Review of 2019 (Part 3)

In the last two weeks of 2019 we are running material which we have primarily covered during the year but which discusses the important developments during this year.  As we reflect on what has transpired during the year, let’s also think about how we can improve the tax procedure process going forward.

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Penalty Approval by Manager

The impact of Graev v. Commissioner, a 2017 Tax Court decision, has been felt throughout the world of tax procedure over the last two years. In Graev, the Tax Court adopted the 2nd Circuit’s holding in Chai v. Commissioner and ruled that in order to assess a penalty, the IRS generally has the burden under IRC 6751 of showing that written approval from a supervisor occurred before a Tax Court proceeding was initiated. Automatically-imposed penalties are an exception to the written approval rule. In recent affected Tax Court cases, the IRS has sought to reopen the record in order to submit additional evidence of supervisory approval, as otherwise Graev would preclude the court sustaining a penalty assessment. This is a complicated issue which will continue to drive further litigation in the near-future.

See William Schmidt, Designated Orders: Another Graev Issue and More Petitioners Refusing to Sign a Decision (5/13/19 to 5/17/19), Procedurally Taxing (July 10, 2019), https://procedurallytaxing.com/designated-orders-another-graev-issue-and-more-petitioners-refusing-to-sign-a-decision-5-13-19-to-5-17-19/

Keith Fogg, Prior Supervisory Approval Not Necessary for Late Filing Penalty Imposed Under IRC 6699, Procedurally Taxing (June 18, 2019), https://procedurallytaxing.com/prior-supervisory-approval-not-necessary-for-late-filing-penalty-imposed-under-irc-6699/

Keith Fogg, An IRC 6751 Decision Regarding the Initial Penalty Determination, Procedurally Taxing (June 10, 2019), https://procedurallytaxing.com/an-irc-6751-decision-regarding-the-initial-penalty-determination/

Keith Fogg, Automatically Generated Penalties Do not Require Managerial Approval, Procedurally Taxing (June 6, 2019), https://procedurallytaxing.com/automatically-generated-penalties-do-not-require-managerial-approval/

Keith Fogg, Tenth Circuit Agrees with Graev II – IRS Attorney Can Impose Penalties, Procedurally Taxing (May 20, 2019), https://procedurallytaxing.com/tenth-circuit-agrees-with-graev-ii-irs-attorney-can-impose-penalties/

Keith Fogg, Variance Doctrine Trumps IRS Failure to Obtain Administrative Approval of Penalty, Procedurally Taxing (May 6, 2019), https://procedurallytaxing.com/variance-doctrine-trumps-irs-failure-to-obtain-administrative-approval-of-penalty/

Government Closure

Jurisdiction of Tax Court

Government shutdowns continue to pose problems for tax procedure, and particularly for taxpayers attempting to file petitions with the Tax Court. In 2016, in Guralnik v. Commissioner, the Tax Court held that a day on which the Tax Court was closed due to a snowstorm did not hold open IRC 6330(d)’s statutory deadline based on IRC 7503 – the Saturday, Sunday and holiday rule; that the 30-day time period in IRC 6330 was a jurisdictional time period not subject to equitable tolling; and that taxpayer’s use of a better private mailing service than was included on the approved IRS list did not meeting the timely mailing rule of IRC 7502.  However, the Tax Court allowed the taxpayer into the court based on a determination that no Tax Court rule governed the circumstance when the court closed for a reason other than a Saturday, Sunday or holiday and in the absence of a rule it could keep the time period open using Federal Rule of Civil Procedure 6. That holding greatly informed the Tax Court’s treatment of petitions filed during the lengthy government shutdown of 2018-2019. Petitions due during the period of the shutdown were facially untimely, and thus the IRS sought to dismiss the resulting cases. In response, the Tax Court adopted a standard policy of issuing a generic order, requiring that the IRS supplement its motion to dismiss to address the applicability of Guralnik. In the majority of the cases, the IRS then conceded the issue and the Tax Court denied the pending motions to dismiss. Thus, in effect, Guralnik appears to govern in government shutdowns, and thus taxpayers can have their petitions treated as timely filed when delivered to the court upon the conclusion of a shutdown.

See Keith Fogg, The Broad Impact of Guralnik, Procedurally Taxing (Aug. 16, 2019), https://procedurallytaxing.com/the-broad-impact-of-guralnik/

Keith Fogg, How the Government Shutdown Impacted the Tax Court Filing Deadline, Procedurally Taxing (July 12, 2019), https://procedurallytaxing.com/how-the-government-shutdown-impacted-the-tax-court-filing-deadline/

Keith Fogg, Fallout from the Shutdown – The Odyssey of a Tax Court Petition, Procedurally Taxing (May 28, 2019), https://procedurallytaxing.com/fallout-from-the-shutdown-the-odyssey-of-a-tax-court-petition/

Jurisdiction and Equitable Tolling                                            

Myers v. Commissioner, a case decided this summer in the D.C. Circuit, is the first time that an appellate court has found a Tax Court statutory deadline to be nonjurisdictional. Myers concerned IRC 7623(b)(4), which sets forth the deadline for filing a whistleblower award petition in Tax Court. More importantly, the language of section 7623(b)(4) is a near-exact mirror of the deadline language found in the CDP deadline statute, 6330(d)(1) – which the 9th Circuit found was jurisdictional in Duggan v. Commissioner. Accordingly, the ruling for the petitioner in Myers creates a circuit split, which could very well generate a future hearing of the issue by the Supreme Court – which has consistently found statutory deadlines to be nonjurisdictional in recent years.  The D.C. Circuit has denied an en banc hear, the government has asked for an extended time within which to decide whether to make a cert petition because of the perceived circuit split.  The issue has far reaching implications for tax litigation deadlines and the ability of taxpayers with strong excuses for filing late to have their day in court.

The implication of a nonjurisdictional finding is that it allows the Tax Court to hear cases when a petition is not timely filed, if doing so would be fair under the doctrine of equitable tolling. Currently, if a taxpayer fails to timely their petition, then the Tax Court is unable to hear their case, regardless of the circumstances.  The tax clinic at the Legal Services Center of Harvard Law School filed an amicus brief in this case on behalf of Mr. Myers as it had done for Mr. Duggan.

See Carlton Smith, D.C. Circuit Denies DOJ En Banc Rehearing Petition in Myers Whistleblower Case, Procedurally Taxing (Oct. 9, 2019) https://procedurallytaxing.com/d-c-circuit-denies-doj-en-banc-rehearing-petition-in-myers-whistleblower-case/

Carlton Smith, D.C. Circuit Holds Tax Court Whistleblower Award Filing Deadline Not Jurisdictional and Subject to Equitable Tolling, Procedurally Taxing (July 3, 2019), https://procedurallytaxing.com/d-c-circuit-holds-tax-court-whistleblower-award-filing-deadline-not-jurisdictional-and-subject-to-equitable-tolling/

Gov’t Jurisdiction & closure

This past year’s federal government shutdown was the longest in U.S. history and as a result, posed many unique and challenging issues for taxpayers and practitioners. For one, as discussed at length above, it was unclear for much of the year whether the Tax Court would apply Guralnik to allow petitions due during the shutdown to be deemed timely. Perhaps more obviously, the shutdown was deeply disruptive for taxpayers engaged in collection matters with the IRS, who were unable to communicate with furloughed IRS employees. The recently-departed former National Taxpayer Advocate, Nina Olson, has in the past proposed that the IRS apply an emergency exception to the Anti-Deficiency Act to allow TAS employees to continue to work during a shutdown to assist taxpayers experiencing economic hardship. As future government shutdowns are unfortunately likely, hopefully the IRS will continue to implement reforms that will mitigate the impact of shutdowns on taxpayers.

See Bryan Camp, After The Shutdown:  Dealing with Time Limitations, Part IV — Equity, Procedurally Taxing (Jan. 31, 2019), https://procedurallytaxing.com/after-the-shutdown-dealing-with-time-limitations-part-iv-equity/

Bryan Camp, After The Shutdown:  Dealing with Time Limitations, Part III, Procedurally Taxing (Jan. 28, 2019), https://procedurallytaxing.com/after-the-shutdown-dealing-with-time-limitations-part-iii/

Leslie Book, Finding Guidance on the Effects of the Shutdown, Procedurally Taxing (Jan. 27, 2019), https://procedurallytaxing.com/finding-guidance-on-the-effects-of-the-shutdown/

Christine Speidel, The Taxpayer Advocate Service’s Role During an IRS Shutdown, Procedurally Taxing (Jan. 25, 2019), https://procedurallytaxing.com/the-taxpayer-advocate-services-role-during-an-irs-shutdown/

Bryan Camp, After The Shutdown:  Dealing with Time Limitations, Part II, Procedurally Taxing (Jan. 23, 2019),  https://procedurallytaxing.com/after-the-shutdown-dealing-with-time-limitations-part-ii/

Bryan Camp, After The Shutdown:  Dealing with Time Limitations, Part I, Procedurally Taxing (Jan. 22, 2019),  https://procedurallytaxing.com/after-the-shutdown-dealing-with-time-limitations-part-i/

Financial Disability

Stauffer and others

Recent litigation has clarified the narrow scope of the financial disability exception of IRC 6511, which suspends the statute of limitations (“SOL”) for a refund claim if an individual is “financially disabled”. In Stauffer v. Internal Revenue Service, the 1st Circuit recently ruled against the estate of the taxpayer, finding that because the taxpayer’s son held a durable POA during the period in question, the estate is not entitled to file a refund claim outside of the SOL. Similarly, in Carter v. United States, a district court recently found that an estate executor’s disability was irrelevant to the SOL consideration, because the estate was the actual taxpayer in question. Finally, in Thorpe v. Department of Treasury, another district court held against the taxpayers who tried to make a disability argument but failed to comply with any of the enumerated requirements of Rev. Proc. 99-21.

See Keith Fogg, First Circuit Sustains Denial of Financial Disability Claim, Procedurally Taxing (Oct. 21, 2019), https://procedurallytaxing.com/first-circuit-sustains-denial-of-financial-disability-claim/

Keith Fogg, An Estate Cannot Use the Financial Disability Provisions to Toll the Statute of Limitations for Filing a Refund Claim, Procedurally Taxing (Sep. 12, 2019), https://procedurallytaxing.com/an-estate-cannot-use-the-financial-disability-provisions-to-toll-the-statute-of-limitations-for-filing-a-refund-claim

Keith Fogg, Financial Disability Argument Loses Because Taxpayer Husband Did not even Allege Disability, Procedurally Taxing (Mar. 25, 2019), https://procedurallytaxing.com/financial-disability-argument-loses-because-taxpayer-husband-did-not-even-allege-disability/

CDP

Summit

The new CDP Summit initiative seeks to improve the CDP process with input from taxpayers, practitioners and IRS staff. Many ideas are on the table as potential ideas for reform. A recent case, Webber v. Commissioner illustrates the need for improvements to the actual physical CDP notices themselves. In Webber, the taxpayer was misled by the multiple IRS mailing addresses on the received CDP notice (one for the CDP appeal and one for remittance of payment) and timely filed his CDP appeal with the incorrect address – thus missing the statutory deadline. Upon later appeal to the Tax Court, the IRS initially filed a motion to dismiss but then quickly withdrew the motion, perhaps recognizing the unfair result and the potential for the Tax Court to reach the issue of the jurisdictional nature of the deadline. The CDP Summit initiative seeks to make improvements to protect such taxpayers from unfair results, which defeat the purpose of CDP as a tool for taxpayers to quickly and effectively settle disputes with the IRS.

Carolyn Lee, Two tickets to Tax Court, by way of § 6015 and Collection Due Process, Procedurally Taxing (Aug. 28, 2019), https://procedurallytaxing.com/two-tickets-to-tax-court-by-way-of-%c2%a7-6015-and-collection-due-process/

William Schmidt, Collection Due Process and Webber v. C.I.R., Procedurally Taxing (July 24, 2019), https://procedurallytaxing.com/collection-due-process-and-webber-v-c-i-r/

Carolyn Lee, Collection Due Process Summit Initiative, Procedurally Taxing (July 18, 2019), https://procedurallytaxing.com/collection-due-process-summit-initiative/

Litigating merits

Under IRC 6330(c)(2)(B), taxpayers are able to contest the merits of their underlying liability in CDP proceedings only if they had (1) not previously received a statutory notice of deficiency for the liability or (2) not had a “prior opportunity” to dispute the liability. While the first element of this provision is relatively clear, the question of what constitutes a prior opportunity has been a topic of recent discussion for practitioners. In a series of recent cases, several circuits agreed with the IRS that a taxpayer is precluded from litigating the merits in CDP hearing if they previously had the ability to request a pre-assessment hearing. The IRS has also apparently taken the position that failure to receive a SNOD is not sufficient for a taxpayer to dispute liability on the merits if the taxpayer later files an audit reconsideration request and receives an opportunity for an appeals hearing in the process.  The opinion appeared to ignore the “or” language in the statute. And in a recent Tax Court proposed opinion in Lander v. Commissioner, a Special Trial Judge has accepted this argument. The proposed opinion in Lander is interesting, as the taxpayer did not receive a SNOD but, per the opinion, was still precluded from challenging on the merits because a pre-assessment hearing had already been offered. However, the case was recently submitted to Judge Goeke on November 13th, so the final disposition of the case may change.

See Keith Fogg, More on the Muddle of CDP, Procedurally Taxing (Sep. 9, 2019), https://procedurallytaxing.com/more-on-the-muddle-of-cdp/

Keith Fogg, The Muddle of Seeking to Litigate the Merits of a Tax Liability in Collection Due Process Cases, Procedurally Taxing (Aug. 6, 2019), https://procedurallytaxing.com/the-muddle-of-seeking-to-litigate-the-merits-of-a-tax-liability-in-collection-due-process-cases/

POA

Scope

A recent case in the Court of Federal Claims provides guidance on the scope of authority conveyed by a Power of Attorney Form 2848. In Wilson v. United States, the taxpayer’s 2848 representative, upon the taxpayer’s instructions, prepared a claim for refund and signed on the paid preparer line, but did not get the taxpayer’s signature before filing. In the subsequent suit, the government filed a motion to dismiss for lack of subject matter jurisdiction, asserting that the claim had not been “duly filed” under IRC 7422. The government argued that the 2848 did not provide the taxpayer’s representative with the authority to sign and file refund claim on the taxpayer’s behalf. The court looked to the instructions on the 2848 and found significance in the form’s express inclusion of a check box for taxpayers to authorize representatives to sign returns on their behalf. The court thus found that the plaintiff had not explained why the 2848 requires express authorization for signing one form under penalty of perjury but not for another. Accordingly, the court ruled for the government, finding that the plaintiff’s representative did not have broad authority under the 2848 to sign the claim for refund.

See Tameka Lester, The Scope of a Power of Attorney: When Can a Representative Sign a Refund Claim?, Procedurally Taxing (Aug. 13, 2019), https://procedurallytaxing.com/the-scope-of-a-power-of-attorney-when-can-a-representative-sign-a-refund-claim/

IRS Properly Returned Offer in Compromise

The case of Brown v. Commissioner, T.C. Memo 2019-121 provides several important statements concerning offers in compromise.  It’s only through the window of Collection Due Process (CDP) that we get judicial review of offers.  Here the review provides guidance on several aspects of the offer in compromise.  The case also provides an important reminder regarding CDP cases and what to expect when you go to Tax Court.  The case also inaccurately describes the IRS filing a notice of federal tax lien (NFTL).  I will spend a little time on the NFTL issue at the end.

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CDP

Starting with the CDP decision in the case, the Court declined to allow petitioner’s attorney, a seasoned Tax Court practitioner, to place into evidence his notes of phone calls with two IRS employees working the case.  The court refused to allow the notes because they were not in the administrative record before the Appeals employee reviewing the case.  We have written about the importance of building the administrative record most recently in the context of the new provision in the innocent spouse statute coming out of the Taxpayer First Act.  It can be difficult to remember to get everything into that record.  The Brown case demonstrates what happens when something does not make it into the administrative record though it is not at all clear that this evidence would have made a material difference in the outcome of the case. With the passage of TFA and the new code section IRC 6015(e)(7), building the administrative record has become critical in innocent spouse cases.  In CDP cases where you are located can make a difference.  The Ninth Circuit, the circuit to which an appeal would lie in Brown, is one of the circuits holding that the Tax Court should make its decision based on the administrative record.  That circuit precedent plays a role in the outcome of this issue here.

OIC

With respect to offers, the first decision of the court deserving note is the decision that the offer examiner did not err in returning the offer once the existence of an investigation by the IRS Collection Division Abusive Tax Avoidance Transaction (ATAT) group became known.  This part of the IRS Collection Division was developed about two decades ago as a means of putting extensive resources to difficult cases and in particular to cases with offshore assets.  When the IRS developed the collection queue in the early 1980s it went from a system of dividing all of the collection cases in a district by the number of revenue officers.  Under that system revenue officers could have hundreds of cases in their inventory making management of those cases extremely difficult.  In reducing the number of cases to a manageable number for each revenue officer, it also seemed that many collection managers began putting a premium on closing cases without taking a deep dive into the difficult cases.  I remember commenting to a manager how a certain revenue officer seemed to send to the District Counsel’s office a lot of interesting collection cases.  I intended the comment as a compliment; however, the manager’s view of the revenue officer was that he put too much time into his cases causing him not to keep up with the inventory.  That manager’s view of how a revenue officer should manage their inventory was common.  So, taxpayers with difficult collection cases often got a pass because the manager did not want the revenue officer to put the time into a case needed to develop difficult cases.  (Similar problems exist in the examination division causing the end of audits on small businesses and partnerships.) 

To combat the problem of glossing over difficult cases, the IRS developed a specialty collection group designed to handle the tough cases and not to worry about number of hours on a case.  These groups had a compliance mission somewhat like that of criminal investigation rather than a strictly revenue gathering focus.  If the taxpayer’s collection case resided in part in the ATAT group, it means that the IRS had significant concerns that the taxpayer was taking steps to keep assets away from the IRS.  The Internal Revenue Manual provided that the OIC specialist should return the offer when learning of the existence of a taxpayer’s account in the ATAT group.  In Brown, the OIC specialist followed the IRM instructions.  The Tax Court found that doing so was appropriate and the Appeals employee reviewing the CDP case did not err in agreeing with this decision.

The IRS manual provisions regarding cases pending with the ATAT group make sense.  Stopping an offer while the ATAT group makes its determination seems an appropriate way to balance collection concerns with offer in compromise possibilities.  Returning the offer does not keep the taxpayer from submitting it at a later point and does not signal a policy rejection of the offer.  Still, it’s also understandable that the return of the offer for this reasons raises concerns from the taxpayer’s perspective.  It may be difficult for a taxpayer to know if a revenue officer group investigating their tax situation is an ATAT group.  Had the taxpayer known that his account was in the hands of an ATAT group then the taxpayer, undoubtedly, would not have submitted an offer in compromise with an $80,000 payment up front.  To the extent that a disqualifying condition existed with respect to the offer, there should be some way to let the taxpayer know of the impact of that condition before the acceptance of the money.

The taxpayer also argued that the OIC specialist should not have returned the case because a TEFRA audit was pending.  The IRM provides for the return of an OIC if a pending TEFRA audit exist.  The IRM also provides that an OIC could not be accepted until all TEFRA audits had reached their conclusion.  The Tax Court agreed that returning the case was appropriate given the IRS procedures that apply to this situation.

The taxpayer further argued that the 20% down payment he made when he submitted the OIC should be returned to him.  The court noted that the taxpayer knew at the time of submitting the OIC that the IRS would keep this 20%.  The court did not agree that the return of the offer allowed petitioner to see a return of the money paid with the OIC.  I agree with this in general; however, I am troubled by how it plays out in a situation like this where the IRS reason for returning the offer may not be readily apparent to the taxpayer or the representative in making the offer.  If the taxpayer knew of or should have known that the IRS would return the offer in his situation, then I am fine with the IRS keeping the 20% payment.  If the taxpayer did not have a reasonable basis for knowing that the existence of some part of his outstanding liability in an ATAT group prevented the IRS from considering the offer then the taxpayer did not have real knowledge necessary to evaluate whether to pursue the offer.

Rarely, if ever, would the client of a low income tax clinic end up in an ATAT group.  So, I do not know what type of notice, if any, that a taxpayer receives when their account ends up in an ATAT group.  Given the consequences to an offer of having your account in an ATAT group, some notice to the taxpayer alerting them to the fact an ATAT group has their account and the consequence of that fact would alleviate the unfairness perceived in this situation.

The taxpayer’s last argument concerns the effect of returning the offer.  The taxpayer argued that because the return of the offer was improper, the offer continued in existence at the IRS.  The taxpayer further argued that because the offer continued in existence, the time the offer was pending with the IRS exceeded 24 months.  Because the offer was with the IRS for more than 24 months with no action, the taxpayer argued that the offer was deemed accepted.  For prior post regarding the two year rule see here and here. Since offer cases only get reviewed by the Tax Court and result in an opinion if submitted with a CDP request, this issue rarely appears before the Tax Court.  Here, the court had little difficulty determining that the period during which the offer was pending with the IRS ended when the IRS returned the offer.  As a result, the offer was not deemed accepted under IRC 7122(f).  I remain very interested in hearing from anyone whose offer has aged into acceptance under this rule.

NFTL

In one sentence of the opinion the Tax Court made a common, but unfortunate, mistake as it described the NFTL.  The way the court discussed the lien perpetuates a myth that confuses many people trying to understand the federal tax lien (FTL) and the NFTL.

Here’s what the court said “On April 2, 2015, respondent filed an NFTL against petitioner’s personal residence for $35,268.”  The problem with this statement is that the IRS does not file the NFTL against a taxpayer’s residence.  The IRS files the NFTL against the taxpayer.  The FTL has by that time already attached to all of the taxpayer’s property and rights to property including the taxpayer’s personal residence.  Assuming the IRS files the NFTL in the locality where the taxpayer residence is located, the NFTL will perfect the FTL with respect to the personal residence and other real property owned by the taxpayer which is located in the locality in which the NFTL is filed.  The NFTL will also perfect the FTL with respect to all of taxpayer’s personal property if it is filed in the locality of the taxpayer’s residence. 

Perfecting the FTL means that the IRS will defeat other creditors listed in 6324(a) – purchasers, holders of a security interest, mechanics lien holders and judgment lien holders – who file their lien or security interest or purchase the taxpayer’s property after the filing of the NFTL.  Filing the NFTL also means that the taxpayer’s liability to the IRS becomes public knowledge as the filing of the NFTL serves as an exception to the general disclosure laws of IRC 6103 that a taxpayer’s tax and tax return information is something between the taxpayer and the IRS.

I suspect that the Tax Court knows that the NFTL is not filed against the taxpayer’s residence and its description of the situation was just an attempt to shorthand the effect of the NFTL since the residence may have been the only asset owned by the taxpayer where the NFTL had a major impact; however, the description fosters continued misunderstanding of the NFTL.  Many practitioners and the vast majority of taxpayers think of the NFTL in the way the Tax Court described it.  It’s unfortunate to have the wrong understanding of the NFTL in an opinion of the Tax Court.  The sentence that mischaracterized the NFTL did not adversely impact the case or otherwise have any impact that I can perceive but it does call for slightly tighter language in describing the NFTL in order to assist others in understand the scope and limitations of the NFTL.  For a detailed explanation of the NFTL, its scope and effect, see Chapter 14A.04-10 of Saltzman and Book, “IRS Practice and Procedure.”

Second Remand of a CDP Case

The case of Dodd v. Commissioner, T.C. Memo 2019-107 shows what happens when the Appeals employee handling a CDP case works too efficiently and when the Appeals employee may not have the right background to handle the issue presented.  The uber efficiency results in a second remand and demonstrates both the flaws in handling cases too efficiently but also why CDP can take time to complete.  The case also raises questions, for me at least, concerning why the Chief Counsel attorney cannot fix the problem and must keep sending the case back to Appeals in the hopes that the Appeals employee will “get it.”

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Ms. Dodd works as a secretary at a law firm.  She filed the Tax Court petition pro se even though she worked for and from the opinion continued to work for a law firm whose finances created her tax problem.  She reported a large tax liability on her tax return.  The court described her recitation of the issue as follows:

She explained that most of the liability arose from a $1,073,312 gain on the sale of real estate owned by an LLC of which she was a member. She alleged that she had received none of the sale proceeds, all of which had been wired to a bank to pay off a line of credit of the law firm for which she worked. She stated that she had erroneously reported this gain on her 2013 return and wished to resolve this issue at the CDP hearing.

Once you overreport a tax liability, unwinding it can create nightmares and this case provides another example of the problem of trying to say “I shouldn’t have reported that.”  The IRS does not like to let go of taxes the taxpayer has once said she owes.  Because the CDP case involves amounts reported on a return that the taxpayer wants to reduce, she can have the merits of her liability considered in the CDP case based on the reasoning in Montgomery v. Commissioner, 122 T.C. 1 (2004).

I do not know where Ms. Dodd lives but the Appeals office in Memphis hears her CDP case.  Based on the Chief Counsel attorneys handling her case, my guess would be she lives somewhere near Washington, D.C.  I have not had good experiences with the Memphis office of Appeals but will spare you the details here.  My guess is that Ms. Dodd would say the same thing.

The court provided the following statement about the initial correspondence sent from Appeals to Ms. Dodd:

On January 12, 2017, the SO sent petitioner a letter scheduling a telephone conference for February 28, 2017. The letter informed petitioner of the paperwork she needed to complete in order for the SO to consider collection alternatives. The letter did not address petitioner’s contention that she did not owe the tax liability and did not invite petitioner to file an amended return.

At the hearing the Settlement Officer notes that Ms. Dodd had not provided collection alternatives, made no mention of her underlying liability and issued a determination letter three days after the hearing denying her CDP request.  When she filed a Tax Court petition, her case landed in the hands of Chief Counsel attorneys who immediately recognized the problem and asked the court to remand her case to appeals for a do over.  As discussed before, the Chief Counsel attorneys who recognized the problem and who would know what to do to fix the problem have not been granted the authority by the client to fix the problem as they would do in a deficiency case.  So, when the Tax Court grants the remand, the case goes back to the same Settlement Officer in Memphis would did not understand the case the first time around.

The Settlement Officer worked the remand case quickly and for that deserves credit.  Within a month of the remand a letter went out scheduling another hearing:

On June 13, 2018, the SO sent petitioner a letter scheduling a telephone conference for July 10, 2018. That letter consisted of three pages of single-spaced text and closely resembled the letter scheduling the original hearing. But the June 13, 2018, letter included an additional bullet point stating: “Your 2013 tax liability was determined based on the documents you submitted and the return that was filed by you. If any figures were in error, please submit a Form 1040X Amended return by 07/03/2018 for my review.” The letter did not request documentation supporting the entries appearing on any amended return petitioner might submit, and it did not warn petitioner of any negative consequences if she did not submit the amended return before the hearing.

Ms. Dodd did not file an amended return within the three weeks provided.  Based on the court’s description of her response to the Settlement Officer, I can see where the SO would have frustrations.  At this point the case has been around for a while and Ms. Dodd has not prepared an amended return or gathered up the information to present her case.  On the other hand, she has raised a merits issue that seems on its face very meritorious.  Another problem with CDP in this situation is that the SO in Memphis probably has little idea of what to do with the merits issue and has only a collection background.  So, one confused pro se person is talking to a collection person about a merits issue while the court and the Chief Counsel attorneys stand on the side tapping their toes.

The SO quickly sends out another determination letter.  Back in Tax Court the Chief Counsel attorney moves for summary judgment and the taxpayer says:

[s]he did not receive and could not possibly have received $1 million from a real estate transaction in 2013 because “the only income she had was her salary working as a legal secretary in a law firm.” She states that she needed to get advice on the procedures for completing an amended return and did not have time to secure such advice before the supplemental hearing. She also states that she had questions about the implications of filing an amended return for other taxpayers involved in the LLC transaction (apparently including the law firm for which she worked).

This makes sense even if it does not completely prove her case.  The Tax Court judge denies the summary judgment request and sends the case back to Appeals a second time and in resending it provides much more detailed instructions:

petitioner had clearly explained to the SO her position–namely, that she did not receive any of the LLC’s real estate proceeds because 100% of the proceeds had been wired to her law firm’s bank to pay off her law firm’s line of credit. Petitioner even told the SO the name of the bank in question. That being so, submission of an amended return omitting $1 million of sale proceeds would not have added much to the SO’s sum of knowledge. To get to the bottom of the “underlying liability” issue, the SO needed information supporting the facts that petitioner alleged. But the SO’s June 13, 2018, letter did not request factual information that would support petitioner’s position. That letter simply asked petitioner to “submit a Form 1040X Amended return by 07/03/2018 for my review.” And the letter did not indicate that petitioner’s failure to submit an amended return by that deadline would preclude her from challenging her underlying liability. Petitioner appears to have come to the supplemental hearing with questions about the procedures for (and consequences of) filing an amended return. But rather than address those questions or provide petitioner with additional time to supply the information that was needed, the SO closed the case the very next day. We think this action was unreasonable, particularly in light of respondent’s acknowledgment that the SO pulled the trigger too quickly the first time around.

We can all hope that on her third visit to Appeals, Ms. Dodd and Appeals figure out her correct tax liability for the year at issue.  Maybe the lawyers at her firm could give her a hand in working through the tax issue.  Maybe the lawyers in Chief Counsel can give the Appeals person with a collection background a hand in working through the tax merits issue.  Maybe the judge will not need to provide further instructions.  Maybe there’s a better solution to the problem than having a pro se taxpayer work with a Service Center Appeals employee with a collection background to figure out a complicated tax merits issue. 

The case points to problems in the system that should have been resolved by this point.  The CDP summit initiative seeks to address some of the systemic problems that continue to exist in CDP 20 years after enactment.  When enacted CDP represented a radical departure to prior collection practices.  The IRS has not worked out all of the wrinkles.  This case points to another wrinkle it needs to work out.

TIGTA Report Reminds That IRS Regularly Misclassifies CDP Requests Impacting Taxpayer’s Ability to Obtain a CDP Hearing and the Statute of Limitations

When Congress passed the Restructuring and Reform Act in 1998, it demonstrated significant concern about the performance of the IRS in the collection area.  The law made significant changes to the way the IRS collects as well as to oversight of the IRS collection activity.  The principal oversight imposed involves annual reviews by the Treasury Inspector General for Tax Administration (TIGTA) of several aspects of IRS collection actions.  We have written about these reports many times because they can contain rich sources of information about what is happening inside of the IRS.

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TIGTA usually produces the bulk of these annual reports in September.  On September 6, 2019, TIGTA produced its annual report regarding Collection Due Process (CDP), and it points to continued problems two decades after creation of the CDP program.  Since TIGTA’s job involves identifying problems, the fact that it found some problems does not come as a surprise.  The problems that it identified fit nicely with some of the initiatives of the ongoing CDP summit as well as some of the problems we have discussed before.  I will focus on the two main problems identified by TIGTA.

Misclassifying CDP Requests

Here’s what TIGTA found:

We found that the IRS misclassified nine of the 140 CDP and Equivalent Hearing cases we reviewed. As a result, these taxpayers did not receive the hearings to which they were entitled or incorrectly received a hearing when they should not have. By comparison, we identified eight misclassified CDP and Equivalent Hearing cases in our prior year review. Based on our sample results, we estimate that 1,402 of 35,850 taxpayer cases closed in FY 2018 were misclassified by Appeals and, as a result, taxpayers did not receive the type of hearing to which they were entitled.

The results suggest a relatively significant error rate in classifying CDP requests.  When the IRS misclassifies the request of a pro se taxpayer, many will not have the tools to contest that misclassification and will accept the equivalent hearing instead of the CDP request to which they were entitled.  One of the suggestions made to the IRS regarding the making of the request for a CDP hearing is to make it simpler.  The IRS could create one fax number or one snail mail address to which all CDP requests could be sent.  Instead it has a confusing fabric of places to which a CDP request may need to be sent in order for the IRS to consider it mailed to the right place.  It also uses the CDP notice as a collection tool rather than just as a tool to notify taxpayers of their right to a CDP hearing.  By using the notice primarily as a collection tool, the hearing opportunity not only gets lost in translation but so does the address.  The TIGTA report identifies cases in which the IRS timely receives a CDP request but receives it at the wrong location.  Many other taxpayers might make a timely request if the CDP notice provided more notice and less collection information.

The TIGTA report notes that misclassification of the CDP request impacts the hearing the taxpayer receives and the notice following that hear but it does not address the jurisdictional arguments the IRS makes if the taxpayer petitions the Tax Court.  For a more extensive discussion of the issues raised by misclassification, see prior discussions here and here (this links to a Tax Notes article available only to subscribers.)

Statute of Limitations

With respect to the statute of limitations on collection, TIGTA found a significant number of errors here as well:

We found that eight of the 140 cases reviewed had an incorrect CSED. In comparison, we identified nine cases with CSED errors in our prior year review. We identified:

  • Five CDP cases for which the CSED was incorrectly extended. As a result, the IRS had more time to collect delinquent taxes than it was authorized. Based on our sample results, we estimate that the IRS may have incorrectly extended the CSED in 2,183 of 35,850 CDP and Equivalent Hearing cases closed in FY 2018.
  • Three CDP and Equivalent Hearing cases for which the CSED was incorrectly shortened. As a result, the IRS had less time to collect any outstanding balance from the taxpayer than it was authorized. Based on our sample results, we estimate that the IRS incorrectly reduced the CSED in 588 of 35,850 CDP and Equivalent Hearing cases closed in FY 2018.
  • The suspension of the CSED is systemically controlled by transaction codes on the Integrated Data Retrieval System. One code is entered to start the suspension, and another code is entered to stop the suspension and restart the statute period. Generally, the code to suspend the collection statute, along with the date the suspension should begin, is input by the Collection function. However, in certain instances, Appeals personnel are responsible for inputting the suspension code and start date. Upon completion of the CDP hearing, Appeals is responsible for entering the code to remove the suspension of the statute period along with the hearing completion date. The Integrated Data Retrieval System will systemically recalculate the CSED based on the dates entered for the two codes (which generally reflect the length of the Appeals hearing or the exhaustion of any rights to appeal following judicial review). We found that Collection function and Appeals personnel did not enter the correct date to start the suspension of the collection statute. In addition, Appeals personnel did not enter the correct date to end the suspension of the collection statute. Appeals management agreed with all but *1* of the errors we identified.

The fact that the IRS improperly extended the statute of limitations on collection in over 2,000 cases in one year should give any practitioner pause to rely on the statute of limitations calculated by the IRS.  Calculating the statute of limitations on collection has become very complicated.  See our prior discussion here.  Relying on the IRS to properly compute the statute of limitations seems risky given the over 5% error rate suggested by this report. 

The IRS does not bring many suits to reduce an assessment to judgment, but when these suits occur, the Department of Justice seems to file them right at the statute of limitations deadline.  This TIGTA report provides strong support for the practice of carefully reviewing the statute of limitations determination by the IRS.

The Collection Due Process Summit Initiative – 2019 Low Income Taxpayer Representation Workshop

I am here to provide an update of the Collection Due Process (CDP) Summit Initiative, which Carolyn Lee first wrote about in this post. Some of you may be aware that the American Bar Association holds a Low Income Taxpayer Representation Workshop each December in Washington, D.C. For 2019, the focus is on the Collection Due Process Summit Initiative. Anyone interested in Collection Due Process is welcome to attend. Registration is only $20 for ABA members, and $30 for nonmembers.

The meeting will be held December 3 from 8:30 to noon at Morgan, Lewis & Bockius LLP. More details are below.

The Collection Due Process Summit Initiative

The origin for the Collection Due Process Summit Initiative came about when preparing for a panel presentation for the 2019 May Tax Meeting for the American Bar Association Section of Taxation meeting in Washington, D.C. The panelists were Keith Fogg, Judge Gustafson, Mitch Hyman, Carolyn Lee, Erin Stearns and myself. Within the panel, we made a point of discussing issues with CDP to avoid complaining and with the goal of brainstorming creative ways for positive change. We also wanted to look at several areas related to CDP – the CDP notices mailed out by the IRS, the meetings with Appeals, the Tax Court process, and whether a creative solution like mediation would apply.

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Following the panel, several members of the group kept in touch. We worked to develop a core group of people to steer the Summit Initiative. With that steering committee, we discussed a set of roughly 30 issues with CDP. We took that input and people’s votes for what would be popular. We also wanted input from within the IRS of what sounded realistic. If something would not work, why not? We took the input on those 30 issues, divided into stages, and selected the top 3 to 4 for each.

It must be noted that the steering committee includes private practitioners, educators, IRS Chief Counsel, the Taxpayer Advocate Service, and LITC directors. We also have people within IRS Appeals, IRS Collections, and the Tax Court that we stay in communication with and use as sounding boards regarding their stages of CDP.

Members of the steering committee also wanted to provide further education on the CDP process. At the 2019 Fall Tax Meeting for the American Bar Association Section of Taxation meeting in San Francisco, there were 3 panels developed by the CDP Summit Initiative connected to the CDP process. The first panel, for the Young Lawyers Forum and Diversity committees, was part of the Tax Bridge on the Road, titled “What is Collection Due Process? A Practical Introduction to the Stages of CDP.” The second, for the Individual & Family Taxation committee, was called “Collection Due Process Notices: Much Needed Works in Progress.” The third panel, for the Pro Bono & Tax Clinics committee, was called “Prior Opportunities to Dispute Liability in Collection Due Process: An Oversized Reaction to Insufficient Action.”

The Workshop

While it is a goal of the CDP to promote education regarding CDP, we also want to bring discussion for change. The day will start out with some history of CDP and the Summit Initiative. From there, we turn to a panel on how to approach change with the IRS to achieve the best results. Next, we turn to breakout sessions regarding the top opportunities cited at the various stages of the CDP process. We will bring the group together to share what each group learned before turning to Keith Fogg for closing comments. We will be using the results to guide working groups next year to tackle those top opportunities at each stage.

All who are interested in CDP improvement are invited – from the private bar, Enrolled Agents, CPAs, and those attending the LITC conference that week. As you can see, Keith and others from the Procedurally Taxing website are involved with the CDP Summit Initiative. The cost is low so should not keep any of you in the area from attending – especially as it will include 2 MCLE credits and a box lunch!

2019 Low Income Taxpayer Representative Symposium
Collection Due Process Summit Initiative Workshop

December 3, 2019
8:30 a.m. – Noon

Improving Procedures for Taxpayers to Arrange
Sustainable Plans to Collect the Correct Amount of Tax Owed.

Who should attend?  Everyone interested in the efficient, effective collection of tax, via procedures that are humane for taxpayers, including the IRS (Collection, Appeals, Counsel), taxpayer representatives and the Tax Court
Date: Tuesday, December 3, 2019
Time: 8:30 a.m. – Noon (box lunches to grab and go)
Location: Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004
Registration Fee:  $30 General Registration
$20 ABA Member
$20 Full-time LITC Employee
Free Full-time J.D., LL.M., or M.T. Candidates (No CLE Credit)
[Law Student registrants who are current nonmembers will also receive complimentary Membership in the ABA and the Section of Taxation]

AGENDA

8:30 a.m.

Opportunities for CDP Improvement: Efforts Underway by the Collection Due Process Summit Initiative.
Collection Due Process (CDP) is a bundle of IRS collection procedural protections governed by IRC section 6320 and 6330, that affect taxpayers, their representatives, the IRS, and the Tax Court. CDP provides a structured path to achieving sustainable tax collection alternatives of procedural value to taxpayers and IRS Collection professionals. However, over time, CDP as applied lapsed into policies and procedures that often inhibit a broad range of individual and business taxpayers from establishing collection alternatives to full payment of the correct tax owed, which taxpayers can maintain. In addition, CDP procedures as applied frequently create frustration for IRS Collection professionals and IRS Counsel attorneys. These developments are contrary to the express beneficial intent of the Section 6320/6330 legislation and imperil efforts to efficiently arrange sustainable methods for taxpayers to pay the correct amount of tax owed.

Change for the better is in the air, in the form of the CDP Summit Initiative established in May 2019 to support CDP and improve how it works. Summiteers include representatives of all stakeholders, as direct participants or advisory resources. Following a methodical, consensus-driven process, the Summit Steering Committee identified priority opportunities with high potential to increase the beneficial impact of CDP in application. Summit Working groups formed around the priority opportunities are in the early stages of determining objectives, strategies and tactics to result in change.

This session will update LITR participants about Summit-designated opportunities to improve CDP, why the opportunities were selected for further exploration and action, and how all stakeholders interested in the effective and efficient arrangement of reasonable collection alternatives will benefit from the Summit’s collaborative work.

The CDP Summit’s work has the support of several ABA Tax Section committees including the Pro Bono & Tax Clinic Committee and the Individual Tax and Family Committee. ABA tax meetings have provided an important platform to discuss CDP issues and solutions while educating conference participants about functioning effectively within CDP boundaries.
Moderator: Sarah Lora, Low Income Tax Clinic, Lewis & Clark Law School, Portland, OR
Panelists: Mitchel Hyman, IRS Office of Chief Counsel, Washington, D.C.; William Schmidt, Kansas Legal Services, Kansas City, KS; Erin Stearns, Low Income Taxpayer Clinic, University of Denver, Denver, CO

9:15 a.m.

Approaching Change With the IRS
This panel will identify and explain constructive ways for practitioners to work with the IRS to create positive change benefiting both the IRS and taxpayers in the area of CDP and beyond. Panelists will explore various levels of rulemaking, the scope and authority of those rules, and ways to influence those rules. The panel also will discuss tools practitioners may use to explore and understand the underpinnings of regulatory actions, such as the Freedom of Information Act, as well as effective opportunities for proposing regulatory reform. The panel will also discuss the role of the Taxpayer Advocate Service’s Systemic Advocacy Management System (SAMS) in identifying the need for systemic changes and implementing those changes.
Moderator: Matthew James, Low Income Tax Clinic, North Carolina Central University, Durham, NC
Panelists: Mary Gillum, Legal Aid Society of Middle Tennessee & the Cumberlands, Oak Ridge, TN; John B. Snyder, III, Low-Income Taxpayer Clinic, University of Baltimore, Baltimore, MD; James P. Leith, Local Taxpayer Advocate, Baltimore, MD

10:00 a.m. Break

10:15 a.m. Exploring CDP Challenges and Practical Solutions – Working Breakout Sessions
Session participants will actively explore CDP policy and procedures focusing on CDP Summit priority opportunities and potential feasible solutions. Output will further the work of Summit Working Groups to effect change and increase efficient, fair tax collection.

Workshop participants choose to attend one of three concurrent sessions:

(1) Improving IRS CDP Notices and Communications. This program will educate participants about IRS communication approaches as they pertain to CDP rights and procedures and known issues with the communications. The session leaders will facilitate an exchange of ideas for more effective messaging to increase taxpayer participation in CDP and more effective engagement with Collections at the earliest possible stage.
Facilitators: William Schmidt, Kansas Legal Services, Kansas City, KS; Jeff Wilson, Taxpayer Advocate Service, Indianapolis, IN; Beverly Winstead, Low Income Taxpayer Clinic, University of Maryland, Baltimore, MD

(2) Improving CDP Administrative Proceedings. Participants will learn about opportunities for more effective engagement with IRS Appeals, including when a taxpayer may challenge the accuracy of an assessed liability, the critical role of a record in establishing a sustainable collection alternative to immediate full payment, and procedural traps for the unwary. Participants will collaborate to identify improvements yielding more efficient and effective application of CDP through constructive interaction between taxpayers (or their representatives) and Appeals.
Facilitators: Soreé Finley, Charlotte Center for Legal Advocacy, Charlotte, NC; Susan Morgenstern, Local Taxpayer Advocate, Cleveland, OH; Erin Stearns, Low Income Taxpayer Clinic, University of Denver Sturm College of Law, Denver, CO

(3) Exploring CDP rights and procedures within judicial proceedings. Focused on improving effectiveness and efficiency for all participants in Tax Court matters, this session will analyze common petitioner and respondent approaches to litigating CDP in Tax Court. The session will explore opportunities to increase the number of taxpayers who exit litigation with a sustainable plan to collect the correct amount of tax due. Participants will discuss the Court’s authority and limits to achieving a result satisfactorily resolving the issues between the parties; typically, a collection solution for taxpayers litigating in good faith.
Facilitators: Keith Fogg, Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA; Christine Speidel, Villanova University Charles Widger School of Law, Villanova, PA

11:15 a.m. Discussion of Breakout Session Results and Identification of Next Steps
Breakout session leaders will report on results of the group discussions, focusing on pragmatic elements for IRS procedural change, practitioner performance improvement and taxpayer orderly, effective interaction with CDP. Essentially a collaborative CLE, educating the participants on best practices in applying CDP, the output will inform the strategic and educational work for the Collection Due Process Summit Initiative during 2020. Proposals will address, among other topics, an analysis of IRS CDP correspondence, taxpayer rights in Appeals, and the role of judicial review in guiding sustainable collection alternatives. This session will emphasize sharing taxpayer representative practice tips and easy-to-implement internal IRS process improvements.
Facilitators: Susan Morgenstern, Local Taxpayer Advocate, Cleveland, OH; William Schmidt, Kansas Legal Services, Kansas City, KS; Christine Speidel, Villanova University Charles Widger School of Law, Villanova, PA; Erin Stearns, University of Denver Sturm College of Law, Denver, CO

11:55 a.m. Closing remarks. Addressing the importance of critical analysis of CDP as applied and vigilant efforts to support the proper application of CDP, in order to achieve the beneficial intent of IRC Sections 6320 and 6330.
Presenter: Keith Fogg, Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA

Noon Workshop adjourns. Box lunches to grab and go.

Love, Legal Fees, and the Origin of the Claim: Designated Orders September 23 – September 27, 2019

Despite a relatively small number of orders designated during the week of September 23, they were diverse and interesting. I discuss three below, but the orders not discussed addressed: IRS’s motion for summary judgment in a case where petitioner cited the book, “Cracking the Code” to support his position (here); and a motion to stay (here) and a motion to dismiss for lack of jurisdiction (here) from petitioners in a consolidated docket case involving converted partnership items.

Docket No. 15277-17, Maria G. Leslie v. C.I.R. (order here)

This first order piqued my interest because it covers a topic that comes up in the individual income tax class that I teach every year. The order addresses the IRS’s motion for summary judgment and the case involves alimony and the deduction for legal fees under section 212. The Tax Cuts and Jobs Act separately impacted both of these issues by eliminating the income inclusion (and corresponding deduction) of alimony for divorces decreed post-2019, and by suspending miscellaneous itemized deductions (so below-the-line attorney’s fees cannot currently be deducted). The analysis in this order is still helpful and relevant to past, and perhaps, future years.

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A deduction for legal fees is allowed when the fees are incurred to produce or collect income. Since alimony is considered income by virtue of section 71(c) legal fees related to alimony could be deducted, prior to the TCJA changes. Legal fees related to other costs of divorce are not deductible, so it is important that taxpayers (or more importantly, their divorce attorneys) distinguish between the fees paid for each cause of action.

To determine whether the fees are deductible, the Court must look to the origin of the claim and not the taxpayer’s purpose or desired outcome in the case.

In this specific case, there is a lot at stake for the petitioner. Her ex-husband worked with the firm that handled the class action lawsuit against Enron and for which he received a $50 million fee after the marriage ended.

Originally, a marital settlement agreement (“MSA”) was reached which entitled petitioner to 10% of her ex-husband’s earnings. The amount received under the MSA was determined to be alimony income to the petitioner in an earlier Tax Court case.

Later, petitioner had second thoughts about the MSA and incurred legal fees in three separate proceedings: 1) to set aside the MSA for lack of legal capacity, 2) for an order to show cause as to why she should receive the percentage of earnings as dictated by the MSA nevertheless (her ex-husband deposited her percentage into a trust account for her benefit, but she was barred from accessing it), and 3) for damages for breach of fiduciary duty to her with respect to the MSA negotiations under California Family Code which allows a suit for damages if a breach by her ex-husband results in impairment to her undivided one-half interest in the community estate.

The Court looked to origin of the claim for each proceeding and determined that petitioner was only entitled to deduct legal fees for the second proceeding, because it related to the alimony income in the trust account and her ability to collect it. The IRS’s motion for summary judgment was denied with respect to this part.

The other proceedings were not entitled to a legal fee deduction because the origin of the claim in the first proceeding was related to a flaw in the MSA, and in the third proceeding arose from a duty that her ex-husband had to her as a result of their marriage. In other words, the origin of the first and third claims did not involve the production or collection of income. The IRS’s motion for summary judgement was granted with respect to these parts.

The parties were ordered to submit settlement documents or a status report by the end of November.

Docket No. 6446-19L, Wendell C. Robinson & May T. Jung-Robinson (order here)

In this order the petitioners have filed a motion for summary judgment because they believe they have already paid their 2012 liability of $88,000 with a combination of withholding and a check sent with their return. They argue that as a result of the liability being paid in full, and since the assessment statute is closed, the IRS’s proposed levy cannot be sustained.

In response, the IRS explains that the petitioners’ return contained mathematical errors, so they owed $13,267.20 more than what their return originally reflected. The IRS used its math error authority to correct the returns, so no notice of deficiency was issued. There has been considerable coverage by PT on various math error authority issues (for example: here and here) and it was an “Area of Focus” in former NTA, Nina Olson’s Fiscal Year 2019 Objectives Report to Congress.

The Court has an issue with the IRS’s use of math error authority in this case – mainly that Appeals’ notice of determination makes no mention of the mathematical corrections permitted by section 6213(b)(1), nor of whether the petitioners were notified of the corrections, as required, to give them an opportunity to request abatement. Abatement can be requested under section 6213(b)(2)(A) and doing so entitles the taxpayer to deficiency procedures.

The Court would like more evidence on this issue, so it denies petitioner’s motion.

Docket No. 17799-18L, Michael Balice v. C.I.R. (order here)

This case involves an interesting scenario in the CDP world that I have not encountered – it is one where a taxpayer timely requests a CDP hearing but is not provided with one. Keith covered the topic in 2015 (here), and in 2016 (here) after the IRS provided guidance on how its attorneys should handle the issue in Chief Counsel Notice (“CC”) 2016-008. The issue has also come up in at least one other designated order post (here).

In this order, it appears that Counsel may not have adhered its own guidance and the IRS has moved to dismiss the case alleging that the petitioner took only frivolous positions in his CDP requests for a levy and lien.

The IRS argues that the Court should grant summary judgment in their favor because they did not violate petitioner’s due process rights by denying him a CDP hearing. In the IRS’s view, petitioner had an opportunity to raise issues regarding his liability and the validity of the lien in other courts (because the DOJ had the case for a period of time) and petitioner’s request was properly disregarded because it only raised frivolous issues. IRS also argues that there is no benefit to remanding the case to Appeals, which the Court may be permitted to do, because of petitioner’s frivolous arguments and because Appeals lacks the authority to compromise petitioner’s liability due to the DOJ’s involvement.

The Court isn’t convinced by the IRS’s arguments and reviews the history of the case. Earlier on, as a result of the Office of Appeals’ view that the petitioner’s request was frivolous, it did not communicate with the petitioner in any of the usual ways. The petitioner did not receive an explanation of the process and Appeals did not request any financial information.

The only correspondence Appeals sent to petitioner was a notice of determination sustaining the NFTL (petitioner’s request related to his proposed levy was not timely). This denial of a CDP hearing is permitted under section 6330(g), but Thornberrypermits the Tax Court to review the “non-hearing” for an abuse of discretion.

That opportunity for review is potentially helpful for petitioner in this case. The Court reviews the form letter that petitioner submitted with his CDP request and nothing seems frivolous about it.  If only some portions of petitioner’s request are frivolous, then Appeals may have abused its discretion in denying the CDP hearing. The Court also identifies a section 6751 supervisory approval issue and the IRS has not demonstrated it has met its burden. As a result, rather than grant the IRS’s motion, the Court sets the motion for argument during the upcoming trial session.

A Journey Through Rule 81(i) – Designated Orders: August 19 – 23, 2019

There were only four orders this week. The first and most interesting order explores Rule 81, which governs the taking and use of depositions in the Tax Court. Two CDP orders and a tax protester in a deficiency case round out this week’s orders.

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Docket  Nos. 16634-17L, 15789-17, Raley v. C.I.R. (Order Here)

This short order from Judge Buch strikes from the record Respondent’s lodging of a document entitled “Respondent’s Designation of Deposition Testimony To Be Used At Trial.” Judge Buch characterizes Respondent’s filing as “an attempt to put into the evidentiary record of this case a deposition of a non-party taken pursuant to a stipulation under Rule 81(d) . . . .” For those practitioners who don’t often take depositions in cases before the Tax Court (myself included), a brief review of Rule 81 is called for.

Rule 81 provides that a party may take depositions only where (1) the parties agree to do so under Rule 81(d), or (2) the party seeking the deposition applies for permission from the Court under Rule 81(b). Compared to Rule 30 of the Federal Rules of Civil Procedure, which requires an application only in limited circumstances, the Tax Court has much more discretion under its Rules to allow an unconsented deposition. But here, the parties stipulated, and so didn’t need Court permission to take the deposition.

Now we have a deposition. But what can we do with it? Rule 81(i) governs use of the deposition in the Court. Rule 81(i) is analogous, but not identical, to FRCP 32.

At the trial . . . any part or all of a deposition, so far as admissible under the rules of evidence applied as though the witness were then present and testifying, may be used against any party who was present or represented at the taking of the deposition or who had reasonable notice thereof, in accordance with the following provisions:

1. The deposition may be used by a party for the purpose of contradicting or impeaching the testimony of the deponent as a witness;

2. The deposition of a party may be used by an adverse party for any purpose;

3. The deposition may be used for any purpose if the Court finds: (A) That the witness is dead; (B) that the witness is at such a distance from the place of trial that it is not practicable for the witness to attend, unless it appears that the absence of the witness was procured by the party seeking to use the deposition; (C) that the witness is unable to attend or testify because of age, illness, infirmity, or imprisonment; (D) that the party offering the deposition has been unable to obtain attendance of the witness at trial, as to make it desirable in the interests of justice, to allow the deposition to be used; or (E) that such exceptional circumstances exist, in regard to the absence of the witness at the trial, as to make it desirable in the interests of justice, to allow the deposition to be used.

So, to summarize, the deposition may be used in three circumstances: (1) impeaching the deponent as a witness at trial; (2) for any purpose, if the deponent is a party; and (3) purposes related to the unavailability of a witness at trial, including death, distance, inability to attend or compel attendance, or other exceptional circumstances.

Here, Respondent, according to Judge Buch, simply attempted to put the entire deposition into the record. That won’t work, because Respondent didn’t even identify how Respondent intended to use the deposition. Without at least this, the Court has no basis to determine whether the deposition will be permissibly used under Rule 81(i).

Respondent’s counsel didn’t take this lying down. A week later, Judge Buch issued a subsequent order in this case. The parties held a conference call with Judge Buch, and explained that the deponent would be unavailable for trial—one of the reasons a deposition can be used, for any reason, under Rule 81(i)(3). Judge Buch accordingly vacated the August 21 order, retitled Respondent’s filing of the deposition as a “Motion Under Rule 81(i),” and ordered the parties to stipulate to the admissibility of so much of the deposition as possible. That stipulation was filed on September 6, and the Court accordingly granted Respondent’s motion under Rule 81(i) on September 18.

Docket  Nos. 5227-18L, 4986-18L, Koham v. C.I.R. (Order Here)

This CDP case from Judge Buch involves petitioners who don’t appear sympathetic. The liability arose from the taxpayer’s self-assessment of income tax liabilities on returns they filed for 2013 and 2014. The taxpayers filed an OIC, but listed “patently excessive” expenses (e.g., $9,500 for housing expenses). In the interim, the Service filed a NFTL, and so Petitioners elected to pursue the OIC through the CDP procedures.

The settlement officer calculated a monthly net income for the taxpayers of $987, after reducing their monthly expenses to the IRS collection standards amounts. The SO found a reasonable collection potential of $312,361—far greater than the corresponding tax liability of $35,117 and dwarfing petitioners’ offer of $2,500.

The SO offered a streamlined installment agreement of $332 per month (i.e., the total liability divided by 72 months). But Petitioner didn’t accept it and the SO issued a Notice of Determination that sustained the NFTL. Petitioners proceeded to the Tax Court, arguing in their response to Respondent’s eventual motion for summary judgment that the SO made a “blanket rejection” of the OIC.

There was simply nothing here for the Court—or frankly, the IRS—to work with. Petitioners provided no evidence of an IRS error with the expense calculation to lower the “reasonable collection potential”; no purported special circumstances that would justify acceptance of an offer for less than the reasonable collection potential; and no further allegations (e.g., that the SO failed to verify all applicable statutory and procedural requirements). They complained of the SO’s “blanket rejection” of the OIC; instead it seems the SO considered the circumstances and rejected the OIC for a fair reason. Pro se CDP litigants should take note: your reasons for seeking reversal must be well-grounded in the facts and law.

Docket  No. 24599-17L, Marra v. C.I.R. (Order Here)

Another CDP case, this time from Chief Special Trial Judge Carluzzo. Respondent filed a motion for summary judgment, while Petitioner moved to remand the case to IRS Appeals. The primary issue is whether Petitioner may challenge the underlying liability pursuant to IRC § 6330(c)(2)(B). Respondent objects because they believe Petitioner did not raise the underlying liability during the CDP hearing itself, and is therefore precluded from raising that issue before the Tax Court. See Giamelli v. Commissioner, 129 T.C. 107, 112-13 (2007). Petitioner responded that, in fact, he raised the issue in a Form 1127, Application for Extension of Time for Payment of Tax Due to Hardship, which he allegedly submitted during the CDP hearing.Judge Carluzzo notes a further disagreement to whether Petitioner had reasonable cause for failure to pay the underlying liability, in addition to the liability itself.

Because Judge Carluzzo finds there to be a continuing dispute regarding the underlying liability, he denies Respondent’s motion for summary judgment, because genuine issues of material fact remain in dispute (though the order does not detail precisely what facts are material or in dispute).

Further, Judge Carluzzo denies Petitioner’s motion to remand—likely because the issue centers on the underlying liability. If the Court finds that Petitioner did raise the underlying liability at the hearing, then the Court may consider it de novo without need for remand. See Sego v. Commissioner, 114 T.C. 604, 610 (2000). If not, then it’s a moot point anyway. In any case, remand doesn’t make sense here.

Docket No. 322-19, Barfield v. C.I.R. (Order Here)

Finally, Judge Guy defeats a classic tax protester tactic. In an earlier proceeding, Petitioner alleged an issue regarding tax year 2015. But at that time, the Service hadn’t issued a notice of deficiency for 2015. So, Respondent moved to dismiss for lack of jurisdiction as to 2015, which the court granted.

Later, the Service did issue a notice of deficiency for 2015. Petitioner asked the Tax Court for review, and filed a motion for summary judgment, arguing that the earlier proceeding had dismissed the 2015 tax year, and thus, was res judicata as to this new proceeding. Respondent filed a motion for judgment on the pleadings in response. 

Judge Guy parries this tax protester’s attempt to nullify the Service’s notice of deficiency and grants Respondent’s motion for judgment on the pleadings. Because Petitioner didn’t allege any errors or facts with respect to Respondent’s notice—aside from the baseless res judicata argument—Judge Guy found that “the petition . . . fails to raise any justiciable issue.” Judge Guy also warns petitioner about the section 6673 penalty, but does not impose one. A review of the case’s docket suggests that Petitioner heeded Judge Guy’s warning, as there have been no further filings in this docket. 

More on the Muddle of CDP

On August 6, 2019, I wrote about what I called the muddle that has been created in Collection Due Process (CDP) merits litigation.  Maybe because of the muddle of the litigation or maybe because I too am muddled, I kept thinking about the problem and I feel the need to write more about my concerns with the proposed decision in the Landers case that the prior post addressed.

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The ability to litigate the merits of a tax liability during the collection phase of a case came into the code in 1998 with the advent of CDP.  Among the opportunities provided to taxpayers by a CDP hearing is the opportunity to contest the merits of the liability in certain circumstances.  IRC 6330(c)(2)(B) 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.

At least one part of the muddle is the meaning of “or” in this provision, as it separates the clause discussing the failure to receive the notice of deficiency from the clause concerning prior opportunity.  At the ABA Tax Section meeting this fall, a panel on October 5 in the Pro Bono and Tax Clinics Committee will discuss prior opportunity as a part of the CDP summit.  Understanding how to interpret this clause and how the proposed Landers decision fits into the jurisprudence around this clause will take up some of the panel’s time.  It seems that the IRS and the Tax Court do not pay much attention to this “or”.

In 1998, Congress created the CDP to give taxpayers an opportunity to talk to the IRS before it levied on property and after it filed a notice of federal tax lien.  Although the focus of CDP centers on collection action, Congress included in the legislation a provision allowing taxpayers to litigate the merits of their tax liability if they had not previously had such an opportunity.  Congress did not provide an unlimited opportunity to contest the merits of a liability included in a CDP.  The statute rests on two separate requirement that the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”

The first basis for contesting the merits of a tax liability in the CDP context arises if the taxpayer did not actually receive the statutory notice of deficiency. In the hearings leading up to the 1998 legislation, Congress heard from many taxpayers who said that they never received a statutory notice of deficiency and the first time they learned that they owed the IRS occurred when the IRS began collection action against them.  Taxpayers who do not receive a statutory notice of deficiency because of some snafu in the mailing or receipt did have an opportunity to contest the liability in a judicial forum.  The statutory notice of deficiency would only have legal effect if sent to their last known address.  Whatever prevented these taxpayers from filing a timely petition in the Tax Court, they had a valid opportunity to seek review in the Tax Court.

The language of the statute permits these taxpayers to get back to the Tax Court to litigate their liability as long as they can prove non-receipt of the notice of deficiency.  Proof usually consists of their testimony that they never received the notice.  Assuming that the taxpayer meets the burden of proving non-receipt, the statute arguably places no limitations on the taxpayer’s ability to contest the merits the taxpayer failed to contest when the IRS sent the notice of deficiency.

In contrast to those CDP cases in which the taxpayer can contest the taxes reflected on a notice of deficiency, the statute creates a second less well-defined group of taxpayers who can contest the merits of the liability in CDP.  This group of taxpayers are ones “who did not otherwise have an opportunity to dispute such liability.”  This language leaves room for interpretation in looking at the words opportunity and dispute.  The IRS provided definition in its regulations with respect to this statute.  The regulation provides that the term “opportunity to dispute” includes “a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.”

Landers ignores the “or” and proposes that if the taxpayer actually has a meeting with Appeals, in this case through the audit reconsideration process, then this prior opportunity prevents the taxpayer from having a merits hearing in the Tax Court.  Landers does not talk about whether the failure to receive a notice of deficiency provides a stand-alone basis for a merits hearing as the statute seems to suggest but, without discussion, treats the “or” as an “and”.

This treatment would be the first case to hold that even though the taxpayer did not receive a notice of deficiency the actual meeting with Appeals overrides the language of the statute stating that the failure to receive the notice is the basis for a merits hearing.  It would not be the first Tax Court case to overlook the “or”.

In discussing the case within PT as I tried to work through the muddle, Christine provided the following comments:

I think the IRS view is that both conditions must be satisfied, since they felt the need to clarify in the reg. that an appeals conference offered before the issuance of a SNOD does not count as a prior opportunity, notwithstanding their general position that it does count. If the two grounds for merits review were wholly independent, the opportunity for an appeals administrative hearing would never matter in a case where a SNOD was issued but not received. 


I looked through a few of the income tax opinions on this, and noticed that in Montgomery and Tatum the judge changes the “or” to “and” when rephrasing the rule. The IRS acquiescence to Montgomery quotes the “and” rephrasing. 


That said, Tatum (and Sherer) are all about receipt & the taxpayer’s knowledge of the SNOD, and don’t discuss what opportunities for appeals review may have existed in between the SNOD and the CDP notice.


It’s puzzling to me in Onyango that the discussion is all about receipt of the SNOD, and the court does not talk about the “prior opportunity” language or use that language to find for the IRS. The D.C. Circuit’s affirmance says “Appellant has not shown that the Tax Court clearly erred in … finding that he ″received″ a notice of deficiency as that term is used in 26 U.S.C. § 6330(c)(2)(B).” In contrast, the Sego case does find that the petitioner wife who deliberately refused certified mail had a “prior opportunity” to dispute, in addition to citing caselaw saying that taxpayers can’t defeat actual notice by refusing mail. So the Sego court took care to eliminate both prongs for merits review, while the Onyango court did not. 

It will be interesting to see what happens to the “or” as Landers moves forward.  The Tax Court has not yet fully embraced the regulation, and its expansive view of opportunity has the effect of eliminating most CDP merits hearings.  So far, having an actual Appeals hearing seems important to the Tax Court making the provision a trap for the unwary, as discussed in the previous post.  That interpretation, which traces back to Lewis v. Commissioner, shows a gap between the Tax Court and the regulation, even if the Lewis case otherwise provides little comfort to taxpayers seeking merits relief.  The court now seems poised to accept the IRS interpretation of “or” in deciding that it really means “and”.  (It’s also not clear and not discussed in Landers how, if at all, IRC 6330(c)(4) has a role here if the taxpayer has an actual Appeals hearing.)