Review of 2019 (Part 1)

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.  We welcome your comments on the most important developments in 2019 related to tax procedure.


Important IRS Announcements

CC Notice 2020-002Contacting IRS attorney by email

This recently-issued Chief Counsel notice announces a process for email communications between practitioners and Chief Counsel attorneys. Formerly, communication with Chief Counsel attorneys was difficult, due to internal restrictions on emailing taxpayer information. Under the new notice, Chief Counsel employees can now exchange email with taxpayers and practitioners using encrypted email methods. This new policy will likely prove helpful for practitioners, who can now make quicker progress in working with Chief Counsel to resolve Tax Court litigation or to prepare for trial.

CC Notice 2019-006Deference

This notice is a policy statement, warning Treasury and the IRS about the current judicial state of play on deference to agency regulations. It states that Chief Counsel attorneys will no longer argue that courts should apply Chevron or Auer deference to sub-regulatory guidance, such as revenue rulings, revenue procedures, or other notices. This guidance should be read in conjunction with the Supreme Court’s decision last term in Kisor v. Wilkie, in which the Court scaled back the applicability of Auer deference and indicated a willingness to rethink the scope of agency deference.  As tax lawyers it’s easy to overlook important administrative law decisions such as Kisor, but we all need to recognize the importance of such decisions on how to practice before the IRS. 

See Keith Fogg, Notices on Communicating with IRS, Chief Counsel’s Office and Deference, Procedurally Taxing (Oct. 28, 2019),

Altera, Good Fortune, & Baldwin – Deference to regulations

The 9th Circuit recently reversed the Tax Court’s decision that the transfer pricing regulations at issue in Altera Corp. v. Commissioner, 926 F.3d 1061 (9th Cir. 2019), rev’g 145 T.C. 91 (2015) were invalid because they lacked a “reasonable explanation” as required by the Supreme Court in State Farm.  A majority of the Ninth Circuit concluded that Treasury made “clear enough” its decision by including “citations to legislative history” that the dissent said were “cryptic.” The 9th Circuit recently denied Altera’s petition rehearing en banc over a vigorous dissent from three judges, making the case a possible vehicle for certiorari and the latest Supreme Court reexamining of administrative deference.

In contrast, a decision by the D.C. Circuit in Good Fortune Shipping v. Commissioner, 897 F.3d 256 (D.C. Cir. 2018), rev’g 148 T.C. 262 (2017), held invalid regulations that narrowed an excise tax exemption for corporations owned by shareholders in certain countries.  The regulations said ownership of bearer shares could not be used to qualify for the exemption.  The preamble to the regulations suggested the rule was needed because of the difficulty of reliably tracking the location of the owners of bearer shares, but the court observed that other regulations issued by the agency suggested that the location of the owners of bearer shares were becoming easier to track over time.

On the other hand, in Baldwin v. United States, 921 F.3d 836 (9th Cir. 2019), reh’g denied, 2019 U.S. App. LEXIS 18968 (9th Cir. June 25, 2019), petition for cert. filed, 2019 WL 4673331 (U.S. Sept. 23, 2019) (No. 19-402), the Ninth Circuit held that a claim for refund was late because the common law mailbox rule was supplanted by Treas. Reg. § 301.7502-1(e)(2)(i).  Because the Ninth Circuit had previously held the statutory rule (IRC § 7502) provided a safe-harbor that supplements the common-law rule, the district court held the regulations invalid.  Under the Supreme Court’s holding in Brand X, “[a] court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”  In this case, the regulations trumped the Ninth Circuit’s prior interpretation of IRC § 7502 because it said its earlier decision was filling a statutory gap.  Litigators have indicated this case may be the perfect vehicle for the Supreme Court to consider overruling Chevron or Brand X. 

See Andrew Velarde, Can the Humble Mailbox Rule Bring Monumental Changes to Chevron? 94 Tax Notes Int’l 412 (Apr. 29, 2019) (noting that Justices Thomas, Gorsuch, Kavanaugh, Alito, Breyer, and Chief Justice John Roberts have arguably expressed reservations about an overly broad reading of Chevron).

Taxpayer First Act (“TFA”)

Innocent Spouse changes/Effect of 6015 (e)(7)

The TFA made perhaps unintentional but significant changes regarding the Tax Court’s review of appeals of adverse innocent spouse determinations.  The change is codified at 6015(e)(7) Such appeals will be reviewed de novo (codifying previous Tax Court precedent). This part of the new law regarding the standard for review is uncontroversial and will not result in changes for those seeking innocent spouse relief; however, the legislation changes the scope of review.  Previously, the innocent spouse proceeding went forward with no restrictions on the information the taxpayer could present in the Tax Court.  Now, the scope of review is limited to the administrative record plus the Tax Court can consider “newly discovered or previously unavailable” evidence. While these provisions may seem innocuous, they also may lead to significant new disadvantages for taxpayers. For one, innocent spouse cases present uniquely burdensome evidentiary issues for taxpayers. Presenting evidence of spousal abuse, for example, may be difficult, especially if police or medical reports do not exist in the administrative record. Meanwhile, the one exception to the administrative record, “newly discovered or previously unavailable” evidence, remains ill-defined in the statute and may prove to be a source of confusion for taxpayers and practitioners. Important evidence that a taxpayer may already possess – thus not making it “newly discovered or previously unavailable” – but didn’t include in the administrative record could potentially be excluded. For pro se taxpayers in particular, who may not be aware of the relevance of certain documents when making their case, this is a particular challenge.

The first few Tax Court cases implicating 6015(e)(7) have begun to emerge and may provide more clarity. One potential judicial solution to the issue would be for the Tax Court to remand cases with under-developed records back to the IRS.

Carlton Smith, Should the Tax Court Allow Remands in Light of the Taxpayer First Act Innocent Spouse Provisions?, Procedurally Taxing (Oct. 17, 2019),

Keith Fogg, First Tax Court Opinions Mentioning Section 6015(e)(7), Procedurally Taxing (Oct. 16, 2019),

Christine Speidel, Taxpayer First Act Update: Innocent Spouse Tangles Begin, Procedurally Taxing (Oct. 10, 2019),

Steve Milgrom, Innocent Spouse Relief and the Administrative Record, Procedurally Taxing (July 9, 2019),

Carlton Smith, Congress Set to Enact Only Now-Unneeded Innocent Spouse Fixes, Part 2, Procedurally Taxing (Apr. 4, 2019),

Carlton Smith, Congress Set to Enact Only Now-Unneeded Innocent Spouse Fixes, Part 1, Procedurally Taxing (Apr. 3, 2019),

Ex parte in TFA and CDP

The TFA does not specifically address ex parte communications between appeals and examinations or collections personnel. However, it does codify appeals’ status as an independent office, which may further strengthen arguments against ex parte communication. The currently applicable ex parte restrictions are found in Rev. Proc. 2012-18, which sets forth extensive guidance on permissible and impermissible forms of ex parte communications.

 In CDP proceedings, ex parte communications can potentially occur between appeals officers and revenue officers via the transmission of the administrative file to Appeals. Rev. Proc. 2012-18 prohibits the inclusion of material that “would be prohibited if . . . communicated to Appeals separate and apart from the administrative file.” But as demonstrated by a recent case, Stewart v. Commissioner, this may be a high bar for taxpayers to clear in challenging such communications. In Stewart, the revenue officer included contemporaneous notes in the file that indicated the taxpayer’s representation was somewhat uncooperative during a field meeting. The Tax Court declined to accept the taxpayer’s argument that the notes were prejudicial and ruled in favor of the Commissioner. 

See Keith Fogg, Application of Ex Parte Provisions in Collection Due Process Hearing, Procedurally Taxing (Sep. 19, 2019),

Taxpayer protection program

Identify fraud has been a consistent and significant problem for the IRS. But the Service’s new procedures for protecting taxpayer information may be unduly burdensome, particularly for taxpayers who need representation with time-sensitive matters. For those representing taxpayers whose returns are flagged as potential victims of identity theft, the process of authenticating identity is difficult and requires knowledge of taxpayer personal information that may not be readily available, such as place of birth or parent’s middle name. The burden is such that it may even implicate the Taxpayer Bill of Rights (TBOR)’s “right to retain representation”. By de facto requiring that the taxpayer actively participate in the identity verification process, the taxpayer is effectively deprived of their right to have their representative act for them in dealings with the IRS.

See Barbara Heggie, Taxpayer Representation Program Sidesteps Right to Representation, Procedurally Taxing (Oct. 3, 2019),

VITA referrals to LITCs

Especially relevant for our purposes, the TFA “encourages” VITA programs to advise participating taxpayers about the availability of LITCs and refer them to clinics. This is a helpful step, which strengthens the connection between VITA and LITCs and may help inform eligible taxpayers of the existence of their local LITC.

Notes from the Fall 2019 ABA Tax Section Meeting

From October 3 to 5 Les, Christine and I attended the tax section meeting in San Francisco.  We were each on different panels and we each enjoyed a delightful dinner cruise on the bay Friday night courtesy of tax procedure guru, Frank Agostino.  During the cruise the three of us had an in depth discussion with Frank about his latest ground-breaking tax procedure initiatives which we hope to highlight in coming posts.

For this post I intend to provide some of the information passed out during the update sessions in the Administrative Practice and Court Procedure Committees.  For anyone interested in more depth or more precision, it is possible to purchase audio tapes of the committee meetings from the tax section.


Administrative Practice Committee

The discussion initially focused on Appeals and the Taxpayer First legislation seeking to create a more independent Appeals.  Apart from the legislation, Appeals issued a new conferencing initiative on September 19, 2019.  A request for comments on the new process went out. 

The presenter discussed the change to IRC 7803(e)(5)(A) and the right to a hearing in Appeals.  This change resulted from the Facebook case discussed here.  For those who do not remember the Facebook litigation, Chief Counsel denied Facebook the opportunity for a conference with Appeals after Facebook filed its Tax Court petition — even though Facebook had not met with Appeals prior to filing the petition.  The new provision will make it more difficult to deny a taxpayer the opportunity to meet with Appeals in this circumstance.

Another provision of the Taxpayer First Act, IRC 7803(e)(7)(A), grants taxpayers the right to their file 10 days in advance of a meeting with Appeals.  This provision has some income limitations but will generally benefit the vast majority of individual taxpayers.  It seems like a good step forward, though I would like the file much earlier than 10 days before the meeting, and I have had trouble getting it from Appeals in the past.  Some Appeals Officers (AOs) have denied my request for information in the administrative file, even though taxpayers have always had the right to this information.  If the case is in Tax Court, a Branerton letter to the Chief Counsel attorney will almost always result in that attorney calling the AO to tell the AO to send the material.  If you go to Appeals prior to Tax Court and have no Chief Counsel attorney to make this call, I wonder if the legislation will cause Appeals to take the position that a taxpayer cannot receive the material until 10 days prior to the meeting.  This would be a shame, because meetings are much more productive when parties can properly prepare.

The Taxpayer First Act also made changes to the ex parte provisions, set out in 7803(e)(6)(B), first enacted in 1998 as a means of insulating Appeals from the corrupting influence of other parts of the IRS.  The ex parte provisions were previously off-code but picked up by the IRS in a pair of Revenue Procedures describing how they would work.  The new provision allows Appeals to communicate with Chief Counsel’s office in order to obtain a legal opinion as it considers a matter, as long as the Chief Counsel attorney providing the advice was not previously involved in the case.  I don’t think this changes much.  Rev. Proc. 201218 already allowed attorneys in Chief Counsel to provide legal advice to Appeals.  Maybe this makes it clear that Appeals is not so independent that it cannot receive legal advice when it needs it, but it seemed that Chief Counsel and Appeals had already figured that out — even if some taxpayers criticized Appeals for obtaining legal advice.  Of course, when obtaining advice Appeals needs to seek out someone other than the attorney who was providing advice to Examination, in order to avoid having the attorney be the Trojan horse improperly influencing Appeals.

The panel mentioned Amazon v. Commissioner, 2019 U.S. App. Lexis 24453 (9th Cir. 2019). This is an important transfer pricing case clarifying what constitutes an “intangible” that must be valued and included in a buy-in payment to a cost-sharing arrangement between a parent company and its foreign subsidiary entity. The 9th Circuit panel affirmed the Tax Court, declining to apply Auer deference and holding that certain of Amazon’s abstract assets, like its goodwill, innovative culture, and valuable workforce, are not intangibles.

The committee also discussed Chief Counsel Notice CC-2019-006 “Policy Statement on Tax Regulatory Process” (9-17-2019).  A copy of the complete policy statement can be found here.   Each of the four points is important in its own way.  I find number three to be especially important.  We discussed the notice previously in a post here.

A few recent cases were mentioned as especially important to administrative practice:

Mayo Clinic v. United States, 124 AFTR2d 2019-5448 (D. Minn. 2019) provides the most recent interpretation of Mayo and what it means, in the context of whether Mayo Clinic was entitled to an exemption as an “educational organization” under Treas. Reg. § 1.170A-9(c).

Baldwin v. Commissioner, 921 F.3d 836 (9th Cir. 2019) is a mailbox rule case in which the taxpayer seeks to overrule National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967 (2005).

Bullock v. IRS, 2019 U.S. Dist. LEXIS 126921 (D. Mont. 2019) is a pre-enforcement challenge to Rev. Proc. 2018-38 which relieves 501(c) organizations of the obligation to disclose the names and addresses of their donors.

Court Practice and Procedure Committee

Robin Greenhouse, who now heads Chief Counsel’s LB&I office, gave the report for Chief Counsel’s office.  She read from her notes and provided no PowerPoint presentation or handout material, so this time I cannot FOIA the PowerPoint presentation to provide the data.

She discussed two financial disability decisions which seems like an interesting place to begin.  First she mentioned Carter, as representative for Roper, v. United States, 2019 U.S. Dist. LEXIS 134035 at( N.D. Ala. 2019) in which the court determined that an estate cannot use 6511(h) to assert financial disability because an estate is not an individual.  I wrote a post on this case earlier in the fall.   Next she mentioned the case of Stauffer v. Internal Revenue Service, which I recently wrote about here.  I failed to make notes on the other cases she discussed and I cannot remember why.

Judge Marvel talked about the new Tax Court announcement on limited scope representation and the Chief Counsel Notice, CC-2020-001 on that issue.  During the first month of the fall Tax Court calendar four persons entered a limited appearance, including our own Christine Speidel.  The limited appearance ends when the calendar ends, making it not entirely clear what to do with a decision document.  Some suggested getting the decision document signed by the petitioner was the way to go.

So far the Tax Court has 18 pending passport cases.  Judge Marvel indicated that we might see the first opinion in a passport case soon.

Effective on September 30, 2019 the Tax Court has begun accepting electronic filing of stipulated decisions.  The practical effect of this is that because the IRS always signs the decision document last, it will be the party to submit the document.  I doubt this change will have a profound impact on Tax Court practice but, in general, more electronic filing is better.

Development of the Tax Court’s new case management system is moving quickly.  The court expects it to go online by Spring of 2020.  When implemented, this system will allow parties to file petitions electronically.  Judge Marvel expects that practitioners will like the new system.  The new system may allow changes to the public’s access to documents; however, whether and how that might happen is unclear.

Gil Rothenberg, the head of the Department of Justice Tax Division’s Appellate Section gave an update on things happening at DOJ.  He said there have been 75 FBAR cases filed since 2018 with over $85 million at issue.  Several FBAR cases are now on appeal – Norman (No. 18-02408) (oral argument held on October 4th) and Kimble (No. 19-1590) (oral argument to be scheduled) both in the Federal Circuit; Horowitz (No. 19-1280) (reply brief filed on July 18th) in the 4th Circuit and Boyd (No. 19-55585) (opening brief not yet filed) in the 9th Circuit.

Over 40 bankers and financial advisors have been charged with criminal activity in recent years and the government has collected over $10 billion in the past decade.  I credit a lot of the government’s success in this area to John McDougal discussed here but the Tax Division certainly deserves credit for this success as well.

DOJ has obtained numerous injunctions for unpaid employment taxes in the past decade.  It has brought over 60 injunction cases against tax preparers and obtained over 40 injunctions.  These cases take a fair amount of time and resource on the part of both the IRS and DOJ.  They provide an important bulwark against taxpayers who run businesses and repeatedly fail to pay their employment taxes.  Usually the IRS revenue officers turn to an injunction when the businesses have no assets from which to administratively collect.  We have discussed these cases here.  I applaud DOJ’s efforts to shut down the pyramiding of taxes.  Congress should look to provide a more efficient remedy, however, for addressing taxpayers who engage in this behavior.

He said that while tax shelter litigation was generally down, the Midco cases continued.  He mentioned Marshall v. Commissioner in the 9th Circuit (petition for rehearing en banc was denied on October 2nd) and Hawk v. Commissioner in the 6th Circuit (petition for certiorari was denied by the Supreme Court on October 7th).  We have discussed Midco cases in several posts written by Marilyn Ames.  These cases arise as transferee liability cases.  See our discussion of some past decisions here and here.  My hope is that the government will continue to prevail on these cases as the scheme generally serves as a way to avoid paying taxes in situations with large gains.  I wonder how many of these cases the IRS misses.

In Fiscal 2019 there were 200 appeals.  The government won 94% of the cases appealed by taxpayers and 56% of the cases appealed by the government.  I was naturally disappointed that he only talked about cases in which the government prevailed and did not discuss some of the larger losses such as the one in Myers v. Commissioner discussed here.

He briefly discussed the Supreme Court’s decision in Taggart v. Lorenzen, a bankruptcy case, in which the court held that the proper standard for holding the government in contempt for violating the discharge injunction required mens rea.  This followed the position of the amicus brief submitted by the Solicitor General. The Court declined to adopt the petitioner’s position, which would permit a finding of civil contempt against creditors who are aware of a discharge and intentionally take actions that violate the discharge order. The Court found this proposal to be administratively problematic for bankruptcy courts, distinguishing between the purpose and statutory language of bankruptcy discharge orders (which require mens rea) and automatic stays (which do not).

He ended by announcing that he will retire on November 1, 2019.

Application of Ex Parte Provisions in Collection Due Process Hearing

We have not written much about the ex parte provisions that entered the code in 1998.  We have a couple of posts on the topic here and here.  In the recent case of Stewart v. Commissioner, T.C. Memo. 2019-116 the taxpayer alleges that material in the administrative file created an ex parte communication.  The Tax Court decided that the material did not violate the provision prohibiting ex parte communications between Appeals and other parts of the IRS that might improperly influence Appeals. 


The Stewarts received a CDP notice of intent to levy for 2015 and a CDP notice of the filing of a notice of federal tax lien for 2015 and 2016.  Although the court doesn’t write about the amount that the Stewarts owe the IRS, my guess is that they owe a fair amount because their case was being handled by a Revenue Officer.  The clients in my clinic usually do not owe enough to have a revenue officer (RO) assigned to their cases.  I prefer cases in which a revenue officer works the case because then I have only one person to deal with and I do not have to contact the Automated Collection Site.  Because ROs have their boots on the ground in the community where the taxpayer lives, it’s also possible for them to understand local issues in a way that someone sitting in a windowless room on the other side of the country might not.  Of course, the down side of a revenue officer is that they see things someone on the other side of the country might not see.

In this case the Stewarts’ representative seems not to have formed a favorable relationship with the revenue officer.  In fact, he invited the RO to leave his office in what the RO describes as a brusque manner.  The RO put his interactions with the representative into his case notes.  When the representative decided he could not achieve his goals for the case with the RO, he let the RO know that his next stop was Appeals.  That stop came as a result of a CDP request.  Unfortunately for the Stewarts the Settlement Officer (SO) in Appeals seemed to see the case similar to the way the RO saw the case.  The representative believes that the RO improperly influenced the SO and raises that issue in the context of ex parte and how the alleged ex parte actions of the RO tainted the CDP hearing.  Here’s how the court characterized the argument:

Petitioners contend that the ICS history transmitted to SO Wert as part of the administrative file was an ex parte communication. They contend that they were not aware that RO Wagner’s “gratuitous characterization” of petitioner’s counsel was part of the administrative record. Petitioners request that their case be remanded to the Appeals Office and assigned to a different settlement officer who has not been exposed to the alleged ex parte communication. Respondent contends that the alleged ex parte communication was a permissible transmittal of petitioners’ administrative file between the revenue officer and the settlement officer during the CDP process.

Congress created restrictions on ex parte communications in the IRS Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec. 1001(a)(4), 112 Stat. at 689 but the provisions did not make it into the Internal Revenue Code.  Instead, the IRS flushed out the rules regarding CDP in a pair of Revenue Procedures, Rev. Proc. 2000-43, 2000-2 C.B. 404, amplified, modified, and superseded by Rev. Proc. 2012-18, 2012-10 I.R.B. 455. Rev. Proc. 2012-18, sec. 2.01(1), 2012-10 I.R.B. at 456.  The 2012 revenue procedure defines ex parte communication as “a communication that takes place between any Appeals employee * * * and employees of other IRS functions, without the taxpayer * * * [or her] representative being given an opportunity to participate in the communication.” The “communication” referred to in the revenue procedure includes oral and written communications.

The court notes that transmitting the administrative file to Appeals from the appropriate function does not normally create an ex parte communication.  If it did, Appeals employees would operate almost totally in the blind; however, the court also notes that the 2012 revenue procedure provides some guidance about what should not be included in the administrative file such as material “if the substance of the comments would be prohibited if they were communicated to Appeals separate and apart from the administrative file.”  In essence, taxpayers’ representative here argues that the RO by including in his field notes that the representative impolitely asked the RO to leave the office of the representative prejudiced the SO improperly making the communication an ex parte communication.  Stated differently, the representative felt the RO put this into his notes for the purpose of communicating to the SO something other than “just the facts.”

The court is not buying what the representative is selling.  It finds that the RO’s notes were contemporaneous.  They were made according to his duties as an RO.  As such they were an appropriate part of the administrative file and not something the RO created for the purpose of improperly prejudicing the taxpayers in Appeals.  Since this was the only argument the taxpayers made in their CDP case, the court sustained the determination by Appeals to allow the IRS to levy on the taxpayers and to leave in place the notice of federal tax lien.  The outcome here seems appropriate on the facts described.  Certainly, circumstances could exist in which the IRS employee seeks to improperly influence Appeals by putting material into the files that does not belong there, and the court cited to some cases of that type, but this does not appear to fit those circumstances due to the timing of the RO’s notes and the fact that his characterization does not appear challenged.

In the Taxpayer First Act Congress made a brief return to the issue seeks to make Appeals even more independent than it was previously.  To the extent it has even more perceived independence, perhaps the ex parte rules have more importance.  Like the provisions providing taxpayer rights, the ex parte provisions contain no specific remedy for the failure to follow the rules.  Although the Tax Court finds no ex parte violation here and, therefore, fashions no remedy, perhaps its willingness to fashion a remedy for violation of this provision has something to say about remedies it might fashion for a violation of TBOR.  So, far the Tax Court has not looked to fashion remedies for TBOR violations as discussed in prior posts here and here and an article I wrote here.

Hom on Top of the World: Opinion Looks at Ex Parte and Disregard

There are some taxpayers who have a propensity for finding themselves featured in Procedurally Taxing. While those taxpayers, unlike our guest bloggers, do not get a Procedurally Taxing coffee mug, they do get the satisfaction of a PT home page appearance. John Hom is one of those taxpayers, giving me the chance to pay homage to my colleague Steve.

Early on I wrote about Mr. Hom in What Happens When IRS Violates a Statutory Requirement Relating to Notices of Deficiency. Steve wrote about Hom’s district court case holding that an online poker account was a bank account for FBAR purposes. Steve also wrote IRS Says Hom Gonna Getchya on FBAR Too, where the district court held that that the Service could allow its employees to share the return and return information it collected in its income tax audit to other employees who would investigate the FBAR issue.

Last week, the Tax Court in John Hom & Associates v Commissioner, a summary opinion, held that Hom and Associates was not responsible for intentional disregard penalties associated with failing to file Forms W-2 and W-3 with the Social Security Administration. In this post, I will discuss some of the procedural issues in the case, including the effect of a prohibited ex parte communication and the ability to beat the penalty using credible testimony.

First some background.


Mr. Hom was the sole engineer at his self named Marin County-based “geotechnical engineering firm specializing in soil testing services and providing geotechnical consulting.” According to the opinion, “Mr. Hom performed geotechnical investigations for various projects, such as parking lots and retaining walls. Mr. Hom explored the subsurface conditions of proposed jobsites and analyzed the results of fieldwork to provide recommendations for construction.”

Hom became a professional poker player in the early 2000s, though he still did some engineering work and had employees. For 2004 and 2006, he filed his W-2s with the employees but failed to send those and the transmittal W-3 into Social Security.

IRS assessed intentional disregard penalties under Section 6721(e) for both years in the amounts of about $2,000 and $8,000 respectively. IRS filed a NFTL and Hom submitted a Form 12153 challenging the liability.

He testified that he believed he had filed the forms with SSA and therefore the penalty should not apply because his failure was unintentional:

After mailing the forms to the SSA, Mr. Hom would save copies of the Forms W-2 and W-3 on his computer. Because Mr. Hom retained copies of the 2004 and 2006 Forms W-2 and W-3 on his computer, he believed that he had completed the previous step of filing those forms with the SSA.

The issue was teed up for trial, though before getting to the merits the opinion dealt with a preliminary matter, Appeals’ violation of the ex parte rules.

Ex Parte Rules Violated Yet No Remedy at Hand

The IRS had previously filed a motion for summary judgment, which the court denied; in the motion was a declaration by the Settlement Officer (SO) in the case that had as an attachment a letter that an IRS Revenue Officer (RO) had written to the SO. That letter included statements that “He is difficult to deal with.” and “He is very argumentative and unwilling to listen.” IRS conceded that the Revenue Officer’s statements were ex parte communications. As per RRA 1998, Appeals is prohibited from ex parte communications (Keith wrote about that and more in Expanding Ex Parte).

The opinion addresses what consequences if any should flow from the breach of the ex parte rules. In some cases, the Tax Court has remanded a case back to Appeals with an order that a fresh Appeals employee conduct a new hearing. In this case, the Tax Court declined to do that, in large part because the case come up on de novo review of the underlying liability with little prejudice to Hom flowing from the RO’s characterizations and Appeals’ violating the ex parte rules:

Respondent urges that, because the proper level of scrutiny in this case is de novo review and we have already conducted a trial on the merits, we are in a better position to adjudicate petitioner’s challenge of the underlying tax liabilities than a different settlement officer. If we remand the case to respondent’s Appeals Office, the case will potentially come before us again when respondent issues a new notice of determination. Since we have already held a trial on the merits, we conclude that remand of this case to the Appeals Office for a new section 6330 hearing would unnecessarily burden petitioner and respondent with a second hearing and possibly with a second trial on the merits. Since we review the matter de novo, we will not remand this case to the Appeals Office.

This reminds me a bit of my first post on Hom in 2013, where I discussed the lack of consequences from the IRS’ failure to include information about TAS in the stat notice. Not every IRS statutory violation triggers a remedy. That is somewhat unsatisfying, as one should assume that when Congress tells IRS to do something it generally means what it says and that if IRS fails to comply there should be some consequences. While I agree with the Tax Court’s approach here, I point this out because I find this still somewhat unsatisfying.

Maybe an IRS apology is in order? While there is no apology as best as I can tell, and that seems unlikely given the amount of litigation between IRS and Hom, Hom has to be pleased with the case’s outcome on the penalties, which I discuss below.

Intentional Disregard Penalty

After shooing away the ex parte issue, the opinion turns to the penalties.

The regulations under Section 6721 provide that intentional disregard is determined on the facts and circumstances, which include but are not limited to:

(i) Whether the failure to file timely * * * is part of a pattern of conduct by the person who filed the return of repeatedly failing to file timely * * *;

(ii) Whether correction was promptly made upon discovery of the failure;

(iii) Whether the filer corrects a failure to file * * * within 30 days after the date of any written request from the Internal Revenue Service to file * * *; and

(iv) Whether the amount of the information reporting penalties is less than the cost of complying with the requirement to file timely ** *

Section 301.6721-1(f)(3).

In addition, the Tax Court cited a bunch of cases where the courts have found that there was no intentional disregard:

In Gerald B. Lefcourt, P.C. v. United States, 125 F.3d 79, 83 (2d Cir. 1997), the Court of Appeals defined “intentional disregard” in the context of section 6721(e) as voluntary, conscious, and intentional conduct. In other words, the penalty applies when the failure was not accidental, unconscious, or inadvertent. See id. In American Vending Group, Inc. v. United States, 103 A.F.T.R.2d (RIA) 2009- 2181(D. Md. 2009), the District Court concluded that the taxpayer did not act with intentional disregard and the failure to file was accidental where the Forms W-2 and W-3 were prepared but were likely misplaced on a messy desk and not filed.

Another case the Tax Court discussed was a 2004 bankruptcy case, In re Flanary & Sons Trucking, Inc. which held “that the taxpayer did not act with intentional disregard where an officer testified that he had mailed the Forms W-2 and W-3 and that if they had not been received by the Service, it was not because of intentional disregard on his part.” As the Hom opinion summarized, in Flannery, “the bankruptcy court noted that “[w]hile a taxpayer’s testimony as to the mere mailing of the return may be insufficient as a matter of law to establish actual filing, such testimony is clearly pertinent when ascertaining whether the taxpayer knowingly or willfully disregarded its filing obligations.”

The opinion applies the regulatory factors as well as applies the cases that give taxpayers some slack to Hom’s circumstances. Hom’s testimony was believable (well one would expect a skilled poker player to have a good testimony face), and the court found in Hom’s favor:

Mr. Hom testified convincingly that he believed that he filed the 2004 and 2006 Forms W-2 and W-3 because he had retained copies of the forms on his computer and he was in the habit of storing the copies on his computer after the forms were filed. In addition, there was no pattern of conduct that would indicate that petitioner consistently failed to file Forms W-2 and W-3 since the forms were unfiled only for 2004 and 2006. We conclude that while the evidence is insufficient to establish actual filing, the evidence does establish that petitioner did not intentionally disregard its filing obligation for Forms W-2 and W-3.

I have not read many of the cases where the IRS has sought penalties for relatively few nonfilings such as this. Hom is getting a lot of IRS attention, which undoubtedly led to these troubles. One factor I found interesting is the court’s discussion of the cost of complying versus the amounts of the penalties (one of the regulatory factors):

Since no payment is required with the filing of Forms W-2 and W-3, there is no cost of complying with the provision other than the time taken to prepare the Forms W-2 and W-3 and the cost of postage. The section 6721(e) penalties assessed are $2,070.30 for 2004 and $8,018.75 for 2006. Any rational taxpayer would comply with the reporting requirement and avoid the risk of assessment of his penalty. Therefore, this factor favors petitioner.

For penalties associated with filing the W-2 and W-3 that is always the case though the time associated with complying may lead to fairly significant compliance costs if the numbers of employees are high. In any event, while this opinion is nonprecedential, it is useful as a way to think about the difficulties IRS may face in imposing intentional disregard penalties, especially for small employers such as Hom.

Expanding Ex Parte

In 1998 Congress created the IRS version of ex parte  found in section 1001(a)(4) of RRA 98 but not codified.  It also created rules making public certain previously internal documents found in section 3509 of RRA 98 which were codified in IRC 6110(i) permitting the release of Chief Counsel e-mail advice to the public.  The two provisions came together for me through a post on Tax Notes on January 26, 2015 of a Chief Counsel e-mail on September 18, 2014 concerning the application of the ex parte rules to communications between Appeals and Chief Counsel.  The message, though short, bears a close look if you care about ex parte rules – and I am not sure that I do because I now represent low income taxpayers to whom they have little applicability.


The ex parte rules seek to insulate Appeals from other parts of the IRS that might taint their opinion by providing insights about a taxpayer that the taxpayer has no ability to counter.  This goal has some merit but some limitations.  It can create artificial barriers to attorney-client communications when Appeals needs advice from counsel.  It can also create work duplication in an agency already understaffed and has almost no meaning for low income taxpayers because no employee individually knows much about their cases since the cases get worked in batch processing which does not have a single IRS compliance employee assigned to the case who might later taint the Appeals employee.

Shortly after passage of RRA 98, the IRS promulgated Rev. Proc. 2000-43. In 2012, with a decade’s more experience, it published Rev. Proc. 2012-18 setting out its view of how the ex parte provisions will work.  Working on ABA comments to Rev. Proc. 2012-18, I saw how very differently lawyers representing large taxpayers view ex parte than those representing low income taxpayers.  The goal of those representing large taxpayers centered on isolating Appeals Officers to the greatest extent possible including from their attorneys.  This makes sense for large taxpayers.  It may or not make the best sense from a policy perspective.

The rationale for the ex parte provisions stems from concern that the non-Appeals IRS employees called their colleagues in Appeals and provided them with negative insights never written into the case file and so never available to the taxpayer.  Where this happened the taxpayer could not rebut the stigma that it did not even know existed.  No circumstance better demonstrates the IRS pre-1998 practice than the examination of a large corporation.  When the IRS examined a large corporation, it sent a team of agents who spent months or years examining the return and creating adjustments that led to a proposed tax deficiency.  If the taxpayer filed a protest and took some, or all, of the case to Appeals to dispute the audit findings, the audit team would come to the Appeals Office and meet with the assigned Appeals Officer for a day, or more, going over each of the adjustments.  This meeting provided an excellent opportunity for the newly assigned Appeals Officer to get up to speed on a case but also gave the audit team the opportunity to heavily promote their views on each legal and factual issue as they rebutted the taxpayer’s arguments in the protest.  Ex parte ended these meetings unless the taxpayer was also invited.  Essentially, it ended the meetings – a good result if you view them as unfair to the taxpayer and a bad result if it created a more inefficient system and a less informed Appeals Officer.

Another change to the way the IRS operates came about at approximately the same time with the creation of the stovepipe business units.  Counsel attorneys assigned to those units and particularly to LB&I regularly work with the exam client during the audit to develop the positions that go into the adjustments to the return.  This creates the possibility that if an Appeals Officer seeks advice from Counsel as the Appeals Officers work the case following the protest, the person giving legal advice on the matter could be the same attorney who gave legal advice to the IRS exam team.  In such a situation the ex parte rules could be compromised as the attorney provides the same insights about the taxpayer previously provided by the exam team.  To avoid this the 2012 Revenue Procedure lays out a number of rules concerning the interaction between Counsel and Appeals; however, the Revenue Procedure does not cover every possible situation.

The September 18 email demonstrates the dance Appeals and Chief Counsel must go through when Appeals seeks legal advice.  The email addresses whether the ex parte rules apply when Appeals must coordinate with Counsel because a case related to the one in Appeals exists in Counsel jurisdiction.  This issue did not get addressed in the 2012 Revenue Procedure or did not get directly addressed.  The email may be the first public pronouncement on the issue.

Generally, and logically, Appeals must coordinate a settlement with Counsel where each office holds a related case.  The response from Counsel in the email creates a distinction in the way Counsel communicates with Appeals based on whether the case is in court or not in court.

If the related cases are in court, Counsel can communicate with Appeals without providing the communication to Appeals before, after or during the communication.  If the case in Appeals is not in court, then the ex parte rules apply and Counsel must involve the taxpayer in the communication.  The Counsel attorney would have worked with the Examination employees in developing the large case.  The application of ex parte to this communication stems from the concern that the Counsel attorney will provide the Appeals employee with the same type of “insight” the examiner would have received making this an end run around the prohibition against the examiner talking to Appeals without the taxpayer present.  The price here is stifling of lawyer client communications between Appeals and Counsel.

For those interested in ex parte, the email provides a glimpse at current thinking on the subject.  The glimpse comes because of the change to the law in 1998 opening up the internal communications of Chief Counsel’s Office.  This exercise in open government allows us to see and understand agency actions previously opaque.  This change benefits all taxpayers by making available to all information that previously may have been available only to a few.  Based on the Chief Counsel opinion here it appears that the IRM has not been updated since the 2012 Revenue Procedure came out and may not contain the latest thinking on this subject.  Practitioners can point Appeals to the email pending future revisions of the IRM.  Perhaps this issue will spur other updates of the IRM concerning ex parte situations that have come to light since the writing of the 2012 Revenue Procedure.  While my clients may not care about ex parte because their cases are handled by IRS compliance in batch processing, other taxpayers do care.  I appreciate the openness of the process.