TIGTA Report Recommends Shortcutting Deficiency Procedures For Returns Claiming Casualty Loss Deductions

A recent TIGTA report discusses the processes the IRS uses to evaluate tax returns that reflect a claimed casualty loss deduction.  TIGTA criticizes the IRS for allowing casualty loss deductions that are not allowed under current law. It recommends that the IRS institute up front checks to prevent the processing of returns that may reflect an erroneous casualty loss deduction. In so doing, I believe TIGTA is recommending that IRS violate a fundamental taxpayer right to access Tax Court through normal deficiency procedures. To IRS’s credit, IRS disagreed with TIGTA. In this post I will discuss the (admittedly wonky) issue.

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As readers may know in the Tax Cuts and Jobs Act Congress substantially cut back the ability of taxpayers to claim casualty deductions for the years 2018-2025, with losses only allowed when connected to claims associated with Federally declared disasters. 

How does this relate to tax procedure and tax administration?

The path from tax return filing to IRS processing is confusing, even for tax professionals. A recent helpful blog by NTA Erin Collins discusses the lifecycle of a tax return, including detailing the IRS’s review process before it posts to the IRS system. As the NTA notes, the vast majority of returns IRS processes without hiccup. If the return reflects an overpayment it either generates a refund (or offset) or begins the separate post-assessment collection stream. 

As the NTA notes, however, there are a number of detours a return can take that delay the normal process, including error resolution system (ERS): “ERS systemically identifies potential errors made on a taxpayer’s return and then requires an employee to manually review to address the identified error.”

If a return goes to ERS the return is manually reviewed. If ERS review confirms that there is an error, IRS generally sends either 1) a letter requesting additional information or 2) a math error letter. 

The TIGTA report reviews the process IRS uses to evaluate returns that reflect a claimed casualty loss deduction:

When the President declares a Federal disaster or emergency, immediate notification is made to the Governor of the affected State or U.S. Territory, appropriate members of Congress, and Federal departments and agencies. The Internal Revenue Service (IRS) Disaster Assistance and Emergency Relief Program Office prepares and distributes an internal Disaster Relief Memorandum to the IRS that summarizes the tax relief to be provided. Individuals and businesses in eligible counties are identified by zip code. For those individuals and businesses affected, the IRS adds the specific Federal Emergency Management Agency (FEMA) disaster declaration number (hereafter referred to as a FEMA number) that identifies the Federally declared disaster to the tax account. Taxpayers who live outside the identified zip codes and are affected by a Federally declared disaster can self-identify by calling the IRS’s disaster toll-free telephone line. The IRS will automatically grant tax relief and manually input the FEMA number on the taxpayer’s account. 

TIGTA has previously reviewed post TCJA returns claiming casualty loss deductions and has noted that returns claiming casualty losses have failed to include the FEMA declaration disaster number (i.e., the FEMA number) as required on Form 4684, Casualties and Thefts. TIGTA found over 12,000 2019 returns that failed to include the FEMA number. Those returns reflected over $309 million in casualty loss deductions. 

TIGTA’s solution to the problem of a missing FEMA number is for IRS to add this issue to the vast pile of returns in ERS that could trigger a summary assessment without the bother of sending a post audit statutory notice of deficiency.  This up front flagging is important from TIGTA’s perspective because prior studies showed that due to dollar criteria and resource issues under 2.5% of the returns that failed to include a FEMA number would be potentially subject to examination (and many fewer would actually be examined).

IRS partially disagreed with TIGTA, noting that the “absence of the FEMA number on Form 4684 is not a condition the IRS could use to summarily determine whether the claim is unallowable. Such a determination must be made under deficiency procedures, which is beyond the scope of the Error Resolution function.” 

As the response reflects, summary assessments are the exception and require statutory identification. (We have previously discussed one form of summary assessment, math error notices. See Keith’s post from last week.)

Congress could have chosen to add the casualty loss issue to the summary assessment category, but it did not. That should not be a determination IRS makes. Kudos to the IRS for pushing back on TIGTA’s recommendation.

There are other ways to address the problem without abridging taxpayer rights. IRS noted that it has changed the Form 4684 to more explicitly require the FEMA number. It will evaluate the results of the change. IRS stated that it would also work with software providers to make more explicit a prompt that a FEMA number is needed.

In addition, former NTA Nina Olson has previously written in testimony, blog posts and recommendations in reports to Congress that IRS should use data and information that it has to identify issues that would help get to the right answer or minimize harm to taxpayers. (See here at page 12, for example, linking to Senate testimony from 2018 tying the concept to using data to identify taxpayers who are at risk of economic hardship). Disaster relief is based on zip codes.  At least for some group of these returns, the IRS could determine whether the zipcode of the taxpayer’s address matches the zipcode for the Presidentially declared disaster.  For other returns, the taxpayer isn’t in the zipcode but is affected by the zipcode, and the taxpayer has called the IRS Disaster Office, and as TIGTA notes the IRS places the FEMA code on their account.  So in the vast majority of cases the IRS has internal data that can verify the legitimacy of these returns and casualty loss claims without a human needing to look at the return.  Thus, IRS could (1) reduce administrative burden on taxpayers who have already suffered extraordinary losses and have more important things to worry about than a specific number to tag on a return and (2) reduce the number of returns going to ERS by instituting a machine-learning program to identify likely legitimate returns.  

TIGTA’s mission is to promote “integrity, economy, and efficiency in the administration of the Nation’s tax system.” In so doing, however, it should be mindful of the statutory rights taxpayers enjoy.

There are a couple of related points to this post as well that will soon merit their own posts. The infrastructure legislation contains proposed language that will amend Section 7508A(d), which addresses the authority to postpone deadlines due to presidentially declared disasters or terroristic or military actionsA prior post on that topic is here is here.

The concept of burdens that taxpayers experience is the topic of a proposed law review article that Keith, Nina and I have submitted to journals this cycle. The paper explores the concept of administrative burdens and proposes a new framework to identify and mitigate those burdens, tying it all to protecting taxpayer rights.

In Whistleblower Case Tax Court Admonishes IRS For Failing to Follow Its Own Rules

Rogers v Commissioner is a Tax Court opinion that explores the IRS process for whistleblower claims and the impact of administrative law principles when the IRS fails to follow its own guidance. The case involves a series of allegations against nine family members and acquaintances who Rogers claimed had “conspired to commit grand theft through conversion of the assets of Mr. Rogers’ mother.”  As the opinion recounts, Rogers claimed that the nine fraudulently shifted assets away from his mother causing her to be “[divested] of her financial assets and property without her direct knowledge or control.”

The opinion discusses the process the Whistleblower Office (WBO) employs to review claims. That has recently changed, with SBSE operating division classifiers reviewing the claim (it used to be done principally by WBO staff). In this case the classifier recommended that the Service reject the claim because the “allegations are not specific, credible, or are speculative.”

In response, the WBO sent a letter to Rogers stating that it rejected his claim because it “decided not to pursue the information you provided.” The letter did not identify the reason for rejecting as being tied to a credibility determination.

Rogers appealed to the Tax Court seeking review of the WBO’s award determination under Section 7623(b)(4). The IRS filed an answer and then filed a motion for summary judgment. The Tax Court rejected the IRS’s motion, and in so doing issued a precedential opinion that clarified a few prior important principles and also established some new ones. In this post I will highlight some of the major points in the opinion.

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As an initial matter the opinion notes that the monetary thresholds for mandatory awards under 7623(b) are not jurisdictional and are affirmative defenses that the government must plead and prove. There are two thresholds for mandatory awards; a $200,000 income test and $2 million dispute test. A prior opinion established that the $2 million test was not jurisdictional and Rogers extends that reasoning to the $200,000 test. As the government failed to raise that defense in its answer, the opinion proceeded to the merits of the motion.

As I discussed in Tax Court Decides Scope and Standard of Review in Whistleblower Cases WBO appeals are subject to the record rule, meaning that generally the Tax Court is bound to the record below (scope of review). The standard of review is abuse of discretion, meaning that the Tax Court will not sustain a decision when a determination is arbitrary, capricious, or without sound basis in fact or law.  

As part of that abuse standard review, administrative law precedent establishes that an agency that fails to follow its own regs has abused its discretion.  In addition, under the Chenery doctrine the Tax Court “can uphold the WBO’s determination only on the grounds it actually relied on when making its determination….This means that the WBO must clearly set forth the grounds on which it made its determination, so that we don’t have to guess.” 

These points are key in this case, as the opinion discusses how the WBO letter to Rogers purported to reject his claim but in fact was a denial. 

The regulations under 7623 distinguish between WBO office rejections and denials. Under the regulations, “[a] rejection is a determination that relates solely to the whistleblower and the information on the face of the claim that pertains to the whistleblower.” Sec. 301.7623-3(c)(7), Proced. & Admin. Regs.; see also Internal Revenue Manual (“IRM”) pt. 25.2.1.1.3(7) (Apr. 29, 2019).

As the opinion notes a denial “is fundamentally different from a “rejection.” Under the regulations, “[a] denial is a determination that relates to or implicates taxpayer information.” Sec. 301.7623-3(c)(8), Proced. & Admin. Regs.; see also IRM pt. 25.2.1.1.3(3) (“A denial is a determination that is made for reasons beyond the information contained on the Form 211. [sic] (e.g., the Service did not proceed based on the information provided by the whistleblower, the case was surveyed or no changed by the operating division, the issue(s) alleged by the whistleblower were no change issues, the issues alleged by the whistleblower were below threshold, the statute has expired on the issues raised by the whistleblower, there are no collected proceeds).”).

The distinction matters, as there are different process for denials as compared to rejections. And it matters even more for purposes of this case because the Tax Court is going to hold the IRS to the procedures it has established in the regs:

On its face, the Letter states that the WBO is rejecting Mr. Rogers’ claim. But the WBO Letter fails to include any rationale that would support a rejection under the regulations….

Rather than focusing on the whistleblower and explaining what he failed to [do it] switches its focus to the agency itself and what the agency chose to do. Thus, the Letter tells Mr. Rogers that “the IRS decided not to pursue the information you provided.” While this may be a plausible explanation for a denial, it does not explain the basis of a rejection.

The opinion continues with a reference to the late great Yogi Berra:

In short, the regulatory framework gave the WBO two distinct paths for action — rejection or denial. Having come to that “fork in the road,” the WBO Letter followed Yogi Berra’s advice and “took it.” The Yankee great’s suggestion was sound in context, as both prongs of the fork led to his home. But with respect to a whistleblower award, the two prongs of the regulations lead to very different places. By including the “decided not to pursue” rationale as the reason for its purported rejection, the WBO Letter in effect said to Mr. Rogers “we reject your claim because we are denying the claim.” This statement was self-contradictory — and therefore impermissible — under the regulations.

There is more to the opinion and I will highlight some of the main points below.

Under Chenery the Tax Court will look beyond the determination letter to see if there was other material in the record as a “determination letter that is silent or muddled with respect to a supportable rationale may still be sustained if other materials in the record clarify the agency’s reasoning.” 

After performing that inquiry the opinion concluded that the rest of the record contradicted the rationale it gave Rogers in the letter. I found this part of the opinion interesting, as it revealed the likely reason why the WBO used the language it did with Rogers. Rejections generate fewer opportunities to perfect a claim; thus WBO likely did not want to have Rogers resubmit his claim and take additional IRS resources in dealing with additional submissions. 

The opinion did not look favorably at this tactic, emphasizing that the “WBO is not free to take away with double speak rights that the regulations plainly provide.” 

And for good measure the opinion rebukes the WBO for failing to treat Rogers fairly:

As the Supreme Court recently observed: “If men must turn square corners when they deal with the government, it cannot be too much to expect the government to turn square corners when it deals with them.” Niz-Chavez v. Garland, 593 U.S. ___, ___, 141 S. Ct. 1474, 1486 (2021). We cannot countenance intentional obfuscation on the part of the WBO. And neither the WBO Letter alone nor the Letter coupled with the administrative record here provides a coherent account of the WBO’s determination that is consistent with the regulations. That, in turn, represents an abuse of discretion, and accordingly we must deny the Commissioner’s motion

Conclusion

The opinion also explores the implications of the shifting of some WBO functions to SBSE in light of a general reluctance of courts to interfere with agency enforcement decisions. 

But the main takeaway from Rogers is that the opinion explores how even limited abuse of discretion review such as that in WBO determinations can ensure that the IRS treat individuals transparently and in line with its own procedures.

As the opinion notes, “it may well be that Mr. Rogers’ claim is nothing more than a personal dispute that the IRS will decide not to pursue even if Mr. Rogers provides additional information. Nevertheless, the WBO must comply with the regulations, and Mr. Rogers is entitled to transparency and candor as to the reasons for its ultimate determination. We cannot countenance intentional obfuscation by the WBO, nor will we bless attempts to improperly shield cases from judicial review

IRS Whiff on Timeliness of Refund Claim Prevents Payment of Refund If Taxpayer Fails to File Suit Within Two Years

What happens if a taxpayer timely files a refund claim, IRS denies the claim because it mistakenly believes that the claim is untimely and the taxpayer fails to files a refund suit within two years? To top it off, IRS, outside the two-year window for filing suit, realizes that it made an initial mistake in rejecting the claim on SOL grounds?

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A recent email released as Chief Counsel Advice describes this scenario. As the email notes, that the IRS later acknowledges the claim as timely does not grant the IRS the power to reconsider its earlier denial if the two year period for filing suit in federal court has passed. 

A quick statutory background on refunds. As to filing a suit, Section 7422 authorizes a suit for refund for taxpayers who believe they have overpaid taxes (or are entitled to an excess of refundable credits). Section 7422 authorizes such a suit only once the taxpayer has submitted an administrative claim for refund with the Service. Section 6532 prevents suits 1) until at least six months have passed after filing the claim (unless there is an earlier denial) or 2)  “after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.”

The email/advice does not provide the underlying facts but as many readers (and my suffering procedure students learn) is that the 6511(a) and 6511(b) SOL refund rules and limitations on amount can be tough.  The email flags that the timeliness of the claim issue in question relates to Section 7503, which provides rules for when the last day for performing an act falls on a weekend or holiday.  The advice acknowledges that the  refund claim was in fact timely when taking into account Section 7503.

As the advice notes, if a taxpayer has not in fact filed suit, under Section 6514(a)(2) a refund issued after the two-year period in 6532 is considered erroneous. As such, the taxpayer is out of luck unless there was some procedural defect with the IRS’s denial of the refund, such as a failure to be sent to the proper address or a failure to send by certified or registered email. 

What would happen if the IRS had issued the refund after the two-year period had lapsed?  Then the payment would be an erroneous refund, allowing the IRS to recover under erroneous refund procedures, leading to yet another complex set of rules that delight tax professors and annoy students and taxpayers alike.

The situation highlights the at times unfairness of the SOL rules. Whether the time period for an action is jurisdictional or generally subject to equitable exceptions is a topic we have discussed frequently. Bryan Camp has thoroughly discussed these issues in a recent Tax Lawyer article where he explores why he believes the refund suit rules in Section 7422 and Section 6532 are not jurisdictional.  To that end see also a PT post from Carl Smith discussing a district court case from the ED of Washington where the court equitably tolled the 6532(a) filing deadline, citing the Volpicelli case from the 9th Cir. holding that the 6532(c) wrongful levy suit filing deadline is not jurisdictional and is subject to equitable tolling. The brief CCA does not go down this rabbit hole, but I note that IRS does not accept Volpicelli, and this topic is one courts will continue to address.

Boyle Strikes Again: Incarcerated Individual Subject to Delinquency Penalties Even Though Attorney Embezzled Funds and Failed To File His Tax Returns

We have often discussed the reach of the 1985 Supreme Court case United States v. Boyle. Section 6651(a)(1) and (2) impose delinquency penalties for failing to file a tax return or pay a tax unless the taxpayer can establish that the failure was due to reasonable cause and not willful neglect.  Boyle essentially stands for the position that taxpayers have a nondelegable duty to be aware of tax deadlines. An agent’s incompetence or willful misconduct will not excuse the taxpayer from delinquency penalties.

Lindsay v US is the latest case to apply the principle.

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Lindsay was incarcerated and executed a POA to Bertelson, an attorney, to manage his affairs, including filing his tax returns.  The attorney assured Lindsay he was doing so for the years 2012-15; instead he failed to file the returns and for good measure embezzled hundreds of thousands of dollars. The actions resulted in Lindsay receiving $705,414.61 in actual damages and $1 million in punitive damages.

Lindsay eventually filed his tax returns and paid over $425,000 in delinquency penalties. He filed a claim for refund; IRS rejected and he filed a suit in district court. The district court, contrary to the magistrate’s recommendation, granted the government’s motion to dismiss, citing Boyle as precluding a claim for relief. Following a timely appeal, the Fifth Circuit affirmed. In so doing it applied Boyle to Lindsay’s somewhat sympathetic circumstances:

Lindsay claims that he exercised ordinary business care and diligence by giving Bertelson his power of attorney and by directing Bertelson to file his income tax returns and to pay his taxes. Lindsay routinely asked Bertelson whether he was handling Lindsay’s tax obligations, and Bertelson said that he was. In Lindsay’s view, he has a reasonable cause for late filings and delayed payments because he used ordinary business care and prudence but was nevertheless unable to file his returns and pay his income taxes due to circumstances beyond his control, i.e., Bertelson’s malfeasance.

Lindsay’s position was rejected in BoyleBoyle established that taxpayers have a non-delegable duty to promptly file and pay their taxes. 469 U.S. at 249–50. Unlike cases where taxpayers seek and detrimentally rely on tax advice from experts, “one does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due.” Id. at 251. Lindsay’s argument fails.

The opinion disposed of a couple of other of Lindsay’s arguments. He also raised the IRS’s own definition of unavoidable absence as excusing delinquency. Citing George v Comm’r, a 2019 TC Memo opinion that collects cases on the point, the Fifth Circuit panel emphasized that the mere fact of incarceration itself does not mean there was reasonable cause to miss deadlines.

Lindsay’s final argument was that  Boyle does not control in cases where a taxpayer is not “physically and mentally capable of knowing, remembering, and complying with a filing deadline.” The opinion stated that even if Boyle created an incapability exception he could have done more, “much like he conducted business and employed a CPA while incarcerated.” 

Conclusion

Lindsay, like many other taxpayers, is out of luck when it comes to trying to recover delinquency penalties that can be directly linked to an agent’s misconduct or incompetence. He did have some recourse, however, as he was awarded significant compensatory and punitive damages from his embezzling attorney. 

Levy on Social Security Benefits: IRS Taking Payments Beyond Ten Years of Assessment Still Timely

Dean v US involves a motion to dismiss a taxpayer’s suit alleging that the IRS recklessly disregarded the law by continuing to levy on a taxpayer’s Social Security payments beyond the ten year SOL on collections.  The magistrate concluded that the IRS’s actions were not improper and recommended that the case be dismissed. The district court approved the recommendation and Dean timely appealed to the 11th Circuit, which affirmed the district court.  The case nicely illustrates how the ten-year collection period does not prevent collection beyond the ten-year period when there is a timely levy relating to a fixed and determinable income stream.

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Dean owed over two million dollars for tax years 1997-2005. IRS assessed the liabilities in 2007; IRS recorded a notice of federal tax lien shortly thereafter. In 2013, IRS served a levy on Dean and the SSA for the unpaid tax. Following the levy, SSA began paying over all of the benefits slated for Dean to the IRS. I here note as a tangent that this differs from the federal payment levy program under 6331(h), which authorizes an automatic 15% levy on certain federal benefits, including social security. IRS is not precluded from issuing continuous manual levies, as it did here, where it could take all of the benefits, subject to exemptions that the taxpayer establishes as per 6334(a)(9).

In 2017, with the CSED expiring, IRS filed a certificate of release of federal tax lien stating that Dean had “satisfied the taxes,” that the lien was “released,” and authorized the proper IRS officer to “note the books to show the release of this lien.” IRS also abated the assessments.

Dean at this point believed that the levy on his social security benefits should have stopped. When it did not, he filed a complaint in federal court alleging that the levy was an unauthorized collection action and he sought over $64,000 in damages.

Unfortunately for Mr. Dean, as the magistrate noted, the argument does not “hold water” (allowing me gleefully to link to the great Joe Pesci and Marisa Tomei scene in My Cousin Vinny).

The regs under Section 6331 describe the relationship between a levy and fixed and determinable payments: “[A] levy extends only to property possessed and obligations which exist at the time of the levy.” 26 C.F.R. § 301.6331–1(a). “Obligations exist when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date.” Id. 

An obligation is fixed and determinable “[a]s long as the events which gave rise to the obligation have occurred and the amount of the obligation is capable of being determined in the future …. It is not necessary that the amount of the obligation be beyond dispute.” United States v. Antonio. 71A AFTR 2d 93-4578], *6 n. 2 (D. Haw. Sept. 24, 1991). Numerous cases establish that Social Security benefits are a fixed and determinable obligation of the SSA and are subject to one-time levies. 

As the lower court opinion discusses, the 2013 levy created a custodial relationship between IRS and the SSA and as such the benefits came into constructive possession of the IRS. The regs under Section 6343 also provide that “a levy on a fixed and determinable right to payment which right includes payments to be made after the period of limitations expires does not become unenforceable upon the expiration of the period of limitations and will not be released under this condition unless the liability is satisfied .” 26 C.F.R. § 301.6343-1(b)(1)(ii).

The Eleventh Circuit also helpfully explains the relationship between the levy and the benefits, directly refuting the claim that the collection occurred after the expiration of the SOL:

Instead, the IRS seized his entire Social Security benefit—that is, his “fixed and determinable right to payment” of his Social Security benefit in monthly installments—immediately upon issuing the notice of levy in June 2013. 26 C.F.R. § 301.6343-1(b)(1)(ii); see Phelps, 421 U.S. at 337. Having seized his entire benefit before the expiration of the collection limitations period, the IRS was not required to relinquish it after the period expired. See 26 C.F.R. § 301.6343-1(b)(1)(ii).

The lower court opinion also nicely discusses the lack of legal significance of the IRS’s abatement of the assessment and issuance of the release of federal tax lien. Both events did not change that Dean owed an underlying tax.  As to the abatement, taxpayers are liable for the tax regardless of whether there has been an assessment. While the release of the federal tax lien affects the IRS’s security interest, it did not release the levy and had no bearing on the underlying tax debt.

CIC Fallout: Anti Injunction Act Bars Motion for Protective Order

US v Meyer presents a somewhat unusual context for a court’s application of the Anti Injunction Act. Meyer stems from an injunction action due to allegations that Meyer promoted “an abusive tax scheme that result[ed] in scheme participants claiming unwarranted federal income tax deductions for bogus charitable contributions.” In 2018, the parties settled that suit and filed a joint motion for permanent injunction. The settlement expressly did not preclude the US from “pursuing other current or future civil or criminal matters or proceedings,” or preclude Defendant from “contesting his liability in any matter or proceeding.”

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Following the settlement, the IRS began a civil investigation and proposed approximately $7 million in Section 6700 civil penalties. Following the proposed assessment, Meyer sought a protective order from the federal district court that had previously been the forum for the injunction proceeding. In particular, Meyer alleged that the IRS’s computation of the proposed 6700 penalty improperly relied on admissions he had made in the injunction proceeding, in violation of Federal Rule of Civil Procedure 36(b). FRCP 36(b) provides that “an admission under [Rule 36] is not an admission for any other purpose and cannot be used against the party in any other proceeding.”

The request for a protective order was initially heard by a magistrate judge.  In April, that judge issued a report and recommendation concluding that Meyer’s request for relief was barred under the AIA. In so doing, the magistrate judge held that the AIA applied even though Meyer did not bring the suit but instead sought a protective order in a suit that the US had brought (recall that the AIA provides that  “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person….”). Meyer had sought relief based upon a federal district court’s broad power under Fed Rule Civ Procedure 26 which upon a showing of “good cause,” provides that a court may issue a protective order providing a variety of remedies, such as precluding discovery altogether or “specifying terms … for the disclosure or discovery.”

In finding that the AIA barred the request for a protective order stemming from an alleged violation of Fed Rule Civ Procedure 36 from a government-brought injunction case, the magistrate noted that there was no case law squarely on point but looked to analogous cases applying the AIA where taxpayers sought to limit information that the IRS could use in civil proceedings. According to the magistrate, Meyer’s relief request was essentially requiring the IRS to recalculate the penalty and “preclude the IRS from using certain information to assess a tax penalty and is, therefore, impermissible under [the AIA].”

In finding that the AIA did not allow the court to issue a protective order, the magistrate punted on the issue as to whether Rule 36 had any impact on the IRS’s proposed penalty assessment, and whether a “proceeding” for Rule 36 purposes also included an IRS civil penalty examination.  The magistrate noted that the substantive issue could be teed up in a refund proceeding.

Following the magistrate’s report, Meyer timely appealed the recommendation, with the district court then as per Fed Rule Civ Procedure 72 reviewing the matter on a de novo basis. The federal district court judge affirmed and adopted the magistrate’s order, though the opinion is somewhat noteworthy because it addresses Meyer’s additional filings with the court briefly dismissing Meyer’s argument that CIC Services supported finding that the AIA did not apply:

In the present case, the relief Defendant seeks falls squarely within the contours of the Anti-Injunction Act—namely, to limit the information the IRS may consider in its assessment of $7,066,039.00 in tax penalties under  § 6700. See ECF No. [98] at 5 (requesting that the Court “issue an order preventing the Government and its client, the IRS, from using [Defendant’s] Rule 36 Admissions to support factual conclusions in the IRS’s Section 6700 Penalty examination.”); ECF No. [105] at 10 (“request[ing] that this Court enter an order directing the Government that it may not use the Defendant’s RFA Responses for any purpose other than as admissions in this proceeding.”) (emphasis in original); see also CIC Serv., 141 S. Ct. at 1593 (“suits sought to prevent the levying of taxes … [cannot] go forward.”). Thus, the Court agrees with [the magistrate judge’s] conclusion that Defendant’s Motion is barred under the Anti-Injunction Act.

Conclusion

As did the magistrate judge’s, the district court’s order ended with a statement that Meyer was not without recourse as he could bring a refund proceeding and thus get a court to address the merits of Meyer’s claim that Federal Rule of Civil Procedure 36(b) should bar the IRS from using admissions from a separate injunction in calculating a 6700 penalty in a civil exam. Of course, a refund suit is predicated on Meyer satisfying Flora, though the 6700 penalty has special statutory rules allowing for partial payment to secure court review.

Pro Publica Tax Dump

Our post today features an Op Ed that Les wrote reacting to the Pro Publica release of information.  Because Les is on vacation, I have the opportunity to introduce his post which he asked me to do because I was making comments on the release as well.  My first comment goes not to the significant disclosure violation that appears to underlay the information provided in the article but to whether we should adjust our disclosure laws so we are not shocked by the revelations in the article.  My second comment relates to the IRS and its protection of information.

I wonder if the publication of this information should cause us to rethink the disclosure laws.  These returns would have been disclosed in the 1860s when the first income taxes were imposed.  They would have been disclosed, at least in part, on returns filed after the passage of the 16th amendment.  But for the kidnapping of Lindbergh’s baby, maybe they would still be partially disclosed.  There was a vigorous debate surrounding disclosure back when the income tax was only imposed on the wealthy.  Should part of the wealth tax discussion be disclosure of their returns or parts of their returns such as the bottom line of tax paid.

It also seems that we have quickly forgotten that the IRS kept, and continues to keep, Mr. Trump’s returns from disclosure when there was intense interest.  With the filters the IRS has on access and the breadth of individuals in this disclosure, it’s difficult for me to imagine it came from an IRS source.  Nonetheless, a thorough investigation is needed to make sure the IRS filters capture access to this information on its system and to make sure that the leak did not come from the IRS.  Keith


Last week Pro Publica released the first report of a series that will focus on the financial lives of our nation’s richest people and will “explore in detail how the ultrawealthy avoid taxes, exploit loopholes and escape scrutiny from federal auditors.”

Released close in time to the 50th Anniversary of the publication of the Pentagon Papers, the report is based on extensive confidential data.  Longtime tax reporter David Cay Johnston, in noting how the report detailed in a granular way how little income taxes some of our richest have paid over the past decade or so hailed the Pro Publica release as the “biggest and most important” tax story in his 55-year career.

Over the weekend, I wrote an opinion piece on the Pro Publica report for NBC News’ Think series.

The culture of respecting taxpayer confidentiality is deeply engrained in the IRS and is punishable by civil and criminal penalties.  While Pro Publica did not reveal who released the information (and states it did not know the source), it is not clear whether the perception that the IRS cannot be trusted with confidential information may have an impact on some of the major procedural/tax administration proposals in the Biden Made in America Tax Plan.

More On The Implications of CIC Services

We are starting to see some fallout from last month’s CIC Services opinion. For example, Tax Notes’ Kristen Parillo discusses[$] Hancock Land Acquisitions v US , another microcaptive case. Parillo’s article explores the parties’ post CIC Services supplemental filings in a case where the taxpayer brought an action alleging that the IRS’s failure to refer its case to Appeals violated the Taxpayer First Act’s addition of Section 7803(e)(4) and its mandate that Appeals’ “shall be generally available to all taxpayers.” Immediately following the Supreme Court opinion, the government filed a supplemental brief claiming that CIC does not alter that the challenge is barred by the AIA, emphasizing that the partnership was not challenging a reporting obligation and that the relief requested was close to an assessment on the partners.

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The partnership responded, claiming that its challenge squarely fits in with the three CIC factors that led the Court to conclude that the challenge was not to a tax, including that its relief looks to a remedy for alleged violations of their procedural rights and that any impact on assessment or collection is just a downstream consequence.  

Earlier this week there was also a very interesting blog post on CIC Services in Notice & Comment, the administrative law blog. The post, Do you C what I C? – CIC Services v. IRS and Remedies Under the APA, from Professor Mila Sohoni, explores what CIC Services offers more broadly for admin law purposes: 

The Court’s opinion in CIC Services throws some much-needed light on two important points of contention within that debate: what do litigants mean when they ask a court to “enjoin” a rule or “declare” a rule “unlawful” in an APA action, and what does the APA mean when it says that a court may “hold unlawful and set aside” a rule?

For readers interested in those issues I suggest reading the brief but powerful post.  The post focuses mostly on APA 706 and whether APA violations can lead to vacating regs/rules in their entirety or rather a more narrow focus on the individual plaintiff. The takeaway from the post is that there has been some uncertainty in admin law circles on the scope of a federal court’s powers when in a preenforcement action it finds that an agency (not just the IRS) violates the APA. As Sohoni discusses the Sessions led DOJ in the Trump Administration issued litigation guidelines that adopted the narrow view. Others have argued that the courts have much broader powers to enjoin agency action. Sohoni argues forcefully that CIC Services provides support for the latter view:

The opinion in CIC Services shows that the Court does not hold this [the narrow] view of the meaning of “set aside.” Throughout its opinion, the Court treats “set aside” as a type of relief. (See, e.g., CIC Servs., slip op. at 4-5 (“So the complaint asks the court to ‘set[] aside IRS Notice 2016-66 …’”); id. at 11 (“the existence of criminal penalties explains why an entity like CIC must bring an action in just this form, framing its requested relief in just this way”). Moreover, the Court not only treats “set aside” as a kind of relief, but the Court also necessarily is using the term “set aside” in its conventional sense: to mean “invalidate,” not merely to “ignore.” 

These developments are just the opening rounds on the impact of CIC Services. Stay tuned.