstances that cause the IRS to determine an offer is non-processable as well as the process for making the determination can be found in IRM 5.8.2. The Centralized OIC units make the determination as stated in IRM 5.8.7.2.1 which provides:

Not Processable Returns

  1. An offer is determined to be not processable if any of the “Not Processable” criteria listed in IRM 5.8.2.3.1, Determining Processability, is present. This decision is the sole responsibility of the Centralized OIC (COIC) sites located in the Brookhaven and Memphis Campus.

About a dozen years ago several taxpayers litigated the processability issue with respect to the bankruptcy criteria. These taxpayers argued that making bankruptcy a processability criteria disadvantaged them in an inappropriate manner. After a couple of victories at the bankruptcy level (See In re Holmes, 298 B.R. 477 (Bankr. M.D. Ga. 2003); In re Chapman, 1999 Bankr. LEXIS 1091 (Bankr. S.D. W. Va. 1999)), the tide turned on this issue and the IRS prevailed (See In re Shope, 347 B.R. 270 (Bankr. S.D. Ohio 2006); In re Uzialko, 339 B.R. 579 (Bankr. E.D. Pa. 2006). I mention the cases for those who might have interest in attacking the processability criteria to show that such an attack would prove difficult because of the discretion IRC 7122 gives to the IRS in making the OIC determination.

A sure sign that the IRS is returning an OIC as non-processable is that the IRS does not give a taxpayer appeal rights when it rejects an OIC. Those who regularly submit offers know that getting a call from the OIC unit relatively quickly after submitting an OIC where the person at the offer unit says “if I do not receive X within 10 days I am going to return your offer as non-processable” happens fairly regularly.

It appears from IRS activity on Mr. Kenny’s OIC submissions several months after the initial submission that the IRS did consider the OICs on their merits before rejecting them; however, the type of rejection may not always be clear. In a recent post complaining about the telephone number provided by the offer unit, I spoke about a processability rejection (an incorrect one) because the assessment occurred as a result of a restitution order and when it does the IRS has no ability to administratively compromise the liability. Unfortunately, the Kenny case offers little guidance on when the return of an OIC results from a non-processable submission verses an unacceptable one on the merits of the offer because Mr. Kenny did not provide much evidence. Despite the absence of clear guidance, the Kenny case serves as a reminder that submitting an offer suspends the statute of limitations on collection and submitting multiple offers can suspend it for quite some time if the submitted offers make it past the processability stage. For taxpayers seeking to defend collection suits on the basis of the statute of limitations keeping careful track of these submissions and the basis for denial of the OIC requests becomes important in deciding if a procedural defense to the suit is available.

 

 

 

 

 

 

When Does the Period Begin for Filing a CDP Request?

I previously blogged the case of Weiss v. Commissioner in which the taxpayer argued that the date on the Collection Due Process (CDP) Notice controlled the period for making a CDP request. Les provided an update on the case that included the oral argument and the briefs. The D.C. Circuit issued its opinion, an unpublished per curiam, on May 22, 2018, affirming the decision of the Tax Court but not without some criticism of both parties.

As a reminder about the case and to set up the language of the Circuit decision, the taxpayer owes a substantial amount of tax for many periods. Three bankruptcy cases suspended the statute of limitations on collection. Near the end of the statute of limitations, a revenue officer made a personal visit to the home of Mr. Weiss to deliver the CDP Notice. The RO dated the notice he expected to deliver during the visit; however, the RO did not go up to the door and deliver the notice because a dog of sufficient size and ferocity made him think better of personal delivery. Instead, the RO returned to his office and mailed the notice. He did not get around to mailing the notice until two days after the date on the notice.

Mr. Weiss filed a CDP request within 30 days of the date on which the notice was actually mailed but more than 30 days after the date on the notice. He argued that his request should be treated as a request for an equivalent hearing which does not suspend the statute of limitations on collection and the IRS argued that the actual date of mailing controls which meant that his request for a CDP hearing was timely and suspended the statute of limitations on collection. The consequence of a statute suspension was that a suit brought by the IRS was timely filed. The Tax Court agreed with the IRS that the date of actual mailing controls but had some sharp words for both parties.

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When requesting a CDP hearing or an equivalent hearing, the IRS asks that the taxpayer file a Form 12153. The form contemplates that if filed within 30 days of the CDP notice the taxpayer will receive a CDP hearing with full rights and if filed after that time but within one year of the CDP notice the taxpayer will receive an equivalent hearing. Although the form does not contemplate the option, it seems possible that a taxpayer could make a request for an equivalent hearing during the first 30 days by stating that request. Because of the suspension of the statute of limitations that accompanies a CDP hearing and because of the low likelihood of success in court on those cases, good reason exists to want an equivalent hearing in some circumstances.

Here, the taxpayer argues that he wanted an equivalent hearing and he thought he would get one based on the timing of his request. In my experience the IRS regularly puts dates on its letters, not just CDP notice letters, that do not correspond to the date on which the IRS mails the letter. Weiss tells you not to rely on the date of the letter as the meaningful date. For taxpayers seeking an equivalent hearing in this context, it would seem that a clear statement that an equivalent hearing is sought plus waiting for a couple of weeks after the 30 day period ends from the date on the CDP notice would be the best practice. The D.C. Circuit, while agreeing that the language of the statute dictates using the date of mailing rather than the date on the letter, had some pretty sharp words for the IRS and its practice of putting a date on the letter that was not the actual date of mailing:

Nonetheless, in spite of the unappealing proposition that we must side either with a taxpayer deliberately attempting to manipulate the Code to prevent paying his own taxes or a government agency that seems not to care whether it provides the citizenry with notice of their rights and liabilities, we must decide whether the date on the notice or the date of mailing governs. The taxpayer’s position has the advantage of common sense. But the government’s position has the insurmountable advantage of compliance with the language of the statute. That is to say, what the statute requires is “the notice . . . shall be . . . sent by certified or registered mail, return receipt requested . . . not less than thirty days before the date of the first levy. . . .” (emphasis added). In this case, the undisputed evidence is that the notice was “sent,” that is mailed, no more than thirty days before Weiss’s March 14 mailing. Therefore the statute was tolled.

We note in parting the court’s hope that few taxpayers will be as anxious as Weiss to manipulate the law in order to attempt to extinguish tax liabilities. We further hope that few agencies will be as careless with dates and especially with the rights of the citizens as the IRS in this case. Nonetheless, unattractive as the position of the IRS may be, it does comport with the language of the statute and the apparent meaning of the word “send.” We therefore affirm the decision of the Tax Court.

Congress could fix this problem, and others regarding CDP notices, by requiring the IRS to put a date on the letter by which the taxpayer should file the request and providing that the taxpayer could rely on that date or on the later date of actual mailing. There were enough problems with notices of deficiency that Congress addressed the situation in that context in 1998 at the same time it created the CDP process; however, it failed to give taxpayers seeking CDP relief the same benefit as those seeking relief in the deficiency context.

 

Updates on Collection Issues

The IRS has recently updated several matters that impact taxpayers in collection. This post pulls together some of the newly available information.  The areas discussed in this post are the financial standards, the updated offer in compromise booklet, the impact of the new law on amounts exempt from levy and the impact of the new law on the time to file wrongful levy claims.

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Financial Standards

On March 26, 2018 the IRS issued new financial standards to be used in collection cases.  The new standards provide guidance to individuals seeking to prepare a collection information statement in order to convince the IRS to grant an offer in compromise, an installment agreement, to make a currently not collectible determination or to otherwise decide the appropriate course of action in a collection case.  The financial standards have their roots in information published by the Bureau of Labor Statistics.  Congress also makes them applicable in bankruptcy cases for certain purposes.

Offer in Compromise

On March 25, 2018, the IRS issued a new Offer in Compromise Booklet. The updated booklet contains the following changes:

Form 656, Section 6, Filing Requirements – “I have filed all required tax returns and have included a complete copy of any tax return filed within 60 days prior to this offer submission.”

This is also addressed in the opening Q&A section under “Other Important Facts”:

“Note: If you have filed your tax returns but you have not received a bill for at least one tax debt included on your offer, your offer and application fee may be returned and any initial payment sent with your offer will be applied to your tax debt. Include a complete copy of any tax return filed within 60 days prior to this offer submission.”

WHAT YOU NEED TO KNOW, Q&A Section, Bankruptcy, Open Audit or Innocent Spouse Claim – “If you currently have any open audit or outstanding innocent spouse claim, wait for those issues to be resolved before you submit an offer.”

PAYING FOR YOUR OFFER – There is better highlighting of the Low-Income Certification option, with emphasis that low income certification means no money need be sent with the offer.

Because the IRS will not work an offer if a taxpayer has not complied with tax laws by filing all necessary returns, many taxpayers file returns immediately prior to the filing of an offer in compromise. The IRS does not always process past due returns with haste because it puts more focus on processing the currently due returns.  The new requirement that a taxpayer attach returns filed within 60 days of the submission of the offer allows the IRS offer group to avoid rejecting cases for lack of filing compliance and to get a view of the liabilities the taxpayer owes in advance of the actual assessment.

The warning about waiting for the resolution of outstanding audits or claims should be considered in the context that an offer in compromise acts as a closing agreement resolving all matters concerning the years covered by the offer. A taxpayer cannot go back and seek a refund after obtaining an offer and the IRS cannot go back and seek an additional assessment.  It is important to resolve all issues for the years covered by the offer but many taxpayers do not appreciate the scope of the offer with respect to the years it covers.

Low income taxpayers continue to receive a benefit when applying for an offer because they do not have to pay a fee for the offer or remit a percentage of the offer. Almost all practitioners know this but many individuals filing offers pro se may not appreciate this benefit and the new booklet tries to make it clearer.

Each of the changes seem appropriate and helpful.

Exemption from Levy

The exemption from levy is tied to the personal exemption. The personal exemption went up last year and the IRS has published guidance on how that change impacts the amount of the exemption from levy in a wage levy situation.  This creates a windfall for individuals subject to a wage levy that Congress probably did not think about when it passed the law.  Of course, windfall may be the wrong term when talking about a provision that can bring a taxpayer to their knees.  Here is the IRS description of the way the wage levy provisions will now work:

Public Law Number 115‐97, TAX CUTS AND JOBS ACT OF 2017, signed by President Trump on December 22, 2017, temporarily increases the basic standard deduction applicable to the 2018 taxable year [IRC § 63(c)(2); Rev. Proc. 2016‐ 55] across all filing categories:

  • From $6,350 to $12,000 for single individuals and married individuals filing separate returns;
  • From $9,350 to $18,000 for heads of households; and
  • From $12,700 to $24,000 for married individuals filing a joint return and surviving spouses.

The Act also suspends personal exemption deductions. Both changes, the increase in the standard deduction and the suspension of the personal exemption, are effective for taxable years beginning after December 31, 2017, and before January 1, 2026. These two changes impact how a recipient of a levy will figure the amount of income exempt from levy. Prior to the change in the law, the amount that was exempt from levy was calculated by taking into consideration both the standard deduction and the total exemptions of the payee. With the elimination of personal and dependency exemptions, a new method for determining the amount of income exempt from levy was needed.

As part of the Tax Cuts and Jobs Act, Congress amended §6334 to provide that from January 1, 2018 through December 31, 2025 employers and other recipients of levies would exclude from levy $4,150 per dependent per year in addition to the amount excluded based upon the standard deduction for the filing status of the person subject to levy. The amount exempt from levy each pay period is calculated by dividing the total amount exempt from levy for the year by the number of pay periods. Publication 1494, Table for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income has been updated. Changes are also being made to Forms 668-W(c), 668-W(c)(DO), 668-W (ICS) and Form 668-W, Notice of Levy on Wages, Salary, and Other Income, along with the instructions.  Due to the increase in the standard deduction amount, in most cases, the taxpayer will have more take-home pay that is exempt from levy.

Employers or others receiving levies will need to figure the amount of income exempt from levy. To do so the recipient  must determine what the payee’s filing status will be (The amount exempt from levy is based upon the standard deduction for that filing status); the frequency of payments, Daily (260), Weekly (52), Bi-Weekly (26), Bi-Monthly (24), Monthly (12); and lastly, the number of dependents that the payee will claim. In this example, the employer knows that the employee will claim the married filing joint standard deduction and has two dependents.

STEP 1: Determine the filing status of the payee.

STEP 2: Find the amount exempt from levy based upon how often taxpayer is paid:

Married Filing Jointly:

STEP 3: The taxpayer is entitled to exclude $4,150 per year per dependent. This chart shows the amount that can be excluded each pay period based upon pay frequency. The amount from far the right-hand column for the correct pay frequency will need to be multiplied by the number of dependents to arrive at the total amount exempt from levy that is attributable to the payee’s dependents.

Amount Exempt from Levy per Dependent:

Step 4:

Amount Exempt from levy from Bi-Weekly Pay:

Add the amount exempt per pay period based upon the payee’s filing status, plus the amount exempt per pay period per dependent to arrive at the total amount of take-home pay that is exempt from levy. A taxpayer that is married, files jointly, is paid $1,500 bi-weekly, and claims two dependents will receive $1,242.32 and will have $257.68 ($1,500-$1242.32) levied.

Wrongful Levy Claims

IRC § 6343(b) previously required taxpayers to make a wrongful levy claim within nine months of the taking of the property. For some people, this time frame was too short because they did not even learn about the taking during that time.  In response, Congress increased the amount of time taxpayers have to seek the return of property when they believe the IRS has wrongfully taken their property while trying to collect from a taxpayer.

Public Law 115-97, the Tax Cuts and Jobs Act extends the period for making an administrative claim to two years and if the taxpayer makes an administrative claim during that period the time to bring suit is extended for 12 months from the date of filing of the claim or for six months from the disallowance of the claim, whichever is shorter. The change applies to levies made after December 22, 2017, and to levies made prior to that date if the nine month period under the prior law had not yet expired.  The IRS issued IR-2018-126 to discuss the change and has revised Publication 4528 to reflect the change.

 

Requesting Innocent Spouse Relief

The National Taxpayer Advocate posted a blog detailing the impact of the change in the time period for requesting innocent spouse relief as a result of the litigation concerning the regulation under IRC 6015(f). The result of the study regarding the volume of the requests made after the change in the regulation makes clear that opening the time period for requesting relief under (f) from two years to the full period of the statute of limitations on collection has not had a material impact on the number of requests for innocent spouse relief. This information refutes concerns raised by the IRS in the litigation that opening up the time period would open the floodgates of cases seeking 6015 relief. The IRS makes similar floodgate arguments in the equitable tolling cases with similar empirical data to support its claim.

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For those not familiar with the issue, the 1998 Restructuring and Reform Act significantly changed the innocent spouse provisions and created three forms of relief available under subsections (b), (c) and (f) of IRC 6015. The legislation capped the time period for taxpayers to claim relief under (b) and (c) but was silent regarding (f) relief. The IRS promulgated regulations providing a two year period for seeking relief under (f) to match the time period under the other subsections. Low income taxpayer advocates Paul Kohlhoff and Bob Nadler attacked the regulation in the case of Lantz v. Commissioner, 132 T.C. 131 (2009), rev’d, 607 F.3d 479 (7th Cir. 2010). Although they convinced the Tax Court that this provision of the regulation was contrary to the statute, the Seventh Circuit reversed and upheld the regulations. Two other circuits upheld the regulations and cases were pending in other circuits when a letter from numerous members of Congress convinced the IRS to reverse its position and pull the regulation. [As a side note, the IRS issued Rev. Proc. 2013-34 following its change in course but has yet to publish a new regulation despite seeking comments several years ago.]

Since (f) relief is available to individuals who cannot obtain (b) or (c) relief, one of the IRS arguments in support of the two year limit on (f) relief was that it was necessary in order to avoid an end-run around the time limitation and open the door to a high volume of innocent spouse requests. The statistics published in the NTA’s blog suggest that the IRS fears of a high volume of requests due to the expanded time frame have not materialized. The relatively flat number of requests for relief before and after the change in the regulation suggest no need exists for Congress to amend (f) in order to protect the integrity of the innocent spouse statute.

The lack of any material change suggests that most individuals seeking relief do so relatively shortly after learning of their liability for a tax debt they believe they should not owe. My own experience with individuals seeking this relief supports this conclusion. Most of the time these individuals have ended the marriage and they seek to correct the problem as soon as possible. This is not something about which they procrastinate. The receipt of the IRS notice and demand letter individually and the prospect of facing the IRS collection system usually drive them to seek relief as soon as possible.

The post by the NTA also contains statistics concerning the percentages related to granting of innocent spouse relief. These statistics show a recent decline in the number of cases in which the IRS has granted relief. The statistics match the anecdotal concerns of advocates requesting innocent spouse relief. It is not clear if the quality of the requests has gone down, the review has become tougher or some other factor has influenced the rate at which the IRS grants these requests. As with most matters, it does make a difference if the individual is represented. I would be curious if statistics exist showing whether the number of requests from individuals representing themselves have increased or if the decline in acceptance of these requests reflects an across the board decline. My clinic usually gets involved in these cases when the individuals learn of the clinic after filing a Tax Court petition. Finding a way to have qualified individuals seeking this relief to come to clinics at an earlier stage in the process might improve the success rate of those seeking innocent spouse relief.