Leslie Book

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Eleventh Circuit Upholds Enforcement of Summons Relating to Law Firm and Its Clients (And Sweeps in the 1980 Miracle on Ice)

The Eleventh Circuit opinion in Presley v US ostensibly is about how IRS can summons a bank for information relating to deposits from a law firm’s clients. The opinion starts with a recounting of the 1980 Winter Olympics, when the US Olympic hockey team, against heavy odds, beat the Soviets.  Drilling into the details, the opinion includes the average age of the US team (22), links to the E.M. Swift’s Sports Illustrated article on the win, references the 2004 Disney movie Miracle, and how one of the players (Jack O’Callahan), was so moved by Coach Herb Brooks’ pregame speech that he could recount it decades later.

What is the connection between the power of the IRS to gather information from third parties and the Miracle on Ice?

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Writing for a unanimous panel, Judge Rosenbaum contrasts the uphill battle that the US hockey team faced from the battle that the plaintiffs faced:

But forget about tough odds the U.S. hockey team faced, Plaintiffs face-off with something even more formidable…

According to the opinion, more formidable than the Soviet team is the considerable power that the IRS has to get information via its summons powers. The opinion nicely summarizes the statutory framework and Supreme Court guidance that stack the deck heavily in favor of the IRS.

The facts are straightforward. The plaintiffs are a lawyer and his law firm, and they sought court protection to avoid their bank’s compliance with summonses the IRS issued in connection with an exam of Presley’s individual income tax liability.

As the opinion discusses the IRS summonses sought records “pertaining to any and all accounts over which [each Plaintiff] has signature authority,” including bank statements, loan proceeds, deposit slips, records of purchase, sources for all deposited items, and copies of all checks drawn.

Presley objected to the bank’s turning over information related to their clients’ trust and escrow accounts, arguing essentially that his clients’ Fourth Amendment expectation of privacy would be violated if the IRS obtained the information about the clients’ financial transactions with the law firm.

The opinion starts by describing that there is some uncertainty whether the law firm, rather than the clients, can make the Fourth Amendment argument. After all, it is the clients whose privacy interests are at stake. This is akin to a standing dispute; i.e., does the law firm have standing to make the case that its clients’ privacy interests may be violated?

The opinion is able to sidestep that issue, noting that unlike traditional Article III standing disputes, Fourth Amendment standing is not jurisdictional, meaning that the opinion can effectively decide the matter on the merits without weighing in on whether technically Presley can in fact make the argument.

Getting to the merits, Presley argued that in light of the clients’ privacy interests in the financial information the IRS must show probable cause to enforce the summons. The court disagreed, noting that probable cause would only be required if the clients had a reasonable expectation of privacy in the financial records.  The opinion says that there is no such expectation, referring to what is known as the third-party doctrine and citing to the 1976 Supreme Court case US v Miller (also involving an IRS summons and a bank):

[A] party lacks a reasonable expectation of privacy under the Fourth Amendment in information “revealed to a third party and conveyed by [that third party] to Government authorities, even if the information is revealed on the assumption that it will be used only for a limited purpose and the confidence placed in the third party will not be betrayed.”

Presley tried to distinguish Miller, because unlike in that case, there was an intermediary between the clients and the bank, i.e., the clients transferred money to the law firm, which then made deposits on behalf of the clients. The court found that distinction insignificant:

Nor does it matter that Plaintiffs’ clients gave their records to Plaintiffs rather than directly to the bank. Plaintiffs conveyed their records, such as checks for deposit in Presley Law’s escrow or trust accounts, knowing that the firm would, in turn, deposit these items with the Bank. So if Plaintiffs cannot escape Miller directly, Plaintiffs’ clients cannot avoid its application indirectly. In short, Miller precludes us from holding that Plaintiffs’ clients have a reasonable expectation of privacy in the summoned records.

There were two other issues of note in the opinion. Presley also argued that even if there was no Fourth Amendment requirement that the government show probable cause to ensure enforcement, the Florida constitution had a heightened privacy protection for these circumstances. The Eleventh Circuit declined to consider the impact of the Florida constitution on the reach of IRS summons powers, noting that state laws that “conflict with federal laws by impeding the ‘full purposes’ of Congress must give way as preempted,” a doctrine known as the Supremacy Clause. That has come up before in tax cases, as courts have enforced IRS summonses despite, for example, state law doctor-patient privileges.

Once dispelling with the argument that the IRS had to establish heightened probable cause to justify the summonses, the opinion rested on a traditional application of the Powell factors, which in effect is a proxy for the Fourth Amendment protection that an IRS search met the lesser standard that it not be unreasonable. Noting that Presley did not claim a conflict with Powell, and that there was no claim that the IRS was using the summons power as a subterfuge to investigate the clients or violate attorney-client privilege, the opinion found “no reason to discern why the summons should not be enforced.”

As a final argument, Presley argued that the district court failed to comply with the so-called John Doe summons procedures under Section 7609(f). That requires the IRS to go to a district court in an ex parte hearing when it seeks information about unnamed third parties. We have discussed that a few times in PT, and I discuss it heavily in Chapter 13 of Saltzman and Book, including in the context of the IRS investigation of crypto currency users.

Here, while the IRS sought information that included information about unnamed third parties (the clients), the main targets were the law firm and Presley himself, who were named on the summons and who did receive notice of the IRS actions. Moreover, the plaintiffs in Presley conceded that their clients were not the subject of the IRS investigation, unlike in the Bitcoin dispute where IRS has been trying to gather information to allow it to determine whether Bitcoin customers were complying with federal tax laws.

For good measure, additional Supreme Court precedent, Tiffany v US, allows the IRS to effectively issue dual purpose summonses that could also provide information about unnamed third parties, provided that the IRS complies with the notice provisions under Section 7609(a)—which it did here.

Taken together, the defenses that the government mustered were more formidable than Vladislav Tretiak, and the bank will have no choice but to comply with the summons and I doubt there will be a Disney movie about this story.

When Can An Entity Be Subject to Return Preparer Penalties?

I have been reading a lot of opinions discussing misbehaving tax return preparers. The IRS has a heavy arsenal it can deploy against those preparers short of criminal sanctions: civil penalties, injunctions and disgorgement are the main tools, all of which we have discussed from time to time. A recent email advice that the IRS released  explores when an entity that employs a return preparer can also be subject to return preparer penalties.

One way to think about the uptick in actions against return preparers is that the IRS has taken Judge Boasberg and others to heart when IRS lost the Loving case a few years ago.

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Part of the reason Judge Boasberg (later affirmed by the DC Circuit) tossed the IRS return preparer scheme out was that the IRS approach to including return preparation within 31 USC § 330 (which authorizes the Secretary to regulate “the practice of representatives of persons before the Department of the Treasury” )seemed to disregard or minimize the existing powers the IRS had to combat bad egg preparers:

Two aspects of § 330’s statutory context prove especially important here. Both relate to § 330(b), which allows the IRS to penalize and disbar practicing representatives. First, statutes scattered across Title 26 of the U.S. Code create a careful, regimented schedule of penalties for misdeeds by tax-return preparers. If the IRS had open-ended discretion under § 330(b) to impose a range of monetary penalties on tax-return preparers for almost any conduct the IRS chooses to regulate, those Title 26 statutes would be eclipsed. Second, if the IRS could “disbar” misbehaving tax-return preparers under § 330(b), a federal statute meant to address precisely those malefactors—26 U.S.C. § 7407—would lose all relevance.

As Judge Boasberg flagged, a key aspect of the IRS power to police return preparers is civil penalties under Title 26. Section 6694(b) provides a penalty for a preparer’s willful or reckless misconduct in preparing a tax return or refund claim; the penalty is the greater of $5,000 or 75% of the income derived by the tax return preparer from the bad return/claim.

The recent email advice from the National Office explored the Service’s view on whether the IRS can impose a 6694 penalty on the entity that employs a misbehaving return preparer as well as the individual return preparer who was up to no good.  The advice works its way through the statutory and regulatory definitions of return preparer under Section 6694(f), which cross references Section 7701(a)(36) for the definition of “tax return preparer.”

Section 7701(a)(36) provides that “tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, tax returns or refund claims.

The regs under Section 6694 tease this out a bit. Treasury Regulation § 1.6694-1(b) provides the following:

For the purposes of this section, ‘tax return preparer’ means any person who is a tax return preparer within the meaning of section 7701(a)(36) and § 301.7701-15 of this chapter. An individual is a tax return preparer subject to section 6694 if the individual is primarily responsible for the position(s) on the return or claim for refund giving rise to an understatement. See § 301.7701-15(b)(3). There is only one individual within a firm who is primarily responsible for each position on the return or claim for refund giving rise to an understatement. … In some circumstances, there may be more than one tax return preparer who is primarily responsible for the position(s) giving rise to an understatement if multiple tax return preparers are employed by, or associated with, different firms.

Drilling deeper the advice also flags Reg § 1.6694-3(a)(2), which sets out when someone other than the actual return preparer may also be on the hook for the 6694 penalty:

  1. One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(b);
  2. The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; OR
  3.   The corporation, partnership, or other firm entity disregarded its reasonable and appropriate review procedures though willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.

In the email, the Counsel attorney points to the above reg for the conclusion that  its “interpretation of Treasury regulation § 1.6694-3(a)(2) is that generally, the entity (corporation, partnership, or other firm entity) that employs a tax return preparer will simultaneously be subject to the penalty under section 6694(b) only if the specific conditions set forth in the regulation are met. Otherwise, only the individual(s) that is primarily responsible for the position(s) on the return or claim for refund that gives rise to the understatement will be subject to the penalty.”

The email does refer to a district court opinion case (affirmed by the Sixth Circuit) from a few years ago, US v Elsass, where the court found that the owner of an entity was a “tax return preparer” for the purposes of the return preparer penalty provisions. In that case, the owner was the sole owner and personally prepared a substantial number of the returns at issue and was in its view the moving force on the positions (a theft loss/refund scheme).

The upshot of the advice is that absent circumstances similar to Elsass, or the presence of conditions 1 and either 2 or 3 above in Reg 6694-3(a)(2), an entity that employs return preparers itself is likely not subject to penalties. That conclusion suggests that return preparers should be careful to document and review procedures that are in place to ensure that an employed preparer has supervision and, of course, to make sure that management follows those procedures.

Court Rejects Prior Settlement From Barring Release of Documents in FOIA Claim

“Some on the street say snitches get stitches, but in this case they become the subject of Freedom of Information Act requests.” So starts Montgomery v US, one of the more interesting FOIA cases I have come across in this round of updates for the Saltzman Book IRS Practice and Procedure treatise.

I start by noting that “FOIA” and “interesting” do not usually find themselves paired. But in Montgomery, a district court opinion from earlier this year, the two fit nicely. In an opinion written by Judge James Boasberg, the same district court judge who wrote the opinion a few years ago in Loving v IRS, which struck down the testing and continuing education requirements for return preparers, Montgomery addresses a FOIA issue I had not previously seen-namely whether a prior settlement agreement can serve as a nonstatutory basis for the government’s withholding documents in a FOIA case.

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This case had its origins in the IRS’s examination of the taxpayers’ complex partnership transactions many years ago. As the opinion describes, the partnership transactions attracted the attention of the IRS, leading to opinions that upheld the determination that the partnerships were shams and that the IRS properly issued final partnership administrative adjustments, but also a separate refund suit that the IRS ultimately settled, leading to an almost $500,000 refund for the Montgomerys.

The settlement did not end the dispute. The Montgomerys filed a FOIA claim, convinced that the IRS troubles with the partnerships were the result of information that an informant provided to the IRS. The FOIA claim sought general information pertaining to the IRS investigation, but also specific forms the IRS uses when confidential informants trigger an investigation.

The case implicates FOIA Exemption 7D, which we discuss in Chapter 2 of the treatise, and which provides protection for “records or information compiled for law enforcement purposes [which] could reasonably be expected to disclose the identity of a confidential source…”

7D has a lot to unpack, and there has been a substantial amount of case law getting into its nooks and crannies, and we discuss that in Chapter 2.03[6] of the treatise.

This opinion, however, involves a preliminary defense that the Service raised in a motion for summary judgment. In settling the refund suit in 2014, the IRS and Montgomery entered into an agreement that “fully and final resolve[d] all ongoing disputes” among the IRS, the Montgomerys and their partnerships; the language in the agreement also referred to resolving all issues in “pending” lawsuits.

In justifying its refusing to hand over documents that the Montgomerys requested in the FOIA request, the government argued that the refund suit settlement agreement’s final resolution language barred the Montgomerys from bringing their FOIA case.

The problem, however, is that the settlement agreement, which resolved the ongoing disputes and pending litigation, predated the FOIA claim, which was filed a year or so after the agreement. Despite that challenge, the government argued that the Montgomerys in their refund suit had sought similar information in a motion for disclosure, and thus there was an “ongoing dispute” that brought the FOIA claim within the parties’ settlement agreement.

The court disagreed:

Where the IRS goes off track, however, is in conflating the underlying information that Plaintiffs seek with the device through which they are pursuing documents…. The Service cannot try to shoehorn this action into the Settlement Agreement simply because Plaintiffs’ end game is the same.

While the opinion rejected the government’s argument, the opinion notes that the outcome might have differed if in the prior litigation the taxpayers had sought information pursuant to Rule 34 of the Federal Rules of Civil Procedure, which allows for inspection of documents or electronically stored information and which the opinion notes  “might arguably be more akin to a FOIA request.”

Conclusion

For readers with an interest in FOIA, there is a bit more to this case, as the  opinion also rejects strained res judicata and collateral estoppel arguments the government raised in its motion.

Despite the initial win for the Montgomerys, the dispute continues, however, as the parties differ on the reach of the statutory basis for withholding of documents, as well as the applicability of a so-called Glomar denial, which is when the government refuses to confirm or deny information pertaining to a request. A Glomar denial has its origins in a case involving the CIA and the government’s withholding information relating to Project Azorian, a massive project to uncover a sunk Soviet sub. Its reach in FOIA cases involving the IRS and its possible use of informants is now squarely at issue in this case. Stay tuned.

 

 

 

NTA Releases 2019 Objectives Report Highlights Challenges With Private Debt Collection Program

Last week the National Taxpayer Advocate released her FY 2019 Objectives Report to Congress. This is the second report the NTA releases annually; the first is issued in January. In Volume 1 of the Objectives Report the NTA highlights key aspects of the past filing season, and in Volume 2 she presents the IRS responses to prior recommendations regarding most serious problems she identified in the end of year annual report.

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Volume 1 presents lots of statistics and data on how IRS performed on some of its key tasks. This year Volume 1 also details 12 priority issues the NTA will be focusing on in the upcoming year, a fascinating window into TAS research projects (including a look at the impact of behavioral messaging and educational letters on tax compliance), and five appendices providing history on TAS and some internal measures of its performance.

As usual, the report has lots to offer, but here in the words of TAS is the snapshot summary of the review of the past filing season:

During the 2018 filing season, the IRS processed most returns successfully, but taxpayers needing help from the IRS faced a more challenging experience. The IRS could not answer the majority of the calls it received, especially on its compliance telephone lines. It served fewer taxpayers who sought help at Taxpayer Assistance Centers (TACs) and continued to answer only a limited scope of tax law questions.  Its identity theft and pre-refund wage verification filters and certain processing glitches significantly delayed refunds for hundreds of thousands of taxpayers who filed legitimate returns, harming some taxpayers and creating additional work for the IRS.

The select areas of focus in the report include discussions on the following:

  • Private debt collection (highlighting the program’s challenges, including its net loss and taxpayer burdens; more on this in Volume 2 of the report);
  • The need for guidance following the 2017 tax legislation;
  • The false detection rate associated with IRS fraud and identity theft detection measures;
  • The due process rights jeopardized by the newly implemented passport denial and revocation program;
  • The need for IRS to emphasize what the NTA calls an omnichannel approach to taxpayer service (essentially an understanding that many taxpayers are ill-equipped to use online self-help tools and may need a more personal touch); and
  • A plea for a well-funded and implemented IRS IT function.

Volume 2: Tax Administration Transparency and Private Debt Collection

I am in the middle of reading Volume 2 of the report. In this volume, IRS offers written responses to past NTA recommendations and NTA replies to those responses. This to me is one of the most interesting and important parts of the report. It has its origins in the statutory mandate of the NTA, which is required to submit reports directly to Congress “without any prior review or comment from the Commissioner, the Secretary of the Treasury, the Oversight Board, any other officer or employee of the Department of the Treasury, or the Office of Management and Budget.”

The statute also provides that the Commissioner “establish procedures requiring a formal response to all recommendations submitted to the Commissioner by the National Taxpayer Advocate within three months after submission to the Commissioner.”

The IRS written responses in the Objectives Report are part of the procedures for the Commissioner’s response to the Annual Report.  This inside view of the back and forth between TAS and IRS on some of the key tax administration issues of the day is a fascinating window into the challenges associated with administering differing parts of the tax law.

For example, the first part of Volume 2 includes very different perspectives that TAS and IRS have on the private debt collection program (a topic Keith has discussed). The report includes copies of the NTA Taxpayer Advocate Directive ordering IRS not to assign to private debt collectors taxpayers with incomes under 250% of federal poverty guidelines and, in response, an IRS appeal of the TAD, all almost in real time with the latest IRS correspondence on the issue issued in late June. In addition, Volume 2 reveals that IRS is not allowing TAS employees to monitor phone interactions between private debt collection agency employees and taxpayers, leading the NTA to conclude that she is prevented from doing her job of ensuring that the IRS treats taxpayers fairly and respects their rights.

Going deeper on the private debt collection issue, Volume 2 details how IRS has no systemic method of screening out vulnerable taxpayers for assignment to debt collectors (including those getting SSDI and SSI), and how those taxpayers are essentially on their own to make the case with the private debt collectors that they should not be assigned to the debt collection agency or enter into an installment agreement.

More on this from the NTA:

[W]here there are methods to systemically identify recipients of SSDI or SSI benefits, it is profoundly negligent on the part of the IRS to allow the determination of whether a case is returned to the IRS to turn on whether a taxpayer, in talking with a PCA [Private Collection Agency] employee, happens to mention that he or she receives SSDI or SSI benefits. SSDI and SSI recipients are among the most vulnerable taxpayers the IRS deals with. They may be fearful that challenging a PCA may result in levies on or loss of their benefits, and thus agree to amounts they cannot afford to pay. This, in fact, is what the data discussed in the 2017 Annual Report to Congress show. Moreover, it is an abdication of the IRS’s oversight responsibilities to rely on PCAs to return these taxpayers’ debts, which would require the PCA to forego a potential commission on a payment. The IRS can and should systemically prevent the debts of SSDI taxpayers from being assigned to PCAs and should work with SSA to identify the debts of taxpayers who receive SSI.

This issue typifies the trade offs that tax administrators make when dealing with the most vulnerable taxpayers and illustrates the challenges of giving life to taxpayer rights. The statute authorizing transfer of cases to debt collectors allows IRS to assign cases with “potentially collectible inventory.” This requires a deeper consideration of the meaning of “potentially collectible.” In a post from 2017 Keith recounted his meeting with the Commissioner that covered some of this ground in this report, including the importance of programming to effectuate policy decisions not to assign certain cases to debt collectors. The Objectives Report makes a compelling case for a fuller consideration of systemically excluding from the category of “potentially collectible” all taxpayers who are likely vulnerable and who are unlikely to either fully pay or be able to comply with the terms of a payment plan.

The IRS response on this issue states that to build into its IT capability a way to systemically screen out vulnerable taxpayers (like SSDI recipients) would require resources and it is not required to do so by law.

It is not easy to quantify the costs of unfair collection procedures (though no doubt those costs are very real and tangible for those affected) whereas there are scarce dollars at issue in building out an IT system that would limit the assignment of vulnerable taxpayers to private debt collectors. Forcing the IRS to justify its approach and explain is a key way to expose trade offs when an agency, as IRS does here, declines to apply the resources as the NTA suggests. As the report reveals, the risks to taxpayers are still present. The real value of this part of the report is that absent a process such as this it is almost certain that the taxpayers whose rights are impacted would be mostly invisible. Visibility is a necessary but not sufficient means of protecting taxpayers. Absent a change in policy by the IRS itself, it will be left to Congress and perhaps the courts to ensure that the rights the NTA flags are protected.

Recent Tax Court Case Highlights CDP Reach and Challenges With Collection Potential (and a little Graev too)

I read with interest Gallagher v Commissioner, a memorandum opinion from earlier this month.  The case does not break new ground, but it highlights some interesting collection issues and also touches on the far-reaching Graev issue.

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First the facts, somewhat simplified.  The taxpayer was the sole shareholder of a corporation whose line of business was home building and residential construction.

The business ran into hard times and was delinquent on six quarters of employment taxes from the years 2010 and 2011. IRS assessed about $800,000 in trust fund recovery penalties under Section 6672 on the sole shareholder after it determined he was a responsible person who willfully failed to pay IRS. IRS issued two notices of intent to levy including rights to a CDP hearing. The taxpayer timely requested a hearing, and the request stated that he sought a collection alternative.

After the taxpayer submitted the request for a CDP hearing the matter was assigned to a settlement officer (SO). There was some back and forth between the SO and the taxpayer, and the taxpayer submitted an offer in compromise based on doubt as to collectability for $56,000 to be paid over 24 months. After he submitted the offer, IRS sent a proposed assessment for additional TFRP for some quarters in the years 2012 and 2014.

The SO referred the offer to an offer specialist. Here is where things get sort of interesting (or at least why I think the case merits a post). The specialist initially determined that the taxpayer’s reasonable collection potential (RCP) was over $847,000. That meant that the specialist proposed to reject the offer, as in most cases an offer based on doubt as to collectability must at least equal a taxpayer’s RCP, a figure which generally reflects a taxpayer’s equity in assets and share of future household income.

Before rejecting the offer, the specialist allowed the taxpayer to respond to its computation of RCP. The taxpayer submitted additional financial information and disputed the specialist’s computation of the taxpayer’s equity in assets that he either owned or co-owned.  That information prompted the offer specialist to revise downward the RCP computation to about $231,000 after the specialist took into account the spouse’s interest in the assets that the taxpayer co-owned and also considered the impact of the spouse on his appropriate share of household income.

Following the specialist’s revised computations, the taxpayer submitted another offer, this time for about $105,000. Because it was still below the RCP (at least as the specialist saw it), she rejected the follow up offer, which led the IRS to issue a notice of determination sustaining the proposed levies and then to the taxpayer timely petitioning the Tax Court claiming that IRS abused it discretion in rejecting his offer and sustaining the proposed levies.

So what is so interesting about this? It is not unusual for taxpayers to run up assessments and to then disagree with offer reviewers on what is an appropriate offer and to differ on RCP. RCP calculations are on the surface pretty straightforward but in many cases, especially with nonliable spouses, illiquid assets and shared household expenses (as here) that calculation can be complex and lead to some differences in views.

In addition, the opinion’s framing of the limited role that Tax Court plays in CDP cases that are premised primarily on challenges to a collection alternative warrants some discussion. The opinion notes that the Tax Court’s function in these cases is not to “independently assess the reasonableness of the taxpayer’s proposed offer”; instead, it looks to see if the “decision to reject his offer was arbitrary, capricious, or without sound basis in fact or law.” That approach does not completely insulate the IRS review of the offer (or other alternative) from court scrutiny, and in these cases it generally means that the court will consider whether the IRS properly applied the IRM to the facts at hand. While that is limited and does not give the court the power to compel acceptance of a collection alternative, it does allow the court to ensure that the IRS’s rejection stems from a proper application of the IRM provisions in light of the facts that are in the record and can result in a remand if the court finds the IRS amiss in its approach (though I note as to whether the taxpayer can supplement the record at trial is an issue that has generated litigation and differing views between the Tax Court and some other circuits).

That led the court to directly address one of the main contentions that the taxpayer made, namely that the specialist grossly overstated his RCP due to what the taxpayer claimed was an error in assigning value to his share of an LLC that owned rental properties.  This triggers consideration of whether it is appropriate to assign a value for RCP purposes to an asset that may in fact also be used to produce income when the future income from that asset is also part of the RCP. The IRM addresses this potential double dipping issue but the Gallagher opinion sidesteps application of those provisions because the rental properties did not in fact produce income, and the offer specialist rejection of the offer, and thus the notice of determination sustaining the proposed levies, was not dependent on any income calculations stemming from the rental properties.

The other collection issue worth noting is a jurisdictional issue. During the time the taxpayer was negotiating with the offer specialist, IRS proposed to assess additional TFRP for quarters from different years that were not part of the notice of intent to levy and subsequent CDP request:

Those liabilities [the TFRP assessments from quarters that were not part of the CDP request] were not properly before the Appeals Office because the IRS had not yet sent petitioner a collection notice advising him of his hearing rights for those periods.  In any event, the IRS had not issued petitioner, at the time he filed his petition, a notice of determination for 2012 or 2014. We thus lack jurisdiction to consider them. [citations omitted]

Yet the taxpayer in amending his offer included those non CDP years in the offer. The Gallagher opinion in footnote 5 discusses the ability of the court to implicitly consider those non CDP years in the proceeding:

We do have jurisdiction to review an SO’s rejection of an OIC that encompasses liabilities for both CDP years and non-CDP years. See, e.g., Sullivan v. Commissioner, T.C. Memo. 2009-4. Indeed, that is precisely the situation here: the SO considered petitioner’s TFRP liabilities for 2012 and 2014, as well as his TFRP liabilities (exceeding $800,000) for the 2010 and 2011 CDP years, in evalu- ating his global OIC of $104,478. We clearly have jurisdiction to consider (and in the text we do consider) whether the SO abused his discretion in rejecting that offer. What we lack jurisdiction to do is to consider any challenge to petitioner’s underlying tax liabilities for the non-CDP years.

This is a subtle point and one that practitioners should note if in fact liabilities arise in periods subsequent to the original collection action that generated a collection notice and a consideration of a collection alternative in a CDP case. Practitioners should sweep in those other periods to the collection alternative within the CDP process; while those periods are not technically part of the Tax Court’s jurisdiction they implicitly creep in, especially in the context of an OIC which could have, if accepted, cleaned the slate.

The final issue worth noting is the opinion’s discussion of Graev and the Section 6751(b) issue. While acknowledging that it is not clear that the TFRP is a penalty for purposes of the Section 6751(b) supervisory approval rule, the opinion notes that in any event the procedures in this case satisfied that requirement, discussing and referring to the Tax Court’s Blackburn opinion that Caleb Smith discussed in his designated orders post earlier this month:

We found no need to decide that question because the record included a Form 4183 reflecting supervisory approval of the TFRPs in question. We determined that the Form 4183 was suffic- ient to enable the SO to verify that the requirements of section 6751(b)(1) had been met with respect to the TFRPs, assuming the IRS had to meet those requirements in the first place.

Here, respondent submitted a declaration that attached a Form 4183 showing that the TFRPs assessed against petitioner had been approved in writing by …. the [revenue officer’s] immediate supervisor…. In Blackburn, we held that an actual signature is not required; the form need only show that the TFRPs were approved by the RO’s supervisor. Accordingly, we find there to be a sufficient record of prior approval of the TFRPs in question.

Tax Court Order Highlights Faulty Stat Notice Issued to Married Taxpayers

What happens when IRS wishes to issue stat notice to taxpayers who filed joint returns? Section 6212(b)(2) provides that the notice may be a single joint notice, except if the IRS has been notified that the spouses live separately. IRS Restructuring Act of 1998 in an off-Code provision states that IRS is required, “whenever practicable,” to send “any notice” relating to a joint return separately to each spouse.  When taxpayers file joint returns, and IRS issues a stat notice, IRS policy is to send duplicate notices to each spouse even if they live at the same address.

Parson v Commissioner is a recent undesignated Tax Court order that highlights the risks to the IRS when it does not strictly follow its procedures for issuing separate notices.

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Here are the facts. Parson involved married taxpayers who lived at the same address. In 2014, the husband filed a MFS return and the wife did not file a return; in 2015 they filed a joint return. IRS examined the husband’s 2014 MFS return and the 2015 joint return. IRS issued and sent a single stat notice that covered the husband’s 2014 MFS return and the joint return. The letter portion of the stat notice was addressed only to the husband. The waiver allowing immediate assessment only listed the husband as the sole taxpayer. Accompanying the letter were two separate Forms 4549 A, Income Tax Examination Changes, one for 2014 in the husband’s name and the other for 2015 that referred to both husband and wife.

The Parsons together filed and signed a single petition; the petition swept in both years. For 2014, IRS moved to dismiss the case for the wife, which the Tax Court granted, given that in 2014 the examination pertained to the husband’s MFS return.

Special Trial Judge Armen on his own raised the issue of a jurisdiction for the wife for 2015 given that the stat notice letter only listed the husband’s name. IRS claimed that the Tax Court had jurisdiction over the wife for 2015 because the Income Tax Examination Change Form 4549 A for 2015 also had her name on it and that she was not misled or confused—after all she did file a petition the Tax Court.

Judge Armen disagreed:

However, the Court views the matter differently. First and foremost, it is clear that the . . . notice of deficiency was addressed solely to [husband]. See I.R.C. sec. 6212(a) and (b). Second, the Commissioner is obliged, “wherever practicable, [to] send any notice relating to a joint return under section 6013 of the Internal Revenue Code of 1986 separately to each individual filing the joint return.” Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec. 3201(d), 112 Stat. at 740. This was not done in the present case.

The order thus dismissed the wife’s case for lack of jurisdiction; the order goes on to state that of course IRS could issue a separate stat notice to the wife and that if she wishes to challenge that in Tax Court she will have to timely file a new petition.

Observations and Conclusion

RRA 98’s off Code provision requiring “wherever practicable” that IRS issue separate notices related to a joint return is an important protection from abusive or controlling spouses that may not share correspondence (IRS by the way interprets “any notice” relating to a joint return as only notices required by statute). The separate notice requirement is not an absolute directive and Section 6212 allows a single joint notice when IRS does not know that spouses live separately. The order in Parson highlights the risk to IRS when its stat notice itself fails to explicitly list both spouses’ names, and IRS fails to send separate letters. Parson also is a reminder to practitioners to review carefully IRS correspondence to make sure that IRS complied with its notice requirements. Query how Judge Armen would have ruled if the IRS had sent a duplicate copy of the stat notice addressed to the wife that failed to include her name on the letter portion of the notice.

Hat tip to Lew Taishoff who flagged this order on his blog.

 

 

 

 

Some Additional Reading on IRS Notice Regarding State and Local Deductions

My post last week discussing the IRS’s Strategic Plan briefly referred to the IRS notice indicating that Treasury intended to issue proposed regulations that will “assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.”

For those wanting some more on the IRS notice, I recommend Two Cheers for IRS Guidance on the New SALT Cap on Medium by University of Chicago Law School Professor Dan Hemel.  Dan’s post distinguishes between what is in the IRS notice’s crosshairs, i.e., plans enacted or on the books that allow taxpayers to get credit for charitable contributions to state-linked funds, from other state plans, like the NY State Employer Compensation Expense Program, that allow employees to claim credits if as Dan notes the “employer opts into a new payroll tax regime.”

Dan discusses some interesting procedural issues as well, emphasizing that a 2011  informal Chief Counsel memorandum,which some have used as legal support for the deduction of proceeds contributed to state linked charitable funds, is not precedential. (For those wanting some more substance on the support for the workaround see Federal Income Tax Treatment of Charitable Contributions Entitling Donor to a State Tax Credit, an article posted on SSRN by Dan, Joe Bankman, Jacob Goldin, David Gamage, Darien Shankse, Kirk Stark, Dennis Ventry and Manoj Viswanathan).

Dan’s post discusses how states may be able to avoid the reach of the Anti-Injunction Act (AIA) to bring a pre-enforecement judicial challenge to any future regs. Dan’s main point here is that absent a pre-enforcement challenge, states would have little direct chance to challenge the regulations when they are eventually promulgated. As Dan discusses, in 1984 the Supreme Court in South Carolina v Reagan allowed states to challenge legislation that pegged the federal income tax exemption of interest from state and local obligations to bonds issued in registered rather than bearer form. Despite objections from the federal government that the AIA should restrict a state’s ability to challenge that legislation, the Court disagreed:

In sum, the Anti-Injunction Act’s purpose and the circumstances of its enactment indicate that Congress did not intend the Act to apply to actions brought by aggrieved parties for whom it has not provided an alternative remedy. In this case  if the plaintiff South Carolina issues bearer bonds, its bondholders will, by virtue of 103(j)(1), be liable for the tax on the interest earned on those bonds. South Carolina will incur no tax liability. Under these circumstances, the State will be unable to utilize any statutory procedure to contest the constitutionality of 103(j)(1). Accordingly, the [AIA]cannot bar this action.

Dan’s flagging of South Carolina v Regan and its allowing states to challenge the future guidance seems spot on to me.

Stay tuned, both for 1) more IRS/Treasury guidance on this and other workaround plans and 2) states challenging whatever regulations Treasury eventually promulgates.

IRS Publishes 5-Year Strategic Plan

Earlier this week IRS published a 5-year strategic plan.The plan identifies the following six strategic goals.

  • Empower and Enable All Taxpayers to Meet Their Tax Obligations
  • Protect the Integrity of the Tax System by Encouraging Compliance through Administering and Enforcing the Tax Code
  • Collaborate with External Partners Proactively to Improve Tax Administration
  • Cultivate a Well-Equipped, Diverse, Flexible and Engaged Workforce
  • Advance Data Access, Usability and Analytics to Inform Decision-Making and Improve Operational Outcomes
  • Drive Increased Agility, Efficiency, Effectiveness and Security in IRS Operations

Here are some observations:

  1. The plan starts with a recitation of the IRS mission, and lists the taxpayer bill of rights. Including the taxpayer bill of rights so prominently in the plan is a very good sign, as IRS courts and taxpayers are all wrestling with precisely how and in what way those rights should manifest themselves in particular situations.
  2. The message from the acting commissioner is wrapped up with the challenges of administering the late 2017 tax legislation. That is less strategic in and of itself but certainly part of the IRS broader goals of empowering taxpayers to meet their obligations.There is tons on the IRS plate when it comes to getting guidance out; new procedures with OMB when it comes to issuing regulations, and many issues from pre-2017, such as more BBA guidance that my colleague Marilyn Ames and I are awaiting as we finalize the new partnership content in the Saltzman and Book treatise.  (One example will no doubt be watched and litigated: just this past week IRS issued Notice 2018-54concerning state workarounds to avoid the $10,000 limit on SALT deductions. The Notice reminds taxpayers that federal law controls the characterization of payments for federal tax purposes, and that regulations will reflect that substance over form will control the outcome).
  3. On the goal of empowering taxpayers to meet obligations, the plan emphasizes a multi-channel approach that incorporates taking advantage of digital technology but also recognizes that face to face and telephone interaction are key. The plan also discusses the importance of educating taxpayers when communicating.
  4. On protecting the integrity of the tax system, the plan reflects that interactions with taxpayers, even when there is a suspicion that a return may be incorrect (especially among individuals), can be a chance to inform and educate taxpayers and nudge compliance. Audits, while crucial, especially for those intent on gaming the system by leveraging information asymmetry and the inability and undesirability of IRS auditing all suspicious returns, are costly, and IRS needs to think more robustly about ways to encourage better taxpayer behavior, an issue I have been thinking about lately and which I explore further in an article with Intuit’s Dave Williams and Krista Holub that was just published in the Virginia Tax Review.
  5. The report has an important sidebar about challenges associated with administering a tax system in a changing environment. The report flags for emphasis the growth in the gig economy and in multi-generational households as two key challenges that present  difficulties for the IRS. Lots of income earned in the gig economy is not subject to information reporting. Credits like EITC which depend on income level and family living arrangements present a next level type of challenge for tax administration.
  6. The report emphasizes a need to reboot how “data is collected stored analyzed and accessed.” This is a key area that I suspect will be a challenge for the new Commissioner. Technology is changing so rapidly and there are many value choices that are manifested in the way data is used to inform agency practices. I am deeply interested in this area, and there is growing important research looking at how government agencies, under the guise of more efficient use of data in informing and driving compliance choices and procedures, have compromised the rights of those especially less able to navigate bureaucracy due to poverty and transience and other challenges facing the working poor.
  7. The conclusion emphasizes a world where more taxpayers will be able to resolve matters quickly and efficiently, while also recognizing that IRS faces substantial barriers to achieving its goals. Some of those challenges include “changes in tax law, aging technology infrastructure, staffing challenges, cybersecurity risks and fiscal uncertainty.” As part of its main goals, the report discusses the key role that a well-trained and motivated IRS workforce must play in a successful tax administration. While resources and technology and use of data are all key, I think that a trained and motivated agency is the best safeguard of the future for tax administration. The report notes that 27% of the IRS workforce is nearing retirement; and only half of 1% of the workforce is under 25. This is a major challenge for the new Commissioner.
  8. I think the report’s emphasizing collaborating with others (like the private sector and volunteer organizations and other government entities) is so important. Getting the right input from those who bring differing perspectives is a challenge but can in my view pay substantial dividends. There are signs of success in this area (like the Security Summit where IRS has partnered with private sector and states and others to drive down ID theft), and I think this is an area that has even great potential. With potential, there is also risk (e.g., agency capture), but with transparency and true broad stakeholder engagement the risks I think can be mitigated.