More on the Muddle of CDP

On August 6, 2019, I wrote about what I called the muddle that has been created in Collection Due Process (CDP) merits litigation.  Maybe because of the muddle of the litigation or maybe because I too am muddled, I kept thinking about the problem and I feel the need to write more about my concerns with the proposed decision in the Landers case that the prior post addressed.

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The ability to litigate the merits of a tax liability during the collection phase of a case came into the code in 1998 with the advent of CDP.  Among the opportunities provided to taxpayers by a CDP hearing is the opportunity to contest the merits of the liability in certain circumstances.  IRC 6330(c)(2)(B) provides:

The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.

At least one part of the muddle is the meaning of “or” in this provision, as it separates the clause discussing the failure to receive the notice of deficiency from the clause concerning prior opportunity.  At the ABA Tax Section meeting this fall, a panel on October 5 in the Pro Bono and Tax Clinics Committee will discuss prior opportunity as a part of the CDP summit.  Understanding how to interpret this clause and how the proposed Landers decision fits into the jurisprudence around this clause will take up some of the panel’s time.  It seems that the IRS and the Tax Court do not pay much attention to this “or”.

In 1998, Congress created the CDP to give taxpayers an opportunity to talk to the IRS before it levied on property and after it filed a notice of federal tax lien.  Although the focus of CDP centers on collection action, Congress included in the legislation a provision allowing taxpayers to litigate the merits of their tax liability if they had not previously had such an opportunity.  Congress did not provide an unlimited opportunity to contest the merits of a liability included in a CDP.  The statute rests on two separate requirement that the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”

The first basis for contesting the merits of a tax liability in the CDP context arises if the taxpayer did not actually receive the statutory notice of deficiency. In the hearings leading up to the 1998 legislation, Congress heard from many taxpayers who said that they never received a statutory notice of deficiency and the first time they learned that they owed the IRS occurred when the IRS began collection action against them.  Taxpayers who do not receive a statutory notice of deficiency because of some snafu in the mailing or receipt did have an opportunity to contest the liability in a judicial forum.  The statutory notice of deficiency would only have legal effect if sent to their last known address.  Whatever prevented these taxpayers from filing a timely petition in the Tax Court, they had a valid opportunity to seek review in the Tax Court.

The language of the statute permits these taxpayers to get back to the Tax Court to litigate their liability as long as they can prove non-receipt of the notice of deficiency.  Proof usually consists of their testimony that they never received the notice.  Assuming that the taxpayer meets the burden of proving non-receipt, the statute arguably places no limitations on the taxpayer’s ability to contest the merits the taxpayer failed to contest when the IRS sent the notice of deficiency.

In contrast to those CDP cases in which the taxpayer can contest the taxes reflected on a notice of deficiency, the statute creates a second less well-defined group of taxpayers who can contest the merits of the liability in CDP.  This group of taxpayers are ones “who did not otherwise have an opportunity to dispute such liability.”  This language leaves room for interpretation in looking at the words opportunity and dispute.  The IRS provided definition in its regulations with respect to this statute.  The regulation provides that the term “opportunity to dispute” includes “a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.”

Landers ignores the “or” and proposes that if the taxpayer actually has a meeting with Appeals, in this case through the audit reconsideration process, then this prior opportunity prevents the taxpayer from having a merits hearing in the Tax Court.  Landers does not talk about whether the failure to receive a notice of deficiency provides a stand-alone basis for a merits hearing as the statute seems to suggest but, without discussion, treats the “or” as an “and”.

This treatment would be the first case to hold that even though the taxpayer did not receive a notice of deficiency the actual meeting with Appeals overrides the language of the statute stating that the failure to receive the notice is the basis for a merits hearing.  It would not be the first Tax Court case to overlook the “or”.

In discussing the case within PT as I tried to work through the muddle, Christine provided the following comments:

I think the IRS view is that both conditions must be satisfied, since they felt the need to clarify in the reg. that an appeals conference offered before the issuance of a SNOD does not count as a prior opportunity, notwithstanding their general position that it does count. If the two grounds for merits review were wholly independent, the opportunity for an appeals administrative hearing would never matter in a case where a SNOD was issued but not received. 


I looked through a few of the income tax opinions on this, and noticed that in Montgomery and Tatum the judge changes the “or” to “and” when rephrasing the rule. The IRS acquiescence to Montgomery quotes the “and” rephrasing. 


That said, Tatum (and Sherer) are all about receipt & the taxpayer’s knowledge of the SNOD, and don’t discuss what opportunities for appeals review may have existed in between the SNOD and the CDP notice.


It’s puzzling to me in Onyango that the discussion is all about receipt of the SNOD, and the court does not talk about the “prior opportunity” language or use that language to find for the IRS. The D.C. Circuit’s affirmance says “Appellant has not shown that the Tax Court clearly erred in … finding that he ″received″ a notice of deficiency as that term is used in 26 U.S.C. § 6330(c)(2)(B).” In contrast, the Sego case does find that the petitioner wife who deliberately refused certified mail had a “prior opportunity” to dispute, in addition to citing caselaw saying that taxpayers can’t defeat actual notice by refusing mail. So the Sego court took care to eliminate both prongs for merits review, while the Onyango court did not. 

It will be interesting to see what happens to the “or” as Landers moves forward.  The Tax Court has not yet fully embraced the regulation, and its expansive view of opportunity has the effect of eliminating most CDP merits hearings.  So far, having an actual Appeals hearing seems important to the Tax Court making the provision a trap for the unwary, as discussed in the previous post.  That interpretation, which traces back to Lewis v. Commissioner, shows a gap between the Tax Court and the regulation, even if the Lewis case otherwise provides little comfort to taxpayers seeking merits relief.  The court now seems poised to accept the IRS interpretation of “or” in deciding that it really means “and”.  (It’s also not clear and not discussed in Landers how, if at all, IRC 6330(c)(4) has a role here if the taxpayer has an actual Appeals hearing.)

Timely Filing Issues in Bankruptcy Court

Dixon v. IRS, No. 2:18-cv-00274 (N.D. Ind. July 24, 2019) presents the issue of whether filing a bankruptcy petition extends the time within which a taxpayer can file a claim for refund.  In re Long, No. 19-20186 (Bankr. E.D. Wis. July 29, 2019) raises the issue of whether a debtor in a bankruptcy case must accelerate the time for filing their income tax return because of filing bankruptcy.  The answer to both questions is no.  Details and explanation below.

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Charles Dixon filed a chapter 13 bankruptcy petition on September 2, 2010.  As with most chapter 13 cases, it took time before his bankruptcy case came to an end on July 22, 2016.  While his bankruptcy cases was pending Mr. Dixon filed an amended return for tax year 2012 on April 13, 2015.  The IRS notified him by Letter 105C, a statutory notice of claim disallowance, on January 21, 2016, that it would not allow his claim.  For some reason he filed another amended return for 2012 in June of 2016 and the IRS sent him a statutory notice of claim disallowance with respect to that claim on August 3, 2016. 

On July 26, 2018, Dixon filed a complaint alleging that the IRS improperly denied his first claim.  The IRS filed a motion to dismiss because of the filing of the complaint more than two years after the notice of claim disallowance.  Though the court couches the dismissal discussion in jurisdictional terms, readers of this blog know that the timing of filing of the complaint vis a vis the sending of the claim disallowance issue may not present a jurisdictional issue though the time frame for filing provided in IRC 6532(a)(1) does represent an important time frame that a taxpayer must meet or show reasons for the failure to meet the time frame.

The statute requires that the taxpayer file the refund suit within two years of the sending of the statutory notice of claim disallowance.  Here, Mr. Dixon filed suit more than two years after the notice.  To overcome this timing problem, Mr. Dixon argues that his bankruptcy case tolled the time for filing the refund suit.  In support of this argument he cites to IRC 6503(h).  This section provides a tolling of “the period of time in which the United States can collect a tax against a taxpayer/debtor.” But it does not mention tolling the time within which to bring a refund suit.  The bankruptcy court declined to extend the tolling provision to the refund situation.  Doing so would have created a shocking result.  The tolling statute that he cited in support of the timeliness of his claim seeks to give the IRS more time to collect a liability in situations in which the automatic stay of bankruptcy prevents it from collecting.  The statute has nothing to do with extending the time for a taxpayer to file bankruptcy.

Next he argued essentially that his second refund claim gave him more time; however, the second claim mirrored the first claim.  It did not raise new grounds for recovery.  The court found that a second claim could only extend the time within which to bring suit if the second claim raised new legal arguments.  Since it did not, the filing of the second claim here had no meaning.  (The IRS pointed out that even if the second claim had contained a second ground for recovery it would have done no good here because Mr. Dixon filed it after the statute of limitations for filing a refund claim.)  Although Mr. Dixon did not argue that the statute of limitations for filing his refund claim did not create a jurisdictional bar to filing a claim after that date, he presented no evidence that appeared in the opinion which would have allowed him to miss the due date.

As a result of making arguments on which he achieved little traction, the court grants the motion to dismiss filed by the IRS with relatively little discussion.  He does not appear to have made the argument that the time frame for filing a refund suit is not a jurisdictional time frame.  The facts available in the published opinion do not suggest that he would succeed in an equitable tolling argument.

The second case pits the taxpayer/debtor against the chapter 13 trustee rather than the IRS.  Here, the trustee argues that the taxpayer should have filed his return prior to the first meeting of creditors in his chapter 13 bankruptcy case.  The opinion parses the interpretation of a statute designed to require taxpayers to file their tax returns in order to obtain chapter 13 relief. 

Before the passage of the relevant statute in 2005, at almost every chapter 13 confirmation hearing day across the country, the IRS routinely sent attorneys who objected to the confirmation of a debtor’s plan because the debtor had unfiled returns which prevented the IRS from knowing whether, and how much, to claim against the estate.  Bankruptcy judges got tired of postponing hearings so that delinquent debtors could file these returns.  I made the objections in the 1980s and 1990s in the bankruptcy court in Richmond.  When we first started making them, the bankruptcy judge would give a stern lecture to the debtor about their criminal behavior in not filing returns.  It didn’t take too long before the judge realized that far more people failed to file their returns than he thought possible.  So, he stopped making the lectures but he still denied confirmation.  Stopping confirmation wastes the time of the court which must reschedule the hearing, prevents creditors from getting paid, costs the debtor’s attorney money to fix the plan and reappear and costs the trustee time and effort.  In 1994 when Congress appointed a bankruptcy commission to assist it in revising the bankruptcy laws to fix problems stemming from the Bankruptcy Code’s passage in 1978, the commissioners quickly identified this as a problem that needed to be fixed.  It took about eight years after the commission presented its findings before Congress got around to passing the correctively legislation but now anyone going into bankruptcy must be up to date on their return filing (the same basic rule that applies to anyone seeking an installment agreement or offer in compromise from the IRS). 

The Long case looks at the meaning of the statute requiring chapter 13 debtors to be current in their tax filing.  The bankruptcy case here was filed on January 8, 2019, during the filing season.  Usually the first meeting of creditors is scheduled within 20 to 40 days of the bankruptcy petition.  So, the debtor had more time to file their return according to the Internal Revenue Code than the date scheduled for the first meeting of creditors.  The issue before the court was whether the bankruptcy code accelerates the return filing date in this situation.  Here’s how the bankruptcy court framed the question at the outset of its opinion:

“Shortly after a debtor commences such a case, the United States trustee (or a designee) must “convene and preside at a meeting of creditors.” Id. §341(a); Fed. R. Bankr. P. 2003(a). By no later than “the day before the date on which the meeting of the creditors is first scheduled to be held”, the debtor must file with appropriate tax authorities the prepetition tax returns specified in 11 U.S.C. §1308(a), unless the chapter 13 trustee gives the debtor more time, see §1308(b). If the debtor does not file “all applicable Federal, State, and local tax returns as required by section 1308”, the court cannot confirm the debtor’s plan. Id.§1325(a)(9). The issue presented here is whether the prepetition tax returns specified in §1308(a) include returns that are not due to be filed with the appropriate tax authority before the date on which the meeting of creditors is first scheduled to be held.”

The bankruptcy court in Wisconsin was not working with a clean slate.  This issue, at least in that jurisdiction had been bubbling for quite a long time.  The court described the situation:

“This provision [Section 1308] may simply require the debtor to file, before the date on which the meeting of creditors is first scheduled to be held, all tax returns for the specified prepetition taxable periods that the debtor was otherwise required to file — i.e., that were due to be filed — before that date. But In re French, 354 B.R. 258 (Bankr. E.D. Wis. 2006), offers a competing construction: that §1308(a) requires “debtors who file for Chapter 13 protection . . . to have their return for the prior year filed by the date first scheduled for the meeting of creditors, even if the return is not yet delinquent under [applicable nonbankruptcy law].” Id. at 263.”

The opinion is lengthy and goes into some depth in seeking to find the meaning of Section 1308 and how it interacts with other provisions of the bankruptcy and tax codes.  The court expresses concern that following French really puts debtors filing early in the calendar year into a near impossible bind and allows the trustee to stop their bankruptcy cases by the simple act of refusing to extend the time of the first meeting of creditors.  After balancing the competing provisions, the court decides that the French case reaches the wrong conclusion and allows the debtor here to confirm a plan without filing the return not yet due under the tax code. 

I agree with this result as a logical reading of the code and the intent of the statute.  The statute seeks to require debtors to file past due returns.  The IRS or the debtor have a mechanism to add the debt for the 2018 year into the plan if they choose to do so.  Adding in the debt for the prepetition year after plan confirmation is a bit messy and expensive but denying confirmation to someone for not filing a return by the end of January also presents problems.  On balance the court reaches the logical result, but debtors who know they will owe taxes for the immediately past year do themselves no favors by failing to address the year in their plan.  Perhaps chapter 13 debtors should consider, as one of the factors in deciding the timing of filing a bankruptcy petition, postponing if possible to avoid filing at the very beginning of a calendar year.  If they can wait a few weeks or months before filing, they can avoid this problem.  Such a delay, however, is not always possible and taxes should not drive this timing.

Reliance on Preparer Does Not Excuse Late E-Filing of Return

The case of Intress v. United States, No. 3:18-cv-00851 (M.D. Tenn. 2019) again raises the question of Boyle in an electronic era.  Does e-filing have the ability to change the outcome in Boyle?  According to the district court in this case, it does not. 

We have traveled this road before.  Last year Les wrote an excellent post on the Spottiswood v United States case in which the District Court for the Northern District of California held that a taxpayer who attempted to e-file his return a few days before the filing deadline but who incorrectly entered his child’s Social Security number was responsible for a late filing penalty.  That post contains links to a couple of other relevant posts and to submissions I helped to draft on behalf of the ABA Tax Section as part of its annual meeting with the Commissioner in which Tax Section raised this issue to the IRS because people are being penalized for filing electronically in situations in which the IRS would not impose penalties for paper filing.  That post also contains a link to the amicus brief filed in the Haynes case, discussed below, by the American College of Tax Counsel (ACTC).  Since the IRS has encouraged people to e-file for the past two decades, it seems odd that it would impose stricter penalties and cite to Boyle if it really wants to encourage e-filing.  Seems like it’s time for rethinking the situation.

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According to the decision Kristen Intress and Patrick Steffen are a “marital community” in Tennessee.  They brought a refund action seeking to recover a late filing penalty imposed on them with respect to their 2014 return.  The penalty amount here, $120,607.27, makes it worth the fight.  At the time of the filing deadline for their 2014 return taxpayers were out of the country.  Their preparer sought to file a request for an automatic extension and queued up the extension document using her e-file software; however, she failed to hit send.  The taxpayers, and the preparer, did not discover the error until October.  Of course, by that time the return had already amassed the maximum failure to file penalty.

They paid the penalty, and requested a refund arguing that they met the dual requirements for abatement – reasonable cause and lack of willful neglect.  They argued that reliance on their return preparer to make the request for the automatic extension was reasonable; however, that argument runs right into Boyle.  So, they additionally argued that Boyle in its stark black and white view of the world should not apply to an e-filing situation in the same way it did in the 1980s.

The district court finds their position at odds with Boyle and states that their argument that Boyle does not govern e-filed returns “presents a novel legal question – one not previously addressed squarely by the federal courts.” Citing Haynes v. United States, 760 F. App’x 324, 326 (5th Cir. 2019)Haynes squarely raised a Boyle question but did not decide it.

In Haynes, the 5th Circuit described the facts as follows:

“On October 17, 2011, the last day of a six-month filing extension, John Dunbar, a certified public accountant and paid tax preparer, electronically transmitted the Hayneses’ Form 1040 income tax return, which he had prepared, to Lacerte Software Corporation for filing with the IRS. Later that day, Dunbar notified Mr. Haynes that the 2010 return had been timely filed. Ten months later, however, on August 20, 2012, the Hayneses received an overdue-return notice from the IRS for the 2010 tax year.

In response to the Hayneses’ resulting inquiry, Dunbar ultimately determined that, on October 17, 2011, Lacerte accepted the electronically submitted return and timely transmitted it to the IRS. Nevertheless, the IRS rejected the return because Ms. Haynes’s Social Security Number erroneously appeared on the line designated for an employment-identification number. For reasons unknown, the Hayneses did not receive a rejection notice from the IRS, Dunbar, or Lacerte prior to the August 2012 notice of nonpayment.”

Haynes pushes the problem of the mistake further down the line because of the way e-filing works.  Haynes handed off to the CPA who handed off to the transmitter who handed off to the IRS.  Somewhere between the transmitter and the IRS the problem occurred but no one got back to either the CPA or the Hayneses to notify them of the botched handoff.  What responsibilities do the parties bear to insure that the document made it successfully to the IRS in the absence of notice that it did not arrive?  Once they learned of the failure of transmittal the Hayneses immediately filed a paper return; however, because this occurred 10 months after the extended due date the IRS hit them with the late filing penalty.

Under the facts here the 5th Circuit sidesteps the decision regarding the application of Boyle in an e-filing era stating;

“While the e-filing issue is an interesting one, it is one that we need not decide today. Even if the Government is right that Boyle should apply to e-filing, another genuine dispute of material fact—laid out in the next section— still defeats summary judgment. Consequently, we take no position on whether a taxpayer’s reliance on a CPA to e-file a tax return, by itself, constitutes reasonable cause.”

The case arrived at the 5th Circuit after the lower court granted summary judgment to the IRS; however, the 5th Circuit said this case presents a different factual situation than Boyle.  In Boyle, the preparer put the wrong due date on his calendar and everyone agreed that the mistake belonged to the preparer.  Here, the preparer timely and properly filed the return but did not follow up when he did not receive a notice confirming receipt.  The fact, the duty to follow up after an electronic transmission, creates a different situation than Boyle, requiring the trier of fact to determine, after testimony, whether the duty to follow up has the same consequence as the duty to get the date right in the first place.

After the 5th Circuit’s opinion the Department of Justice Tax Division sent a letter to the court notifying the court that the case was moot because the government conceded the case and refunded the money paid by the Hayneses to them.  Of course, the letter does not provide details of why the government conceded this case but it is clear from subsequent events it has not conceded the issue.  Thereafter, the Hayneses sought attorneys’ fees but that effort failed, though the government did pay court costs.

In addition to citing Haynes, the district court also cited to the National Taxpayer Advocate’s 2018 annual report to Congress where she discussed this issue.  Having looked at the relevant cases and discussions swirling around the issue of Boyle’s continued viability in very different e-filing world that now exists, the court holds for the IRS and applies Boyle to prevent relief but states that its “conclusion is neither axiomatic nor self-evident, and is worthy of analysis.”

While agreeing that the landscape for filing returns has changed drastically since the Boyle decision, the district court finds commonality between petitioners’ situation and Boyle in that “taxpayers are not obligated to use tax preparation services.”  The taxpayer controls which preparer to hire and the decision of whether to file using a paper return.  While the IRS has encouraged e-filing and while most taxpayers do e-file, taxpayers may still file using paper just as they could when the Supreme Court decided Boyle.  The court states that if the IRS gets to the point of requiring everyone to e-file taxpayers’ argument would become more plausible.

The court then finds that even if taxpayers could get past the Boyle issue, they would still need to show reasonable reliance on the return preparer.  They should show they took reasonable steps to check to make sure the extension was received but they showed nothing of this sort.  The record did not indicate that the taxpayers made any effort to verify the filing of the extension request.

This will not be the last case on late e-filing and the Boyle case.  Last month ACTC wrote a letter to the IRS Chief Counsel urging him to revise the rules that apply to e-filing.  The letter does an excellent job of setting out three possible solutions to the application of the bright line rule in Boyle to the e-filing situation:  1) the IRS should not apply the bright line test to e-filed returns; 2) the IRS should require the ERO to notify the taxpayer of the acceptance or rejection of the e-filed return within a reasonable time after the e-filing and 3) the IRS should implement a systemic first time abatement program.  (The Intress case does not discuss first time abatement which is an administrative program rather than a basis for courts to grant relief.

The situation needs to change.  The IRS understandably does not want to go back to the slippery slope that existed before Boyle with taxpayers (and their representatives/preparers who are themselves frequently on the line for malpractice in these cases) pleading for relief because of the special circumstances that caused the late filing of the return.  It’s a lot easier to send them away with the bright line rule of Boyle.  Yet, the notification issues and the mismatch issues that really do not impact the viability of the document as a return need recognition.  In Intress, the facts are not as favorable to the taxpayers as in Haynes and some of the other situations.  Here, the preparer screwed up by not pressing send.  No part of the fault for the late return lies at the doorstep of the IRS.  Yet, even here, the situation cries out for relief.  The ACTC has made some good proposals, the NTA has made some good proposals, and the ABA Tax Section has made some good proposals.  It’s time for the IRS to make some decent counterproposals to try to work out this problem administratively with new procedures and regulations.  It’s time for Congress to step in to help them by passing laws governing the imposition of penalties in the e-filing setting that match the circumstances.  Both taxpayers and practitioners need to know their responsibilities as we continue to encourage e-filing.

Settlement of Docketed Collection Due Process Cases

The IRS just issued new IRM guidance on the settlement of docketed Collection Due Process (CDP) cases. At this point all CDP cases go to the Tax Court for litigation. The IRM provisions set out the difference between trying to settle a Tax Court case involving a notice of deficiency and one involving CDP. It’s worth discussing the difference and thinking about whether there should be a difference and how the difference impacts the ability to settle and the timing of the settlement.

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IRM 35.5.2.19 (08-06-2019) provides:

Settlement of Docketed Collection Due Process Cases

(1) The settlement of liability issues in CDP cases should be done in a manner consistent with the policies applied in deficiency cases. See CCDM 31.1.1.1.3.1, Settlement Policies in Deficiency Proceedings. If Appeals erroneously failed to address liability, the liability should generally be resolved through settlement or trial, as liability is reviewed de novo by the Tax Court. In some instances, though, remand to Appeals for consideration of the underlying liability may be helpful to develop facts or facilitate settlement to avoid further litigation.

(2) For non-liability issues in CDP cases, if the administrative record is complete and Appeals did not err or abuse its discretion, Counsel should generally defend the determination.

(3) Settlement through acceptance of a collection alternative such as a new offer in compromise or installment agreement where there has been no abuse of discretion by Appeals may be appropriate when it is necessary for the fair treatment of a taxpayer or when a lack of settlement could result in unfavorable legal precedent. Otherwise, the determination should be defended and the taxpayer should be encouraged to submit a collection alternative after the litigation is concluded.

(4) Counsel does not have the authority to directly accept collection alternatives from taxpayers on behalf of the Service. If Counsel seeks to settle a docketed CDP case through a collection alternative, Counsel must request the assistance of the Service to evaluate and accept or reject the proposed collection alternative. See IRM 5.8.10.12.2, Docketed Collection Due Process (CDP) Cases, for guidance on requesting consideration of offers in compromise in docketed CDP cases.

(5) In lieu of settlement, Counsel can consider filing a motion to remand in the instances discussed in CCDM 35.3.23.7, Motion to Remand.

The IRM provision in section (1) says that the settlement of liability issues, i.e., litigation in CDP of the merits of the liability, should happen just as it happens in cases in which the petitioner reaches the Tax Court as a result of receiving a statutory notice of deficiency. The examination side of the IRS has essentially delegated to Chief Counsel’s office the ability to settle their cases in Tax Court. When you petition the Tax Court based upon a statutory notice of deficiency, the Chief Counsel attorney has full authority to settle a case without going back to the examination division to ask if it is okay to settle. The Chief Counsel attorney must obtain the consent of their manager but no one contacts the IRS office that generated the case. In the vast majority of cases, the examination side of the IRS really expresses no interest in the case once it is sent to Counsel.

The collection side of the IRS apparently does not trust its attorneys to the same degree that the examination side does. In part (4) of this IRM provision it explains that Counsel does not have the authority to directly accept collection alternatives. This means that even where the taxpayer can convince the Chief Counsel attorney that a proposed collection resolution is appropriate, the Chief Counsel attorney cannot effectuate a settlement to reflect this agreement. Think about what happened in the Dang case blogged here. The revenue officer and the settlement officer told the taxpayer that the IRS would not/could not levy on the taxpayer’s IRA account even though doing so would save the taxpayer the 10% excise tax imposed by IRC 72(t) and, in this case, about $10,000. The Chief Counsel attorney seemed to get it right away that the IRS could levy on the IRA account and that doing so made perfect sense yet the Chief Counsel attorney could not settle this collection matter and had to send the case back to Appeals so it could enter into the settlement agreement. This caused delay, additional interest, unnecessary processing and anguish.

Why is it that Chief Counsel attorneys can settle the underlying tax but cannot settle the collection of the tax? Appeals can settle both. Are Chief Counsel attorneys not trusted by their client? Are they not competent enough in collection matters to make a good decision? I really don’t know why Chief Counsel attorneys must send back collection cases to their client to settle. It seems to me that it would make sense not to create this dichotomy. Department of Justice attorneys can and do settle collection suits all the time. It’s not rocket science. I suggest giving Chief Counsel attorneys the ability to settle collection matters. It would make CDP cases resolve more easily when there is a mistake. It would avoid unnecessary remands. It would recognize that Chief Counsel attorneys understand collection issues and have the ability to resolve them.

An IRC 6751 Case Regarding the Burden on the IRS to Produce the Supervisory Approval

The partnership case of RERI Holdings I, LLC v. Commissioner, No. 17-1266 (D.C. Cir May 24, 2019) recently decided by the DC Circuit addresses in part of the opinion an argument by petitioner that the penalty imposed by the IRS and sustained by the Tax Court should be abated because the IRS did not affirmatively prove that the initial supervisor timely and properly approved the imposition of the penalty.  Carl discussed the Tax Court opinion and set up the argument presented in the appeal of this case in a post here.  The DC Circuit determines that petitioner could not raise this issue on appeal where it did not raise the issue below sustaining the imposition of the penalty.  Thanks to Carl for noticing the decision and providing some of the write up.

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This is a charitable contribution case where the substantive issue was substantial compliance with the requirement to complete a Form 8323, where the taxpayer left the line for basis blank.  Petitioner claimed a huge charitable contribution for a gift of land to the University of Michigan.  The IRS disallowed the deduction and imposed a penalty for gross overvaluation. 

The Tax Court held that the basis was necessary — even applying the rule that substantial compliance would be enough.  On appeal, the Department of Justice (DOJ) argued that there should be a much higher level of test than substantial compliance, but the D.C. Cir. found it unnecessary to decide the legal issue, since it agreed with the Tax Court that, even if the substantial compliance rule applied, the omission of the basis did not satisfy substantial compliance.  If you are interested in this issue, the opinion goes into some detail.  This post will focus on the IRC 6751(b) issue also raised by petitioner.

The Circuit Court took relatively little time in agreeing with the Tax Court that the contribution should not be allowed and spent most of its time in the opinion with various issues regarding the penalties imposed.  One issue the taxpayer raised in the appeal was that the IRS hadn’t introduced into the Tax Court record evidence of compliance with 6751(b).  Citing Chai, the taxpayer argued that the IRS hadn’t met its burden of production on the penalty.  (BTW, RERI is a TEFRA partnership and so the Tax Court would probably today hold that 7491(c), which applies to individuals, doesn’t shift the burden of production to the IRS on the 6751(b) issue, but the D.C. Cir. makes no mention of the TEFRA issue and doesn’t decide who has the burden of production,)  The D.C. Circuit, unlike Chai, holds that the taxpayer waived the issue by not raising it in the Tax Court.  Here’s what the D.C. Circuit wrote on this point:

RERI asks us to excuse its failure to raise this argument before the Tax Court on the ground that prior to Chai it did not clearly have a claim the IRS violated § 6751(b)(1). Fiddlesticks. The fact is that when RERI was before the Tax Court, it “was free to raise the same, straightforward statutory interpretation argument the taxpayer in Chai made” there. Mellow Partners v. Comm’r, 890 F.3d 1070, 1082 (D.C. Cir. 2018); accord Kaufman v. Comm’r, 784 F.3d 56, 71 (1st Cir. 2015). We therefore see no reason to excuse RERI’s failure to preserve its claim. 

The decision creates a split in the way the two circuits approach the case.  Maybe these types of issues will slowly fade away as everyone argues from the outset that the IRS must prove supervisory approval; however, for at least the next few years there will continue to be cases in which taxpayers did not raise the 6751(b) issue at the first level because they were unaware of the strength of the issue.  The RERI case shows the importance of raising IRC 6751(b) from the outset and in raising all of the possible issues presented by that provision.  Rarely will the taxpayer be a sympathetic party.  Just keeping up with all of the IRC 6751 litigation may turn into a stand-alone blog soon.  For those representing parties like RERI with huge tax dollars and huge corresponding penalties, too much is at stake to fail to lay the foundation for all possible permutations of IRC 6751.  Even for low income taxpayers paying a penalty of $1,000 presents a huge challenge.  All practitioners must pay attention and make appropriate arguments.

It’s hard to fault the practitioners in this case for not having a crystal ball that could see into the future.  It will not be hard to fault practitioners who fail to make the arguments now.

Bonus material

We occasionally write back and forth with Jack Townsend who writes a tax procedure blog at http://federaltaxprocedure.blogspot.com/.  On this case Jack sent me the following note on the burden of proof issue raised by the case.  If you are into tax procedure, you should check out his blog and his book.

If a defense to a new matter “is completely dependent upon the same evidence,” id., as a defense to the penalty originally asserted, then there is no practical significance to shifting the burden of proof. Furthermore, “the taxpayer would not suffer from lack of notice concerning what facts must be established.” Id. Here, the facts required to establish the two elements of the reasonable cause and good faith exception are the same regardless whether the alleged misstatement was “substantial” or “gross.” In other words, although the IRS may theoretically have had the burden of proof as to the increase in penalty, there was no additional fact to which that burden applied.

From that opinion, in my [Federal Tax Procedure] book, I added the following:

I think it would be helpful to illustrate the new matter issue.  Recall that § 6662 provides a 20% substantial understatement penalty that is then increased to 40% if the understatement attributable to a gross valuation misstatement.  If the notice of deficiency asserted the 20% penalty but, in its answer, the IRS asserts the 40% penalty, the IRS will have the burden of proof on the increase in the penalty.  That seems to be the straight-forward reading of the rule shifting the burden of proof to the IRS.  But, let’s focus on one issue raised in this setting.  The taxpayer can avoid the accuracy related penalties if there was reasonable cause for the position on the return.  This is like an affirmative defense to the penalty.  Thus, as to the 20% penalty asserted in the notice and contested in the petition, the taxpayer bears the burden of proving reasonable cause even after the IRS meets its production burden under §7491(c); as to the increased 40% penalty, the IRS bears the burden of proof, including establishing absence of reasonable cause.  fn

fn  See Blau, TMP of RERI Holdings I, LLC v. Commissioner, ___ F.3d ___, ___ (D.C. Cir. 2019) (discussing the Tax Court authority and expressing “no opinion as to whether Rule 142 requires the IRS to negate affirmative defenses when it pleads a new penalty in an answer;” the Court of Appeals accepted the Tax Court’s holdings that the burden on the reasonable cause defense did shift to the IRS as new matter; but “If a defense to a new matter “is completely dependent upon the same evidence,” id., as a defense to the penalty originally asserted, then there is no practical significance to shifting the burden of proof;” the Court then held that the burden had been met on the record but the facts were fully developed so “there was no additional fact to which that burden applied;” I am not sure exactly what that holding means, because, assuming that the trier (the Tax Court) were in equipoise as to reasonable cause (equipoise being a possible, although rare phenomenon), the IRS could have prevailed on the 20% penalty but the taxpayer on the 40% penalty.).

Assessable Penalties Do Not Violate Due Process

In Interior Glass Systems, Inc. v. United States, No. 17-15713 (9th Cir. 2019) the court held that a taxpayer against whom the IRS had assessed an IRC 6707A listed transaction penalty could not have the penalty abated on the basis that the pre-litigation assessment and collection of the penalty violated due process.  The decision does not break new ground and in some respects the appeal of this issue surprised me because I thought the law well settled here.  In part, I write about this case because the first factor of the three factors the court uses to analyze whether a violation of due process exists, intrigues me when applied to cases such as the case of Larson v. United States, 888 F.3d 578 (2nd Cir. 2017) blogged here.

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The company joined a Group Life Insurance Term Plan to fund a cash-value life insurance policy owned by its sole shareholder and only employee.  The IRS applied the tests in Notice 2007-83 in determining that participating in the cash-value life insurance policy involved a listed transaction.  Because the taxpayer did not alert the IRS of its participation in a listed transaction, the IRS imposed three $10,000 penalties, one for each year of participation, pursuant to IRC 6707A(a).  The taxpayer paid the $30,000 and sued for a refund of the money paid on the penalties.  The taxpayer’s first and perhaps primary argument addressed the application of the listed transaction provisions to the facts of its case.  Taxpayer argued unsuccessfully that it was not a listed transaction.

The taxpayer’s second argument concerned due process.  The 6707A penalty is one of many assessable penalties added by Congress in the last few decades.  Once the IRS determines that the taxpayer has engaged in the activity controlled by the penalty, Congress authorized the IRS to assess the penalty prior to giving the taxpayer the opportunity to litigate the correctness of the penalty in a pre-assessment setting.  Assessable penalties allow the IRS to move quickly to impose a liability on what it perceives as wrongdoing but the process also causes the taxpayer to lose the opportunity to judicially contest the matter without first paying the penalty (or for some divisible penalties a portion of the penalty.

The 9th Circuit cites to Flora v. United States, 362, U.S. 145, 177 (1960) for the proposition that the taxpayer first had to pay the penalty in order to get into court.  It then provides the general rule that the “government may require a taxpayer who disputes his tax liability to pay upfront before seeking judicial review.  Standard stuff.  In support of its statement that the government can require a taxpayer to pay first before litigating, the court cites Phillips v. Commissioner, 283 U.S. 589, 595 (1931) as well as one of its own cases Franceschi v. Yee, 887 F.3d 927, 936 (9th Cir. 2018).  It points to Jolly v. United States, 764 F.2d 642 (9th Cir. 1985) as establishing a three-factor test based on Mathews v. Eldridge, 424 U.S. 319 (1976) for deciding whether a taxpayer is “entitled to pre-collection judicial review of a tax penalty.

Factor one concerns “the private interest that will be affected by the official action.”  With respect to this factor, the 9th Circuit finds that the taxpayer’s private interest will not significantly suffer since the post-deprivation proceedings will provide full retroactive relief if the taxpayer prevails in its refund suit.  The court says this is not a case in which an individual faces abject poverty in the interim citing Goldberg v. Kelly, 397 U.S. 254, 264 (1970).  That seems true in the case of Interior Glass but how does this test work in assessable penalty cases such as Larson in which the taxpayer must pay $60 or $160 million in order to bring the refund suit.  Maybe the court would say that the requirement to make such a payment would not send the taxpayer into abject poverty because the taxpayer has no possibility of making such a payment.  The Second Circuit did not apply this three factor test when asked to allow a taxpayer into court in Larson faced with the ridiculously high liability.  It seems that this test could aid a taxpayer owing a huge amount even though it did not aid Interior Glass where the amount owed was only $10,000 for each of three years.

Factor two concerns the “risk of an erroneous deprivation of the private interest.”  Here the court found that deciding if a penalty should apply did not involve a difficult task.  Instead it simply involved comparing the language of the transaction with the language of the notice regarding listed transactions in a setting in which “the IRS is therefore unlikely to err in the generality of cases.”  Further mitigating the possibility of a problem here is the opportunity the taxpayer has for an administrative appeal as the taxpayer had in Larson.  The court does not mention, and did not need to mention, that in Larson the taxpayer raised some issues that would require testimony to resolve and may not lend themselves to an easy determination.  In this same paragraph of the opinion the court extolled the benefits of this administrative opportunity to appeal and cited the Collection Due Process (CDP) cases of Lewis v. Commissioner, 128 T.C. 48, 59-60 (2007) and Our Country Home Enterprises, Inc. v. Commissioner, 855 F.3d 773, 781 (7th Cir. 2017) in which the courts turned away taxpayers seeking to use CDP as a means of litigating the merits of the liability prior to paying the tax because of their opportunity to talk with the Appeals Office.

Factor three measures the “government’s interest in retaining the full-payment prerequisite to this refund action.”  The court cited the difficulty of learning about listed transactions that taxpayers do not self-identify and how IRC 6707A encouraged voluntary disclosure of such transactions.  It went on to say this objective would be jeopardized if taxpayers had a pre-payment forum in which to litigate the proposed penalty.  I wonder why assessable penalties are more important than tax itself.  Congress gives taxpayers the right to a pre-payment forum prior to assessment of income tax.  Penalties do not seem more important to the government or its operation than income tax.

The outcome here is not surprising.  On factor one I would like to see an analysis of this factor in a case like Larson where the payment of the tax is a monetary impossibility.  Does the impossibility of making a payment cause it to slip outside something that would impact the party’s interest and therefore not impact the person from a due process perspective?

The Broad Impact of Guralnik

On July 12, 2019, I wrote about one case in which the Tax Court applied the reasoning in Guralnik v. Commissioner to extend the time within which a taxpayer could file their Tax Court petition during the government shutdown. We picked up that case through the Tax Court’s designated order feature. As we have discussed before the order feature of the Tax Court’s web site allows users to perform word searches. Inspired by the first case and expecting there should be others, Carl Smith did such a search and found others to which he alerted me. I had my research assistant, Michael Waalkes, follow up on Carl’s research and this post will identify the cases we have found in which Guralnik has made a difference as well as a few where it did not. Leading into the shutdown, we reminded readers on December 31, 2018, not to forget Guralnik. It’s clear from these orders that the Tax Court did not forget it and that the earlier case we wrote about was part of a concerted effort on the part of the court to identify cases in which the court opened its doors to cases which would otherwise have been late but for the application of Guralnik to the situation.

In each of these cases the IRS moved to dismiss. At some point perhaps the IRS will accept Guralnik and no longer file a motion to dismiss or it will seek to litigate it in the circuits. At least for this round of government shutdown, the IRS seems content to raise the issue in every case but accept the outcome in every case without filing an appeal. Of course, if the IRS accepts Guralnik without filing a motion to dismiss, we would not find the case through an order search so it may have accepted many more cases than it contested. Perhaps the issue is a function of getting the word to the field offices. The possibility also exists that it wants to bring each situation to the court’s attention and have the court make the specific decision allowing the case to move forward.

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Per the search of the Tax Court orders: here are the cases involving Guralnik’s application to the government shutdown, in which the Court denied an IRS motion to dismiss for a petition due during the shutdown: Coleman v. Commissioner, Docket No. 1856-19; Baird v. Commissioner, Docket No. 1706-19; Meaut v. Commissioner, Docket No.: 1851-19; Crager v. Commissioner, Docket No. 2191-19; Vlach v. Commissioner, Docket No. 614-19S; Wilson v. Commissioner, Docket No. 0691-19S; Hamilton v. Commissioner, Docket No. 436-19S; Doherty v. Commissioner, Docket No. 101-19; Cajuste v. Commissioner, Docket No. 2190-19; Witt v. Commissioner, Docket No. 2071-19; Kendrick v. Commissioner, Docket No. 806-19S; Baird v. Commissioner, Docket No. 1706-19; Worku v. Commissioner, Docket No. 1864-19; Gettys v. Commissioner, Docket No.1686-19S; Hager v. Commissioner, Docket No. 1854-19.

The Tax Court appears to have adopted a standard policy in cases where the IRS files a Motion to Dismiss for Lack of Jurisdiction on timeliness for petitions due during the government shutdown. The Court first issues a generic order (sample linked here) citing Guralnik and requiring that the IRS supplement its motion, which leads to the IRS conceding timeliness in its supplement and the Court then denying the motion to dismiss. 

Despite the 14 cases listed above in which the Tax Court did open its doors, some petitioners still remained outside of the benefit created by the extra time resulting from the government shutdown. These cases deserve a closer look since they do not follow the cookie cutter results of the cases listed above. In Bancroft v. Commissioner, Docket No. 2063-19, the Tax Court issued its standard order for the IRS to file a supplement to its motion to dismiss, which the IRS did. The Tax Court then granted the motion to dismiss without issuing an order, so it’s unclear why the Court wasn’t convinced that the shutdown affected the timeliness of the petition filing. It would have been nice to have some reasoning here given the importance of the issue. We did not pay to obtain the response filed by the IRS which might have made it clear why the court granted the motion to dismiss in this case.

And in Barnhart v. Commissioner, Docket No. 5783-19S, in response to an IRS motion to dismiss for late-filing a petition that was due on December 24, 2018 (several days before December 28, 2018 when the Tax Court stopped operating), the petitioners argued that their efforts to administratively resolve their issue with the IRS had been hampered by the government shutdown, as the IRS began its furlough earlier on December 22, 2018, two days before the filing deadline. But Judge Foley granted the motion to dismiss and issued an order finding that a government shutdown at the administrative level was not sufficient to alter the filing deadline with the Tax Court, which at the time was still unaffected. This case demonstrates the confusion that some petitioners might have had between the shutdown of the IRS (and most of the government) and the shutdown of the Tax Court (and most of the courts). The non-budget funds available to the courts allowed them to remain open for a short period after the rest of the government shut its doors. Perhaps this confusion should not matter from a jurisdictional standpoint but the whole issue of shutdown must have caused confusion for some parties seeking a remedy.

Finally, in Janjic v. Commissioner, Docket No. 2003-19, the petitioner was a taxpayer who lived abroad and did not return to the U.S. until during the period of the IRS furlough. The petitioner argued that she was unaware that the Tax Court was still operational during this time and thus the Court should still consider the case. The Tax Court disagreed, and Judge Foley granted the IRS motion to dismiss, while noting his sympathy for the petitioner’s situation. The Janjic case most clearly raises the issue of confusion and provides a possible basis for equitable tolling should the time frame for filing a petition in a deficiency proceeding prove not to be jurisdictional.

The issue of jurisdictional nature of the timing of the filing of a deficiency case will be argued in the 9th Circuit in San Francisco on October 22, 2019, in the cases of Organic Cannabis Foundation LLC v. Commissioner, Ninth Circuit Docket No. 17-72874 and Northern California Small Business Assistants, Inc. v. Commissioner, Ninth Circuit Docket No. 17-72877.  We will be closely watching those cases as the decision there could impact other petitioners like Ms. Janjic who file their Tax Court petitions late but have a reason for doing so that would support a finding of equitable tolling. Although we have not written as standalone post on Organic Cannabis and Northern California Small Business Assistants, we did discuss them in the December 31, 2018 post linked above. Just as a reminder, here is what we wrote in that post:

There are currently before the Ninth Circuit two companion cases of petitions sent in around the same time as Guralnik, also by FedEx First Overnight, that arrived a day late. In these cases, Organic Cannabis Foundation LLC v. Commissioner, Ninth Cir. Docket No. 17-72874, and Northern California Small Business Assistants, Inc. v. Commissioner, Ninth Circuit Docket No. 17-72877, it is not clear why the petitions were filed late, but it appears that the Federal Express driver could not access the open Tax Court Clerk’s Office on the last day – either because of construction work, police activity, or some other reason – so the driver returned the following day (one day too late if section 7502 can’t be used). In unpublished orders issued on July 25, 2017 (here and here), the Tax Court declined to extend Guranik to cover situations where the Clerk’s Office was in fact open.

In the Ninth Circuit, the taxpayers not only seek to extend Guralnik, but also argue (as the tax clinic at Harvard did in Guralnik) that the deficiency petition filing deadline is not jurisdictional and is subject to equitable tolling. The DOJ relies on the holding in Guralnik, but argues that Guralnik cannot be stretched to cover the situation where the Clerk’s office is actually open. Since the parties cannot confer jurisdiction in a case merely by not making certain arguments, it would not be impossible for the Ninth Circuit to eventually rule both in these cases that the filing deadline is jurisdictional and that the Tax Court cannot import into its own rules any rule from the Federal Rules of Civil Procedure that extends the filing deadline when the Clerk’s Office is formally closed. That is, nothing stops the Ninth Circuit from rejecting the latter holding in Guralnik. Thus, until there are some court of appeals rulings on this fact pattern, it may be wise not to try to rely on the closure of the government as a reason for not mailing a Tax Court petition on time or attempting hand delivery to the court on the first date it reopens. The cases before the Ninth Circuit are fully briefed… Among the briefs there are amicus briefs from the Harvard tax clinic arguing that the filing deadline is not jurisdictional and is subject to equitable tolling.

Of course, we are closely following the jurisdictional nature of the timing of filing Tax Court petitions in several of the bases for jurisdiction. With respect to the recent decision of the D.C. Circuit that the time for filing a petition in a whistleblower case is not jurisdictional, blogged here, the Department of Justice has requested more time to decide whether to request an en banc review of the decision. As discussed in the blog post on the Myers case, because the language in the whistleblower statute essentially mirrors the language in the Collection Due Process statute passed several years earlier, the Myers decision essentially sets up a split between the D.C. Circuit and the 9th Circuit on this issue which creates at the least the possibility of a trip to the Supreme Court.

Statistics on Cases in Litigation from ABA Tax Section Meeting in May

In May, the ABA Tax Section held its annual meeting in DC. Because of the location, this meeting has more government attendees than the other two meetings during the year. Since the government attendees were unable to attend the previous ABA meeting due to the shutdown, there was a fair amount of information disseminated by them at this meeting. My comments come from the first session of the Court Procedure and Practice Committee. This committee opens with a panel which includes government representatives from different parts of the tax world. There is a representative from the Office of Chief Counsel, from the Tax Court (usually the Chief Judge) and from the Tax Division of the Department of Justice. Chief Judge Foley announced the Court’s decision to allow limited representation starting in September and focused his remarks on that coming change. I expect that we will be writing more about that in coming weeks.

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Rich Goldman from Procedure and Administration provided lots of statistical information in the form of slides. Because the slides were not made a part of the material available to attendees, I requested them informally. Because the slides were not made available to me based on the informal request, I obtained them through FOIA. For that reason it has taken a little time after the meeting to make these slides available. The slides cover a few different types of cases in litigation and provide different perspectives on the cases. The slides not only provide a perspective of what’s happening in tax litigation over the arc of the last decade but they can provide context in some types of litigation where letting the court know of the numbers of certain types of cases can be useful.

Inventory of Cases in Litigation

The first set of slides (slides 2 and 3) discusses the dollars in dispute pending in Tax Court, the Court of Federal Claims and the district courts filed in the last decade. As you will see in later slides the vast majority of tax litigation by number of cases occurs in the Tax Court. Because so many of the cases in Tax Court involve small dollar amounts the amount of money in dispute in the other two courts can make their dockets look bigger. Just focusing on dollars the Tax Court is the clear winner but the contrast gets much starker when looking at number of case filed which you can find in the following slides, 4 and 5.

The data then moves from graphs to pie charts to provide a greater breakdown of the Tax Court’s inventory (slide 6). The pie chart is followed by another graph showing dollars in dispute by type of Tax Court case. It comes as no surprise that a small percentage of Tax Court cases dominate the amount of dollars at issue (slide 7).

Tax Court Filings by Category

The next slide provides a 10-year arc of the filings in Tax Court by category (slide 8). This graph shows that the number of Tax Court cases have declined in recent years but the decline has not been as significant as I might have expected given the cut back in some of the audit activity by the IRS. These slides do not show the percentage of cases petitioned based on the number of statutory notices or determinations issued by the IRS. A long time ago the percentage of cases filed in the Tax Court by taxpayers receiving notices that provided a ticket to Tax Court was around 3%. If that percentage still holds or provides even a reasonably close approximation of the number of filings per notice, you can see that a drop off at the Tax Court of 1,000 cases reflects a much more significant drop off at the IRS of the number of cases in which it sends a notice.

Receipts and Closures at the Tax Court

A trio of slides shows the number of receipts and closures at the Tax Court (slides 10, 11, and 18). The Tax Court has been closing cases faster than it receives them for several years. I have not seen statistics on how this has impacted the length of time a case spends in the Tax Court. I expect that the length of time from filing to conclusion has decreased but that type of statistic was not included in the package of statistics provided at the ABA meeting. Another pair of slides shows the receipts and closures by case category type (slides 12 & 13).

Sources of Cases Petitioned to Tax Court

One slide shows the sources of case petitioned to the Tax Court. No big surprise that Service Center notices provide the vast majority of cases. I go to the Tax Court fairly regularly and sit in the docket room looking at cases on upcoming calendars in Boston. It’s interesting when you go through a calendar to see the types of case that make it to the Court. I have been struck in the last few years how few earned income tax credit cases appeared on the calendars. A large number of cases involved unreported income picked up by the automated underreporter unit which matches the information returns against the information reported on the return. Without these computer audits, the number of Tax Court cases would plummet.

Settlement

Two of the slides focus on settlements showing cases settled in Appeals and in Chief Counsel’s office (slides 15 & 16). The vast majority of cases do not go through Appeals on the way to Tax Court because the vast majority of cases involve pro se taxpayers who do not avail themselves of the opportunity to go through Appeals. It would be interesting to see what would happen to the Tax Court inventory if exhausting your remedies by going to Appeals was made mandatory instead of voluntary as a part of getting to Tax Court. All Collection Due Process (CDP) cases take the Appeals route prior to coming to court.

Pro Se Cases in Tax Court

One slide shows the number of cases filed by pro se petitioners in Tax Court and the dollars at issues in those cases. While many of the petitioners filing pro se meet the criteria as low-income taxpayers under IRC 7526 which pegs qualification at 250% of poverty, a large percentage of the petitioners in this group file pro se because the cost of representation exceeds the amount at issue. For many middle income or even high income taxpayers a dispute with the IRS that involves less than $15-20,000 may not justify the cost of obtaining representation. For individuals working calendar call, it is not unusual to encounter these petitioners. Of course, many of the more sophisticated pro se petitioners, whether low, middle or high income, can navigate the system and settle with Appeals or IRS Counsel. Still, some of the pro se individuals from each income level need assistance to effectively manage their case to the best result.

Refund Cases

There are five slides depicting various facets of refund litigation (slides 19-23). The striking aspect of refund litigation is how few cases end up in refund litigation anymore. The number of refund cases has historically been much less than the number of Tax Court cases but that trend has significantly accelerated in the past couple of decades. Some cases must go the refund route because the Tax Court route is unavailable, either because of the type of tax or the taxpayer’s initial decision to report the tax and allow the IRS to make an assessment. Larger corporations with sophisticated counsel tended to go the refund route if the forum shopping opportunity provided the best path to victory. The reduction in refund cases may reflect the significant decrease in audits of the types of taxpayers who made this type of choice in years past.

Collection Due Process

Four slides show the numbers of CDP cases in the Tax Court. The number of these cases is not as large as one might expect. It is unclear why so few taxpayer who elect CDP choose to go to Tax Court.

It’s worth noting that the Chief Counsel’s office did not display in any of the slides the number of cases in litigation in the bankruptcy courts. Section 505(a) of the bankruptcy code gives taxpayers going through bankruptcy the opportunity to litigate their liability in bankruptcy. No statistics were provided to show how many and what type of taxpayers avail themselves of this opportunity. Despite this absence, the group of slides provides a fairly detailed look at the tax litigation system and the cases going through it.