Summary Opinions for 10/31/14

The first week of November had two great guest posts.  The first post, which can be read here, was by attorney Michelle Feit, who discussed the extended statute of limitations found under Section 6501(c)(8).  The second, found here, was by Robert Everett Johnson, an attorney with the Institute for Justice, who discussed two recent cases where the IRS was found to have improperly seized assets using the Anti-Structuring Laws. I would suggest our readers review the comments to that post, found here, which were very strong. I would also commend to our readers the comments to Keith’s post on the suspension of the statute of limitations due to continuous absence from the US.  Lots of good information.

To the other procedure:

  • The Fifth Circuit, in Hoeffner v. Comm’r, reviewed a collection case, and found no reasonable cause for failure to file and pay, although the taxpayer did have obstacles in obtaining information to file.  Mr. Hoeffner was a prominent attorney in Houston.  In 2007, he was indicted on fraud, conspiracy, and money laundering, where he allegedly bribed adjusters at The Hartford Financial Services group with luxury cars, trips, night life and cash.  It seemed as though this counselor was headed to be a jailhouse lawyer, but the case resulted in a mistrial. He later paid costs related other criminal charges, which were then dropped.   Mr. Hoeffner then sued the Hartford and its general counsel (who was then the US Deputy Treasury Secretary) for negligently causing the bribery charges to be brought against him, and for a related cover-up for what he claimed was the extortion of him for the “bribes” to have cases settled.  Much of this summary is taken from a Bloomberg article found here.  In 2012, that case was settled.  Here is an article, including an interview with Mr. Hoeffner, from after the settlement.  So, Mr. Hoeffner lost his law license for a few years, and a couple million bucks, but somewhat cleared his name.

The tax case revolves around whether or not Mr. Hoeffner had reasonable cause for failing to timely file his 2008 tax return and timely paying his tax liability.  Mr. Hoeffner argued that a pre-trial order in his criminal case barred him from contacting his accountant, who had his tax records.  The Court held that neither unavailability of records, nor involvement in litigation, was reasonable cause, and he could not rely on his criminal defense lawyer’s advice to not file the incomplete or incorrect return.   The accountant did testify, and said it would have been impossible for another preparer to figure out the returns without his papers, but the Court still imposed the penalties.  Peter Reilly has additional coverage over at Forbes.

  • The Feds have removed and withdrawn regulations relating to the qualified payment card agent program.  The Service indicated that the program is now obsolete because of the reporting obligations found under Section 6050W.
  • As mentioned in the intro, we were fortunate to have Mr. Johnson from the Institute for Justice posting this week on the government seizing assets using the Anti-Structuring Laws.  Jack Townsend shared his initial thoughts on the NYT article last week, which can be found here.  Like all of Jack’s content, this is well worth your time.
  • Taxpayer who prevailed on about ¼ of Section 7431 wrongful disclosure case that was settled in part and dismissed in part was not entitled to attorney’s fees under Section 7430, as it did not “substantially prevail” in the amount or the most significant issue.  In The National Organization for Marriage (NOM) v. US, NOM and the Service disagreed on the amounts in question, and the Court held for the government.  I can say with certainty NOM will not be on my giving Tuesday list, but I am not sure how I feel about this holding.  I think it is correct, but have concern about how the holding could be expanded…but perhaps unfounded concern.  My concerns pertain to the Court’s determination of the amount in question, and as to what the “most significant issue” was in the case.

As to the most significant issue, the Court highlighted that the IRS conceded the wrongful disclosure claim in the answer to the complaint.  The complaint apparently had a bunch of other trumped up First Amendment/government conspiracy claims by NOM that the disclosure was related to.  These were dismissed, leaving only the amount of the damages to be determined.  The Court found that the other B.S. claims were the real reason for the suit, which was evidenced by the suit moving forward even though the government admitted to the disclosure.  The Court also noted that the government was substantially justified, which also precluded the award, which I did not take issue with.  The parties settled for $50k on the improper disclosure.  I suspect NOM did protract litigation on potentially bogus claims, but the underlying, primary claim was wrongful disclosure, which the IRS did.

I also was slightly uncomfortable with the “amount in question” conclusion.  NOM’s position was that the amount in question was either $60, 500 or $58,586, which were the specified damages in the complaint.  The government said that amount should have been $117,586, plus the pled (or pleaded) unspecified punitive damages.  The Service’s $117k number was based on the fact that NOM amended its claims, withdrawing a portion of around $50k, and then adding back in a similar amount for a different claim.  The Service added both together.   The Court accepted the $117k base number, and then went through a rational and lengthy discussion about including punitive damages.  The Court eventually concluded it needed to calculate a number and add it to the other damages, which it did, ending with a substantially higher number.  Had the Court accepted the government’s stated number, the recovery would have been a little under 50%.  Whereas with the punitive damages it is around 25% recovered.  Only recovering 45% is not sufficient, but in a different circumstance, the punitive damages number could have been the difference.

This is something to think about when throwing in “plus punitive damages”, and when including ancillary arguments in your complaint beyond your primary issue.

  • In US v. Briggs (couldn’t find a free link, sorry), the US District Court for the Eastern District of North Carolina denied a trustee’s motion to dismiss the government’s claim to foreclose a lien against the trust’s interest in an LLC.  The Court indicated state law stated the interest in the LLC was a property right, which then in turn allowed the government to lien the property under Section 7403, and levy the same.  I do not know N.C. law on this matter, but I wonder if it restricts collection against LLC interests to charging orders.  I also wonder how those laws interact with the government’s collection powers.
  • The Information Reporting Program Advisory Committee issued its annual report.  The report suggests an increased use of TIN matching to increase accuracy and compliance, a minimum threshold for 1099 corrections, and various other suggestions to increase compliance while making said compliance easier for taxpayers and information reporters.
  • Tax Court dismissed a petition for failure to timely file the same when the taxpayer attempted to use  The postmark was clearly on the last permitted filing day, and there was evidence that the 3rd party who mailed the petition did so at the post office on the last day for filing; however, the envelope also contained a postmark from the USPS the following day.  See Sanchez v. Comm’r, TC Memo 2014-223.  Another unfortunate result due to using the wrong mailing service.
  • SCOTUS granted certiorari in King v. Burwell, one of the ACA cases dealing with whether the tax credits are available for insurance purchased on a non-state exchange.  We have prior coverage here.

Summary Opinions for 9/19/14


Another great tax procedure week.  We have news on two (alleged for one) celebrity tax cheats.  More importantly, the Tax Court issued another qualified offer holding regarding concessions, and one on what constitutes a prior opportunity to dispute a liability when the Service denies such a request.  Plus a handful of other tax procedure matters, and an interesting case on when the proceeds from suing your accountant will not be taxable income.

  • The Tax Court, in Bussen v. Comm’r, had another holding on whether a full IRS concession is tantamount to a settlement for purposes of qualified offers under Section 7430(c)(4)(E)(ii)(I).  For those of you unfamiliar with the issue, I wrote on it in the infancy of PT here , and Keith followed up with an excellent post focusing on interesting issues in the Knudsen appeal.  A full concession by the Service during the pendency of the court case has been held to both be a settlement and not a settlement in the past, although the majority of the holdings appear to be leaning towards concessions being settlements.  I am not sure I agree with the holdings, and think it advances a Service-favorable policy that is contrary to the statute, allowing the Service to go well beyond the ninety day qualified offer period and still thwart fees.  Unfortunately, Bussen is a terrible fact pattern for the taxpayer.  In Bussen, the taxpayer withheld the information from the Service that it needed to make its determination.  The Service requested the information repeatedly.  Only after filing with the court did the taxpayer provide the information, and the Service promptly conceded.  This is not the type of case where the taxpayer equitably seems entitled to costs.  Jan Pierce of Lewis and Clark Law school, who knows as much on this topic as just about anyone, also noted that in Bussen the Service conceded before the actual trial, where in other cases, notably Knudsen, the Service waited until after the trial.

 Given the bad facts, if a court were inclined to hold concessions were not settlements, perhaps an appropriate holding in Bussen would have been a limiting of the “reasonable administrative costs”  and “reasonable litigation costs” because it was unreasonable for the Bussens to protract the process and not provide the requested information-thereby making the costs unreasonable and not appropriately payable.   Keith also noted that the statute specifically provides that a prevailing party that unreasonably protracts the proceedings will not be entitled to costs.  See Section 7430(b)(3).

  • In Johnson v. Comm’r, the Tax Court offered an interesting discussion of what constitutes a prior opportunity to dispute a liability.  In a prior CDP hearing, the settlement officer affirmatively told the taxpayer he could not challenge amount or existence of the underlying liability in connection with an unclaimed notice of deficiency.  In a subsequent CDP hearing, the taxpayer was denied the opportunity to question the amount or existence of the underlying liability because he may have had the right in the first hearing and did not challenge the settlement officer’s preclusion.   It is hard to find that the second settlement office abused his or her discretion, but the Service did bar the taxpayer from contesting the underlying liability when it perhaps was allowed, leaving a somewhat inequitable result.
  • Not exactly tax procedure, but the Tax Court, in Cosentino v. Comm’r,  has held that malpractice proceeds received by taxpayers from their accountants was not taxable income.  The accountants assisted the taxpayers in the disposition of some rental property pursuant to a bunk plan that increased basis somehow offsetting boot received in a 1031 exchange.  The plan was disallowed, and the taxpayers paid tax on the gain (or at least the boot).  The taxpayers sued their accountants for bad advice, and were made reimbursed for the tax paid.  The Service took the position this was taxable income, while the taxpayers argued they would have otherwise done a 1031 exchange with no boot, thereby not recognizing the gain.  The Court agreed that the malpractice proceeds were a return of capital and not taxable.
  • In Dynamo Holdings, LP v. Comm’r, the Tax Court has allowed the IRS to use predictive coding in digging through very large quantities of electronic documents to determine what is and what is not privileged and relevant to the IRS discovery requests.  We may have more on this in the future, so I won’t delve too much into the topic.  And, my knowledge of coding is about as strong as Keith’s knowledge on the Jersey Shore (I would say Les also, but I think he secretly loves that show)…more on that below.
  • In the most recent celebs behaving tax badly, the Situation has ended up before a judge on tax evasion charges(Keith was not familiar with the Situation’s work, and is on a Jersey Shore binge this weekend after completing some amazingly long MS bike ride ).  Sometimes you just completely misjudge a celebrity.  I was certain that Mike “the Situation” Sorrentino was smart enough not to get embroiled in tax evasion, he just seemed to have such a good head on his shoulders.  TMZ (I am starting to question the amount of times we have referenced them) reports that the Sitch is blaming his business manager, who is, of course, his brother, and claiming he knew nothing of his finances (sort of believable).  His Bro, in turn, is blaming their accountant.  The NY Times reports (now I feel slightly better about covering this) the indictment was based on the Situation and his brother running personal expenses through their pass through entities to reduce their taxable income, including personal grooming expenses (appropriate tanning salon and hair gel jokes are made).  All of which may have been hidden from the accountant.
  • In the immortal words of just about every rapper ever, “I gotsta get paid”, and, as such, I’m a pretty big fan of Section 6323(b)(8) giving lawyers a super priority in settlement provisions for reasonable compensation in obtaining the settlement.  The Eastern District of Louisiana recently reviewed this provision in Barnett v. D’Amico.  Although the case did not break any new legal ground, it did provide an outline for the reasons behind the priority and what lawyer fees could be deemed to relate to the settlement (and were reasonable), and which advances were properly made under Louisiana law and could be part of the priority lien.

Summary Opinions for 9/12/14

Sum Op for the week of the 12th is running a bit behind schedule because of a really wonderful two part guest post by A. Lavar Taylor on what constitutes an attempt to evade or defeat taxes for Section 523(a)(1)(c) of the Bankruptcy Code, which can be found here and here.  The post generated quite a few strong comments and responses, so I would encourage everyone interested in the topic to review those also.  Here are the other items we didn’t cover two weeks ago:

  • The Tax Court in Duarte v. Comm’r has remanded an Appeals decision to reject an OIC and proceed with collection action against an immigrant who ran a roofing business.  The Court found it was unclear if the settlement officer abused his discretion in rejecting the OIC when a prior settlement officer had already approved the OIC, but then the Service failed to process the  offer for unexplained reasons for quite a while.  The opinion framed Mr. Duarte as working very hard to solve his tax issues, including making the payment associated with the agreed upon OIC.  The second settlement officer determined there was significantly more collection potential, but the record did not indicate as why various decisions were made, actions were taken or actions were not taken.  It did seem clear, however, that the Tax Court did not like the result, and wanted the Service to, at a minimum, fulfill its obligations fully before implementing such a result.
  •  As Big Dan Teague said, “Yes, the word of God…there’s damn good money during these times of woe and want,” even when you take a vow of poverty.  That can cause an issue when you want to keep that money, so sometimes you need to divert those dollars to a shell entity in order to keep your vow of poverty and minimize taxes…Wait, that seems really shady, which is what the Service thought about the scheme.  On the slightly positive side, the whole thing may have been a tax play, which seems less insulting to the congregation members.  In Cortes v. Comm’r, for 2007 to 2009, the taxpayer, Mr. Cortes, a pastor, signed a “vow of poverty”, and created “A Corporation Sole” that received bi-weekly checks from the church.  Mr. and Mrs. Cortes had unfettered access to the account held by the corporation.  Mr. Cortes argued that his vow of poverty was evidence that he did not have income in the years in question.  The Court found that the signed paper did not change the fact that Mr. Cortes was effectively paid a salary that Mr. Cortes had full control over and used for personal expenses.  Mr. Cortes did highlight a line of cases where someone took a vow of poverty, was paid an income stream, but assigned that stream to a tax exempt organization.  The Court found the cases inapplicable because…Mr. Cortes was just cheating on his taxes (Mr. Cortes alleges that any such failure to pay was inadvertent).   Tony Nitti over at Forbes has more coverage.  The Service, in 2012, flagged the Corporation Sole set up as questionable.
  • It seems so much less offensive when the fraud doesn’t involve a church.  Like in US v. Bennett, where employees of a logistics company fraudulently directed around $600,000 to shell companies for fake expenses to the detriment of their employer and the IRS.  The Service charged the co-conspirators and one of their wives with tax evasion, and all three were convicted.  One of the two employees, Mr. Hogeland, spent months faking an illness to get out of his criminal proceeding by injecting himself with potassium chloride causing his blood to have elevated potassium levels.  Mr. Hogeland’s lawyer claimed Mr. Hogeland’s wife may have been behind the elevated potassium levels to set Mr. Hogeland up because of some tension relating to her having an affair.  Hogeland did end up dying – so perhaps he was actually ill— and at the time both Hogeland and his co-defendant Bennett were both appealing the conviction.  Bennett modified his appeal to take into account Hogeland’s death, arguing that Hogeland’s death abated the entire criminal proceeding ab initio (this was true of Hogeland’s conviction).  The Court was not impressed, holding on the first point that the reasoning for Hogeland’s reversal was that a defendant should not be denied the right to appeal, even by death.  Further, the punitive purpose cannot be served by a dead guy.  Neither applies to Bennett, who was still free to appeal and go to jail.  Bennett did argue other reasons the death should spring him from the slammer, but the court was likewise unimpressed and held Hogeland’s misfortune would not benefit Bennett.
  • The Service has issued Chief Counsel Advice , which is not really procedure related but I found interesting, stating that a controlled foreign corporation that “holds” a debt obligation of its United States sole shareholder  gives rise to taxable interest on the accrued but unpaid interest amount, which is treated as US property under Section 956(c).  This in turn will likely increase the US shareholder’s taxable income under Section 956 relating to US property.  The regulations provide the CFC will “hold” a debt where the CFC is treated as the pledgor or guarantor on the shareholder’s loan from a third party, and the “obligation” amount in question becomes the unpaid principal and accrued but unpaid interest.  Following the mental leap, the interest is payable to the CFC holder of the debt, which then flows through to the US shareholder who owes the interest to a third party.  So, to simplify, I think the CCA states that if a US parent company borrows funds from an unrelated third party and the CFC is guarantor, the accrued but unpaid interest is taxable income to the CFC, which passes back through to the US parent.  I do not profess to be an expert in this area and read the CCA quickly, so I could be wrong, but this seems to be a bad result.
  • The DC Circuit has agreed to an en banc review of Halbig v. Burwell.  We had some prior coverage on the matter here.   As you can imagine, the decision has caused quite a bit of partisan debate.
  • So, SOCTUS is getting an education in hip hop.  This is not tax procedure related, but I thought it was interesting.  The article indicates that while SCOTUS will occasionally reference song lyrics, it has apparently never quoted rap lyrics.  It also implies the Justices don’t know anything about hip hop (and perhaps question the artistic value of rap lyrics).  Although it would have been fun to assist in the drafting of the amicus brief, it might be more efficient and entertaining to just enlist the Roots, Jimmy Fallon and JT  to show up and perform the various songs (there are two others if you are interested and somehow missed this—you should have no trouble finding them on the internet).  A sort of  pop-star chamber, except without the abuse of power.   If you’re looking for rap music about taxes, and who isn’t, check out Slim Thug’s “Still a Boss”, with a solid nod to claiming fake dependents.

Summary Opinions for 7/18/14

A quick thank you to Christine Speidel for her guest post last week on the unanswered questions regarding ACA and tax procedure.  If you have not yet reviewed, please take a look and check out the interesting comment from one of our readers.  Here are a few other items from last week that caught our eye:

  • Good news for employers.  Y’all can’t be held responsible for the satanic requirement of requesting a Social Security Number from your prospective employees.  Congress and/or the IRS is the devil that makes you do that, and that evil likely won’t be excised any time soon.  See Yeager v. Firstenergy Generation Corp., where the district court tossed a religious discrimination suit brought by a prospective employee who was denied an internship because of he would not supply an SSN; he believed identification by any number, including an SSN, was the “mark of the beast”.   That’s got to be tough in the deli line.
  • The First Circuit has held that interest owed by a transferee under Section 6901 is not calculated under the Code, as it would be for the transferor, and instead is calculated under the applicable state law.  See Schussel v. Werfel.  I was surprised by the holding, and I have not fully digested it yet, as it is very long.  I won’t delve too deep into the analysis, but the Court relied on the 1958 Supreme Court case, Commissioner v. Stern, which held that “where…state fraudulent transfer law supplied the substantive rule, state law controlled the existence and extent of the [transferee] liability.”  The current statute still looks to state law to determine if there has been a transfer, so the 1st Circuit determined it must also dictate the actual amount owed, including the interest calculation.  This issue is covered in ¶ 17.05 of Saltzman and Book, including the related issues as to when interest actually starts to run, and other potential conflicts between state and federal law on related procedural matters.  All very interesting.
  • On July 2, 2014, a new AJAC memo was issued regarding the second phase of the implementation.  The memo, which is very long, can be found here.  We previously covered this about a year ago here.  We continue to applaud this effort, and look forward to the implementation.  We may also have some additional coverage regarding this memo in the future (once I find time to read all 62 pages).
  • A taxpayer was booted from court on her wrongful collection claim under Section 7433 in Antioco v. US because the Court found the inappropriate actions occurred during assessment and not collections.  I only looked at the holding, and the Appeals officer seemed rude and overzealous (but I have heard of worse).  What struck me was the characterization of this matter as assessment, and not collections.  Taxpayer received a notice of intent to levy for taxes she owed from two and three years before.  She requested a CDP hearing and asked for an installment agreement.  She had the CDP hearing, the IA was denied, and the levy sustained.  Tax Court sent it back to reconsider the IA.  This is when CDP hearing is terrible, and IA is rejected.  Goes back to Court, wins again, back to Appeals, and gets an IA.  The Court highlighted the various cases that indicated Section 7433 should be construed narrowly to only collection actions, and then stated:

 All of [taxpayer’s] alleged wrongdoing took pace prior, or in relation to, platinff’s CDP hearing.  They were, therefore, actions taken during the determination or assessment of plaintiff’s taxes, not during their collection….indeed, the government never collected taxes pursuant to [taxpayer’s] assessment; instead, plaintiff sought , and was granted, a second appeal which ultimately resulted in her successful application for an installment plan.

Hmmm. I’m not certain the Court was wrong in its holding, but the opinion does not clearly convince me that levy actions, liens, CDP hearings, and installment agreements (all of which would have been after assessment of the tax) are not collection actions, and are instead assessment actions.  This is especially true, because there was no mention in the opinion of the taxpayer questioning the underlying assessment of tax.  She was simply seeking collection alternatives.

Halbig & King: “SCOTUS, it’s ACA, Please Take us Back”

As was well documented today, the DC Circuit in Halbig v. Burwell and the Fourth Circuit in King v. Burwell issued conflicting opinions this morning on the IRS regulations authorizing tax credits in federal exchanges under section 36B of the ACA.   The DC Circuit held the regulations were invalid and only state exchanges could receive the credits, while the Fourth Circuit said the Service had a reasonable interpretation of the ambiguous statute and subsidies were available for folks who signed up through the federal exchange.

Les covered both of these case before, when each was in the lower court.  The Halbig write up can be found here, and the King write up can be found here.  We will have some in depth coverage and thoughts on the holdings later this week.  Stay tuned!

Although I indicate in my title, this is heading to the Supreme Court, it is possible that en banc review will be requested, putting off what I suspect is the inevitable hard look from John Roberts and Co.

ACA and Tax Procedure: Many Unanswered Questions Still Exist

In today’s guest post we welcome Christine Speidel. Ms. Speidel is an attorney with the Vermont Low Income Taxpayer Project and the Office of the Health Care Advocate, both at Vermont Legal Aid. She has a particular interest in health care reform as it affects low-income taxpayers. Christine will co-author, with Tamara Borland of Iowa Legal Aid, a new chapter on the Affordable Care Act in the upcoming 6th Edition of “Effectively Representing Your Client before the IRS.” Les

Two major tax code sections created by the Affordable Care Act took effect this year. First, Section 5000A provides that individuals must either have health insurance that is “minimum essential coverage,” have an exemption from the requirement to have coverage, or make a shared responsibility payment with their income tax return. Second, Section 36B makes an advanceable and refundable credit available to certain taxpayers to offset the cost of individual market health insurance obtained through the ACA’s affordable insurance exchanges. I will outline the procedures for assessment and collection of the 5000A payment. Then I will briefly outline the procedures for assessing and collecting overpayments of the 36B premium tax credit.


The individual shared responsibility payment is colloquially known as the “ACA penalty.” The Service is restricted from treating the penalty like any other tax debt. Although the penalty is to be “assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68.” (Section 5000A(g)(1)) the Service may not employ criminal penalties, criminal prosecutions, the Notice of Federal Tax Lien, or levy procedures to collect the penalty. Section 5000A(g)(2). The ban on levy procedures encompasses many programs employed in the general course of tax collection, including the State Income Tax Levy Program and the Federal Payment Levy Program.

While a Notice of Federal Tax Lien (NFTL) may not be filed based on a Section 5000A assessment, the “secret” statutory lien that applies to all tax debts will still arise and attach to all property of the taxpayer under Section 6321. The secret lien could potentially be foreclosed in federal district court pursuant to Section 7403, but the Service will not have the benefit of any priority status that would have been conferred by a NFTL.

Collection of the ACA penalty is expected to occur largely through voluntary payments and refund offsets. Refund offsets are possible, despite the ACA’s prohibition on levies, because the application of an overpayment to a tax liability pursuant to Section 6402(a) is technically not a levy. Perry v. Comm’r, T.C. Memo. 2010-219, and cases cited. See also discussion in the National Taxpayer Advocate’s 2011 Annual Report to Congress, p. 598 (noting that legislation could be helpful to curb inappropriate uses of the Service’s offset authority).

It remains to be seen how the Service will implement the restrictions on its collection powers. For example, the penalty may need to be tracked on its own account transcript. If the penalty is not included on the 1040 account transcript, taxpayers’ representatives will presumably need to identify the penalty as a separate matter on the Power of Attorney (Form 2848).

As an excise tax, the ACA penalty will be subject to the 3 year assessment statute of limitations of Section 6501(a). It is an excise tax because Section 5000A can be understood as imposing an indirect tax on the condition of not having health insurance. Nat’l Fed. Indep. Bus. v. Sebelius, 132 S.Ct. 2566, 2599-2600 (2012). Section 5000A is located in chapter 48, subtitle D of the Internal Revenue Code. Subtitle D is titled Miscellaneous Excise Taxes. If the penalty is underreported by more than 25 percent of the reported penalty, the limitations period is 6 years under Section 6501(e)(3). There is no limitations period at all in the case of fraud or a willful attempt to defeat or evade the penalty, or a failure to file a return. Section 6501(c)(1)(2)&(3).

We do not yet know what the Service’s assessment procedures will be for the ACA penalty. Nothing in the Affordable Care Act or subsequent amendments limits the IRS’s assessment authority with respect to the penalty. Third party information returns filed under Sections 6055 and 6056 will aid the Service in its assessment efforts. Taxpayers have no right to Tax Court deficiency procedures prior to assessment of the ACA penalty. See Section 6211(a), definition of a deficiency. The Service could voluntarily create a pre-assessment administrative review process. This seems advisable as a matter of fairness and political expediency. Many taxpayers will not be able to afford paying the penalty and then filing a refund suit.

In many ways it would make sense, and promote administrative simplicity, for the ACA penalty to be subject to the same assessment procedures as an individual income tax liability. The ACA penalty is to be included on the individual income tax return. Section 5000A(b)(2). More importantly, calculation of the penalty is based on the income, health insurance status, and exemption status of the taxpayer(s) and their dependents.

Automated adjustments, examinations, and Tax Court deficiency litigation frequently involve items of income or whether a person qualifies as the taxpayer’s dependent. Health insurance status could be at issue in a proposed disallowance of the Health Insurance Premium Tax Credit (which is subject to deficiency procedures). The ACA penalty may be implicated by the outcome of these processes. It might be simpler and less confusing for taxpayers if proposed adjustments to the ACA penalty were included with notice of other proposed adjustments to a tax return. However, once a petition is filed in Tax Court, any ACA penalty issues will have to be separated because they are beyond the court’s jurisdiction.

We also do not yet know what procedures the Service will use to collect the ACA penalty. As with the assessment issues just discussed, in some areas the Service has very few restrictions placed on it. For example, because liens and levies may not be used to collect the penalty, the collection due process rights associated with liens and levies do not apply. The Service is not legally obligated to provide the rights conferred by sections 6330 and 6331 when employing its offset authority. Boyd v. Comm’r, 451 F.3d 8 (1st Cir. 2006). As a matter of fair and efficient tax administration, though, it may choose to provide for post-assessment administrative review.

The general collection statute expiration date (CSED) under Section 6502 should apply to collection of the ACA penalty. It has been suggested that there is no CSED with respect to refund offsets under Section 6402(a), because Section 6502(a) only explicitly limits levies and proceedings in court. ((See Ajay Gupta, ACA Penalty: Toothless? Hardly! Corporate Raiders Fare Better, 141 Tax Notes 877 (Nov. 25, 2013)). This is contrary to the Service’s current practice, and would be a fundamental change in collection policy. See IRM, Refund Offset Research (10/1/2013), Note following #3 (requiring consideration of the CSED “in all cases.”). Section 6402(a) explicitly refers to “the applicable period of limitations”. Section 6401(a) of the Code also provides that the term ‘overpayment’ includes a payment of any internal revenue tax that is “collected after the expiration of the period of limitation properly applicable thereto.” In Program Management Technical Advice 2011-035, the Service has noted: “Although the phrase any liability in respect of an internal revenue tax is not defined in the statute, it has long been the Service’s position that a tax liability which could be enforced through normal assessment and collection procedures … is a prerequisite for making an offset under section 6402. See Treas. Reg. section 301.6402-1.”

If the ACA penalty is not timely paid, late payment penalties may be imposed under Section 6651(a)(3). Interest may be imposed under Section 6601, although interest will not begin to run until assessment. Section 6601(e)(2)(A). This is a result of Congress having specified that the ACA penalty is to be collected in the same manner as an assessable penalty located in subchapter B of chapter 68 of the Code.

The Service has stated that the 6662 accuracy-related penalty does not apply to the shared responsibility payment. 78 FR at 53655 (Aug. 30, 2013). The Service reasoned, “The section 5000A shared responsibility payment is not taken into consideration in determining whether there is an underpayment of tax under section 6664. Therefore, the shared responsibility payment is not taken into account under section 6662.” It is not clear how this conclusion was reached: the section 6662 penalty applies to underpayments of tax as defined in section 6664, and section 6664 refers to “any tax imposed by this title.” For Constitutional purposes, the ACA penalty is a tax, imposed by Title 26 of the U.S. Code. However, even if the Service changes its interpretation of section 6664, any accuracy-related penalty would at least have to be based on negligence or disregard of the rules. Section 6662(b)(1). The “substantial understatement” penalty under section 6662(b)(2) only applies to income tax.

The Service has not yet released forms, instructions, detailed publications, IRM provisions, or much guidance regarding assessment and collection of the ACA penalty. There are significant uncertainties at this point regarding the practical implementation of section 5000A.

Assessment and collection of Premium Tax Credit overpayments

In contrast to the individual shared responsibility payment, the Health Insurance Premium Tax Credit (PTC) fits readily into the Service’s existing assessment and collection procedures. The PTC is a new refundable credit, and it is treated for assessment and collection purposes like the existing refundable credits. PTC is available in advance or may be claimed on a tax return.

Anyone who receives advance PTC payments (APTC) must file a tax return to reconcile the advance payments with the PTC actually due to the taxpayer. Treas. Reg. § 1.36B-4. Excess advance payments are treated as additional income tax liability. Section 36B(f)(2); Treas. Reg. § 1.36B-4(a)(1)(i). PTC not taken in advance could also be refunded and then subsequently disallowed.

The Service’s determinations related to PTC eligibility are subject to the same deficiency procedures available to other refundable tax credits under Section 6211(b)(4). Thankfully, there is nothing analogous to the Earned Income Credit ban for PTC.

The ACA does not impose any limits on the Service’s collection powers for excess PTC; therefore, collection may take the form of liens, levies and refund offsets. Penalties and interest may be assessed as with any other unpaid income tax liability.

The uncertainty around accuracy-related penalties under section 6662 is relevant to recipients of the Premium Tax Credit, and particularly to taxpayers who take APTC. The accuracy-related penalty is complex, and I will not describe it in detail here (it has been the subject of several previous Procedurally Taxing posts, including just this past week). In brief, the penalty may be imposed when there is an underpayment of tax as defined in section 6664. In Program Manager Technical Advice Memorandum 2012-016, the Service has conceded that the accuracy penalty does not apply if a disallowed refundable credit was frozen and not actually received by the taxpayer. Previously, the Service asserted that the accuracy penalty did apply if the disallowed credit was received by the taxpayer. However, in Rand v. Commissioner the Tax Court held that disallowed refundable credits cannot reduce the amount shown as tax on the return below zero. 141 T.C. No. 12 (2013). The Commissioner initially appealed the decision to the Seventh Circuit. On June 10, 2014, the parties filed a stipulation to dismiss the appeal with prejudice. It remains to be seen whether the Service will attempt to overrule Rand through regulations or other means.

ACA and Victims of Domestic Abuse

The Affordable Care Act (ACA) raises interesting procedural issues. One such issue relates to victims of domestic abuse. The tax law as generally written does not reflect the realities of taxpayers who are victims of domestic abuse. Domestic abuse connects to tax issues in myriad ways, most prominently in connection with requests for relief from joint and several liability. It also can effect eligibility for many credits which are generally not available for taxpayers who file as married filing separately(MFS).

The IRS has addressed this problem in the context of the ACA in Notice 2014-13. The Notice expands eligibility for those credits to victims of domestic abuse who are unable or unwilling to file a joint return due to the abuse. Below I discuss the issue and illustrate how the Notice solves the problem. The IRS solution for this problem raises a question in my mind as to whether the IRS will open this procedure up to taxpayers who wish to claim other credits that are not generally eligible to MFS taxpayers, such as the EITC.


The Issue

Eligible individuals who purchase coverage under a qualified health plan are entitled to receive tax credits under Section 36B. An eligible individual is a taxpayer (1) with household income for the taxable year between 100 percent and 400 percent of the federal poverty line for the taxpayer’s family size, (2) who may not be claimed as a dependent by another taxpayer, and (3) who files a joint tax return if married (within the meaning of § 7703).

The Notice addressed requirement 3. The problem with the law is that there may be circumstances where someone who is married for state law purposes may be unable to or unwilling to file an MFJ return. There is a general way for married taxpayers who do not file joint returns to file a return other than an MFS return. As the Notice describes, under Section 7703(b)  someone who is married for state law purposes will not be treated as married for tax purposes in certain circumstances:

[A] married taxpayer who lives apart from the taxpayer’s spouse for the last six months of the taxable year is considered unmarried if he or she files a separate return, maintains as the taxpayer’s home a household that is also the principal place of abode of a dependent child for more than half the year, and furnishes over half the cost of the household during the taxable year.

The  Problem

The problem, as the Notice also describes, is that a spouse’s abuse or other circumstances may make it difficult or impossible to meet some of the requirements:

However, § 7703(b) does not apply to many individuals who are victims of domestic abuse. For example, the abuse may have occurred in the last six months of the taxable year, the victim may not have the financial means to furnish over half the cost of a household, or the victim may not have a dependent child.

The Solution

The Notice recognizes this reality and provides a way for taxpayers who file MFS returns to still receive the premium tax credits:

For calendar year 2014, a married taxpayer will satisfy the joint filing requirement of § 36B(c)(1)(C) if the taxpayer files a 2014 tax return using a filing status of married filing separately and the taxpayer (i) is living apart from the individual’s spouse at the time the taxpayer files his or her tax return, (ii) is unable to file a joint return because the taxpayer is a victim of domestic abuse, and (iii) indicates on his or her 2014 income tax return in accordance with the relevant instructions that the taxpayer meets the criteria under (i) and (ii).

The IRS flagged this issue in proposed regulations issued in 2012. The Notice indicates that IRS will issue more formal guidance in final regulations. The preamble to the proposed regulations and the Notice identify some of the issues IRS will have to address, including what documentation victims will have to submit to establish eligibility.

Parting Thoughts

This is an important and fair development. While adding administrative costs to the IRS, it allows taxpayers caught in an untenable situation a way to get deserved benefits. It raises the question as to whether IRS will expand the application to other valuable credits, such as the EITC. While victims of domestic abuse who would otherwise be eligible for the EITC are more likely to satisfy the current statutory rules to be treated as unmarried, those rules are not a perfect fit and leave many forced to file an MFS return. Perhaps it is time for a legislative fix on marital status issues. TAS has recommended Congress revisit the marital status issues—see for example the 2012 Annual Report Recommendations to Congress.  The current rules do no reflect the reality for many, especially those who are victims of abuse.