Seeking First Time Abatement Through Collection Due Process

In Kelly v. Commissioner, TC Memo 2022-73 petitioner sought to use Collection Due Process (CDP) as a means to obtain first time abatement.  First time abatement was not the only issue in the case but seeking to have the Tax Court decide that the IRS had improperly administered its policy granting relief seemed a stretch.  We have talked about the issue of first time abatement in prior posts here and here.  These were some of the first posts written for this blog.  The policy has been around for many years.  It is a popular policy but one that leaves taxpayers dissatisfied when the IRS uses it instead of using another basis for abatement, like reasonable cause, so that the taxpayer can preserve the first time abatement for another filing.  I wrote a post about reversing first time abatement where the IRS later realized it had granted abatement in derogation of its policy.

I did not look at the underlying pleadings filed but was struck that the case did not involve a discussion of prior opportunity.  With penalties, the IRS often gives the taxpayer an opportunity to go to Appeals if the first line denies the request for penalty abatement.  If the IRS gives that opportunity, the taxpayer cannot raise the merits of penalty abatement in a CDP case.  Here, there was no discussion of prior opportunity but just a discussion of the merits of the penalty request.

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During the years at issue, 2013-2015, Mr. Kelly was a securities broker in New York City making over $1 million each year.  He did not timely file his returns for these years.  At the end of 2017 he filed his 2013 and 2014 returns reporting tax of more than $500k each year without remittance to which the IRS added failure to file, failure to pay and estimated tax penalties.  In early 2018 he filed his 2015 return without remittance but reporting a tax due of more than $400,000 to which the IRS added penalties.

The IRS sent CDP notices of intent to levy and filed notices of federal tax lien (NFTL) which also triggered CDP notices.  He timely requested a hearing seeking an installment agreement, withdrawal of the liens and abatement of the penalties.  The Settlement Officer explained during the CDP hearing that first time abatement was a non-starter because he had been delinquent before including in 2012.  Mr. Kelly also requested abatement based on reasonable cause.  He explained that his wife spent money lavishly and he went through a divorce in 2015 which caused him experience financial hardship, emotional problems and depression.  The SO rejected this request as well citing to his history of non-filing, his high income and his lack of a payment protocol.

Mr. Kelly also ask for lien withdrawal because the NFTL put a mark on his securities license which might impact his business.  The SO was not moved by this argument either.

Finally, Mr. Kelly proposed a partial pay installment agreement; however, he was not current on his 2019 liability causing the SO to reject this request and issue the notice of determination.  In the Tax Court case the IRS sought summary judgment. 

The Tax Court agreed with the SO that he did not qualify for first time abatement because he had unreversed additions to tax within three years of the year for which he sought the application of this policy.  I was a bit surprised that the Court ruled on the first time abatement issue and consider that a victory for taxpayers even if it did not help Mr. Kelly in this instance.

Next, the Court looked at the alternate argument of reasonable cause.  The Court said he faces a “decidedly uphill battle in attempting to show reasonable cause.”  It noted that his excuses, the initiation by his wife of a divorce and resulting depression, only occurred at an unspecified time near the end of the three year period of non-payment.  Mr. Kelly provided no explanation for his history of non-compliance while making over $1 million each year.  His high income also made his other excuse, financial hardship, difficult to understand.  Despite the fact the Court sees little chance of success on these arguments, they present factual issues in dispute and not ones suitable for summary judgment.

The Court then found the SO satisfied the statutory requirements of 1) verification – concluding the IRS properly notified Mr. Kelly of the NFTL filing; 2) rejection of the partial pay installment agreement – concluding the rejection met the IRM guidelines due to his ongoing failure to comply and history of non-compliance; 3) lien withdrawal – concluding that Mr. Kelly’s allegations that the liens would adversely impact his future income were “entirely speculative”  and even if not speculative reflected decisions within the control of the IRS not the Court; and 4) balancing – concluding that the size of the liabilities, his repeated failure to file returns or even to make modest estimated tax payments supported the conclusion the SO did not abuse his discretion.

The outcome here is unremarkable, but the number of different arguments made by Mr. Kelly give others an opportunity to see the many ways a taxpayer can attempt to attack a collection action.  His long period of non-compliance and high dollar liabilities make Mr. Kelly an unsympathetic figure for the relief he requests.  Still, he provides us with a roadmap to the many types of arguments available.  The Court’s careful look at both the statute and the IRM shows that the IRS needs to take care to follow its internal procedures as well as Congressional instructions if it hopes to prevail in support of its collection decisions when faced with a well-funded and well-crafted argument attacking those procedures.  Most petitioners in this circumstance will not have the resources Mr. Kelly had to attack the IRS actions, but his unsuccessful attempts show others with better cases where they might go to find relief.

Polish Lottery Winner’s Son Sues Over Penalties For Failing To Report Foreign Gifts

The other day I read in Tax Notes the complaint in Wrzesinski v US. I usually do not write about cases at this stage but it is a head scratcher.

Wrzesinski involves a refund suit for a hefty penalty under Section 6039F for failing to file Form 3520, the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

Krzysztof Wrzesinski emigrated to the US from Poland in 2005 at the age of 19. About five years later his mom, who still lived in Poland, won the Polish lottery. She took the proceeds and made gifts to Krzysztof of $830,000 over the course of 2010 and 2011.

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According to the complaint, prior to receiving the gift, Krzysztof consulted an accountant who told him he did not need to file any forms with his tax returns and that the gift proceeds were exempt from gross income. 

Fast-forward about 8 years and Krzysztof, now a Philly cop, wants to make a gift to his godson. Searching the internet about consequences of that re-gift, he discovers that when he received the gift from his mom, he was supposed to file a Form 3520 to report the foreign sourced gifts.  In 2018, he contacts a Philly tax attorney for assistance with filing the forms and uses the “Delinquent International Information Return Submission Procedures.” As per those procedures, he explained in the submission his earlier reliance on an advisor and claimed that he had reasonable cause for failing to file the forms for both years. 

About a year later IRS assesses penalties anyway; $87,500.00 and $120,000.00 for 2010 and 2011. He files a protest, hoping to get the matter to Appeals. The protest gets lost in the system, and he gets TAS to intervene to get the matter before Appeals. 

About another year later Appeals abated $70,000 of the $87,000 penalty assessed for 2010 and $96,000 of the $120,000 penalty assessed for  2011. The Appeals write up indicated: “Case resolution based on ‘Hazards of Litigation’”; the remaining $41,500 in penalties was sustained.

Krzysztof paid the balance, and filed refund claims for both years. In denying one of the years’ claims the denial referred to the claim as “frivolous.”

Assuming the facts are as they are alleged (and they were properly before Appeals), and the taxpayer’s accountant was competent, I am struggling to see why Appeals did not fully concede.  The IRS had another chance to make this right when it considered the refund claim. Under Boyle and subsequent cases, reliance on an advisor that is premised on a mistake of law relating to the need to file a return at all differs from a nondelegable  duty as to when a taxpayer needs to file a return. And Appeals abated 80% of the penalty initially, an indication that it knew its position is shaky.

According to the IRS “[p]enalties exist to encourage voluntary compliance by supporting the standards of behavior required by the Internal Revenue Code.” I struggle to see how leaving thousands of dollars of penalties on the books for what seems like a good faith mistake based on what an advisor told makes any sense. Luckily for Wrzesinski, he was able to fully pay the balance of the penalties; otherwise Flora would have prevented him from bringing a refund suit. Of course, there is always the option of pursuing the initial advisor for malpractice, but that has costs.

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.