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.

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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.

No Refund to Individual Granted Innocent Spouse Relief under IRC 6015(c)

In Yiu v. Commissioner, T.C. Summ. Op. 2020-23, the Tax Court holds that the individual who succeeded in obtaining innocent spouse relief could not get back the money she paid on the liability before receiving relief from the liability.  This result occurs because she received relief under IRC 6015(c) rather than under one of the other two bases for innocent spouse relief.  This outcome does not provide a new or surprising result.  Here, she wins the battle of being deemed an innocent spouse but loses the war because she receives no relief in her request to have her payment of the liability created by her ex-husband returned to her. 

For anyone who has not previously litigated innocent spouse issues, this case might provide an alert to seek relief under the other provisions if the taxpayer wants a refund.  The innocent spouse unit in Covington, Kentucky seems to default to 6015(c) relief perhaps because of its more mechanical application; however, accepting a determination for relief under that subsection can bring less than full relief where the innocent spouse has made payments on the liability.  Contesting the grant of relief under 6015(c) also brings significant obsticales.

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Petitioner was married to James Neiswonger in 1998.  They remained married until after joint returns were filed for the years at issue.  As occurs in approximately 95% of innocent spouse cases, the wife seeks relief here.  The year at issue is 2011. 

The opinion says that the only liability for which she seeks a refund now is a $2,500 education credit attributable to her husband (who had no income in 2011).  She says she signed the return without looking at it which is always a bad fact, but the opinion makes no finding that she knew or had reason to know that the credit was erroneous (which would bar relief under (b), but not necessarily under (f)).  Because it is necessary to relief under 6015(c), the IRS conceded that she did not have actual knowledge and the opinion makes no finding that she had a reason to know the claim of the credit was wrong.  Section 6015(g)(3) provides:  “No credit or refund shall be allowed as a result of an election under subsection (c).”  For unexplained reasons, she conceded to the court that she was not entitled to relief with respect to this credit under (b) or (f).  We don’t have enough facts to be able to see that her concession made sense.  If she won under (b), she could get a refund. If she could win under (f) but for the fact that she could also win under (c), then the regulations provide that she can’t get a refund because she has gotten relief under (c) — even though she can’t get the only relief she sought under (c), a refund.  Reg. § 1.6015-4(b) (which applies to relief under (f)), states:

This section may not be used to circumvent the limitation of § 1.6015-3(c)(1) (i.e., no refunds under § 1.6015-3) [i.e., the regulations under subsection (c)]. Therefore, relief is not available under this section to obtain a refund of liabilities already paid, for which the requesting spouse would otherwise qualify for relief under § 1.6015-3.

This regulation was controversial when enacted in 2002.  In Taft v. Commissioner, T.C. Memo. 2017-66, the IRS conceded that a taxpayer was not liable under (c), but argued that because the taxpayer was getting relief under (c), she could not get a refund under (f).  Carl posted on Taft here.  In Taft, the taxpayer argued that she should get relief of a refund under (b) or (f), and the court agreed with her that she could get a refund under (b), so it did not have to decide the (f) issue.  In order to enhance her chances in case the she might not qualify for relief under (b), the taxpayer argued that the regulation prohibiting a refund under (f) if the taxpayer qualified for relief under (c) is invalid.  Carl’s prior post has a link to the brief filed by her pro bono attorney, Joe DiRuzzo. The Harvard clinic also filed an amicus brief arguing that the reg. under (f) is invalid.  A copy of the clinic’s brief is attached here

Because of the decision to allow relief under 6015(b) the Tax Court did not reach the issue of the validity of the regulation.  The validity of the regulation has never been decided by a court. 

Ms. Yiu essentially ended her chances to succeed when she conceded that she was not entitled to relief under (b) or (f).  Someone in her situation should not make such a concession unless it is obvious that the taxpayer can’t possibly win under those subsections.  If making that concession, no need to bring a Tax Court case exists.  Of course, a person in this position must consider arguing that the regulation under (f) is invalid if it appears that the taxpayer would otherwise qualify for equitable relief under (f) (which can occur even if the taxpayer had reason to know so could not qualify under (b)).

The default to relief under 6015(c) drives knowledgeable taxpayers to avoid paying a tax assessment if they contemplate divorce and a claim of innocent spouse relief.  Probably less than 1% of taxpayers have knowledge of this consequence.  They need assistance from knowledgeable tax practitioners but they also need to seek assistance early.  This situation reminds me of the rules created by the IRS with respect to the Trust Fund Recovery Penalty, viz., if more than one responsible officer exists the one who pays first loses.  See a discussion of those rules here.  So, clients in this situation must try not to pay the taxes directly or by offset if they intend to seek innocent spouse relief.  Trying to do that is hard.  Adjustments to withholding to try to avoid having a refund can result in owing tax if not properly calculated.  As a result, many people in Ms. Yiu’s circumstance end up paying some or all of the tax from the joint return because of the offset of refunds from later year returns.

This circumstance also argues for seeking innocent spouse relief as soon as possible.  If the person seeking innocent spouse relief seeks such relief when the notice of deficiency is sent before there is even an assessment of the additional taxes, they do not have to worry about seeking a refund.  Unfortunately, many individuals who might have a valid innocent spouse defense do not raise it at the notice of deficiency stage and only become concerned about it when the IRS moves into the collection phase.  Some individuals with this defense may still be in a positive relationship with their spouse at the notice of deficiency phase and not think about their individual responsibility should the marriage dissolve.

Once the assessment occurs a slightly different dynamic can occur.  Seeking relief will keep the IRS from beginning to take administrative collection action while the innocent spouse request is pending.  Section 6015(c) relief only becomes available if the spouses divorce, separate for 12 months or one dies.  It may take some time before the spouse becomes eligible for this relief.  In the period before this occurs the spouse would look to relief under 6015(b) or (f).  After 6015(c) relief becomes available, the person seeking relief who has made a payment and wants a refund must argue for 6015(b) relief or face a somewhat difficult argument for 6015(f) relief if 6015(c) relief is available.

If the individual can wait for two years after the IRS initiates collection, then 6015(c) relief is no longer available and the individual can seek relief under 6015(f).  This two-year rule creates the easiest basis for going directly to 6015(f) relief.  Of course, the individual would also attempt to keep from paying during that two-year period if possible in order to avoid having to seek a refund in the innocent spouse case.

In addition to the problem of only receiving a refund under the right subsection of 6015, the individual has to thread the needle of Flora which will prevent the receipt of a refund in situations in which the individual seeks the refund more than three years after filing the return or two years after making payment.  Additional hurdles imposed by Flora involve the need for full payment if the taxpayer seeks relief in district court and the position of the trial section of the Department of Justice regarding the use of innocent spouse cases as a vehicle for obtaining a refund discussed here, here and here.

Individuals who desire to use the innocent spouse provisions to relieve themselves of a liability and to obtain the return of money paid on a debt they argue should not be placed on them face numerous challenges.  Obtaining a refund in the innocent spouse context is not impossible but is difficult because of default to 6015(c) relief, the regulation barring a taxpayer from seeking a refund through 6015(f) if they qualify for 6015(c), the Flora rule and the unclear jurisdictional situation of seeking a refund in district court.  The best outcome for someone seeking innocent spouse relief involves not having paid anything towards the debt but few taxpayers know that money once paid toward the debt will prove difficult to recover.  Ms. Yiu joins a long list of taxpayers who while deemed innocent of the liability still end up paying all or part of it and not recovering that payment.  Maybe Congress should rethink how the relief works for people caught in this situation.

A Webber Update, Possible Pandemic Changes, and Conservation Easements: Designated Orders 5/11/20 to 5/15/20 and 6/8/20 to 6/12/20

There were 7 designated orders during the week I monitored in May and 1 designated order for the week I monitored in June (Mark Alan Staples order), covering a variety of topics.  We start with an order updating the Webber case and its Collection Due Process issues.  Next, is there a change in the Tax Court treatment of motions to dismiss during the COVID-19 pandemic?  Following that, there are conservation easement, innocent spouse and other cases to review.

A Webber Update

Docket No. 14307-18 L, Scott Allan Webber v. C.I.R., Order available here.

Previously in Procedurally Taxing, the Webber case prompted discussion and change regarding Collection Due Process (CDP) and jurisdiction in Tax Court.  I wrote here regarding the case and Judge Gustafson’s taking issue with a prior IRS motion to dismiss.  The motion to dismiss was based on an IRS notice concerning CDP rights that had 2 addresses listed, one to request a CDP hearing and the other to make payment to the IRS on the listed amount due.  Mr. Webber had attempted to submit his CDP hearing request, but wound up mailing it to the payment address by mistake.  Based on the request’s movement through the IRS bureaucracy, it arrived at the correct location but late enough to only allow Mr. Webber an equivalent hearing (limiting his access to Tax Court review).  After Judge Gustafson took the IRS to task on the motion to dismiss as being a harsh result for such a simple taxpayer mistake, the IRS withdrew their motion to dismiss.  Things were not done regarding CDP, though, as there was a CDP Summit Initiative Workshop where these types of issues with CDP notices were discussed (also here).  Keith wrote here that a result of this discussion led to a program manager technical assistant (PMTA) memo setting new IRS policy to determine timeliness of a CDP hearing request.  The new policy is based on the type of situation above – receipt of a CDP hearing request at an incorrect office when it was mailed to the incorrect office because of being an office listed on the notice. 

I would like to also announce that the IRS is making a revision to the Internal Revenue Manual at IRM 8.22.5.3 to reflect that PMTA memo.  The revision will be effective beginning July 6 and will be incorporated into the IRM within 2 years of the date of this memorandum, reflected here (this links to a Tax Notes article available only to subscribers). 

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Got that?  Because the current designated order has a change of topic.  This designated order’s topic is shift from jurisdiction to the topic of credit elects.

In fact, Mr. Webber is dealing with a credit elect dating back to 2003 (when it was $71,012).  Over the years, that credit elect was applied to each tax year until we are dealing with the tax year at issue and the question of whether a credit elect of $77,782 from 2012 applies to his 2013 tax return.  If so, it reduces his 2013 total tax of $5,690 so that there is a credit elect of $72,092 that would carry to the 2014 tax return.

The problem is that Mr. Webber has received conflicting messages from the IRS regarding allowance of the credit elect over the years.  Certainly, removing an earlier link in the chain of credit elects would affect the 2013 tax year.  Part of the problem is that the review by Appeals during his CDP hearing was not honoring a prior IRS letter allowing the credit elect for tax years 2004 and 2005.

This order deals with both an IRS motion for summary judgment and Mr. Webber’s response, which contains a motion to dismiss and a motion to remand.

Mr. Webber presents the issue raised, the availability of the credit elect for tax year 2013, as a challenge to the existence of an underlying liability.  He contends that no valid CDP hearing was conducted asking to dismiss for lack of jurisdiction, but also asking for a remand back to Appeals for them to take appropriate action.  The judge finds dismissal for lack of jurisdiction to be unwarranted.  Regarding remand, Judge Gustafson says it may or may not be necessary based on the IRS argument concerning the credit elect issue in the CDP hearing so no remand at this time.  Both motions are denied (the motion to remand denied without prejudice).

While the Court is not adjudicating Mr. Webber’s entitlement to the overpayment underlying the credit elect in 2013, the Court does have the responsibility to determine if the IRS allowed the overpayment but failed to credit it.  The Court states that is a genuine dispute of material fact since Appeals gave a statement in 2012 that they are allowing the full amount of the claimed credit elect for 2004 and 2005.  Appeals stated in the more recent CDP hearing that the question needed to be resolved outside Appeals so the Court reviews possible reasoning (statute of limitations, non-determination years, or refunds received).  None of that is conclusive so there is a genuine dispute of fact, leading to denial of the motion for summary judgment.  The parties are currently filing joint status reports to the Court.

Bob Kamman wanted to let us know about some coincidences – there is a citation in this order to a published Tax Court opinion from 2012 that also involves a credit-elect dispute in a CDP context.  The taxpayer is named Hershal Weber and the opinion was written by Judge Gustafson.  The more things change, the more they stay the same?

Stance on Motions to Dismiss During Pandemic?

Docket No. 10386-19S, Salvador Vazquez, v. C.I.R., Order available here.

This order is rather short, but notable.  The order begins by stating this case was scheduled for the Los Angeles trial session beginning June 1 before COVID-19 disrupted the Tax Court calendars.  The IRS filed a motion to dismiss for failure to properly prosecute on May 6, stating that the petitioner failed to respond to numerous attempts by the IRS to make contact.

Judge Carluzzo states:  “Under the circumstances and at this stage of the proceedings, we are reluctant to impose the harsh sanction that respondent requests. Our reluctance, however, to impose the sanction at this time in this case should not in any way be taken as a suggestion that a party’s behavior, as petitioner’s behavior is described in respondent’s motion, could not support such a sanction under appropriate circumstances.”

It is too soon to tell if this is any type of new position for the Tax Court regarding motions to dismiss during these pandemic times.  Since then, the judge ordered the parties to, separately or together, submit reports by August 24.

Conservation Easements

In recent years, the IRS has been taking a harder stance against several organizations that have claimed deductions for the donations of conservation easements.  For those looking to learn more about the issues, I recommend listening to two of the June 2020 podcast episodes from Tax Notes Talk.  A problem I have noticed is that both the bad apples and the good ones have been swept up in the IRS enforcement efforts.  For example, a request I have seen from the good apples is that they would like to get sample language from the IRS on how to draft documents relating to the conservation easement donation that will be satisfactory to the IRS.

One current development regarding conservation easement cases is that the IRS announced in IR-2020-130 that certain taxpayers with syndicated conservation easement issues will receive letters regarding time-limited settlement offers in docketed Tax Court cases.  Perhaps that will help reduce the conservation easement cases on Tax Court dockets.

  • Docket No. 5444-13, Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner v. C.I.R., Order available here.

Oakbrook Land Holdings would like to reopen the record to add four deeds from the Nature Conservancy that have language to support the argument that Oakbrook’s deed doesn’t violate the regulation regarding their conservation easement donation.  The Court ruled the evidence is merely cumulative.  Also, the Conservancy’s comments, not practices, are what is discussed so the proffered deeds won’t change the outcome of the case.  The motion to supplement the record is denied.

  • Docket No. 10896-17, Highpoint Holdings, LLC, High Point Land Manager, LLC, Tax Matters Partner, v. C.I.R., Order available here.

This case required a look to state law in Tennessee regarding interpretation of the deed at issue and that does not help Highpoint Holdings.  The IRS motion for partial summary judgment is granted and the parties are to submit their status reports on how to proceed in the case.

Innocent Spouse

Docket No. 4899-18, Doris Ann Whitaker v. C.I.R., Order available here.

This is an innocent spouse case that came to Tax Court as Ms. Whitaker is seeking relief from joint liability for 2005 income tax, pursuant to IRC 6015(f).  Ms. Whitaker has not completed high school and is employed as a nurse’s aide.  When filing the 2005 tax return, income attributable to her then-disabled and drug-addicted husband was not reported on the return.  Ms. Whitaker did not report his income as she incorrectly understood “married filing jointly” to mean “married filing separately”.  Basically, she thought filing the joint return took care of her obligations and her husband was required to file his own separate return.

The IRS filed their motion for summary judgment, arguing “there remains no genuine issue of material fact for trial”.  The Court, when reviewing the facts and circumstances, takes Ms. Whitaker’s education and resources into account and finds this factor is sufficient to prompt a holding that there is a genuine issue of material fact to prompt denial of the motion without prejudice.

However, what to make of the recent amendment to IRC 6015(e)(7)?  The amendment requires the Tax Court to review applicable innocent spouse cases based on (A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence.  What should be done with motions for summary judgment in conjunction with these evidentiary requirements?  In this case, only the IRS motion is on hand.  The Court has the discretion to construe an opposition to a summary judgment motion as a cross-motion for summary judgment but only where the parties have adequate notice and adequate opportunity to respond.  There was no such notice to treat Ms. Whitaker’s opposition as a cross-motion.  The Court orders the parties to communicate toward settlement.  The next order is for the IRS to file a certified administrative record and motion for summary judgment based on that record.  Ms. Whitaker is ordered to file any objections she would have about the administrative record, a response to the motion and a cross-motion for summary judgment.  The Clerk of the Court is also ordered to serve on Ms. Whitaker a copy of the information letter regarding the local Low Income Taxpayer Clinics potentially providing assistance to her (this case is being worked by Winston-Salem IRS Counsel so presumably this would be the 2 North Carolina clinics).

There have been subsequent orders filed in this case.  The first order relays that in a telephone conference between the parties that the IRS is conceding the IRC 6015 issue in the case so the parties are ordered to file a proposed stipulated decision or joint status report no later than July 17.  The second order relays that the IRS filed a motion for entry of decision on June 24, proposing a zero deficiency and no penalty due for the 2005 tax year, after applying IRC section 6015(b), and there is no overpayment in income tax due to petitioner for the 2005 tax year.  However, the motion states that the petitioner objects so Ms. Whitaker is to file no later than July 24 a response to the motion explaining why it should not be granted and a decision should be entered in this case.

Unless there is a procedural issue in her case I am overlooking, I find this to be a win for Ms. Whitaker and think she should not file a response to the motion.

Short Takes on Issues

  • Docket No. 6946-19SL, Soccer Garage, Inc., v. C.I.R., Order available here.

This case concerns Collection Due Process regarding a levy and penalties for failure to file.  The IRS argues there was an intentional disregard of the filing requirement.  There are not enough facts provided regarding the petitioner’s intent so the Court denied the IRS motion for summary judgment.

  • Docket No. 10662-19W, Wade H. Horsey v. C.I.R., Order available here.

Mr. Hosey requested the reconsideration of the determination of a whistleblower claim and his motion was denied.

  • Docket No. 6560-18, Mark Alan Staples v. C.I.R., Order and Decision available here.

Mr. Staples filed a motion for new trial that the Court had to recharacterize as a motion for reconsideration of findings or opinion.  Mr. Staples made arguments about the characterization of his retirement benefits, Constitutional arguments, and generally argued about his computation regarding tax year 2015.  The Court denied the motion as the IRS computations were in line with the Court’s memorandum findings of fact and opinion.  On this case, I am generally confused by the petitioner’s actions – was he a tax protestor or just ignorant of tax procedure?  Either way, his motion was filed in vain.

 

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.