Update on Premature Assessments

May 18, 2022 by Leave a Comment

At the recent ABA Tax Section meeting the Tax Court announced that it had eliminated its backlog of cases which should stop the premature assessment problem it has created during the past two years because of the significant delays in getting petitioners over to IRS Chief Counsel’s office.  As we have discussed before here and here, when the IRS sends out a notice of deficiency, it puts a time frame on hearing that the taxpayer has filed a petition in Tax Court in response to the notice.  The notice suspends the statute of limitations on assessment for 90 days plus 60 days but the IRS must act relatively quickly after the 90 days runs in order to insure that it makes a timely assessment.  So, if it has not heard that the taxpayer filed a Tax Court petition by the date it selects after sending the notice – something like 90 days plus an additional 20 days – it assesses the liability shown in the statutory notice and begins the collection process.

The Tax Court eventually acknowledged the problem its petition processing delays caused the IRS, and hence the petitioner, and several months ago worked out a system for notifying Chief Counsel of new petitions even before it formally sent the petition to Chief Counsel for answer.  The system seems to have worked well and eliminated or significantly reduced the number of premature assessments.  Judge Toro noted in his comments that because the Tax Court has caught up with its backlog, the Court is winding down the early warning system created to avert premature assessments.  In a later panel Paul Butler, an executive with Chief Counsel in SBSE, stated that petitions generally arrive at Chief Counsel now about 3-4 weeks after filing but some still take a few months. So, it seems that we have a happy ending.

Professor Elizabeth Maresca, the director of the tax clinic at Fordham law school, raised an interesting point at the recent ABA Tax Section meeting that I had not considered.  I pass it along in case others have also not thought of the potential problem caused by the premature assessments and the cases in the settlement pipeline.

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The problem of premature assessments has been around for as long as I remember; however, the incidence of premature assessments prior to the pandemic was low.  In my experience, it usually happened for cases filed around the holiday period at the end of the year when the Tax Court clerk’s office probably operated at a skeletal level due to both holiday leave and end of year use or lose leave.  Each year it seemed some cases would not make it from the Tax Court to Chief Counsel.  For represented petitioners the premature assessment usually caused little problem because their representative would contact the local Chief Counsel office and the assigned attorney would fix the problem rather promptly causing an abatement of the assessment.  For pro se taxpayers who did not know the assessment should not have occurred, fixing the problem did not necessarily occur quickly because they failed to ask for an abatement.  The number of problem cases, however, would generally be quite low which does not mean it did not adversely impact individuals unaware that an easy fix existed.

Now we have quite a large number of premature assessments in the system.  Chief Counsel attorneys are on the alert for premature assessments but may not catch them all.  The possibility exists that the IRS has made premature assessments yet to be reversed and it has collected money on those assessments by offset or otherwise.  Now these cases filed a year or two ago are coming to the end which will cause the preparation of a decision document.  I hope that in every case in which the IRS prepares a decision document, it pulls a transcript and carefully checks to determine if a premature assessment occurred and if payments were made that need to be reflected in the decision document.  I am not sure that it does.

Professor Maresca recommended that attorneys representing petitioners in Tax Court cases request from Counsel a transcript of account for the year(s) before the Tax Court in order to make a check for any premature assessment and payment before signing the decision document.  The advice makes sense to me.  If the taxpayer has made payments on the account and the decision document does not reflect those payments, the taxpayer could lose them unless the problem is found within 30 days of the entry of the decision document.

While I mentioned above that the Chief Counsel assigned to the case will quickly fix it if the premature assessment is brought to their attention, the possibility exists that delays will occur.   Chief Counsel’s office has created a form for making a referral of a premature assessment and has a special email address.  You can find the form here.  The email address is on the form.

If calling your favorite Chief Counsel attorney, or the attorney assigned to the case, or emailing the form does not quickly result in fixing the premature assessment, you could consider filing a Tax Court Rule 55 motion.  Here is a template memorandum that could accompany such a motion for anyone in need of this resource.  Thanks to Frank Agostino for providing this resource.

Hopefully, we will soon be back to the good old days of rare premature assessments.  Until we get all of the assessments from the pandemic worked through the system, be on the lookout for problem cases.

Filed Under: Assessment, Tax Court

Boilerplate Provisions in Stipulated Decisions May Have “Interesting” Consequences

April 21, 2022 by 5 Comments

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

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

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

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

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

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

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

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

Maybe. Bear with me on this one.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Maybe.

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

The Takeaways

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

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

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

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

Filed Under: Abatement, Assessment, Interest

Losing Interest: Delayed IRS Assessments

April 20, 2022 by 2 Comments

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

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

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

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

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

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

And perhaps there is…

Rule 260 Redux?

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

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

Probably not.

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

But here is where things diverge.

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

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

Unreasonable Delay: The Seemingly Obvious Argument

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

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

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

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

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

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

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

“Non-Discretionary Act” Test

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

First test = passed.

“Clean-Hands” Test

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

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

“Causation” Test

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

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

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

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

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

Filed Under: Abatement, Assessment, Interest

Jeopardy Assessment Case Originating in the Tax Court

March 11, 2022 by 1 Comment

Jeopardy assessment cases can end up in the Tax Court.  I have written on the long running jeopardy case of former Pennsylvania Senator Fumo’s on numerous occasions that you can find here with links to other posts going back almost nine years to the beginning of this blog site.  That case, however, took the traditional route of jeopardy cases to the Tax Court by passing through the district court first.  Jeopardy cases are relatively rare, but jeopardy cases arising while a case is pending in Tax Court are very rare indeed.  Read this post by Bob Kamman for a very old and interesting jeopardy case. 

The case of Yerushalmi v. Commissioner, Dk. No. 5520-08 (docket entry 161 on December 28, 2021) has got to be one of the oldest cases still open in the Tax Court’s inventory.  It concerns liabilities from 1999 and 2000.  While I am prone to complain when I think the Tax Court has taken too long to get out an opinion, this case presents a situation in which the delays stem from matters outside of the Tax Court’s control.  While this 14-year old Tax Court case was pending, the IRS came across information that made it believe the collection of the liability was in jeopardy.  So, we get a rare opinion from the Tax Court on whether jeopardy exists rather than the more normal Tax Court opinion in a jeopardy case where it is following after the district court.  On top of that we get a case with interesting facts in an opinion written by Judge Holmes.  The opinion comes out in the form of an order.

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The IRS read something in a stipulation in the divorce proceedings of petitioner and her ex-husband that made it think that petitioner

is or appears to be designing quickly to place her property beyond the reach of the Government either by removing it from the United States, by concealing it, by dissipating it, or by transferring it to other persons

Once the IRS makes the jeopardy assessment, the person against whom the IRS makes the assessment has 90 days to contest the assessment.  The court reviews the jeopardy determination de novo, looking at two issues as part of its scope of review:

(1) Is the jeopardy assessment “reasonable under the circumstances,” and (2) is the amount assessed “appropriate under the circumstances.”

The IRS has the burden to prove jeopardy. The Tax Court has the choice to agree  – allowing the assessment to stand; to order abatement of the tax in full causing the IRS to go through the deficiency process as in the Fumo case; to redetermine the amount of tax at jeopardy, letting the assessment stand on that amount; or to take other action it deems appropriate.  Whatever the Tax Court decides in a jeopardy case is final.  Neither party can appeal the jeopardy determination.  The Tax Court can base its determination on evidence that normally would not come into the record.  In short, jeopardy cases are the court equivalent of a Wild West proceeding but one normally followed by a deficiency proceeding which takes place either while the IRS is out collecting on the assets it feared it might lose or while the IRS stands around tapping its toe awaiting the deficiency determination, as it has been doing in the Fumo case now for almost nine years.

The Tax Court’s standard of review in a jeopardy case requires it to sustain the jeopardy determination if it was reasonable.  After setting the legal scene, the Court gets into the facts of the case which, as you might imagine, are interesting and unusual.

The happy couple got married in 1971.  He was a tax attorney and she, after 1983, did not work outside the home.  They bought their marital residence in Great Neck in 1983.  In 1989 he created the Yerushalmi Family Trust with his wife as the grantor and a friend as the trustee.  In 1995 he set up a qualified personal residence trust (QPRT) with his wife as the grantor.  They took large losses on their 1999 and 2000 returns that resulted in the Tax Court deficiency case.  In 2002 she sued for divorce.  In 2007 he filed bankruptcy for himself and his law firm starting with a chapter 11 case but converting to a chapter 7.  The divorce case lasted for 17 years which explains part of the delay in the Tax Court case. 

The trustee in the husband’s bankruptcy case tried to bring some of the value of the marital residence into the estate but the bankruptcy court ruled that the QPRT was valid, preventing the trustee from getting value from the house for general unsecured creditors.

I don’t know anything about QPRTs, but Judge Holmes cites to 26 C.F.R. § 25.2702-5(b)(1) in support of the view that they expire after a set term.  This one was set to expire in September of 2018, at which time the property was supposed to be transferred into the Yerushalmi Family Trust I, but nothing was recorded.  In 2019 they created the Yerushalmi Family Trust II for their children and grandchildren and a notice was issued to transfer the assets from I to II, listing someone as the trustee of I different from the person originally listed.

Meanwhile, the 17-year-old divorce proceeding was finalized in 2019 in which the parties stipulated that Mr. and Mrs. Yerushalmi owned the marital residence with no mention of trust I or II.

They also bought a condo in New York City in 1997 listing trust I as the owner but listing a third person as the trustee.  No record of the retirement of any previous trustees, just a new trustee each time.  In the divorce finalization, this property was also listed as owned by Mr. and Mrs. Yerushalmi.

These were not the only two properties they owned, but other properties also had issues with the title or with consideration.  He also filed a statement of net worth in the divorce proceeding listing the properties as owned by the QPRT or trust I.

Having analyzed the property transfers, titles, lack of recordation and shifting trustees, the Court finds that the IRS has made a “good case.”  Taxpayers’ actions here appear designed to conceal ownership of the property.  So, the motion to review the jeopardy assessment is denied.

Given the small number of jeopardy cases the Tax Court sees, I am a little surprised that the decision comes out in the form of an order.  The speed with which a jeopardy determination must occur may have played a role in issuing an order rather than a memorandum opinion. 

The facts here remind me in some ways of the Fumo case, where the bulk of the assets at issue were real property which was also being transferred about.  There the district court judge did not find jeopardy, in part, because of the nature of the assets.  Real property is not going anywhere but transfers can occur before the IRS gets to make an assessment following a Tax Court case and, of course, a sale of the property could occur, allowing the dissipation of proceeds.  In cases involving real property that the taxpayer is playing with as here and as in the Fumo case, I think that if the reviewing court is not going to let the jeopardy assessment stand, it should use its ability to “take other action it deems appropriate” to tie up the property even if it does not let the assessment stand.  It’s easier to think of jeopardy when a taxpayer has an airplane ticket and a bag full of cash or a history of transfers to a tax haven.  The situation here does put the IRS at jeopardy of getting paid once the Tax Court cases reaches its conclusion and jeopardy or some other action seems appropriate to keep the proceeds available.

Filed Under: Assessment, Jeopardy, Tax Court

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return

January 10, 2022 by 3 Comments

We welcome back my colleague, Audrey Patten for a discussion of a recent case providing an expansive view of the tacit consent doctrine.  Audrey has developed a significant docket of innocent spouse cases and is currently working with Christine to write the third edition of A Practitioner’s Guide to Innocent Spouse Relief.  Look for their book coming out later this year.  Keith 

For those of us with many innocent spouse cases, it is common for clients to point out that they may not have actually signed a joint return.  Such clients’ position is that they should therefore be absolved of any joint liability derived from the return.  It is well established case law, however, that a missing spousal signature does not automatically negate the validity of a joint return.  While the burden will be on the IRS to prove a return with a missing signature is valid, the doctrine of tacit consent holds that if the facts and circumstances show that a non-signing spouse intended to file a joint return, a return the taxpayer did not actually sign can still meet the criteria for a valid joint return.  But how far can the doctrine of tacit consent go? On December 1, 2021, the Tax Court issued a memorandum opinion in Soni v. Commissioner that extends the tacit consent doctrine beyond the joint tax return context to encompass tax matters handled by the other spouse, including powers of attorney and extensions of the statute of limitations. The application of tacit consent in areas beyond the validity of a joint return is what makes the Soni case significant.

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Soni is not an innocent spouse case.  Rather, Om Soni and his wife, Anjali Soni, filed a tax court petition that challenged the validity of a Notice of Deficiency issued on a joint return they filed for tax year 2004 (for clarity, the parties’ first names will be used throughout).  Two questions presented in the case were whether the joint return was valid and whether the limitations period for assessment of tax had expired before the notice issued.  (The other two questions were challenges to the imposition of penalties under I.R.C. §6501 and §6651 and are beyond the scope of this discussion). The Court found that tacit consent on the part of Anjali was dispositive of both issues.

Om was a businessman who engaged in a variety of ventures.  Anjali was a homemaker and, aside from some marginal passive income, did not make any money.  By her own testimony, the marriage was very traditional and she expected her husband to handle all financial matters, including the couple’s taxes.  She lived an affluent lifestyle.  There were no allegations of any domestic abuse. Om for his part, often delegated personal business, including handling IRS related mail, to his employees.  The couple also had a grown son who would discuss his parents’ tax matters with his father and assist with preparing documents.  Anjali, again by her own testimony, never reviewed any tax returns because such documents made her nervous.  She also never signed any returns herself.  She even testified that she left documents “for days and days. Because I don’t feel like reading papers like this.”  She also testified, regarding her husband, that “I trust him with everything…whatever he does, I do trust him. I never discuss his business with him.”  Anjali would sometimes collect mail left at the house, but only sort out her magazines.  Any IRS correspondence she would immediately pass to Om or her son without opening it.

For the 1999 through 2004 tax years, an accounting firm prepared all of the couple’s joint income tax returns. Om would review the returns, but not Anjali.  For the 2004 return, the couple’s son physically signed his mother’s name onto the return, without first showing her the return.

Om’s businesses suffered losses during 2004. In 2006, the IRS began auditing the 2004 return.  In 2008, the IRS received a Form 2848, authorizing a representative named Mr. Grossman to act on behalf of the Sonis.  The signatures on the form were dated in 2006.  Anjali did not sign the Form 2848 authorizing Mr. Grossman to represent her, but her signature was present.  It later turned out that Mr. Grossman was in the habit of signing his clients’ names onto Forms 2848 for them.  In 2015, the IRS received a set of two Forms 2848, authorizing the couple’s son to represent Om and Anjali.  Om signed his Form 2848.  Anjali did not personally sign her Form 2848.

Over the next several years, a total of eight Forms 872 (including one Form 872-I), “Consent to Extend Time to Assess Tax,” were filed with the IRS.  The first two were signed by Mr. Grossman as the representative.  The remaining six were signed by Om for himself and by the son on behalf of Anjali.  Neither Om nor his son ever discussed Form 872 or 872-I with Anjali.   The extensions ultimately extended the period of limitations for assessment of tax to December 31, 2015.  As a result of the extensions, the IRS argued it was still within its limitations period when in March 2015 it mailed a Notice of Deficiency of $642,629 for tax year 2004.

The first argument raised by the Sonis was that the 2004 tax return itself was invalid as a joint return because, not only did Anjali not sign the return, but her signature was placed on the return by her son.  The Court provides a useful review of the rules for establishing the validity of a joint return.  First, it points out that if a spouse does not sign a return, the burden is on the IRS to prove it was valid.  However, the lack of signature can be overcome by showing that the parties intended to sign a joint return.  Even if the non-signing spouse did not explicitly state that she wanted to file a joint return, the facts and circumstances can lead to a finding of validity under the tacit consent doctrine.  Since tacit consent is a facts and circumstances analysis, the fact that the signature was written by the son also does not, by itself, negate the validity of the return.  Common factors in the tacit consent doctrine include whether the non-signing spouse had filed a separate return, whether there was a prior history of filing joint returns, whether the non-signing spouse had objected to the return after it was filed, and whether there was a pattern of one spouse handling the financial matters.

All of these factors weighed in favor of tacit consent in this case.  Anjali repeatedly testified that she did not review the returns by choice because she expected her husband to handle them.  She did not file any returns on her own and there is no record of her contacting the IRS to object to the joint filing.  The couple had also been consistently filing joint returns for the prior five years. These facts were supplemented by Anjali’s admissions that she chose not to review the returns.  The Court was able to confidently find that the 2004 joint return was valid via the tacit consent doctrine.

However, the opinion moves into more complicated territory when determining whether the extended time periods for the IRS to assess the return were valid.  To do this, the Court first reviews whether the Form 2848 appointing Mr. Grossman as a representative was valid as to each of the Sonis and then it discusses whether the eight Forms 872 were also valid as to each spouse.  As the Court acknowledges, “[t]he Code treats married taxpayers who file jointly as one taxable unit; however, it does not convert two spouses into one single taxpayer.  Spouses filing a joint return are separate taxpayers, and each spouse has an absolute right to extend or not extend the time within which to assess…A waiver to extend the period to assess a deficiency is valid only as to the spouse who signs the waiver.”

The Court first finds that Om’s signature on the Form 2848 was valid.  It then uses common law agency principles to find that, as to the first two extensions signed by Mr. Grossman, Om had delegated that authority because he treated Mr. Grossman as his representative throughout the time period in question.

But how does this extend to Anjali?  Common law agency principles would not work here because there is no evidence of Anjali directing Mr. Grossman to act as her representative.  Instead, the Court states, because Anjali gave Om “tacit consent to handle tax matters…we might be able to rely on that authority to conclude Om authorized Mr. Grossman’s representation of Anjali.”  The only further analysis the Court makes on this point is to note that Anjali remained silent as to the representation, thus allowing the IRS the impression that Mr. Grossman represented both parties, and therefore making his signatures on the first two Forms 872 valid. The Court’s conclusion is that “[b]ecause Om authorized Mr. Grossman’s representation, Anjali also tacitly consented, through Om’s agency.”

The Court takes this position a step further by then finding that the next six Forms 872 signed by Om and by his son signing on behalf of Anjali, without her direct knowledge, were also valid on the basis that Anjali had tacitly consented to letting Om handle all financial matters and that she never showed any due diligence in becoming involved in resolving the couple’s tax matters.  The Court found that “[w]hile Anjali may not have expressly given her husband authority to sign specific forms, it was well understood that Anjali gave him implied authority to act on her behalf.”

The specific facts in this case, particularly Anjali’s own testimony that she did not want to deal with any tax matters and trusted her husband to handle them, convinced the Court that she had given Om a blank check for any decisions made regarding taxes.  In doing so, however, the Court took the specific doctrine of tacit consent as applied to confirming the validity of joint returns and converted it into a general concept of “tacit consent to handle tax matters,” with only limited further analysis.  This expansion of the doctrine raises concerns, especially as to cases that may not have such clear spousal testimony as to the consent.  If a spouse has indeed given tacit consent to a joint return, it does not automatically follow that they have tacitly consented to each and every decision the other spouse later makes regarding that return.  The consequences of a broad reading of the tacit consent doctrine could be quite severe to a taxpayer’s individual rights and rigorous analysis should be required to justify such conclusions.

A reason that does support this decision concerns the impact of the documents on the IRS.  The IRS relied on the signed document to extend the statute and, in the case of the return, to assess the liability.  If one taxpayer can come back later after the statute has expired and say I did not sign this and did not consent to filing this, then the IRS is put in a bad position.  Here, the Court seemed to find that the burden to undo the potential harm of having the statute extended should fall on Anjali.  That does not necessarily seem wrong on the facts in the Soni case, but this presents a difficult situation that can also come up in other contexts, such as the filing of joint Tax Court petitions in situations where one spouse is claiming they have the other spouse’s authority to file a joint petition. 

It thus remains an open question as to how far the tacit consent doctrine can be expanded in future cases.  Specifically, if one party is passive in the circumstances surrounding a tax liability, how far should the IRS or the Tax Court go to make sure that the other party is on board?  In the interim, the major takeaway from this case is that spouses will not get very far in arguing that they are absolved by having taken a head in the sand approach to joint tax matters.

Filed Under: Assessment, Form 2848, Statutes of Limitation, Tacit Consent

2021 Year in Review – Administrative Matters Part 2

December 30, 2021 by 1 Comment

This part includes some Tax Court administrative matters in addition to those at the IRS.  Also included in this part is a reminder of the problems with the calculation of the statute of limitations on collection, changes to the FAQ policy and the new policy on offset in offer in compromise cases.

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Collection Statute of Limitations

The NTA published the National Taxpayer Advocate Objectives Report to Congress (Fiscal Year 2022) which provides some information on the glitch causing the IRS to improperly record the collection statute of limitations.  The glitch was first publicly identified in a blog post by then-NTA Nina Olson.  In that post, Nina said the IRS was working to address a glitch that was causing the IRS computer system not to recognize the CSED in certain cases in which taxpayers had sought installment agreements.  She indicated in her post that the issue surfaced two years prior in 2016 and her office had been working to identify cases. 

Her blog post identified five different buckets of cases in which the IRS was incorrectly calculating the CSED:

  • Bucket 1 = multiple pending IAs with only one corresponding rejected IA determination
  • Bucket 2 = one pending IA and one approved IA where 52 or more weeks have passed
  • Bucket 3 = multiple pending IAs with one approved IA, where 26 or more weeks have passed
  • Bucket 4 = one pending IA with one rejected IA, at least 52 weeks later
  • Bucket 5 = one pending IA, with no other action on the IA request for at least 52 weeks

Prior to her post, the IRS had agreed to review the cases TAS identified in Bucket 3 and found that 83% had incorrect CSEDs.

In 2017, TAS identified a population of taxpayer accounts with unreversed or improperly reversed pending IAs that led to incorrect CSED calculations and erroneously added time to the tax debt collection period. TAS also found inconsistent IRS procedures related to CSED guidance. The IRS agreed to correct taxpayer accounts with erroneous CSEDs and the underlying problems that led to the miscalculations.

In July 2020, TAS identified and provided the IRS with over 6,000 taxpayer accounts with CSEDs erroneously extended by one year or more. As of December 2020, the IRS had not finished reviewing and correcting these cases. TAS has recently provided the IRS with several thousand more taxpayer accounts that appear to have the CSED incorrectly extended by a year or more. Despite efforts to find and correct unreversed and improperly reversed pending IAs, TAS continues to find errors, resulting in incorrect CSED extensions of a year or more.  Even the most sophisticated taxpayers face challenges in calculating the CSED because of its complexity, as noted in this post from several years ago. 

IRS Update on FAQs

One of most commonly utilized IRS methods of explaining the tax law when it needs to get out guidance quickly has become FAQs.  Everyone understands the need for quick guidance and the fact that because of the speed in issuing guidance through FAQs the IRS does not want to be bound by this type of guidance.  It should not be bound by this type of guidance and should be applauded for quickly issuing guidance.  The concerns come when taxpayers follow this type of guidance and then the IRS changes its position.  The IRS has taken the position that taxpayers should rely on those FAQs at their own peril, as there would be no relief if the guidance turned out to be incorrect.

On Friday, October 15, 2021, the IRS finally issued guidance addressing the controversial issue of taxpayer reliance on positions the agency announces in FAQs, which are published on its website (IR-2021-202, IRS updates process for frequently asked questions on legislation and addresses reliance concerns.  The new guidance accepts two of the three recommendations made by the National Taxpayer Advocate Erin Collins in her July 7, 2020 blogpost. But, unfortunately, the new guidance suffers from the same shortcomings that attended the NTA’s recommendations.

During the week of October 19, 2021, we published a series of comments on the FAQ guidance which you can find here, here, here and here.  It was interesting for us because it was maybe the first time we had received multiple requests to publish posts on an issue.  All of the posts provide thoughtful takes on the procedure and the IRS position regarding this guidance.

Change to Offer in Compromise Policy

The new policy regarding offset in OICs represents a significant shift in collection policy for the benefit of taxpayers with accepted offers.  Kudos to the decision makers behind this policy shift.  A recent blog post from the National Taxpayer Advocate sets out the shift in policy and does a nice job of providing background as well as summarizing the new policy.  This post seeks to complement the information provided by the NTA but is somewhat duplicative.  Christine wrote a two-part blog post on offers and refunds, here and here, if you want more background on this subject.

The specific language developed by the IRS regarding the commitment of the taxpayer to give up their refund in the year of the OIC acceptance is found on page 5 of the form in section 7(e), which states:

The IRS will keep any refund, including interest, that I might be due for tax periods extending through the calendar year in which the IRS accepts my offer. I cannot designate that the refund be applied to estimated tax payments for the following year or the accepted offer amount. If I receive a refund after I submit this offer for any tax period extending through the calendar year in which the IRS accepts my offer, I will return the refund within 30 days of notification.

Even though the IRS rarely accepted OICs prior to the change in its policy in 1992, it did have an OIC program.  In the Sarmiento case, discussed below, the clinic traced this language back to at least 1964.  At that time, however, refundable credits did not exist and the policy as originally designed would not have been intended to claw them back after OIC acceptance.

For OICs accepted after November 1, 2021, the IRS will forego taking the post-OIC acceptance refund for the year of acceptance.  It will still take refunds for the periods leading up to the acceptance of the OIC (subject to the discussion of Offset Bypass Refunds (OBRs) discussed below).  The benefit to taxpayers varies based on the amount of refund they might have received for the year of OIC acceptance.  The NTA’s blog has some statistics on this; however, the individuals receiving significant refunds based on refundable credits, usually among the poorest of the taxpayers receiving acceptances, will definitely benefit.

The new policy does make clear that the IRS expects to offset any refunds related to pre-OIC acceptance tax years.  This policy makes sense.  It prevents taxpayers from delaying the submission of amended returns until after an OIC acceptance in an effort to circumvent having the refund offset.  In this way, the policy operates similarly to the requirement that taxpayers disclose their interest in potential lawsuits and other claims not yet turned into a definite amount at the time of making the OIC.  The IRS should receive these monies or at least know about them and make a judgment.  See our full post on this issue here.

Premature Assessments

The IRS was not the only place backed up because of the pandemic.  During 2020, the IRS held off on sending out notices of deficiency because of the pandemic.  Those notices went out late in 2020 and during 2021, creating a significant increase in the number of new Tax Court petitions, especially during the first half of 2021.  The Tax Court clerk’s office, like the IRS Service Centers, is not working at full strength during the pandemic because of efforts to ensure the safety of the employees.  The combination of a much higher volume of cases to process and the pandemic work restrictions created significant delays in the processing of new petitions from the Tax Court to IRS Chief Counsel, which meant that the IRS treated taxpayers as not having petitioned the Tax Court, resulting in premature assessments or inappropriate collection.

The Tax Court could have done a better job of alerting the practitioner community to the problem earlier but eventually began putting out news releases and working with Chief Counsel to notify it of new cases even before formally processing them and serving the answers.  Both the IRS and the Court react quickly to information about a premature assessment or collection; however, the high volume of pro se taxpayers filing petitions who do not know that a premature assessment should not have occurred hinders the process of identifying all of the problem cases. 

The Court’s dedicated email address for dealing with premature assessments created is taxcourt.petitioner.premature.assessment@irs.gov.  In addition to contacting the Court, reaching out to the local Chief Counsel Office will also result in assistance in fixing a premature assessment.  On December 9, 2021, the Tax Court issued a news release focused on the number of petitions filed in 2021 and the method of filing those petitions.  By the end of November, the Court had received 33,000 petitions, a significant increase from 2020 when filings were down due to COVID suppressing IRS issuance of notices that would lead to the filing of petitions.  The increase in filings coupled with the work restrictions brought on by the pandemic have led to delays in processing petitions which we have reported on previously here and here.

To provide some perspective based on recent years, below are the statistics for filing for the previous five years.  This information is taken from page 21 of the Congressional Budget Justification for Fiscal Year 2022, submitted by the Court on April 5, 2021.  This report has quite a bit of data about the Tax Court for those interested in the Court’s budget and operations.

TAX COURT CASES FILED AND CLOSED
FISCAL YEAR                         FILED              CLOSED
2016                                      28,831                       33,038
2017                                      27,091                       29,037
2018                                      25,422                       26,259
2019                                      24,364                       21,740
2020                                      16,988                       19,568


In FY 2020, of the 16,988 cases filed, 10,061 were regular cases and 6,927 were small cases. The overwhelming majority, 95%, of the cases filed in FY 2020 were based on the Court’s original deficiency jurisdiction granted by Congress.  The mix of regular and small cases filed in 2020 veers away from the mix in recent years which has run closer to 50-50.  The percentage of deficiency cases is higher than normal, reflecting the shutdown of collection for much of the year.

Tax Court Proceedings

The Tax Court stopped holding in-person trials in March of 2020 as the world recognized the dangers posed by COVID.  It cancelled the remaining trial calendars in the Winter session that year and all of the calendars in the Spring session, using the time to develop an online platform for interacting with taxpayers and the IRS.  It held all of its 2021 trial calendars remotely using the online platform before announcing a return to in-person proceedings at the beginning of 2022.  We discuss the announcement here.  As it returns to in-person proceedings, the Court remains willing to hold remote proceedings at the request of the parties.  Many of the hearings the Court holds can occur just as effectively in a remote setting as in-person.  The pandemic may have hastened a move to hybrid court proceedings that could make the Tax Court more efficient.  It has also caused many, if not more or all, of the judges to begin interacting with petitioners on a regular basis prior to calendar call.  This is a good thing.

Filed Under: Assessment, Frequently Asked Questions, Offer in Compromise, Statutes of Limitation, Tax Court

Jeopardy Assessments

September 22, 2021 by 1 Comment

Jeopardy assessments are relatively unusual and have not been heavily covered on PT, with the exception of the District Court and Tax Court cases of former Pennsylvania state Senator Vincent J. Fumo. I first wrote about the government’s attempted jeopardy assessment against Mr. Fumo early in the life of this blog, here and here, with the second link containing links to even earlier discussions of the case and of jeopardy assessment.  Caleb Smith wrote a more recent post about the case.  Mr. Fumo is a former powerful state senator in Pennsylvania who was convicted of abusing his position and spent time in prison as a result.  His tax liability relates to his use and alleged abuse of a tax exempt organization for personal gain.  In May 2021, only eight years after the filing of the Tax Court petition following the denial of a jeopardy assessment against him, the Tax Court granted partial summary judgment to the IRS, leaving the balance of the issues to be decided after a trial to be held at a future date.  This is not the normal time trajectory for a jeopardy assessment case.  The blog posts above provide background regarding the denial of the jeopardy assessment. 

A recent jeopardy decision in the case of Kalkhoven v. United States, No. 2:21-cv-01440 provides a much more normal case for taking another look at jeopardy assessment for those readers who did not follow PT in 2013 when I provided an earlier explanation of the provision.

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Jeopardy stands as an exception to the normal path of making an assessment. The IRS’s authority to make assessments is set out in the Code. In our income tax system, described as a self-assessment system, the vast majority of assessments made by the IRS result from the filing of a tax return on which the taxpayer tells the IRS the amount of tax owed and grants permission thereby for the IRS to make the assessment. IRC section 6201(a)(1).

In cases in which the IRS challenges the amount of tax reported on the return, the person auditing the return seeks the taxpayer’s permission to assess additional tax by asking the taxpayer to sign a form consenting to an additional assessment.  If the taxpayer does not consent to the additional assessment, the statute provides for the IRS to send a notice of deficiency giving the taxpayer the chance to contest the additional taxes prior to assessment, resulting in statutory permission for the IRS to make the additional assessment either because of default of the taxpayer in petitioning the Tax Court or a Tax Court decision document entered after settlement or judicial opinion.  (Math error assessments are another part of this path to assessment; they involve consent by default or the opportunity for a notice of deficiency.) See IRC sections 6212 and 6213.

Standing outside this normal path to assessment is jeopardy assessment.  Congress recognized that the ability of the IRS to assess additional taxes could take time.  It may not have envisioned the amount of time the Fumo case is taking, but it knew that the taxpayer could delay assessment by slowing down the audit and by going to Tax Court, and that the delay of assessment could create opportunities for dissipation of assets which would ultimately prevent the IRS from collecting the correct amount of tax.  So, in extraordinary circumstances, it permits the IRS to assess the additional income taxes (or other taxes subject to the deficiency procedure) first and only later give the taxpayer a chance to contest the correctness of the assessment. (See sections 6851, 6852, 6861, and 6862.) The IRS employed this procedure successfully in the Kalkhoven case.

Mr. Kalkhoven participated in tax shelters, held money in offshore accounts and controlled businesses that sold valuable real estate.  The IRS calculated he owed about $350 million in taxes, penalties, and interest.  As in the Fumo case, he brought suit in district court seeking a review of the jeopardy assessment.  This type of case is usually fast moving because the IRS has tied up the taxpayer’s assets without the normal formality of permission or a Tax Court case.

a taxpayer may seek judicial review of a jeopardy assessment. See id. § 7429(b)(1)–(2) (“[T]he taxpayer may bring a civil action against the United States for a determination under this subsection — district courts of the United States shall have exclusive jurisdiction over any civil action for a determination under this subsection). The court’s review is de novo. Olbres, 837 F. Supp. at 21; Fumo v. United States, No. 13-3313, 2014 WL 2547797, at *16 (E.D. Pa. June 5, 2014) (“The district court’s review . . . gives the IRS’s administrative determination regarding the jeopardy assessment no deference whatsoever.”). The district court’s consideration is limited to determining only 1) whether the jeopardy assessment was reasonable under the circumstances, and 2) whether the amount assessed was appropriate. 26 U.S.C. § 7429(b)(3); Olbres, 837 F. Supp. at 21. The government bears the burden on the first issue, while the taxpayer bears the burden of proof on the second. 26 U.S.C. § 7429(g)(1)–(2).

Mr. Kalkhoven did not challenge the amount of the assessment.  He only challenged the appropriateness of using the jeopardy process.  The court noted that the standard of reasonableness of the IRS actions requires it to show that collection might be jeopardized by a delay caused by using the normal procedures for assessment and collection and not that collection would actually be jeopardized.  It also noted that because of the nature of the proceeding it can hear information that might not come into evidence in a trial on the merits and that parties can present affidavits.  The object here is to have the court make a swift decision on the basic correctness of allowing the IRS to bypass the ordinary assessment and collection process.  (The taxpayer will still get the opportunity to go to Tax Court to contest the amount of the assessment, but the Tax Court’s review will be post-assessment and possibly post-collection.)  The district court must make this decision within 20 days after the suit contesting the jeopardy assessment is brought (unless the taxpayer requests an extension), and the decision of the district court, like the decision of the Tax Court in a small tax case proceeding, is final and not reviewable.

The court first addressed a jurisdictional issue raised by the IRS that Mr. Kalkhoven failed to exhaust administrative remedies prior to bringing the jeopardy action.  The IRS argued that he needed to make an administrative request to undo the jeopardy assessment before he could jump into court.  The court skirts the issue, finding that it has jurisdiction to decide if the jeopardy assessment was reasonable.  It points out that Mr. Kalkhoven did send correspondence to the IRS prior to bringing suit and did have a virtual conference with Appeals days before filing suit.  Perhaps the court did not want to fully address this issue because of the way it intended to rule in the case.  Holding against the taxpayer on this issue might allow an appeal and delay the process.  Courts have allowed an appeal of the denial of jurisdiction in this context.  The Tax Clinic at Harvard cited to the allowance of an appeal in this context, discussed here, in its failed attempt to appeal the denial of jurisdiction in the small tax case context.  The circumstances seem parallel.

In looking at the reasonableness of the IRS actions, the court noted that some disagreement among reviewing courts existed regarding reviewing for reasonableness or reviewing based on the preponderance of the evidence. It sided with the majority on this issue, reviewing for reasonableness.  Citing the Fumo decision at the district court, the court stated that it looks to see if one of three conditions exist:

(i) The taxpayer is or appears to be designing quickly to depart from the United States or to conceal himself or herself.

(ii) The taxpayer is or appears to be designing quickly to place his, her, or its property beyond the reach of the Government either by removing it from the United States, by concealing it, by dissipating it, or by transferring it to other persons.

(iii) The taxpayer’s financial solvency is or appears to be imperiled.

The court also noted that finding one of those three conditions does not serve as a precondition to sustaining the jeopardy assessment and that other actions by the taxpayer could also support a finding that the jeopardy assessment was reasonable:

“[p]ossession of, or dealing in, large amounts of cash,” “[p]ossession of . . . evidence of other illegal activities,” “[p]rior tax returns reporting little or no income despite the taxpayer’s possession of large amounts of cash,” “[d]issipation of assets through forfeiture, expenditures for attorneys’ fees, appearance bonds, and other expenses,” “[t]he lack of assets from which potential tax liability can be collected,” “[u]se of aliases,” “[f]ailure to supply appropriate financial information when requested,” and “[m]ultiple addresses”) (citations omitted)). Several courts have considered additional factors such as whether:

the taxpayer travels abroad frequently, . . . the taxpayer is leaving or may be expected to leave the country, . . . the taxpayer has recently conveyed real estate, . . . or discussed such conveyance, . . . the taxpayer controls bank accounts containing liquid funds, . . . the taxpayer has not supplied public agencies with appropriate forms or documents when requested to do so, . . . the taxpayer controls numerous business entities, . . . the taxpayer attempts to make sizable bank account withdrawals at the time of the assessment, . . . the taxpayer maintains foreign bank accounts, . . . the taxpayer takes large amounts of money offshore, . . . the taxpayer has many business entities which can be used to hide his assets.

Bean v. United States, 618 F. Supp. 652, 658 (N.D. Ga. 1985)

Here, the court finds that the IRS met the second test.  Mr. Kalkhoven argued that he was not removing his assets quickly.  I guess, without looking at his brief, that he argued he was doing so with all deliberate speed but not quickly.  The court found his actions to warrant concern by the IRS and support the reasonableness of its jeopardy assessment.  It then spent several paragraphs detailing his actions and how they appeared designed to place his assets beyond the reach of the IRS despite his large outstanding liability.  It contrasted Mr. Kalkhoven’s case with the Fumo case in a footnote:

Kalkhoven argues he disclosed the existence of all his assets on his tax returns and the fact of disclosure also renders the assessment unreasonable. However, it is unclear what underlying assets were disclosed. Gov. Suppl. Br at 4; compare Fumo, 2014 WL 2547797, at *21 (“Defendant knows the location and amount of the proceeds from [p]laintiff’s real estate sales. . . . Moreover, the IRS was able to trace the transfers using only public records, which does not tend to show an appearance of trying to hide assets from the government”). Although Kalkhoven may have disclosed the entities that hold certain assets “the mere disclosure of entity names does not negate the added complexity and collection difficulty that attends such schemes. To find otherwise would reward those who engage the most sophisticated advisors and encourage taxpayers to establish complex asset-holding schemes that they can disclose on the surface to escape potential jeopardy assessment or collection.”   

Certainly, the size of his liability also matters in a case like this, although the court does not expressly mention it.

In the Fumo case, the IRS lost the jeopardy hearing, throwing it into the “normal” deficiency process, though eight years into its Tax Court proceeding I am not sure that this would be called the normal process.  Whether normal or not, the deficiency process does not provide the IRS with the immediate opportunity to seize assets to satisfy a liability.  In essence, the district court in the Fumo case felt that the assets would still be around to satisfy the tax at the end of the deficiency process, where the district court in the Kalkhoven case was concerned that they would not.  This abbreviated proceeding takes on great significance when you contrast the difference in outcomes between the two cases and see the IRS standing on the sidelines unable to take any collection action against Mr. Fumo for almost a decade while it has immediately taken possession of Mr. Kalkhoven’s assets and has the green light to go after any others it can locate.

Filed Under: Assessment, Jeopardy

Proving the Liability – The Presumption of Regularity

September 14, 2021 by 2 Comments

I am not sure, but I don’t think we have written about a case from Guam since Les cited one in a post during our first month of existence as a blog.  The case of Government of Guam v. Guerrero, No. 19-16793 (9th Cir. 2021) gives us a chance to make up for lost time regarding tax law and Guam.  Perhaps the first issue to address concerns why we care about Guamanian tax issues.  We care because their tax code essentially mirrors our, similar to other territories, and procedural issues regarding their tax issues decided by the 9th Circuit could impact similar issues arising from the U.S.

At issue in the Guerrero case is whether the government of Guam kept adequate records to prove the liability it asserted and to prove that the statute of limitations remained open for it to act.  The court makes a decision regarding the presumption of regularity that could easily apply to the IRS.  For that reason, this circuit court opinion matters.

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Guam’s Department of Revenue and Taxation (DRT) determined that Mr. Guerrero owes about $3.7 million in unpaid taxes for 1999-2002.  He filed his returns late for those years.  The dispute concerns when the taxes were assessed.  The court states:

the official records are missing, likely due to water, mold, and termite damage at the storage facility where they were housed.

This suggests that Guam does not maintain its tax records on a computer system.  That’s surprising.  Maybe the antiquated IRS system is not the worst system in the world.

The court says that after assessment the DRT filed tax liens (I assume the court meant to say the DRT filed notices of federal tax liens) on various parcels of real property (I assume the DRT simply filed notices against Mr. Guerrero and the liens attached to his real property along with his other property.)  After filing the liens, DRT brought this case to foreclose the liens on the real property to which the liens attached.

Mr. Guerrero asserts that DRT cannot prove that it timely assessed the taxes against him.  DRT acknowledges that it does not have the original certificates of assessment, but invokes the presumption of regularity relying on the DRT procedures:

Guam’s evidence that the Department timely assessed Leon Guerrero’s taxes instead consists only of the Department’s internal documents rather than the certificates of assessment. Guam argues that these internal documents are sufficient evidence that the Department assessed Leon Guerrero’s unpaid taxes in January 2006 and sent the relevant notices before the three-year statute of limitations expired. Guam relies on the Department’s internal registers (record lists of delinquent taxpayers) known as TY53 and TY69 registers, as well as an internal transmittal sheet sent to the collections branch after the TY53 and TY69 notices were sent to Leon Guerrero, to demonstrate both that it followed standard procedure for purposes of the presumption of regularity and to show the assessment dates.

At a meeting on March 10, 2006, DRT learned that the notices of assessment did not reach Mr. Guerrero but instead went to his ex-wife’s address.  During the meeting, DRT gave Mr. Guerrero final demand and notice of intent to file a lien and he signed an acknowledgment.  This meeting took place about two weeks before the expiration of the assessment statute of limitations.  The court describes the testimony of the DRT officials who testified at the two-day trial explaining the system for making assessments and notifying taxpayer.  The statutory scheme, and much of the system, mirrors the system in the U.S. used by the IRS.

Because the assessment certificate itself is missing, DRT seeks to prove that it timely made the assessments in question by some other means, here the presumption of regularity.  The court notes:

We have held that a public actor is entitled to the presumption of regularity where there is some evidence that the public actor properly discharged the relevant official duties, which an opposing party must rebut with clear, affirmative evidence to the contrary….

As previously observed, whether the presumption applies or has been rebutted with clear and affirmative evidence to the contrary are mixed questions of law and fact that may be reviewed for clear error. The clear error standard is significantly deferential, and clear error is not to be found unless the reviewing court is “left with the definite and firm conviction that a mistake has been committed.”

Here, the 9th Circuit is not deciding the case as an initial matter but as a reviewing court.  It finds that the district court did not make clear error but it also finds that the district court’s opinion was “opaque and did not adhere to the proper steps of the analysis.”  So, the 9th Circuit sets out to explain the proper steps for making a presumption of regularity determination.

First, it should have considered if some evidence existed to support timely assessment of the taxes.  Instead, the district court determined the presumption was automatically available.  Despite this misstep, the testimony of the DRT officials did provide evidence in support of a timely assessment.  The district court should have explicitly stated that it relied upon the credibility of the DRT witnesses.

Next, the court should have examined whether Mr. Guerrero rebutted the presumption that could be drawn from the testimony.  At the trial level, he did not argue that the records presented were inaccurate.  Therefore, he waived that argument.  He failed to build the type of record he needed to build at the trial level.  The arguments he does make that are not waived by his prior actions are insufficient to cast adequate doubt on the records of the DRT.

The opinion leaves the impression that no one had a good idea what they were doing at the trial level but that DRT had enough on the ball to put into the record evidence supportive of a conclusion that a timely assessment occurred.  The presumption here is one on which the IRS may need to rely if its records are destroyed or it otherwise suffers a degradation of its system.  The court provides a bit of a roadmap for someone trying to attack a record like an assessment.  Certainly, the attack should be straightforward and clearly done at the trial level.  Mr. Guerrero should have sought the testimony of individuals who could talk about the impact of the lost records and how it cast doubt on the correctness of the entire system.  The importance of an expert testifying on this point to counteract the testimony of the government officials cannot be overstated.  Unless the government officials were destroyed on cross, Mr. Guerrero needed to give the court something to cause it to pause before presuming DRT handled the case correctly.  He gave the court nothing to go on and the 9th Circuit finds that significant.

The dissent picks up on some of the errors by DRT and offers a roadmap for how Mr. Guerrero might have attacked the validity of the assessment.  The dissent provides good lessons for those who find themselves in this situation trying to combat a presumption of this nature.  The case leaves me a little concerned about the use of the presumption of correctness in this situation to prove the timeliness of the assessments.  Like the dissent, I felt the majority made some leaps to get to the favorable result for the DRT.

Filed Under: Assessment, Burden of Proof, Presumption of Regularity, Statutes of Limitation
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