TIGTA’s Annual Review of CDP Processing     

It’s the time of year when the Treasury Inspector General for Tax Administration (TIGTA) starts producing the annual reports required of it by the Restructuring and Reform Act of 1998.  It recently produced its report regarding the Collection Due Process program.  The report is short. 

To produce the report, TIGTA looked at a sample of CDP and Equivalent Hearing cases designed to produce a picture of CDP performance with a 95% accuracy rate.  This year it reported that in FY 2021 there were 28,667 CDP and Equivalent Hearing cases closed.  It sampled 91 of those cases finding that “Appeals complied with most of the I.R.C. and Internal Revenue Manual 8.22.4, Collection Due Process Appeals Program (May 12, 2022), requirements for processing hearing requests.”

The one area where TIGTA dinged Appeals, an area where it has dinged Appeals before and we have discussed before, here, here and here, concerned the statute of limitations on collection (CSED).  TIGTA found that in 20% of the reviewed cases the IRS got the CSED wrong.  In 10 of the cases it got the CSED wrong in a way that incorrectly extended the statute of limitations.  Based on this sample, it projected that 3,233 of the CDP and Equivalent Hearing cases closed in 2021 would have incorrect CSED in which the IRS sought to collect from taxpayers after the CSED expired.  This is way too high an error rate and it’s not the first time a high CSED error rate has been reported.  The IRS has got to learn how to calculate the CSED.

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TIGTA found that in 8 cases in its sample the IRS miscalculated the CSED in  a way that wrongly reduced the period the IRS had to collect.  It extrapolated that this meant 2,586 of the CDP cases closed in 2021 had the CSED shortened.  While shortening the CSED does not imping on the taxpayer rights of the individual taxpayer, it does mean that collectively the taxpayers of the United States may not have as much collected from people who owe.

Calculating the CSED is hard with the exceptions that currently exist and the way they operate.  If the IRS cannot get this right – and it has demonstrated over a relatively long period of time that it cannot – perhaps Congress should look at simplifying the process.  The most obvious place to simplify it would be to do away with the really confusing extension related to installment agreements.  Eliminating that statute extension would probably bring the IRS error rate down significantly but TIGTA does not provide us with an analysis of the mistakes that it found.  Had it done so, it would have provided the IRS and the public with a better roadmap for pursuing success.

TIGTA found that Appeals correctly classified CDP and Equivalent Hearing requests; however, it did so based on the criteria published in the IRM and not based on case law.  TIGTA does not address cases in which a taxpayer sends in a CDP request after the 30 day period based on a good excuse or sends the CDP to the timely but not to the office requested by the IRS.  Because it does not look for these types of cases, TIGTA misses an opportunity to assist the IRS in updating its outdated IRM provisions.  It audits based on what the IRS says and not what the IRM should say.

TIGTA also does not audit the CDP letter which does a poor job of advising taxpayers of their rights.  It might consider in future years looking at why the uptake rate of CDP cases is so low and how that relates to the notice received by taxpayers.

For this year we know that the Appeals, and the IRS generally, struggles with the CSED.  Looking for ways to fix that other than continuing to point to IRM compliance might provide an overall benefit to the system.

Prior Opportunity and Other Collection Due Process Information

At the Court Practice and Procedure committee during recent ABA Tax Section meeting there was a panel on Collection Due Process (CDP.)  The panel put up some statistics on CDP from a few years ago that I will put into this post.  It also discussed a 15 year old case precedential CDP case, Perkins v. Commissioner, 129 T.C. 58 (2007) to highlight the narrow path it presents for obtaining a hearing on the merits of the underlying tax in contrast to most prior opportunity cases.  The panel also discussed the very recent case of Jackson v. Commissioner, T.C. Memo 2022-50 regarding the issue of variance in CDP cases.  In addition to providing the statistics, I will discuss the two cases.

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The first slide depicts the number of CDP cases filed in the past two fiscal years:

The second slide provides data from 2018 regarding the percentage of taxpayers who make CDP requests:

The third and fourth slides provides information about the taxpayers most likely to make CDP requests:

In addition to discussing characteristics of typical CDP petitioners, the panel discussed the narrow path to getting the Tax Court to look at the merits of an assessable penalty provided by the Perkins case.  As we have blogged about in some depth, the Tax Court takes the view that having the opportunity to go to Appeals counts as a prior opportunity for purposes of determining if a taxpayer may raise the merits of the underlying liability in a CDP case.  Here is a link to a post discussing prior opportunity and linking to several other posts on this issue.  The concern arises regularly in assessable penalty cases such as the three cases Lavar Taylor took to the circuit courts and discussed in posts found in the linked post; however, it arises in other contexts as well. 

I find it unsatisfactory that a visit to Appeals qualifies as a prior opportunity.  Taxpayers had that type of opportunity prior to the passage of the CDP legislation.  Why would Congress have passed a statute giving taxpayers an opportunity to contest the merits of their liability that they already had?  The tenor of the statute seemed to be one of a broad exception to the Flora rule but which has now been interpreted to create a very narrow exception to the Flora rule and one which is almost impossibly narrow of the case of Lander v. Commissioner, 154 T.C. No. 7 (2020) is taken to its logical extreme since every taxpayer who does not receive their notice of deficiency has the opportunity to seek audit reconsideration.

A long introduction to reach the narrow exception provided by Perkins for obtaining a merits hearing in a CDP case.  In Perkins the IRS sent a math error notice and Mr. Perkins did not respond within 60 days allowing the math error assessment to stand without requiring the IRS to send a notice of deficiency; however, he appealed the increase in a letter that was forwarded to Appeal. While the case was pending in Appeals, the IRS sent a notice of intent to levy and he requested a CDP hearing in which he sought to contest the merits of the assessment.

Before Mr. Perkins had his CDP hearing, Appeals held a hearing on his original request treating it as a request for abatement and denying the request. In his CDP case Appeals declined to hear his merits request again stating he had a prior opportunity to contest it.  The Tax Court held that because his first request for an Appeals hearing was still pending at the time of his CDP request he had not had a prior opportunity.  The panelist at the ABA took the position that the same situation that faced Mr. Perkins could occur in other setting, such as assessable penalties, if the appeal of the merits of the assessable penalty was still pending at the time the taxpayer received the CDP notice.  Given the delays at Appeals caused by the pandemic, the chance that Appeals might take a long time to resolve an administrative appeal of an assessed liability may exist now to a greater extent than might ordinarily be true.

I don’t know how often collection of the tax gets out in front of an administrative appeal on the merits of an assessed liability.  Keeping Perkins in mind for those situation is important but may provide a benefit only in rare situations.

In the Jackson case the Court granted a summary judgment motion filed by the IRS.  In the Jackson case the taxpayers did not remit full payment with the return and the unpaid balance was high enough that the IRS filed a notice of federal tax lien (NFTL.)  The Jacksons did not file a CDP request in response to the NFTL.  They sought an installment agreement which the IRS rejected after which it sent a notice of intent to levy.  They did request a hearing in response to this CDP notice.  Petitioners sought an installment agreement in the CDP hearing; however, the Settlement Officer informed them that because they had failed to make necessary estimated tax payments their lack of compliance rendered them ineligible for this relief.  Appeals issued a notice of determination sustaining the proposed levy.

In Tax Court petitioners continued to seek an installment agreement but also abatement of interest and penalties.  The Court viewed this additional request as a variance from the issue raised in their CDP request.  It pointed to its prior decisions requiring taxpayers to raise issues with Appeals if they wanted to raise them with the Tax Court:

This Court considers a taxpayer’s challenge to an underlying liability in a collection action case only if he or she properly raised that challenge at the administrative hearing. Giamelli v. Commissioner, 129 T.C. 107, 115 (2007). An issue is not properly raised at the administrative hearing if the taxpayer fails to request consideration of that issue or if the taxpayer requests consideration but fails to present any evidence after receiving a reasonable opportunity to do so. Id. at 115-16; Gentile v. Commissioner, T.C. Memo. 2013-175, at *6-7, aff’d, 592 F. App’x 824 (11th Cir. 2014).

The Petition in this case appears to assign error to respondent’s assessments of section 6651(a)(2) additions to tax and statutory interest for the years in issue. However, respondent asserts that petitioners never challenged their underlying liabilities at the CDP hearing, and we agree. The record of the CDP hearing includes no evidence that petitioners challenged their liability for the additions to tax or sought an abatement of interest. Neither petitioners’ Form 12153 nor the attached cover letter references additions to tax or interest. Furthermore, SO Melcher’s case activity record indicates that Mr. Bolton specifically disclaimed a challenge to the assessments in issue during their telephone conference. According to SO Melcher’s notes, the only issue Mr. Bolton raised during their telephone conference was the rejected installment agreement. Petitioners have not set forth any evidence suggesting otherwise.

The Jackson case does not raise new issues. It merely serves as a reminder to raise all issues when requested a CDP hearing.

Dial, redial, repeat

We welcome back guest blogger Barbara Heggie. Barb is the supervising attorney for the Low-Income Taxpayer Project of 603 Legal Aid in Concord, New Hampshire.  Her clinic serves taxpayers through the Granite State and is the only LITC in the state.  Today, she describes a recent experience in trying to assist a client.  Her effort reminds us of the difficulties facing taxpayers and practitioners trying to reach the IRS in the first place and trying to reach the “right” part of the IRS.  We recently discussed one of the impediments to reaching the IRS in our post on fee based calling which pushes human callers to the back of the line. Keith

Most people think of the autonomic nervous system as confined to such unconscious bodily processes as breathing, digestion, and heart rate. But most of you reading this have probably added another to the list – (re)dialing the IRS. Pandemic-related staffing shortages, antediluvial technology, and a private robocalling industry have teamed up to render uncertain the once-inviolable privilege of being placed on hold for an hour. Instead, any attempt to reach the IRS by phone, even via the Practitioner Priority Service (PPS), will likely end with this now-familiar recording: “We are sorry, but due to extremely high call volume in the topic you requested, we are unable to handle your call at this time.” A new callback option can spare us the slow torture of short-looped, wondrously-insipid hold music, but it can’t spare us the agony of trying to get there.

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Dial, redial, repeat.

This is all the more agonizing when we realize that a few well-placed, taxpayer-centric changes at the IRS could make this time suck a complete non-necessity. The National Taxpayer Advocate (NTA), Erin Collins, has written here and here about the robocalling problem and the low levels of telephone service at the IRS. And see here for several seemingly doable suggestions regarding economic hardship and collection processes by former NTA Nina Olson in her 2018 Annual Report to Congress.

Last week, I called PPS for a disabled domestic violence survivor subsisting solely on $1,020/month in Social Security Disability Insurance payments. She has a joint tax liability with her estranged husband, and she’s terrified he’ll get to her through the IRS. Each new collections notice sent her to the phone, anxious to explain her circumstances and request some sort of forbearance. But she couldn’t get past the “extremely high call volume.”

She came to me for help, and we decided I would start by asking the IRS to (1) record her balance-due accounts currently not collectible, due to financial hardship, and (2) place a domestic violence marker on all her accounts to prevent the IRS from releasing any of her contact information to an unauthorized person, including her husband. Conceivably, each of these requests could be made in writing, but much harm could come to this client while waiting for the IRS to process such submissions. A call to the IRS was required.

After dialing PPS sixteen times, each attempt involving a must-listen to various recorded messages, I made it onto the queue. Huzzah! I readily agreed to the callback option and got connected to a customer service representative (CSR) a half an hour later, just as promised. He placed a Victim of Domestic Violence (VODV) marker on my client’s accounts but said he could not record her balances uncollectible. I was surprised, given that I had chosen the menu option for “individual accounts already in collections, ACS.” Moreover, for balances at my client’s level, the Internal Revenue Manual requires no Collection Information Statement (CIS) if the only source of income is Social Security. But there had been a change in procedures, the CSR explained, and he offered to transfer me to the “real” Automated Collection System (ACS), where someone could do as I had requested.

Rather than have him transfer me, however, I decided to call PPS again – not because I thought a different CSR would give me a better answer, but because this one wasn’t able to send me the transcripts I wanted due to some equipment failure he was experiencing, and I wasn’t sure an ACS CSR would have the authority to do this. I hadn’t been able to retrieve the transcripts myself from the IRS Transcript Delivery Service (TDS) because . . . I don’t know. The CSR affirmed I had been listed on the accounts as an authorized representative for several days, but TDS said otherwise and refused to give up the transcripts. (This doesn’t appear to be an isolated incident; recently, many others in the Low-Income Taxpayer Clinic community have reported the same problem.)

Thus, I called PPS again.

Dial, redial, redial,

redial, redial, redial,

redial, redial, redial,

redial, redial, redial.

Just twelve times! The second PPS CSR got me the transcripts but said the same thing as the first one; the CNC request can only be handled by ACS personnel, no matter the circumstances. (A week later, TDS is still denying me access to these accounts.)

The CSR offered to transfer me to ACS, and this time I agreed. After a few minutes, another CSR picked up the line, and I made my simple pitch: please record my client’s balance-due accounts as uncollectible because her only income is Social Security and she’s experiencing financial hardship. This CSR, #3 of the day, said he couldn’t see any debt under my client’s SSN – and, therefore, couldn’t help me. I stressed it was a joint liability, with my client listed as the secondary on the account. The CSR responded that this explained the problem and asked if I had any other questions. Telling him that the previous two CSRs of the day hadn’t had any such problem left him unfazed. When he suggested transferring me to “Collections,” I agreed, not bothering to ask where I had been the whole time.

The beauty of a unit-to-unit transfer is that you bypass the hold queue and go straight to a CSR picking up your line. At least, that’s how it used to be. This time, it took over two hours – the longest hold time I’ve ever encountered. Luckily, however, CSR #4 of the day was able to both see and do. I made my pitch for uncollectible status and explained the client’s income stream. The CSR verified the Social Security income, found no other sources, and granted the request for uncollectible status. As expected, she didn’t require a CIS. And by then, it was bedtime.

Fans of the Python-esque film Brazil may find some commonalities.

What are the Most Litigated Issues and What’s Happening in Collection?

This year the National Taxpayer Advocate took a new approach to calculating the most litigated issues in her annual report.  You can read about her approach starting on page 183 of the report.   Instead of just looking at the tried cases, which she does capture, she also looks at the cases in which taxpayers filed a Tax Court petition.  It’s all in how you define litigation.  Is it best measured by the relatively small number of cases that get tried and receive an opinion, i.e., looking at the end of the case where about 1% of the filed cases end up, or by looking at the filed cases in which taxpayers started litigation but for a variety of reasons did not follow it to a conclusion by trial and opinion?  Since she gives you both sets of data, it’s hard to complain no matter which set of information you prefer.

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Here are the charts, with the first one based on opinions issued and the second one on petitions filed:

Some things come out the same in either measure as the report states:

[Gross income disputes] was the number one issue among those litigated in the Tax Court with 66 substantive opinions issued. It was also the largest category of cases petitioned to the Tax Court. In FY 2021, taxpayers petitioned the Tax Court in 13,558 cases where gross income was an issue during the examination.

In the same vein, trade or business disputes came in second under both methods:

50 opinions where this category of issues was litigated in the Tax Court. Taxpayers petitioned the Tax Court in 2,255 instances where trade or business expenses were an issue during the examination in FY 2021.20 This category is high on our list as the second most prevalent category of opinions issued at the Tax Court and the second most petitioned issue in the Tax Court.

Collection due process notices and hearing requests continue to fall.  Some of the falloff in the most recent period is no doubt attributable to the pandemic, but the trend was set before Covid arrived.  Here is a graph displaying the trend:

The report gives more details and explanations for those interested.  It also included a chart on the number of family status cases petitioned to the Tax Court.  The number of Earned Income Tax Credit (EITC) cases seems low when you read about the number of EITC audits.

This section of the report also contains an analysis of the number of non-Tax Court cases litigated during the past year.  Even more than the CDP filing chart above, a chart showing the number of lien cases referred to the Department of Justice shows a precipitous decline.  Perhaps, the decline should come as no surprise given the decline in revenue officers over this period.  Without revenue officers to initiate these cases, there can be no referrals to DOJ.  The number is getting close to approaching zero which is bad news for tax administration.  Again, of course, the pandemic plays a role, but the slide started before the pandemic arrived.

This is a good time to mention an excellent article recently published in Tax Notes regarding collection or the need for more resources at the IRS in order for it to engage in meaningful collection efforts.  Attached is the article.  The decline in suits is more than matched by the decline in liens, levies and seizures.  The chart below shows the amazing decline in these activities.  This chart shows not only the recent drop off as a result of the pandemic but also the 10-year decline as the IRS’ resources were squeezed by Congressional budgetary action.

No big surprises that the IRS is struggling in its enforcement efforts, that these efforts have declined significantly over the past decade or that they declined significantly during the pandemic.  Still, a pretty bleak picture of the IRS’ ability to pursue meaningful collection action when needed.

Disclosure of Collection Activity with Respect to Joint Returns

It’s the annual season for the reports from TIGTA mandated by Congress in 1998 and never unmandated.  So, each year TIGTA dutifully expends its resources on the problems Congress was concerned about in 1998, whether or not anyone is concerned about those issues today.  Some of the issues on which TIGTA writes its reports show that the IRS has persistent problems which, year after year, it cannot seem to fix.  One of the areas on which TIGTA reports annually and which the IRS cannot seem to fix is disclosing information on joint returns.  I wrote about this topic in 2020 and I wrote about this topic in 2018 when the annual TIGTA reports were released.  I probably sound like a broken record by writing on the topic this often, but the IRS needs to train its employees so they understand how the law works. 

Congress recognized that in certain situations the collection of a taxpayer’s liability is tied to payments potentially made by others.  In these situations, prior to the change in the law creating an exception to the disclosure laws and allowing the IRS to provide information to jointly liable parties, it was impossible to obtain information about payments from those jointly liable parties.  The TIGTA report shows that it can still be a practical impossibility to obtain this information, even though Congress opened the door allowing those jointly liable to learn of payments made, or not made, by the jointly liable person.

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The most recent TIGTA report on IRS compliance with the law allowing taxpayers access to information on joint accounts suggests that taxpayers still struggle to obtain this information.  The IRS continues to experience difficulties when it sets up mirrored accounts.  Read the prior post from 2020 linked above if you are unfamiliar with mirrored accounts.  These accounts create difficulty for the IRS and taxpayers alike who do not understand when they exist and how they operate.  Here is the primary finding of this year’s report, which sounds much like the primary finding from each of the last five years:

We reviewed judgmental samples of 124 Accounts Management case histories and 20 Field Assistance case histories documented in the Account Management Services system related to joint filer collection information requests in the W&I Division.7 Based on our review, we determined that employees did not follow the joint return disclosure requirements in 26 (21 percent) of the 124 Accounts Management customer service representatives’ history files and three (15 percent) of the 20 Field Assistance individual taxpayer advisory specialists’ history files. The 29 cases were errors because employees did not provide the requested collection activity to the divorced or separated spouse as required by law. In most cases, employees incorrectly stated that they could not provide any collection activity on the other joint taxpayer, such as whether the other taxpayer made a payment or the current collection status, because the taxpayers were no longer married nor living together. As a result, these 29 taxpayers or their representatives were potentially burdened with additional delays in resolving their respective tax matter. This has been a recurring issue for the last five years and we have made recommendations for the respective IRS business units we have reviewed to update the IRM as well as to provide additional training to their employees. The IRS should continue to address this issue in its respective business unit IRMs that provide guidance to employees who may respond to taxpayer inquiries about a joint return matter.

We also observed that 10 (38 percent) of the 26 cases with disclosure errors in Accounts Management and all three of the cases with disclosure errors in Field Assistance had “mirrored accounts.” Mirroring a joint account sets up two accounts, one for each of the taxpayers. Establishing two separate accounts provides the IRS a means to administer and track collection activity unique to each of the taxpayers. Each taxpayer remains jointly liable for the entire debt; i.e., mirroring an account does not divide the liability in half. Because joint filer taxpayers remain jointly liable, the same collection information, when requested, on mirrored accounts should be disclosed to both taxpayers as would be disclosed on any other jointly filed return, except when the request is for unrelated personal information.

In addition to looking at case files, TIGTA interviewed IRS employees, with 8 out of 24 responding incorrectly regarding information that could be provided to a divorced spouse when the question involved a “regular” account and 15 out of 24 responding incorrectly when the question involved a mirrored account. 

Problems not only occurred when asking the employees questions regarding information that should be disclosed to the former spouse.  TIGTA asked the IRS employees questions that made it clear the employees would provide information they were not authorized to disclose, including:

providing information about the other spouse’s location, name change, or telephone number; information about the other spouse’s employment, income, or assets; the income level of the other spouse at which a currently not collectible module would be reactivated; or the bankruptcy chapter filed by the other spouse.18 When asked questions about a taxpayer who was divorced or separated, five employees (21 percent) of the 24 interviewed responded that they would disclose some of these prohibited items about the other spouse.

This year’s responses continue to point to disclosure of information regarding ex-spouses as a weak point for the IRS.  The law allowing some disclosure of information was enacted 25 years ago.  Almost all of the persons surveyed would have started work at the IRS after the law went into effect.  This is not a case of changes in the law creating confusion.  Yet, confusion continues to persist.

It’s not clear if the problem is that the employees need more training or better training.  The persistent existence of problems in this area which TIGTA identifies year after year should cause the IRS to change its method of training employees so that it can ensure compliance with the law both for the benefit of ex-spouses seeking information and employees trying to keep from violating disclosure laws.

BC 507(a)(8)(C) Priority Prevents Discharge under BC 523(a)(1)(A)

Last week I wrote about the case of Lufkin v. Commissioner, T.C. Memo 2021-71, in which the Tax Court ruled on the impact of filing bankruptcy on the statute of limitations.  In that post, I mentioned that Bryan Camp wrote about the case as part of his Lessons from the Tax Court series, which alerted me to the decision.  In that same post Bryan also wrote about Barnes v. Commissioner, T.C. Memo. 2021-49, which Judge Lauber decided on May 4, 2021.  As with the Lufkin case, Bryan has a good write-up, and he provides good bankruptcy background information.  I will try to add a little additional color to the case.

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The Barnes case shows what happens when a taxpayer goes into bankruptcy while still contesting a liability.  As taxpayers learn, the result does not favor the taxpayer in a situation in which the unresolved liability gets resolved after the bankruptcy filing and the resolution allows the IRS to assess an additional amount.  The Tax Court must work through the bankruptcy provisions to get to the correct result which it does as it demonstrates again that bankruptcy discharge issues can find their way into Tax Court decisions requiring the Tax Court judges to understand bankruptcy law as they rule on tax collection issues.

When Mr. and Mrs. Barnes entered bankruptcy, they were still waiting for the Tax Court to make a decision on their 2003 liability.  They filed the Tax Court petition in 2008 and tried the case in June 2009.  They had submitted their briefs in the case when, on July 26, 2010, before the issuance of an opinion, they filed a chapter 11 petition.  The filing of the bankruptcy petition stayed the Tax Court proceeding and would have caused the Tax Court judge working on the opinion in their case to hold onto the opinion.  While the automatic stay stops the Tax Court proceeding, I don’t know if Tax Court judges interpret it as stopping them and their clerks from working on the case, or if it just stops them from issuing an opinion.  My guess is the latter, but I have not spoken with a Tax Court judge about how strictly the Tax Court interprets the stay.  Perhaps the Tax Court judges interpret the stay to require them to completely stop working on the opinion until the stay lifts, or perhaps there is a split among the judges regarding how they interpret the stay when it comes into existence during the opinion-writing stage of a case.

In any event, the existence of the unresolved Tax Court case means that as to the liability at issue in the Tax Court, the debt in the bankruptcy court for that unresolved liability would receive priority status under BC 507(a)(8)(A)(iii) because the liability was not yet assessed but was assessable. Here, the Barnes filed a chapter 11 case, which requires in BC 1129 that they commit in their plan to fully pay all priority claims.  The IRS participated in the plan and filed a proof of claim; however, it failed to include in its claim the 2003 liability.  The Barnes could have filed a claim on behalf of the IRS for 2003 or could have included 2003 in their plan, but the plan did not include the 2003 liability.  It’s hard to know whether this was oversight by one or both of the parties or a calculated decision.  The Barnes may not have wanted to commit to paying the $50K or so the IRS thought was due and may have been stretched to come up with a plan that would have paid it over time.  The IRS may have preferred to collect outside of bankruptcy and not lose the interest it would lose if paid through bankruptcy.  In any event, 2003 was not addressed.

Note that chapter 11 cases for individuals occur relatively infrequently.  If this were a chapter 11 filed by an entity, an oversight of this type could have ended the IRS’s hopes for any recovery on 2003 because of the super discharge available in chapter 11 to entitles.  That super discharge is not, however, available to individuals who must look to BC 523(a) for the discharge provisions and that’s where the Barnes lose their case with respect to the tax.

The chapter 11 plan, silent as to 2003, was confirmed.  The Tax Court says the automatic stay remained in place while the debtors made their plan payments.  In November 2011, the IRS filed a motion to lift the stay to allow the Tax Court case to move forward, which the bankruptcy court granted.  On April 2, 2012, the Tax Court entered its opinion.  Although the Barnes appealed the Tax Court opinion to the D.C. Circuit, they, like 99.9% of Tax Court petitioners who appeal, did not post a bond to stay assessment.  The IRS assessed on August 1, 2012.  The IRS eventually filed a notice of federal tax lien which allowed the Barnes to make a collection due process (CDP) request, which eventually led to the second Tax Court opinion regarding 2003 – this one only 18 years after the tax year, though the delay was not due to the Tax Court, which had acted reasonably expeditiously in both cases.

The Barnes’ first argument in the CDP case was that the 10-year statute of limitations on collection had ended before the IRS filed the notice of federal tax lien.  This argument makes absolutely no sense given that the assessment date for the 2003 liability is in 2012.  The Tax Court was gracious in noting that the collection statute remained open.

Next, the Barnes made another argument that made no sense – that the 2003 liability was discharged by the bankruptcy case.  Again, the Tax Court graciously pointed out that the liability was entitled to priority because it was not yet assessed but still assessable at the time of the bankruptcy petition.  Since they were represented, I am surprised by both arguments.

The Barnes requested an offer in compromise, but the IRS determined they had the ability to fully pay the debt.  Since they did not agree with that determination or did not want to pay the debt in full, the IRS determined the filing of the notice of federal tax lien was valid and the lien did not need to be released or withdrawn.  The Tax Court sustained this determination by ruling for the IRS in response to a motion for summary judgment.

Tax and penalty liability do not travel on the same discharge path in BC 523.  The penalty for late filing and the penalty for accuracy were discharged because they are governed by BC 523(a)(7) rather than 523(a)(1).  The provision for penalties essentially allows their discharge if three years has passed from the due date of the return at the time of the bankruptcy filing.  The Tax Court notes that these two penalties were discharged.  The interest on the penalties would likewise be discharged just as the interest in the tax would not.

Note that if the Barnes had owed taxes based on their return and not their deficiency case, the taxes owed which were shown on their return would have been discharged subject to an argument regarding the one-day rule, which the IRS would not raise and which the D.C. Circuit has not decided.  It’s possible for a taxpayer having liabilities that arise at different points in time to achieve different discharge results based on the timing of the liability vis a vis the timing of the filing of the bankruptcy petition.

If you have not read one of the many posts regarding the one-day rule, you can read one here which links to others.  The late filing of the 2003 return could itself have posed a basis for losing the ability to discharge any taxes due on 2003 had they filed bankruptcy in the 1st, 5th or 10th Circuits.  No one raised that argument in this case, and I mention it just because there was a late filing penalty assessed.

Buying Property from the IRS

A short Chief Counsel Advisory opinion provides a cautionary tale for those purchasing property from the IRS.  CCA 2021021011190596 explains that if the buyer at an IRS sale does not follow through and make all of the payments necessary to complete the purchase, the IRS can declare the sale null and void.  When it does so, the purchaser forfeits all of the payments made to that point and the IRS can resell the property.

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When the IRS seizes real or tangible property, IRC 6335 governs the sale.  Subsection (a) provides:

As soon as practicable after seizure of property, notice in writing shall be given by the Secretary to the owner of the property (or, in the case of personal property, the possessor thereof), or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district, the notice may be mailed to his last known address. Such notice shall specify the sum demanded and shall contain, in the case of personal property, an account of the property seized and, in the case of real property, a description with reasonable certainty of the property seized.

The IRS created a special unit within the collection division to deal with sales because the rules governing sales are specific, the number of sales is not that great, and the effort of revenue officers (ROs) to follow the technical rules created too many problems and took the ROs too much time.  So, once the IRS seizes property, the RO in charge of collecting from the taxpayer turns the property over to the PALS unit for it to conduct the actual sale.  If the sale results in full satisfaction of the tax liability, then the RO is finished with the case.  If the sale does not result in full satisfaction, which is probably the more likely outcome, then the RO continues to pursue collection.

Since RRA 98, the IRS has conducted relatively few seizures and therefore holds relatively few sales.  Because these events occur infrequently, no one at the IRS becomes familiar with the process as a routine.  I suspect that certain ROs conduct most of the seizures and some never do so.  Similar to the lack of deep knowledge on the IRS side because of the low number of seizures and sales is the lack of deep knowledge on the buyer side.  Buyers must understand what they are purchasing if they buy property from the IRS and the failure to understand the rules that govern purchases can lead to unhappy outcomes.  Purchasing property from the IRS at one of these sales will look like a real bargain and it could be.  It could also be a trap for the unwary.

IRC 6335(b) provides the rules regarding the notice of sale that the IRS must give:

The Secretary shall as soon as practicable after the seizure of the property give notice to the owner, in the manner prescribed in subsection (a), and shall cause a notification to be published in some newspaper published or generally circulated within the county wherein such seizure is made, or if there be no newspaper published or generally circulated in such county, shall post such notice at the post office nearest the place where the seizure is made, and in not less than two other public places. Such notice shall specify the property to be sold, and the time, place, manner, and conditions of the sale thereof. Whenever levy is made without regard to the 10-day period provided in section 6331(a), public notice of sale of the property seized shall not be made within such 10-day period unless section 6336 (relating to sale of perishable goods) is applicable.

IRC 6335(e) governs the manner of sale.  It is the rules set forth in this section that are the focus of the CCA.  The IRS should not seize and sell property that has no equity.  In order words, it cannot just seize property to cause the taxpayer an inconvenience.  It actually did that prior to 1980 as a way of disrupting businesses that were pyramiding their taxes.  Now, the RO needs to make a determination prior to seizure that the sale will bring positive dollars to the Treasury.  Instead of seizing property with no equity, the IRS now brings injunction action against taxpayers who pyramid and who it cannot shut down with administrative action as discussed here and here

Of course, the RO could make a mistake in determining value, but the RO cannot just seize property to thwart the taxpayer from conducting business.  One of the other reasons seizures are down since 1998 is that a willful failure by the RO in the seizure could trigger the application of sin number one of the 10 deadly sins resulting in possible termination of employment.  We have written about the 10 deadly sins here and here.  Some ROs do not want to take that risk, which means ROs will be, or certainly should be, very careful when deciding to seize property and following through.

The manner of sale rules under IRC 6335(e) provide:

(1) In general

(A) Determinations relating to minimum price.

Before the sale of property seized by levy, the Secretary shall determine—

(i)

a minimum price below which such property shall not be sold (taking into account the expense of making the levy and conducting the sale), and

(ii)

whether, on the basis of criteria prescribed by the Secretary, the purchase of such property by the United States at such minimum price would be in the best interest of the United States.

(B) Sale to highest bidder at or above minimum price

If, at the sale, one or more persons offer to purchase such property for not less than the amount of the minimum price, the property shall be declared sold to the highest bidder.

(C) Property deemed sold to United States at minimum price in certain cases

If no person offers the amount of the minimum price for such property at the sale and the Secretary has determined that the purchase of such property by the United States would be in the best interest of the United States, the property shall be declared to be sold to the United States at such minimum price.

(D) Release to owner in other cases

If, at the sale, the property is not declared sold under subparagraph (B) or (C), the property shall be released to the owner thereof and the expense of the levy and sale shall be added to the amount of tax for the collection of which the levy was made. Any property released under this subparagraph shall remain subject to any lien imposed by subchapter C.

In the case on which the CCA focuses, an RO has seized property, turned it over to the PALS who have sold it with a provision that the purchaser will pay something down and something over time.  The purchaser has defaulted on one of the subsequent payments.  The CCA determines that the appropriate IRS official can declare the purchaser in default and the purchase null and void.  This will give the IRS the chance to resell the property while keeping the payments it received from the first purchaser.  The CCA does not talk about who will benefit from the defaulted proceeds – the taxpayer or the IRS.  That’s governed by another provision.

The CCA notes that:

Discretion to return to the purchaser any portion of the amount paid is not stated in or implied in the Code or the Treasury Regulations. Both provide that any amount paid by a defaulting bidder “shall be forfeited.” I.R.C. § 6335(e)(3); Treas. Reg. § 301.6335-1(c)(9). Similarly, there is nothing in the IRM that suggests any circumstances under which the Service would have the ability to return any portion of the amount forfeited under section 6335(e)(3). In fact, the IRM has special accounting procedures for how the Service is to handle forfeited bid-in amounts. See I.R.M. 5.10.6.5.1(2) (cross-referencing I.R.M. 3.17.63).

The IRS will take the forfeited amounts and place them in the general treasury account, meaning that the taxpayer will not get the benefit of the forfeited payments, but instead, the general public gets those benefits.  The taxpayer may benefit if the next sale brings in more money or may lose if it does not.

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.

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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.” 

Assessment

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.

Collection

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.