The Fatty Rule for Post TFA Innocent Spouse Cases? An Early Look at the Otherwise Unavailable Evidence Exception

The Taxpayer First Act changed the scope of review in innocent spouse cases. Rather than allow parties to introduce evidence at trial, as we have discussed (see for example Christine’s post Taxpayer First Act Update: Innocent Spouse Tangles Begin) the TFA restricts the parties to the administrative record. TFA contains two exceptions: when there is evidence that is newly discovered or was otherwise unavailable.  There is considerable uncertainty surrounding this new rule, as well as how the Tax Court will define and apply the newly discovered and otherwise unavailable exceptions.

This past March in Fatty v Commissioner, Judge Holmes issued a bench opinion in an S case that gives an early nonprecedential look at the otherwise unavailable exception. 

read more...

The case itself is a fairly straightforward application of the equitable relief factors arising from an approximately $7,000 reported liability attributable to the withdrawal of funds from Mrs. Fatty’s retirement account. At the time the then-married Mr. and Mrs. Fatty used the money to pay for expenses associated with the purchase a house. They later divorced, and pursuant to the divorce agreement Mrs. Fatty, who retained ownership of the home, was responsible for the tax liability. 

Despite Mr. and Mrs. Fatty entering into and complying with an installment agreement (with Mrs. Fatty paying the monthly amounts) Mr. Fatty sought relief from the joint and several liability. Mrs. Fatty intervened and the case went to trial. 

In normal deficiency cases, and in innocent spouse cases prior to the TFA changes, at trial, Mr. Fatty would have the opportunity to testify and introduce other evidence. In setting up the opinion, Judge Holmes summarized the TFA changes:

Until recently, the scope of review in a Tax Court case involving a request for innocent spouse relief is also de novo. People would come, they’d introduce evidence, and I as a judge would look at it with fresh eyes. Congress has more recently changed that scope of review. Now I am supposed to look at what is called the administrative record. The administrative record consists of all the documents and the evidence that the IRS looked at when Mr. Fatty first applied for relief.

Judge Holmes also explained the two exceptions to the TFA record rule:

I am supposed to look only at the administrative record, with two exceptions. And those two exceptions are evidence that is newly discovered or evidence that was previously unavailable. This is a change in the law, and the Fattys are one of the first cases to come after this change in the law.

Here is where the opinion gets interesting. As I mentioned, the TFA does little to expand upon what either exception means.  As a practical matter, these exceptions will likely be important, especially with pro se taxpayers who may fail to develop a case before the centralized and correspondence based IRS innocent spouse unit.

In Fatty, Judge Holmes takes a very generous view of  the meaning of otherwise unavailable, offering one approach that takes into account the absence of trial like procedures in IS administrative determinations:

However, in this particular case, I just assumed that testimony given under oath and subject to cross-examination, like the testimony given by both Mr. and Mrs. Fatty, is this newly available evidence, because when Mr. Fatty applied for innocent spouse relief, he wasn’t able to give sworn testimony and neither he nor his wife were subject to cross-examination

This approach, if adopted in other cases, leaves open the possibility for witness testimony, given the absence of sworn testimony and the right of cross examination in administrative IS determinations.  

To be sure, it is hard to read too much into this: this is just a bench opinion in an S case and the language discussing the exception is a bit garbled. Judge Holmes notes the limits: “As I said, I’m not deciding this for all cases in the future. This is an S case.” Yet for practitioners this is an important early development. It provides a convincing approach to allow parties to testify despite the TFA record rule limiting the scope to the record below. We will see if the Tax Court adopts it, or whether other Tax Court judges apply it in future nonprecedential opinions. 

What about the Fattys’ case? As with many Judge Holmes opinions he transparently discusses his approach, which is refreshing in a case implicating a multi-factor balancing test.

What I look at, and what I think is the appropriate fulcrum, is the extent to which the economic immunity of a household that files a joint return has been broken down by the actions of the non-requesting spouse in a way that didn’t allow the requesting spouse’s reasonable exit from having joint returns and a joint liability.

The opinion notes that the parties equally enjoyed the benefits of the income and explains that the IRS is not bound by the parties’ divorce agreement. After walking through the factors and emphasizing that Mr. Fatty had remedies under state law if Mrs. Fatty failed to pay on the agreement and the IRS collected from him, Judge Holmes held that Mr. Fatty was not entitled to relief. 

Innocent Spouse Updates

The 11th Circuit upheld the decision of the Tax Court in Sleeth v. Commissioner, — F.3d — 2021 WL 1049815 (11th Cir. 2021), holding that Ms. Sleeth was not an innocent spouse.  The Sleeth case continues the run of unsuccessful taxpayer appeals of innocent spouse cases following the major structural changes to the law in 1998.  Another taxpayer is trying to break the string by appealing the Tax Court decision in Jones v. Commissioner, TC Memo 2019-139 to the 9th Circuit.  I will discuss both cases below.

read more...

Sleeth

The Sleeth case is the second case the Tax Clinic at the Legal Services Center of Harvard Law School appealed to a circuit court.  If you are interested in the oral argument, you can listen to it here.  Madeleine DeMeules argued on behalf of the clinic and did an excellent job but faced significant headwind from the court because of the burden that an appellant must meet to overcome a trial court decision.   

In both cases argued by the tax clinic the Tax Court found multiple positive factors and only one negative factor applying the tests of Rev. Proc. 2013-34.  Yet, despite the multitude of factors favoring relief in each case the Tax Court found that the knowledge factor was negative for the taxpayer and denied relief.  The pattern developing in these cases suggests that the Tax Court views the knowledge factor as a super factor, despite changes in IRS guidance no longer describing it as such.  In this post, Carl Smith discussed Seventh Circuit’s decision in the Jacobsen case, the first of the two cases the tax clinic took to a circuit court, and cites to all of the unsuccessful appeals of innocent spouse cases.

In Sleeth the court knocked down each of the three arguments for petitioner.  The appeal challenged the decision of the Tax Court regarding the knowledge element, the economic hardship element and the overall application of the factors.  Ms. Sleeth signed three joint returns at once, two of which were delinquent, showing liabilities totaling a few hundred thousand dollars.  She did not work, and her then-husband was a doctor who worked as a contractor rather than an employee.  In prior years he had also run significant liabilities which he had always paid off in relatively short order.  They had not filed delinquent returns before, so both the number of returns with an unpaid liability and the total amount of the liability exceeded prior circumstances.  She testified she expected he would pay off these liabilities, and he might have but he lost his job and ultimately paid in enough money to almost fully pay one of the years, but which still left a hefty balance.  The 11th Circuit found the Tax Court’s determination that she should have known he would not pay off the liabilities reasonable under the circumstances.

The size of the liability significantly exceeded her assets and her income was essentially non-existent.  The Tax Court found the economic hardship factor neutral, and the clinic argued on appeal it should be a positive factor for her, since devoting her assets to a partial payment of the liability would have left her homeless and penniless.  The 11th Circuit found that she might have had some assets other than her modest townhome, with which she could have paid a relatively small fraction of the outstanding liability. The court also foundthat she did not show she could not pay something toward the liability.  The Tax Court record regarding her assets and ability to pay was not as robust as it might have been.

Taking all factors into consideration and having agreed with the Tax Court on the two contested factors, the 11th Circuit did not find it unreasonable to deny Ms. Sleeth innocent spouse relief, even through the court had found three positive factors for relief and only one negative factor.  The case shows the importance of creating a strong record in the Tax Court and of prevailing at the Tax Court.  Overturning a primarily factual decision will never be easy.

Jones

Despite the difficulty in obtaining a reversal on an innocent spouse decision, Ms. Jones seeks to do exactly that in the 9th Circuit.  The Jones case involves not only a determination of her status as an innocent spouse but also the issue of whether she filed a joint return.  The tax clinic recently filed an amicus brief in the case on the issue of tacit consent.  We have not written much on tacit consent, but it is a regular feature in innocent spouse cases where one spouse, almost always the same spouse arguing for innocent spouse status, asserts that they did not agree to sign the joint return.  In many cases the spouse’s actual signature is not on the return, because the return was filed electronically or because the other spouse signed for both.  The Tax Court has created a body of case law deciding when the non-signing spouse intended the joint filing of a return and refers to the taxpayer’s consent in these situations as tacit consent.

Some of the factors the court relies upon in deciding whether a non-signing spouse intended to create a joint return are (1) whether the non-signing spouse objected to the filing of a joint return; (2) whether prior filing history of the couple during the marriage suggests an intent; (3) whether the non-signing spouse filed a separate return if that spouse had a filing requirement; (4) whether general reliance on one spouse for financial matters existed and (5) whether the couple had specific rules between themselves governing signing for one another.  While the issue of abuse and duress goes beyond tacit consent, it can play a role here.  If one spouse physically or emotionally intimidates or abuses the other, it could invalidate even an actual signature or could influence a court’s decision on the granting of tacit consent.

Taxpayer’s contesting a joint return liability should always look first to determine if they have an argument that no joint return exists.  Knocking out the existence of the joint return provides a surefire way of avoiding any liability stemming from the spouse’s income or other tax issues (note however that this does not hold true in a community property state, where the innocent spouse will still be required to include their share). Taxpayers can easily argue that they did not sign a joint return but face a much more difficult argument regarding their intent.  Bob Nadler wrote a post on the joint return issue several years ago in which he touched on tacit consent but the case did not focus on this issue.  Bob wrote the book on innocent spouse issues.  Christine Speidel and Audrey Patten are in the process of updating the book and the third edition should go to press later this year. 

Ms. Jones argues she did not intend to file a joint return and that if she did file a joint return, she should receive innocent spouse relief.  She is being represented by Lavar Taylor, a frequent guest blogger.  The case is still in the briefing stage and will not get argued until later this year.  Perhaps Ms. Jones can break the string of taxpayer defeats in appellate courts on the innocent spouse issue or avoid the innocent spouse issue altogether with a victory on tacit consent.  For those interested in innocent spouse issues, the case is worth following.

Offset of Rebate Recovery Credit and Some Innocent Spouse News

We have written several posts on offset over the past year and offset posts continue to be the most popular posts we write.  It might be possible to start an offset blog based on reader interest.  Some prior posts are here (injured spouse offset issues); here (CARES Act offset exceptions); and here (offset bypass rules – most heavily visited post on our site.)

read more...

The issue of offset of stimulus payments took an interesting turn this past week.  As you probably remember last year, in passing the CARES Act Congress took the extraordinary step of excepting from offset all debts except for past due child support.  This meant that stimulus payments in the first and second rounds went directly into the hands of taxpayers who would ordinarily have simply received a letter notifying them that their refund was taken to satisfy some past due debt. 

It looked like individuals who did not receive their stimulus payment for the first or second round and who could claim it as a Recovery Rebate Credit (RRC) as they filed their 2020 return would have the disadvantage of having the payment subject to federal tax offset and all of the other available offsets.  A recent post by the National Taxpayer Advocate (NTA) sets out some of the history on what the IRS did as it moved into the 2020 filing season. 

The bottom line is that the IRS has now decided to exercise its discretion under 6402(a) with respect to the offset of federal tax refunds to federal tax liabilities.  The IRS will allow refunds based on RRC to pass through to taxpayers without being offset to satisfy prior federal tax debts.  Great news for persons with only federal tax debts in their portfolio of debts subject to offset under the Treasury Offset Program (TOP) but less good news for taxpayers with other outstanding obligations.  For a detailed discussion of offset and an explanation of TOP, you can read an article recently written by Michael Waalkes and me found here.

The NTA points out two problems with the otherwise good news regarding the IRS decision to forego offset of refunds based on RRC.  First, the decision happened in the middle of the filing season after many taxpayers had already filed and already had their refunds offset.  A similar offset decision occurred last year when the Department of Education decided during the middle of the filing season not to exercise its right to offset federal tax refunds (and other federal payments) against outstanding student loan debts.  Individuals who filed early (i.e., those most likely to have substantial refunds) get treated differently than those who wait.  A similar issue has occurred during this filing season with unemployment benefits that Congress decided mid filing season to exclude from income.  (Though yesterday the Commissioner in his testimony before Congress said that the IRS was working on a way to fix this for early filing taxpayers without the need for them to file a superseding or amended return.) 

Should the unfairness of the treatment of early filers versus later filers cause the IRS not to adopt a change like this in the middle of a filing season?  Should the IRS (can the IRS) reverse the offsets it has already made during this filing season and put everyone on equal footing?  The NTA says “For taxpayers who already have had their RRCs offset to repay federal tax debts, we will work with the IRS to try to identify a way to make them whole.”  So, perhaps a fix will come for early filers with RRC based refunds, similar to what will happen for early filers reporting unemployment income.  This is a lot of extra work for the IRS when it is already strained recovering from the pandemic and pushing out stimulus payments.  If it can make this happen, it will be impressive.

The NTA pointed out a second problem with the IRS decision to exercise its discretion to allow the RRC refunds to bypass the federal tax offset – the IRS does not have the ability to keep these refunds from offset through TOP.  IRC 6402(a) gives the IRS discretion to waive offset of federal tax refunds but does not give it authority to waive offset of the other offsets that occur when a taxpayer has a federal tax offset.  The NTA says “Therefore, there remains a significant disparity between the treatment of taxpayers who received advance payments and the treatment of taxpayers who did not receive advance payments and are claiming their benefits as RRCs.”

Fixing the second problem requires Congressional action and passage of a bill with language similar to the CARES Act legislation last year.  There is no indication that such legislation is coming.  When the IRS is considering offset bypass refunds (OBR) discussed in the post linked above and in the article, it does not exercise its discretion when it can see a debt indicator on the taxpayer’s account alerting the IRS that the exercise of discretion will not put the money in the taxpayer’s hands but simply send it to the Bureau of Fiscal Services to satisfy another federal or state outstanding debt.  Because of the blanket decision to exercise discretion made with respect to RRCs, the IRS will benefit other federal and state creditors in some instances rather than the taxpayer.  While not optimal, this is the most the IRS can do with the authority it has.  It also provides a model for IRS moving forward that could benefit recipients of certain types of refunds, such as those generated by the earned income tax credit or other programs designed to put money in taxpayers’ hands.

Innocent Spouse news regarding the administrative record

We received correspondence from PT reader James Everett of DeFranceschi & Klemm, PC in Boston.  Mr. Everett represents the taxpayer in Sutherland v. Commissioner which Christine blogged here and I blogged here in the year in review post because of the importance of this case.  For those who do not remember Sutherland, it involves the issue of IRC 6015(e)(7) which limits Tax Court review in innocent spouse cases to the administrative record, including cases pending at the time of enactment that had already gone through the administrative process prior to the legislation creating the limitation.  The case was originally set for trial on December 2, 2020 in Boston but continued and rescheduled for trial on St. Patrick’s Day in Phoenix.  Most Bostonian’s would welcome a trip to Phoenix during the winter.  Alas, this trip was a virtual one. 

Here is the news from Mr. Everett regarding the IRS position on the administrative record:

The national office interjected itself into the case and the IRS objected to all documents that we wanted to include with the stipulation that weren’t part of the “administrative” record (i.e. documents not provided during the administrative stage).  In other words, it looked like the IRS was setting this case up for an appeal.  There was really no way of telling what the AO or CISCO actually reviewed previously because records weren’t kept in that fashion (since it didn’t matter with a de novo review).  Judge Lauber was going to require the IRS to call the appeals officer as a witness at the trial to discuss the record.  A few days before the trial, the IRS dropped its administrative record objections.  Judge Lauber asked the respondent’s counsel if this was reflection of Service wide policy (i.e., the IRS agreed that §6015(e)(7) didn’t apply to pending cases), respondent’s counsel candidly replied that this was above his paygrade to comment on – he could only speak to the case at hand. Thought this might be helpful to the readers of your blog.  

The withdrawal of objection to the administrative record is welcome news but does not resolve the issue.  The administrative record rule presents significant problems for individuals who go through the administrative process pro se, since they often fail to develop the full record needed if litigation occurs.

Two Against One in Innocent Spouse Case Decided by Judge Vasquez the Subject of New Book

Innocent spouse cases and dependency exemption cases can seem like divorce court once-removed.  Most tax practitioners decide not to be family lawyers because they have personalities that are dry as toast and want to avoid the emotional rollercoaster of domestic disputes.  Nonetheless, taxes provide the opportunity for plenty of ongoing domestic disputes as the case of Leith v. Commissioner, TC Memo 2020-149 demonstrates.  For an excellent write up of the case you should also read Bryan Camp’s post on this case as part of his Lessons from the Tax Court.

read more...

Judge Vasquez

Before I get to the case, I want to pause for a commercial interlude.  The Leith case is decided by Judge Vasquez.  This month the ABA Tax Section has published a biography of Judge Vasquez, From the Texas Cotton Fields to the United States Tax Court: The Life Journey of Juan F. Vasquez.  This is the first biography of a Tax Court judge and a remarkable story about his path to the court.  Judge Vasquez was originally appointed by President Clinton and became a senior judge in 2018 – the status all Tax Court judges must take when they reach the age of 70.  The path of each judge to the Tax Court differs but few follow a path remotely like the one taken by Judge Vasquez.

Intervention

When a taxpayer seeks innocent spouse relief, they usually begin by filing a Form 8857 with the IRS asking the IRS to abate all or part of a joint tax liability assessed against them.  The IRS has centralized consideration of innocent spouse requests in the Cincinnati Service Center, which is actually located in Covington, Kentucky.  At this location a group of IRS employees spend all day, every day reading the sad stories of individuals who have signed on for something they wish they had not.  When a taxpayer submits a request for innocent spouse relief, thereby becoming the requesting spouse (RS) in innocent spouse parlance, the IRS provides the non-requesting spouse (NRS) with notification of the request giving the NRS the opportunity to comment on whether the IRS should grant the request.  We have written about intervention before here, here and here.

Fears of Innocent Spouse Applicants

One problem with giving the NRS the notice of the innocent spouse request stems from the fact that some persons requesting relief have fled from the NRS as victims of domestic violence.  These victims often do not want the NRS to know that they have requested relief, because it could enrage their spouse or former spouse and lead to additional violence.  They also worry that making the request could alert the NRS to their whereabouts.  While the IRS does not provide the NRS with the Form 8857, the NRS can obtain the form and other data through FOIA.  The IRS would seek to protect the address and other identifying information in the case of an innocent spouse request involving domestic violence, but the RS would rightfully be nervous about relying on the IRS to carefully redact everything that might serve to identify where they lived.

I have had victims of domestic violence come to my clinic seeking assistance who backed away once they learned that the NRS could have access to the information submitted even if it was limited access.  In those cases there are strategies to pursue to protect the RS and still provide some relief.  The safest strategy for obtaining relief in that situation is probably an offer in compromise.  For one spouse to compromise a joint debt does not allow the other spouse to comment or see the file.  Some clients have even been concerned about that level of information sharing with the IRS and prefer to just wait out the statute or at most seek currently not collectible status.

Finding an Ally in IRS

In this case Ms. Leith finds the IRS in agreement with her application for innocent spouse relief.  In a case in which the NRS has intervened, a petitioner cannot simply sign a decision document with the IRS agreeing to the result.  So, the case goes to trial even though the taxpayer and the IRS agree as to the result.  This procedure gives the NRS the opportunity to keep the RS from leaving the NRS as the only liable spouse.

I certainly do not know the whole back story, but the timing of the tax problem lines up with the economic problems the country faced following the Great Recession.  My clinic still serves several clients who trace their tax problems back to that recession.  At the time the recession began petitioner worked at home taking care of the children while NRS had a job outside of the home which he lost in 2009.  Petitioner took a job as a waitress while NRS formed a partnership with two others to clean out foreclosed homes.  Petitioner had no connection to the business.

The couple’s financial difficulties continued into 2010 and 2011.  She tried to find a position in the mortgage industry where she had worked before becoming a mother but was unsuccessful and ended up working more shifts as a waitress.  NRS withdrew money from a retirement account.  Early withdrawals were so common following the Great Recession that the students in my clinic at the time became experts in IRC 72(t), seeking to find ways to fit the client into an exception to the imposition of the 10% excise tax.  When I turned 59 and ½ they threw me a 72(t) party complete with cake and decorations.  That’s how focused we were on that life milestone because of the number of clients we had draining their retirement accounts.  It was good to see that Congress had learned from that experience and provided some relief for this problem in the CARES Act.

The returns were audited resulting in additional tax.  They also filed their 2013 with a balance due and no remittance.  In Tax Court both were pro se; however, by virtue of having the IRS in agreement with her, petitioner in certain respects did have representation.  For example, when the NRS sought to introduce documents not properly exchanged prior to trial, the IRS attorney objected to the violation of the Court’s order and succeeded in keeping the documents out of the record.  Having persuaded the IRS, the petitioner also had an advantage in persuading the Court regarding her credibility in a case that became somewhat of a he said/she said.  Much of the opinion describes her credibility and the NRS failure to bring forth credible evidence.  Nowhere does credibility become more important than in her allegations of abuse.

The administrative record in the case at bar provides a detailed account of intervenor’s psychological abuse and physical intimidation of petitioner. In her second request petitioner stated unequivocally that she had been a victim of spousal abuse or domestic violence. She attached to the second request a letter containing detailed descriptions of intervenor’s abusive behavior. Such behavior included: (1) locking petitioner out of the house when she was pregnant because he was angry that petitioner had left the house to run an errand and (2) screaming at petitioner and kicking household objects. Petitioner also discovered three large kitchen knives underneath her mattress, causing her to fear for her and her daughters’ safety.

The trial record reinforces the abuse allegations petitioner made during the administrative process. At trial petitioner credibly testified that intervenor was controlling and prone to outbursts.

Spouses who can prove abuse stand a very high chance of success in an innocent spouse case because such abuse pervades all of the factors in Rev. Proc. 2013-34 published by the IRS to set out the criteria for determining innocent spouse status under IRC 6015(f).  Although not required to do so, the Court here faithfully followed the factors set out in the Rev. Proc.  The Court goes so far in following the Rev. Proc. as to base its determination on the streamlined factors in the Rev. Proc.:

We find that petitioner is entitled to streamlined relief from joint and several liability pursuant to section 6015(f) for the years at issue to the extent of the tax items attributable to intervenor.

Nothing in the statute or regulations mentions regular or streamlined paths to innocent spouse relief.  It is interesting that the opinion reviews her qualifications for a streamlined path to victory.

Also interesting in this case is the determination of abuse.  The IRS, unlike many state laws concerning abuse, creates a recognition of abuse that does not require physical abuse.  This case involves non-physical abuse.  The IRS and the Tax Court deserve kudos for recognizing that many forms of abuse do not involve mere physical actions.  The abuse discussion in the opinion is not unique in Tax Court jurisprudence but does a good job of highlighting that the path to proving abuse need not go through the hospital emergency room.

Conclusion

This is not a precedential opinion.  Perhaps there is little new here but the opinion reinforces the importance of the non-binding Rev. Proc.; displays the benefits of having the IRS on your side in court; and provides a good example of abuse in a situation in which the petitioner did not suffer physical abuse.

When Does an Innocent Spouse Request Stop a Levy

The case of Landers v. United States, 3:20-cv-00455-G (N.D. Tex. 2020) raises the issue of the timing of the injunction against collection vis a vis the completion of a bank levy.  This case appears to break ground not previously broken, as Ms. Landers seeks to undo the levy because she filed her innocent spouse request during the 21-day period the bank was holding the funds in the joint account after receipt of the levy.  The court decides that the language stopping collection resulting from the filing of an innocent spouse request does not stop the bank levy during the 21-day period.  The opinion goes through an analysis of the Anti-Injunction Act to get there.

For those interested in a deeper dive on the issue presented by the case and the arguments made by the parties you can find the following case documents: motion to dismiss; affidavit of Revenue Officer; plaintiff’s brief; IRS reply; and plaintiff’s sur reply.

read more...

Ms. Landers and her ex-husband jointly filed a 2016 return at the end of 2017.  The IRS assessed a liability of $742,728 against them jointly and severally in January of 2018.  Although the opinion does not say this explicitly, I assume from the timing of the assessment that the IRS assessed a tax shown on the return.  The couple divorced on September 14, 2018.  On December 5, 2019, the IRS issued a levy to a bank where Ms. Landers had an account owned solely by her.  The bank received the levy notice on December 11 which started the 21 day holding period after a bank levy.  On December 20, 2019, Ms. Landers submitted a request for innocent spouse relief.  At the conclusion of the 21-day period, the bank turned over all of the money in her account as of December 11.

She filed this action on February 24, 2020 seeking relief, arguing entitlement to an injunction for return of the funds because the IRS should have ceased the levy upon the filing of the innocent spouse relief request until the conclusion of the innocent spouse case pursuant to IRC 6015(e)(1)(B)(i). This subsection provides:

no levy or proceeding in court shall be made, begun, or prosecuted against an individual making [an innocent spouse claim] . . . for collection of any assessment to which such election or request relates until the close of the 90th day referred to in subparagraph (A)(ii) . . . .

Additionally, she argued that she deserved declaratory or injunctive relief under 28 U.S.C. 2201 and 5 U.S.C. 702 for harm caused by the action and she deserved mandamus relief under 28 U.S.C. 1361 requiring the IRS to return the money acquired through the levy.

Injunctive Relief

The IRS filed a motion to dismiss for lack of subject matter jurisdiction citing the Anti-Injunction Act (AIA) creating a situation of dueling injunctive provisions.  The innocent spouse provisions contain one of the enumerated exceptions to the AIA in subsection 6015(e)(1)(B)(ii) which provides:

Notwithstanding the provisions of section 7421(a) [the AIA], the beginning of such levy or proceeding during the time the prohibition under clause (i) is in force may be enjoined by a proceeding in the proper court[.]

The court states that it must decide two questions: (1) what is the scope of the exception to the AIA provided in the innocent spouse provision and (2) do the facts of Ms. Lander’s case fall within the scope of the innocent spouse exception to the AIA.  It then states that the innocent spouse exception to the AIA does not provide an exception upon which she can rely in these circumstances.

The parties focused extensively on the phrase in (B)(i) “no levy or proceeding in court shall be made, begun, or prosecuted.”  The court, however, notes that the discussion of the language in (B)(i) must be tied into the language in (B)(ii) to determine if the court has jurisdiction to enjoin the IRS from this collection activity.  It finds that the phrase “the beginning of such levy” in (B)(ii) crucial to its determination of jurisdiction.

The court noted the absence of case law interpreting the phrase and resorted to rules of statutory construction.  It finds that (B)(ii) allows taxpayers to seek a preemptive injunction against the IRS starting the levy process but does not provide an indefinite right allowing an injunction after a levy has issued.  I find this peculiar.  What taxpayer wants to bring a suit to enjoin the IRS from issuing a levy before it does so?  Such a construction would suggest taxpayers should preemptively bring injuction suits after filing innocent spouse requests rather than rely on the statute to stop such actions.  Courts would not look kindly on such suits.

The logical conclusion of the court leaves taxpayers helpless if they do not preemptively sue to enjoin the IRS before it issues a levy.  Ms. Landers points this out to the court arguing that its interpretation makes the injunction in the innocent spouse provision toothless.  In answer the court says it seeks to read both the innocent spouse provisions and the AIA in such a way as to protect the purposes of both statutes.  It also notes that the AIA provides a broad restriction requiring strict enforcement.  It points out that Ms. Landers had more than a year after her divorce before she filed her innocent spouse request and she received notice of the intent to levy giving her a further, more specific opportunity to act before she did.  She had a broad window for seeking an injunction and missed it.  It concludes the first section of its opinion by providing:

Without deciding when exactly the levy began (and the court’s power under subsection (B)(ii) expired), the court concludes that Landers was long past that point when she sought injunctive relief, more than a month after the funds had already been turned over to the government by ICU. Therefore, the court is without subject matter jurisdiction over Landers’ claims for injunctive relief, and they must be dismissed.

Mandamus Relief

The court relies heavily on its decision regarding the injunction to reach its conclusion here.  It points out that the mandamus provisions cannot override the AIA by obtaining injunctive relief in the guise of a mandamus.  It basically dismisses this action because it attempts to end run the AIA, which the court believes serves to prevent injunctive relief here.

Declaratory Relief

The court points out that the exception in the Declaratory Judgment Act (DJA) for taxes intended to leave the Flora rule intact requiring full payment before seeking a return of money.  It looks to the case of Cohen v. United States, 650 F.3d 717,729-31 (D.C. Cir. 2011) to find an answer to the jurisdictional issue raised here.  In Cohen the court found that the relief sought was simply a declaration with no effect on the assessment and collection of taxes.  It finds that to the extent Ms. Landers seeks merely a declaration her case closely mirrors the Cohen case.

In other words, the DJA does allow courts to issue declarations regarding procedural issues so long as the declaration does not run afoul of the AIA by interfering with the assessment and collection of taxes. Taxpayers may seek a declaration of their procedural rights, but that declaration cannot be used to bootstrap a right to injunctive relief.

The court finds that it has jurisdiction over her DJA claim as long as she only seeks a declaration that the IRS followed proper levy procedures and does not seek an injunction or return of the levy proceeds.

Obtaining a statement that the IRS did not follow procedures but can still keep the money may not help Ms. Landers very much.  If she wins her innocent spouse case, will the IRS return the money at that point or will it require her to finish paying off the balance of the large assessment before she can sue for refund.  If she seeks a refund will the IRS argue that the district court has no jurisdiction over that case as it has done in the past despite the contrary arguments it has made to appeals courts.  Ms. Landers’s path to recovery of the levy proceeds remains unclear.  Simply obtaining a statement that the IRS did not properly follow procedures will not put food on the table.  This cases raises interesting questions.  We may not have seen the last of it.

The APA: The Other Taxpayer Bill of Rights

The Taxpayer First Act (TFA) provides that the Tax Court apply a 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”.  In today’s guest post practitioner Steve Milgrom advances a novel argument, that the TFA’s changes to Section 6015 open the door to the possibility that IRS innocent spouse hearings should be subject to the formal adjudication rules under the APA. Steve’s provocative post raises the soon to be very important problem of ensuring that parties requesting relief from joint and several liability are entitled to present relevant evidence that may be difficult or impossible to present administratively. While I am skeptical of the solution that Steve proposes, it is likely that at a minimum the Tax Court will be wrestling with the terms “newly discovered” or “previously unavailable” in fashioning broad exceptions that will allow the Tax Court to evaluate difficult cases that often implicate circumstances (like abuse) that may not be fully developed via centralized correspondence-based determinations that are the hallmarks of the current regime under Section 6015. Les

Unlike other Federal government agencies that routinely hold trial like hearings on the record, the IRS stopped doing so back in the 1920’s.  In the case of §6015 innocent spouse determinations, this may be about to change. 

The road to this change in IRS procedure begins with a bill of rights.  No, not that Bill of Rights, the first ten amendments to the US Constitution (although even this Bill of Rights may come to play a critical role).  I’m not even referring to the Taxpayer Bill of Rights, Code §7803(a)(3).  Here I refer to the bill of rights Congress passed in 1946 to protect us against the Federal government:

[A] bill of rights for the hundreds of thousands of Americans whose affairs are controlled or regulated in one way or another by agencies of the Federal Government.  S.Doc. No. 248, at 298.

The 1946 bill of rights is the Administrative Procedure Act (APA), which is found at 5 U.S.C §551-§706. While the Taxpayer Bill of Rights has not gotten much traction in the courts, the APA is a significant restraint on Federal administrative agencies.

read more...

Before I delve into the mysteries of the APA keep in mind that, like all statutes, standing atop the APA is the U.S. Constitution and its Bill of Rights.  Whether or not the APA applies to agency action, compliance with the Due Process Clause of the 5th Amendment to the Constitution is also required.    PBGC v. LTV Corp., 496 U.S. 633, 655 (1990).  See also, Wong Yang Sung v. McGrath, 339 U.S. 33, at 49 (1950) (The constitutional requirement of procedural due process of law derives from the same source as Congress’ power to legislate and, where applicable, permeates every valid enactment of that body.)

Another preliminary matter is APA §559, dealing with the effect of subsequent statutes on the APA.  §559 states that a “[s]ubsequent statute may not be held to modify” the APA “except to the extent that it does so expressly.”  Faced with the prospect of having to comply with the APA’s formal procedural requirements the IRS might argue that the recent amendment to Code §6015 that I discuss below expressly modified the APA.  Arguments that tax law provisions are express modifications of the APA have gotten traction when made in connection with the judicial review of IRS proceedings.  See Kasper v. Commissioner, 150 TC 8 (2018).  However, these cases do not deal with how the agency itself must proceed and the change to §6015 doesn’t modify the APA in any way.  §6015 states that the procedures for the IRS to make a determination are to be prescribed by the Secretary of the Treasury.    Clearly the procedures prescribed by Treasury have to comply with the APA.  Mayo Foundation for Medical Education v. U.S., 131 S.Ct. 704 (2011).  

The APA covers a lot of ground.  It sets forth rules for agency rule making, agency adjudications, and for judicial review of agency proceedings.  To understand the APA one must first study the definitions.  “Rule making” is defined as an agency’s process for formulating, amending, or repealing a rule.  An “adjudication” is any agency process for the formulation of an order.  An “order” is a final disposition of an agency in a matter other than rule making.  APA §§551(5), (6), and (7).  Basically, adjudications are the things that agencies do other than rule making.  

Another important distinction made by the APA is between what are known as formal vs. informal agency proceedings, both in the context of rule making and adjudications.  The formal vs. informal dichotomy determines which set of procedural requirements apply to agency action.  Both rule making and adjudications are allowed to proceed informally unless the statute governing the agency activity requires it to hold a hearing on the record.  In the tax world, the statute governing agency activity is the Internal Revenue Code (Code).  If the statute calls for a hearing on the record, then the formal procedural requirements of the APA must be following by the agency.  Formal rule making is governed by §§556 and 557.  Formal adjudications are covered in §§554, 556, and 557.  Informal rule making and informal adjudications are covered by §553 and §555, respectively.

Agency adjudication can still avoid being subject to the formal procedural requirements of the APA based upon six specific exemptions, one of which is relevant to this discussion.  APA §554(a)(1) provides that any matter “subject to a subsequent trial of the law and the facts de novo in a court” is exempt from the formal procedural requirements of the APA.  Note that this is not an exemption from the APA itself, only from the formal rules. It is this exemption that has historically allowed the IRS to proceed, in APA parlance, informally.

The exception of matters subject to a subsequent trial of the law and facts de novo in any court exempts such matters as the tax functions of the Bureau of Internal Revenue (which are triable de novo in the Tax Court).  S. Comm. On the Judiciary, 79th Cong., 1st Sess., Administrative Procedure Act.  (emphasis in original).

Last year, in the Taxpayer First Act (TFA), Congress rewrote the rules applicable to the Tax Court’s determination of the availability of innocent spouse relief.  See Taxpayer First Act, Pub. L. No. 116-25, §1203, adding Code §6015(e)(7).  While §6015(e)(7) retains the rule that the Court’s review of an IRS determination is de novo, it is now to be based on the administrative record.  No more trial of the facts de novo.  The exemption provided by APA §554(a)(1) no longer applies.  Does this change mean that the IRS must now comply with the formal procedural requirements of the APA when making an innocent spouse determination? Only if the Code requires the adjudication “to be determined on the record after opportunity for an agency hearing …” See APA §554(a) prefatory language.

The Code says nothing about the IRS holding a hearing when it makes an innocent spouse determination. Might we find the hearing requirement elsewhere?  US v. Florida East Coast Railway Company, 410 U.S. 224, 245 (1973), deals with agency rule making.  However, the language of the APA for adjudications is the same.  In both rule making and adjudications the triggering language is identical, for the formal rules to apply the APA states that the operative statute must require agency action “on the record after opportunity for an agency hearing.”   In Florida East Coast Railway Company the Supreme Court had this to say about these key terms:

… the actual words ‘on the record’ and ‘after … hearing’ used in §553 were not words of art, and that other statutory language having the same meaning could trigger the provisions of §§556 and 557 in rulemaking proceedings. Id, at 238.  (emphasis added)

Other courts have confirmed that there are no magic words. 

[W]hether the formal adjudicatory hearing provisions of the APA apply to specific administrative processes does not rest on the presence or absence of the magical phrase “on the record.”  Marathon Oil Co. v. Environmental Protection Agency, 564 F.2d 1253, 1263 (9th Cir. 1977).

Courts often rely upon the Attorney General’s Manual on the Administrative Procedure Act (1947) in interpreting the APA.  See Vermont Yankee Nuclear Power Corp v. Natural Resources Defense Council, Inc., 435 U.S. 519, 546 (1978).  The AG Manual gives examples of statutes that require formal adjudications where the governing statute requires a hearing but says nothing about it being on the record:

[W]hile the … Act does not expressly require orders … to be made “on the record”, such a requirement is clearly implied in the provision for judicial review of these orders … Other statutes authorizing agency action which is clearly adjudicatory in nature … specifically require the agency to hold a hearing but contain no provision expressly requiring decision “on the record”.

The examples in the AG’s Manual deal with statutes that require a hearing but make no reference to its being “on the record.”  Is there any less of an implication when the missing language is reversed, when the statute calls for judicial review of an administrative record but makes no reference to the agency holding a hearing?  

Due process requires every agency adjudication to involve some type of hearing.  Even where there is no “adjudication required by statute,” the APA’s formal procedures have been imposed based upon the hearing requirement of the due process clause.  Wong Yang Sung v. McGrath, 339 US 33 (1950).  The APA provision stating that it is only applicable to hearings “required by statute” exempts agency hearings that are conducted by a lesser authority than a statute, such as by regulation or rule, not hearings that are held out of compulsion, either by statute or constitutional requirement.  Wong Yang Sung, at 50.  So when the Supreme Court referred to “other statutory language having the same meaning” in Florida East Coast Railway Company, to be consistent with Wong Yang Sung it would have been clearer to say “other statutory or constitutional language having the same meaning.”  

Now that §6015(e)(7) requires the Tax Court to perform its review of an IRS innocent spouse determination based upon the administrative record, the IRS must make its determination “on the record.”  While §6015 leaves it to the IRS to establish procedures for making its determinations, as the Attorney General said some 70 years ago, a requirement that an agency act on the record is “clearly implied in the provision for judicial review.”  §6015(e)(7) is just such a provision for judicial review and here you don’t have to search for an “implied” requirement.  The requirement for an administrative record is explicit.

Did Congress intend to force the IRS to hold formal hearings on the record when making a §6015 determination?  While the number of words used to impose the requirement are few, they are unique, this is the only place where the Code uses the phrase “administrative record.”  By adopting a new approach to Tax Court procedure, using a phrase that comes from the world of administrative law, it does seem that this change in judicial review should also change the agency level procedure applicable to innocent spouse determinations.  

Having decided to limit the Tax Court to reviewing the administrative record, maybe Congress was familiar with Wilson v Commissioner, 705 F.3d 980 (9th Cir. 2013).  In Wilson, the 9th Circuit rejected the IRS’s argument that the Tax Court should be restricted to a review of the administrative record in a §6015(f) case.  Wilson rejected what Congress has now made the law.  The rationale of the 9th Circuit explains why it is so important that the IRS be required to follow the formal procedural requirements of the APA in §6015 cases.  The Wilson decision is based in large part on the fact that the pre-TFA process used by the IRS for making a §6015(f) determination did not result in a sufficient record for the Tax Court to review:

There is no formal administrative procedure for a contested case at which the taxpayer may present her case before an administrative law judge.  At no time during the process is the taxpayer afforded the right to conduct discovery, present live testimony under oath, subpoena witnesses for trial, or conduct cross-examination. … [I]t is before the Tax Court that the taxpayer has the vehicle to conduct discovery … subpoena witnesses and documents … and submit evidence at trial.  Wilson, at 990.

The 9th Circuit continued its explanation of the importance of trial like proceedings:

The ability to supplement the administrative record is particularly important in equitable relief cases, which require a fact-intensive inquiry of sensitive issues that may not come to light during the administrate phase of review.  The threshold requirements for innocent spouse relief may present a complicated and contradictory dilemma for the taxpayer.  The innocent spouse must show that he or she is ignorant of the spouse’s tax misdeeds, yet must marshal documentary support to prove it.  The taxpayer often has limited or no access to critical records.  The innocent taxpayer who has been misled by a spouse often may not understand the full extent or scope of the erring spouse’s misdeeds.  Compounding these difficulties is an administrative system where the only opportunity to present a case is through telephonic interviews with an agent in a remote location.  Wilson, at 991.

Since the Tax Court is no longer permitted to decide the facts de novo, the administrative record which the Tax Court reviews must be created by the IRS using the formal procedural requirement of the APA, allowing for discovery, testimony under oath, cross-examination of witnesses, and the many other procedures that are designed to lead to a full and fair determination of the facts.

The last time Congress set up an agency of the Executive branch that conducted the sort of hearings that the APA requires for formal adjudications was 1924.  That agency was named the Board of Tax Appeals (BTA).  In 1969 Congress moved the functions of the BTA out of an administrative agency and placed them in the Judicial branch, in a court known as the United States Tax Court.   Harold Dubroff and Brant J. Hellwig, The United States Tax Court, an Historical Analysis, 49 (2nd ed. 2014).  When the activities of the BTA were moved to the Tax Court, the job of holding formal hearings to determine the facts of a case likewise moved to the judicial branch of our government.  While the 1924 Act that created the BTA did not provide for any direct appellate review of its decisions, the decisions could be collaterally attacked in a suit for a refund where the findings of the BTA were prima facie evidence.  In 1926 the law was amended to permit review of BTA decisions in the Court of Appeals, where review was limited to questions of law.  Why return to a system of agency level factual determinations followed by judicial review of the agency record? The IRS is constantly underfunded.  The Tax Court is fully capable of hearing the facts of §6015 cases de novo.  What can possibly be gained by forcing the IRS to build a whole new infrastructure just for 6015 cases? 

How might the IRS implement this new requirement?  Currently, requests for §6015 relief are handled by a special office in the IRS, known as CCISO.  There is no need for the operations of this office to change.  When Congress changed the §6015 judicial review provisions it also established a new office within the IRS, known as the Internal Revenue Service Independent Office of Appeals.  This office is required to be fair and impartial to both the government and the taxpayer.  While I don’t know what was in the mind of the drafters of the TFA but it seems like this new office was specifically created to, among other things, handle the task of complying with the APA formal procedural hearing requirements. 

The IRS has long argued that the Tax Court’s review of innocent spouse determinations should be restricted to the administrative record.  Since the argument was not based upon a statutory requirement, had the Tax Court agreed with this proposition it would not have triggered the APA’s formal procedural requirements at the agency level.  While the IRS lost in Tax Court, it prevailed in some Courts of Appeal, but not others.  Congress stepped in to resolve the circuit split by adopting the position advocated by the IRS.  There is now a statute that requires judicial review based upon the administrative record, the operative requirement for application of the formal procedural requirements of the APA.  I am reminded of Marty Ginsberg’s maxim of Moses’ rod:

Every stick crafted to beat on the head of a taxpayer will metamorphose sooner or later into a large green snake and bite the commissioner on the hind part.  Ginsburg, Making Tax Law Through the Judicial Process, 70 ABA J. 74, 76 (1984).

Only Tax Court Petitions Filed After July 1, 2019 Are Subject to TFA’s Restricted Scope of Review

In the en banc opinion Sutherland v. Commissioner, the Tax Court held that spousal relief cases petitioned before 7/1/19 are not subject to the Taxpayer First Act’s narrowed scope of review under new subparagraph 6015(e)(7). At this conclusion many practitioners with pending cases breathed a sigh of relief. However, the thorny issues raised by 6015(e)(7) remain to be litigated another day. We have written about these issues on PT several times, both as the Taxpayer First Act (TFA) was pending (here and here), and after it became law (here, here, here, and here).

read more...

It’s worth noting the procedural posture of the Sutherland case, as it involves one of those thorny to-be-litigated issues. Last year Carl Smith wrote a post arguing that, in light of the new subparagraph (e)(7), the Tax Court should revisit its holding in Friday v. Commissioner that it lacks the power to remand standalone 6015(e) cases. In an email to the PT team, Carl explains that in his October 2019 post

I suggested that someone move for remand in a 6015 case.  Only weeks later, on Nov. 11 (three weeks  before a trial set for Boston), the taxpayer’s lawyers in Sutherland moved to remand the case, apparently arguing that Friday needed to be revisited — at least in a case like Sutherland, where the lawyers were counting on a de novo standard of review and standard for introducing evidence in the Tax Court.  The motion was argued at the calendar call, where Judge Lauber struck the case from the calendar and retained jurisdiction to rule on the motion.  Today’s unanimous opinion holds that the effective date of 6015(e)(7) is ambiguous, and the best construction is that it does not apply to this case. 

The Effective Date of TFA § 1203

For a review of the changes made by TFA section 1203 to IRC section 6015(e), see Steve Milgrom’s post from July 9, 2019. Relevant to the Sutherland case, the TFA appears to restrict the Tax Court’s scope of review in standalone spousal relief cases, so that it is now based primarily on the administrative record. In previous posts we have mused about what exactly that might mean.

Starting in July 2019, several judges began to issue orders asking the parties to address the impact of section 6015(e)(7) generally. Later in the fall, other judges issued orders specifically asking the parties to identify the administrative record, any disputes as to its contents, and state whether any newly discovered or previously unavailable evidence would be offered at trial.

In Sutherland, the court takes a step back and considers what the effective date provision really means, rendering many of those pretrial orders moot.

Donna Sutherland’s case is an example of previously sound strategy that no longer works under the Taxpayer First Act. Unlike most spouses requesting relief, Ms. Sutherland was represented in the administrative proceedings. Her counsel thought that the IRS Appeals Officer was misapplying the equitable relief factors and that further submissions would not be productive. So, counsel made a tactical decision to stop trying to persuade the AO and instead move the case to Tax Court. The petition was filed in February 2018.

When the statute changed over a year later, shifting the Tax Court from a de novo scope of review to the administrative record, Ms. Sutherland was left in an unhappy situation. At the time she filed her petition, she had no reason to suspect that her case would not receive a full trial de novo under the Court’s holding in Porter v. Comm’r, 132 T.C. 203 (2009).

Ms. Sutherland’s counsel filed a motion asking the court to remand the case to the IRS for fuller development of the administrative record. But rather than reconsider its ability to remand standalone innocent spouse cases, the court instead scrutinized the effective date provision in the Taxpayer First Act.

Taxpayer First Act section 1203(b) reads:

Effective Date. The amendments made by this section shall apply to petitions or requests filed or pending on or after the date of the enactment of this Act.

The structure of this sentence renders the provision ambiguous from the outset. The Court explains,

“[P]etitions or requests filed or pending” could mean “petitions filed or pending, or requests filed or pending.” Alternatively, it could mean “petitions filed or requests pending.” If the former reading is adopted, so that “pending” modifies both “petitions” and “requests,” subsection (e)(7) likely would apply here because this case was pending in this Court when the amendment was enacted. If the latter meaning is adopted, so that “pending” modifies only “requests” and “filed” modifies only “petitions,” subsection (e)(7) would not apply. Petitioner’s request for innocent spouse relief had been resolved by the IRS, and hence was not “pending,” on or after July 1, 2019. And her petition to this Court was filed before that date.

Judge Lauber gives two hypotheticals illustrating how such compound sentences can be interpreted:

For example, assume a municipal ordinance that is effective for “cars or boats parked or docked” at a city marina after a specified date. This provision would logically be interpreted to refer to “cars parked or boats docked.” That is because each adjective comfortably modifies only one noun.

On the other hand, assume a sales tax that is effective for “cars or trucks sold or leased” after a specified date. Unless the context suggested otherwise, this provision would likely be interpreted to refer to “cars sold or leased, or trucks sold or leased.” Both adjectives comfortably modify both nouns, and it would be odd to have different tax treatment for similar transactions involving similar vehicles.

Looking to the language of the Code, the Court concludes that TFA

sec. 1203(b) more closely resembles the first example above. We have discovered no instance in which Congress, either in the Code or in an uncodified effective date provision, has used the phrase “petition(s) pending” when referring to ongoing matters in our Court. And interpreting Act sec. 1203(b) to refer to “petitions filed [in this Court] or requests pending [with the IRS]” on or after the effective date makes logical sense in light of the statutory context.

The Court finds additional support for this conclusion in the structure of TFA section 1203 and the cannon against superfluity. Finally, the Court notes that this interpretation

also has the merit of preventing inequitable results that Congress presumably would have wished to avoid when prescribing the transition to the amended scope of review ordained by subsection (e)(7).

…[I]f subsection (e)(7) were to apply to cases such as this–where the conclusion of the administrative process and the filing of the petition both preceded July 1, 2019, but the case remained pending in this Court thereafter–a sort of “gotcha” could occur. The taxpayer would have gone through the administrative process believing that the scope of review in this Court was de novo. But she would then learn, once the time came for trial, that the scope of review was not de novo and that she could be prejudiced for not having made a more complete administrative record.

Because the Court finds that subsection 6015(e)(7) does not apply to this case, Ms. Sutherland will be free to introduce new evidence at trial.

The Remand Question Remains

In his email, Carl points out that the Sutherland opinion “goes out of its way to note the issue of Friday”:

Because we hold that section 6015(e)(7) does not apply, the scope and standard of review in this case will remain de novo, consistently with our case law predating the amendment. See Porter, 132 T.C. at 210. Petitioner will thus be free to introduce at trial any competent evidence that she desires. Because the premise for her motion to remand thus disappears, a remand (if we could order one) would serve no useful purpose. We will accordingly deny her motion for that reason. Cf. Burke v. Commissioner, 124 T.C. 189, 194 n.5 (2005) (declining to remand a collection due process case because a remand would not be productive); Whistleblower 23711-15W v. Commissioner, T.C. Memo. 2018-34, 115 T.C.M. (CCH) 1154, 1156 n.7 (declining to remand a whistleblower case because a remand would serve no useful purpose). That being so, we have no need to address her request that we reconsider our holding in Friday as applied to cases that are governed by the amended statute. 

It may not be long before another case squarely presents this issue and asks the Court to consider a remand. The opinion itself concedes, “[s]ome taxpayers might have received a determination letter shortly before July 1, 2019, with their petition to this Court due to be filed thereafter.” Under Sunderland’s interpretation of the TFA, such cases would be subject to the administrative record provision. (Note this is the result even if the requesting spouse had made the exact same strategic gambit as Ms. Sutherland. The Court’s analysis is grounded in textual interpretation, not equity.) In this situation the Court suggests that the requesting spouse could contact the AO and ask to re-open the administrative record. However, if the IRS declined to do so it is unclear what remedy a taxpayer would have, besides requesting a remand from the Court.

The broader concerns raised by Steve Milgrom and Carl Smith also apply to cases pending with the IRS as of July 1, 2019 (and for that matter new requests for relief), particularly when it comes to unrepresented individuals and victims of domestic violence. There will certainly be cases subject to the TFA in which a poor administrative record exists, even if the taxpayer technically had the opportunity to create a full record after July 1, 2019.

As pro se petitioners and practitioners in such cases consider their options, it’s helpful to remember the Tax Court’s May 29 press release which Keith described as a “significant and welcome change in the price structure of documents ordered from the Court.” As a result of that change, anyone interested in obtaining a copy of the motion to remand, response, and reply in Sutherland may obtain them by email for no more than $3 per document. The Court’s pricing change will make it feasible for those without deep pockets to closely follow this litigation and to make well-developed legal arguments in other TFA cases.

Generally Speaking, the IRS Fails to Understand the Law Governing Disclosure of Joint Accounts

In 1996 Congress added IRC 6103(e)(8) to the disclosure provisions allowing each spouse to access the collection account of a joint liability.  The addition of this section and the complimentary section 6103(e)(9) regarding disclosure of information to jointly liable responsible officers of the Trust Fund Recovery Penalty filled a gap necessary to allow taxpayers to have a true picture of what they owe.  Each of these two code subsections allows persons who share a liability to see the true picture of the account.  In both instances the IRS seeks to collect the liability only once, even though it has the ability to collect from more than one liable person.  If you are one of those persons, you want to know the true balance on the account in making decisions and not just the amount paid by you.  Congress should pass a law allowing this type of disclosure anytime more than one person owes for a joint liability and not just in these two specific instances.

The Treasury Inspector General for Tax Administration (TIGTA) recently released a report in which it displayed the result of tests it performed to see how well IRS employees understood IRC 6103(e)(8).  Basically, the IRS failed the test.  I will discuss details below, explain more about these types of accounts and suggest some additional legislation.  Before I provide that information, I want to make a quick observation regarding IRS employees and the disclosure laws. 

Many IRS employees live in fear of the disclosure laws.  Because they lack a clear understanding of the long and complex disclosure statute, because they must make snap decisions and because of the severe consequences of a wrong decision to disclose rather than to refuse, many IRS employees default to refusal to disclose even when they should provide the requested information.  What is the consequence of refusal to disclose?  The person asking must find someone else to ask or simply walk away empty handed.  The employee refusing to disclose faces no penalty for the refusal, no reprimand from their supervisor, no civil or criminal penalty for giving out information they should not have given out. 

We have a system in which IRS employees have learned the right answer is to follow Nancy Reagan’s advice – “Just say no.”  The TIGTA report does not address the bureaucratic and systemic reasons that IRS employees refuse to disclose information they should disclose.  It simply notes that they fail.  If we seek a system in which IRS employees will do a better job in disclosing information they should disclose, a balance of consequences must exist.  Until that happens all of the TIGTA reports telling us that IRS employees fail to follow the disclosure law provide little assistance.

read more...

We are entering the season in which TIGTA issues the annual reports required by Congress in 1998.  Because TIGTA must issue reports on the same subject dictated in 1998 over and over again, it tries to be a little inventive and cover slightly different aspects of some of the subjects each year in order to avoid the groundhog day effect of reporting on the same thing over and over.  Maybe it’s time for Congress to think about having them report on some different things or require some of the reports every two, three, four or five years apart rather than every year.  I don’t think Congress has revisited the issue of these reports and I doubt if many people in Congress read the TIGTA reports.  Would it be so hard to rethink how it uses TIGTA resources?

The Results

TIGTA tested both revenue officers (ROs) and employees at Automated Call Sites (ACS).  You would expect that ROs would significantly outperform ACS employees because of the training and education requirements of ROs.  The ROs did better but did not cover themselves in glory.  TIGTA interviewed 12 ROs and 12 ACS employees asking about the ability to disclose information to the other spouse about a joint liability.  TIGTA asked two questions.  First, it asked if these IRS employees would disclose information to the spouse if the couple was married.  Second, it asked the same question except in the circumstance in which the couple was divorced.

All of the IRS employees got it right if the couple remained married.  All would have provided the information about the joint liability to either the H or the W.  Only 8 of 12 ROs would provide the information if the couple was divorced and only 6 of 12 ACS employees would provide the information in that situation.  The statute requires the disclosure of the information in both circumstances.  The refusal to provide the information violates the taxpayer’s rights and places the taxpayer in an awkward situation – exactly what Congress tried to avoid in passing the provision.

Mirrored Accounts

When a couple takes certain divergent paths such as an innocent spouse request or one spouse, but not the other, filing a Tax Court petition or a bankruptcy case, the IRS master file changes their account transcript from one containing all of the data for one spouse to two mirrored accounts – one for each spouse. The now-separate accounts generally “mirror” each other but diverge with regard to tax adjustments made on only one spouse’s account after the mirroring (see IRM 25.15.15.1 for further detail). Per IRM 21.6.8.3,  only certain information from a mirrored account (such as amount collected and current collection status) must be disclosed to a requesting spouse. The creation of the mirrored accounts tricks many practitioners and taxpayers who see the account transcript of the joint liability zeroed out and also leads the IRS employees down the wrong decision path in this situation when it comes to making a decision.

The problems with the IRS computer system need no explanation to regular readers of this blog or any description of the IRS.  Mirroring accounts, apparently a creature of the IRS computer system, not only trick others but create an impression that may provide one of the causes for IRS collection employees to do so poorly on the TIGTA test regarding IRC 6103(e)(8).  Would it be possible as the IRS continues to upgrade its computer systems to put a statement on joint accounts providing the reader with information that mirroring an account does not terminate the liability?  Would it be possible to put some indication in the account transcripts that IRS employees can read instructing them that information on a mirrored account can be provided to both H & W, thereby giving the IRS employee a little help in understanding this somewhat counterintuitive disclosure provision?

Disclosure and Domestic Violence

One of the things a taxpayer can learn about their joint account is who has accessed it and when.  Normally, providing this information seems appropriate; however, in a domestic violence situation it may create a bad situation.  Since the passage of IRC 6103(e)(8) in 1996, we have made many strides in improving the situation for victims of domestic violence.  DV victims can have a VODM (Victim of Domestic Violence) placed on their account by the innocent spouse unit which provides certain protections.  Congress should provide an additional protection.  It should not allow the other spouse to know when an inquiry regarding an account has occurred.  This could provide needed protection to a VODM.