Proving the Liability – The Presumption of Regularity

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.


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.

Premature Assessment Announcement from Tax Court

On August 16, 2021, the Tax Court issued the following press release regarding premature assessments:


Washington, D.C. 20217

August 16, 2021


On July 23, 2021, the United States Tax Court issued a press release regarding the significantly increased number of petitions received this year. To date, the Court has received more than 26,000 petitions.

On July 26, 2021, and August 2, 2021, the Court met with various stakeholders, including representatives from the American Bar Association’s Section of Taxation, the Internal Revenue Service, low income taxpayer clinics, and bar-sponsored pro bono programs, to address concerns relating to the increased number of petitions being filed. The Court continues to process petitions expeditiously. It has also begun notifying the IRS of those petitions the Court has received prior to service in order to limit the potential for premature assessment and enforcement action against petitioners.

As a reminder, the IRS created a dedicated email address in October 2020 for petitioners to reach out with concerns about premature assessments or enforcement action:

If you have questions about whether the Court has received your petition, you can contact the Public Affairs Office at (202) 521-3355 or email

The press release primarily provides information we reported in a post on July 28, 2021.  While there is not a lot of new information in the latest press release, the press release itself is a hopeful sign that the Tax Court has set a path to keep the public better informed about the ongoing problem in processing petitions and the efforts to ensure that the problem has the least possible impact on petitioners.


The most important sentence is the one stating that the Court is notifying the IRS of petitions prior to formal service of the petitions so that the IRS has the opportunity to mark its system and input the proper codes in the computer to prevent assessment and collection barred by the filing of the petition.  Perhaps the system devised by the Court will eliminate or substantially eliminate the problem caused by late notification of the filing of a Tax Court petition.

In the prior post on this subject and in most prior discussions, we have focused on premature assessments.  In the majority of premature assessment cases, the assessment triggers a notice to the taxpayer, the notice and demand letter, but not enforced collection, which will not occur for a few more months while the IRS goes through the collection notice stream.  For most taxpayers in deficiency proceedings who experience a premature assessment, there is time to fix the premature assessment prior to actual collection.  For those taxpayers where the timing of the premature assessment precedes the payment of a refund, the collection issue will occur when the IRS offsets the refund based on the premature assessment.  Offset is the most likely collection damage to occur in the premature assessment situation.

We have not focused our discussion on the taxpayers filing Collection Due Process petitions in response to a notice of intent to levy under IRC 6330.  For these taxpayers the threat of immediate enforced collection action is very real based on the failure of the IRS to input freeze codes resulting from the filing of the Tax Court petition.  CDP levy cases represent less than 5% of the petitions filed, but for taxpayers in these cases, the prospect of significant negative consequences as a result of the late transmittal of information to the IRS is the most urgent.

Stand-alone innocent spouse cases represent another vulnerable group of taxpayers.  Many of these taxpayers have gone through the collection notice stream prior to filing the innocent spouse petition.  The filing of the innocent spouse request puts a hold on collection action, but that hold ends if the IRS rejects their innocent spouse claim and they do not petition the Tax Court.  These cases could go immediately back into the collection stream, resulting in enforced collection prior to the fix of the notification of the petition.

CDP lien cases do not present the same type of urgency.  In CDP lien cases it is the taxpayer who hopes the Court will act quickly to grant relief.  The IRS, by filing the notice of federal tax lien, has already placed itself in the position it needs in order to protect its interest.  So, late notification of the filing of a CDP lien petition is unlikely to have direct adverse consequences on the taxpayer.  It simply delays the date on which the taxpayer might receive some form of relief from the lien filing.

In the stakeholder meetings, which Christine and Caleb attended, the Tax Court indicated that it is processing petitions based on a FIFO system. It is unclear whether the Court will be able to provide pre-service information to the IRS for petitions that were in its backlog at the time the Court’s petition acceptance procedures changed. As the Court works through the petition backlog, it might consider triaging cases to identify the CDP levy cases and stand-alone innocent spouse cases in which taxpayers are most vulnerable.  These CDP levy and innocent spouse petitioners could benefit the most from getting the information about their petitions over to the IRS in time to stop enforced collection.

As the IRS returned to more normal operation last fall, it produced a surge of notices that caused the significant uptick in Tax Court filings in the first half of 2021.  If we are past that surge, and I cannot say if we are with certainty, the balance of the year should return to a more normal filing pattern for the Tax Court and allow the Tax Court clerk’s office to catch up and catch its breath.  If you are filing a petition, lots of reasons exist for filing the petition electronically, but one of those reasons is that it will make it easier for the clerk’s office to process the petition, which should help to more quickly reduce and eliminate the premature assessment problem.  Consider filing your petitions electronically if you haven’t done so previously.

Tolling the Statute of Limitations by Filing Bankruptcy

The case of Lufkin v. Commissioner, T.C. Memo 2021-71, puts the Tax Court in a position to rule on the impact of filing bankruptcy on the statute of limitations.  The taxpayers raise arguments not only regarding the collection statute of limitations but also the validity of the underlying assessment, which gives me the opportunity to discuss the impact of bankruptcy on the collection statute, which is significant, and on assessment, which after 1994 is rather small.  Bryan Camp wrote about the case as part of his Lessons from the Tax Court series which alerted me to the decision.  He provides some general background on bankruptcy which may also be helpful.


The important IRC sections when working out these statute of limitations issues are (1) §6501(a) which provides the general three year time period for assessment after the return filing date; (2) §6502(a) which provides the general rule that the IRS has 10 years to collect after assessment: and (3) §6503(h) which “suspend[s] [the period of limitations] for the period during which the Secretary is prohibited by reason of such case [a bankruptcy case and the automatic stay] from making the assessment or from collecting and—(1) for assessment, 60 days thereafter, and (2) for collection, 6 months thereafter.” 


Before 1994, the tolling in 6503(h) created a significant issue.  BC 362(a)(6) prohibits assessment during the period that the automatic stay is in effect.  A literal reading of this provision prohibits the IRS from assessing a self-reported tax on a return which would also prohibit the IRS from issuing refunds to debtors in bankruptcy while the automatic stay remained in effect.  This could prevent a debtor in a chapter 13 case from receiving a refund for five years absent a court order lifting the stay.  The language of BC 362(a)(6) provides an example of legislation that fails to consider the functional role of assessment.

For the 16 years from the passage of the Bankruptcy Code in 1978 until the change to 362(b) in 1994, the IRS arguably violated the automatic stay millions of times because it decided that Congress could not have intended to keep it from assessing returns where an overpayment existed.  So, it made the assessment of tax shown on the return and refunded to the taxpayer the overpayment resulting from the excess credits.  After almost two decades, the IRS, with significant assistance from the Tax Division of the Department of Justice, which had contacts in the Judiciary Committee, persuaded Congress to allow it to assess.  Congress did not, however, remove the restriction on assessment from 362(a)(6).  It still exists.  Instead, it neutered it by expanding the exception to the stay in 362(b)(9).

There exists one remaining area in which bankruptcy can suspend the statute of limitations on assessment.  It results from BC 362(a)(8), which prohibits taxpayers from commencing or continuing a Tax Court proceeding while the stay is in effect.  This provision can suspend the statute of limitations on assessment if the taxpayer has received a notice of deficiency and files a bankruptcy petition prior to the 90th day and prior to filing a Tax Court petition.  In this situation, the combination of the prohibition on filing the Tax Court petition, which suspends the 90-day period for timely filing a Tax Court petition, and the suspension of the statute of limitations on assessment caused by the notice of deficiency suspends the statute of limitations on assessment.  The suspension could be lengthy.  This suspension can also easily cause confusion since it operates through the intermediary of the notice of deficiency suspension.

For bankruptcy petitions filed after October 20, 1994, when the amendments to the bankruptcy statute occurred, the only way the automatic stay suspends the statute of limitations on assessment is through this two-step procedure triggered by the notice of deficiency.


The suspension of the statute of limitations on collection operates in a much more straightforward manner.  BC 362(a)(6) stays collection of pre-petition liabilities as well as assessment.  This prohibition on collection triggers the suspension of the statute of limitations on collection and lasts for the period during which the automatic stay exists plus, pursuant to IRC 6503(h), an additional six months.  To calculate the impact of the stay on collection, you must know when the stay begins and when it ends.  The beginning part is easy.  The stay begins the moment the debtor files the bankruptcy petition.  The ending of the stay creates more challenges.  It depends on the type of bankruptcy.  Generally, the stay will come to an end when the debtor receives a discharge or when the bankruptcy case comes to an end.  This could be several years in a chapter 13 case with a five-year plan.  Some debtors, like the Lufkins, file multiple bankruptcy cases, which can make the calculation trickier.

Before getting to the facts of the case, note that the docket here was interesting and different from the typical pro se case.  This was Mr. Lufkin’s second Tax Court CDP case.  He filed one in 2013 which he settled on a basis not available to see on the electronic Tax Court docket sheet.  He filed the current case in 2017.  In both cases, he took the offensive, filing his own motions for summary judgment and for other reasons.  Unlike his first case, which resulted in a settlement of some type, in this case, he went to trial.  The trial occurred before Judge Ruwe in June of 2019; however, Judge Ruwe retired in November 2020 before rendering an opinion.  So, the case was reassigned to Judge Greaves.

The taxes at issue in this case were employment taxes filed on Form 941.  Mr. Lufkin is a lawyer and the taxes arose from his law practice for the third and fourth quarters of 1998.  With taxes that old, which were assessed in 1998 and 1999, it’s easy to understand why Mr. Lufkin would argue that the statute of limitations had expired.  He also argued that he was not liable for these taxes.

Applying the assessment and collection statute suspensions to the Lufkin’s facts, Judge Greaves found that because Mr. Lufkin filed multiple bankruptcy petitions between 2000 and 2011, the statute of limitations on collection was suspended for a sufficiently long period to allow it to remain open when the IRS issued the notice of intent to levy.  Since Mr. Lufkin responded to that notice by requesting a Collection Due Process (CDP) hearing, he further suspended the statute of limitations on collection.

Mr. Lufkin made two arguments in the CDP hearing.  First, he argued that he was not liable for the taxes because another entity had assumed the debt.  The court does not spend much time with this argument and it shouldn’t.  Even if another entity assumed the debt, it would not relieve Mr. Lufkin of his liability for the debt.  Since he offered no evidence on this issue, the decision was easy.  It’s worth noting that the court did allow him to raise the merits of his employment tax liability since it would have been assessed without the issuance of a notice of deficiency.  The court did not perform any analysis regarding his ability to raise the merits.  So, I assume that the IRS did not object to the procedural issue of his raising this debt.

With respect to the statute of limitations argument, the court notes that its precedent regarding review of this type of challenge is ambiguous.  This might be considered a merits challenge in which the court would review the evidence de novo or it might be considered something the court reviews on an abuse of discretion standard.  Because the court finds it does not matter here which standard applies, it does not stop to sort out the correct answer.

The court does not perform an analysis of the impact of each of Mr. Lufkin’s bankruptcy petitions during the 11-year period between the assessment and the notice of intent to levy but states “even under a conservative calculation, more than 10 years had not elapsed” on the statute.  Probably, the IRS brief performed the analysis based on each bankruptcy petition.  It’s easy to believe that the court was correct if there were multiple petitions and this is one downside of going into bankruptcy repeatedly, since each filing triggers, at a minimum, a six-month extension of the statute of limitations on collection, even if the stay in bankruptcy is quite short.

In addition to challenging the statute of limitations, Mr. Lufkin challenged the verification by Appeals.  He argued that they had destroyed records regarding the assessment and this “amounted to a violation of procedural due process under the Thirteenth Amendment to the Constitution.”  For those of you who specialize in tax and not constitutional law, the Thirteenth Amendment abolished slavery and involuntary servitude.  It will not surprise you to learn that this argument failed with the court, which stated that Mr. Lufkin had failed to establish a nexus between the Thirteenth Amendment and his tax case.

As Bryan mentions in his post, the primary lesson here regards the impact of filing bankruptcy petitions on the statute of limitations.  Several actions can suspend the statute of limitations on collection.  I wrote recently that the IRS is having trouble correctly calculating the statute of limitations on collection primarily related to installment agreements.  Here, the IRS has plenty of cushion and easily turns back an argument based on the limitations period.

Math Error

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

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


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

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

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

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

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

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

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

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

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

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

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

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

Tax Court Announcement re Premature Assessments

The Tax Court has finally publicly acknowledged the problem it is having processing new petitions.  On Friday, July 23, 2021, it issued the following notice:

The United States Tax Court has received a significantly higher number of petitions this year. The total number filed in a typical year is between 23,000 and 26,000. In contrast, year to date, the Court has received over 24,000 petitions. The Court is processing petitions expeditiously, but the increased volume has caused a delay between when a petition is received by the Court and when it is served on the Internal Revenue Service (IRS).

The IRS is generally not permitted to assess or collect a tax deficiency when a taxpayer has filed a timely petition with the Court. The Court is alerting the IRS of petitions received but not yet served. If you have filed a petition with the Court but have been notified of an IRS assessment or collection action, you can email the IRS at

If you have questions about whether the Court has received your petition, you can contact the Public Affairs Office at (202) 521-3355 or email

The Court’s announcement that it is willing to verify receipt of petitions is an important development. The PT team has been informed that, going forward, the Office of Chief Counsel will contact the Court to verify receipt of a petition if they are notified of premature collection action.


Readers may be surprised to learn that this was not previously the case. A recent comment on the ABA listserv for those representing low income taxpayers illustrates what has been happening:

The Tax Court is over 2-months behind in processing new cases.  My client received a bill based upon a SNOD where we filed a timely Petition in May, but the Tax Court hasn’t served the government yet.  I emailed and asked them to freeze collection and abate the erroneous assessment. Here was their answer –  

Thank you for your request. Unfortunately, we cannot yet take action on this matter. The Petition has not yet been served on the IRS. Once the case has been served on the Respondent, we can take action. In the meantime, I will make a record of this communication in a file tracking alleged premature assessments.

We have written before about premature assessments here, here and here if you need background information about this issue.  I am surprised that it took the Tax Court so long to publicly acknowledge the problem and seek to guide petitioners to the right place.  With over 70% of petitioners filing pro se, it is not enough that practitioners know about the problem; unrepresented petitioners need to know, too. 

The number of Tax Court petitions each year ebbs and flows.  It was down during the pandemic and has trended down over the past decade as the IRS sent out fewer notices due to its dwindling resources.  If the IRS is beefed up, the Tax Court, and the clerk’s office, must be beefed up as well.  In the 1980s during the tax shelter wars, the Tax Court handled over 100,000 petitions in some years.  It’s easy to understand how the ebbs and flows of the number of docketed cases impacts the speed with which the court can process the petitions.  It’s also easy to understand how the restrictions on work environment caused by the pandemic could reduce the efficiency of the clerk’s office.  It’s not as easy to understand why the Tax Court did not make a public announcement acknowledging the problem earlier or why it cannot send something over to Chief Counsel’s office to allow the IRS to input the necessary freeze codes on its computer to prevent premature assessments.

The Court’s announcement and the resulting change in Chief Counsel procedures are both good news. However, a systemic solution is still needed that does not require individuals to email the Office of Chief Counsel or call the Court. Pro se petitioners do not usually understand that there should be a litigation hold on their case while it goes through the Tax Court process. Most petitioners are not going to call the Court in response to a collection notice. The problem the government is having in processing cases should be something the IRS and the Court are working hard to correct.

TIGTA Report on Restitution

Last week I wrote about a recent Tax Court order regarding restitution.  In that case, the taxpayer fully paid the tax included in the restitution order.  At issue in the case were penalties the IRS proposed against the taxpayers.  I pointed out at the conclusion of that post the significant benefit to the IRS of the ability to assess based on the restitution order because without that ability the IRS might have needed to wait years, until the conclusion of the Tax Court case, before it could assess and begin collection on the underlying tax liability.

A TIGTA report issued on June 7, 2021 suggests that the IRS fumbles the opportunity to make restitution based assessments in a number of criminal cases and that it makes the assessments much slower than the target dates for doing so.  In its response to the TIGTA report, the IRS basically said it agreed with the TIGTA findings and would work to improve the process.  In addition to the findings that the IRS failed to make some restitution assessments and made other assessments much slower than expected, TIGTA also found that the IRS was making assessments of interest and penalties through the restitution assessment process even though it should not.  In short, the report shows the IRS fumbling a very advantageous assessment process Congress handed to it in 2010.


At the outset TIGTA gave some figures on the total amount of restitution ordered and collected.  It also noted that not every restitution order gives the IRS the right to assess:

From FYs 2016 to 2020, the courts ordered defendants to pay over $2.7 billion in criminal restitution to the IRS. During that same period, a total of $844 million in restitution was paid to the IRS, only 31 percent of the amount ordered. Figure 2 lists the amounts of restitution ordered and paid from FYs 2016 to 2020.

Figure 2: Amount of Restitution Ordered and Paid (FYs 2016–2020)
Fiscal YearsRestitution OrderedRestitution Paid18% of Restitution Paid
Source: Information Provided by CI and the SB/SE Division.

The low percentage of restitution paid to the IRS in recent years may not be indicative of the effectiveness of the law change providing for the assessment of restitution. As we previously described, the IRS only has the authority to assess the restitution ordered by the courts if the criminal offense was for a tax-related crime. Since the law change in Calendar Year (CY) 2010, CI devoted significant resources investigating cases for which the IRS did not have the authority to assess any restitution ordered. For instance, the IRS was unable to assess any restitution ordered if defendants were sentenced for crimes involving identity theft because the restitution is attributable to fictitious tax returns. During FYs 2013 through 2017, CI initiated over 4,000 investigations involving identity theft.

TIGTA then analyzed the cases in which the IRS made a restitution based assessment and those where it did not.  It found that the IRS collected almost 50% of the tax when it made a restitution based assessment and a very low percentage when it did not (or could not) make a restitution based assessment.  Based on this data, it seems that the IRS should seek even more expanded authority to make restitution based assessments, assuming it could show Congress that it would appropriately use the power granted to it.  Following the passage of the law allowing restitution based assessments, the IRS developed procedures for identifying the appropriate cases and processing the request for assessment from CI to SBSE.  As mentioned above, the IRS has done a weak job of following the procedures it established:

According to the IRM, CI is required to close its case and notify the civil functions of the amount of restitution ordered no later than 30 calendar days after final adjudication by a court. CI notifies the applicable functions within the SB/SE and W&I Divisions of the amount of restitution ordered by completing Form 13308, Criminal Investigation Closing Report, and Form 14104, Notification of Court Ordered Criminal Restitution Payable to the IRS, (hereafter we will refer to these as “closing documents”) and attaching the Judgment and Commitment Order (J&C). The closing documents sent to the civil functions can also include the plea agreement, indictment, and Special Agent Report.

We conducted testing to determine if the IRS properly assessed restitution when the courts sentenced and ordered 3,435 defendants to pay just over $2.5 billion in restitution to the IRS for tax-related crimes during FYs 2016 through 2019. Our analysis of CIMIS revealed that 418 of the 3,435 cases for which a total of $244 million in restitution was ordered were SIRF cases with no IRS conditions of probation or supervised release. The restitution ordered in these types of cases was not assessable. We compared the remaining 3,017 cases, for which restitution of nearly $2.3 billion was ordered, to Master File data obtained from the DCW. Our testing determined that the IRS made restitution assessments in 1,958 cases where defendants were ordered to pay nearly $1.3 billion in restitution. This left 1,059 cases for which the defendants were ordered to pay nearly $1 billion in restitution that was not assessed. Figure 4 presents the results of this testing to determine if restitution was assessed.

Figure 4: Analysis to Determine If the IRS Assessed Restitution
Restitution Assessment CategoryNumber of DefendantsTotal Restitution Ordered
Restitution Assessed1,958$1,295,060,577
Not Assessed1,059$979,749,303
Source: Analysis of CIMIS and Individual Master File data.

We selected a statistical sample of 140 of the 1,059 unassessed restitution cases and reviewed the associated Form 14104 to determine if CI indicated that the restitution was assessable. Our analysis identified 33 cases for which CI determined that restitution of more than $21.6 million was assessable. For the other 107 cases, among the more prevalent reasons the IRS did not assess the restitution was that CI determined that the restitution was not assessable (94 cases) or the case was currently under appeal (seven cases). We provided information for 33 cases to the SB/SE Division, and it responded that:

– In 19 cases, the restitution of just over $9 million was not assessed because the Technical Services Unit indicated that it did not receive the closing documents from CI. In 12 instances, CI acknowledged that the closing documents were never sent or were not sent timely. In seven instances, CI asserted that the documents were sent. The Technical Services Unit had to request the pertinent information from CI.

– In seven cases, restitution assessments of more than $10.2 million were delayed because of COVID-19. The Technical Services Unit eventually assessed the restitution in all seven cases by December 2020.

– In seven cases, restitution of almost $2.4 million was not assessable. This included * * * 1* * * for which the restitution was ordered solely as a condition of supervised release or probation. In these instances, the Technical Services Unit indicated that it would assess the restitution when the defendant is released from prison.

When we projected the results to the population, we estimate that restitution of $69 million was not assessed in 144 cases because CI did not send the closing documents or the documents could not be located. When forecast over five years, we estimate that a total of $345 million in restitution was not assessed in 720 cases.

By failing to follow its own procedures in CI in making the referral of the case for the restitution based assessment, the IRS appears to be leaving money on the table from individuals it has identified as tax cheats.  These individuals are likely to pay the tax if it keeps them from further time in prison but could become very difficult to pursue thereafter.  Fumbling the handoff from CI back to SBSE for assessment and collection seems most unfortunate after it has spent so many hours developing the criminal case and when the percentage of collection of restitution based assessments is relatively high.

In cases where CI made the handoff to SBSE, problems persisted because SBSE could not make the assessment in a timely fashion.  Speed can matter here because the assets of this group will diminish quickly.

Once CI prepared the closing documents, it took the Technical Services Unit an average of 198 calendar days to assess the restitution. Technical Services Unit personnel told us they face barriers in their efforts to timely assess restitution, including receiving incomplete or late packages from CI and the process of posting the actual assessments, which must pass through other Campus functions to be established. They indicated that they established a process to track restitution assessments to evaluate timeliness, but they agreed with the need to conduct periodic reviews. Figure 5 contains a breakdown of the number of days it took to assess the restitution.

Figure 5: Analysis of Days to Assess Restitution for the 68 Sample Cases
Restitution Assessment CategoryExpected Days to Complete51Average Days to Complete
From the Date of Final Adjudication by a Court Until the Date CI Forwarded the Closing Package to the Technical Services Unit3057
From the Date CI Forwarded the Closing Package Until the Date the Technical Services Unit Assessed Restitution75198
Total Days From the Date the Court Filed the J&C Until the Date the Technical Services Unit Assessed Restitution105255

In addition to these problems, TIGTA found that the IRS was not following the Tax Court decision in Klein v. Commissioner, 149 T.C. No. 15 (2017), which held that the IRS may not assess and collect interest and penalties on restitution ordered for a criminal conviction for failure to pay tax.  TIGTA notes the IRS actions after Klein provide another example of the IRS not protecting taxpayer rights reminiscent of its actions after losing the Rand case.  Rather than proactively abating the interest and penalty it knew was wrong, Chief Counsel’s office advised the IRS to wait and only make the abatement if a taxpayer brought up the issue. Despite this advice, the IRS did decide to identify and abate interest and penalties but so far has done so in only 31 of 676 cases TIGTA identified.  So, if you have a client in this situation, you may need to be proactive to get the penalty removed.

The final part of the report shows that the IRS was not following up on taxpayers meeting the conditions of probation and reporting violations to the probation officer.  This type of monitoring can be critical to success in collection.  From the description it appears that the handoff between CI and SBSE creates some of this problem.  While TIGTA did not make a formal recommendation on this point because it knows that IRS resources are strained, it stated:

The inability to properly monitor the conditions of probation or supervised release could be a contributing factor for why U.S. courts rarely revoked the probation or supervised release for defendants sentenced for tax-related crimes. The courts revoked probation in only 12 of the over 9,000 CI criminal investigations for which a defendant was sentenced for tax-related crimes during FYs 2016 through 2019. Courts will generally not revoke probation unless the failure to comply was willful. Because this can be hard to prove, this remedy is not widely invoked. One Special Agent in Charge we contacted also indicated that the resources of the USAOs are also limited, and * * * 1 * * *.

All in all, the report provides a picture of a program with much promise that is not meeting its potential.  The IRS has had a decade to work out these issues.  It can see from the percentage of dollars collected in cases in which a proper restitution based assessment occurs that the benefits of making this type of assessment are high.  It needs to find a way to reap the maximum benefits from this program and obtain money from the individuals it has determined represent the worst taxpayers.

Imposing Penalties After Restitution Assessment

The recent case of Ervin v. Commissioner, T.C. Memo 2021-75 affirms the ability of the IRS to impose penalties after it makes a restitution assessment.  This case does not create precedent or cover new ground but does provide a reminder of how the restitution based assessments work.  We have previously written about restitution based assessments most of which are collected in this post.  TIGTA issued a report on restitution based assessments earlier this month which I plan to discuss in a future post.


Mr. Ervin and his wife owned a real estate management company in Alabama and apparently received cash payments for many of the properties.  They were indicted in 2011 not only on tax evasion, IRC 7201, but also on title 18 charges of conspiracy to defraud the United States and aiding and abetting.  The conspiracy charge appears to stem from their efforts to avoid reporting of cash deposits by structuring the deposits to keep them under $10,000.  A jury convicted them on most counts, including tax evasion, for the years 2004-2006. 

A couple of things are a little unusual about their criminal case.  First, they were convicted of evasion even though they did not file tax returns from 2000-2009.  Proving evasion based on non-filing can be difficult.  No doubt the structuring aspect of the case was crucial to this proof.  The second thing I found a bit unusual was the ten-year length of their sentence.  As we discussed in the post describing the sentence of former Tax Court Judge Kroupa, sentencing in tax cases primarily turns on the dollars lost to the government.  Here, the IRS could calculate the loss not only over the years of the conviction but the other years of non-filing causing a total of over $1.4 million.  Because they went to trial, the Ervins would not have received any positive points in the sentencing calculation for acceptance of responsibility.  This is a substantial sentence for a financial crime of this type but not necessarily an inappropriate sentence under the guidelines or otherwise.

In addition to the sentence of time in prison, the court ordered restitution to the government of $1,436,508 for the estimated tax loss to the government for the ten years of unfiled returns.  The IRS made restitution based assessments and actually collected the full amount of the liability; however, it did not stop there.  In 2014, it sent petitioner Monty Ervin two notices of deficiency – one for 2002-2004 and one for 2005-2007.  These notices were based on penalties, additions to tax, the IRS felt he owed for these tax years.  The IRS imposed four separate penalties, though not for each period.  The penalties were for failure to file, failure to pay, failure to pay estimated tax and fraudulent failure to file.  The penalties total another several hundred thousand dollars.

From prison Mr. Ervin contested the imposition of the penalties, making two arguments: 1) the IRS could not impose penalties after making the restitution based assessments and 2) the IRS had already determined he could not pay so it should not impose the penalties and make assessments in this situation. 

The Court provided a brief overview of the applicable law which foretells the outcome of the case:

Section 6201(a)(4)(A) provides that “[t]he Secretary shall assess and collect the amount of restitution * * * [ordered by a sentencing court] for failure to pay any tax imposed under this title in the same manner as if such amount were such tax.” The IRS may not make such an assessment until the defendant has exhausted all appeals and the restitution order has become final. See sec. 6201(a)(4)(B). The restrictions on assessment imposed by section 6213 do not apply to restitution-based assessments. See sec. 6213(b)(5). The IRS therefore is not required to send the taxpayer a notice of deficiency before making an assessment of this kind.

[*9] In Klein v. Commissioner, 149 T.C. 341, 362 (2017), we held that “additions to tax do not arise on amounts assessed under section 6201(a)(4).” That is because a defendant’s restitution obligation “is not a civil tax liability,” id. at 361, or a “tax required to be shown on a return,” ibid. (quoting section 6651(a)(3)). Rather, restitution is assessed “in the same manner as if such amount were such tax.” Sec. 6201(a)(4)(A) (emphasis added). But we explained that the IRS was not thereby disabled from collecting such sums. “If the IRS wishes to collect * * * additions to tax, it is free to commence a civil examination of * * * [the taxpayer’s] returns at any time.” Klein, 149 T.C. at 362.

The IRS properly followed that procedure here. It made the assessment after the restitution order became final. It subsequently commenced a civil examination of petitioner’s individual liabilities for 2002-2007 and prepared SFRs, allocating him a portion of the relevant income and deductions. See supra ap. 4-5. It then calculated additions to tax based on the deficiencies so determined.

While the Court’s explanation of the law signals the ability of the IRS to follow a restitution based assessment with proposed penalty assessments, the Court analyzed each proposed penalty to determine if the imposition of the penalty appropriately matched the facts of the case.  After finding that the IRS appropriately applied the penalties, the Court granted summary judgment.

Petitioner may never pay this amount, as collection from someone coming off of 10 years of incarceration will be extremely difficult, but the legal principle here follows from prior determinations of the manner in which restitution based assessments work.  The design seeks to allow the IRS to make an assessment of the core amount of the tax determined in the criminal proceeding without having to wait many years for the end of the tax merits process to come to a conclusion.  The way this case played out demonstrates the benefit to the IRS of the restitution based assessment.  The criminal case essentially ended with the sentencing in June of 2012.  Now it is nine years later before the Tax Court case ends.  Prior to the restitution based assessment provisions, the IRS would have had to sit on its hands regarding collection until the end of the Tax Court case which would have allowed it to assess.  By making the restitution based assessment shortly after the end of the criminal case, the IRS stands a much better chance of collecting, and here it appears to have collected all of the tax.  The delay caused by the deficiency process and six years in the Tax Court may make its chances to collect the penalty portion of the case difficult, but the core of the liability in this case was recovered.  That’s a victory for the process.

Premature Assessments

In this time of pandemic, both the IRS and the Tax Court have curtailed their access to mail. While this may be a relief to some taxpayers, it can have grave consequences for others. Where a taxpayer mails a petition to the Tax Court and the IRS doesn’t notate the taxpayer’s account, the tax may automatically assess. The result is a premature assessment. The IRS may start collecting the tax it perceives to be assessed, including offsetting refunds the taxpayer may especially need now. Up until I read recent postings on the ABA’s Pro Bono & Tax Clinics listserv about this issue, I had not considered this consequence of the Tax Court’s closing. Of course, this is not novel to this virus, but the virus reminds us of the consequences of premature assessment. I write to explain what happens to cause premature assessments and how to resolve them.


In tax procedure 101 you learn that defaulting on a notice of deficiency serves as one of the ways the IRS can make an assessment against a taxpayer. Most people who receive a notice of deficiency do not file a Tax Court petition, whether because they default on the notice, don’t understand the notice, or may not have received the notice. Only about 3% of the taxpayers to whom the IRS sends the notice of deficiency petition the Tax Court. I do not know why the percentage hovers at such a low number, but the default rate on the notice has existed at a high rate for many years.

Making an assessment after the default on the notice requires careful timing at the IRS because of the statute of limitations and because of the injunction against assessment if the taxpayer files a Tax Court petition.  On the one hand, the IRS does not want to wait too long after default, because the suspension of the statute of limitations on assessment triggered by the sending of the notice of deficiency comes to an end 60 days after the 90 period within which the taxpayer must petition the Tax Court.  To explain it another way, the IRS generally has three years from the due date of a taxpayer’s return within which it must make an additional assessment.  If the IRS sends a notice of deficiency, that three-year period gets suspended for the 90 period during which the taxpayer can petition the Tax Court plus an additional 60 days pursuant to IRC 6213 and 6503.  Sometimes, the IRS sends the notice of deficiency close to the end of the three-year statute of limitations on assessment, so it must stand ready to make an assessment quickly after the 90 period ends.

On the other hand, IRC 6213 enjoins the IRS from making an assessment during the 90 period and during the time a Tax Court case exists.  So, for the 97% of cases in which the taxpayer does not file a petition with the Tax Court, the IRS must wait until the 90 period runs until it makes the assessment.  On the 91st day, the IRS does not receive a formal notification from the Tax Court that the taxpayer did not file a petition.  The Tax Court could not send such a notification even if it wanted to do so because timely petitions need only be timely mailed.  The Tax Court may not know for several days after the 90th day whether a taxpayer has filed a petition because of the mail times involved.

The Tax Court does notify IRS Chief Counsel’s office when it receives a new petition.  IRS Chief Counsel’s office almost immediately thereafter notifies the IRS of the existence of a petition and the IRS, upon the receipt of this notice, puts an indicator on the taxpayer’s file not to assess the tax until the end of the Tax Court case.  To accommodate the lag in time for petitions to arrive at the Tax Court, to move from the Tax Court to Chief Counsel’s office and from Chief Counsel’s office to the IRS office that inputs the code stopping the assessment, the IRS must build in an additional period of time beyond 90 days before it makes an assessment on the 97% of the cases that do not respond to the notice.  If it chooses a period that is too long, it begins to sweat about making a timely assessment.  If it chooses a period that’s short, it makes an assessment prematurely in violation of the injunction against assessments during the 90-day period and the pendency of the Tax Court case. 

So, like Goldilocks, the IRS must pick a period that’s just right for the vast majority of the cases.  In the last couple of decades, the IRS has sent out about one million notice of deficiency a year and about 30,000 people have petitioned the Tax Court year.  Here are some statistics on premature assessments from the years 2012-2014:

This system works well when the Tax Court clerk’s office and the IRS offices handle cases efficiently.  It can break down when inefficiencies occur.  During an ordinary year, the most inefficient time occurs at year’s end when many employees at both the Court and the IRS take leave for the holidays and also take leave because of the end of the federal leave year which sometimes extends into the second week of January.  As a result, my experience of many years was that most premature assessments occurred during this period because of the time frame set for holding off on the assessment after the end of the 90 days and the absence of enough employees to cause the machinery to run smoothly.

Several years ago a group of Taxpayer Advocate Service employees and Appeals employees studied this. The group found there were several reasons for premature assessments:

  • Non-compliance with established procedures
  • Lack of understanding of premature assessments
  • Assessments made early in the default assessment period before a case appears on a docket list
  • Late docket lists due to unforeseen circumstances

The group also made several suggestions for fixing the problem:

The closure of the Tax Court clerk’s office for months adds a whole new dimension to the problem.  Taxpayers whose petitions arrived in the Tax Court starting about March 9 did not have their petition processed until a couple of weeks ago.  Taxpayers whose petitions would have arrived at the Tax Court after the Clerk’s office closed still await processing.  Obviously, though due to no fault of the Tax Court or the IRS, this blows a hole in the system.  The IRS would have no idea who has filed a petition and, if it has its normal filters in operation, will have made assessments against many who may have petitioned.

What should petitioners do to resolve a problem of a premature assessment?  Keeping in mind that 70% of the people who petition the Tax Court do so pro se, the problem here really involves getting out information to people rather than the actual fix.  Chief Counsel attorneys do a great job of fixing premature assessments.  They have a process for notifying the IRS and causing the IRS to reverse the assessment, refund any money collected and put the case in the posture that should have existed prior to the premature assessment.  Representatives should know or can easily find out how to pull the correct levers in order to reach the right attorney in Chief Counsel’s office and fix the premature assessment.

Pro se taxpayers will need help.  Maybe that help can come in part from the Court and postings on its website.  Maybe that help can come from Chief Counsel attorneys affirmatively looking for premature assessments rather than waiting for the taxpayer to raise their hand.  Maybe that help can come from clinics telling their clients why a premature assessment was made and seeking to reverse the process.  Everyone in the system wants the system to work.  If we find a way to identify the people against whom a premature assessment was made (and this could be someone who received a notice of deficiency in mid-January who has not yet filed a Tax Court petition) then the fix is the easy part.