Third Time is the Charm for CDP Case

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

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

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

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

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

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

Premature Assessment Announcement from Tax Court

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

UNITED STATES TAX COURT

Washington, D.C. 20217

August 16, 2021

PRESS RELEASE

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

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

As a reminder, the IRS created a dedicated email address in October 2020 for petitioners to reach out with concerns about premature assessments or enforcement action: taxcourt.petitioner.premature.assessment@irs.gov.

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

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

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

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

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

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

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

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

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

Tolling the Statute of Limitations by Filing Bankruptcy

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

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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.

Nominees

Several years ago I wrote a post providing a general explanation of nominee liens in discussing two decisions.  Christine wrote an excellent post on a case that had an income tax twist to the nominee situation, but she also expanded my discussion of the nominee lien doctrine.  The case of United States v. Simones, No. 1:20-cv-0079 (D. N.M. 2021) provides a look at nominee lien cases from the perspective of the nominee rather than the person creating the purported nominee situation.  The Simones case is short, yet it still provides an important point for those the IRS tags as nominees.

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Nominee liens occur when the IRS believes that a taxpayer has transferred property to a third person(s) in an effort to prevent the IRS from collecting the tax from the transferred property.  The person allegedly holding the property for the taxpayer is the nominee.  A nominee case will exist because a revenue officer assigned to the taxpayer’s account believes the taxpayer has transferred the property but retained an ownership interest.  The revenue officer will prepare a case and send it to Chief Counsel for approval before being allowed to file the nominee lien.  Some cases provide a clear picture of nominee status, such as when a taxpayer transfers property but continues to reside there, pay the mortgage, utilities, etc., and some will be much less clear.

The opinion is quite brief and does not provide background information concerning the tax debt or the creation of the nominee situation.  The information presented does not allow a reader to draw conclusions regarding the likely or appropriate final outcome here.  It explains that the taxpayer owes $276,283.56 and that the IRS asserts that the taxpayer fraudulently transferred property to the Ancient of Days Trust.  The case involves an effort by the nominees to extract themselves from a suit brought by the IRS.  The IRS sued to reduce the liability to judgment against the taxpayer and the trust; to obtain a judgment that the trust holds title to property as a nominee of the taxpayer which property is encumbered by the federal tax lien; and to set aside the conveyances of property from the taxpayer to the defendants as a fraudulent conveyance.

When the IRS brings a suit of this type it almost always has a count seeking to reduce the liability to judgment.  Doing so takes little additional effort and provides the IRS with much more time to collect the tax liabilities.  See the discussion of the benefits to the IRS of obtaining a judgment here.  This part of the case does not involve the nominees except to the extent that the IRS seeks a judgment against the trust.

The second reason the IRS brings this suit is to set aside the record title of the property showing that the trust is the record owner.  This is a natural part of any nominee suit.

The third part of the suit seeks to set aside the conveyance of property to the nominees and to the trust.  Two of the three nominees challenge the suit against them, arguing that the court lacks subject matter jurisdiction and that the IRS lacks authority to assert claims against them.  The court disposes of their argument in two sentences:

[F]ederal district courts have original jurisdiction over “any civil action arising under any Act of Congress providing for internal revenue,” 28 U.S.C. § 1340, as well as “all civil actions, suits or proceedings commenced by the United States,” 28 U.S.C. § 1345. Moreover, this court has jurisdiction to issue orders and render judgments “as may be necessary or appropriate for the enforcement of the internal revenue laws.” 26 U.S.C. § 7402(a).

It does not take the court much effort to let the nominees know that the IRS does indeed have a right to bring an action against them.  That does not mean that it will win and prove that they are nominees of the taxpayer, but that on the basic issue of the authority of the IRS to initiate the action there is little to discuss or debate.

The opinion does not discuss it, but prior to the filing of this suit, the IRS almost certainly filed nominee liens against the individuals it has named as nominees in the suit.  It did this to tie up the property while it works to clean up the title so it can be sold for the highest price.  The nominee lien, unlike the regular federal tax lien, will list the specific property covered by the nominee lien and will not attach to all of the property owned by the nominees.  Nonetheless, it will cause the nominees to have to explain the lien to anyone from whom they seek to borrow.  They will also need to explain the existence of the suit itself.  Serving as a nominee for someone seeking to make a fraudulent transfer does not come without downsides.  Frequently, the friends or relatives who agree to serve as a nominee fail to appreciate the potential costs of that action.

Lavar Taylor has discussed in prior posts, two of which are found here and here, the inability of nominees to avail themselves of collection due process.  This means that unless an individual targeted by the IRS as a nominee can convince the IRS informally that they are not nominees, they face the likelihood of being named in a suit such as this and forced to litigate in order to prove they are not serving as nominees.  They have no formal path to an administrative decision.  Because all nominee liens require approval by Chief Counsel, alleged nominees with a good legal argument seeking to avoid getting caught up in litigation might seek a conference with the attorney in Chief Counsel’s office who approved the nominee lien in an effort to convince that person that nominee status does not exist and to provide information that the revenue officer making the nominee referral to Chief Counsel may have failed to provide.

Additional OIC Comments Not Specifically Related to the Mason Case

When Bryan was writing his post, we had an exchange about OICs.  Some of the comments I provided to him I might have provided in posts over the years, but I will state them here in case we have new readers or old readers with memories like mine.  Most of these comments relate to the history of OIC provisions or the IRS administration of the OIC.

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The Current OIC Program

Although Congress authorized the IRS to compromise collection cases in the 1860s, the IRS very rarely did so.  In Virginia when I started working in Chief Counsel’s office in 1980, one RO in the state was assigned to work offers.  He would travel the state working the offers and reject every offer after careful consideration.  I think what was happening in Virginia was happening across the US.  Then in 1990, Congress extended the statute of limitations on collection from 6 to 10 years.  I was working in the National Office at the time in the group of attorneys specializing in collection matters.  I watched firsthand the reaction to the change in the statute of limitations, which came as a surprise to the IRS.

The extension from 6 to 10 years was an idea that Congress had to collect more money without having to say they raised taxes.  They could score this as something which would bring in dollars and use that score to reduce taxes elsewhere or spend more money and have it look as though the event was revenue-neutral.  We see the same discussion today as Congress debates whether to give the IRS more money so it can collect billions of additional dollars.  While I think the IRS could use more money, the amount it will collect as a result of receiving more money is tricky to predict.

When Congress changed the statute of limitations on collection in 1990, it did not consult with Treasury or the IRS.  Had they been consulted, Congress would have learned that the IRS collects very little money after the first two years.  The bill got passed at a time when Congress, and therefore the IRS, was very concerned with the Accounts Receivable due to the IRS and was asking lots of questions about how the IRS could reduce the ARDI (I can’t remember all of the acronym.)  The IRS even had an executive whose only job was to reduce accounts receivable. 

The IRS knew that the extended statute of limitations was going to cause the ARDI to balloon because of the uncollectable accounts that were going to stay on the books four years longer.  So, it started casting about looking for fresh ideas to reduce it and one of them was to actually accept offers instead of rejecting them.  It was the wild west for the first few years as the IRS tried to get its policy completely lined up.  In the mid-1990s an excellent attorney, now an IRS executive, Carol Campbell, created the income and expense guidelines as well as the exempt asset guidelines based on IRC 6334.  In 1998, Congress came behind and codified some of the things going on, including requiring the IRS to have income and expense guidelines which it had already created.  So, the current OIC program is less than 30 years old and resulted not from a change in the statute but from a change in administration because Congress gives the IRS almost complete discretion in OICs.

OICs for Low-Income Taxpayers

One of the few restrictions placed upon the IRS as the IRS codified additional OIC provisions in 1998 was the requirement that it not reject OICs simply because the taxpayer did not offer some minimum amount.  This restriction is located in IRC 7122(c)(3).  You can give credit for that code section primarily to Nina Olson and partially to me.  Nina had a Tax Court case with my office back when she directed the Community Tax Law Project in Richmond, Virginia.  The IRS had determined that the taxpayer owed a lot of money.  The case had a messy factual background that was going to require a lengthy and difficult trial. 

If the IRS won, it was unlikely to collect anything from the taxpayer, whose business had ended and who had spent time in prison.  I suggested that, instead of a trial, she concede the liability and we compromise the debt.  Nina liked the idea, but we fought over the compromise because I wanted a minimum amount to make the effort worthwhile.  Subsequent to the case but not long thereafter, Nina was asked to testify before Congress.  In her testimony to Congress leading up to the 1998 changes, she convinced Congress that requiring a minimum amount to compromise the debt of a low-income taxpayer was wrong.  Her testimony resulted in the passage of IRC 7122(c)(3), for which I claim partial credit since I was the person at the IRS who “inspired” her testimony.

OIC Stats

For those who can peek behind the paywall, David Van Den Berg recently wrote an article for Law 360 building on the current National Taxpayer Advocate’s comments regarding OICs in the mid-year report.  In her report, she provides stats on the declining number of OICs over the past decade. According to the NTA, fiscal year 2020 marked the seventh consecutive year of decline in OIC receipts, and total OIC receipts for FY 2020 were the lowest they had been since 2008.  She states that TAS is looking for ways to increase the number of successful OICs.  Unemployment is a big driver of receipts.  Perhaps the unemployment situation caused by the pandemic will cause many more OICs. 

In his article, David mentions that the IRS is considering investing in robotics and exploring digitization of the OIC forms as well as creating an ability to submit the OIC online.  I mentioned to him when he contacted me about the article that I would like to see the IRS articulate its goals for the OIC program as part of deciding whether it has too many or too few OICs.  It started the modern program over 30 years ago as a reaction to a surprise change in the statute.  It started the program to reduce accounts receivable rather than to necessarily benefit collection or benefit taxpayers as a whole.  With a tightly crafted goal for the program, it would be easier to determine if it was meeting the goal for accepting offers rather than just saying a goal exists to increase the number of offers.

Submitting an Offer in Compromise Through Collection Due Process

The case of Mason v. Commissioner, T.C.M. 2021-64 shows at least one benefit of submitting an offer in compromise (OIC) through a request for a collection due process (CDP) hearing.  As part of his lessons from the Tax Court series, Bryan Camp has written an excellent post both on the case and the history of offers.  I will try to provide some insights not explicitly covered in Bryan’s post, but if you have time to read just one, I suggest reading his post.

In my clinic, we try to file offers in CDP if possible because we get the chance to go to Tax Court, where the possibility of a reversal exists, such as occurred here.  Except in CDP cases, taxpayers cannot go to court to contest the denial of an OIC.  Bryan prefers that the door to court remains shut because he thinks the process should be inquisitorial and not adversarial.  The current system works primarily in that way, with only a small percentage of cases having the opportunity to go to court and a still smaller group actually going to court with an even still smaller group getting a favorable outcome by going to court.  His point, which is a valid one, is that the cost of going to court is too high compared to the benefits it brings to the system.  My thought is that it benefits the system to occasionally have someone outside the IRS look at how the system is working and set some parameters for the IRS.

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In Mason, the taxpayer had submitted an OIC prior to requesting a CDP hearing.  The IRS returned rather than rejected the OIC request.  The IRS returns OICs that either do not meet its processability standards or which relate to cases in which the taxpayer fails to complete some action requested by the OIC specialist.  The IRS returns OICs at the outset because the taxpayer has unfiled returns, has an ongoing bankruptcy case, or because of a host of other reasons stated in section 5.8.7.2 of the Internal Revenue Manual.  My clinic knows the reasons for the return of offers at the outset and almost always has no problem with those.  In every case, after the OIC unit determines that an offer meets the processability requirements and does not quickly return it, an OIC examiner is assigned who then works the case and eventually, several months later, reaches out to the clinic to tell us what additional information it needs.  In almost 15 years of submitting offers for clinic clients, I may have seen one or two offers get accepted without the request for additional information, but in 99% of the cases, the OIC examiner calls after reviewing the file and wants more.  When the OIC examiner calls, the taxpayer and the representative usually have a short window within which to obtain the additional information.  The OIC examiner will state a date in the conversation by which the material must arrive on their desk and state “if X does not arrive by Y date, your offer will be returned and you will not have appeal rights.”  We try very hard to get the newly requested material to the OIC examiner by the requested date and only fail if the lengthy period of darkness waiting for the review of the OIC to conclude has caused us to lose touch with the client.

In the Mason case, a rare reason for returning the offer occurred.  The Masons owed over $150,000.  Owing that much usually buys you the chance to have a revenue officer (RO) work your case.  As someone who primarily represents low-income taxpayers who do not owe enough to buy the services of an RO, I am envious.  I would much rather work with an RO than an Automated Call Site (ACS).  Of course, some ROs are difficult to work with and some ACS responders are good to work with, but by and large I would prefer to work with an RO because most ROs will be responsive and, if it is possible to frame an RO’s work this way, reasonable.  Having an RO means you have someone who can exercise much more judgment and therefore work toward reasonable solutions that ACS would find difficult.

The Masons, however, experienced the downside of having an RO work their case.  The RO assigned to their case appears diligent, competent, and committed to reaching the appropriate result.  For them, this proved a bad combination.  They had valuable assets with which they did not want to part in order to satisfy their large tax obligation.  Shortly after their conversation with the RO, who let them know that they needed to work to pay the liability, they filed an OIC offering about $5,000.  The RO did something I cannot remember seeing before.  The RO wrote to the OIC unit and said that the taxpayers submitted the OIC for purposes of delay and not in a good faith attempt to satisfy their liability.

Had the OIC unit accepted the OIC for processing, it would have taken several months before the OIC came to an end.  It would have ended with a rejection (assuming the Masons stuck to the very low dollar offer) and would have provided them the opportunity to go to Appeals, which could have taken several more months.  At the end of this lengthy process which almost certainly would have resulted in a rejection of the OIC, the case would have gone back into the active collection inventory but might have been assigned to a less diligent RO, if one was assigned at all.  By going the OIC route, the Masons would have suspended the statute of limitations on collection but would have also had access to their assets for the period that the OIC was under consideration and might have benefited on the back end.

To keep this from happening, the diligent RO wrote to try to convince the OIC unit to return the offer at the outset without processing it.  The OIC unit agreed and returned the offer as submitted for delay based upon IRC 7122(g).  This kept the momentum of the collection of the liability going; however, the next step for the RO with taxpayers who would not voluntarily liquidate their assets and pay the tax was to levy.  Before the RO could levy, a CDP notice needed to occur.  While the Masons did not diligently pursue payment, they did diligently pursue their rights and they quite properly filed a timely CDP request.  In making the request they stated a desire for an OIC.

After the normal delays present in a CDP case, an employee of Appeals worked their CDP request.  The Appeals employee looked at their OIC, which mirrored the OIC returned to them earlier, and determined that the OIC unit properly returned the OIC.  Because the OIC unit properly returned the OIC, the Appeals employee determined that they should not receive an OIC through the CDP process without looking at the merits of the OIC but only at the merits of the earlier decision by the OIC unit to return the OIC.

As mentioned before, only a small number of OICs are subject to judicial review and only a tiny fraction of those involve the issue of returned OICs.  Judge Holmes looks at the prior case law involving OICs and gives a good background on those cases.  He determines that the Appeals employee working a CDP case must consider the merits of the offer and cannot simply determine that the prior decision to return the offer was correct.  So, he remands the offer to allow Appeals a second chance.  Unless Ms. Mason, who now pursues the case alone after Mr. Mason’s death, substantially modifies the offer or unless her circumstances have materially changed over the period of this process, it seems likely that Appeals will make a determination that the IRS should not accept the OIC as a collection alternative to levy.  If it makes that decision and the Tax Court does not overturn it, then the case may go back to the diligent RO, or perhaps that RO has now retired, moved, been promoted, or has too large an inventory. 


Tax Court Jurisdiction When Taxpayer Late Files the Request for a Collection Due Process Hearing

In Ramey v Commissioner, 156 T.C. No. 1 (2021) the Tax Court determined in a precedential opinion that when the IRS issues a notice of decision rather than a notice of determination and the taxpayer has filed the collection due process (CDP) request late, the Court lacks jurisdiction to hear the case.  The taxpayer, a lawyer, represented himself and pegged his arguments to last known address rather than jurisdiction.  Nonetheless, the decision expands the Court’s narrow view of jurisdiction to another setting without addressing the Supreme Court precedent on jurisdiction and its impact on the timing of the filing of documents.

I think the Court gets it wrong without ever getting into a real discussion of the jurisdiction issue and am surprised after the prior litigation on this issue that it so casually determines that it lacks jurisdiction.  Having said that, the result may have been the same had it not addressed the issue from the perspective of jurisdiction for the reasons discussed below.

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Mr. Ramey apparently has a law office in a location that carries the same address as several other businesses.  The IRS addressed the letter to that location which is the taxpayer’s last known address.  The post office timely delivered the letter, but it was received by someone working for another of the businesses at the location and did not make its way to Mr. Ramey until a short period before the 30-day window to request a CDP hearing.  The Court spends some time on the issue of the address and the delivery of the notice.  Mr. Ramey spends almost all of his energy on this issue, but I have no problem with the CDP notice.  The IRS sent it to his last known address.  You can read the opinion for the details on what went wrong causing him to receive it late.  Had he framed the facts as giving rise to a basis for equitable tolling, the issue would have some interest but simply framing it as a last known address issue gets him nowhere. 

He delayed mailing the request for a hearing until a few days after the 30-day period but seeks to receive a CDP hearing, arguing that, because of the snafu regarding the delivery of the mail and its delayed receipt by him, the otherwise late request for a CDP hearing should be considered as a timely request.

The Court frames the issue as follow:

In this collection due process (“CDP”) case, we are asked to consider what appears to be a question of first impression for our Court: whether a notice of intent to levy that is sent to a taxpayer’s actual (and last known) address by United States Postal Service (“USPS”) certified mail, return receipt requested, starts the running of the 30-day period for requesting a hearing under section 6330, even though the taxpayer does not personally receive the notice because the taxpayer’s address is shared by multiple businesses and the USPS letter carrier leaves the notice at that address with someone who neither works for the taxpayer nor is authorized to receive mail on the taxpayer’s behalf.

Framed in this way, I have no problem with the Court’s decision that the notice did start the 30-day period.  As the opinion progresses, it becomes clear, however, that the Court does much more than answer this question and takes on the issue of its jurisdiction.

Due to the late submission of the CDP request, Appeals gave Mr. Ramey an equivalent hearing rather than a CDP hearing.  It did not reach a resolution with him on whether an alternative to levy existed regarding his $247,033 liability.  This resulted in Appeals sending him a notice of decision from which he filed a Tax Court petition.

The Court acknowledged that it had previously accepted a notice of decision as appropriately invoking its jurisdiction but held that it only did so in situations in which Appeals inappropriately calculated whether the taxpayer submitted the CDP request on time.  It stated that if the IRS inappropriately calculated the timing of the submission and sent a notice of decision as a result, the taxpayer could successfully petition the Tax Court in that situation.  Regarding this issue, the Court states:

A decision letter issued after an equivalent hearing generally is not considered a determination under section 6330 and is therefore insufficient to invoke our jurisdiction. See, e.g., Moorhous v. Commissioner, 116 T.C. at 269-270; Kennedy v. Commissioner, 116 T.C. at 262-263. But we have recognized that a decision letter issued after a timely request for a hearing under section 6330 “is a ‘determination’ for purposes of section 6330(d)(1),” regardless of the label IRS Appeals places on the document. Craig v. Commissioner, 119 T.C. 252, 259 (2002); see also Andre v. Commissioner, 127 T.C. at 70. Put differently, if, in reviewing a CDP case, we determine that IRS Appeals erred in concluding that a taxpayer’s request for a section 6330 hearing was untimely, we have jurisdiction to correct the error and review IRS Appeals’ decision as a determination.

Interestingly, in starting its discussion of jurisdiction, which was preceded by a significant discussion of the IRS regulations that would seem to have little bearing on the issue of jurisdiction, the Court begins the discussion by citing to a whistleblower case in support of the statement that it is a court of limited jurisdiction.  It does not cite to the whistleblower case of Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019),  in which the D.C. Circuit, the circuit to which all whistleblower cases are appealed, overturned the Tax Court in interpreting a statute essentially identical to the CDP statute on the issue of jurisdiction.  Carl Smith discussed the Myers case here and here.

The IRS position on timely submission of the CDP request has evolved over the past few years and it now treats as timely CDP requests sent to the “wrong” IRS office within 30 days.  We have discussed that issue in a series of posts you can access here.  Linked in that post is an article I wrote in Tax Notes on the issue, which not only discusses the mailing of a request to the right place in the IRS, but the underlying issue of Tax Court jurisdiction based on the timing of the CDP request.  I borrow from that article in some of the following discussion.

The Tax Court first addressed the issue of the impact of the Supreme Court jurisprudence on jurisdiction as applied to IRC 6330 in the case of Guralnik v. Commissioner, 146 T.C. 230 (2016) (en banc), where the tax clinic at Harvard filed an amicus brief arguing that the issue of the timing of the filing of the petition was claims processing issue rather than a jurisdictional one.  The Tax Court rejected that argument 16-0 in its precedential opinion in that case.  Two circuit courts have interpreted IRC 6330 the same as the Tax Court regarding the timing of the filing of the petition after a determination letter – Duggan and Boechler.  Duggan was unrepresented.  The Eighth Circuit split on the Boechler case both in the opinion and the decision on rehearing en banc.  I believe a petition for cert will soon be filed in the Boechler case arguing that the case was wrongly decided and that there is a conflict between the circuits since the language of the whistleblower statute interpreted by the D.C. Circuit in Myers is identical.

The litigation regarding the Tax Court’s jurisdiction when the taxpayer files a late petition differs from the litigation regarding the Tax Court’s jurisdiction when a CDP request arrives late at the IRS.  A different part of the statute controls.  Even if the Tax Court correctly decided Guralnik, and Duggan and Boechler, those decisions would not control the issue of jurisdiction regarding the timing of the submission of a CDP request to the IRS. 

The Conference Committee report on IRC 6330 provides some guidance but does not get mentioned by the parties or the Court.  It reads:

If a return receipt is not returned, the Secretary may proceed to levy on the taxpayer’s property or rights to property 30 days after the Notice of Intent to Levy was mailed.  The Secretary must provide a hearing equivalent to the pre-levy hearing if later requested by the taxpayer.  However, the Secretary is not required to suspend the levy process pending the completion of a hearing that is not requested within 30 days of the mailing of the Notice.  If the taxpayer did not receive the required notice and requests a hearing after collection activity has begun, then collection shall be suspended and a hearing provided to the taxpayer.

H.R. Rep. (Conf.) 105-599 at 265-266 (Emphasis added).

For purposes of looking at the timeliness of making the CDP request, the applicable statute is IRC 6330(b)(1).  It provides that “If the person requests a hearing in writing under subsection (a)(3)(B) and states the grounds for the requested hearing, such hearing shall be held by the Internal Revenue Service Office of Appeals.”   This statue says nothing about the jurisdictional nature of the provision and neither does 6330 (a)(3)(b) which provides “the right of the person to request a hearing during the 30-day period under paragraph (2).”  IRC 6330(a)(2)(C) in applicable part provides “not less than 30 days before the day of the first levy with respect to the amount of the unpaid tax for the taxable period.”

So, reading the section that creates the hearing and the two subsections that mention the 30-day time period, there is no suggestion that Congress intended the period to be jurisdictional.  If the statute does not make the 30-day period for filing the CDP request jurisdictional, then the taxpayer should have the opportunity to have that period tolled by actions showing that the taxpayer had reasonable cause for missing the time period.  The IRS does not acknowledge this in its regulations and neither does the Court in its opinion.

The Tax Court denies jurisdiction here based on an administrative practice of the IRS.  The IRS administrative practice is at odds with the administrative practice of other agencies on similar issues. The Social Security Administration (SSA) and the Veterans Benefits Administration (VBA), agencies that touch millions of customers, provide useful instruction regarding the filing of similar appeal requests.

SSA allows claimants to appeal decisions administratively regarding their Social Security payments by mailing a form to any Social Security office, regardless of which office issued the notice being appealed. SSA Program Operations Manual System (“POMS,” the SSA equivalent to the IRS’s IRM) provides that the deadline for mailing this form may be extended in situations where the claimant can show good cause for late filing.The examples listed in the manual include illness, misleading information provided by an SSA employee, and failure to receive notice, to name a few. In this way, we can see similarities with the “equitable tolling” doctrine discussed in Manella v. Commissioner.

The VBA approach is customer friendly in a different way. That agency maintains one national intake center for all correspondence related to compensation claims. The VA’s manual for the regional offices provides that, “A claimant may request, cancel or reschedule a hearing in writing, by e-mail, by fax, by telephone, or in person.”  Neither the SSA nor the VBA take the hard-line view that the IRS takes with respect to these administrative submissions.  Both SSA and VBA go out of their way to assist the persons working with their agencies in getting the requests to the right places.  Their procedures not only recognize the non-jurisdictional nature of the request but adopt an approach that would closely fit with the approach the Commissioner of the IRS must take pursuant to the Taxpayer Bill of Rights.

Several veteran’s cases have allowed for equitable tolling at the administrative stage.  Bailey v. Principi, 351 F.3d 1381, 1382 (Fed. Cir. 2003) (“We hold that the filing with the regional office of a document that expresses the veteran’s intention to appeal to the Veterans Court equitably tolls the running of the 120–day notice of appeal period, and we therefore reverse and remand.”); Santana-Venegas v. Principi, 314 F.3d 1293, 1298 (Fed. Cir. 2002) (“We hold as a matter of law that a veteran who misfiles his or her notice of appeal at the same VARO from which the claim originated within the 120–day judicial appeal period of 38 U.S.C. § 7266, thereby actively pursues his or her judicial remedies, despite the defective filing, so as to toll the statute of limitations.”); Jaquay v. Principi, 304 F.3d 1276, 1288 (Fed. Cir. 2002), overruled by Henderson v. Shinseki, 589 F.3d 1201 (Fed. Cir. 2009) (“The filing of the misdirected paper itself satisfies the diligence requirement as a matter of law.” (citing Goldlawr, Inc. v. Heiman, 369 U.S. 463, 467 (1962)).  Additionally, one circuit case allowed the late filing where the misfiling was between a court and an arbitration proceeding. Doherty v. Teamsters Pension Trust Fund of Philadelphia & Vicinity, 16 F.3d 1386, 1393 (3d Cir. 1994), as amended on reh’g (Mar. 17, 1994) (finding that equitable tolling could be allowed for when the plaintiff mistakenly filed in federal court rather than the appropriate arbitration forum). 

Why must the IRS and the Tax Court take such a hard line here?  It is not driven by the statute.  It is not driven by good customer service or Taxpayer Rights.  It is not that the IRS has so many more CDP request than the Social Security or Veteran’s Administration has claims.  It seems to be because of the perpetuation of a wrong view about jurisdiction, as well as about how to treat people in the various circumstances that life throws at them.  Other agencies and courts have come to an understanding of this.  Why must the IRS and the Tax Court persist in trying to keep people out of court, and why doesn’t the Tax Court acknowledge the Supreme Court jurisprudence in deciding this case, even if it then sets out to distinguish it?

Maybe Mr. Ramey is not the best petitioner to make this argument, because of his small opportunity to react and file his CDP request and, because he did not set up the jurisdictional argument at the Tax Court level he is not the best person to make this argument on appeal, but this issue will not end with the opinion in this case.

Recent Collection Due Process Decisions

Recently, we were in the process of updating “IRS Practice and Procedure,” which caused me to read some Collection Due Process decisions I failed to catch as they came off the wire.  While the four opinions discussed here do not represent major shifts in the way the Tax Court approaches CDP, they are worth mention for addressing discrete corners of the law.  This issues I discuss here are only a portion of the issues addressed in these cases.  It’s clear that CDP litigation continues at a high level within the Tax Court.

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Galloway v Commissioner, TC Memo 2021-24

This case holds that a taxpayer cannot use the CDP process to rehash a prior rejected offer in compromise (OIC).  Mr. Galloway actually submitted two OICs that the IRS rejected.  As an aside, from the description of the OICs in the Court’s opinion, the rejections seemed appropriate strictly from an asset perspective, since he did not want to include the value of a car he owned but allowed his daughter to use.  He is not the first person I have encountered who seems to feel that providing their property for the use by their children should preclude the IRS from using it as a source of collection.  This view will fail every time.

After rejection of his second OIC, he appealed the decision.  Appeals sustained rejection, which led not too long thereafter to his opportunity for a CDP hearing, which he used to complain about the decision to reject his offer.  The Appeals office hearing the CDP case declined to review the rejection of the OIC, finding that section 6330(c)(4) precluded Mr. Galloway from raising this argument.  The Tax Court agreed with the determination of Appeals, finding that the statute did not allow him to raise the merits of the administrative determination rejecting the offer during the CDP case.  The court cited to the trio of circuit court decisions decided a few years ago holding that the inability of the taxpayer to appeal administrative determination to court did not change the outcome based on the language of the statute.  See our prior discussions on those cases here.

The Court did not speculate on what Mr. Galloway might have done instead of arguing that the prior determination of Appeals was wrong.  I think he could have resubmitted an OIC during the CDP process that either took into account the changes in his circumstances since the prior OIC submission or that offered more than the previously rejected amount, based on his better understanding of the offer criteria.  Had he submitted an offer that was not identical to the one  previously rejected, I think Appeals would have considered it as part of the CDP process.  The rejection of the prior offer did not foreclose his further use of the offer process but did foreclose further argument about the rejected offer.

Friendship Creative Printers v. Commissioner, TC Memo 2021-19  

This case holds that the taxpayer could raise the merits of delinquency penalties by the backhanded method of challenging the application of payments.  Taxpayer failed to pay employment taxes over an extended period of time and failed to file the necessary returns but at some point made payments on the earliest periods.  In the CDP hearing taxpayer argued satisfaction of the earliest periods and eventually provided an analysis showing payments equal to the tax paid.

The Court treated this as a challenge to the merits of the delinquency penalties imposed.  Unfortunately, taxpayer did not designate its payments, which meant that the payments it made were not applied in the manner it expected and it argued in the CDP hearing.  Taxpayer also looked at the transcripts without appreciating the impact of accruals not reflected in the assessed portion of the transcript but accruing nonetheless.

Reynolds v. Commissioner, TC Memo 2021-10

This case holds that the IRS can collect on restitution based assessments even when the taxpayer has an agreement with the Department of Justice to make payments on the restitution award.  Taxpayer engaged in significant criminal tax activity for which he was successfully prosecuted.  The prosecution resulted in a significant restitution order. Like the majority of taxpayers who go through the criminal tax process and spend time in jail, taxpayer’s assets and ability to earn income significantly diminished as a result.  He agreed to pay DOJ $100 a month or 10% of his income.  At the time of the CDP case he was not working and did not appear to have many prospects for future employment.

He argued that the IRS did not have the right to file a notice of federal tax lien or to levy upon him because DOJ was collecting on the liability.  Citing Carpenter v. Commissioner, 152 T.C. 202 (2019), the Tax Court said that the IRS did have the right to pursue collection from him.  Obviously that right, at least with respect to levy, is tempered by the requirement in IRC 6343 not to levy when it would place someone in financial hardship, but no blanket prohibition existed to stop the IRS from collecting and therefore to stop it from making a CDP determination in support of lien or levy.

Although losing the case on the issue of the IRS basic authority to collect, the taxpayer did manage to remove penalties and interest through the CDP process.  The case is a good one to read for anyone dealing with a restitution based assessment to show the interplay between DOJ and IRS in the collection of this type of assessment, as well as to show the limitations of restitution based assessments compared to “regular” assessments.

BM Construction v. Commissioner, TC Memo 2021-13

This case involves, inter alia, a business owned by a single individual and the mailing of the CDP notice to the business owner rather than the business.  The Tax Court finds that sending the CDP notice to the individual rather than the business does not create a problem here, since the sole owner of the business would receive the notice were it addressed to the business rather than to him personally.