Public Comment and LITCs: Bringing Client Voices To the Administrative Process

We welcome guest blogger Madeleine DeMeules who was a student of my clinic during the past semester.  She spent time this semester working on the Clinic’s brief to the 11th Circuit in an innocent spouse case, giving her a basis for reflecting on the process and offering some ideas to the IRS about its form.  The Clinic tries to comment on matters that impact low income taxpayers when the IRS offers the opportunity.  I was fortunate that Madeleine had the experience from her case work to provide several comments to the IRS we hope might improve the process.  Keith

The Harvard Federal Tax Clinic is a Low Income Tax Clinic (“LITC”), one of many such organizations nationwide that are sponsored by the IRS and work to serve low- and moderate-income taxpayers through individual representation as well as systemic policy work.

As a rising third-year law student with the Harvard Tax Clinic, I recently had the opportunity to work with our Clinic on an important piece of written advocacy on behalf of our clients. At the beginning of June, the Clinic submitted feedback to the IRS in response to its request for public comment on upcoming changes to IRS Form 8857. This is the form that taxpayers use to submit a request for innocent spouse relief under § 6015 of the Internal Revenue Code. In short, the innocent spouse provision of the tax code allows married taxpayers who have filed joint returns to seek relief from liability arising from the deceptive, improper, or otherwise inequitable behavior of a spouse. While there are many interesting facets to this particular type of IRS proceeding, a few in particular are worth mentioning:

  • First, the Internal Revenue Code phrases the innocent spouse provision in gender neutral language (i.e., referencing “individuals” and “spouses”). However, at least 90% of § 6015 litigants are women. See Stephanie McMahon, What Innocent Spouse Relief Says About Wives and the Rest of Us, 37 Harv. J.L. & Gender 141, 149 (2014).
  • Second, individuals who request innocent spouse relief may have experienced some form of abuse in their marriage, sometimes connected to the tax liability at issue.
  • Third, the Taxpayer Advocate Service—an independent organization that works from within the IRS to be a voice for taxpayers—has described innocent spouse relief as one of the most frequently litigated issues within the IRS as recently as 2017.

As any one of these points demonstrates, the stakes can be high in an innocent spouse case. Coupled with the difficulties of litigating complex tax issues pro se, these high stakes make innocent spouse cases an ideal issue for LITC clinics to assist clients with. Many clinics, including ours, make innocent spouse work an important part of their docket.  

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Significantly, LITC clinics may meet their clients at a variety of time points throughout a case. Sometimes clinics and clients encounter each other before a proceeding begins, and the clinic can help the client prepare their case from the initial filing of Form 8857. In other cases, a clinic might not meet their client until after administrative proceedings have begun, but before an appeal or Tax Court petition has been filed. From this spectrum of experience, then, clinics have the opportunity to observe and learn from their clients about what it is like to fill out IRS forms like 8857 without the aid of counsel. At seven pages long, Form 8857 is detailed; it goes without saying that completing it on one’s own is difficult. As a result, clinics are aware that the presence or absence of counsel at the outset of a case can influence a client’s eventual chances of success.  This is particularly important because of the changes to the Code last year which place additional emphasis on the administrative record.

In our recent comments to the IRS, the Clinic sought to summarize what we have learned from our clients in order to give the IRS specific suggestions about how it can improve Form 8857 for the range of taxpayers that encounter this form, and in particular for those clients that must proceed pro se because clinics are unable to reach them or do not have enough capacity. We suggested five changes, two of which are summarized below to illustrate the types of concerns that our clients have, and that we believe the IRS should account for as it updates Form 8857.

1. Form 8857 should include a voicemail contact permission.

The IRS sometimes calls taxpayers with questions after they submit Form 8857, but only during restricted business hours. Currently the IRS cannot leave voicemails, so taxpayers with irregular work schedules may be missing out on contacts with the IRS that could involve clarifying questions about their submission and potentially help their case. Low- and moderate-income individuals may juggle work schedules with changing shifts, or even multiple jobs. Adding a voicemail permission to Form 8857 is a simple change that should greatly increase the ability of all taxpayers to make contact with the IRS and participate fully in their case. 

2. Form 8857 should give taxpayers the option to identify as ESL and list their first or preferred language.

Currently, the IRS only offers Form 8857 in one translated format—Spanish—even though the agency has language resources, including phone interpretation, in over three hundred language and dialects. By collecting this information from taxpayers who wish to share it, the IRS will be better equipped to connect ESL taxpayers submitting Form 8857 with existing language resources. Additionally, the Clinic could find no published data about the language needs of the over 50,000 taxpayers annually who submit Form 8857. This addition to the form will allow the IRS to collect that data in a meaningful manner; at the Clinic, we hope that this data can be used in the future to make the case for translating Form 8857 into additional languages. 

While we at the Clinic of course hope that our comments will encourage the IRS to adopt the specific improvements we suggested, we also hope that the IRS appreciates the people and the perspectives that we sought to represent in this comment. In 2018, LITCs around the country served over 19,000 low-income taxpayers. By participating in public comments proceedings like these, our Clinic seeks to amplify the voices of the clients that we serve. We hope that the presence of their voices in the administrative process reminds that IRS that it serves these clients too.

Over the last two weeks, George Floyd’s death has reminded our country that society does not work the way it works by happenstance. Our society is the way it is because it is built on systems—systems of race, power, and privilege that are shaped by choices and constructed to produce specific results. The tax system is no exception: it directly influences how our society thinks about and interacts with pressing topics like healthcare, marriage, immigration, and income inequality. I am heartened that Harvard’s Clinic appreciates the importance of bringing as many voices as possible to the administrative process, so that as administrative agencies like the IRS continue to shape these systems, they do so with as much knowledge as possible about the needs of the people they serve.

Seventh Circuit Affirms Tax Court’s Discretion to Weigh Actual Knowledge More Heavily than Four Positive Factors for Innocent Spouse Relief

Last summer, I alerted PT readers here to an innocent spouse case, Jacobsen v. Commissioner, T.C. Memo. 2018-115, that Keith and I were litigating in the Seventh Circuit on behalf of the Harvard tax clinic.  We took on the appeal of one year (2011) where the taxpayer did not get equitable innocent spouse relief from the Tax Court under section 6015(f) from the unreported taxes on the taxpayer’s former wife’s embezzlement income.  For that year, the Tax Court held that because the former wife was already jailed when the return was filed and because the taxpayer helped a CPA prepare the return, the taxpayer had actual knowledge of the deficiency.  Of course, while actual knowledge is fatal to relief under subsections (b) and (c), it is not supposed to be fatal under subsection (f) equitable relief.  Knowledge (whether actual or reason to know) is only supposed to be one factor of seven factors to consider under subsection (f), as elaborated on by Rev. Proc. 2013-34, 2013-2 C.B. 397.  Under the liberalizing 2013 Rev. Proc., unlike under the earlier Rev. Proc. 2003-61, 2003-2 C.B. 296, actual knowledge was now to be weighed no more heavily than reason to know in the factor analysis.  And, in the case, the Tax Court held that of the remaining factors, four were positive for relief – marital status, lack of significant benefit, compliance with future tax filing and payment obligations, and serious health issues.  So, it struck Keith and me as wrong – and as not consistent with what most Tax Court judges were doing – for the court to have still denied relief in this case.  It seemed to us that the Tax Court had not, in substance, applied the Rev. Proc. (which, concededly is not binding on the court, but which the court generally follows and purported to follow in the case).

Keith and I hoped a reversal of the Tax Court in the Jacobsen case would have a salutary effect on Tax Court judges not to overweigh the actual knowledge factor.  And, this would be the first appeals court to ever have to apply Rev. Proc. 2013-34 (surprisingly).  Then, during briefing of the appeal, Congress enacted the Taxpayer First Act, which amended section 6015(e) to add paragraph (7) providing that the Tax Court should decide innocent spouse cases on a de novo standard and a supplemented administrative record.  Because the amendment applied to pending cases, the Jacobsen Seventh Circuit opinion would also be the first to consider the impact of subsection (e)(7) on appellate review.

Well, we lost. In Jacobsen v. Commissioner, 2020 U.S. App. LEXIS 4544 (7th Cir. Feb. 13, 2020), in a published opinion, the Seventh Circuit upheld the Tax Court’s ruling, though noted that this was a close case and that, had it been the trier of fact (and not employing deferential appellate review), it might have ruled for the taxpayer.

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Given Jacobsen, I am not sure that any court of appeals will ever reverse the Tax Court on a section 6015 ruling against a taxpayer.  My research before the clinic’s taking on the appeal revealed that, while taxpayers occasionally obtained a reversal of the Tax Court under the former innocent spouse provision at section 6013(e) (in effect from 1971 to 1998); see, e.g., Resser v. Commissioner, 74 F.3d 1528 (7th Cir. 1996); no taxpayer since 1998, in 14 tries, had obtained a reversal of the Tax Court under section 6015.  See Asad v. Commissioner, 751 Fed. Appx. 339 (3d Cir. 2018); Nunez v. Commissioner, 599 Fed. Appx. 629 (9th Cir. 2015); Deihl v. Commissioner, 603 Fed. Appx. 527 (9th Cir. 2015); Karam v. Commissioner, 504 Fed. Appx. 416 (6th Cir. 2012); Maluda v. Commissioner, 431 Fed. Appx. 130 (3d Cir. 2011); Greer v. Commissioner, 595 F.3d 338 (6th Cir. 2010); Golden v. Commissioner, 548 F.3d 487 (6th Cir. 2008); Aranda v. Commissioner, 432 F.3d 1140 (10th Cir. 2005); Feldman v. Commissioner, 152 Fed. Appx. 622 (9th Cir. 2005); Alt v. Commissioner, 101 Fed. Appx. 34 (6th Cir. 2004); Doyle v. Commissioner, 94 Fed. Appx. 949 (3d Cir. 2004); Mitchell v. Commissioner, 292 F.3d 800 (D.C. Cir. 2002); Cheshire v. Commissioner, 282 F.3d 326 (5th Cir. 2002); Wiksell v. Commissioner, 2000 U.S. App. LEXIS 5857 (9th Cir. 2000).  The taxpayer losing string continues.

An interesting issue in the Seventh Circuit in Jacobsen was its discussion of the appellate standard of review in light of section 6015(e)(7).  As to what would be “inequitable” under section 6015(f), the IRS argued for abuse of discretion review, and the taxpayer argued for clear error review.  There isn’t much of a difference between the two standards, but (e)(7) was designed to prevent the Tax Court from giving deference to IRS rulings under (f), which had been held though, until Porter v. Commissioner, 132 T.C. 203 (2009), to be reviewed by the Tax Court on an abuse of IRS discretion standard.  In Porter, the Tax Court held it would henceforth decide (f) issues on a de novo standard – the position adopted by statute in (e)(7).  And at least some Tax Court judges had said that the Tax Court does not exercise equitable discretion under (f), but merely makes a factual finding of what would be “unfair”.  Cf. Hall v. Commissioner, 135 T.C. 374, 391-392 (2010) (Thornton and Holmes, JJ., dissenting) (arguing that by using the word “inequitable” in § 6015(f), Congress did not imply the rules of equity practice, but rather only meant that it would be “unfair” to hold the taxpayer liable;  “A request for relief under section 6015(f) is called a request for ‘equitable relief’ not because it is a request for reformation, rescission, specific performance, or accounting, but because to a reasonable decisionmaker at the IRS it would be unfair to hold one spouse jointly liable with another for a particular tax debt.”).  Factual findings are usually reviewed by appellate courts for clear error.  

In Jacobsen, the Seventh Circuit dodged the appellate review standard issue in the following discussion:

Although the parties agree generally that we review the Tax Court’s decisions “in the same manner and to the same extent as we review district court decisions from the bench in civil actions,” 26 U.S.C. § 7482(a)(1); Gyorgy v. C.I.R., 779 F.3d 466, 472–73 (7th Cir. 2015); Resser, 74 F.3d at 1535, they disagree as to whether that means we review the denial of relief under § 6015(f) for clear error or an abuse of discretion.

The parties’ differing views on the standard of review hinge in part on the Taxpayer First Act, legislation that was passed shortly after the parties filed their briefs. See Pub. L. No. 116-25, 133 Stat. 981 (July 1, 2019). As relevant here, § 1203 of the Taxpayer First Act added a new paragraph at the end of § 6015(e) codifying the existing practice of de novo review by the Tax Court of appeals from the denial of innocent spouse relief. Because this addition to § 6015 simply “clarified,” see Pub. L. No. 116-25, § 1203 (“Clarification of equitable relief from joint liability.”), the existing standard and scope of Tax Court review, the Commissioner maintains it has no effect on our standard of review. Thus, argues the Commissioner, denial of relief under § 6015(f) should be reviewed in the same manner as any determination of equitable relief in the district court—for abuse of discretion. See, e.g., Bowes v. Ind. Sec. of State, 837 F.3d 813, 817 (7th Cir. 2016) (explaining general applicability of abuse of discretion standard to equitable determinations).

Jacobsen, however, insists that the Taxpayer First Act confirms his position that we review decisions under § 6015(f) for clear error. Jacobsen explains his reasoning as follows: (1) the Taxpayer First Act makes equitable relief under § 6015(f) mandatory as opposed to discretionary; (2) mandatory relief under subsection (f) “is now the same as mandatory relief under subsection (b),” which also contains an inequity condition; and so (3) Tax Court rulings under subsection (f) should be reviewed under the same standard as subsection (b). Jacobsen finds further support for his position with the fact that subsection (b) is a continuation and expansion of former § 6013(e), which we held in Resser was subject to clear error review, 74 F.3d at 1535.

We are unconvinced, however, that the Taxpayer First Act (which settled only the Tax Court’s standard of review of IRS determinations) sheds any particular light on our standard of review as to relief under § 6015(f), which multiple courts have recognized as for abuse of discretion. See Greer v. C.I.R., 595 F.3d 398, 344 (6th Cir. 2010) (innocent spouse relief under § 6015(b) reviewed for clear error but equitable relief under § 6015(f) reviewed for abuse of discretion); Cheshire v. C.I.R., 282 F.3d 326, 338 (5th Cir. 2002) (same). Fortunately, we need not resolve the issue today, as we would affirm the Tax Court’s decision under either deferential standard.

Slip op. at 9-11 (emphasis in original; some citations omitted).

As to the underlying issue of whether the Tax Court could let actual knowledge outweigh four positive factors for relief, the Seventh Circuit wrote:

Because each of the factors for consideration was either neutral or favored relief, Jacobsen claims the Tax Court must have weighed knowledge more heavily than the other factors, in contravention of Rev. Proc. 2013-34 § 4.03(2)(c)(i)(A). Nothing in the Tax Court’s opinion, however, suggests that it believed knowledge of the embezzled funds necessarily precluded Jacobsen from equitable relief or automatically outweighed the other factors for consideration. Although the 2013 regulations make clear that knowledge is no longer necessarily a strong factor weighing against relief, as Jacobsen himself acknowledges in his brief, they do not prohibit the Tax Court from assigning more weight to petitioner’s knowledge if such a conclusion is supported by the totality of the circumstances. As explained in the Revenue Procedures, “no one factor or a majority of factors necessarily determines the outcome.” Rev. Proc. 2013-34 § 4.03. And although knowledge no longer weighs heavily against relief, nothing in the statute or revenue procedures forecloses the decisionmaker from concluding that in light of “all the facts and circumstances,” § 6015(f), knowledge of the understatement weighs heavily against granting equitable relief. There is thus no reason to believe the Tax Court’s decision was necessarily erroneous because only one of the nonexhaustive factors for consideration weighed against relief.

Jacobsen also suggests it was inappropriate for the Tax Court to factor his “participation in preparing the 2011 return” into its assessment, characterizing it as “another way for the court to extra-count” Jacobsen’s knowledge of the embezzlement. In assessing the role of Jacobsen’s knowledge in his entitlement to equitable relief, the court noted that in addition to Jacobsen’s actual knowledge on account of Lemmens’ criminal conviction and sentence, in 2011 Jacobsen himself provided the tax information to the paid preparer, whereas in previous years Lemmens had always prepared and submitted the tax information. Far from demonstrating that the Tax Court erred, the court’s consideration of his role in preparing the 2011 return demonstrates its commitment to heed the Revenue Procedure’s directive that the seven listed factors merely provide “guides” as opposed to an “exclusive list” and that “[o]ther factors relevant to a specific claim for relief may also be taken into account.” Rev. Proc. 2013-34 § 4.03(2).

It is clear from its opinion that the Tax Court considered the factors relevant to Jacobsen’s specific claim for relief. The court considered Jacobsen’s individual circumstances as it analyzed each of the listed factors. Jacobsen does not argue, nor could he, that the Tax Court misapprehended the facts or otherwise overlooked information relevant to Jacobsen’s claim.

We are sympathetic to Jacobsen’s situation, and recognize that the Tax Court could have easily decided on this record that Jacobsen was entitled to equitable relief under § 6015(f). Indeed, were we deciding the case in the first instance as opposed to on deferential review, we may have decided the case differently. But notwithstanding the existence of many factors favoring relief and only Jacobsen’s knowledge counseling against it, nothing in the record indicates the Tax Court misapprehended the weight to be accorded Jacobsen’s knowledge or treated it as a decisive factor barring relief. Indeed, its discussion of each of the factors as well as the relevance of Jacobsen’s involvement in preparing the 2011 taxes demonstrate that the Tax Court did not engage in a mechanical balancing of the factors where the number of factors favoring relief necessarily counterbalanced the ultimate question of whether it was inequitable to hold Jacobsen liable for the 2011 deficiencies. We thus cannot say the Tax Court either abused its discretion or clearly erred in its denial of relief for 2011.

Slip op. at 16-18 (emphasis in original; some citations omitted).

Based on our research (much of which we incorporated in the briefing in Jacobsen), the Jacobsen case is unusual in letting so many positive factors be outweighed by only one negative factor.  But, if other Circuits are going to be so deferential in reviewing the Tax Court’s weighing of factors, it is hard to imagine any taxpayer ever being able to mount a successful attack on a Tax Court judge’s weighing of the factors.  About the only chance for reversing the Tax Court may be if the Tax Court made a factual error as to whether a particular factor was positive, negative, or neutral for relief.

That brings me to Sleeth v. Commissioner, T.C. Memo. 2019-138.  Like Jacobsen, Sleeth is one of those outlier cases where the Tax Court unusually treated knowledge as outweighing multiple other factors for relief.  Sleeth is an underpayment case, where the taxpayer signed returns showing balances due (two of which were being filed late), but where the taxpayer’s husband, a doctor making $418,000 a year, failed to later fully pay the balances due that initially aggregated, in tax alone, about $354,000.  The Tax Court held that the taxpayer had reason to know that the taxes would never be fully paid because the taxpayer knew that in a prior year, the husband had once used an installment agreement.  As in Jacobsen, the Tax Court in Sleeth held that the taxpayer had not proved she would suffer economic hardship if forced to pay the liabilities, so this factor was neutral.  As in Jacobsen, the court in Sleeth found three other factors favored relief:  marital status, lack of significant benefit, and compliance with later tax return filing and payment obligations.  The main difference between the two cases is that, while Jacobsen had a serious health issue that favored relief, Sleeth did not.

Sleeth had paid counsel in the Tax Court, but she could not afford to pay counsel for an appeal.  The Harvard tax clinic, pro bono, is now representing her in an appeal to the Eleventh Circuit (Docket No. 20-10221).  If the Eleventh Circuit is as deferential as to the weighing of factors as the Seventh Circuit was in Jacobsen, Sleeth will have a hard time in obtaining victory.  However, there are arguments that the Tax Court erred in its holdings with respect to the knowledge and financial hardship factors.  So, it is still possible that Sleeth will break the unbroken string of taxpayer losses in appeals of innocent spouse cases from the Tax Court.  The appellate briefing in Sleeth has only just begun.

Review of 2019 (Part 2)

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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2017 Tax Legislation

The Tax Cuts and Jobs Act (TCJA) has already had significant effects on taxpayers in the first two years since its enactment. The law almost doubles the standard deduction for taxpayers, while mostly eliminating personal exemptions and limiting or eliminating certain personal deductions. Of particular relevance in the LITC context, the Child Tax Credit (CTC) was doubled from $1,000 to $2,000 per qualifying child (though only $1,400 is refundable). While the elimination of the personal exemption for dependents largely makes this a wash for many taxpayers, low income taxpayers may actually be advantaged by the change, since the CTC is partially refundable, and exemptions are of less benefit to those with low marginal rates. Finally, beginning in 2019, the TCJA eliminates the shared responsibility penalty assessed on taxpayers who fail to enroll in qualified health insurance plans under the Affordable Care Act.

The TCJA has also led to another potentially unintended consequence for some taxpayers seeking ITINs for their dependents. Since the dependency exemption is now worth $0 and because (almost) all tax benefits attributed to an ITIN dependent requires that they physically live in the United States (see e.g. IRC 24(h)(4)(B)), the IRS is now reluctant to issue ITINs to dependents outside of the US unless a specific tax benefit is demonstrated. (See W7 Instructions, “What’s New”). This causes serious problems for taxpayers that live in “non-conforming” states (like Minnesota) where a dependency exemption is still worth something on the state return, but their dependent lived in Mexico the whole year. These taxpayers can’t get an ITIN for the dependent because there is arguably no federal tax reason, and they can’t put their dependent on the state return because they don’t have a federally issued ITIN. The University of Minnesota LITC has dealt with this issue and had some success by working with a VITA site that issues ITINs. In at least one instance, the clinic was able to get an ITIN issued based on an issued position letter that argued that there was a federal benefit to an ITIN.

Leslie Book, Suggestions to Get Up to Speed on (Some) Issues With the New Tax Law, Procedurally Taxing (Dec. 17, 2017), https://procedurallytaxing.com/suggestions-to-get-up-to-speed-on-some-issues-with-the-new-tax-law/

Third party contacts

Until the TFA was enacted, a 9th Circuit case, J.B. v. United States, represented anew obstacle for IRS making contact with third-parties during an audit. During the course of the audit of the petitioner and his wife, the IRS issued a summons to a third-party (incidentally, the California Supreme Court), seeking information on compensation issued to the petitioner. The petitioner then moved to quash the summons, on the basis that the IRS failed to give reasonable advance notice of the third-party contact (in accordance with IRC § 7602(c)(1)) when it sent Publication 1, a pamphlet included with the initial notice of audit. Publication 1 is a generic publication that broadly gives advance notice of the possibility that the IRS will make contact with a third party.

The 9th Circuit held that the publication was insufficient as not reasonably calculated to inform the taxpayer of the contact. The court based its decision on a number of factors, including the two-year length between the issuing of Publication 1 and the contact, the possibility of privileged information being included in the summons, and the extensive contact between the taxpayers and IRS. Perhaps most relevantly, the court suggested in a footnote that Publication 1 alone may never be sufficient to provide reasonable notice due to its broad language and lack of certainty regarding the chance of contact.  But see, High Desert Relief, Inc. v. United States, 917 F.3d 1170, 1193 (10th Cir. 2019) (assuming, without deciding after J.B., that Publication 1, in substance, did provide sufficient notice under section 7602(c)(1)). 

Following a 2017 National Taxpayer Advocate report discussion of TPCs, Section 1206 of the Taxpayer First Act (TFA) amended IRC § 7602(c) by repealing the requirement for the IRS to provide “reasonable notice,” making J.B. less relevant.  It clarified that the IRS may provide this third-party contact (TPC) notice only if it intends to make a TPC during the period specified in the notice, which may not exceed one year.  Generally, the IRS must send the notice at least 45 days before making the TPC.  TAS has been advocating that an IDR be included with the TPC notice so that the taxpayer has a realistic opportunity to avoid a TPC that seeks new information by providing the information requested.

See Leslie Book, Ninth Circuit Rejects IRS’s Approach to Notifying Taxpayers of Third Party Contacts, Procedurally Taxing (Mar. 4, 2019), https://procedurallytaxing.com/ninth-circuit-rejects-irss-approach-to-notifying-taxpayers-of-third-party-contacts/

EITC

Special Report to Congress

Before leaving her post as National Taxpayer Advocate, Nina Olson issued a Special Report on the Earned Income Tax Credit as part of her annual report to Congress. The report makes a number of recommendations to improve administration of the EITC, notably including that the IRS develop an examination process for EITC bans and that Congress legislate whether the Tax Court has jurisdiction over EITC ban cases. Under the current situation, taxpayers are left with little recourse or due process opportunity when the IRS imposes such a ban.

See Bob Probasco, The EITC Ban – Further Thoughts, Part One, Procedurally Taxing (Sep. 27, 2019), https://procedurallytaxing.com/the-eitc-ban-further-thoughts-part-one/

Leslie Book, EITC Ban: NTA Report Recommends Changes and IRS Advises on its Application to Partial Disallowances, Procedurally Taxing (Aug. 8, 2019), https://procedurallytaxing.com/eitc-ban-nta-report-recommends-changes-and-irs-advises-on-its-application-to-partial-disallowances/

Earned Income for EITC but not for Income Taxes

Feigh v. Commissioner involved a novel issue of law: the interplay between the exclusion of Medicaid Waiver Payments from income (a change made via notice in 2014) and the EITC. The petitioners in Feigh would have been able to exclude these received payments from their income, but it actually would have made them worse off by removing the “earned income” necessary for them to qualify for the EITC and Child Tax Credit (“CTC”). The IRS rationale was that it was preventing the provision of a double tax benefit not intended by Congress. The Tax Court applied Skidmore deference to the IRS notice changing the waiver treatment and found that the notice was not persuasive that payments were excludible under IRC 131. The court then held that the IRS could not reclassify the status of the payments via notice as a means to eliminate the benefits of the EITC and CTC.

See Caleb Smith, Invalidating an IRS Notice: Lessons and What’s to Come from Feigh v. C.I.R., Procedurally Taxing (June 17, 2019), https://procedurallytaxing.com/invalidating-an-irs-notice-lessons-and-whats-to-come-from-feigh-v-c-i-r/

Innocent Spouse

Jurisdiction of District Court to hear refund

The question of whether taxpayers can bring an innocent spouse claim as part of a refund suit is an increasingly litigated issue. Under the long-time rule of Flora v. United States, taxpayers must pay their assessment first in order to bring a refund claim in federal district court. But whether such taxpayers could litigate the merits of their innocent spouse claims in such an action has been unclear. In 2018, a Texas district rejected the argument that an innocent spouse claim could proceed in a refund suit in Chandler v. United States. But in the more recent case of Hockin v. United States, an Oregon district court allowed a refund suit involving such a claim to proceed. Hockin is set for trial in early 2020 and may prove an interesting test case for this issue.  Ms. Hockin was represented by the tax clinic at Lewis & Clark and the tax clinic at the Legal Services Center of Harvard Law School filed an amicus brief in this case on behalf of Ms. Hockin.

See Sarah Lora & Kevin Fann, Innocent Spouse Survives Motion to Dismiss in Jurisdictional Fight with the IRS, Procedurally Taxing (Sep. 18, 2019), https://procedurallytaxing.com/innocent-spouse-survives-motion-to-dismiss-in-jurisdictional-fight-with-the-irs/

Carlton Smith, Another District Court Holds It Lacks Jurisdiction to Consider Innocent Spouse Refund Suits – at Least for Section 6015(f) Underpayment Cases, Procedurally Taxing (May 3, 2019), https://procedurallytaxing.com/another-district-court-holds-it-lacks-jurisdiction-to-consider-innocent-spouse-refund-suits-at-least-for-section-6015f-underpayment-cases/

Carlton Smith, Update: Can District Courts Hear Innocent Spouse Refund Suits?, Procedurally Taxing (Dec. 24, 2018), https://procedurallytaxing.com/update-can-district-courts-hear-innocent-spouse-refund-suits/

Innocent Spouse and Rev Proc.

Under Rev. Proc. 2013-34, actual knowledge of a spouse’s omission of income does not preclude equitable innocent spouse relief under IRC 6015(f). A recent case litigated by the tax clinic at the Legal Services Center of Harvard Law School has sought to reinforce the availability of equitable relief to such taxpayers. In Jacobsen v. Commissioner in the 7th Circuit, the petitioner has challenged the Tax Court’s denial of his appeal of an innocent spouse determination. The petitioner had four positive factors for relief under the statute, but the Tax Court found that his actual knowledge of embezzled income outweighed those factors thus not entitling him to relief. Oral argument was held in September 2019, and the case is currently pending.  Since the oral argument in Jacobsen two additional Tax Court cases have ruled against individuals claiming innocent spouse status where there was three positive factors and knowledge was the sole negative factor.  The Tax Court seems to be placing a heavy thumb on the scale when knowledge exists.

See Carlton Smith, Seventh Circuit to Hear First Case about Applying Latest Innocent Spouse Equitable Rev. Proc., Procedurally Taxing (July 30, 2019), https://procedurallytaxing.com/seventh-circuit-to-hear-first-case-about-applying-latest-innocent-spouse-equitable-rev-proc/

Should the Tax Court Allow Remands in Light of the Taxpayer First Act Innocent Spouse Provisions?

The Taxpayer First Act amended section 6015 to add a new subsection (e)(7) that provides for a Tax Court de novo standard of review of a section 6015 determination of the IRS based on (1) “the administrative record established at the time of the determination” and (2) “any additional newly discovered or previously unavailable evidence”.  Thus, the statute appears to contemplate that there be an administrative record in a section 6015 case and that the IRS had made a determination in such case before the Tax Court “review[s]” that determination.  But, the administrative record in section 6015 cases is often incomplete or nonexistent (e.g., in cases where the IRS hadn’t yet ruled after a 6015 request or because 6015 was first raised in response to a notice of deficiency). 

In the past, the Tax Court has never remanded in section 6015(e) stand-alone cases or in deficiency cases seeking innocent spouse relief, but then those cases were not to be tried primarily based on the administrative record.  In Friday v. Commissioner, 124 T.C. 220 (2005), citing the de novo nature of its proceedings under section 6015, the Tax Court denied an IRS motion to remand a stand-alone section 6015(e) case to Cincinnati Centralized Innocent Spouse Office (CCISO). The IRS had argued that CCISO had previously erroneously failed to consider section 6015(f) equitable relief on the merits.  

In light of the Taxpayer First Act amendment no longer making Tax Court innocent spouse proceedings fully de novo, the Tax Court should overrule Friday, and it should also allow remands in deficiency cases, though limited to the section 6015 issue.  Any taxpayer currently facing a limit on getting additional pertinent evidence not in the administrative record before the Tax Court beyond what is indisputably newly discovered or previously unavailable evidence should move to remand his or her case to CCISO and ask the Tax Court to overrule Friday, so that the pertinent evidence can be proffered to the IRS in the remand and become part of the administrative record before the case is returned to the Tax Court (if it returns at all).

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Let me first say that I have read the legislative history of section 1203 of the Taxpayer First Act (the section that added subsection (e)(7)), and it provides no useful guidance or even hints about what Congress had in mind about remands.  The Committee Report just parrots the new statute in explaining the workings of the new subsection.  See H. Rep. 116-39, Part I, at 38-40.

So, let’s begin by looking at the reasons for the Tax Court’s ruling in Friday prohibiting a remand in a section 6015(e) stand-alone case that was not one of the rare ones commenced 6 months after the Form 8857 was filed but before an IRS determination had been issued.  This was a case where the IRS did not consider relief under subsection (f) apparently because the IRS thought the request too late based upon the now-overruled regulation that provided that subsection (f) relief requests had to be made within 2 years of the commencement of “collection activity”.  In McGee v. Commissioner, 123 T.C. 314 (2004), the Tax Court held that an IRS failure to include in a refund offset notice any mention of the offset’s consequences regarding section 6015 relief debarred the IRS from relying on the offset as “collection activity”.  In Friday, the IRS told the court that the case was governed by McGee, presumably meaning CCISO had thought a refund offset taking place more than 2 years before the Form 8857 was filed constituted “collection activity”, but IRS attorneys in the Tax Court now realized the offset notice had not included the proper section 6015 language.  Thus, CCISO had never considered subsection (f) relief on the merits, but should have under McGee.

Here’s what the Tax Court wrote in Friday:

In support of his request, respondent relies on Natl. Nutritional Foods Association v. Weinberger, 512 F.2d 688, 701 (2d Cir. 1975), Camp v. Pitts, 411 U.S. 138, 143 (1973), and Asarco, Inc. v. EPA, 616 F.2d 1153, 1160 (9th Cir. 1980).  Those cases, however, are examples where courts, in reviewing administrative action, remanded for further factual determinations that were deemed necessary to complete an inadequate administrative record or to make an adequate one.

In certain specific cases where statutory provisions reserve jurisdiction to the Commissioner, a case can also be remanded to the Commissioner’s Appeals Office. Under sections 6320(c) and 6330(d)(1), this Court may consider certain collection actions taken or proposed by the Commissioner’s Appeals Office. Under paragraph (2) of section 6330(d), the Commissioner’s Appeals Office retains jurisdiction with respect to the determination made under section 6330. As part of the process, a case may be remanded to the Appeals Office for further consideration. See, e.g., Parker v. Commissioner, T.C. Memo. 2004-226.

The situation is different, however, in a section 6015 proceeding, which is sometimes referred to as a “stand alone” case. Although entitled “Petition for Review by Tax Court”, section 6015(e) gives jurisdiction to the Court “to determine the appropriate relief available to the individual under this section”. The right to petition is “In addition to any other remedy provided by law” and is conditioned upon meeting the time constraints prescribed in section 6015(e)(1)(A)(i) and (ii). Even if the Commissioner fails to do anything for 6 months following the filing of an election for relief (where there is nothing to “review”), the individual may bring an action in this Court. See sec. 6015(b), (e)(1)(A)(i)(II). A petition for a decision as to whether relief is appropriate under section 6015 is generally not a “review” of the Commissioner’s determination in a hearing but is instead an action begun in this Court. There is in section 6015 no analog to section 6330 granting the Court jurisdiction after a hearing at the Commissioner’s Appeals Office.

124 T.C. at 221-222 (footnotes omitted).

After the Taxpayer First Act, the statutory situation is clearly different from that on which the Tax Court relied in Friday.  Section 6015(e)(7) now discusses a “review” by the Tax Court of a “determination made under this section” and specifically mentions an “administrative record” that is part of the basis for the judicial record.  At least for section 6015 cases where there was a determination made and an administrative record created, the Tax Court proceeding is now much more like that of the Tax Court’s Collection Due Process (CDP) jurisdiction.  Although section 6015 does not discuss who in the IRS is to make the determination that is reviewed (unlike section 6330, which makes clear that the IRS Appeals Office both makes the determination and has retained jurisdiction), the Tax Court can fill in that blank by remanding to the case back to the IRS function (either CCISO or the Appeals Office) that made the final determination.

Relying on what the Tax Court has done in CDP cases, the Tax Court should remand such 6015 cases for pretty much any good reason proposed by either party.  See, e.g., Churchill v. Commissioner, T.C. Memo. 2011-182 at *12-*16 (discussing various previous reasons for remanding CDP cases to Appeals and adding a new one – where there were changed financial circumstances such that remand would be “helpful, necessary, or productive”) (Holmes, J.).  And, as in CDP, the IRS should be asked to create a “determination” or “supplemental determination” letter, and the Tax Court should only review the latest IRS determination letter.  Kelby v. Commissioner, 130 T.C. 79, 86 (2008) (“When a [CDP] case is remanded to Appeals and supplemental determinations are issued, the position of the Commissioner that we review is the position taken in the last supplemental determination.”).

In a previous post on the whistleblower award review case of Kasper v. Commissioner, 150 T.C. 8 (2018) (Holmes, J.), Les noted that the Tax Court held that there are numerous judge-created exceptions to the administrative record rule that the Tax Court will follow in whistleblower cases – making the Kasper opinion arguably very important for all Tax Court jurisdictions where the Tax Court review is based on the administrative record.  Those record-review exceptions are also being followed in CDP cases appealable to those the Circuits holding that the Tax Court proceeding is limited to the administrative record. See, e.g., Robinette v. Commissioner, 439 F. 3d 455, 459-462 (8th Cir. 2006) (allowing Tax Court “testimony from the appeals officer that further elucidated his rationale” to supplement the administrative record).  Les has more recently raised the question whether those judicial exceptions to the administrative record rule survive section 6015(e)(7), which, on its face, specifies only two items beyond the administrative record that are to be part of the Tax Court record on review – i.e., newly discovered or previously unavailable evidence.  Arguably, expressio unius est exclusio alterius (the expression of one thing implies the exclusion of another thing).  This is a serious question to which I have no answer, though I certainly hope that the judicial exceptions to the administrative record rule survived the statute’s enactment.  As Les put it in an e-mail to me recently, “Is the concern that the statutory language (previously unavailable or newly discovered) preempts the exceptions Judge Holmes discussed in Kasper? Or is there a desire for systemic pressure on a better administrative process?”

But, this Kasper question of Les’ becomes moot if the Tax Court is willing to remand section 6015 cases to supplement the record not just to address concerns underlying the judicial exceptions to the administrative record rule, but also to add any other pertinent materials to the record that may aid the proper determination.

I would also note that earlier this year, the Tax Court held that it could remand a whistleblower award case to the IRS Whistleblower Office.  Whistleblower 769-16W v. Commissioner, 152 T.C. No. 10 (April 11, 2019).  That opinion compares and contrasts the Tax Court’s CDP and innocent spouse provisions (pre-Taxpayer First Act) and says the Tax Court does not consider it dispositive that section 7623(b)(4) contains no retained jurisdiction provision like section 6330(d)(2) for CDP.  The court points out that section 7623(b)(4) says nothing either way about remands.  The court held that remands were permitted because that is normal when review of agency action is on an abuse of discretion standard and under the administrative record rule.  Those were the standard and scope of review adopted in Kasper.  Section 6015 is somewhere between CDP and section 7623(b)(4), with a de novo standard of review, but a limit mostly to reviewing the administrative record.

I would hope that the Tax Court would liberally remand section 6015 cases to the IRS for the IRS to consider any material not previously included in the administrative record that might significantly alter the outcome of the case.  This would include both newly discovered or previously unavailable evidence, but not be limited to that.  Let me give you an example of material falling outside section 6015(e)(7) of the type I am worried about:  I have seen Tax Court cases that have been brought to me as a clinician after the taxpayer has filed a pro se Tax Court petition.  Pro se petitioners often do a bad job in creating the administrative record.  I have known cases where the taxpayer has been the subject of abuse and there are police records to prove it – in addition sometimes to orders of protection – yet the taxpayer never sent the police records or orders of protection to the CCISO examiner.  Such items are not previously unavailable or newly discovered, but they would likely have strongly affected the IRS’ determination had it seen such documents before issuing the notice of determination denying relief.  It is hard for me to imagine that Congress would have wanted this evidence of abuse to be excluded from the Tax Court record merely because the unrepresented taxpayer did not think to find and submit this evidence to the IRS earlier.  If the Tax Court were to be presented with such documentation, I would think the best course would be to remand the case to the IRS.  There is a good chance such evidence would moot the case, as the IRS would probably concede in most cases.

Next, the statute as written discusses Tax Court review of IRS determinations, but leaves unstated what the scope and standard of Tax Court review is to be where the IRS hasn’t made a determination under section 6015 yet.  This can happen when a taxpayer files a Form 8857 and brings suit after 6 months in the absence of an IRS determination or when the taxpayer responds to a deficiency notice by, for the first time, raising an innocent spouse request in the Tax Court petition.  Legislative history of section 6015(e)(7) does not address these “no determination” situations.  But, for the reasons that Congress thought it would be better for the Tax Court to review IRS determinations (and using the administrative record), I would urge the court to remand all such cases to CCISO for an initial determination.  That way, regardless of the procedure by which the case came to the Tax Court, the case would be decided on a similar standard of review and record of review to the cases Congress specifically addressed.  Current Tax Court case law holds that section 6015 review is done on a de novo record and standard, regardless of the procedure by which the case came to the court.  Porter v. Commissioner, 130 T.C. 115 (2008), and 132 T.C. 203 (2009).  In Porter I, the Tax Court expressed concern that the IRS’ proposal to limit the review of section 6015(f) determinations in cases under section 6015(e) to the administrative record would provide inconsistent procedures in similar cases, since review in deficiency cases or where a case was brought under section 6015(e) before the IRS ruled would be on a de novo record.  130 T.C. at 124-125.  Frankly, if the Tax Court doesn’t allow remands in these “no determination” cases, it appears that the Tax Court is currently bound by its precedent to allow a de novo trial record.

My final observation is one I have been repeating since the adoption of the Taxpayer First Act:  The best solution here is to amend section 6015(e)(7) to provide for a de novo record for Tax Court determinations under section 6015 – thus reestablishing Porter I as the controlling authority for all Tax Court section 6015 cases.  Such an amendment would make the need for remands of such cases moot.

First Tax Court Opinions Mentioning Section 6015(e)(7)

On October 10, 2019, Christine wrote about the provision added to the innocent spouse section by the Taxpayer First Act and the discussion of that section during the Fall ABA Tax Section meeting.  Christine’s post highlights some of the issues concerning this section that we have discussed before, here with links to two posts by Carl that came out when the language in the statute first appeared.  The new provision concerns and confuses those of us practicing in this area and Christine provides a link to the first response on IRC 6015(e)(7) filed by the IRS in the Tax Court.  If you haven’t read Christine’s post or the earlier posts on this issue, you might want to do that as background to the new information presented today. 

On October 15, 2019, the Tax Court issued two innocent spouse opinions — one relieving the taxpayer (Kruja, under (c)), the other not (Sleeth, under (f)).  These are the first two opinions that even mention section 6015(e)(7), adopted by the Taxpayer First Act.  Carl Smith noticed the opinions and sent a message to the rest of us on the blog team.  Most of what follows is taken from Carl’s email as he discusses what two Tax Court judges said about the new provision in each case.  There have been two other opinions concerning 6015 relief issued after the Taxpayer First Act added subsection (e)(7) on July 1, but these opinions did not mention subsection (e)(7): Ogden v. Commissioner, T.C. Memo. 2019-88 (issued 7/15/19), and Welwood v. Commissioner, T.C. Memo. 2019-113 (issued 9/4/19). Thus, today’s opinions are the first to even acknowledge the new subsection’s application to currently-pending Tax Court cases.

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In Kruja v. Commissioner, T.C. Memo 2019-136 the court said: 

Because the trial evidence was merely cumulative of what was already included in the administrative record, section 6015(e)(7) does not affect the outcome of this case. As a result, we have not addressed the effect of section 6015(e)(7).

In Sleeth v. Commissioner, T.C. Memo 2019-138 the court said:

We decide this case pursuant to section 6015(e)(7) as the administrative record has been stipulated into evidence and the testimony taken at trial was not available in the administrative record.

In Kruja the taxpayer was unrepresented.  The taxpayer appears to have resided in Arizona at the time of filing her petition.  In Sleeth the taxpayer was represented by counsel.  The taxpayer lived in Alabama at the time of filing her petition.  In both cases the husband intervened.  Sleeth is a rare case in which the petitioning spouse loses after an intervention.

Sleeth’s statement that the testimony “was not available in the administrative record” could mean that everything on which testimony was taken in Tax Court was newly discovered or previously unavailable at the time the determination was made.  However, I seriously doubt that is the case if one carefully read through the testimony. I hope Judge Goeke is making a ruling that anything testified to at trial (regardless of whether it is newly discovered or previously unavailable at the time the determination was made) is admissible as part of what the Tax Court reviews.  That would be a readoption of Porter I’s holding of a de novo scope of Tax Court record. See Porter v. Commissioner, 130 T.C. 115 (2008) (en banc).  But, I seriously doubt that is what Judge Goeke intends to say.

Thanks for Carl for finding these opinions and providing his insight.  As you can see from these opinions the new provision applies to innocent spouse cases already tried as well as those pending.  Since the first two opinions do not require a retrial, reopening the record or additional briefs, perhaps that pattern will follow in decisions to come.  Anyone with a pending innocent spouse case needs to pay careful attention to this issue and develop the record accordingly.

Taxpayer First Act Update: Innocent Spouse Tangles Begin

Last week many of the PT bloggers spoke at the ABA Tax Section Fall Meeting. One of sessions discussed recent developments relating to innocent spouse relief. This post provides a brief update on how the IRS and the Tax Court are grappling with the Taxpayer First Act’s changes to the innocent spouse provisions.

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We have blogged before about the Taxpayer First Act’s changes to the innocent spouse provisions. After the TFA was enacted on July 1, 2019, Steve Milgrom and Carl Smith flagged many questions raised by the legislation. Carl Smith discussed his concerns about the proposed innocent spouse legislation in the Taxpayer First Act here and here back in April before it became law. 

The changes discussed at the ABA meeting affect how the Tax Court reviews IRS decisions on innocent spouse relief. Steve Milgrom explained:

On July 1, 2019 President Trump signed the Taxpayer First Act  (TFA) into law. One provision of the TFA, section 1203, makes procedural amendments to the innocent spouse rules …. The new provision defines the scope and standard of review that govern the Tax Court’s review of an IRS determination. Basically, “scope of review” deals with what the court will consider in making its decision, what evidence it will look at. A court’s “standard of review” defines how much deference to give to the decision (determination) made by, in tax cases, the Commissioner.

The Taxpayer First Act added a new paragraph to section 6015(e):

(7) STANDARD AND SCOPE OF REVIEW. — Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon —
(A) the administrative record established at the time of the determination, and
(B) any additional newly discovered or previously unavailable evidence.

This new standard applies “to petitions or requests filed or pending on or after the date of the enactment” of the Act, which was July 1, 2019. At the ABA meeting, IRS speaker Julie Payne reported that between 300 and 350 standalone innocent spouse cases are generally pending in U.S. Tax Court at any given moment. All of those cases are now subject to the new standard. The question of how the new language applies is an immediate one for the Court and the Service. The Tax Court must decide not only how it will conduct trials, but how to address cases that have already been tried but are pending the court’s decision.

I will not repeat the points made and questions identified by Carl and Steve but I encourage readers to review the PT post of July 9 and the comments on that post for an understanding of the many ways in which the new statutory language is problematic.

Several Tax Court judges have responded to the Taxpayer First Act by issuing orders to the parties, asking the parties to address the effect of the Act on their case. William Schmidt links to one of these orders by Judge Copeland in a recent Designated Order post. Similar orders were issued by Special Trial Judge Leyden and by Judge Thornton, and there are likely others by now.

Judge Leyden issued the first of these orders on July 24 in Grady v. Commissioner, Docket No. 016411-17S, and the first IRS response was filed in that case on September 23. (Ms. Grady is self-represented.) Additional filings were due in other cases on October 4 and October 10. I do not have copies of those submissions but would welcome them if any enterprising readers would like to order them from the Tax Court. Thanks to Sheri Dillon and Francesca Robbins of Morgan Lewis for obtaining the Grady filing at short notice last week, in time for discussion at the Tax Section Meeting. The other cases are:

  • Rubin v. Comm’r, Docket No. 26604-14 (J. Thornton) – response due 10/4.
  • Bargeron v. Comm’r, Docket No. 019828-17 (J. Thornton) – response due 10/4.
  • Robinson v. Comm’r, Docket No. 12498-16, (J. Copeland) – response due 10/4.
  • Morales v. Comm’r, Docket No. 25380-18S (J. Leyden) – response due 10/10.

The IRS speakers at the Tax Section meeting did not discuss the Taxpayer First Act submissions, as the matter is the subject of ongoing litigation, and the Service has not formalized its position. However, Respondent’s submission in Grady is instructive of the Service’s current litigating position. I recommend reading the full response, but are the highlights.

Respondent’s Position in Grady

On the standard of review, Respondent agrees that the Taxpayer First Act is clear: the standard of review is de novo in all cases brought under 6015(e). The Tax Court does not review the IRS’s determination for abuse of discretion but instead reaches its own determination of the appropriate relief. This applies to all avenues for relief under 6015, including traditional innocent spouse relief under 6015(b), separation of liability under 6015(c), and equitable relief under 6015(f).

The scope of review is the tricky part. Even though the Tax Court is to come to its own conclusions, the new statutory language appears to limit the evidence that the Tax Court can consider in making its determination. New 6015(e)(7) says the Tax Court’s de novo review “shall be based upon (A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence.” Respondent’s filing takes each in turn.

The administrative record

Congress did not define what it means by the administrative record here. In Grady, Respondent submits that the term should have essentially the same meaning as it does in Collection Due Process cases. The Treasury regulations at section 301.6330-1(f)(2) Q&A-F4 define administrative record as

The case file, including the taxpayer’s request for hearing, any other written communications and information from the taxpayer or the taxpayer’s authorized representative submitted in connection with the CDP hearing, notes made by an Appeals officer or employee of any oral communications with the taxpayer or the taxpayer’s authorized representative, memoranda created by the Appeals officer or employee in connection with the CDP hearing, and any other documents or materials relied upon by the Appeals officer or employee in making the determination under section 6330(c)(3) …

In applying this definition to the innocent spouse context, Respondent notes

Obvious changes might include substituting “IRS or IRS employee” for “Appeals Officer or employee” and removing references to section 6330, as appropriate. Relevant documents could include: tax returns; notice of deficiency; documents where petitioner acknowledges deficiency (e.g., form 4549, statement of income tax changes); account transcripts; Form 8857 and any attachments; any documents submitted by petitioner; any documents submitted by [the] non-requesting spouse; CCISO’s or Appeal’s final determination; allocation/attribution worksheets; any statement of disagreement by petitioner and/or non-requesting spouse; CCISO’s or Appeal’s workpapers; Integrated Collection System (ICS) history, or financial information.

Newly discovered or previously unavailable evidence

Respondent turns to the dictionary to interpret the terms “additional” “newly discovered” and “previously unavailable.”

Combining these various dictionary definitions suggests the scope of review should encompass supplementary evidence of which a party was recently made aware, but could not get or use before. Applied specifically to innocent spouse claims, the plain meaning suggests that the scope of review is limited to evidence not already provided or existing in the administrative record, of which the party introducing the evidence became aware since the administrative determination, and which the party introducing the evidence could not have obtained and provided before the administrative determination.

In a footnote, Respondent further suggests

As to words of the statute that denote timing, i.e. “newly” and “previously,” (e)(7)(B), these are perhaps best understood with reference to the administrative determination. Accordingly, “newly” would cover the period of time after the administrative determination, whereas “previously” would encompass the time period before the determination.

Next steps

What does all this mean for Ms. Grady, in Respondent’s view?

As to the specific case in issue here, as a result of the amendment, it may be necessary for the parties to either agree what constitutes the administrative file and whether other evidence presented at trial was newly discovered or previously unavailable, or if the parties cannot agree, to hold a supplementary hearing to determine whether the Court is in full possession of the administrative record, and whether any evidence presented to the Court was not newly discovered or previously unavailable under section 6015(e)(7)(B).

This will not be welcome news to Ms. Grady.

Initial Thoughts

As others have commented, limiting the Court’s scope of review while setting a de novo standard of review makes very little sense, particularly in equitable relief cases and cases in which abuse is a factor. Unfortunately, taxpayers seeking relief will be caught up in delays and litigation over these provisions.

At the Tax Section meeting, attendees suggested that the parties simply waive any evidentiary objections under the Taxpayer First Act, at least as to cases that have already been tried. The Robinson trial took place over a year and a half ago, in February 2018. The Grady case was tried a year ago. In the interests of the efficient resolution of cases, and in fairness to the self-represented petitioners for whom further proceedings could pose a hardship, the parties could agree to have the Court decide the case based on the evidence submitted.

The administrative record was another topic of discussion. In many cases, the administrative record is simply poor, and it is not possible for the court to reach a de novo determination without fleshing out what happened in the administrative proceedings. Innocent spouse cases are fact-intensive and involve taxpayers telling nearly their entire life story to the examiner. Unfortunately, phone calls between the spouses and IRS and Appeals employees are not recorded and there is no reliable transcript of what was said. IRS employees’ case notes vary in quality, and taxpayers are not allowed to record these calls themselves.

Les recently noted that “last year’s Tax Court’s discussion of exceptions to the record rule in Kasper (the whistleblower case) will be even more important” in the context of the Taxpayer First Act. In a post on Kasper last year, he discusses the issue in the context of general administrative law principles. Les noted:

What makes Kasper one of the most significant tax procedure cases of the new year is that in reaching those conclusions it walks us through and synthesizes scope and standard of review and Chenery principles in other areas, such as spousal relief under Section 6015 and CDP cases under Section 6220 and 6330.

In what I believe is potentially even more significant is its discussion of exceptions within the record rule that allow parties to supplement the record at trial. To that end the opinion lists DC Circuit (which it notes in an early footnote would likely be the venue for an appeal even though the whistleblower lived in AZ ) summary of those exceptions:

• when agency action is not adequately explained in the record;
• when the agency failed to consider relevant factors;
• when the agency considered evidence which it failed to include in the record;
• when a case is so complex that a court needs more evidence to enable it to understand the issues clearly;
• where there is evidence that arose after the agency action showing whether the decision was correct or not; and
• where the agency’s failure to take action is under review

Established exceptions to the record rule in other contexts may provide some relief in cases where the administrative record falls short of what is reasonably necessary for a de novo determination. For example, where it is clear from the record that a specific contention was made during the administrative process, but the IRS case notes do not adequately describe the testimony given, the Tax Court may be able to take testimony on that specific point.

This post has barely scratched the surface of the Taxpayer First Act issues the Tax Court will grapple with in pending innocent spouse cases. We will continue to blog about developments in this area as they unfold.

Impact of Fraud Penalty on Only One Spouse

The case of Chico v. Commissioner, T.C. Memo. 2019-123 points out the benefits to the “good” spouse when the other spouse files a fraudulent tax return.  The case follows earlier Tax Court precedent established in the non-precedential case of Said v. Commissioner, T.C. Memo. 2003-148.  Because of the interplay of the fraud penalty and the accuracy related penalties, the “good” spouse gets a pass on penalties on the return.  While this outcome has nothing to do with the innocent spouse provisions, it has the effect of leaving the “good” spouse free of penalties when the fraud on the return relates only to the other spouse.  Thanks to our fellow blogger Jack Townsend for bringing this case to my attention.

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Mr. Chico ran several businesses including a return preparation business.  He filed returns that failed to report income from several sources and otherwise contained errors that caused the IRS to assert the fraud penalty.  When the IRS asserts the fraud penalty on a joint return, it must prove fraud of each spouse in order to have the fraud penalty apply to both spouses.  Here, Mr. Chico’s knowledge of the businesses and of return preparation made him the obvious target of the penalty while the IRS could not overcome the showing that Mrs. Chico had little knowledge of the matters on the return.  So, the court found the fraud penalty with respect to Mr. Chico but not his wife.

The finding of the fraud penalty against Mr. Chico did not end the pursuit of penalties by the IRS.  As it normally does, the IRS had asserted the lesser penalties in the accuracy penalty provisions of IRC 6662 against both husband and wife.  Here, the issue of penalty stacking comes into play.  The IRS cannot hit someone with the fraud penalty and the accuracy related penalty.  It can either obtain the fraud penalty or the accuracy related penalty but not both.  Because of the anti-stacking provision found in IRC 6662(b), the Tax Court found that it could not impose an accuracy related penalty against Ms. Chico since doing so would create a stacking of penalties.

IRC § 6662(b) states the following as it pertains to the imposition of accuracy-related penalties on underpayments.  The IRS may not stack penalties when any of the following apply:

  • When a penalty is imposed under IRC § 6663 (fraud penalties)
  • When a penalty is determined as being a “gross valuation misstatement” as defined under IRC § 6662(h)(2), the portion of the underpayment shall be penalized 40 percent in total (and not an additional 40 percent to the standard 20 percent penalty)
  • When a penalty is determined from a nondisclosed noneconomic substance transaction as defined under IRC § 6662(i), the portion of the underpayment shall be penalized 40 percent in total (and not an additional 40 percent to the standard 20 percent penalty)

Treas. Reg. 1.6662-2(c) is the anti-stacking provision in the CFR as it pertains to accuracy related penalties:

A. If a portion of the underpayment of tax shown on a return is attributable to both negligence and a substantial understatement, the accuracy-related penalty would apply only once at the 20 percent rate to this portion of the underpayment. The examiner should assert the penalty that is most strongly supported by the facts and circumstances and write up the other as an alternative penalty position.


B. The penalty is applied at the 40 percent rate on any portion of the underpayment attributable to a gross valuation misstatement. Any penalty at the 20 percent rate that could have applied to this portion is not asserted except as an alternative penalty position.


C. A penalty is applied at the 75 percent rate on any portion of the underpayment attributable to civil fraud. Any penalty that could have applied to this portion at the 20 or 40 percent rate is not asserted except as an alternative penalty position.

IRM 20.1.5.3.3.1 No Stacking Provision (12-13-2016) sets out the anti-stacking rules for IRS employees to follow. 

The application of the anti-stacking penalties allows Mrs. Chico to avoid having any penalty for filing an improper return assessed against her.  Although the IRS sought the accuracy related penalty against her it does not seem inclined to pursue the issue into the circuit courts to overturn the position stated by the Tax Court that imposing the lesser penalty on the spouse not liable for fraud creates impermissible stacking.  In the absence of a court challenge, the IRS must go to Congress and seek a change in the stacking rules to allow assessment against the spouse who did not commit fraud or forgo any lesser penalty against that spouse in these circumstances.

The spouse who did not commit fraud may still suffer because of the fraud.  Unless that spouse obtains innocent spouse relief, that spouse will owe all of the additional tax assessed as a result of the audit.  Unless the spouse who did not commit the fraud has no withholding and makes no estimated tax payments during the year, that spouse may have to repeatedly apply for injured spouse relief in subsequent years if the couple receives a refund of taxes since the IRS will likely take the whole refund to satisfy the penalty liability of the fraudulent spouse.

Here, the Chico’s filed a joint petition.  Two attorneys are listed in the opinion as representing the taxpayers.  It is not clear if one was representing Mr. Chico and the other Mrs. Chico or if they were both representing both parties.  This is a situation in which the attorneys must be careful because the interests of Mr. and Mrs. Chico do not align. 

This is also a situation in which Mrs. Chico was fortunate to have representation.  Without representation she has little chance of catching the mistake made by the IRS in seeking to impose a lesser included penalty on her.  Perhaps the Tax Court Judge would always or almost always catch this mistake and protect the unrepresented party but that puts a great deal of pressure on the judge which does not belong there.  Just because Tax Court judges do a good job of catching these issues and protecting unrepresented taxpayers does not mean that this is a perfect system.  An unrepresented taxpayer could end up owing a penalty which the IRS should not have imposed.  Even the accuracy related penalty would have been almost $40,000 for the three years at issue in this case.  That would have been a steep price for the unrepresented spouse to pay.

The court stated:

Respondent has not asserted fraud penalties against Ms. Chico but alleges that she is liable for the section 6662(a) accuracy-related penalty for each year at issue.

I interpret the court’s statement to mean that no penalty was asserted against Ms. Chico in the notice of deficiency but the attorney in Chief Counsel’s office decided to pursue the penalty after the filing of the petition.  If I have interpreted the situation correctly, it looks like the notice writers at the IRS read the IRM but the Chief Counsel attorney and supervisor did not or maybe Chief Counsel’s office does not agree with the decision in Said.  If I interpreted the situation correctly, maybe it’s time for a new Chief Counsel notice assuming that Chief Counsel’s office now agrees with this outcome.

Innocent Spouse, Abuse of Discretion, and Remand: Designated Orders 8/5/19 to 8/9/19

My August week of designated orders brought four orders in different areas. The topic range includes innocent spouse (with the question of application under the Taxpayer First Act), collection due process and remands. One of the remands has an abuse of discretion issue.

Taxpayer First Act and Innocent Spouse
Docket No. 12498-16, Beverly Robinson v. C.I.R., Order available here.
In her first designated order, Judge Copeland brings up how the Taxpayer First Act affects a pending innocent spouse case. Carlton Smith blogged about this issue in Procedurally Taxing previously here. Carlton’s article discusses the implications of the Taxpayer First Act section concerning innocent spouse cases, specifically IRC section 6015(f) cases.

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This order concerns a case that already went to trial on February 5, 2018. The parties filed a joint stipulation of facts and a joint first supplemental stipulation of facts. The petitioner moved to admit Exhibit 58-P and it was admitted into evidence. Each party called witnesses in support of their arguments. The entire administrative record was not presented or received into evidence. The trial was before Judge Chiechi, who has since retired. The case was reassigned to Judge Copeland. After trial, on July 1, 2019, the Taxpayer First Act was signed into law. The relevant portion to this case is below.

Section 1203(a)(1) of the Taxpayer First Act of 2019 (TFA) amended IRC section 6015(e) to add a new paragraph (7):

(7) STANDARD AND SCOPE OF REVIEW. — Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon —
(A) the administrative record established at the time of the determination, and
(B) any additional newly discovered or previously unavailable evidence.

TFA section 1203(b) states those sections apply to “petitions or requests filed or pending on or after the date of the enactment of this Act.”

Judge Copeland issued this order, stating that the parties shall file a response to the order addressing the effect of sections 1203(a) and (b) of the TFA on this case.

At first, I thought the judge wanted the parties to do research on the TFA and how its innocent spouse provision applied in general to their case so I would have directed them to Carlton’s article. However, I reread the order and realized just what she meant concerning the TFA’s application to their case.

The case was pending on the date the TFA was enacted. Now, normally the Tax Court would review the innocent spouse determination de novo based upon (A) and (B) listed above. However, the administrative record was not introduced or received into evidence, which is part of subsection (A) above. What to do in this case? Let the parties make their arguments about the matter. Thus, the judge ordered the parties to submit their responses on or before September 4, 2019.

As a follow-up – on August 30, the IRS filed an unopposed motion for an extension of time. That motion was granted to give the IRS an extension of time to October 4.

Takeaway: Applying the Taxpayer First Act will open up several questions for years to come. Since the Taxpayer First Act specifically discusses Tax Court review of innocent spouse cases, this may be a prominent issue moving forward in designated orders. They should still read Carlton’s article.

More Innocent Spouse
Docket No. 10341-18, Jeffrey C. Elliott v. C.I.R., Order available here.
Pamela Elliott filed a motion for leave to file a notice of intervention in this innocent spouse case. Normally, she could have intervened as a matter of right. However, she filed the motion after the 60-day window during which she could intervene and requests leave to do so at this late time. Her reasoning is that “she was not represented by counsel and did not understand her procedural rights,” adding that the “interests of justice favor allowing her request.”

The Court reviews factors regarding Ms. Elliott’s motion for leave to file a notice of intervention. The first factor is the length of time she knew or should have known of her interest. Ms. Elliott waited a year so that factor weighs against her. The second factor is the prejudice the parties may suffer by her failure to intervene earlier. Mr. Elliott did not provide proof of additional fees he would suffer, the docket in this case has been inactive, and the parties have sufficient time to prepare for an October 2019 trial so it is determined that the parties will not suffer prejudice from her failure to intervene earlier so that factor weighed in her favor. The third factor is the prejudice she will suffer from a denial of her motion. Because she will be affected by the decision on innocent spouse relief, she would suffer prejudice by not being able to participate in the trial and that factor weighs in favor of granting the motion. The fourth and final factor is any unusual factors weighing in favor of finding timeliness. There are no issues affecting timeliness, but the parties are involved in another Tax Court proceeding (2957-19) involving similar issues. On balance, the factors allow for Ms. Elliott to be granted the relief she sought.

The Court grants her motion for leave to file a notice of intervention, ordering to amend the caption and serve her with the proper notice and pretrial order so she may prepare for trial.

Takeaway: It is not recommended to file documents after a deadline has passed. However, factors may allow for the Court to grant an individual the relief sought.

Abuse of Discretion for Installment Agreement Notice
Docket No. 2018-17L, Don R. Means v. C.I.R., Order here.
The petitioner is a retired airline pilot who claimed deductions based on participation in tax shelter programs. Audits of those schemes resulted in the IRS disallowing the deductions and deficiencies for 7 tax years. The Tax Court entered final judgments in 2013 regarding the aggregated assessed tax and associated accrued interest to be, respectively, $102,765 and $76,498. Mr. Means entered into a $500 monthly installment agreement in February 2014. The IRS terminated the agreement in May 2016. In July 2016, the IRS issued a Notice of Intent to Levy. Mr. Means filed a Form 12153 to request a Collection Due Process hearing. In the form and also by request to the settlement officer, Mr. Means requested an explanation of the termination of the installment agreement.

Termination of an installment agreement must be preceded by a 30-day notice that provides an explanation to the taxpayer. There were inconsistencies in the administrative record so it was unclear that the notice requirement under IRC section 6159(b)(5) was met or that such notice was provided to Mr. Means (though there is an indication that Mr. Means, his ex-wife, or both, failed to provide the IRS updated financial information, which led to the termination).

The Court cannot agree with the settlement officer’s determination that legal and administrative procedures were met. Therefore, the conclusion is that the determination sustaining the proposed levy was an abuse of discretion. The Court remands the case to Appeals for a supplemental hearing. On remand, if Mr. Means did not have proper notice, he should either be allowed to continue the installment agreement or receive the proper notice due, with the right to appeal.

Takeaway: Consistent procedure is necessary for the IRS so that a taxpayer receives proper due process. If the administrative record is inconsistent about notices, it is more likely for the Court to decide there was abuse of discretion.

Collection Due Process, Remand, and Summary Judgment
Docket No. 25904-16SL, Chinyere Egbe & Sheila Daniels Egbe v. C.I.R., Order and Decision available here.
To begin, petitioners received an IRS notice of deficiency for tax years 2012 and 2013. They did not petition the Tax Court based on that notice.

Next, the IRS issued to the petitioners a Final Notice of Intent to Levy and Notice of Your Right to Hearing for the 2013 tax year. The petitioners submitted a form 12153 to request a collection due process (CDP) hearing.

The settlement officer assigned to the case worked with the petitioners and their representative. The officer granted them an extension of time and did not receive any requested financial documents. However, he told their representative that they qualified for a streamlined installment agreement of $275 per month. The representative agreed to get back with the settlement officer after discussing with the petitioners. The petitioners made two payments before realizing the agreement was not in effect and then terminated their relationship with the representative because of not communicating acceptance of the installment agreement to the IRS.

The IRS issued a notice of determination to the petitioners not to grant relief from the proposed levy action. The petitioners filed a timely petition to the Tax Court concerning the notice of determination, also checking the box for a notice of determination concerning innocent spouse relief (which did not apply) and indicating the notice was for tax years 2012 and 2013 (when it was only for 2013).

The IRS filed a motion for summary judgment, which the Court denied. The Tax Court remanded the case to IRS Appeals for a further administrative hearing so the IRS could provide petitioners a supplemental CDP hearing. The Court dismissed tax year 2012 and the innocent spouse claim from the case.

The same settlement officer held a further CDP hearing. He informed the petitioners they could not challenge the liability for tax year 2013 because they received a valid notice of deficiency and that they had accrued an additional liability. The settlement officer proposed an increased installment agreement and they accepted, signing form 433D.

The IRS issued to the petitioners a supplemental notice of determination related to tax year 2013, determining that the proposed levy is not sustained because they agreed to a $600 per month installment agreement.

Following the supplemental notice of determination, both parties were to file status reports but only the IRS filed one. The Court scheduled the case for trial on the September 23, 2019, docket for New York, New York. The IRS filed a motion for summary judgment, with the settlement officer’s statement in support. The petitioners filed their objection to the motion for summary judgment.

In the Court’s analysis, the petitioners did not show there was a genuine issue for trial. Since the petitioners were in an installment agreement, the IRS did not sustain the proposed levy. The Court granted the motion for summary judgment because there was no genuine issue of material fact and removed the case from the September calendar.

Takeaway: To some degree, I think the petitioners had bad representation, but I think the biggest problem was a lack of understanding of IRS and Tax Court procedure. What are some indicators? They did not petition the Tax Court regarding the liabilities for 2012 and 2013 from the notice of deficiency. They (or their representative) did not respond or communicate with the settlement officer for the CDP hearing. They did not fill out their Tax Court petition correctly based on the original notice of determination.

I find that clients do not understand the difference between the various notices that provide them access to the Tax Court. Generally, the notice of deficiency allows them to contest the liability while a notice of determination concerning collection action is about abuse of discretion in a CDP hearing. It is critical to know what lane you are in to argue correctly and find success in the Tax Court.