Suspension of Collection Statute of Limitations Redux

Les and I have blogged previous cases involving Mr. Weiss here, here and here.  Thanks to sharp eyes by Carl Smith, we get to revisit Mr. Weiss in his continuing, and long lasting, journey along the path to tax compliance.  When we first wrote about Mr. Weiss, he had a Collection Due Process case underway in which he argued that he was purposefully attempting to file an equivalent hearing so that the statute of limitations on collection would run.  The problem he had with the argument stemmed from a difference between the date on the CDP notice and the date of actual delivery to the postal service.  In his case the revenue officer (RO) attempted to hand deliver the CDP notice, but a dog prevented him from making it up the driveway. So, the RO went back to his office where two days later, the RO mailed the CDP notice using certified mail but did not change the date on the notice itself from the date it bore on the date he attempted personal delivery. The taxpayer claimed that the earlier date on the notice governed the 30-day period within which he needed to file a timely CDP request.  The Tax Court held that the date of mailing governs and not the date on the notice.  He unsuccessfully appealed that decision as discussed further below. And for further discussion, Jack Townsend has also written about this case here.

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In 2019, the Department of Justice (DOJ) brought a collection suit against Weiss for his self-reported taxes shown on his 1986-1991 returns seeking to reduce the assessment to judgment.  He filed all those returns late in 1994.  By the time the suit was filed, he owed about $800,000.  How could the collection statute of limitations (CSED) remain open more than 15 years after it would normally have expired?  The opinion of the court does an excellent job detailing the facts and walking carefully through all of the suspensions that occurred.

Mr. Weiss filed bankruptcy three times.  Filing bankruptcy extends the CSED from the time of the bankruptcy petition until the lifting of the automatic stay plus an additional six months.  Depending on the type of bankruptcy, this period can add several years to the CSED. Then he received a notice of intent to levy (NOIL) and requested a CDP hearing, petitioned the Tax Court (in 2011), appealed to the D.C. Cir., then unsuccessfully sought cert.  This part of his collection history is chronicled in the prior blog posts referenced above.  The consequence of three bankruptcy cases and one very long CDP case is that the IRS calculated the statute of limitations on collection remained open as of the date of the filing of the suit against Mr. Weiss.  Because of the amount of money he owed combined with some belief at the IRS that he had assets which would at least in part exist to satisfy the liability, the RO assigned to his case, perhaps the same one last seen running from the dog in Mr. Weiss’ yard, recommended that the government file suit, the IRS Chief Counsel’s office concurred as did DOJ.

In the collection suit, Mr. Weiss moved for summary judgment once again arguing that the CSED had expired by the time the DOJ brought suit.  His argument in this case differed from his argument in the CDP case which is a good thing, since he would have been barred from making the exact same argument again.  Here he argues that the filing of the request for cert with the Supreme Court did not extend the CSED.  Here is the pertinent tolling language from 6330(e)(1):

[I]f a hearing is requested under subsection (a)(3)(B), the levy actions which are the subject of the requested hearing and the running of any period of limitations under section 6502 . . . shall be suspended for the period during which such hearing, and appeals therein, are pending. In no event shall any such period expire before the 90th day after the day on which there is a final determination in such hearing.

Mr. Weiss argued that a cert. petition is not an “appeal” under the terms of the statute, since it is discretionary and not called an appeal.  The district court, in an opinion dated May 21, denied the motion, holding that a cert. petition is an appeal.  The district court says that a cert. petition is commonly called an appeal, even if it technically isn’t.

The district court’s opinion does not surprise me.  I will also not be surprised if Mr. Weiss decides to appeal the opinion.  I do not say that because I think he will win his appeal.  In the end, if Mr. Weiss decides not to appeal or loses on the appeal, the IRS will have a judgment against him.  As discussed in a prior post, the judgment will give the IRS many more years to attempt to collect from him.  We may have further opportunities to discuss tax procedure issues related to Mr. Weiss.  

In addition to bringing the case to my attention, Carl also reminded me that the language concerning Mr. Weiss in the most recent case is language that has created some controversy in the CDP area before because Congress chose the wrong language to describe a petition to the Tax Court. The opinion doesn’t mention the fact that in 2015, 6330(d)(1) was amended to cease calling the Tax Court proceeding an appeal. While it fixed one problem regarding the language it used to describe the filing of a Tax Court petition, Congress forgot at that time to conform the language in 6330(e)(1).  But, the Tax Court proceeding was called an “appeal” at the time that Weiss petitioned from his wrongly dated CDP notice. 

Carl reminded me that any work done on fixing CDP should make sure to ask for this technical correction to conform 6330(e)(1) language to 6330(d)(1)’s current language. There are two sentences in section 6330(e)(1) that need to be fixed — the above-quoted one and the final sentence, which reads:  “The Tax Court shall have no jurisdiction under this paragraph to enjoin any action or proceeding unless a timely appeal has been filed under subsection (d)(1) and then only in respect of the unpaid tax or proposed levy to which the determination being appealed relates.”  Perhaps Mr. Weiss’ argument concerning the description of the request for cert. will cause a tightening and conforming of the language in the statute the next time it is amended.  If it does, then some good will have come out of the lengthy effort to collect from Mr. Weiss.

Sending Notices with Bad Dates

On June 22, 2020 National Taxpayer Advocate Erin Collins issued a blog post advising readers to keep an eye out for notices with expired action dates.  The post notes that “during the shutdown, the IRS generated more than 20 million notices; however, these notices were not mailed.  As a result, the notices bear dates that now have passed, some by several months and some of the notices require taxpayers to respond by deadlines that have also passed.” I will repeat myself once or twice in this post but if I am reading it correctly the IRS is knowingly and intentionally creating a false entry on thousands, perhaps tens of thousands, of taxpayers’ official records of account.

The NTA describes as a silver lining the fact that the IRS is granting additional time to respond before interest or penalties apply and that the IRS is putting inserts with the letters to explain something about the mismatch in the date of mailing and the dates on the letters.  I will talk more about some of the letters the NTA mentions in her blog post.  I found myself wondering about several things that were not explained in the NTA’s blog post.  Why did the IRS print these notices?  Why doesn’t the IRS shred the notices and recycle the paper in order to issue new notices with the proper dates on the notices?  Why hasn’t the IRS issued a news release or Tax Tip about the notices to alert taxpayers and practitioners?  Prior to the NTA blog post, the IRS only released this information though its National Public Liaison (NPL), which, while helpful, does not reach a wide audience. And while many people read the NTA blog posts, I don’t think it has a readership on a par with broadly released statements from the IRS.

The IRS might think it has communicated to practitioners. It pushed this news out through the NPL on June 9. The stakeholder liaison is an inadequate way to disseminate important news. On the day of the stakeholder liaison email, IRS quietly updated the page on IRS operational status to include the information. It also posted this news as a “Statement on Balance Due Notices” here.  I do not want to detract from the important discussion of the decision itself, but it is also worth mentioning that the information the IRS has made public on this situation and the method and medium of making it public, fails to signal the importance of this action.

Yesterday the NTA released her 2021 Objectives Report to Congress, which confirms the information in her blog post. Kudos to the NTA for including the problem of outdated notices in the news release accompanying the report. This will help get the word out to practitioners.

In a letter to Commissioner Rettig, Representatives Neal and Lewis expressed their concern over the outdated notices and suggested that the IRS take steps to “ensure no taxpayers are penalized” for the IRS’s inability to timely process correspondence. For the reasons explained below, this will not be easy to do if the IRS moves forward with its plan to mail the outdated notices.

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The NTA states that several dozen kinds of IRS notices will be mailed in the next month or two.  Maybe there is still time for the IRS to reconsider its decision to send out-of-date notices.  I hope so.  Here, I will discuss a few of the notices she mentioned.  Before starting the specific discussion, I note that many of these notices are required by statute.  I draw a distinction between statutorily required notices and other types of IRS notices.  While the best practice would be to send out notices on the date listed on the notice for all notices, the purposeful mailing of misdated statutorily required notices creates a more serious problem.

No matter what an insert says, the taxpayer will receive a statutorily mandated notice triggering statutorily prescribed duties and response times with the wrong date on the notice and the wrong date(s) for responding.  In the last two sentences of her blog post the NTA mentions that the IRS computer system will show as the business record of the IRS the wrong date.  She says “[c]ompounding confusion surrounding notice dates, IRS transcripts for taxpayers’ accounts will also reflect incorrect dates for some of the notices.” 

This could have grave consequences for both taxpayers and the IRS if the dates on the letters compromise the IRS business records.  First, taxpayers who do not keep the envelope and the letter may have trouble proving that the dates on the letter did not reflect the actual mailing date when making a future challenge.  Second, if the IRS builds a business record which it knows contains inaccurate information it makes all of its records suspect.  Courts regularly rely on certified transcripts from the IRS for the accuracy of the date an action took place.  If the IRS knowingly puts the wrong dates into its system of records, that calls the entire system into question.  This could have consequences for the IRS far beyond the consequences of recycling these letters and making sure that its records accurately reflect actions taken.

Here you have the NTA saying that the IRS business record is inaccurate.  That could be powerful evidence in court to strike at many IRS actions taken that stem from 2020.  It also has the potential to support grounds for damages if certain collection actions occur after a wrongful assessment or wrongful filing of a notice of federal tax lien.  It may present the possibility that in a CDP case a taxpayer may wish to lean on a rights-based failure to inform argument as a grounds to invalidate the proposed collection action.

Notice and Demand

IRC 6303 requires that the IRS send out a notice and demand letter within 60 days of the making of an assessment.  Case law going back at least three decades holds that the failure to send the notice and demand letter within the 60-day period does not invalidate the assessment but there is some possibly contrary case law.  The failure impacts the timing of the creation of the federal tax lien.  IRC 6321 and 6322 provide that the federal tax lien arises upon assessment, notice and demand and failure to pay within the demand period.  Ordinarily, failure to pay within the demand period causes the federal tax lien to relate back to the date of assessment.  If the IRS sends out the notice and demand beyond the 60-day period, the FTL will only arise upon non-payment and will not relate back to assessment.

You might say “so what,” because who cares about the FTL.  Only after the IRS filed the notice of federal tax lien (NFTL) does the IRS create a perfected lien.  The unperfected FTL still, however, has meaning.  For example, it attaches to property transferred for less than full value.  If a fight arises regarding the attachment of the FTL, the actual date of the mailing of the notice and demand letter matters.  Because of the pandemic, the IRS could not avoid sending out many notice and demand letters after the 60-day period.  Sending them out beyond the time frame must occur due to no fault of the IRS but sending a significantly backdated letter will undoubtedly confuse many recipients and may cause some to even challenge the validity of a notice which on its face asks the taxpayer to do something impossible.  If the notice and demand letter is invalid, the IRS has real problems because it would not have created the FTL, which has many consequences, including but certainly not limited to violating disclosure of a taxpayer’s liability if the IRS records a notice of federal tax lien when no underlying lien exists.

There is also the problem of the address.  The IRS must mail the notice and demand letter to the taxpayer’s last known address.  The IRS must use the taxpayer’s address as shown on the taxpayers most recently filed and properly processed return, unless clear and concise notification of a different address is provided. See, e.g., Duplicki v. Comm’r, T.C. Summary Opinion 2012-117.If these notices have been sitting in the bowels of a service center for months during the filing season, it is quite possible that many taxpayers have filed returns between the time of the creation of the notice and demand letter and the mailing of that letter.  The NTA does not mention if the insert changes the address on the letter.  I imagine it does not.  While many paper returns filed in the past few months remain in the parking lots of the service centers to which they were sent, the vast majority of taxpayers filed electronically.  Many of those returns will have gone through processing, and the IRS will know the taxpayer’s new address before these musty notices get mailed.  Mailing the notice and demand letters to something other than the taxpayer’s last known address will create an invalid notice and demand letter creating the same problems described above.  Maybe these are all notice and demand letters based on returns filed with insufficient remittance and processed early in the filing season, so the notice on the letter is the address on the most recent return.  If these notices do not come from that source, the likelihood that a fair percentage will bear an address other than the last known address is reasonably high.  This means taxpayers should be prepared to challenge the notices on this basis, which is not often done.

Math Error Notices

As most readers know the name math error notice is a misnomer.  Subsection 6213(g)(2) provides the definition of math error notice.  Sixteen different actions trigger the sending of a math error notice only one of which is 1+1=3.  Earlier this year, Les updated Chapter 10 of the treatise “IRS Practice and Procedure” and adopted the practice of the Taxpayer Advocate Service of calling this notice the summary assessment authority notice.  For this post I will stick with the misleading language of the statute, but errors in math play a small role in these notices.

The math error notice provides an exception to the need for the IRS to send a notice of deficiency in order to make an assessment.  Instead of a 90-day letter offering the chance to go to Tax Court, the taxpayer receiving a math error notice has 60 days to write back to the IRS expressing disagreement or the IRS will make the assessment.  We have not written enough about math error notices but some of our prior posts on this topic exists here, here, here and here.  Nina Olson wrote often about these notices as the NTA.  Find some of her writings here, here, here and here

This notice cuts off rights.  Most taxpayers fail to respond giving the IRS a shorter, easier path to assessment than the notice of deficiency.  Math error notices confuse taxpayers in the best of times as discussed in some of the NTA annual reports.  If you couple the ordinary confusion of these notices with dates that make no sense, the likelihood of a failure to response undoubtedly goes up.

Note that the math error notice must be mailed to the taxpayer’s last known address and the discussion above concerning notices with something other than the last known address applies here.  If the math error notice goes to the wrong address but the IRS makes an assessment following a failure of the taxpayer to respond, then the IRS has a bad assessment and all of the things that flow from a bad assessment.  These “things” can take a lot of time and effort to unwind.  They can also cause the IRS to lose the right to assess if the unwinding occurs after the statute of limitations on assessment has passed.

On a smaller scale the government faced a similar problem in the government shutdowns of 2013 and 2018-2019.  The system seems to generate notices automatically at certain points in time.  The system does not understand when the government ceases to operate.  In the prior shutdowns it sent out notices of deficiency and collection due process notices while the government was closed, but those letters didn’t have the wrong date and the taxpayer could still file a Tax Court petition or CDP request in the right time frame.

Collection Due Process Notices  

I wrote a blog post in 2018 about a CDP case in which the Revenue Officer went to the taxpayer’s house to deliver the CDP notice but the taxpayer’s dog deterred the RO from making delivery.  He went back to his office and mailed the CDP notice to the taxpayer to avoid bodily injury; however, he mailed the notice two days later.  When he mailed the notice, it still bore the date of his canine-thwarted personal delivery effort.  The Tax Court concluded that the time to make a CDP request runs from the date of mailing (or delivery) and not the date on the CDP notice.

Now the IRS will throw into the system potentially thousands of wrongly dated CDP notices, causing the recipients confusion and filing dates that may or may not fall within 30 days of the actual date of mailing.  How many taxpayers will keep the letter and the envelope?  Will the IRS have the correct date of mailing in its database or the original date of mailing?  Remember that these mailings result not from a single RO working a case but from a mass-produced effort at the service centers.

Are CDP notices sent by the IRS with knowingly wrong dates valid CDP notices?  If invalid, it makes all downstream levy actions wrongful.  Will the CDP notices be sent to the taxpayer’s last known address or to some other address?  If sent to something other than the taxpayer’s last known address, the CDP notices are not good.

Conclusion

The IRS should throw away these letters.  (Recycle them please with appropriate taxpayer identification precautions.)  Send new letters in which the dates on the letters match the dates of mailing.  Yes, this will be expensive in cost of production of the letters and the time it takes to create the new letters.  But it may prove less expensive than the alternative.  It certainly will create less confusion among the taxpayers receiving the letters, the representatives trying to assist the letters, and the courts interpreting the IRS actions.

Taxpayer Wins Merits Challenge in CDP Case

There are several CLE programs happening if you are looking for training.  The ABA Tax Section has started the online programing based on the sessions that would have been held at its May meeting.  You can see the upcoming programming and sign up for that training here

The Annual NYU Tax Controversy Forum starts this afternoon and features basically everyone in the top brass at the IRS whose work involves tax controversy, aka procedure.  You can sign up for it here

On Monday, June 22 at 1:00 ET the Pro Bono and Tax Clinics committee of the ABA is putting on another one of its COVID-19 seminars.  This one is entitled EIPs, Tax Returns, and Judicial Orders in the context of Domestic Violence during the COVID-19 Era.  It is cosponsored with the ABA’s Commission on Domestic & Sexual Violence.  It’s free for members and you can register for it here.  If you read the outstanding post by Nancy Rossner, here, you know it’s a hot topic.  Nancy is on the panel along with several other experts.

We have blogged on several occasions about the Tax Court’s narrow view of the circumstances in which it can engage in merits litigation in the Collection Due Process context.  In Amanda Iris Gluck Irrevocable Trust v. Commissioner, 154 T.C. No. 11 (2020) the Tax Court allows merits litigation in a situation in which it would not allow the litigation of the item in a deficiency case.  The taxpayer does not win everything sought in the litigation but does break new ground.

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The IRS made computation adjustments to the Trust’s returns for 2012 through 2015 based on IRC 6231(a)(6) eliminating the NOL the Trust claimed for 2012 and disallowing the claimed carryforwards for 2013-2015, resulting in balance due amounts for those years.  Pursuant to the statute, the IRS immediately assessed the resulting tax without issuing a statutory notice of deficiency.  After the assessment, the IRS sent out collection notices including the notice of intent to levy.  The trust requested a Collection Due Process (CDP) hearing for 2012 through 2016 which led to the Tax Court case.  

The Tax Court found that it lacked jurisdiction for the 2012 year because no collection action existed for that year.  Although that year marked the root of the adjustments, the adjustments did not result in any liability on which the CDP request could be based.  For the 2013 year the payment of the liability mooted the CDP hearing.  This left 2014-15 where outstanding liabilities remained.  The IRS moved for summary judgment on those years, but the Court denies the motion, finding that for those years the taxpayers can challenge the merits of the underlying liability and the computational adjustment that resulted in the change to the 2012 net operating loss.

A partnership called Promote had some allocated gain it failed to report and it also, along with its partners, failed to file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, with respect to the gain.  On its 2012 return the Trust did not report its distributive share of the gain from the partnership and did not notify the IRS of the apparent inconsistency, which allowed the IRS to make a computation adjustment without giving the Trust a pre-assessment challenge.

The Settlement Officer in Appeals determined that the Trust, although it did not receive a statutory notice of deficiency, had a prior opportunity because it could have paid the tax and filed a claim for refund.  In the Tax Court case the IRS wisely conceded the incorrectness of the SO’s determination on this point.

The Court holds that since the Trust did not have a prior opportunity to contest the liability without full payment and a claim for refund, it did not have a prior opportunity within the meaning of the statute.  The Court does not state that the failure to receive a statutory notice of deficiency, by itself, is a basis for CDP merits litigation.

The Court states:

In CDP cases involving assessable penalties (viz., penalties not subject to deficiency procedures), we have jurisdiction to review a taxpayer’s underlying liability for the penalty provided that he raised during the CDP hearing a proper challenge thereto. See Yari v. Commissioner, 143 T.C. 157, 162 (2014) (ruling that section 6330(d)(1) “expanded the Court’s review of collection actions * * * where the underlying tax liability consists of penalties not reviewable in a deficiency action”), aff’d, 669 F. App’x 489 (9th Cir. 2016); Callahan v. Commissioner, 130 T.C. 44, 49 (2008). Applying the same reasoning we have held that we may, in a CDP case, review underlying liabilities arising from adjustments to partnership items of TEFRA partnerships, even though such items would not have been subject to our review in a deficiency setting. See McNeill v. Commissioner, 148 T.C. 481, 489 (2017).

It does not always work that assessable penalty cases result in the ability to challenge the merits, even if the taxpayer raises the issue during the CDP process. Lavar Taylor made three failed attempts in the circuit courts to challenge the merits of assessable penalties in CDP cases discussed here, here and here. Because of the Court’s view on prior opportunity, no simple explanation seems to work.

In addition to seeking to the SO’s determination on the prior opportunity issue, the IRS also argued before the court the failure of the Trust to properly raise 2014 and 2015 before the SO. In CDP cases the failure to raise an issue at the administrative stage can preclude the taxpayer from raising it once in the Tax Court. The IRS argued that the Trust focused its attention on 2012; however, the Tax Court rejects this argument stating:

Although petitioner might have articulated its position a bit more clearly, its basic contention was not that it had a credit from 2012 sufficient to eliminate its liabilities for subsequent years. Rather, it was contending that the IRS erred in disallowing the NOL carryforward deductions that it had claimed for 2014 and 2015. The situation is no different in principle from one in which the IRS has disallowed (say) business expense deductions for the CDP year. In both scenarios the taxpayer is challenging his underlying tax liability for the CDP year by disputing the disallowance of deductions he had claimed for that year.

Because the source of the problem was the disallowance of NOLs in 2012, it made sense for the Trust to argue about what happened in 2012. The Trust could not have effectively argued about 2014 and 2015 without addressing the year in which the NOLs were disallowed. Even though the Trust could have more clearly laid out its argument, it did enough to preserve the argument for the years impacted by the disallowance of the NOL.

The ruling here does not mean the Trust wins but merely that it will get its chance to show that the computational adjustment made in 2012 did not correctly adjust that return. Because the Code allows a no pre-assessment contest of this type of adjustment, the Tax Court would not routinely have the opportunity to review an adjustment of this type. Here, it has the opportunity to exercise its jurisdiction over something it would not otherwise see because of the CDP merits process.

Catching Up with Designated Orders, 2-10 to 2-14-20

In the past few months, there have been some developments that are, dare I say, more important than the Tax Court’s designated orders. As such, I’ve prioritized those. Now that I’ve finally found some time, I have written on designated orders for the past few months. Here is the first in a series of posts. 

This week, most of the others are in CDP cases. Below, I highlight two CDP cases, including one case (Chau) where I’d like to have seen the Court deal more squarely with the question of whether the taxpayer waived an issue for review by failing to raise it in the CDP hearing. Another case discusses the taxation of Social Security benefits received by non-residents. 

Other designated orders for this week included:

  • An order from Judge Carluzzo granting Respondent’s motion for summary judgment in a CDP case where Petitioner didn’t provide financial information during the CDP hearing.
  • Another order from Judge Carluzzo in a CDP lien case, granting summary judgment where Petitioner failed to participate in the CDP hearing.
  • An order from Judge Gustafson granting Respondent partial summary judgment on whether a purported conservation easement failed the perpetuity requirement under section 170(h)(5)(A).
  • An order from Judge Gale granting a motion for summary judgment in a CDP case, in addition to imposing a $500 fine for frivolous arguments under section 6673.
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Docket No. 24671-18L, Sneeds Farm, Inc. v. C.I.R. (Order Here)

In the Clinic, I always stress the need to conduct a searching financial analysis before considering any particular collection alternative. Only from there can we proceed to see which options are feasible, and from those, select among those options in light of our clients’ priorities, values, and interests. Sometimes, the financial information isn’t “good”, relative to what would qualify the taxpayer for an Offer in Compromise or affordable installment agreement. In those situations, we need to consider other options, including presenting non-financial hardship information to the IRS. Those are tricky cases, because we must convince an IRS official to exercise their discretion.  

This case before Judge Carluzzo seems to be one I never would have brought before the IRS—at least not without significant facts that demonstrated some sort of hardship beyond these raw numbers.

Respondent filed a motion for summary judgment against Petitioner in this CDP case. The taxpayer had a liability of about $110,000 and had proposed to Appeals an installment agreement of $5,000 per month. Not a terribly bad deal for the IRS; such an agreement should pay off the liability in just over two years.

Nevertheless, because the liability was so high, this taxpayer didn’t qualify for a streamlined installment agreement, where the payment can be spread over 72 months. See IRM 5.14.5, Streamlined, Guaranteed, and In-Business Trust Fund Installment Agreements. Thus, the taxpayer was relegated to a payment based upon its financial circumstances. Unfortunately, the taxpayer apparently owned property with a net value of over $5 million—more than enough to satisfy the outstanding liability. Appeals rejected the proposed IA and issued a Notice of Determination, because the taxpayer wouldn’t explore the idea of selling the property or using it as collateral to obtain financing.

Of course, that’s not the end of the story. Perhaps there would be good reasons to not sell the property, such as if the property (as might be the case here based on Petitioner’s name) might be the very “farm” that gives this business taxpayer its raison d’etre.  Perhaps the taxpayer couldn’t obtain financing to pay off the liability.

If those issues existed, they don’t appear to have been presented to Appeals, let alone to the Tax Court. And because it’s well established that the Tax Court may sustain Appeals’ decision to proceed with collections where the taxpayer has sufficient assets to fully pay the liability, Judge Carluzzo has no trouble granting summary judgment to Respondent.

Docket No. 13579-19SL, Chau v. C.I.R. (Order Here)

CDP Week continues with this order from Judge Panuthos on Respondent’s motion for summary judgment in this CDP lien case. All the liabilities at issue are joint liabilities of former spouses. While the case is captioned only in the name of the Petitioner-husband, Mr. Chau, Judge Panuthos clarifies that both spouses signed the Tax Court petition and the lien notices were issued for joint liabilities.  

This order interests me because it seems to remand the case back to Appeals to consider an issue not raised at the Appeals hearing: Petitioner-wife’s request for Innocent Spouse relief. The petition mentioned that Ms. Nguyen was attempting to file an innocent spouse claim. But the Court doesn’t make reference to this request appearing in the Appeals hearing or in the written correspondence to Collections or Appeals in conjunction with the CDP hearing.

This would seem to raise the specter of waiver; if a taxpayer fails to raise an issue in the CDP hearing, the Tax Court generally “does not have authority to consider section 6330(c)(2) issues that were not raised before the Appeals Office.” Giamelli v. Comm’r, 129 T.C. 107, 115 (2007). Judge Panuthos does note in the Order that Respondent did not respond to the Innocent Spouse issue raised in the petition; but the petition in response to the Notice of Determination isn’t the Appeals hearing. Of course, as we can’t review the underlying summary judgment motion, I cannot speculate on whether Respondent independently raised the waiver issue.

In any event, Judge Panuthos ends up denying the motion for summary judgment and remands the case to IRS Appeals for consideration of the Innocent Spouse claim. I think it would have been helpful to deal squarely with the waiver issue in this order, even though this is designated as a small case, and thus not appealable or precedential.

Taxation of SS for NRAs: Docket No. 6641-18, Thomas v. C.I.R. (Order Here)

Finally, a relatively uncomplicated order on the taxation of Social Security received by nonresident aliens. How might a nonresident alien be entitled to Social Security benefits in the first instance? In this instance, Petitioner is the survivor of her U.S. citizen husband, and was therefore entitled to receive Social Security survivor benefits.

The general rule for non-resident aliens (which I did not know before reading this order) is that 85% of Social Security benefits received are taxed at a 30% rate. I.R.C. §§ 861(a)(8); 871(a)(3). And because Social Security benefits are not effectively connected with U.S. sourced income, no itemized or other deductions may offset the taxation of these benefits.

Most taxpayers are unlikely to wind up before Tax Court regarding such a dispute, because the Social Security Administration must also withhold that 30% from Social Security payments to nonresidents. Indeed, Petitioner’s case is the only case that appears in the Orders Search function on the Tax Court’s website when restricting the search to “861(a)”. But, somehow, Petitioner filed a tax return and received a refund of the withholding payments, eventually catching the eye of the IRS.

Section 861 also isn’t the end of the inquiry for many taxpayers. Practitioners must consult the relevant income tax treaties when researching the taxation of nonresident aliens. In this case, the United States-Trinidad and Tobago Income Tax Convention of 1970 makes no special provision for Social Security payments. Thus, the general rules of sections 861 and 871 apply. Note that the IRS helpfully summarizes the various income tax treaties’ taxation of various forms of income in this document.

Requesting a Collection Due Process Hearing for Notices Sent in March 2020

The IRS has posted additional Q&As regarding the meaning of Notice 2020-23.  The Q&As cover a range of topics and deserve a look from anyone with questions about the impact of Notice 2020-23.  I wrote a post interpreting the Notice 2020-23 as, inter alia, extending the time for a taxpayer to file a Collection Due Process (CDP) request.  Among other topics that it covers, Q&A 31 confirms my interpretation of the Notice.  Here is the action Question and Answer:

A31. I received a Notice of Intent to Levy and Notice of Your Right to a Hearing from the IRS.  The Notice is dated March 16, 2020.  Normally, I would have 30 days to request an administrative Collection Due Process (CDP) hearing with the IRS Independent Office of Appeals.  Has my time to request an administrative CDP hearing been postponed?

A31.  Yes.  Under the relief provided in Notice 2020-23, if the due date for requesting an administrative CDP hearing falls on or after April 1, 2020, and before July 15, 2020, that due date has been postponed to July 15, 2020.  Your Notice dated March 16, 2020, would ordinarily require you to request an administrative CDP hearing by April 16, 2020.  Under Notice 2020-23, your due date for requesting an administrative CDP hearing is postponed to July 15, 2020.

Taxpayers receiving CDP notices in March are the ones impacted by this Q&A.  The Q&A only addresses the notice of intent to levy but the same result would apply to a CDP notice following the filing of a notice of federal tax lien.  The extension will not apply to notices sent on March 1 because the time to file a CDP request for notices that start the 30 day period on March 1 will end before April 1, 2020 when Notice 2020-23 kicks in to create the extended period.

Tax Court Holds Audit Reconsideration Serves as Prior Opportunity Eliminating the Right to a Merits Hearing in a CDP Case

On March 12, 2020, the Tax Court in a precedential opinion in the case of Lander v. Commissioner, 154 T.C. No. 7 adopted without change the opinion of Special Trial Judge Guy, holding that a taxpayer who failed to receive a notice of deficiency (NOD) could not litigate the merits of his tax liability in a Collection Due Process (CDP) hearing because he requested audit reconsideration and received an Appeals hearing as a part of that process.  This is the first case to determine that a taxpayer who failed to receive their NOD could also be denied the opportunity to litigate the merits of the liability.  Almost certainly the Court issued the case as a precedential opinion because it breaks new ground in holding that the failure to receive a notice of deficiency does not serve as a basis for a merits hearing in the Tax Court.  We have discussed the case previously here, and here.   The decision continues a pattern of so limiting the ability to litigate the merits of a tax liability that the promise of doing so when the CDP statute passed in 1998 seems almost eliminated through regulations and court decisions.  This cannot be what Congress intended.

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Many taxpayers fail to properly notify the IRS of a change in their last known address with a clear and concise notification.  If the IRS mailed the NOD to the taxpayer’s last known address but the taxpayer did not receive it, Congress seemed to address that situation in IRC 6330(c)(2)(B) which provides:

The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.

In the Lander case the parties stipulated to the non-receipt of the NOD.  At issue was whether action subsequent to the assessment created a prior opportunity to meet with Appeals and whether the opportunity to meet with Appeals meant that the failure to receive the NOD no longer mattered for purposes of interpreting 6330(c)(2)(B).

In 1998 Congress allegedly heard lots of stories from individuals who were totally shocked to learn that they owed a liability to the IRS.  These individuals apparently never knew they were being audited or, if they knew they were being audited, they thought the IRS had resolved the issues in the audit in their favor because they never received a NOD and only learned of the additional assessment when the IRS took some collection action against them.  While I may have some skepticism that multitudes of people were in this circumstance, Congress apparently felt this way, and that belief drove the passage of the right to come back into Tax Court to litigate the merits of the tax liability – even where the IRS properly sent a NOD to the taxpayer’s last known address.

If the IRS had failed to send the NOD to the taxpayer’s last known address, the taxpayer already had a remedy to attack the assessment by filing a petition in Tax Court after the 90 days had run when the taxpayer became aware of the existence of the NOD.  Such a petition would cause the Tax Court to make a determination regarding the reason it lacked jurisdiction.  If the Tax Court determined that it lacked jurisdiction because the IRS sent the NOD to someplace other than the taxpayer’s last known address then, pursuant to cases such as King v. Comm’r, 857 F.2d 676 (9th Cir. 1988), the Tax Court would hold the NOD invalid, the IRS would abate the assessment and either the IRS would issue another NOD to the taxpayer’s last known address or, in cases where the statute of limitations on assessment had expired, the IRS would simply lose the right to assess.

So, the remedy in 6330(c)(2)(B) did not need to cover NODs sent to someplace other than the taxpayer’s last known address because the taxpayer already had a remedy for that.  Similarly, the remedy would assist no one if unavailable to taxpayers who failed to receive a properly addressed NOD who had the administrative right to seek reconsideration of the assessment through audit reconsideration. This is because the administrative right to seek audit reconsideration after assessment already existed – and existed for all taxpayers assessed after an audit who did not consent to the assessment. IRM 4.13.1 describes audit reconsideration, which allows taxpayers who failed to convince the IRS prior to assessment following an audit to come back and show the IRS new information that would allow the IRS to abate the assessment down to the correct amount of tax.  IRM 4.13.1 allows taxpayers who request audit reconsideration whose request is rejected by the Examination Division of the IRS to take their case to the IRS Office of Appeals to further their chances for success.  What a taxpayer loses when seeking audit reconsideration is the right to go to Tax Court after an unsuccessful request.  It seemed Congress sought to remedy the situation for taxpayers who failed to receive a NOD even though the NOD was correctly sent.  Yet, the Tax Court in Landers says no.

In an effort to address the assessment they felt incorrectly reflected their tax liability, the taxpayers in Landers approached their Local Taxpayer Advocate (LTA).  The LTA guided them to request audit reconsideration, and they did.  Their effort to reduce their liability through audit reconsideration failed, and it included a trip to Appeals.  At some point thereafter they received a CDP notice, timely mailed in a CDP request, obtained a hearing with Appeals and sought to raise the merits of their liability because they had not received the properly mailed NOD.  Appeals denied them the right to raise the merits saying that they had done so during the audit reconsideration. 

In Landers the Tax Court, for the first time and 22 years after the passage of CDP, holds that because a taxpayer can have an Appeals hearing on audit reconsideration and because the regulations say a hearing in Appeals serves as a prior opportunity within the meaning of IRC 6330(c)(2)(B) the taxpayer cannot litigate the merits of the liability in Tax Court.  Because every taxpayer who fails to receive a validly mailed NOD has the opportunity to seek audit reconsideration and in the audit reconsideration process has the right to go to Appeals, the logical extension of the decision effectively renders the ability to go to Tax Court in a CDP case following the failure to receive a NOD meaningless.

Unquestionably, the Tax Court in upholding the decision to deny the Landers the right to raise the merits of their tax liability in the CDP case holds that audit reconsideration provides a trap for the unwary taxpayer who has failed to receive a NOD but may later want to go to Tax Court.  As mentioned above, the logical extension of its decision means that the language of 6330(c)(2)(B) offering the right to go to Tax Court in a CDP case is an illusory right, since every taxpayer has the right to go into audit reconsideration and then the opportunity to go to Appeals if the examination division does not grant the requested relief.

Can this really be what the statute means?

Missed Opportunities… And What Does “Opportunity” Even Mean (to Congress)? Designated Orders, January 27 – 31, 2020 Part 1 of 2

For many, the New Year is a time of opportunity: the power of a new beginning and clean-slate to help us move towards our goals. I’ll admit that I am someone who makes New Year’s resolutions and several months later struggles to remember exactly what they were. In such instances I’ve missed the opportunity to change -to strike when the iron is hot. This post is all about what happens when you fail to act on an opportunity, and what “opportunity” really means… at least in the context of IRC 6330(c)(2)(B). In addressing that issue we will focus entirely on one (very important) designated order from Judge Gustafson in the case of Zhang v. C.I.R., Dkt # 4956-19L (order found here). Because I found this order so important I wanted to devote all of the post to it -Part 2, released later, will cover the remaining orders of the week.

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Because of the procedural posture of the order granting an IRS summary judgment motion, it is a little difficult to parse the facts (i.e. the reality) from the “facts” (i.e. what Judge Gustafson assumes, without deciding, to be true) of the Zhang case. But the “facts” certainly paint a pretty unfair picture for the taxpayer. 

Mr. Zhang runs a restaurant where, not surprisingly, customers pay with credit cards. Credit card companies love these arrangements, since they get transaction fees from the vendor. Consumers (if they don’t carry a balance) love this arrangement because they usually get points or miles. The IRS (probably) also loves this arrangement, because it makes for a paper-trail: specifically, the issuance of Form 1099-K from the credit card processors. (The only people really missing out are those that pay with cash, since the vendor usually passes on the transaction fees to the customer in the form of higher prices. Interesting take found here.)

The paper trail of the Form 1099-K is the root of the problem in this case. Mr. Zhang operates the restaurant through a C-Corporation. Generally, the income from the business (including those reflected on the Form 1099-K) should be reported on the C-Corporation’s return. And that is exactly what Mr. Zhang did: he reported the income on the business’s tax returns, rather than his personal returns. However, the issuers of the Form 1099-K appear to have listed Mr. Zhang (not the C-Corporation) as the recipient of the income… You can probably guess what happens next.

The IRS information matching system (Automated Underreporter, or AUR) prompted the IRS to take a second look at the return.  Mr. Zhang never responded to any of the letters, and attests that he never received the ensuing SNOD (more on that later) so the deficiency was assessed basically through default.

The facts, at this point, are essentially that Mr. Zhang shouldn’t owe the tax the IRS assessed. Judge Gustafson goes so far as to say that the IRS “incorrectly concluded that these payments were unreported income of Mr. Zhang.” 

Thank goodness Congress created Collection Due Process in the 98 RRA. Without it, not only could the IRS levy without judicial review, but Mr. Zhang wouldn’t be able to argue in Court that he doesn’t owe the tax without fully paying it first. Instead, the IRS first had to issue a “Notice of Intent to Levy” giving Mr. Zhang the right to a Collection Due Process (CDP) hearing, which Mr. Zhang dutifully (and timely) requested. 

And here, reader, is where we begin to learn the meaning and value of “opportunity.” Because Mr. Zhang claims he never actually received an SNOD, he would like to use the CDP hearing to dispute the underlying tax. And, assuming that Mr. Zhang did not actually receive the SNOD, he is well within his right to raise that issue. See Kuykendall v. C.I.R., 129 T.C. No. 9 (2007).

Under IRC 6330(c)(2)(B) there appear to be two (conjunctive?) conditions a taxpayer must satisfy to have the right to argue the underlying liability. To wit, a person “may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if [1] the person did not receive any statutory notice of deficiency for such tax liability or [2] did not otherwise have an opportunity to dispute such tax liability.” (I’ve added the bracketed numbers to make this track a little easier.) From what we know, Mr. Zhang did not actually receive the SNOD and didn’t “otherwise have an opportunity” at this point. Keep that second component in the back of your mind.

To the extent that a CDP hearing actually took place (being extremely informal as they are, it is sometimes difficult to pin-down their moment of consummation), IRS Appeals did not appear to consider the underlying tax issue. They also did not properly schedule a telephonic hearing with the taxpayer in the first place. Judge Gustafson goes so far as to say, based on the (assumed) facts, IRS Appeals “abused its discretion in the handling of Mr. Zhang’s” CDP hearing.

In other words, the Court essentially says that based on the assumed facts this was a pretty poor hearing, and a pretty poor opportunity to argue your underlying tax. I’d argue based on the facts assumed by the Court that it wasn’t really a CDP hearing at all -and why I’d argue that will make a lot more sense by the end of this post. 

But for now, it is critical to note that the underlying tax argument (indeed, no argument) was not raised with the Tax Court after this CDP “hearing.” The IRS issued a Notice of Determination upholding the levy, and Mr. Zhang did not respond.

Failing to exercise your right to judicial review when the IRS abuses its discretion is a textbook “missed opportunity.” And it is a costly one in this case. 

It isn’t clear whether the IRS ever followed through on the levy, but they did later issue a Notice of Federal Tax Lien (NFTL) for the same tax year. And with an NFTL comes essentially the same CDP hearing rights, albeit under IRC 6320

Mr. Zhang again timely requests a CDP hearing, and again raises the underlying tax issue. And if it was an abuse of discretion not to consider it before surely it is now, right?

Wrong.

Now it doesn’t even matter if Mr. Zhang “actually received” the SNOD because of the second clause in IRC 6330(c)(2)(B): you can’t argue if you “otherwise have an opportunity to dispute such liability.” And that “opportunity to dispute” was precisely the first CDP hearing… So IRS Appeals again doesn’t entertain the argument about the underlying liability, but this time on the grounds that he already had an opportunity to do so.

This time, however, Mr. Zhang isn’t taking “can’t argue underlying tax liability” for an answer. He petitions the tax court. If only he had done so with the first hearing…

Judge Gustafson feels for Mr. Zhang (“If the facts assumed here are correct, then Mr. Zhang’s situation is very sympathetic,”) but this is not a court of equity and being sympathetic isn’t enough. Mr. Zhang should have petitioned the court after the first hearing where the IRS presumably abused its discretion by not entertaining his argument about the underlying liability. That was his prior opportunity: when you raise the issue, you better follow through. Now, hoping to return to it, he is barred by the language of IRC 6330(c)(2)(B): what was once an abuse of discretion in the first hearing under the first clause of that provision has now morphed into Appeals correctly applying the law.

Summary judgment to the IRS.

There is a lot going on here, such that I cannot help playing arm-chair lawyer. My biggest qualm is with the quality of the “opportunity” Mr. Zhang received. I think the Court and the Treasury Regulations have really stacked the deck against taxpayers in a way that Congress and even the statute as written do not require.

If Mr. Zhang were to argue that the first hearing never really took place (as I suggested), since there was no phone call (it isn’t clear what else happened) might that be a way out? It would be an uphill battle for sure. The Treasury Regulations go so far as to say that simply receiving the CDP Levy notice is enough to preclude arguing the underlying tax at a later CDP lien hearing… whether you act on it or not. See Treas. Reg. 301.6320-1(e)(3), A-E7. The Tax Court appears to take no issue with that Treasury Regulation definition of prior “opportunity” (see, e.g. Nichols v. C.I.R., T.C. Memo. 2007-5). So maybe no dice on that argument… or maybe it has some life in a different iteration (that I will conclude this post with).

Let’s consider just how bad or ethereal an “opportunity” to dispute the tax can be for it to still be an opportunity. In this case, the assumed facts are that the taxpayer raised the issue, was told by the IRS that they couldn’t raise the issue, and then when they tried to raise it again were told they already had the “opportunity” to do so. Note that IRC 6330(c)(4) specifically lists out what issues are “precluded” from being raised: those that were “raised and considered under a previous hearing” (emphasis added) is the first one listed. To me, the underlying liability was certainly raised, but just as certainly not considered. I’ll talk more about why I think that matters from an administrative law perspective, but I’d note that this designated order did not rely on IRC 6330(c)(4) to reach its conclusion: the underlying liability was “precluded” from being reviewed under IRC 6330(c)(2). 

Intentionally or otherwise, the case law and treasury regulations have turned “prior opportunity” into a landmine-strewn DMZ for taxpayers: the moment you step foot towards the Office of Appeals, you better tread lightly. We have already seen that if you raise the underlying liability with Appeals, even though you have no route to Court at that time, you may be barred from raising the liability at a later CDP hearing under the “prior opportunity” rationale. See Keith’s post here for an excellent review (Note that we’re still waiting on Tax Court to rule on the proposed opinion, which was assigned to Judge Goeke on 11/13/2019.)

A lesson used to be “wait to take the first step.” That is, instead of submitting audit reconsideration and going to Appeals, wait until the CDP hearing. This is obviously a poor use of judicial and administrative resources, but one that I feel practitioners have to keep in mind given the IRS (and Court’s) interpretation of the Treasury Regulations. With Zhang v. C.I.R. one can fairly add “once you’ve taken that first step, you better run with it all the way to Tax Court.” It wasn’t that he failed to insist on his administrative rights when given the chance (e.g. ignoring the first notice of intent to levy, which somehow “precludes” raising the issue later), but that he didn’t insist on his judicial rights to enforce the opportunity he was denied. When Mr. Zhang paused after his first step he stranded himself in no-man’s-land.  

Finally, this case brings up interesting Taxpayer Bill of Rights and -of course- potential administrative law questions. I submit to you the following thought experiment: Assuming the Tax Court gets it right (i.e. the first CDP hearing was an opportunity to dispute the tax), might it nonetheless be an abuse of discretion for the IRS Appeals officer to fail to consider the underlying liability? 

Consider the Treasury Regulations first, which provide in relevant part that “In the Appeals officer’s sole discretion, [they] may consider the existence or amount of the underlying tax liability, or such other precluded issues, at the same time as the CDP hearing.” Treas. Reg. 301.6320-1(e)(3), A-E11. However, the Treasury Regulation goes on to clarify “Any determination, however, made by the Appeals officer with respect to such a precluded issue shall not be treated as part of the Notice of Determination issued by the Appeals officer and will not be subject to any judicial review.” Id. In other words, Appeals can be nice and review the underlying liability when it is otherwise precluded, but their decision to do so (or not do so) can never, ever, be questioned. I take issue both with the Regulation’s definition of the underlying liability as “precluded” in those circumstances, and its attempt to limit the Tax Court’s review (one may say, the Tax Court’s jurisdiction).

First, query whether a regulation can limit the jurisdiction of the Tax Court to review a discretionary act, especially where Congress has specifically granted that Court jurisdiction. That, to me, is the admin law question. As a matter of judicial deference to such a regulation, Carl has written here. You might retort: “it isn’t a really a “discretionary” act that the regulation is forbidding review of: Congress precluded review of the underlying liability in those instances.” I think that is dead-wrong, and a huge problem that the Tax Court and Treasury Regulations have created on their own. 

I read IRC 6330(c)(2) as a list of the issues a taxpayer has the right to raise. If the taxpayer’s situation doesn’t meet the requirements therein, they don’t have the right to raise the issue, but that isn’t to say it can’t be raised altogether (i.e. that it is precluded), only that it is discretionary. This reading, I believe, is bolstered by the fact that just two paragraphs down (6330)(c)(4)) Congress does, in fact, list out what issues cannot be raised under the helpful heading “Certain issues precluded.” Unless the underlying tax was already litigated, or “raised and considered” in a prior CDP hearing (again, emphasis added) it is not a precluded issue. And if it isn’t a precluded issue, and the IRS has the discretion to consider the issue, then I find it odd that the Court is precluded from reviewing that exercise of discretion solely because the agency has essentially shielded itself from review through the issuance of a regulation. I rarely invoke the Constitution in my tax practice, but that seems like a separation of powers issue to me.

Now, let’s talk TBOR. Imagine, as is nearly the case here, an IRS Appeals officer says, “I know you probably don’t owe the tax, but you missed your chance to argue it so we’re going to uphold the lien/levy. The Regulations provide that it is in my sole discretion whether to look at the underlying tax or not, and I’ve decided not to because I don’t have to.” Could TBOR provide a statutory basis for saying this is an abuse of discretion? After all, doesn’t TBOR ensure that the IRS employees should act in accord with the right to “pay no more than the correct amount of tax” (IRC 7803(a)(3)(C))? What is the point of that “right” if not to keep the IRS from collecting more tax than is due based on technicalities? 

Again, it is possible that all of the “facts” here make this case seem a lot worse than the reality. But that is the beauty of the posture of this case, and how it illuminates the legal issues that I, for one, would love to see worked out in a precedential case. 

Taxpayer Wins Rare Reversal in CDP Lien Appeal

Last week we covered Collection Due Process in the Federal Tax Clinic seminar at Villanova. Each student had to find a CDP opinion authored by a judge coming to Philadelphia this spring, and present the opinion to the class. I like this exercise, but it is somewhat discouraging. In all the cases presented this semester (and most semesters), the taxpayers were self-represented, and they all lost their appeals. As one student after another explains why the IRS did not abuse its discretion in their case, the exercise shows the wide discretion that the IRS enjoys in the collection domain, and the Tax Court’s deferential standard of review.

Collection Due Process is not always a futile exercise, however. Carl Smith alerted the PT team to an interesting bench opinion posted in December 2019, Cue v. Comm’r, where the Tax Court flatly rejected the IRS’s lien determination. The Cue opinion is unusual not just because the Court found abuse of discretion on a lien determination, but also because the Court did not remand the case to Appeals.

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The Secret Lien, the NFTL, and Collection Due Process

Before we get to the Cue case, a brief reminder of the lay of the land. The Notice of Federal Tax Lien is a powerful compliance tool. While a “secret lien” in favor of the government arises by operation of law, the Notice of Federal Tax Lien (NFTL) perfects this lien and alerts the world (and the taxpayer’s other creditors) to the government’s claim on the taxpayer’s property. The unperfected “secret” lien can be defeated by creditors who would have to fall in line behind a perfected lien.

So when a taxpayer fails to pay the government, it makes sense that the government would protect its priority against other creditors by filing an NFTL. However, this can cause a hardship for taxpayers, as prospective landlords, lenders, suppliers, and customers may see the lien and decline to do business with the taxpayer. Taxpayers without stable housing are particularly vulnerable. The NFTL also seems excessively punitive where the taxpayer has no significant assets and no realistic chance of acquiring any. NFTLs are filed against taxpayers, not against particular pieces of property, and there is no requirement that a taxpayer own real estate or significant assets before the government can perfect its lien. Keith wrote about the problems caused by systematic lien filings in low-dollar cases here. Since Keith’s article was published, the IRS Fresh Start Initiative raised the filing threshold from $5,000 to $10,000. Still, NFTL filing remains a concern for low-income taxpayers, and it is still a tool wielded systemically by the IRS’s automated collection system.

Collection Due Process acts as a check on the juggernaut of automated collections by requiring Appeals to engage in a balancing test, finding that the IRS’s proposed collection action “balances the need for efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” IRC 6330(c)(2)(A).

One might think, at least for taxpayers who own little to no property, that the balancing test would favor restraint. But where IRS policy requires a lien determination, the taxpayer faces an uphill battle to prove that the NFTL will cause a specific serious hardship or impair their ability to pay the tax debt. And the Tax Court reviews the IRS’s determination for abuse of discretion. This leads to cases like Richards v. Commissioner, T.C. Memo. 2019-89, in which Judge Vasquez held that it was not abuse of discretion for Appeals to sustain an NFTL filing against taxpayers in Currently Not Collectible status whose only income was from Social Security.

Mr. Richards pointed out that the NFTL was doing the government no good, whereas on his side of the balancing test it hurt his credit rating and he feared it would hurt his chances of getting a car loan. Unfortunately, the Court found this “bare assertion is insufficient to establish that lien withdrawal would facilitate collection or would be in the United States’ best interests.” Regarding the balancing test, the Court noted,

petitioners do not contend that [Settlement Officer] Piro misinterpreted the IRM in making her determination. Nor did petitioners present any concrete evidence during the CDP hearing to demonstrate how the NFTL would negatively affect their financial circumstances and credit standing.

…SO Piro actually considered Mr. Richards’ argument about petitioners’ credit standing and pursued a followup inquiry. Specifically, SO Piro asked whether the NFTL would affect petitioners’ ability to earn income. After learning from Mr. Richards that their only income source was Social Security, SO Piro determined that the NFTL was not overly intrusive and was necessary to protect the Government’s interest. This determination was well within her discretion.

So the first hurdle a taxpayer faces in fighting a NFTL determination is proving that there is a specific harm caused by the public lien filing, and this should be a harm which impedes collectability of the tax debt. Carl Smith gave a good example in an email:

At Cardozo, I once got a lien withdrawn at a CDP hearing for a person who had virtually no money, but had been working on a screenplay with a big Hollywood producer. I got a letter from the producer saying that he could not have my taxpayer listed among the creative team (or paid) if he was going to seek financing for the film, since investors do tax lien searches on creative teams before investing money. In order to help her possibly earn money from her screenplay work, the SO agreed to remove the filed lien (she had no other property the lien would secure) and leave her in CNC. But, I almost never hear of anyone else successfully getting a lien withdrawn.

Eberto Cue v. Commissioner

Finally we get to today’s case and taxpayer Eberto Cue. Carl Smith described the case:

There was a pro se CDP case on Judge Goeke’s Nov. 12 calendar involving a banker who owed money for taxes reported on two older returns.  The debt had gone into CNC.  Then, the IRS filed a tax lien.  (He owns a condo.)  It appears he had recently gotten a job as a banker that, like many in the financial industry, prohibits his having a notice of federal tax lien filed against him.  In his Form 12153, he asked for the lien filing to be withdrawn, explaining that he would lose his license and his job if the lien notice were not withdrawn. 

Mr. Cue did not propose any collection alternatives. The Appeals settlement officer (SO) offered him three options under which she would withdraw the NFTL:

  1. a direct debit installment agreement under which the total liability would be paid off within 60 months;
  2. immediate full payment; or
  3. documentation that Mr. Cue would lose his job if the notice was not withdrawn.

Not surprisingly, Mr. Cue chose Option 3. On 8/14/18 Mr. Cue sent the SO a letter with information about his banking license. This showed that federal tax liens “would be noted by the licensing officials adversely to his request to renew his license, which he had to renew every year…”

The SO then essentially reneged on her offer. She found that Mr. Cue “was already in breach of the licensing requirements, apart from the Notice of Federal Tax Lien filing,” because he “owed the federal government, and [his] home was foreclosed.” Therefore, she disregarded his documentation and his argument. In a Notice of Determination dated 9/26/18, the SO determined that the account would remain in CNC status, but the lien filing was sustained. Mr. Cue filed a timely petition to the Tax Court.

The Court’s opinion notes that during the CDP appeal, Mr. Cue discussed the NFTL with his employer as required by his banking license. On 8/19/18 he was advised, “You are ineligible to remain in your current position due to your outstanding tax lien.” It is unclear from the opinion whether the SO had this evidence to consider before the Notice of Determination.

Carl Smith:

…the SO did not withdraw the lien notice, and the taxpayer thereafter lost both the job he had at the bank requiring the license and any other job at the bank.  He has been unemployed ever since, relying on being supported by his wife.  So, ultimately, the IRS got nothing by its collection efforts (except possibly priority if the condo gets sold, assuming there is any equity in it).

The IRS had moved for summary judgment exactly 60 days before the calendar call.  Judge Goeke set the motion to be argued at the calendar call. 

At the calendar call on November 12, Attorney Karen Lapekas entered a limited entry of appearance for Mr. Cue. Judge Goeke denied the IRS’s motion for summary judgment and held the trial that same day.

If one goal of CDP is to find an appropriate collection alternative benefiting both the taxpayer and the Treasury, it seems odd that neither petitioner nor the SO in this case proposed an affordable monthly payment as a way to avoid a NFTL. To Judge Goeke, the SO’s reasoning (Mr. Cue was already exposed to losing his license, so the NFTL would not matter) “overlooked the fact that the petitioner had been employed for some time, and was in a position to generate income…”

…it was unreasonable for the settlement officer to overlook the impact of the lien and its public filing on the petitioner’s employment. Her failure to seriously consider the petitioner’s assertions that he would lose his position demonstrates that the settlement officer did not seriously intend to act on the third condition that she provided the petitioner in the telephonic hearing. …the fact that the settlement officer did not seek a reasonable payment from the petition[er] demonstrates that the settlement officer was not actually interested in generating collection from the petitioner, but merely wished to sustain the Notice of Federal Tax Lien.

The Court went on to hold

Given these circumstances, we believe the settlement officer’s actions were arbitrary and capricious, and we sustain the petitioner’s argument that the Notice of Federal Tax Lien should be withdrawn. … We do not look at his current situation [and re-weigh the balancing test]. Rather, we look at the actual analysis of the settlement officer, contemporaneous with the determination, … [and] that analysis we find to be arbitrary and capricious.

Reverse or Remand?

Generally, where abuse of discretion is found the Court will remand the case to Appeals for a supplemental hearing. The lien determination cases of Budish v. Comm’r and Loveland v. Comm’r (blogged by Keith here) and the levy case Dang v. Commissioner (blogged by Keith here) are all good examples of this practice. Keith wrote about the frustration that can result from repeated remands in CDP cases here.

In Mr. Cue’s case however, Judge Goeke simply reversed the Settlement Officer and declined to sustain the Notice of Determination. Under the circumstances, this seems appropriate. The NFTL clearly had cost Mr. Cue his ability to work in banking and had destroyed his ability to make payments towards his tax debts. Under these facts, no reasonable settlement officer could sustain the notice of federal tax lien.