Information on Appeals Presented at ABA Tax Section Meeting

During the Administrative Practice Committee meeting a panel occurred regarding Appeals and the impact of COVID.  The panel offered a couple slides about Appeals inventory that might be of value to readers interested in what’s happening in Appeals.  The panel also discussed some issues regarding Appeals inventory and case handling.

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The first slide presented shows the cases coming into Appeals over the past three years.  The slide shows a sharp dip as a result of the pandemic.  Exam cases accounted for two thirds of the drop in case receipts between FY 2019 and FY 2020.  It’s not surprising given the sharp drop off in exam activity.  Because exam cases constitute such a large percentage of Appeals receipts, this area of drop has a bigger impact even though almost all types of receipts dropped.

The second slide shows staffing as well as receipts and closures over the last three years.  Here, cycle time provides the most eye-catching number.  Cycle time on cases more than doubled between FY 2018 and FY 2021.  This gives a real view of the impact of the pandemic on operations.

The panel talked about the challenges of working from home.  Many Appeals employees were working from home before the pandemic and had the capability to do so, unlike employees in many IRS functions, but the pandemic broke information supply chains making case processing much more difficult in some instances.

Appeals expects video conferences to continue but like other parts of the IRS will move from Zoom to Microsoft Teams.  Maybe I am the only one who prefers Zoom, but I do not view this as an upgrade.

The panel discussed Automated Underreporter Program (AUR) cases.  The AUR program often drives cases into the Tax Court with no development by the IRS.  The computer spits out a notice when it perceives a mismatch between an item reported on the taxpayer’s return and an item reported on a third party information return.  Because reaching someone at the IRS to discuss the AUR notice during the pandemic was “virtually” impossible, taxpayers moved up the chain into Tax Court by necessity and landed in Appeals inventory.  The panel discussed finding ways of addressing these cases without forcing taxpayers to go to Tax Court. 

Appeals issued a memo to all of its employees on April 19, 2022, regarding the backlog in Tax Court cases in its inventory.  A copy of that memo is attached here.  The memo seems to acknowledge that the examination division practice of having computers generate letters based on third party information returns that the examination division does nothing to verify is having a negative impact on Appeals inventory. Higher graded Appeals employees have to figure out whether the taxpayers really had additional income since the examination division essentially declines to do so and instead relies on computers to generate statistics showing the number of cases examined.

The panel also discussed the impact of Chief Counsel Advisory (CCA) opinions on Appeals.  CCAs generally have limited, if any, input from taxpayers.  They can tie the hands of Appeals and force cases into Tax Court.  The panel discussed the dilemma that CCAs sometimes place on Appeals as it seeks to find a resolution to a case or an issue.

The Ongoing Effort to Properly Situate the Tax Court

What is the Tax Court?  Does it reside in the judicial branch?  Might it qualify as an executive agency?  Isn’t this issue resolved?

The issue of the proper locus of the Tax Court has rattled around for a few decades now.  The most recent case making a serious effort to resolve the issue was Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), where the D.C. Circuit had held that the President’s power to remove Tax Court judges at section 7443(f) did not violate the separation of powers.  Carl wrote a post when the Supreme Court declined cert.  Bryan Camp wrote a post reacting to the initial legislation proposed after the decision in Kuretski.  As Bryan pointed out the D.C. Circuit decided in Kuretski that the Tax Court “had to be “located” within the Executive branch.”  Almost three decades ago, the Supreme Court in Freytag held that the Tax Court performs a judicial function.

While the uncertainty of the nature of the Tax Court within our constitutional system of three branches of government may leave academics uncomfortable, for most people life goes on and the Tax Court continues to adjudicate tax disputes between taxpayers and the IRS.  It seemed the debate over the status of the Tax Court, which you can read about in more detail in the posts linked here, had fizzled; however, embers from the debate still glow.

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Kuretski was a Collection Due Process case where Frank Agostino was pro bono counsel.  Kuretski is one of many interesting cases Frank has picked up at a New York calendar call over the years.  Eventually, Tuan Samahon, my then colleague at Villanova Law School and constitutional law scholar, and Carl Smith entered appearances in the Tax Court case and argued that the President’s removal power over Tax Court judges at section 7433(f) violates the separation of powers and so should be stricken. 

Even though the Kuretskis lived in Staten Island, an appeal of the Tax Court’s adverse decision on separation of powers issue was taken to the D.C. Circuit.  At the time, section 7482(b)(1) provided no specific venue rule for CDP cases.  This allowed an appeal in Kuretski to the D.C. Circuit under the default language at the end of that paragraph.  Ultimately, the D.C. Circuit held that there was no interbranch removal power problem because the Tax Court (supposedly per Freytag) is an Executive Agency.  As an executive agency, the President should have the constitutional power to remove Tax Court judges.  While that decision satisfied constitutional muster in preserving the Presidential removal power of IRC 7433(f), the Tax Court judges may not have appreciated finding that they were an executive agency rather than a court.  The Supreme Court in Freytag gave them a more comfortable landing place (but for the issue of separation of powers).

Two legislative developments happened as a result of Kuretski:  First, Congress amended section 7441 (effective Dec. 18, 2015) to add the following sentence to section 7441:  “The Tax Court is not an agency of, and shall be independent of the executive branch of the Government.”  Second, Congress amended section 7482(b)(1) to add a new subparagraph (G) that directed appeals in all CDP cases to the Circuit of residence.  This new venue rule applied to all Tax Court CDP petitions filed after Dec. 31, 2017.  So, even though the statutory challenge in Kuretski may have seemed like one that only academics would follow, it had real consequences.

It seemed that the legislation and the Kuretski decision may have provided the end of the story, but it has not.  Enter Florida attorney Joe DiRuzzo who had a number of Tax Court cases in which he wished to get rulings to overturn Kuretski. 

He moved to recuse the judges in all Tax Court cases because of the constitutional issue.  In Battat v. Commissioner, 148 T.C. 32  (one of Joe’s cases), the Tax Court issued an opinion holding that, despite the amendment to section 7441, there was no constitutional problem in the removal power.  The case goes into the history of the Tax Court and the factors necessary for removal of a Tax Court judge from a case.  For that reason alone, the decision provides an interesting read.  You can find our prior posts on Battat here.

However, in Battat, the Tax Court also held that it was not an executive agency — disagreeing with the D.C. Circuit in Kuretski.  The Tax Court refused to state in which branch of government it lay.  The removal argument actually does not depend on whether the Tax Court is in any particular branch, since, in Freytag, the Supreme Court held that the Tax Court exercises a portion of the judicial power.  The real problem is interpower removal, not interbranch removal.

Joe tried to appeal the holding of Battat to an appellate court, but the appellate court wouldn’t hear the case yet because the appeal was interlocutory.  No final decision had been entered by the Tax Court in the case.  Joe got similar rulings from the Tax Court in unpublished orders in several other cases of his, which he also tried to appeal to other Circuits.  However, every Circuit refused to hear the issue on an interlocutory basis.  One of the cases in which Joe tried an appeal was Crim (Tax Court docket no. 1638-15).  This Crim case was a CDP case that the Tax Court had actually dismissed for lack of jurisdiction — a final ruling.  Joe appealed this Crim ruling to the 9th Cir. It affirmed that the Tax Court lacked jurisdiction, so it declined to rule on the recusal issue.  See this ruling in Crim here.

There was a second Crim Tax Court CDP case in which Joe had also made a recusal motion.  The case was filed in the Tax Court in 2017 (Docket No. 16574-17L).  So, Joe could appeal it to D.C., which he did.  On April 21, 2022, in the D.C. Cir. Joe filed his opening brief and the joint appendix (copies attached here and here).  Joe is making the removal power argument, asking for the D.C. Circuit to overrule its Kuretski holding.

Maybe no one cares or maybe this will lead to more interesting discussions about the Tax Court or other matters.  As Carl mentioned in his post about the many people who made a difference leading up to the Boechler decision, it was Joe who took on the appeal of the Myers whistleblower case pro bono which created the conflict that was instrumental in persuading the Supreme Court to accept the Boechler case.  Who knows where Joe’s appeal of Crim may lead?

January 2022 Digest

A lot has happened in the tax world since the year began, then filing season began last week, and the ABA Tax Section 2022 Virtual Midyear Meeting began yesterday. There are no signs that things will slow down soon, except for (maybe) IRS notices.

Procedurally Taxing will continually provide comprehensive updates and information, but if you fall behind with your reading or struggle to keep up- I’ll be digesting each month’s posts from here on out.

January’s posts highlighted the NTA’s Report, the ongoing impact of the pandemic, and recent Circuit splits.

National Taxpayer Advocate’s Report

NTA Report Released: Essential Reading: The Report is available and contains new features, including an enhanced summary of the Ten Most Serious Problems and a change in the methodology used to determine the Most Litigated Issues.

What are the Most Litigated Issues and What’s Happening in Collection?: A closer look at the Most Litigated Issues. EITC issues are often petitioned but rarely result in an opinion, suggesting that most are settled before trial. In Collection, lien cases referred to the DOJ have declined substantially over the years corresponding with the decline in Revenue Officers and resources.

Who Settles Cases – Appeals or Counsel (and Why?): An analysis of data on the number of Tax Court cases settled by Appeals or Counsel. An increasing percentage of settlements are handled by Counsel, but why? Possible reasons and possible solutions are considered.

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Where Have Tax Court Deficiency Cases Come from in the Past Decade?: Most deficiency cases have come from correspondence exams of low- and middle-income pro se taxpayers. The focus of IRS examinations over the past decade has influenced the cases that end up in Tax Court. A shift in focus may be coming as IRS seeks to hire attorneys to specifically combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.

The Melt – Cases That Drop Away in Tax Court: Around 20% of Tax Court cases get dismissed each year- likely due, in part, to untimely filed petitions. Also due to a failure to prosecute, that is the petitioner abandoned the process somewhere along the way. Ways to address this issue are worth exploring, such as increasing access to representation and implementing a model utilized by the Veterans Court of Appeals.

Supreme Court Updates and Information

Who Qualifies as Press and the Boechler Supreme Court Argument Today: Being consider a member of the press comes with benefits, including the option to attend Supreme Court arguments with a press day pass when Covid-restrictions end. In lieu of being there in person, real-time broadcast links of Oral Arguments are made available on the Supreme Court website.

Transcript of Boechler Oral Argument: A link to the transcript of the Boechler Oral Argument is provided and Keith shares his in-person experiences observing the Supreme Court and the options available to others who are interested in doing so when Covid-restrictions end.

Pandemic-Related Considerations

Refund Claims and Section 7508A: A well-informed analysis of the disaster area suspensions under section 7508A and the refund lookback limits. Does the language in section 7508A allow for an extended lookback period? The IRS Office of Chief Counsel doesn’t think so, but TAS has recommended that Congress amend section 6511(b)(2)(A) for that purpose, and there is an argument that a regulatory solution is already available.

 Making Additional Work for Yourself and Others: The IRS has been cashing taxpayer payments without acknowledging receipt of the associated return. This improper recordkeeping resulted in the IRS sending CP80 notices to taxpayers requesting duplicate returns. This created more work for the IRS, practitioners, and clients. The IRS, however, recently announced it would stop doing this, as summarized directly below.

IRS Announces Stoppage of Notice to Paper Filers Who Remitted Payment and Tax Court Announces Continued Zooming: The IRS will stop requesting duplicate returns from paper filers who remitted payments with their original returns. Members of Congress also made specific requests to the IRS with the goal of providing relief to taxpayers until the IRS backlog is resolved, including temporarily halting automated collections, among other things. The Tax Court announced all February trial sessions will be by Zoom.

Practice and Procedure Considerations

“But I’ve Always Done It That Way!” Practitioner Considerations on Subsequent Year Exams: A TIGTA recommended change to IRS procedure may increase the audit risk for taxpayers who do not respond to audit notices. There is no blanket prohibition on telling clients about audit rates and general likelihoods of audit, so practitioners should be able to advise their clients of this potentially emerging risk and ways to avoid it.

New Rules in Effect for Refund Claims For Section 41 Research Credits Raise A Number of Procedural Issues: New rules for research credit refund claims require extensive documentation which increases costs and the risk of a deficient claim determination. Procedures for determinations were issued at the beginning of the month and have generated concern among practitioners because a determination cannot be challenged with a traditional refund suit and because the IRS modified regulatory requirements without utilizing formal notice and comment procedures.

Tax Court News

Tax Court Going Remote for the Remainder of January[and February]: January calendars (and now February, as mentioned above) scheduled in-person sessions have switched to remote sessions due to ongoing Covid-concerns.

Tax Court Orders and Decisions

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return: The Court in Soni v. Commissioner, allowed the tacit consent doctrine (where facts and circumstances led to finding of consent on the part of a non-signing spouse) to apply to returns, power of attorney authorizations and forms 872. The doctrine could be expanded in future cases, so it should be kept in mind when representing innocent spouses.

Timely TFRP Appeal?: The administrative 60-day deadline to respond to TFRP notices is discussed in an order requesting that the IRS supplement its motion for summary judgment. The origin of a deadline is important. Jurisdictional deadlines are different from administrative deadlines, and cases involving administrative deadlines can be reviewed for abuse of discretion.

Circuit Court Decisions

Eleventh Circuit finds Regulation Invalid under APA: The Eleventh Circuit, in Hewitt, calls into question who has the burden to show that a comment made during a notice and comment period: 1) was significant, and 2) consideration of it was adequate. The Tax Courts says it’s the taxpayer, the Eleventh Circuit says it’s the IRS, but what does this mean for everyone else?

The Fifth Circuit Parts Ways with the Ninth Circuit Regarding the Non-Willful FBAR Penalty: A difference in statutory interpretation results in a recent split between the Ninth and Fifth Circuits over whether the non-willful penalty under section 5321(a)(5)(A) should be assessed on a per-form or per-account basis. The Ninth Circuit held that legislative history, purpose, and fairness support a per-form penalty, but the Fifth Circuit held that Congress’ intent and the objective of the penalty support a finding that it’s per-account.

Goldring is Back with a Circuit Split: The Fifth Circuit addresses how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. It held “a taxpayer is liable for interest only when the Government does not have the use of money it is lawfully due.” This contrasts with other Circuits which have decided that the law allows the IRS to begin computing interest when an amount is “due and unpaid.”

Polselli v US: Circuit Split on Notice Rules for Summonses to Aid Collection: A recent Sixth Circuit decision continues a circuit split on a fundamental issue in IRS summons practice: does the IRS have to give notice when it issues a summons on accounts owned by third parties in the aid of collecting an assessed tax? The Sixth, Seventh and Tenth Circuits read section 7609 notice requirements and its exclusion without limitations, which contrasts with the Ninth Circuit’s more narrow interpretation.

D.C. Circuit Narrows Tax Court Whistleblower Award Jurisdiction: The D.C. Circuit overturns Tax Court precedent by holding that the Tax Court lacks jurisdiction over appeals of threshold rejections of whistleblower requests. Since all appeals of whistleblower cases go to the D.C. Circuit, the Tax Court is bound by the decision unless the Supreme Court takes up the issue. 

Liens and Judgments

Local Taxes and the Federal Tax Lien: The effect of the Tax Lien Act of 1966 was reiterated in United States v. Tilley.  Section 6323(a) sets up the first in time rule of law, but 6323(b) provides ten exceptions, including one for local property taxes, which allows a local lien to defeat a federal tax lien even when the local lien comes later in time.

Tax Judgments and Quiet Titles: Tax judgments can benefit the IRS beyond the 10-year federal collection statute of limitations. Boykin v. United States, like Tilley, involves real property held by nominal owners. The taxpayer brought suit to quiet title, the IRS counterclaimed that the money used to purchase the property was fraudulently transferred, and the taxpayer argued that a state statute of limitations prevented the IRS’s argument. The Boykin Court disagreed with the taxpayer relying upon Supreme Court precedent that state statutes do not override controlling federal statutes.

Bankruptcy and Taxes

Diving Beneath the Surface of In re Webb: An in-depth analysis of a technical bankruptcy issue that can impact taxes involving an election under section 1305, which allows postpetition tax claims to be deemed prepetition claims. The classification of the claims impacts whether a subsequent IRS refund offset violates a debtor’s rights.

Who Settles Cases – Appeals or Counsel (and Why?)

One of the many interesting charts in the National Taxpayer Advocate’s 2021 annual report displays who settled the case before Tax Court trial, Appeals or Counsel.  The trends are not good for Appeals.  They show that more and more settlements occur at Counsel.  What the chart does not show is why.  I would be very interested in a study of the cases that settled at Counsel and why they settled there instead of Appeals.  I suspect the Chief Counsel would be interested in this as well as it reflects resource shifting.

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At page 196 of the NTA’s annual report it states that 82% of petitioned cases settled in FY 2021.  That’s a little higher than the average of cases in the prior decade because the percentage of dismissals was down in FY 2021 (something I will address in a subsequent post) but not far outside the norm.  This post is not about the overall percentage of settled cases but the breakdown of where the cases settled between Counsel and Appeals.  The report has a nice graph for that which you can see here:

Notice that starting in 2018, a pre-pandemic year, the percentage began to shift with more cases being settled at Counsel as a percentage of the total.  In each of the past 10 years Appeals has settled the most cases, but why is it settling less cases in recent years as a percentage of the total?  Is it resources?  Is it training? Is it a change in culture? Did more cases go through Appeals pre-petition?  Are taxpayers less willing to work with Appeals?  Is it some other factor or a combination of factors?  The NTA’s report does not discuss the why question.  It only addresses the who.

The obvious consequence within the IRS is that having more cases settle at Counsel puts more pressure on the resources at Counsel and probably a little more pressure on the resources at the Tax Court since settlement at Counsel usually, but not always, means a settlement closer to trial with more opportunity for some interaction with the Court.  To understand the why question, it would be logical to do a study of the cases settled at Counsel after going to Appeals and learn what caused the taxpayer to forego the opportunity to settle with Appeals and wait to settle with Counsel.  I have not seen such a study.  It seems it would be useful to appeals because it would allow Appeals to learn why Appeals Officers failed to settle cases that ultimately settled without trial.  In learning the answer, Appeals would then be better equipped to evaluate the litigation hazards of the next case.

I complained about the ability of the Appeals Officers I encountered to judge the hazards of litigation in a blog post several years ago.  The thesis behind my complaint with Appeals Officers was that most did not have a good grasp of evidence and litigation hazards.  I could supply a number of anecdotal stories on that point where an Appeals Officer declined to settle because my client could not produce some written proof of a point the AO thought needed to be proved by a piece of paper, but anecdotes are not what is needed to understand if Appeals is functioning optimally.  I had a case last year where the AO totally misunderstood the statute regarding dependency exemptions.  After a failed attempt to explain it to her, I gave up and sent her a qualified offer which she also did not understand.  The case settled immediately upon arrival in the Counsel office.  Everyone who handles a decent volume of Tax Court cases has some story of the misguided AO but the trends in the NTA report show that something is happening beyond just the complaints of a grumpy old man.

Shelly Kay, a former colleague of mine at Chief Counsel who went on to become the head of Appeals, wrote a rejoinder to my 2015 post pointing out that Appeals did properly train its employees on litigation hazards and that actually going to court was not important to understanding how to settle a case.  [One of my complaints was that AOs located in Service Centers had no idea about the dynamics of a Tax Court case and some who worked in field offices had also never seen or closely followed a case in the Tax Court process after it left their hands.] 

I certainly don’t dismiss Shelly’s response, but I continue to feel that Appeals officers need to build a system that tracks what happens to docketed cases after it leaves their hands unsettled in order to learn about the case and build on that knowledge for future cases.  In my prior post I referenced the movie Groundhog Day because of my concern that by not learning what happened to their case after it went to Counsel, AOs were destined to repeat the same mistakes.  If they followed the cases and learned why Counsel settled each case that Appeals did not, they could better handle the next case.

I recognize that some petitioners do not work with AOs just as they did not work with the examiner and that only the imminent threat of trial brings the necessary focus.  I do not mean to suggest that AOs as a group or individually don’t do their job, but I find more often than I feel I should that AOs do not understand the dynamics of what will happen to a case if it goes to trial and therefore cannot properly assess the settlement hazards.  The chart from the NTA report suggests a trend in pushing settlements downstream from Appeals.  It would be nice to have a report from TIGTA or GAO or Appeals and Counsel that took a hard look at settlement trends and how settlement could be accomplished more often and more efficiently at Appeals.

Keep in mind that I am representing low income taxpayers who make up the bulk of the taxpayers the IRS audits but that I have no recent experience with AOs handling large and mid-size cases.

2021 Year in Review – Administrative Matters Part 1

The job of my dreams from 15 years ago has just come open.  The University of Florida, home to one of the best LLM programs in tax in the country, has decided to make it even better by starting a low income taxpayer clinic.  When I was preparing for retirement from Chief Counsel back in 2007, I looked around for a teaching position and especially wanted one in Florida or somewhere in the South if I could not find one in Virginia.  I applied for a couple of positions in Florida but the schools had no interest in me, which was fortunate because I ended up at Villanova where I could not have been happier except that the weather in PA could have been warmer.  Then I moved even further North, reversing the path of most elderly folks, but again was very fortunate to land at the Legal Services Center of Harvard Law School.  Some lucky person will now have the opportunity to teach and to help taxpayers from a nice warm location.  The announcement:

The University of Florida Levin College of Law seeks a non-tenure-track Legal Skills Professor to serve as the instructor and director for our newly funded Low Income Taxpayer Clinic (“LITC”). This is a wonderful opportunity for a licensed attorney with substantial experience representing clients in disputes with the IRS and a passion for clinical legal education. We welcome applications from licensed attorneys already working in legal academia as well as practicing lawyers seeking to transition to legal academia.

Here’s the link to the position: https://explore.jobs.ufl.edu/en-us/job/519429/lecturer-legal-skills

Lots of administrative matters this year as the IRS pushed out a third Economic Impact Payment (EIP) and pushed out the Advance Child Tax Credit payments.  Congress put a lot of burden on the IRS asking it to shoulder these tasks while the IRS sought to dig itself out from two difficult filing seasons with lots of backlogs.

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ID Verification

Among other things that made the last two filing seasons difficult was the high number of ID verification requests the IRS made to taxpayers.  These requests came at an unprecedented scale.  I had the opportunity to ask Wage & Investment Commissioner Ken Corbin about the volume of these requests in a panel I moderated at the annual conference for Low Income Taxpayer Clinics.  He explained why the volume increased so dramatically and why it would probably go down significantly in the future.  Perhaps the IRS has explained this in other settings, but I had not seen an explanation previously.  His explanation made perfect sense.  The EIPs caused a high number of individuals to file a return who had not previously filed a return or who had not filed a return in a long time.  The returns of taxpayers not in the system generate a much higher level of potential fraud, particularly when filed for the purpose of obtaining a refund in one of these payment programs.  Consequently, the IRS sought to verify the ID of many more taxpayers than normal.  Unfortunately, it was unprepared for the call volume.  Fortunately, it has now developed a system rolled out in late November 2021 that should make the process go much smoother.

Misdated Notices

The IRS regularly sends out mail on a date other than the date on the correspondence.  I don’t condone the practice, but it’s been going on for quite some time.  In 2020, however, the IRS sent out millions of letters with the wrong dates and the wrong instructions, creating more confusion than necessary.  You can find our posts on these notices here and here.  During the pandemic, the IRS held off on sending out some of the notices that would have gone out on a regular cycle.  It did so both because it wanted to give taxpayers a break during the pandemic and because it could not staff the phone lines for the calls that would have inevitably resulted from the notices.  The problem continued in 2021.  As she did in 2020, the NTA blogged on the problem, providing a window into IRS action not otherwise available.  The 2021 correspondence problem does not implicate statutory time frames the way the 2020 misdated notices did.  Instead, the new problem involved the IRS sending 109,000 taxpayers a notice with incorrect information.  The notice not only wrongly told taxpayers of action the IRS did not take but contains a typographical error that compounded confusion.  See our posts here and here.

Cases for the Taxpayer Advocate

The Taxpayer Advocate issued guidance regarding the cases it would accept.  It needed to limit the cases it would take both because of case inventories and because it could do nothing about one of the biggest issues facing taxpayers – finding out what had happened to their return.  Because of significant and continuing delays in processing returns due to the pandemic, an unprecedented number of returns sat at IRS Service Centers waiting for someone to process them.  The delays especially impacted taxpayers who filed paper returns, amended returns and late returns.  These taxpayers turned to TAS when calls to the IRS proved unavailing or went unanswered; however, TAS cannot locate unprocessed returns sitting on a trailer outside of a Service Center.  The inability to turn to TAS for assistance provided further frustration for taxpayers, but the decision not to accept these types of cases seemed only logical given the inability to do much with these cases. 

In TAS-13-0521-0005: Interim Guidance on Accepting Cases Under TAS Case Criteria 9, Public Policy (05/06/2021), the National Taxpayer Advocate (NTA) put out guidance on the public policy cases that the Taxpayer Advocate Service (TAS) will accept.  The guidance regarding case acceptance expires on May 5, 2023. Under Code Sec. 7803(c)(2)(C)(ii), Congress listed several types of cases in which TAS will assist taxpayers and gave the NTA the authority to determine additional matters in which TAS will assist taxpayers. We discussed the issue here.

Updates from Independent Office of Appeals

Good news – Appeals has a customer service number: 559-233-1267.

Bad news – Appeals does not call you back if the case is unassigned, which would be my main reason for calling the number.

The update occurred as part of an event put on by the IRS for its stakeholders.  The executives from Appeals had a brief slide presentation which showed staffing and case levels in Appeals as of January 2021.

ITIN Acquisition

There have been changes made to processes at the ITIN unit related to issuing ITINs to dependents in Canada and Mexico.  Since the TCJA passed, the ITIN unit has begun to require proof of U.S. residency for dependents outside the U.S. prior to issuing an ITIN. These policies are not required by the statute or regulations and have perhaps some unintended consequences for vulnerable communities, particularly as they relate to the calculation of family size for the numerous federal and state agencies that use the tax return for this purpose. These policies also contradict the Form 1040 instructions which instruct taxpayers to include dependents from Mexico and Canada on the return.

Unfortunately for ITIN applicants, there is no easy way to appeal a rejection of an ITIN application, making these changes especially burdensome. Requesting an abatement of the math error notice that is issued after an ITIN rejection may provide the only way to appeal a rejected ITIN application. However, sometimes the IRS denies ITINs in situations where the inclusion of the ITIN applicant on the return does not change the amount of tax due, and no math error notice will issue. Creative litigators will have to figure out what remedies are available for a wrongfully denied ITIN application under these circumstances.

Exercise of Discretion Not to Offset Recovery Rebate Credits

The offset statute gives the IRS discretion to decide when to offset.  For the first two stimulus payments, Congress directed that the only offset would be for past due child support; however, it did not limit the IRS’ ability to offset when it passed the final stimulus payment.

A post by the NTA sets out some of the history on what the IRS did as it moved into the 2020 filing season. 

Congress prohibited offset of the first two stimulus payments (EIP), except against past due child support, which were made in 2020.  In passing the third stimulus payment (RRC), Congress did not create the same offset restriction.  Nonetheless, the IRS decided to exercise its discretion under 6402(a) with respect to the offset of federal tax refunds to federal tax liabilities.  The IRS allowed refunds based on RRC to pass through to taxpayers without being offset to satisfy prior federal tax debts.  Great news for persons with only federal tax debts in their portfolio of debts subject to offset under the Treasury Offset Program (TOP), but less good news for taxpayers with other outstanding obligations.  For a detailed discussion of offset and an explanation of TOP, you can read an article by me forthcoming in the Florida Tax Review found here.

The NTA points out two problems with the otherwise good news regarding the IRS decision to forego offset of refunds based on RRC.  First, the decision happened in the middle of the filing season after many taxpayers had already filed and already had their refunds offset.  A similar offset decision occurred in 2020 when the Department of Education decided during the middle of the filing season not to exercise its right to offset federal tax refunds (and other federal payments) against outstanding student loan debts.  Individuals who filed early (i.e., those most likely to have substantial refunds) get treated differently than those who wait. 

A similar issue occurred during the 2021 filing season with unemployment benefits that Congress decided mid-filing season to exclude from income (although the IRS created a way to fix this for early filing taxpayers without the need for them to file a superseding or amended return).  So many problems are created for tax administrators when Congress makes changes during the filing season.  The IRS deserves much credit the past two years for adjustments it has had to make during the filing season while operating under pandemic restrictions.  These type of adjustments can contribute to the processing delays for which the IRS gets a black eye.

Innocent Spouse and the Administrative Record

We received correspondence from PT reader James Everett of DeFranceschi & Klemm, PC in Boston.  Mr. Everett represents the taxpayer in Sutherland v. Commissioner, which Christine blogged here and I blogged here in the 2020 year in review post because of the importance of this case.  For those who do not remember Sutherland, it involves the issue of IRC 6015(e)(7) which limits Tax Court review in innocent spouse cases to the administrative record, including cases pending at the time of enactment that had already gone through the administrative process prior to the legislation creating the limitation.  The case was rescheduled for trial in 2021.

The national office interjected itself into the case and the IRS objected to all documents the taxpayer wanted to include with the stipulation that weren’t part of the “administrative” record (i.e., documents not provided during the administrative stage).  Judge Lauber made it clear he was going to require the IRS to call the appeals officer as a witness at the trial to discuss the record.  A few days before the trial, the IRS dropped its administrative record objections.  Judge Lauber asked the respondent’s counsel if this reflected Service-wide policy (i.e., the IRS agreed that §6015(e)(7) didn’t apply to pending cases); respondent’s counsel candidly replied that this was above his paygrade to comment on – he could only speak to the case at hand.

The withdrawal of objection to the administrative record was great, but based on the record it is not possible to tell if this was specific to the case, a rethink of IRS position, or just a lack of desire to have the AO testify.  The administrative record rule presents significant problems for individuals who go through the administrative process pro se, since they often fail to develop the full record needed if litigation occurs.  We really appreciate the insights provided by Mr. Everett and encourage other readers to provide similar insights if their cases have a significant procedural development.

In Person Hearing Inconveniences Appeals Witness

As is often the case, commenter in chief, Bob Kamman, brought to my attention an order that prior to DAWSON would probably have received the designated order label.  DAWSON did away with designated orders, as we have discussed before, but did not stop the Tax Court from issuing important and interesting orders.  The lack of a place for Tax Court judges to park their interesting orders creates more difficulty in identifying the orders that might be of assistance to the broader community of practitioners who follow the Tax Court, but it doesn’t mean the orders are totally unavailable. 

The feature that existed prior to DAWSON that has still not returned and that provides a critical resource for researching orders is the search function.  It would be nice to know when that feature will return.  Searching orders by issue, by judge, or by key word cannot really be done anywhere else.

The order Bob found has a few interesting aspects.  First, the order signals the return of in person hearings in the Tax Court even before the announced return date.  Second, it provides a window into the IRS view of CDP and the perhaps slightly different view of what is needed in a CDP case from the Court’s perspective.  Lastly, it provides a lesson on how not to respond to a status report.

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The order at issue is not long.  I will copy it in full here in order to provide context and to let the Judge’s voice come through in full fashion:

Wendell C. Robinson & May T. Jung-Robinson  Docket No. 6446-19L

ORDER

Petitioners requested a Collection Due Process hearing on Form 12153 (Doc. 52 at 56), on which they gave their address in Washington, D.C. Thereafter paperwork from IRS Appeals was evidently generated by various personnel in Holtsville (Doc. 52 at 65, 139, 144) and Philadelphia (id. at 138; see also id. at 99, 187). See also id. at 85 (Austin). Appeals issued a notice of determination; petitioners commenced this case; and the case has been set for trial in Washington, D.C. In a telephone conference on November 9, 2021, petitioners expressed a preference for an in-person trial (rather than a remote trial via zoomgov.com), and the undersigned judge stated an intention to hold an in-person trial. On November 12, 2021, the Commissioner filed a status report that states: “Respondent’s Settlement Officer is unable to travel to Washington, DC in order to testify in person during the December 13, 2021, trial session. The Settlement Officer is available to testify remotely during such trial session.” It is

ORDERED that, as soon as possible, and in any event no later than November 19, 2021, the Commissioner shall file a supplement to his status report that shall :   (1) identify the (unnamed) Settlement Officer to whom the Commissioner refers,  (2) explain why that Settlement Officer (rather than another Settlement Officer) is needed as a witness, (3) give a summary of the testimony that the Commissioner expects to offer through this Settlement Officer, (4) explain the reasons that this testimony is important to the Commissioner’s case at trial, (5) explain the reason that the Settlement Officer is “unable to travel to Washington, DC”, though able to testify remotely, (6) explain why the IRS chose the Holtsville Appeals Office for the handling of petitioners’ request, rather than one closer to their residence, and (6) state whether, if the Court is unwilling to allow this Settlement Officer to testify remotely in an otherwise in-person trial, the Commissioner would prefer a general continuance rather than proceeding without this witness.

(Signed) David Gustafson

Judge

Served 11/12/2021

We posted the Tax Court’s announcement recently that it intends to begin holding in person trials again in January 2022 and traveling out to the 74 cities where it sits to hear cases around the country.  What’s mildly surprising about this order is that the Court is holding an in person trial in 2021 or at least attempting to do so.  This is the first in person trial since March 13, 2020 of which I am aware but, of course, there could be numerous in person trials happening that I would not know about.  I take the order to signal that the Court is serious about getting back into the real rather than virtual courtroom.  Another sign we are opening back up.

The second part of the order is the more interesting and amusing.  In this CDP case the IRS attorney wants the Settlement Officer to testify.  It’s not clear from the order why the IRS wants the SO to testify or why the SO cannot do so on that date.  It’s a bit unusual to have the Settlement Officer testify.  Nonetheless, the Settlement Officer is unavailable on December 13.  That trial date comes pretty close to the end of the government leave year.  Perhaps the SO has use or lose leave with plans not to be in the office for the last few weeks of the year.  Perhaps the IRS travel budget does not allow bringing in an SO remote to DC to make a minor point. 

The unavailability of the particular SO to attend leaves the Court asking why another person from Appeals could not testify.  This goes to why the IRS wants the SO to testify in the first place, but also to whether travel funds entered into the response.  If the purpose of the testimony is merely to establish matters almost any IRS could attest, why not have someone else come and testify who is available and local?  We can find out later this week when the IRS files its supplemental status report.

The lesson here may be principally about status reports and how much detail to include.  The IRS clearly did not include enough information in its status report and may have annoyed the Court by failing to do so.  Most, if not all, of the Tax Court judges monitor the cases in which they retain jurisdiction by requiring status reports of the parties.  As a government attorney, I knew I had to always file a status report by the date requested even though almost no pro se petitioners file the ordered reports and many represented parties fail to do so. 

Filing a helpful status report allows the judge handling the case to know what to expect and when.  It’s not a bad idea to anticipate what the judge needs and wants to know and include that in the status report even if it was not the precise information requested.  In pro se cases, the IRS regularly gets a public form of ex parte communication since the other side is usually silent.  Here, the government’s status report was too cryptic and seemed to assume that the Court would go along.  If the status report had reported why the specific witness could not attend on the scheduled day and why that witness brought important information to the CDP case, the judge could have made a decision about moving forward based on that information.  The incomplete information provided only led to a request for more information and put the government on its back foot.

Third Time is the Charm for CDP Case

In Dodd v. Commissioner, T.C. Memo 2021-118, the Tax Court decides the merits of petitioner’s case, having twice remanded the case previously.  In the end, Ms. Dodd lost the merits of her case and owes a large tax liability.  The case shows what happens when the IRS fails to properly conduct the Collection Due Process (CDP) hearing and then what happens when it does.  Ms. Dodd, although an administrative assistant at a law firm, went through CDP process for over four years pro se.  We discussed this case during its previous trip from Appeals to the Tax Court here.

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Starting in 2013, Ms. Dodd became an investor in Cadillac Investment Partners, LLC (Cadillac).  She was the managing member of this real estate partnership with a 35.5% share of its profit, loss, and capital account.  In 2013 Cadillac sold some property generating a large IRC 1231 gain.  She received a K-1 from the partnership and reported on her return $1,073,312 in 1231 gain, $1,909 in ordinary business income, ($100,739) net real estate income and $201,601 in distributions.  She reported all of these items from her K-1 on her 2013 return which showed a liability of $169,882, that she did not pay with her return.  This self-reported liability leads to the CDP hearing.  Because the amount at issue stems from a liability reported on her return, the CDP provision, as interpreted by the Tax Court, allows her to contest the correctness of her own return reporting.

While she was not a model CDP citizen, Appeals also had trouble dealing with her case.  As discussed in the previous post, it twice assigned the same settlement officer who did not seem well equipped to resolve the proper reporting of a partnership distribution.  On the third trip, referred to by the Tax Court as the second supplemental hearing, Appeals assigned a new settlement officer and paired the SO with an appeals officer who had experience dealing with partnership issues.  This team determined that Ms. Dodd correctly reported the liability on her return.  That determination ending remand number three brought the case back to the Tax Court where this time the court has the tools to make a decision.

In the Tax Court the parties agreed to the necessary facts and submitted the case fully stipulated.  Looking at the facts, the court concludes that she correctly reported the liability on her return.  Thus, no merits relief in CDP.  This merits decision occurred after a de novo review of the facts.

Next, the Tax Court looks at whether Appeals abused its discretion in denying her collection relief from the proposed levy.  It concludes that Appeals did not abuse its discretion based on the information Ms. Dodd provided – which was very sparse.  So, four years and three remands after she began her case, she ends up back where she started.  She now has a determination that her return correctly reported the partnership income and expenses.  The IRS has permission to levy upon her and she may need some relief from levy, but she failed to request that relief in a meaningful way during the CDP process.

Appeals correctly dealt with her merits issue on the third try.  I cannot guess what went wrong the first two times.  As discussed in the prior post, the SO initially assigned to the case moved it quickly both times but seemed incapable of addressing the correctness of the reporting of the partnership items.  That an SO would have difficulty determining the correctness of partnership items comes as no surprise, but the failure on the first two tries to line up someone to help with that aspect of these case seems like a failure of the system.  Perhaps the correct handling of the case on the third try signals a better understanding of the way to handle a merits claim or perhaps it just means that in this case Appeals’ eyes finally opened to the problem presented.

Appeals Finalizes Team Case Leader Initiative

The Sixth International Taxpayer Rights Conference kicked off today with a workshop on ombuds and advocates and continues through Friday. As Nina Olson mentioned last week in Taxpayer Rights as Human Rights: Registration is open for the 6th International Conference on Taxpayer Rights, the conference focuses on taxpayer rights as human rights. It provides the opportunity to learn from the way other countries administer their tax systems. If you have the time I strongly encourage you to attend this year’s conference, which is online only.

As part of the conference, I will be speaking Thursday morning on a panel that looks at how the right to administrative appeals promotes integrity and fairness in the tax system. I am joined by the Governor of the Greek Independent Revenue Authority and Professor Carika Fritz from the University of Witwatersrand in South Africa.

One of the topics I will discuss on the panel is the IRS’s Independent Office of Appeals recent decision concerning the Appeals Team Case Leader Conferencing Initiative. As readers may know, back in 2017 Appeals (as of the Taxpayer First Act the IRS Independent Office of Appeals) initiated a pilot program where IRS Large Business and International Exam teams and their Chief Counsel Attorneys meet with Appeals, taxpayers and their representatives at the commencement of the Appeals process. The goal was to narrow the scope of controversies and improve Appeals’ understanding of any differing takes on the law and facts. 

The pilot was limited to large complex cases that are led by seasoned Appeals employees known as Appeals Team Case Leaders. When Appeals announced the pilot, practitioners, the NTA and IRSAC weighed in (see the 2017 NTA comments here and IRSAC here), with some comments expressing deep reservations about the possible impact of Appeals’ engagement with Counsel and compliance employees on public confidence in Appeals’ impartiality and independence.

Last month Appeals announced that it has concluded the pilot and reached a decision on the process going forward. Appeals will not mandate joint case discussions in every case but will continue to operate under policies that allow it, in its discretion, to invite Counsel and Exam employees into the non-settlement portions of the Appeals process.

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It has been a while since I was practicing at large law firms and worked on LB&I Appeals so I cannot speak personally to the experiences of those practitioners who may have strong views on this. I was impressed, however, by the Appeals memo that accompanied the decision to continue the practice. The memo itself discusses the external comments, identifies some of the suggestions practitioners made, and flagged the reasons why Appeals decided to continue and formalize the practice.  As an example of the transparency reflected in the memo, while rejecting the recommendation, Appeals candidly discussed the suggestion that several commenters made to tether the process to taxpayer consent.

In reaching this conclusion, we carefully considered the suggestion by several commenters that taxpayer consent be required for Compliance to attend the non- settlement portion of Appeals conferences. While we agree that an ATCL should always consider the taxpayer’s (or their representative’s) views about Compliance attending an initial case discussion, we left the decision within the ATCL’s sole discretion for several reasons. First, the discretion to invite Compliance to conferences has been Appeals’ policy since at least 1967. During this time, Appeals technical employees have used this discretion sparingly and responsibly. More importantly, requiring taxpayer consent would effectively substitute the judgment of the taxpayer (or the taxpayer’s representative) for the judgment of the ATCL on the question of how best the ATCL can fully understand the merits of both parties’ positions and fairly assess the hazards of litigation in complex cases.

Taxpayers are entitled to negotiate settlements with Appeals without Compliance’s participation but allowing taxpayers to limit Appeals’ ability to understand a case would undermine fair tax administration. ATCLs are highly experienced and knowledgeable tax professionals with the ability to independently judge the facts, law and litigating hazards and propose fair and reasonable settlements. Appeals leadership trusts their judgment in determining when it would be helpful to invite Compliance to attend an initial case discussion with the taxpayer.

Going forward the memo notes that Appeals will focus on best practices and identifies the need to ensure public confidence in the integrity and independence of Appeals. To that end, it states that it will continue to reflect on additional feedback and adjust policies to preserve public confidence in the process. The transparency and willingness to solicit information seems like a strong recipe for tax administration. Even if one disagrees with the conclusion in the memo it is refreshing to see an open discussion of how and why Appeals decided to continue with its policy.