Boilerplate Provisions in Stipulated Decisions May Have “Interesting” Consequences

In my last post, I ran through the arguments a taxpayer may have against interest accruing when the IRS is “dilatory” in assessing tax that was assessed through a Tax Court decision. It was a fun and exciting jaunt through IRC § 6404(e) marred by a rather unfulfilling conclusion: IRC § 6404(e) interest abatement for “dilatory” IRS assessment might not get you where you want to go if your client is poor.

That seems unfair. But as my parents undoubtedly told me when I was a child, life is unfair.

Still, as lawyers we like to believe that we can mitigate some of that cosmic unfairness. Or, failing that, we like to believe we are just cleverer than we really are. I’ll let you be the judge which of those two buckets my following argument falls into…

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Let’s get away from IRC § 6404 for a moment. As Professor Bryan Camp recently detailed, there are a lot of different ways to lose on IRC § 6404 arguments.

Instead of the rocky, uninviting terrain of IRC § 6404(e), let us turn to the lush paradise that is IRC § 6601. Specifically, let us gaze upon IRC § 6601(c).

The provisions of IRC § 6404(e) were full of mushy terms like “ministerial or managerial act,” and “dilatory performance.” IRC § 6601(c), however, gives us nice, bright lines to work with. If the taxpayer waives the restrictions to assessment under IRC § 6213(d), the interest on the deficiency is suspended when the IRS fails to send “Notice and Demand for payment” within 30 days of the waiver.

Note that this code section generally comes up in examination, and not in litigation. In fact, the waiver of interest is commonly referred to as an “870 Waiver” by those in the know (i.e., Bob Probasco, to whom I am indebted on all issues relating to interest), because it is traditionally done through Form 870.

But we’re dealing with people that have decisions entered in Tax Court, not administratively with the IRS. Is there any way to get to IRC § 6601(c) without Form 870?

Maybe. Bear with me on this one.

One of the standard, boilerplate (and IRS insisted upon) provisions on the stipulated Tax Court decisions I enter into reads as follows:

“It is stipulated that, effective upon the entry of this decision by the Court, petitioner waives the restrictions contained in IRC § 6213(a) prohibiting assessment and collection of the deficiency (plus statutory interest) until the decision of the Tax Court becomes final.”

In other words, my Tax Court decisions enter into a section 6213(a) waiver. Am I out of luck because IRC § 6601(c) requires a waiver “under section 6213(d)” and my waiver occurs a mere three sub-paragraphs above that?

We should probably look at IRC § 6213(d) to get an idea. It is a short and fairly straightforward code provision:

“The taxpayer shall at any time (whether or not a notice of deficiency has been issued) have the right, by a signed notice in writing filed with the Secretary, to waive the restrictions provided in subsection (a) on the assessment and collection of the whole or any part of the deficiency.”

Arguments For and Against Tax Court IRC 6213(a) Waiver as IRC 6213(d) Waiver

IRC § 6213(d) really just asks two things:

(1) did the taxpayer waive the restrictions on assessment and collection in IRC § 6213(a), and

(2) did the taxpayer sign and file that waiver with the IRS?

The answer to the first question is an unequivocal “yes” in my Tax Court decision documents. The answer to the second question is not so clear.

Any time I enter into a stipulated decision to some degree I “sign and file” a document with the IRS. I definitely “sign” the document. But I much-less-definitely “file it” with the IRS. As an agreement (a signed stipulation between the parties) it is always countersigned by the IRS. So, I always “send” it to the IRS for them to take further action. Nonetheless, it is debatable whether I’m “filing” it with the IRS. Some would say I am only “filing it” with the Tax Court. But that term is not particularly well defined.

One other wrinkle. I somewhat-subtly substituted “IRS” for the word “Secretary” in the statute (e.g., “file with the Secretary”). Does that matter?

Generally, “Secretary” means the actual secretary of the Treasury (presently Janet Yellen), or their “delegate.” A delegate, in turn, means “any officer, employee, or agency of the Treasury Department duly authorized by the Secretary of the Treasury directly, or indirectly by one or more redelegations of authority[.]” See IRC § 7701(a)(11)(B).

In other words, the word “Secretary” refers to a really broad group of people within the IRS. That’s good news for my argument.

Bad news for my argument (maybe) is the Treasury Regulation on point: Treas. Reg. § 301.6601-1(d). That regulation provides that the suspension occurs after a “district director” determines a deficiency and the taxpayer files an agreement “with such internal revenue officer.” Those may well be more restrictive terms. At the very least, they seem to imply that the waiver must be filed in the administrative proceeding, since it is requiring that I file “with such internal revenue officer” (i.e., those involved in determining a deficiency). IRS Counsel is definitely not involved in determining the deficiency for my taxpayers. They come into play only after I’ve filed a petition challenging that prior determination.

What is one to do when the statutory language and regulations leave wiggle room? Look to the case law.

While contemplating the merits of my argument, one case in particular caught my attention: Corson v. C.I.R., T.C. Memo. 2009-95. In Corson the taxpayer apparently executed a section 6213(d) waiver as part of a stipulated settlement in litigation. The Tax Court found that this waiver, which was part of a stipulated settlement, did indeed suspend interest when the IRS took half-a-year to get around to sending a Notice and Demand letter.

That seems pretty much on all-fours with my argument, right?

Maybe.

It isn’t immediately clear to me how the waiver was executed. Was it just in the stipulated decision document? Was it an added Form 870 filed with the decision documents? Does that matter? I’d say it is at least enough of an opening to make an argument. And that opening expands in reading other cases on the topic. For example, in a later case the Tax Court specifically references Corson for the proposition “[g]enerally, the waiver is executed by filing a designated form, but the restrictions on assessment may be waived in other ways.” Hull v. C.I.R., T.C. Memo. 2014-36. So maybe no “designated form” was filed in Corson. Maybe the generic (but explicit) waiver of restrictions in IRC § 6213(a) is enough…

The Takeaways

I referred to the IRC § 6213(a) waiver as “boilerplate” and, in the title of this post, alluded to them being something of an afterthought for most practitioners. But what does the waiver really do?

The most obvious consequence of the waiver is that it speeds up the process for the IRS to assess and collect, by speeding up the “finality” of the Tax Court decision. Usually, the decision is not final until appeal rights have passed or been exhausted. See IRC § 7481. Since I don’t plan on appealing stipulated settlements, I have no problem bumping up the “finality” date of a Tax Court decision by waiving IRC § 6213(a) restrictions.

But shouldn’t there be some trade-off for this waiver of restrictions? What does the taxpayer get by letting the IRS assess and collect more quickly? Conceptually, it seems to me like the IRC § 6213(a) waiver filed in Tax Court is doing basically the same thing the Form 870 waiver is doing in examinations: speeding things up for the IRS. And when the IRS doesn’t act in a (remotely) timely manner on that taxpayer concession, it seems to me that the consequence should mirror that of the Form 870 waiver: a suspension of the accrual of interest for the IRS’s dilatory behavior.

The beauty of the argument, as I see it, is that I no longer have to prove “causation” when I import IRC § 6601(c) as my means for interest abatement: if the IRS doesn’t send the Notice and Demand on time, interest should be suspended, full-stop. This helps low-income taxpayers that can’t afford to just send blind-interest payments to the IRS. Maybe it will also help the IRS in getting those payments more quickly, too.

Losing Interest: Delayed IRS Assessments

Over the last two years I cannot count the number of times I’ve had to give extraordinarily unsatisfying advice to my clients. That advice being, “please wait.” Wait for the IRS to process your return. Wait for the refund to be issued. Wait for your Collection Due Process hearing.

Of course, waiting can carry a price. I’ve previously posted a bit about the time-value of money, and (especially for low-income taxpayers) the opportunity costs of waiting on a refund. Here, I’ll write about the potential costs to the government and potential arguments taxpayers may have against paying interest. To keep things (relatively) simple, I will be focusing only on IRS delays after Tax Court decisions.

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I’ve come across a lot of practitioners voicing concern about IRS delays in issuing refunds after a Tax Court decision. In those instances, practitioners are well-advised to review Tax Court Rule 260.

Less common (though not unheard of) is the complaint for those that end up owing after their trip to Tax Court. What happens when the parties settle on a deficiency, but the IRS never gets around to actually assessing that (agreed upon) amount? Bob Kamman experienced and posted on something close to this phenomenon (with a bit of a twist), giving the advice to reach out to the IRS counsel’s office to sort things out. In terms of getting the IRS to actually take action, that advice likely still holds, but what about a remedy for all the time you spent waiting?

From the outset, some may see this all as a non-issue. Regardless of the IRS delay in assessment, you can still send payment for the deficiency and maybe throw a little extra on top for the interest accrual you estimate to be due.

But it is important to remember how many people out there don’t have that “little extra” to throw on top. In 2016, approximately 63% of Americans couldn’t cover a $500 emergency. This is not just a problem in the abstract: I have clients that are living on such tight margins that the accrual of interest makes a big difference in their lives. This is all the more true given inflation and the (slight, but real) uptick in interest rates for tax. Perhaps there should also be some relief from the interest that accrues during a delay in assessment…

And perhaps there is…

Rule 260 Redux?

A quick note on where you won’t find relief.

Mere paragraphs above, I advised practitioners to review Tax Court Rule 260 when their clients are waiting on refunds from a Tax Court decision. Some of you no doubt found that Rule so engrossing that you read on to Rule 261… which deals directly with “proceedings to redetermine interest.” Is that where we should look for relief from interest where the IRS fails to assess and send a notice and demand for payment in a timely fashion?

Probably not.

Rule 261 pertains to cases where the Tax Court decision found an overpayment. Imagine two different taxpayers: one we’ll call “Flush” and one we’ll call “Strapped.” Both have identical tax issues, and both bring identical cases to Tax Court. Eventually, both Flush and Strapped reach a settlement with the IRS, agreeing to a deficiency amount less than what was in the Notice of Deficiency.

But here is where things diverge.

Prior to filing the petition, Flush sent in a deposit under IRC § 6603 for the amount listed on the Notice of Deficiency. Strapped, on the other hand, did not. In their stipulated decision documents, Flush will agree to both a deficiency and an overpayment (i.e., the amount by which the deposit for the original deficiency exceeds the agreed upon deficiency). Strapped, on the other hand, will only agree to a deficiency.

It is for taxpayers like Flush that Rule 261 (and IRC § 7481(c)) applies (you can see that situation in action in Hill v. C.I.R., T.C. Memo. 2021-121). But I am concerned with taxpayers like Strapped. What interest-related arguments might Strapped have?

Unreasonable Delay: The Seemingly Obvious Argument

When the Tax Court redetermines a deficiency, the IRS has to assess it. This seems pretty uncontroversial and is enshrined in IRC § 6215(a). If you double-checked my code citation, please note and underline the phrase “shall be assessed.”

If the IRS takes literally over a year to get around to assessing the tax after a final Tax Court decision, it has followed the statutory mandate… but in a sluggish way that perhaps ought to carry consequences. And a fitting consequence for wasting time would be forgoing the time-value of money during that wasteful period. In other words, abating interest.

And it so happens there is a code provision exactly on point for those sorts of issues: IRC § 6404(e), “Abatement of Interest Attributable to Unreasonable Errors and Delays by the Internal Revenue Service.” That sounds promising, particularly the provisions at IRC § 6404(e)(1)(B). What exactly do they entail?

First, the “unreasonable error or delay” has to involve an IRS employee “in performing a ministerial or managerial act.” Since we’re only focusing on assessing tax, let’s call this the “non-discretionary act” test.

Second, the delay in payment has to be “attributable” to the IRS employee being “dilatory” or erroneous. Let’s call this test the “causation” test.

Third, the taxpayer can’t have played a “significant” role in the error or delay. Let’s call this the “clean-hands” test.

Lastly, the period of abatement must come after the IRS has contacted the taxpayer, in writing, with respect to the deficiency. This is mostly a computational test that we don’t really need to worry about here. It will always be met where the interest at issue has accrued after a Tax Court decision finding a deficiency.

“Non-Discretionary Act” Test

The Treasury Regulations define a “ministerial act” as an act that “does not involve the exercise of judgment or discretion, and that occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and review by supervisors, have taken place.” Treas. Reg. § 301.6404-2(b)(2). I’d say inputting the assessment of a deficiency, after a Tax Court decision has found that deficiency and is final, meets that test. This is especially true since the IRS is mandated to enter the assessment (the “shall be assessed” language of IRC § 6215(a)).

First test = passed.

“Clean-Hands” Test

What does it mean for a taxpayer (or someone sufficiently related to the taxpayer) to play a “significant role” in the delay? Most of the cases I found involved taxpayers filing incorrect forms or taking other actions that would make the IRS “ministerial or managerial” acts more difficult. There are also some cases where the taxpayers renege (or attempt to renege) on settlements, and generally contradict themselves while trying to vie for interest abatement. In other words, cases where the taxpayer did not have clean hands. See Mitchell v. C.I.R., T.C. Memo. 2004-277.

Assuming the taxpayer has done everything right up to the point of the Tax Court entering the decision document, they probably meet this test too…

“Causation” Test

Here is where things get tricky. The biggest obstacle is something that was alluded to earlier: arguably, you could have paid the tax (and stopped the interest) even without the IRS taking the ministerial acts to assess it. In other words, it was not the failure to perform a ministerial act that caused the interest accrual. It was simply the taxpayers’ failure to send in money.

There are at least a few cases that look at the causation issue and cut against the taxpayer. The worst (and in my opinion, least fair) line of Tax Court cases provide that there will be no abatement if there is no evidence that an earlier payment would have been made… for example, because the taxpayer is cash-strapped.

The Tax Court has expressly found that the IRS has the “discretion” not to abate tax if the taxpayer fails “to establish that he had the financial resources to satisfy the tax liability when the claimed error occurred.” See Hancock v. C.I.R., T.C. Memo. 2012-31, listing off cases supporting this proposition. In other words, extremely low-income taxpayers may be the least able to get interest abatement under this line of argument.

This may not always be the case and would likely be fact specific. But it is enough for me to have serious concerns about arguing under IRC § 6404(e) for interest abatement when the IRS delays in assessing tax for my clients.

Fortunately, there may be different line of argument that will get my clients relief. My next post will cover that proposition.

Math Error

We have written before about Math Error here, here, here and here.  Last week, the National Taxpayer Advocate (NTA) wrote a very nice blog post explaining math error but also providing some surprising details on the volume of math error notices sent out during the past filing season.  This is the first of a two-part post by the NTA on math error.  If the second post is as good as the first, it will be worth the read.

The IRS has pushed to expand math error authority for many years.  The combination of the direct path to assessment coupled with its confusing notice to taxpayers that leaves most of them wondering what they received makes this an easy path to move cases into collection without the hassle of having to send a notice of deficiency and possibly have the taxpayer file a Tax Court petition.  Of course, the alert taxpayer can write and contest the math error notice triggering the opportunity for a notice of deficiency, but this process just makes it easier to get to assessment.

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It’s not just me complaining that the math error notices lack clarity.  Here is what the NTA says about them:

Unfortunately, because the math error notices do not clearly articulate what was adjusted and why, taxpayers are often left confused as to what changes have been made to their return, making it difficult for taxpayers to determine whether they agree or disagree with the changes. Many math error notices are vague and do not adequately explain the urgency the situation demands. In fact, in some instances, math error notices don’t even specify the exact error that was corrected, but rather provide a series of possible errors that may have been addressed by the IRS through its math error authority.

She points out that the math error notice does not describe the steps the taxpayer must take to disagree with the notice and trigger a notice of deficiency until the middle of the second page “where they are directed to call the IRS if they have questions about the adjustment.”  Directing taxpayers to call the IRS does not create an easy path to getting answers.  Assuming they get through, just how thoughtfully do you think the person answering the phone will advise the taxpayer regarding the decisions to be made when confronted with a math error notice?  The default should be to object if the taxpayer is unsure if the notice is correct, but that’s not what the taxpayer will pick up from the notice itself or from a phone call to an IRS assister.  The NTA also points out the problem of getting through to an assister.

The NTA recommends improving the language of the notice.  I agree with that recommendation but would like to see a more robust system for engaging the public in the drafting of notices and particularly the notices that go in high numbers to low-income taxpayers.

Speaking of high numbers, here is where the blog post surprised me.  She states:

This filing season, over 5 million math error notices were erroneously issued omitting the 60-day time period language entirely where the only adjustment was to the RRC. Taxpayers were not informed of their rights and the ability to request an abatement.

I thought 5 million was a high number of math error notices, but apparently it is only the number of notices sent to people claiming the Recovery Rebate Credit. 

Are these notices valid if they don’t tell taxpayers when they must object in order to avoid having the assessment become permanent?  In Malone v. Commissioner, TC Summary Op. 2011-24, the Tax Court in a non-precedential opinion held that a portion of the assessment based on math error was invalid because the IRS letter did not notify taxpayers that the adjustment was “based on a mathematical error, did not set forth the specific error alleged, and did not adequately explain such error” where the letter simply states “[the IRS has] processed your Amended Return.”.  Les has recently updated the discussion of math error in the treatise “IRS Practice and Procedure” at Chapter 10.04[1][a] for those seeking a deeper discussion.

Section 6213(b)(1) provides for math error assessments as an exception to the normal deficiency procedure.  It states in its final sentence that “Each notice under this paragraph shall set forth the error alleged and an explanation thereof.”  It does not state in that subsection any time frame.

Section 6213(b)(2)(A) provides for the abatement of math error notices in certain situations.  It says “a taxpayer may file with the Secretary within 60 days after notice is sent under paragraph (1) a request for an abatement of any assessment specified in such notice, and upon receipt of such request, the Secretary shall abate the assessment.”  It does not say that the IRS needs to tell the taxpayer about the 60-day period.  It only says there is a 60-day period.

The math error provision does not require that the IRS include in the notice the last date to object to the assessment.  With the deficiency notice the IRS must tell the taxpayer the last day to file a Tax Court petition.  Here, there is no such requirement imposed and, therefore, no easy basis for these five million taxpayers to know to contest the assessment.

As the IRS uses math error more and more, taxpayers need to understand the power of this procedure and be prepared to protect their right to contest the liability in situations where they do not agree.  To do this they need information.  They need a letter that clearly explains the next steps and phone assistance for those who struggle with letters.  If a taxpayer misses the deadline to request an abatement of the liability, they have the chance to contest the merits in a collection due process (CDP) case, but it is much better to contest up front than to do so while the liability is in the collection stream.

The Validity of Near Duplicate Notices, Designated Orders: November 18 – 22, 2019

Five orders were designated during the week of November 18 – November 22, 2019 and the most interesting two are discussed below. The orders not discussed involve an unchallenged American Opportunity Tax Credit denial (here), a motion for failure to prosecute an absent petitioner (here), and a bench opinion involving frivolous returns and whether more than one section 6702(a)(1) penalty should apply (here).

Docket No. 11284-18, SNJ Limited, Ritchie N. Stevens & Julie A. Keene-Stevens, Partners other than the Tax Matters Partner v. CIR (Order Here)

In this first order the Court addresses the IRS’s motion to dismiss for lack of jurisdiction. This case is before the Court on notices of federal partnership administrative adjustment (“FPAA”), and the outcome of the IRS’s motion depends on whether the FPAAs are valid.  

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Validity is at issue because the two separate near duplicate sets of notices, for the same tax periods, were sent a few months apart from each other. Petitioners timely petitioned the Tax Court based on the date on the second set of notices, however, section 6223(f) states that only one FPAA can be valid (with some limited exceptions not applicable here) – which means that if the first set notices is valid, then the second is not and petitioners’ petition was not timely filed.

The notices pertain to 2006 and 2008. The first set was mailed in November of 2017 and the second in February of 2018. Petitioners oppose the IRS’s motion to dismiss by arguing that the first set of notices are not valid, because they were not sent to petitioners’ correct address.

In addition to that argument, but not specifically raised by petitioners, the Court considers whether the November notices are not valid by looking to the reason why the February set of notices covering the same periods were sent.

First, regarding petitioners’ address-related argument, the Court looks to section 6223(c)(1), which requires the IRS to send the FPAAs to the names and addresses listed on a partnership return. In this case, the partnership did not file returns for either year at issue. The IRS is obligated to use another address if it is provided in the manner specified in Treas. Reg. Sec. 6223(c)-1(b)(2) and (b)(3)(v), which is in a written statement signed by the person supplying it, and filed with the service center where the partnership return is filed.

Petitioners did not provide a new address in this manner, and instead, listed the allegedly incorrect address on unsigned returns provided during the examination. The IRS is permitted, though not required, to use the address provided on these unsigned returns pursuant to Treas. Reg. 301.6223(c)-1(f) and that is what it did. The IRS also sent a set of FPAAs (in November and February) to what it believed to be the Tax Matters Partner’s (“TMP”) address. Petitioners argue that address was not the TMP’s address. Petitioners, however, received the February FPAAs sent to that address because they were attached to their petition. As a result, the Court finds that the November FPAAs were not invalid as a result of being incorrectly addressed.

The Court then goes on to evaluate why a second set of FPAAs was even sent – was there an issue with the first set that calls into question its validity?

The IRS explains that it sent the second set of FPAAs out of an abundance of caution because an incorrect partnership name was used on a schedule attached to the November FPAAs. The correct partnership name was used on FPAAs themselves, the FPAAs and schedule listed the partnership’s correct EIN, and the adjustments reflected on the schedule appear to be based on information for the correct partnership. In other words, it was only the partnership name used on the schedule that was incorrect and nothing else, and as a result, the Court determines that doesn’t impact the validity of the November FPAAs. 

In making this determination the Court looks to Campbell v. CIR, 90 T.C. 110, 113-114 (1998), which upheld the validity of a notice of deficiency that named another taxpayer (and even listed amounts related to that other taxpayer) in an attached schedule. Although this case involves FPAAs, rather than a notice of deficiency the Court points out that “the standards governing the validity of an FPAA are less exacting than those governing the validity of a statutory notice of deficiency” and “for an FPAA to be valid it needs to only provide ‘minimal notice’ that the IRS has finally determined adjustments to the partnership return.”

The Court determines that even with the error the November FPAAs meet the “minimal notice” test and are valid. As a result, petitioners’ petition is not timely, the Court does not have jurisdiction, and the case is dismissed.

Docket No. 11229-15, Michael J. Hogan v. CIR (Order Here)

In this bench opinion the Court addresses the IRS’s motion for partial summary judgment on an interest abatement request related to petitioner’s 1994 and 1995 balances. It also addresses the IRS’s motion to compel, which I do not discuss. The years at issue do cause one to wonder why these balances still exist nearly 25 years later, but was the delay caused by an IRS ministerial act?

More information on the interest abatement request is found in an earlier order (here), but to summarize: the Form 843 was submitted in 2012 and requested abatement for interest accrued, according to petitioner, as a result of the returns being “put in a drawer by IRS/CID agent .  .  .” and “not filed by the IRS and processed until August 13, 2001.”  The petitioner never clearly stated the exact period for which he is requesting interest abatement.

The period referenced in the IRS’s motion for partial summary judgment in the earlier order was from the return due dates in 1995 and 1996 through when the original returns were filed in September 1997. The IRS was granted summary judgment with respect to that limited period because petitioner did not assert there was a delay caused by a ministerial act (or any genuine issue of material fact) for the 1995 – 1997 period.

It’s also relevant that in 1999 petitioner pled guilty to conspiring to defraud the government and tax evasion related to his 1994 and 1995 tax years. Pursuant to terms of the agreement, petitioner filed amended tax returns for those years in 2001.

The Court found that all of petitioner’s interest abatement related assertions are for the period after he filed his original returns in 1997, and it is (partially) that period which is addressed in this order. The IRS’s motion here requests that the Court grant summary judgment for the period from 1997 through November 21, 2000, which is the date both parties agree the criminal proceedings related to 1994 and 1995 terminated.

Relying on similar cases cited by the IRS (Badaracco v. CIR and Taylor v. CIR), which reference generally the IRS’s right to take more time evaluating cases that involve fraud or criminal proceedings, the Court decides petitioner is not entitled to interest abatement for the 1997 – 2000 period for either tax year and grants IRS’s motion for partial summary judgment.

The bench opinion doesn’t discuss whether periods after 2000 remain at issue in this case, but I assume they do since only a limited period is addressed by the IRS’s motion. Although the Court acknowledges that it is unclear, petitioner’s interest abatement request may include the interest accrued until at least 2012 when the Form 843 was submitted.

Assessable Penalties Do Not Violate Due Process

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

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

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

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

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

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

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

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

When Can the IRS Reassess After Abatement

Guidance was issued on December 7, 2016, and released on March 31, 2017, regarding reassessment after abatement.  The Procedure and Administration Division of Chief Counsel’s office issued the guidance to an attorney in a field office.  The guidance addressed the following question:

“Whether the statute of limitations for assessment of the section 6651(a)(2) addition to tax for failure to pay remains open after an erroneous administrative First Time Abatement, such that the Service may reassess the addition to tax.”

The guidance concludes that the normal three year statute of limitations for assessment does not apply to the addition to tax imposed in 6651(a)(2) and, therefore, the IRS can reassess a failure to pay addition to tax at any time during the ten year statute of limitations for collection.  The guidance document, though relatively short, contains a couple of statute of limitations issues worth discussing.

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The facts giving rise to the opinion deserve brief mention.  In this case the taxpayer filed a joint return with her husband.  They reported the tax on the return but failed to pay the tax reported on the return.  Later they filed an amended return reporting more tax which they also failed to pay.  The taxpayer’s husband filed a bankruptcy petition but she did not.  The filing of the bankruptcy petition by one spouse causes the IRS to split the tax account from one master file account into two non-master file accounts.  Guest blogger Marilyn Ames discussed master file and non-master file accounts in an earlier post and understanding the differences is important in interpreting IRS transcripts.

Depending on the timing of the bankruptcy, the husband might have discharged the 6651(a)(2) liability.  For penalties and additions to tax, the provision governing discharge is found in BC 523(a)(7) and has a three year rule.  For the same reason, discussed below, that the normal assessment rules do not apply to the 6651(a)(2) liability, the three year rule is a little different in a failure to pay situation since the liability derives from post-return actions (or inactions.)  Whether the husband discharged this liability does not matter in this advisory opinion.  The opinion focuses on the wife’s liability.  Because she did not file bankruptcy, her husband’s discharge, if any, will have no impact on her.  He might discharge not only the 6651(a)(2) liability but the tax and the interest.  She would still have a liability for these amounts no matter how her husband’s bankruptcy treats them with respect to him.

Because she still owes this liability, she called the IRS and requested first time abatement.  Steve has written a couple of excellent posts on first time abatement (FTA), here and here, which have proven to be among the most popular posts of all time.  FTA more frequently occurs with late filing and not late payment but here the IRS person on the phone granted her FTA for late payment.  However, sometime after granting her FTA, the IRS determined that it made a mistake because “she had a penalty or addition to tax within the three years prior to the tax period at issue.”  I suspect the mistake related to the placing of her liability for the tax in a non-master file account.

When the IRS mistakenly abates a liability, it has a few good, but old, cases on which it relies to reverse the mistake and it cites to those cases in the advisory opinion.  The first case is Carlin v. United States, 100 F. Supp. 451 (Ct. Cl. 1951) which held that “if the Commissioner abates the assessment, it ceases to exist or to have any effect thereafter.  The Commissioner cannot subsequently rescind his actions or restore the assessment, but must rather make a new assessment unless, of course, the statute of limitations has previously expired.”  The second case always cited in these situations is Crompton-Richmond v. United States, 311 F. Supp. 1184 (S.D.N.Y. 1970) holding that “if the statute of limitations has not run, the IRS may simply make a new assessment of the tax liability that has been abated.”

These cases allow the IRS to essentially have a “do over” when it erroneously abatement a taxpayer’s liability; however, they limit the do over to the statute of limitations.  Although neither of the quotes in the preceding paragraph make precisely clear which statute of limitations it means, the relevant statute of limitations in these cases is the statute of limitations on assessment.  That gives the IRS a relatively short window within which to fix the problem.  The normal rule on the statute of limitations for assessment of three years from the due date of the return does not apply, however, if the liability comes from 6651(a)(2).

The guidance explains that the assessment period for a 6651(a)(2) liability cannot end three years from the due date (or filing date) of a return because this addition to tax runs for 50 months after the filing date.  During the 50 months after the filing date, the taxpayer gets hit with another liability under the statute for every month that passes based on the outstanding liability as of that month.  Because the assessment of this liability must extend past the normal three year period for assessment, the guidance concludes that the time period for assessment remains open for the ten year statute of limitations on collection.  As with the reassessment after abatement case law, the case law on this ten year statute of limitations is fairly thin and exists in lower court opinions.  The leading case is United States v. Estate of Hurd, 115 A.F.T.R.2d 2015-38 (C.D. Cal 2015).

So, the guidance concludes that because the statute of limitations on collection remained open in W’s case the IRS could reverse the abatement and reassess the liability against her.  The guidance is not surprising and does not break new ground but because this issue does not arise and get discussed very often the guidance is worth looking at if you have a reassessment situation.

 

Effect of General Power of Attorney On Reasonable Cause Exception to Penalties

Chief Counsel Advice memorandums are great sources of statements on IRS policy and the thought process of the Service on various issues.  They often are not long, which can make them difficult to turn into standalone blog posts.  I found one from September fairly interesting though, which discusses penalty abatement for the delinquency penalties when someone is incapacitated.  The CCA touches on two issues, the first time abatement provisions and the impact of a power of attorney on the reasonable cause exception to the delinquency penalties. The power of attorney aspect is fairly interesting, especially in considering the related issue regarding refund limitations periods being tolled by financial disability.

In CCA 201637012, the Service requested guidance on whether a potentially incapacitated person who suffered from dementia could have delinquency penalties abated for reasonable cause.  I found the CCA interesting because it highlighted the fact that the taxpayer had a valid power of attorney in place, and sought guidance on how that impacted the reasonable cause determination.

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The facts indicating that the taxpayer appointed an agent under a durable power of attorney (one that remains operative after someone is incapacitated) prior to becoming incapacitated.  Under the POA, the agent was authorized to file tax returns and handle other tax aspects for the taxpayer.  The agent knew of the POA.  In a later year,  the taxpayer filed untimely returns, and the Service assessed delinquency penalties under Section 6651(a)(1) (failure to file) and Section 6651(a)(2) (failure to pay).

At some point after the filing of the return, the agent under the POA petitioned the state court for an emergency guardian and conservator for the taxpayer.  Usually, when there is a POA in place, we try not to seek guardianship because an agent should have most of the same powers, so I’m curious as to why this was requested.  It is possible the taxpayer was fighting the agent, or power outside of the POA was needed.   The court did appoint the agent as guardian and used the term “incapacitated” in the order.  This was after the late filing, but the CCA seems to indicate it was close enough in proximity to evidence that the taxpayer was incapacitated when the return was not filed.

The two questions presented to Chief Counsel were:

  1. Whether the Service should abate the penalties because of the alleged incapacity.
  2. Whether the Service should deny the request to abate because the POA failed to fulfill the taxpayer’s obligation to timely file and pay tax on behalf of the taxpayer.

Chief Counsel first noted that Appeals should determine if the taxpayer qualifies for First Time Abatement under IRM 20.1.1.3.6.1.  We have discussed FTA on this blog in the past, which can be found here and here.  All tax practitioners should be very familiar with these provisions, as they provide a simple mechanism for eliminating penalties in many cases.  I have used these procedures in various cases, including some very large dollar cases, and have had no issue obtaining waivers when we fit within the framework.

The remainder of the CCA was the portion that I found more interesting.  The CCA went on to discuss reasonable cause for a person suffering from dementia.  As stated above, the taxpayer had a valid power of attorney in place the year in which she failed to file the tax return.  It is alleged that the taxpayer was incapacitated.  Chief Counsel did indicate that it lacked sufficient facts to determine the taxpayer was incapacitated at the time of filing, but seemed to indicate it was possible, and, for purposes of the analysis, assumed that was the case.

The taxpayer requested abatement of the penalties pursuant to Treas. Reg. Section 301.6651-1(c)(1), which provides for abatement due to reasonable cause.  Serious illness of the taxpayer or a family member can be sufficient to show reasonable cause (but not when your preparer is ill).  See IRM 1.2.12.1.2, Policy Statement 3-2.  The CCA indicated that if it could be shown that the taxpayer was demented during the year in question, and was unable to handle her own financial affairs, it could support a finding of reasonable cause.

What I found slightly more interesting was the discussion about the power of attorney.  In the CCA, Counsel states that the POA does not impact the conclusion.  Counsel essentially stated that if the guardian had been appointed during the year in question, reasonable cause would likely not apply.  This was because the guardian would have a duty to handle the finances, and therefore returns, of the ward.  See Bassett v. Comm’r, 67 F3d 29 (2d Cir. 1995) (taxpayer suffered from incapacity due to being a minor, and legal guardian had duty to file returns).  With a POA, however, there may be authorization to take actions regarding returns, but there is no affirmative legal duty to prepare and file returns on behalf of the taxpayer.  Looking to Boyle, Counsel said the duty to file the tax return is on the taxpayer, and not his agent or employee.

I think this is the correct result, but I found it interesting for two reasons.  First, that statement from Boyle is usually used to preclude reasonable cause defenses when a taxpayer fails to file due to the mistake belief that the taxpayer’s accountant, attorney, or other preparer is properly handling the return.  So, for once, I wasn’t muttering frustration about that case.

Second, this position is different than that applicable to seeking a refund due to financial disability.  In general, a refund must be timely made, and that time frame is normally three years from the date the return is filed or two years from the date the tax was paid, whichever expires later.  This statute can be tolled if the taxpayer is “financially disabled.”   Under Section 6511(h), the statute will not expire if the individual is unable to manage his financial affairs because he has a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months.  The general IRS requirements for this are found in Rev. Proc. 99-21.  Most focus on this Rev. Proc. is on the required doctor’s certification.  But, the procedure also requires the person signing the claim to certify that no person was authorized to act on behalf of the taxpayer in financial matters during the period of impairment.

The implication is that having a power of attorney in place could preclude the tolling of the statute, because the agent could/should have been acting.  Seeking to recoup improperly paid funds is slightly different that having penalties abated, but the situations are sufficiently similar that it is interesting that the Service has different positions.

Two Notices of Deficiency, One Abatement, One Lien Release – Taxpayer Still Owes

The recent bankruptcy case of Lewis v. IRS  caught my eye for the number of procedural gears in motion.  The focus of the case is on the impact of the release of the federal tax lien, but much more happens in the case and following the action plus, wondering why the IRS chose a certain path makes for an interesting discussion of what happens when the IRS makes a mistake and how it goes about correcting that mistake.

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Mr. Lewis had a business installing water lines for the city of Haynesville, Alabama. Apparently, the city did not have its own public works department with the capacity to do this and it contracted with Mr. Lewis to get this done.  In 2004, he installed enough water lines to earn $429,251.50.  Unfortunately, Mr. Lewis did not have time to file a federal tax return for that year.  The IRS prepared a substitute for return for him and issued a notice of deficiency.  He defaulted on the notice of deficiency, allowing the IRS to assess.  Based on the assessed liability, the IRS filed a notice of federal tax lien in 2010.  This fact pattern repeats itself all too often and presents nothing unusual.  Mr. Lewis has a case much like that of several clients of the Harvard Tax Clinic.

At almost the same time the IRS decided to file the notice of federal tax lien, Mr. Lewis “got religion” and decided to file his 2004 tax return. He did not get a whole lot of religion, however, because the Form 1040 that he sent to the IRS did not include the $429,251.50 he received for installing water lines and reported no income tax due.  When I first read that he filed the Form 1040 after the SFR assessment, I thought that perhaps he was trying to set the year up for a discharge in bankruptcy; however, he would not leave off the income from the installation of water lines if bankruptcy drove the filing of this return.  So, I cannot speculate why he filed this very late return and why he reported no tax liability on it.  Nonetheless, the IRS processed the return and abated the liability assessed as a result of the SFR.  The IRS routinely processes returns filed after SFRs and abates the SFR assessments down to the amount on the late filed return; however, the IRS usually gives some thought to the information reported on the SFR.  Here, the IRS appears to have given no thought to the late return before abating the assessment based on the SFR.

The abatement of the assessment created a zero balance on the account which triggered the release of the notice of federal tax lien as well as the refund of some of the money the IRS has collected to that point. The following year, the IRS awoke from its slumber on this case and began an audit of the 2004 return that failed to report any of the money on the Form 1099 issued by the city.  Not surprisingly, the IRS determined that he should have reported that amount and issued him a new notice of deficiency offering him what must have been at least his third chance to go to the Tax Court (the filing of the notice of federal tax lien would have given him a chance as well as the first notice of deficiency and I do not know if he also received a CDP notice for intent to levy though I would expect that he did.)  Mr. Lewis again chose not to go to Tax Court and the IRS again assessed the tax.  On January 23, 2015, the IRS filed a second notice of federal tax lien for 2004 and, I assume, gave him another CDP notice since this was a separate assessment.

Mr. Lewis filed a Chapter 13 petition on March 18, 2015 and eventually objected to the large proof of claim filed by the IRS. Mr. Lewis argued that the release of the federal tax lien had the effect of “extinguish[ing] any and all tax liability stemming from the tax period 2004.”  Mr. Lewis is not the first person against whom the IRS has improvidently released the federal tax lien.  A long list of cases exists deciding essentially the same argument he makes in this case – that the statute absolves him from all future liability for the period.  Unfortunately for taxpayers making this argument, that is not exactly what the statute says.  Section 6325(a)(1)(A) says that

“If a certificate is issued pursuant to this section by the Secretary and is filed in the same office as the notice of lien to which it relates… such certificate shall have the following effect:

(A)  In the case of a certificate of release, such certificate shall be conclusive that the lien referred to in such certificate is extinguished.”

Having the lien extinguished and having the liability extinguished are obviously not the same thing, and the Court walked through several cases making that point. I did not read all of those cases but suspect that few of them involved the fact pattern here in which the IRS actually went to the trouble to reassess the liability and file a new notice of federal tax lien.  A footnote in the opinion states that the IRS briefed the issue of whether the lien release barred the IRS from issuing a second notice of deficiency but the Court found it did not need to reach that issue.

Because the IRS not only released the first lien but abated the assessment, I think the court reached the right result using the wrong analysis. The first lien no longer mattered by the time Mr. Lewis filed bankruptcy.  The IRS might have tried to reverse the abatement – something it can do under the right circumstances – and revoke the release of the first lien but it did not.  Instead, it used its authority to issue another notice of deficiency.  The lien on which the IRS based its claim in the bankruptcy case had never been released.  Unless the court found that the release of the first lien barred the IRS from taking any further action with respect to the tax year 2004, which is the argument advanced by Mr. Lewis, the court did not need to cite to the line of cases holding that the release of the tax lien only extinguishes the lien but not the underlying liability.

Sometimes, a mistake by the IRS prevents it from collecting the tax at issue. Here, it had several avenues to use to continue pursuing collection of the tax.  It lost the priority position it held based on the original lien.  Several years passed before it filed the second lien.  The case does not provide enough facts to allow me to determine if other creditors benefited from the loss of the lien position.  The case also does not provide enough details to make it clear whether the IRS will collect on the outstanding liability, but it is clear that the claim filed by the IRS will withstand a challenge simply trying to argue that a mistaken release bars the IRS from further collection for the year at issue.