Generally, taxpayers go to Tax Court when they receive a ticket to the court in the form of a notice of deficiency or a notice of determination. As the IRS has been buried under millions of unread correspondence due to the pandemic and other issues, it fails to process taxpayer correspondence and thereby ignores taxpayer requests that should lead to the opportunity to go to Tax Court. Other than trying to find someone at the IRS to clean up the mess created by ignored correspondence and saying “but, but, but you can’t do that”, when can taxpayers get to court to invoke the remedy they should have received? Will the Tax Court be receptive? Will district courts be receptive?
It’s clear the IRS will not be receptive to these types of cases even though they resulted from IRS missteps, or non-steps. Even if the IRS will object to the bringing of litigation in these situations, will the bringing of the suit which necessarily gets Chief Counsel attorneys and potentially Department of Justice Tax Division attorneys involved, result in administrative action impossible to achieve trying to go in the front door? Today, I will talk about two cases. One involves a Tax Court petition brought because the IRS ignored the taxpayer’s timely request following receipt of a math error notice. The second case involves a suit brought in district court following the IRS ignoring a request for a Collection Due Process hearing. I do not think these are isolated cases. During the height of the pandemic the IRS had great difficulty processing correspondence and it has exhibited great difficulty to date. Many taxpayers must have the same problems reflected in this litigation. The inability to open and timely process correspondence also pushes problems from relatively low graded administrative employees at the IRS to its relatively highly paid legal staff. This is something both Chief Counsel and DOJ Tax Division also want corrected since it essentially makes the attorneys problem resolvers of matters that do not need the attention of lawyers.
read more...The math error case is Kem v. Commissioner, Dk. No. 22944-22. In this case the IRS issued a math error notice. Ms. Kem’s counsel timely responded to the math error notice providing an explanation that should have resolved the matter. The IRS failed to abate the math error assessment and issue a notice of deficiency.
Ms. Kem filed a petition in Tax Court based on the math error notice. The IRS filed a motion to dismiss arguing that the math error notice was not a notice of deficiency and, therefore, the Tax Court did not have jurisdiction to hear the case. The IRS motion is all about what the taxpayer did not receive but makes no mention of the fact that it failed to send the notice when it was legally obligated to do so.
Ms. Kem filed a response to the motion to dismiss in which she stated:
while the Respondent was authorized to initially deny the refundable
credit by math error procedures, once the Petitioner filed a timely objection to that denial, the Respondent was required to reverse the denial and then either allow the credit or issue a Notice of Deficiency. Indeed, the math error notice that Respondent sent to Petitioner told petitioner that, if she objected in writing within 60 days, Respondent would reverse the changes to her return and she would have appeal rights to the U.S. Tax Court. And Petitioner did so object in writing.
I have quoted only one small part of an excellent response to the IRS motion to dismiss explaining what the IRS did and what it was legally obligated to do. As she seeks to shoehorn the LTR 96C received from the IRS into the statutory notice framework, Ms. Kem relies on Dees v. Commissioner, 148 T.C. 1 and Pope v. Commissioner, T.C. Memo 2020-62 explaining at length how those cases provide a basis for interpreting what the IRS does not classify as a notice of deficiency as such a notice.
On February 6, 2023, the IRS filed a response to Ms. Kem’s response and again heads into legalese in its effort to avoid admitting that it has failed to follow the statute. After essentially saying it doesn’t know if Ms. Kem’s allegations are right or wrong, it moves to the old trope that Ms. Kem can fully pay her liability and sue in district court. This is really insulting. Chief Counsel’s office really believes that the answer to failing to follow the law with respect to math error notices is to require the taxpayer to forego their right to go to Tax Court and to meet the Flora rule – a rule that relates to taxpayers who receive a notice of deficiency and do not file a timely Tax Court petition – and then file suit in district court. The petition in this case was filed on October 27, 2022.
On February 22, 2023, Ms. Kem filed a response to Respondent’s response noting that Chief Counsel failed to respond to her argument that she timely responded to the math error notice and the IRS ignored her response. The bulk of this response addresses the timeliness of the mailing of the response to the math error notice.
On March 24, 2023, Chief Counsel filed “Supplement to Respondent’s Response to Petitioner’s Objection to Motion to Dismiss for Lack of Jurisdiction.” In this supplemental response, it stated that the IRS issued a refund to Ms. Kem on February 15, 2023. It made no statement regarding its obligation with respect to math error notices. It did attach a transcript of account which fails to record all of the transactions leading up to the refund because of the limitations of that document.
The refund provided Ms. Kem the relief she sought by filing the petition.
The next document in the case, dated April 11, 2023, dismisses the case for lack of jurisdiction noting that the Tax Court is a court of limited jurisdiction. The order issued from the office of the Chief Judge indicates that the case was not assigned to a judge for a hearing on Ms. Kem’s arguments that LTR 96C served as a notice conferring jurisdiction on the Tax Court in the circumstances of this case where the IRS failed to follow its statutory obligation regarding the math error notice.
While I understand why the court wants to duck the issue when the taxpayer has been made whole after having to file a petition and to supplemental responses, there are others in this situation and a decision regarding the action of the IRS in ignoring its statutory duty would benefit many.
The issuance of the refund to Ms. Kem in February suggests that Chief Counsel and the IRS were working to fix the problem caused by not appropriately addressing the response to the math error notice. The refund also suggests that the strategy of filing the suit in Tax Court worked to pry out the refund that the IRS should have issued administratively. Filing a suit like this for $1,400 is expensive for the IRS and Chief Counsel, for the Tax Court and, of course, for Ms. Kem and her counsel who should receive attorney’s fees for their effort to fix a problem not of their own making. An IRS attuned to the challenges facing Ms. Kem and other similarly situated taxpayers would have resulted in a less technical and legalistic defense. Actions like this lead to the question as to whether the IRS’s failure to act in a way that is consistent with taxpayer rights should lead to some consequences. At present the only path to such a penalty appears to be through the almost impossible needle of IRC 7433 which leads to the second case.
The case of Veg Invest Trust v. IRS, No. 1:23-cv-01072 (D. D.C.) was filed on April 18, 2023, and brings the Kem type case into the CDP setting. Veg alleges that it timely requested a CDP hearing and that despite the timely request, the IRS failed to give it a CDP hearing where it sought to contest the imposition of a penalty for failure to file Form 3520 identifying certain donors. The assessment for 2016 is $1,350,000 and for 2015 is $25,000.
This case is just underway. In addition to arguing that IRS collection action at this point is unlawful because of the failure to hold the CDP hearing, Veg includes a FOIA basis for relief due to its unsuccessful effort to probe for the IRS records of its CDP request and, more importantly for purposes of this discussion, it seeks damages under IRC 7433. For others whose correspondence has gone unopened, or lost or just ignored, the Veg case is another one to watch.
I am a Canada-US tax practitioner (I am an accountant not a lawyer). I find the crazy legalistic back-and-fourth in regards to dates is mind boggling.
Just as a background in Canada after any tax return is filed a “notice of assessment” is issued (this is issued even if CRA assesses the return exactly as filed). Taxpayers are generally allowed to file a “notice of objection” to any notice of assessment (even one issued in accordance with a return filed by the taxpayer). The notice of objection must be filed within 90 days (or by the following year’s due date for individuals).
However if the taxpayer misses the deadline they have one year to request an extension of time to object from the CRA. Taxpayer needs to demonstrate the following in their request:
1. Within the normal objection deadline
a) the taxpayer was unable to act or to instruct another to act; or
b) the taxpayer had a bona fide intention to object to the assessment or make the request
2. given the reasons set out in the application and the circumstances of the case, it would be just and equitable to grant the application; and
3. the application was made as soon as the circumstances permitted.
If the CRA denies the application, the taxpayer can make a similar application to extend the window to object to the Tax Court of Canada.
However in practice CRA will generally allow any extension of time within the one year window as long as the taxpayer can allege any facts which reasonably could satisfy the above. In my career I have not actually seen a single extension request be denied and we actually do not have much case law of the Tax Court looking at these extension requests (which leads me to believe that administratively CRA just accepts every request). However if someone misses the 1 year timeline they are locked out from the tax court permanently (Canada doesn’t have a separate mechanism for suing for refund as the US does). Just as some food for thought Canadian law treats this deadline as “jurisdictional” in nature but will allow for claims processing exceptions to such “jurisdictional” deadlines.
If someone misses their ticket to the tax court they can still file a request to amend their tax return. Administratively this is just a “request” and the CRA is not required to process such returns. However CRA has published positions that explain when they will and will not accept amended returns (in many circumstances CRA does allow people to amend to claim a refund). If the taxpayer falls within those published positions, and CRA refuses to process the amendment it is possible to go to court. In these court cases the decision of the CRA is generally evaluated on a standard similar to that of “abuse of discretion”.
The point that I am trying to bring up is that the merits of our client’s situation generally take a forefront when resolving situations with the CRA and it is the exception rather than the rule that we are arguing with CRA in regards to whether the exactly correct procedural steps were taken. I find that those procedural battles most often only occur for the large Canadian taxpayers.
Also in Canada for “large taxpayers” (with over 50M of assets) the income tax act allows CRA to collect 1/2 of any assessment even when under objection. However a taxpayer’s failure to pay that 1/2 doesn’t have an impact on their case (there just is no bar to CRA’s collection powers).
Nailed it! $1400. Most attorneys won’t even take a case for such a small amount in dispute. And, yes, this does affect many more taxpayers than Ms. Kem. Taxpayers who make too much to qualify for help from an LITC but for whom the amount in dispute is a lot of money (even if it’s not even a rounding error to the IRS).
Further, my experience with the administrative side of the IRS with respect to math and other transcript errors is beginning to border on the Kafkaesque. Part of the problem appears to stem from the fact that they don’t seem to READ correspondence even when they manage to open it. I have sent summary correspondence and supporting documentation to various offices only to be responded to with correspondence that reads like a “check the box” letter. It doesn’t address my correspondence. It picks the form letter that most closely matches what the IRS THINKS the correspondence is saying.
Taxpayer rights are being violated with impunity. I’ve started cc’ing my U.S. Senator on most second or third round correspondence (with the client’s written permission) because oversight of the IRS is on Congress and they need to step up. Yesterday.
“Chief Counsel’s office really believes that the answer to failing to follow the law with respect to math error notices is to require the taxpayer to forego their right to go to Tax Court and to meet the Flora rule”
Chief Counsel has an incredible moral and ethical deficiency in its refusal to obey laws but in this case it’s not because of the Flora rule. The taxpayer doesn’t owe money and doesn’t have to pay anything other than court fees, attorney’s fees, postage, copying, gasoline, plane flights if not living in the US, etc. A refund suit has some possibility.
However, there seems to be a way to get jurisdiction in Tax Court. This requires planning. Silly actions have to be taken in advance by every taxpayer every year. After computing the amount of taxable income, look up the amount of tax in a tax table or computation or whatever, but do not copy that number to the tax return. Subtract $1.00 and declare the incorrect amount as the amount of tax. If the IRS issues a Notice of Deficiency for $1.00 but doesn’t do anything else, pay the $1.00 so there is no more deficiency. If the IRS does do other things such as violating 26 USC section 31, go to Tax Court. The IRS’s determination of a $1.00 deficiency gives Tax Court jurisdiction to redetermine the overpayment.
In Pope v. Commissioner, T.C. Memo 2020-62, the Notice of Deficiency asserted that the IRS adjusted the Earned Income Credit even though Pope did not claim an Earned Income Credit. This makes me think that an embezzler who reattributed parts of Pope’s income and Pope’s withholding to someone other than Pope did claim an Earned Income Credit. I wonder if the embezzler might have been caught and might have been an inmate, and maybe the IRS transferred those claims back to Pope but forgot to transfer Pope’s actual income and withholding back to him. But as Tax Court pointed out, the IRS didn’t actually determine an amount of deficiency so Tax Court didn’t have jurisdiction to redetermine the amount of overpayment.