New Format of Notice of Intent to Levy Fails to Provide Sufficient Notice

Today we welcome back guest blogger E. Martin Davidoff. Last month Marty’s post addressed the offer in compromise Form 656.  Today, he examines the notice of intent to levy form.  The way the IRS writes its forms can have a significant impact on the outcome achieved.  I wrote last fall about changes to the letters in the collection notice stream where the letters sought to bring in revenue.  Early in the life of the blog I wrote about the disconnect between the form used for the collection information statement for offers in compromise (Form 433-A(OIC)) and the Fresh Start provisions that had been adopted about 15 months earlier.  The quality of a form can make a huge different in the outcome of the matter for which the form, or form letter, is created. 

 A well written dunning notice can bring in a lot more money than a poorly written one.  Shortly after RRA 98 I drafted the first notice of intent to levy that sought to combine in one letter the statutory requirements of 6331, the basis for the traditional notice of intent to levy prior to that time, and the new requirements of the 6330 brought about by the advent of collection due process.  I remember the IRS executive overseeing the project impress upon me the importance of the way the letter was written because of its revenue impact.  The letter can also impact how many people exercise their CDP rights.  Marty questions whether the notice of intent to levy letter provides enough notice to those who may want to pursue their CDP rights.  Keith 

Section 6330 provides that “No levy may be made…unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made.” 

            Until recently, such notice was usually accomplished by sending Letter 1058.  On LT 1058, one’s right to a hearing and the urgency of the notice was made very clear.  The first two lines of the notice read, in all caps and larger font:

FINAL NOTICE

NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING

PLEASE RESPOND IMMEDIATELY

Lately, however, the IRS has been moving towards LT11 Sample.  The change is shocking.  Although the notice makes it clear that there is an intent to levy along the following lines:

Notice of intent to levy

Intent to seize your property or rights to property

Amount due immediately:  $XX,XXX.XX

the right to a hearing is not disclosed until the middle of the second page, where in a much smaller font, the IRS states:

Right to request a Collection Due Process hearing

A paragraph explaining the process follows in the normal small font.

The question should come into play is the revised notice, the LT-11 sufficient notice under the Internal Revenue Code?  I suspect it is as many required notices are often buried in publications addressing a myriad of rights.  However, the change in the design of the notice appears clear to me that the IRS is intentionally downplaying Taxpayer’s right to a hearing.  And, I, even as a seasoned tax professional did not at first realize that the LT-11 was the new Letter 1058 until pointed out by my para-legal who is paid to review all the notices with a fine-toothed comb.

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It is clear that the IRS now views the form LT11 as a substitute for the Letter 1058 as both are listed as essentially the same notice on the FAQ section of the IRS website:  https://www.irs.gov/Individuals/LT-11-(Letter-1058)-Frequently-Asked-Questions-(FAQs) .  Interestingly, the FAQs for the LT11 (Letter 1058) does not mention at all the right to a Collection Due Process (“CDP”) hearing.  It merely states “you have the right to appeal” and provides no specific timeline for such appeal.  There is also a separate write-up on Understanding your LT11 Notice: https://www.irs.gov/Individuals/Understanding-your-LT11-Notice which does clearly mention that one may wish to appeal the proposed levy action.

Section 6330 provides what the notice must contain and how it is to be delivered.  However, it does not state the manner in which the information must be displayed within the notice.  And, although the notice is technically legal, I believe it is immoral.  It also appears to violate four of the recently adopted Taxpayer Bill of Rights, at least in spirit.

The Right to be Informed provides that taxpayers “are entitled to clear explanations of the law and IRS procedures in all tax forms, instructions, publications, notices and correspondence”.  In my mind, burying one’s right to a hearing on the 2nd page of a notice is not “clear”.

The Right to Quality Service provides that taxpayers should “receive clear and understandable communications from the IRS”.  I submit that the new design of form LT11 is not clear as to what a taxpayer must do to protect his or her rights.  The second page of the LT11 may never be read as the Taxpayer is likely to panic from the threats made on the first page.

Similar analyses can be made to The Right to Challenge the IRS’s Position and Be Heard and the Right to Appeal an IRS Decision in an Independent Forum.

The Letter 1058 has changed over the years.  For example, the 2002 version had a section entitled WHAT YOU SHOULD DO.   That section of the 2002 Letter 1058 made it clear that there were multiple responses that could be made within 30 days to prevent a levy, and the Appeal through the Collection Due Process hearing was one of those possible responses.  The Letter 1058 of 2002 did this by stating that the levy may happen “Unless you take one of these actions:” and then went on to list alternatives including the CDP process.   The Letter 1058 that I observed being used in 2015 has a revision date of October, 2008.  And even though it does clearly list the option of the CDP hearing on page 1, it does not make it clear on page 1 of the notice that such request alone, without either paying or entering into a payment arrangement (the other alternatives), will prevent the levy action.   However, such is made clear on page 2 under the section What We Are Going To Do.  The LT-11 sets forth one’s right to the CDP hearing on page 2 of the notice and has no information whatsoever regarding appeal rights on page 1.

It should be noted that the 2002 version of the Letter 1058 included the following language:

“Even if you request a hearing, please note that we can still file a Notice of Federal Tax Lien at any time to protect the government’s interest.” 

This had been a very helpful disclosure that is not currently contained in either the 2008 version of the Letter 1058 being used currently nor is such disclosure being made in the LT-11.   Many taxpayers have the misconception that their filing of an appeal to a Notice of Intent to Levy enables them to have a hearing prior to a Lien Filing.   That is why the 2002 language of the Letter 1058 on liens was so helpful and should be reinstated.

Call to Action:

When a form misses the mark it provides an opportunity to call on the IRS to eliminate or revise it.  Perhaps the form LT-11 provides such an opportunity.  The appropriate notice of one’s right to a hearing as prominently displayed as the Letter 1058 is an important notice that implicates taxpayer rights and the responsibility of the IRS to inform them of those rights.

 

Public Policy Cases Accepted by the Taxpayer Advocate Service

The duties of the National Taxpayer Advocate (NTA) are set out in IRC 7803(c). Section 7803 describes the duties not only of the NTA but also of the Commissioner, the Chief Counsel and the Treasury Inspector General for Tax Administration.  The code section merits reading because of the roadmap it provides to various parts of the IRS organization.  Included among the duties assigned to the NTA is the duty to “develop guidance to be distributed to all Internal Revenue Service officers and employees outlining the criteria for referral of taxpayer inquiries to local offices of taxpayer advocates…”

In this post I will address the newly listed policy criteria for getting a case into the local Taxpayer Advocate Service (TAS) office. Before doing that, however, a look at the traditional criteria sets the scene.  A detailed analysis of the factors for acceptance into TAS and the role of case advocates can be found in the National Taxpayer Advocate’s 2015 annual report.

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The two most common criteria for TAS referral are hardship and repeated failure of the IRS to respond to a taxpayer inquiry. These two criteria, however, only serve as general principles.  The actual criteria exist in the Internal Revenue Manual (IRM) 13.1.7.2.  TAS breaks the criteria into four categories and describes them in slightly different terms from me.  The first category involves cases creating an economic burden (hardship) and allows local TAS offices to accept cases meeting one of four listed economic burden criteria: (1) the taxpayer is experiencing economic harm or is about to suffer economic harm; (2) the taxpayer is facing an immediate threat of adverse action; (3) the taxpayer will incur significant costs if relief is not granted; and (4) the taxpayer will suffer irreparable injury or long-term adverse impact if relief is not granted.

As with any of the TAS criteria discussed here, a taxpayer who can demonstrate to TAS that their case fits into one of the enumerated criteria will have their case accepted by the local taxpayer advocate office and assigned to a case advocate. Having their case assigned to a single advocate can create a significant benefit for many taxpayers whose cases would otherwise end up with a rotating pool of IRS employees at the Automated Call Sites or Correspondence Exam.  Except for the fact that the case advocates may have too many cases to effectively handle them all, the single point of contact with a person inside the IRS working to resolve your problem offers a great advantage in trying to work through the maze of the federal tax system.

In addition to the four criteria under the economic burden label, TAS provides three criteria for accepting cases under system burden. In general, these cases involve a failure in the IRS system to operate as intended.  The three criteria under this label are: (1) the taxpayer has experienced a delay of more than 30 days to resolve a tax account problem; (2) the taxpayer has not received a response or resolution to the problem or inquiry by the date promised; and (3) a system or procedure has either failed to operate as intended or failed to resolve the taxpayer’s problem or dispute within the IRS. Of course, as the IRS becomes more dysfunctional due to the funding cuts, more cases meet the system burden criteria which means even more work for TAS which means it too has become somewhat dysfunctional because the case advocates there have too much work to do. The failure to properly staff the IRS creates a vicious cycle in this regard.

The eighth criteria for getting a case accepted by TAS goes under the name “best interest of the taxpayer” and seeks to ensure that taxpayers will receive equitable treatment and that their rights as taxpayers receive respect and protection. The IRM describes this criteria as one where the “manner in which the tax laws are being administered raises considerations of equity, or has impaired or will impair the taxpayer’s rights.”  Of course, this criterion fits like a glove with the new Taxpayer Bill of Rights and offers the prospect of TAS assistance where the taxpayer can demonstrate that some facet of TBOR has failed in application to their situation. This criterion makes it worthwhile to learn and apply TBOR to every case where you want to seek TAS assistance.

The final basis for getting a case accepted by TAS is public policy. The first eight criteria are essentially static but this last basis changes periodically based on problems that the NTA identifies. On November 2, 2015, the NTA issued TAS-13-1115-007 providing interim guidance on cases TAS will accept based on public policy. The guidance lists three circumstances: (1) organizations where IRS automatically revoked their tax-exempt status because the organization did not file an annual return or notice for three consecutive years; (2) cases involving any tax account-related issue referred to TAS from a Congressional office; and (3) cases involving an IRS levy on any Thrift Savings Plan (TSP) as part of the pilot program in IRS ACS units. I suspect soon the NTA will issue guidance including any case in which a private debt collection company seeks to collect from a taxpayer. She issued such guidance the last time private debt collectors were loosed on taxpayers. It will be interesting to see if private debt collectors are allowed to collect on debts arising from the Affordable Care Act that would otherwise rely essentially on notices and offset.

Of the public policy bases for TAS relief, I want to focus levies issued to TSP. TSP is the 401(k) type plan available to federal employees.  This issue only affects current or former federal employees because only these individuals will have such an account.  On December 7, 2015, Chief Counsel Notice 2016-001 issued and superseded Chief Counsel Notice 2013-007. These notices provide guidance concerning how the IRS will levy on TSP accounts.  Because of an interpretation of the enabling legislation, the IRS has taken the position that it can levy on these accounts to reach funds which the employee could not reach.  Ordinarily, a levy on a retirement account only reaches the amount of funds available to the owner of the retirement account at the time of the levy.  So, the interpretation with respect to TSP accounts represents a significant departure from the IRS ability to reach funds from any other type of retirement account and has gained the attention of the NTA.

On January 14, 2013, Congress amended 5 U.S.C. § 8437(e)(3) to provide that moneys due and payable from TSP were subject to a Federal tax levy under I.R.C. § 6331. The provision specifically provides that:

“Moneys  due or payable from the Thrift Savings Fund to any individual and, in the case of an individual who is an employee or Member (or former employee or Member), the balance in the account of the employee or Member (or former employee or Member) shall be subject to legal process for the enforcement of the individual’s legal obligations to provide child support or make alimony payments as provided in section 459 of the Social Security Act (42 U.S.C. 659), the enforcement of an order for restitution under section 3663A of title 18, forfeiture under section 8432(g)(5) of this title, or an obligation of the Executive Director to make a payment to another person under section 8467 of this title, and shall be subject to a Federal tax levy under section 6331 of the Internal Revenue Code of 1986. For the purposes of this paragraph, an amount contributed for the benefit of an individual under section 8432(c)(1) (including any earnings attributable thereto) shall not be considered part of the balance in such individual’s account unless such amount is nonforfeitable, as determined under applicable provisions of section 8432(g).”

On September 10, 2014, the Federal Retirement Thrift Investment Board published final regulations to implement the statute detailing the procedures for complying with federal tax levies on TSP accounts. The regulations allow the IRS to reach the TSP and may go beyond the grant in the statute.  In her 2015 annual report the National Taxpayer Advocate identifies levies on retirement accounts as #11 in her most serious problems.  The write up regarding this problem does not specifically discuss special problems with the levy on the Thrift Savings Plan but provides useful information for anyone interested in the general issue of the ability of the IRS to levy on retirement accounts and the policies that the IRS applies in making decisions to levy on these accounts. Watch for comments from the NTA on this issue because its location on this list signals that it will receive criticism from the NTA in her annual reports and elsewhere due to the perceived unfairness to federal employees.

If you have an issue that raises policy issues for a group of taxpayers, you can bring this to the attention of the NTA in hopes that it will make the policy list and open the doors to TAS assistance.  TAS assistance does not mean that someone whose TSP is levied will get their money back but it does mean that the IRS actions on the account will receive significant scrutiny from the TAS caseworkers who may see procedural irregularities practitioners might find difficult to spot.

 

 

 

 

 

 

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Summary Opinions for April 10th through 24th

Another slightly stale SumOp, but again full with lots of very interesting tax procedure nuggets.  This post is very heavy on the Chief Counsel Advice, much of which deals with statutes of limitations.

I also wanted to point out that you can read Keith’s acceptance speech for the Janet R. Spragens Pro Bono Award staring on page 8 of the ABA Tax Section NewsQuarterly found here.  We previously covered Keith’s honor here.

As our readers know, we at PT are big fans of tax clinics and the wonderful work the clinics do throughout the country.  Les has an article forthcoming in the Tax Lawyer on the benefits derived by students, taxpayers, and the entire tax system, which can be found here. Keith has previously written on the history of low income taxpayer clinics, and his article can be found here.

I also have to congratulate Keith on his temporary relocation over the next year.  The University of Harvard has decided to expand its array of clinics, and will be starting a low income taxpayer clinic.  Keith will be a visiting professor at Harvard for academic year 2015-2016 to set up the clinic.

And, the other tax procedure items:

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  • Last year, Les wrote about the Nacchio case involving the ex-Qwest CEO who was convicted of insider trading and directed to pay a substantial fine and forfeit the profits from the sale of his stock in the company.  Nacchio filed for a refund of tax he paid on those profits, claiming Section 1341 would allow him to treat it as if he never had the gain.  Janet Novak of Forbes on May 1st, had an update on the case found here.  The government has agreed to stipulate the facts of the case, allowing it to bypass a hearing that would have likely discussed in detail the NSA program Mr. Nacchio turned down on behalf of Qwest prior to his investigation.  Janet has a summary of the DOJ’s various arguments as to why it should win based on the law, and it is likely such an appeal is going to occur shortly.  Interestingly, on March 27th, the Service released CCA 201513003, which discusses the Service’s view as to the deductibility of the restitution as a business expense under Section 162.  The issue was whether payments in lieu of forfeiture from a deferred prosecution agreement were deductible.  The advice attached the response from the DOJ in Nacchio where it argued the same issue, although the response was not attached to the released document.  I had initially wondered if the CCA dealt with the Nacchio case, but it appears the Service has a couple cases on the issue.
  • The Northern District of California recently decided US v. McEligot, where the Court held that taxpayers did not have an absolute right to be present during a third party interview pursuant to a summons.  In McEligot, a taxpayer’s accountant refused to answer IRS questions without the taxpayer’s lawyer present. The Court found the accountant had no right to refuse because the Service would not allow the taxpayer or his representative to be involved in the interview.
  • In other CCA news, the Service has issued its position on the assessment period for the Section 6694 preparer penalty for filing a refund request based on an unreasonable position and how long the preparer would then have to request a refund of the penalty amount.  Section 6696(d) houses the statute, and there would be a three year assessment period following the alleged improper refund request.  The preparer would then have three years to seek a refund of the penalty once paid.
  • This is a depressing case.  In Gurule v. Comm’r, the Tax Court remanded a CDP case involving the sustaining of a proposed levy, and whether the Appeals Officer abused his discretion in rejecting an OIC submitted for doubt as to collectability and, in the alternative, rejected an installment agreement (the SNOD may not have been properly sent either).  The primary issue in the collection matters was whether or not the Officer properly considered the economic hardship faced by the family.  In the case, the wife and son had severe medical issues, resulting in high bills.  Wife had a neurological disease resulting in seizures and multiple brain surgeries, and son was in an accident resulting in brain injuries.  The husband had lost his job, and he was using his 401(k) to pay necessary living expenses.  The officer treated the 401(k) loan as a dissipated asset, in particular the loans taken after the taxpayers knew of the outstanding tax.  “Dissipated assets” can be included in in the reasonable collection potential, which is a policy decision to deter delinquent taxpayers from squandering assets when they have outstanding tax liabilities.  An asset, however, should not be considered dissipated if it was needed to provide for necessary living expenses (like medical bills required to keep someone alive).  The Court also directed Appeals to request petitioners to provide documents regarding the son’s death, and how that could impact their collection potential.  While the debate raged on between the Service and the taxpayer, the taxpayer took an additional loan against his 401(k) to pay for his son’s funeral, which the Service found inappropriate.  I really need to start trying to be more thankful for what I have.
  • Chief Counsel has issued legal advice regarding who is authorized to sign a power of attorney for a partnership or LLC.  The issue and conclusion are as follows:

a. Who is authorized to sign a POA appointing a representative for a partnership or limited liability company (LLC) being examined in a TEFRA partnership-level examination?

b. Who is authorized to sign a POA appointing a representative for a partnership or limited liability company for other purposes?

CONCLUSIONS:  A general partner or, in the case of an LLC, a member-manager, may sign a POA for purposes of a TEFRA partnership-level examination or for other tax purposes of the partnership. A POA can also be secured from a limited partner or LLC member for the purposes of securing partnership item information and disclosing partnership information to the POA. In the case of an LLC that has no member who is also a manager, the non-member managers may sign the POA for purposes of establishing that it would be appropriate and helpful to secure partnership item information including securing documents and discussing the information with the designated individual.

KPMG has some coverage and insight here.

  • More tolling content due to financial disability.  In very interesting Chief Counsel Advice, the Service has taken the position that Section 6511(h) does not extend the three year limitations period for net operating losses or capital loss carrybacks.  In the advice, the Service states that Section 6511(h) specifically is limited to the statutes under (a)(b) and (c).  The NOL and capital loss carrybacks are found under Section (d)(2), and therefore not extended by financial disability.

 

Summary Opinions for the week ending 04/03/15

FullSizeRenderYikes, this post is getting a little stale, as it relates to early April, but it still has a lot of great info.  Before getting to the other tax procedure items from the week of April 3rd  that we didn’t otherwise cover, there are a few housekeeping items to touch on.

On April 22nd, Les Posted about the ATPI Conference.  Since then, various folks have asked about a link to the audio.  Les has tracked down a link, and for those of you interested, you can listen to the full webcast here.

Les and Keith are currently on their way to the ABA Tax Section Meeting in DC.  Please let them know your thoughts on the blogs, what topics you would like to see us cover in greater detail, and if you have any interest in guest posting.

I will sadly be missing the meeting this year, but for a wonderful reason.  My wife gave birth to our first son, Oliver, who is pictured to the above. Both mother and babe are doing great, and Oliver has been close to perfect over his first two weeks of life; however, taking a three day trip away from them (on mother’s day weekend) just wasn’t in the cards.

We also had a few guest posters from around the week of April 3rd that I haven’t highlighted yet.  We were very pleased to have Villanova professor Tuan Samahon, co-counsel for the Kuretskis, posting on the Solicitor General’s brief opposing cert.  Also posting was Sean Akins of Covington & Burling, writing on when to seal the Tax Court record.  We are, as always, very appreciative of their efforts.

To the other procedure:

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  • I don’t do much bankruptcy work, so perhaps this is run of the mill, but I found the facts of In re: Elrod, pretty interesting as they related to an IRS levy.  In Elrod, the IRS issued a broad levy to a chapter 13 trustee.  The levy sought to collect taxes owed by a creditor (not someone in bankruptcy) of various individuals who had filed for chapter 13 bankruptcy.  The trustee filed a motion to quash the levy, which the Court granted.  The Court found that the levy violated the automatic stay under 11 USC 362(a).  As I said, this is not my area and those who do bankruptcy may be thinking I am quite uninformed, but I was initially surprised that the automatic stay protected someone other than the debtor in this way.  Most of the provisions under (a) relate to the debtor, but (a)(3) includes as  being prohibited “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”  The Court found that based on other BR sections, “property of the estate” was defined very broadly, and found it inappropriate for the trustee to have to hand the creditor’s payments over to anyone other than the creditor.  The holding also noted that the levy did not specify which cases it applied to, which was one of a few factors that created substantial administrative burden for the trustee.  This also potentially opened the trustee up to personal liability for failure to properly comply with the levy, which was unfair and too onerous.
  • Usually when you set up a BS tax shelter, and you get caught, substantial penalties are headed your way.  In CNT Inv. LLC, v. Comm’r (loyal SumOp readers will remember this case from the last SumOp, dealing with statutes of limitations) however, the taxpayer was able to get out of the gross valuation misstatement penalties where the Tax Court found the taxpayer relied on competent advisers.  Facts worth noting: the taxpayer did fail to hand over some information to his lawyer; the CPA involved was admittedly confused by what was happening; and the lawyer involved was not a tax lawyer.  I’ll admit, this opinion is pretty long, and I did not read it all in great detail.  From a quick review though, it seems like the taxpayer’s current counsel earned his fee, as those facts can often tank a reliance/reasonable cause argument.
  • The IRS has issued PMTA 2014-018, which addressed an interesting statute of limitations issued, specifically:

Does section 6501(c)(8) operate to extend the period of limitations for the assessment of tax with respect to an estate’s Form 1041 or Form 706 if the executor of the estate files the deceased individual’s final Form 1040 and fails to provide information required to be furnished with the final Form 1040 under the provisions of section 6038D?

The Service determined that this would extend the limitations period.  For those unfamiliar with Section 6501(c)(8), the Code provides that if certain foreign transfers are required to be disclosed to the Service and are not, “the time for assessment of any tax…with respect to any return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the [Service] is furnished” with the required information.  This applies to the entire return, in general, unless the failure was due to reasonable cause, in which case the extended period only applies to the undisclosed information.  The Service found that where the executor is required to file the decedent’s last lifetime return under Treas. Reg. 1.6012-3(b)(1), and fails to disclose information required under Section 6038D on the Form 1040, the statute of limitations will be extended for the Form 1040, the estate’s Form 1041 (interesting because the estate is a separate legal entity), and Form 706.  The Service stated the broad language under the statute indicates that “any return” should mean at a minimum all returns required to be filed by the taxpayer “to which such information relates”.  The notices indicates this is very fact specific.  In addition, if a surviving spouse, who was not the executor filed the Form 1040, the result could be different, since the executor wouldn’t be filing the Form 1040.

  • The Service has issued final regulations on the extended statute of limitations under Section 6501(c)(1) on assessment and collection for taxpayers who failed to disclose involvement in listed transactions.  The regs are similar to the proposed regulations, with a  few modifications on how the one year extension works with the normal period when disclosure by an advisor occurs.
  • Over at one of my favorite tax blogs, Jack Townsend’s Federal Tax Crimes Blog, Jack has some thoughts on the recent oral argument in BASR Partnership v. US.  We’ve touched on the issue in BASR a few times, most notably in Les’ initial coverage of the case found here.  For those interested in the issue, Jack’s post is not long but provides some good insights into the positions being offered on whether or not the unlimited statute of limitations for fraud under Section 6501 extends to actions taken by someone other than the taxpayer.
  • The Service lost (again) arguing federal law applied to show transferee liability under Section 6901.  The Court, in Stuart v. Commissioner, held that state law applied to determine the third prong of whether liability existed for the other party, and again rejected the Service’s two step process where it first recasts a transaction with the substance over form doctrine, and then applies state law to determine if the other party is liable.  We’ve touched on prior cases out of the tax court, First, Second, and Forth Circuits.  This case would be appealable to Eighth Circuit.
  • From fivethirtyeight.com, an updated look at exactly when the marriage penalty and bonus go into effect.  I emailed this to a friend who is about to get hitched, and was assuming a tax savings…marriage would have cost him $3k this year.  Bye the way, Nate Silver’s page has won me multiple Oscar pools (I’ve never seen any of the movies), and sports wagers – none of which were for money, of course.
  • And now for something completely different, Andrew Brandt touches on legal issues in the NFL for Sports Illustrated.  Not tax procedure whatsoever, but Mr. Brandt is the Director of the Jeffry Moorad Center for the Study of Sports Law at Villanova University School of Law, where Les and Keith hangout while thinking about PT posts.  The article provides some insights into a host of hot legal topics in the NFL currently, including the unfortunate cases of Aaron Hernandez and Darren Sharper (who Mr. Brandt knew fairly well).

Godfrey v. Comm’r Part II: If the Failure to Serve a Notice of Intention to Levy on Taxpayer’s POA Violates Section 6304(a)(2), What Are the Possible Remedies?

We continue with our three part series on Godfrey. Parts II and III are written by frequent guest blogger Carl Smith.  Carl has updated his post to address some of the comments made on Part I.  I suggest going to the comments if you want to see the full discussion.  Keith

In a prior post on Godfrey v. Commissioner, Keith explained how the IRS’ actions in that case might have violated section 6304(a)(2). With only a few exceptions (none, I believe, relevant in Godfrey), section 6304(a)(2) prohibits the IRS from communicating directly with a taxpayer in connection with collection where the taxpayer is represented by a holder of a power of attorney on file with the IRS.  In Godfrey, the IRS sent a notice of intention to levy (“NOIL”) directly to the taxpayer at the taxpayer’s last known address, but she did not actually receive the NOIL.  The NOIL was returned unclaimed.  The IRS did not send a copy of the notice to the taxpayer’s POA holder.  By the time the taxpayer and her attorney realized that an NOIL had been issued, over a year had passed.  The next day, the POA filed with the IRS a Form 12153 requesting a CDP hearing. The IRS then sent a letter denying any CDP hearing because the Form 12153 was filed too late – beyond the 30-day period provided in section 6330(a)(2) and (3)(B) for requesting a hearing.  Within 30 days of that letter, the taxpayer petitioned the Tax Court.  Without discussing section 6304(a)(2) (which the taxpayer had not raised in the case), in its order, the Tax Court dismissed the case for lack of jurisdiction, in part, on the ground that no copy of the NOIL need have been sent to the POA to make the NOIL valid.  In making this holding, the court drew an analogy to well-settled case law holding that no copy of a notice of deficiency need be sent to a POA to make a notice of deficiency valid.

The taxpayer in Godfrey has moved to vacate the dismissal order, citing the violation of section 6304(a)(2) as one of two grounds.  Section 6304(a)(2) (which only applies to collection communications, not notices of deficiency) renders the court’s analogy inapt.  Leaving aside for the moment the problem of the section 6304(a)(2) argument being raised belatedly, what if a taxpayer who was in a similar situation (i.e., NOIL sent to last known address, NOIL not received, POA not served, so no Form 12153 filing in the 30-day period, and filing in the Tax Court within 30 days of IRS letter refusing to give a CDP hearing) had raised the section 6304(a)(2) violation in her petition, so the court would have to address it?  Assuming that the Tax Court found a violation of section 6304(a)(2), what remedy should be given?  This post explores the possible remedies.  Disclosure note:  Because I feel so strongly about the problem of lack of notice to counsel, in Godfrey I just entered a co-appearance with her current counsel, John Genova, Esq., and assisted in preparing and filing the motion.

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One remedy is obvious: Section 6304(c) states:  “For civil action for violation of this section, see section 7433.”  Section 7433 allows a suit in district court for actual damages sustained by a taxpayer for wrongful collection actions taken by IRS employees intentionally, recklessly, or negligetntly.  However, clearly, the Tax Court has no authority to issue damages judgments under section 7433. Further, there has never been a reported section 7433 district court suit involving an alleged violation of section 6304(a)(2), so we have no idea how actual damages would be calculated if such a suit were brought.

Frequent commentator Jason T. has posted a comment on the Godfrey I post taking issue with Keith and my belief that section 6304(a)(2) applies to an NOIL.  He cites three district court opinions or orders saying that section 7433, which applies “in connection with any collection of . . . tax”, cannot provide damages with respect to NOIL procedure violations, since an NOIL is not a collection action, but precedes collection.  By analogy, he thinks that section 6304(a)(2), which provides that the “Secretary may not communicate with a taxpayer in connection with the collection of any unpaid tax” should be read in pari materia with the somewhat similar language in section 7433 that these courts cited in holding that NOILs are not collection actions.  I am not sure I agree with the district courts about section 7433, and in none of the three cases had the IRS yet started collection, whereas in Ms. Godfrey’s case, the IRS eventually started levying (arguably as a result of the section 6304(a)(2) violation).  I also think that the better analogy to interpreting the words “the Secretary may not communicate with a taxpayer in connection with the collection of any unpaid tax” is to the words in the Fair Debt Collection Practices Act, 15 U.S.C. section 1692c(a)(2), that “a debt collector may not communicate with a consumer in connection with the collection of any debt” – the source of section 6304(a)(2)’s language. As noted by Keith there are court opinions saying notices, such as dunning letters, are communications in connection with the collection of any debt under that Act. For the purposes of the rest of this post, I ask the reader to just assume for now that the court would find a section 6304(a)(2) violation in a Godfrey-type case. The point of this post is only to explore what remedies there might be. Even if section 7433 might not be available, that is not the only possible remedy.

 

For example, does the Tax Court have any equitable remedies that it might apply that could put the taxpayer into the situation that she should have been in, but for the violation – i.e., having a CDP hearing?

 

There is actually precedent for the Tax Court to provide specific equitable remedies to violations of the Internal Revenue Code in CDP matters before the Court. In Zapara v. Commissioner, 124 T.C. 223 (2005), and 126 T.C. 215 (2006), aff’d 652 F.3d 1042 (9th Cir. 2011), in the course of a CDP hearing, the taxpayer asked that the Appeals Officer arrange for the sale of certain stock that had been subject to a jeopardy levy. Despite being obligated to honor the request within 60 days under section 6335(f), the IRS did not sell the stock, and the stock declined in value considerably.  In the CDP appeal in the Tax Court, the taxpayers successfully persuaded the court to direct the IRS to credit their account with the value of the stock on the date that the stock should have been sold under section 6335(f) (60 days after the request), and the court remanded the case to Appeals for a finding as to the appropriate credit.  124 T.C., at 238-243.  When the case returned from Appeals to the Tax Court, the IRS argued that the court had, in effect, granted damages to the taxpayers under section 7433 for unauthorized collection actions, even though the court lacked jurisdiction to make rulings under that section.  The court agreed with the IRS that it lacked jurisdiction to issue damages judgments under section 7433, but the court held that it possessed the inherent power to provide a specific equitable remedy to the taxpayer that would place the taxpayer back into the position the taxpayer would have been in, but for the violation.

If the Zapara holding were applied in the Godfrey-type situation, the IRS’ direct communication with the taxpayer without also communicating with counsel could be repaired by holding the period open to file a CDP hearing until counsel was served with the NOIL.  If that were to be done in the Godfrey-type case, the Form 12153 filing would have been timely.  If the letter denying the CDP hearing in response to the Form 12153 filed in Godfrey-type case were to be treated as a notice of determination, then the taxpayer in such a case – having filed in the Tax Court within 30 days of the letter’s issuance – should be entitled to Tax Court review of that failure to be given a CDP hearing.  Note that the Tax Court has held that the IRS’ erroneous letter treating an Appeals hearing as an “equivalent hearing”, when the Form 12153 had been timely filed to request a CDP hearing, should be treated as a notice of determination that can form the basis of Tax Court jurisdiction.  Craig v. Commissioner, 119 T.C. 252 (2002). And so the Tax Court, in the Godfrey-type situation, could remand the matter to Appeals to afford a CDP hearing, while retaining jurisdiction in the Tax Court to review any such “supplemental” notice of determination issued after the hearing.

This particular equitable remedy is similar to one that is afforded in New York state courts and administrative agencies. There, it is held that the time to file a petition in a court or agency is tolled until counsel is sent a notice by the agency where the agency had sent a notice directly to a person that the agency knew was represented by counsel, but had not at the same time sent the notice to the counsel.  Matter of Bianca v. Frank, 43 N.Y.2d 168 (1977) (30-day period with respect to notice proposing to dismiss police officer); Matter of Multi Trucking, Inc., TSB-D-88(8)C, 1988 N.Y. Tax LEXIS 331 (N.Y. Tax Appeals Tribunal 1988) (90-day period to contest franchise tax notices of deficiency); Matter of Hyatt Equities LLC, 2008 N.Y. Tax LEXIS 94 (N.Y. Tax Appeals Tribunal 2008) (90-day period to contest conciliation order denying sales tax refund claim).

The only issue I see about affording this specific equitable remedy (i.e., tolling the 30-day period to file for a CDP hearing until counsel is served with the NOIL) is whether the 30-day period is jurisdictional or otherwise not subject to equitable tolling. If the period is (1) jurisdictional or (2) non-jurisdictional, but otherwise not subject to equitable tolling, this remedy cannot be afforded.  This gets us into recent non-tax Supreme Court case law that I have discussed in posts within the last year on Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), and Lippolis v. Commissioner, 143 T.C. No. 20 (Nov. 20, 2014).

Under current non-tax Supreme Court case law that was applied in those two lower-court tax opinions, time limits are quintessential “claims processing rules” that are no longer to be treated as jurisdictional, unless Congress provides a “clear indication” that it wants a time period to be jurisdictional. Henderson v. Shinseki, 131 S. Ct. 1197, 1203 (2011) (120-day period to file a petition in the Article I Court of Appeals for Veterans Claims held not jurisdictional). The separation of a time period from the actual jurisdictional grant, however slight, provides a strong indication that Congress did not want a time period to be jurisdictional. Id. at 1204-1205. See Gonzalez v. Thaler, 132 S. Ct. 641, 651 (2012) (“[m]ere proximity will not turn a rule that speaks in nonjurisdictional terms into a jurisdictional hurdle”); cf. Lippolis v. Commissioner, supra (holding that the $2 million disputed liability amount threshold at section 7623(b)(5)(B) in connection with a Tax Court whistleblower award suit under section 7623(b)(4) is not jurisdictional when the threshold is not contained within the jurisdictional grant paragraph – even though it is in the same subsection of the Code).

The provision giving Appeals jurisdiction to hold CDP hearings (even though the provision doesn’t use the word “jurisdiction”) is at section 6330(b)(1), which states: “If the person requests a hearing in writing under subsection (a)(3)(B) and states the ground for the requested hearing, such hearing shall be held by the Internal Revenue Service Office of Appeals.”  By contrast, the 30-day period to file for a CDP hearing is set out at section 6330(a)(2) and (3)(B) (twice), but that is in a different subsection from the jurisdictional grant.  Further, the jurisdictional grant does not contain any limiting language that the CDP hearing request be timely filed – something Congress could have included to give a “clear indication” that it intended the 30-day period to be jurisdictional. Compare Pollock v. Commissioner, 132 T.C. 21, 30 (2009) (holding 90-day period in which to file a stand-alone innocent spouse petition at section 6015(e)(1) is jurisdictional; “The most important point to notice is that the Code here actually uses the word ‘jurisdiction’ — giving us ‘jurisdiction’ if someone files her petition within the 90-day time limit. Statutes granting a court ‘jurisdiction’ if  [20] a case is filed by a stated deadline look more like jurisdictional time limits.”). So, it seems pretty clear that the 30-day period to request a CDP hearing is not jurisdictional.

It is also likely that the 30-day period is subject to equitable tolling. The 30-day period is much more like the simple one-year statute of limitations for filing for habeas relief in federal district court in death penalty cases discussed in Holland v. Florida, 560 U.S. 631 (2010) (Court found the one-year period subject to equitable tolling), than the complex periods under section 6511 to file a tax refund claim (already containing other numerous exceptions, including one, unusually, limiting the amount of the claim) that the Court held was not subject to equitable tolling in United States v. Brockamp, 519 U.S. 347 (1997). See Volpicelli v. United States, supra (relying on Holland and distinguishing Brockamp in finding that the simple 9-month period in which to file a wrongful levy suit is subject to equitable tolling).

Further, as will be discussed in the final post on Godfrey, there is legislative history that seems to provide that an NOIL that is not received in the 30-day time period can still belatedly give rise to a CDP hearing, even when the request is made outside the 30-day period. This is even broader than equitable tolling – strongly suggesting that Congress would have wanted the 30-day period to be subject to equitable tolling generally.

In sum, I see no reason why the Tax Court could not give the specific, tailored equitable relief for a section 6304(a)(2) violation that I noted above.

The third and final post on Godfrey will discuss whether an NOIL that is properly mailed to the taxpayer’s last known address, but that is not actually received by the taxpayer, can give rise to a CDP hearing when the request for such hearing is filed late. A regulation on which the Godfrey court relies says “no”, but I think that regulation is invalid. This is another argument that was belatedly made in the motion to vacate in the Godfrey case.

 

Summary Opinions for the weeks of 3/06/15 through 3/20/15

Image from https://storesafewasnotsafe.wordpress.com/

This will be the last post for the week, as we will all be busy with family activities (and taxes).  We should be back on Monday with some new content, and it looks like next week will cover some really interesting areas, including the recent Godfrey case, and sealing Tax Court records.

We have been very lucky over the last month to have a lot of really great guest posts.  We cannot thank those guest posters enough for the quality content, especially as the three of us have been very busy with our various other jobs (or appearing before the Senate–perhaps more on that next week also).  For the weeks that SumOp is covering in this post, we had Mandi Matlock writing on TPA Most Serious Problem # 17 on how deficient refund disallowance notices are harming taxpayers.  Peter Lowy wrote on the really interesting Gyorgy case, which deals with the taxpayer’s requirement to notify the Service on a change of address, but also highlights a host of other procedure items.   Patrick Smith joined us again, writing on Perez v. Mortgage Bankers Associate, and illuminating us on APA notice and comment requirements for different types of rules and the possible eventual reversal of Auer.  We also welcomed Intuit’s CTO, David Williams who wrote a response to Les’ prior post on H&R Block’s CEO indicating it should be harder to self-prepare (which Les was potentially in favor of).  And, another first time guest blogger, Patrick Thomas, joined us writing on the calculation of SoLs on collections matters.

We were also very lucky again to have Carl Smith writing for us, this time updating us on the Volpicelli jurisdiction case and the Tax Court pleading rules on penalties looking at the El v. Comm’r case.  A thank you to all of our guests over those two weeks, and a special thanks to Carl for his continued support.

To the other procedure items (if you keep reading, the image will make more sense):

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  • The Service released CCA 201510043, in which Chief Counsel stated a taxpayer is entitled to two sets of collection due process rights for the same period when there were two assessments; one for assessment arising out of a civil exam and the other from restitution-based assessment.  Section 6201(a) was recently (five years ago) amended to require assessment and collection of restitution in the same manner as tax.  The advice has a nice summary of cases outlining why this double assessment of the same tax is not double jeopardy.  Although the general rule is that a taxpayer is entitled to one CDP hearing with respect to tax and tax years covered by the CDP notice, there are situations where multiple hearings are appropriate.  The advice highlights Treas. Reg. 301.6320-1(d)(2) Q&A D1 and Treas. Reg. 301.6330-1(d)(2) Q&A D1 as examples of allowing two CDP hearings when there has been additional assessments of tax or new assessments for additional penalties.  The Advice determined that this situation was analogous and warrants two separate CDP hearings.
  • The Northern District of California in In Re Wilson held that penalties for failure to timely file were dischargeable when the original due date was outside of the three year look back under BR Code 523(a)(7)(b), but the taxpayer had extended the due date and the extended date was within the three years.  The Court indicated this was a case of first impression.  Another interesting BR Code Section 523 issue.
  • This clearly only pertains as a practitioner point, and not something any of our readers would personally need, but OPR has announced a standard information request letter to make a Section 6103 request for information maintained by OPR relating to possible violations of Circ. 230.  Info about the letter is found here, and you can get the actual letter here.
  • The Ninth Cir. affirmed the Tax Court in Deihl v. United States in finding a widow spouse did not qualify for innocent spouse relief.  In the case the Court did not find there was clear error by the Tax Court in reviewing the widow’s testimony and find it was not credible.  The surviving spouse provided testimony that conflicted with other evidence regarding the couples’ business, and she did not offer any third party testimony regarding the abuse.  The widow argued that since the Service did not offer contrary testimony regarding the abuse, the Tax Court had to accept her testimony, which the Ninth Circuit stated was incorrect.  Further, looking to Lerch v. Comm’r, a Seventh Circuit decision, stated that the Tax Court did not have to accept testimony that was questionable, even if uncontradicted (tough to overcome the presumption of guilt that comes along with a name like Lerch).
  • Gambling causes fits for the Service.  Tipped casino employees used to underreport frequently, but apparently casinos will provide estimates to the Service.  Gambling website accounts might be offshore accounts (even if sourced in US banks). Add to that list of problems how to treat bingo, keno and slot machine winnings.  This blurb will focus on slot machines.  New proposed regulations offered in a recent IRS Notice would provide a safe harbor to determine gains and losses from a slot machine.  The issue is that gains from “transactions” are included in income.  Losses are deductible to the extent of winning, but generally as itemized deductions.  For slot machines, a “transaction” is session based.  What is a session can be a point of disagreement between the Service and taxpayers.  This is apparently becoming more murky now that people don’t use actual coins.   So, what are those retirees on the bus trips to AC or Vegas to do?  The Service is soliciting suggestions, but the current proposed safe harbor states that a session of play:

A session of play begins when a patron places the first wager on a particular type of game and ends when the same patron completes his or her last wager on the same type of game before the end of the same calendar day. For purposes of this section, the time is determined by the time zone of the location where the patron places the wager. A session of play is always determined with reference to a calendar day (24-hour period from 12:00 a.m. through 11:59 p.m.) and ends no later than the end of that calendar day

The Notice then goes on to explain how to calculate gains and losses during the session.

  • Add this to the list of things that will not get you out of the failure to timely file penalties – taxpayer could not access tax records because his storage unite doors had frozen over.  The argument received an icy reception (oh, man that was bad) with both the Service and the Tax Court. See Palmer v. Comm’r., TC Memo 2015-30 (for some reason this isn’t up on the TC web page anymore – sorry).
  • If you are going to cheat on your taxes, you probably should do so using offshore accounts (I usually charge clients a .5 for that advice, and you all just got it for free!).  Check out Jack Townsend’s blog on US v. Jones, an “ordinary tax cheat”, as Mr. Townsend put it, who got dinged with 80% of the bottom of the guideline range for sentencing.  He was using “sophisticated means”, which seemed fairly run of the mill.  Jack compares this to the sentencing of another UBS client, who ended up getting 22% of the bottom of the guideline range.  Switzerland should use this in its promotional materials.
  • In MSSB v. Frank Haron Weiner, the Eastern District of Michigan found that Section 6332(a) did not establish priority for competing liens, and instead Sections 6321, 6322 and 6323 established the priority (in favor of the IRS in this case).  In MSSB, a debtor owed funds to the IRS and a lawyer named Frank.  The Service recorded four liens, each before December 3, 2012.  Around $1.6MM was owed.  On December 6, 2012, Frank sued the debtor to recover unpaid legal fees and won.  In 2013, Frank obtained a writ to garnish the debtors IRA (Michigan must not offer much in terms of creditor protection for IRAs).  The Service stepped in, arguing it had priority on the IRA.  Frank countered, arguing that Section 6332(a) would give him the money.  The Section states:

Except as otherwise provided in this section, any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

Frank’s position was that his claim was the type of claim referenced by the “subject to an attachment or execution under any judicial process.”  The Court, however, held that the language did not direct which claim (that of the IRS or Frank) had priority, and only stated that the financial institution did not have to turn the funds over to the IRS.  The Court then looked to the other lien provisions, and found the IRS had priority and directed payment.

  • I went to see roller derby one time, which was really entertaining.  A perfect mix of roller skating and WWF.  All of the young women have funny/clever names, and often have slogans.  The announcer said of one that she had “champagne for her real friends, and real pain for her sham friends.”  Unfortunately, this has really nothing to do with this next case, except the tax court was dropping some real pain on a sham partnership.  In Bedrosian v. Comm’r, the Tax Court held that whether legal fees paid by a sham partnership were deductible was an affected item subject to TEFRA, and the Court had jurisdiction to make such a determination.  This was not the Bedrosians’ first Tax Court rodeo, and they keep making new TEFRA law, which now comprises a substantial chunk of revised Saltzman and Book Chapter 8 dealing with general exam procedures and a growing subsection dealing just with the complex world of TEFRA.

Summary Opinions for 02/06/15

As always, a special thanks to Carlton Smith for his post on the Eighth Circuit oral argument on “separate returns” under Section 6013(b)(1) in Ibrahim.  The comment to the post raises a related issue, which Carl responded to and is worth practitioner review. More in the way of comments: Les’ post on proposed legislation kicking around that would address appellate venue in CDP cases drew some worthwhile comments from Carl and frequent commentator JT discussing the implications (and shortfalls) of the proposal.

And, even though it is immediately below this post, I do want to draw attention to Les’ post on the Villanova Graduate Tax Faculty position. I cannot speak from a faculty perspective, but as Les indicated I did receive my LLM in taxation from the traditional program.  The program offers a great mix of academic and practitioner resources to the students, and I feel that translates to the program itself.  I found the student population to be driven and smart. It seems as though everyone at the school is very excited about the expansion of the program and the role the new faculty would be taking on.

To the procedure:

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  • Finally, the IRS has told me how to keep the books for my illegal drug business.  See Chief Counsel Memo 201504011.  Chief Counsel has explained how those of us trafficking in Schedule I and Schedule II controlled substances should capitalize our inventoriable costs.  I’m sure the accountants for the drug dealers will adjust accordingly.  You think I would have picked up something regarding tax from this, but really I was just surprised that marijuana is a Schedule I “hallucinogenic substance”.  I guess you are not really tired and hungry, you are just hallucinating that.
  • From The Taishoff Law Firm, a post on the American Airlines v. Comm’r Tax Court case, where the Service argued the court did not have jurisdiction to review the Airline’s challenge of employment taxes on certain flight attendants because of a prior “RA ’78 Sec. 530 determination.”  From the blog:

Notwithstanding anything to the contrary hereinabove stated, as my two-Martini-lunch colleagues say, and an earlier IRS audit that accorded the cabineers RA ’78 Sec. 530 relief (once a non-employee, always a non-employee), IRS comes back trying to hit AA with FICA, FUTA and all that jazz.

Now there is a material fact (did AA change how they treated the cabineers since the audit years they got off on?), so all we have is partial summary J: does Tax Court have jurisdiction?…

IRS hangs its fifty-mission-crush on Section 7436(a), but wants to ignore Section 7436(a)(2), which specifically mentions RA ’78 Sec. 530 determination. IRS claims neither Section 7436(a)(1) nor Section 7436(a)(2) gives Tax Court jurisdiction.

You’ll have to check out Mr. Taishoff’s blog for the rest.

  • Its tax time, meaning it is time to collect up your W-2s and 1099s, try to find receipts for all those deductions, wish the government would get out of your pocket, and…head butt the heck out of some tax preparers.  The craziest aspect of this story is the head-butting woman didn’t make it on to that People of Walmart webpage (which I’m not going to link to—SumOp is classier than that, even if we do know that webpage exists).  This seems to happen every year now.  Perhaps tax preparation training should include some aspect of self-defense.
  • USVI and its crazy tax credits have appeared quite a bit in SumOp over the last year.  The Service lost another case in Estate of Sanders v. Comm’r.   The Tax Court looked at the recent Vento and Appleton cases out of the Third Circuit and found that the decedent qualified as a USVI resident.  The law firm of Solomon Blum (who I know nothing about) has a nice summary found here.
  • The Third Circuit confirmed the holding of the district court in Patterson v. USVI, where the court found that the Virgin Island Bureau of Internal Revenue (VIBIR) did not have any overpayment from which a refund could be given to the taxpayer.   In the case, the government (here USVI) failed to file any response after getting a handful of extensions.  After chastising government attorney, the Court held that it still had to review the matter.  The salient facts are that Patterson alleged he was a USVI resident.  He paid about $813k to the IRS in the year in question to be applied to his USVI tax debt.  Later, he filed a tax return with VIBIR showing an overpayment of $179,000, requesting a refund of the same, which he never received.  After receiving the payment, the IRS opened an audit to determine if Patterson was really a resident (which it determined was not the case), and contemporaneously VIBIR sought to have the funds transferred to it from the IRS.  The funds were never transferred.  The Code provides that the IRS is supposed to transfer USVI residents’ payments over to USVI, and the taxpayer can take those into account regardless if the transfer actually occurs in determining their tax due to USVI.  The taxpayer argued the “regardless of transfer” aspect should allow him to obtain a refund.  The Court, however, held that the regulation did not direct how a refund was to be obtained, and, for a variety of reasons including the IRS position on his residency, it was not clear he had a valid claim.
  • A lot going on in those tiny islands.  In US v. Bailey, the Third Circuit confirmed the convictions of two individuals for conspiring to defraud the US and evade USVI taxes.  Jack Townsend has extensive coverage on his Federal Tax Crimes blog, found here.  Jack’s summary of the case is:

As described in the opinion, the principal scheme appears to be just garden variety enabler tax fraud.  The defendants were principals in a Virgin Islands company that billed U.S. taxpayers for “services” never rendered and then, after the customers paid, returned most of the amounts to the taxpayers.  The U.S. taxpayers deducted the payments for “services” and treated the amounts returned as “gifts.”  The defraud conspiracy charged related to this conduct. The VI company also claimed certain tax credits against it VI tax liability that it was not entitled to.  The offense conspiracy charge related to this conduct.

 Mr. Townsend then goes on to outline eight findings and holdings, highlighting what he views as important.

  • The Tax Court tossed an IRS determination to reject an OIC and move forward with a levy as an abuse of discretion in Estate of Sanfilippo v. Comm’r.  In Sanfilippo, the original settlement officer and the estate were in serious negotiations over a long period of time regarding the value of assets in an estate and the appropriate amount of tax due (pretty big estate, worth around $63MM at one point).  A second settlement officer took over the case, quickly came to a determination and rejected the OIC.  The Court found the settlement officer failed to properly analyze the situation.  Somewhat surprising that the settlement officer would move so quickly on such a big estate.
  • The 11th Circuit precluded the review of a guaranteed payment issue based on collateral estoppel in Wallis v. Comm’r.  Mr. Wallis was a tax partner at Holland and Knight who left the firm in 2002.  He was entitled to around $338k based on his capital account and interest in the firm (hmm, I need a better capital account), which was paid out over a couple years.  He was audited in one year, and argued that a portion was not taxable –lost- and that a portion was capital gain and not ordinary income—lost.  He later tried to make the same arguments before the courts for different tax years, which the Tax Court and 11th Circuit both indicated were barred by collateral estoppel.  The Courts found that the identical issues were brought and decided before, that Wallis was a participant in the prior hearing, and the issues was fully litigated in the prior preceding.

 

TIGTA Report on ACS Details the Impact of Shrinking Budget on Tax Collection Efforts

 

On September 18, 2014, the Treasury Inspector General for Tax Administration (TIGTA) issued a report about ACS.  The title gives a good preview of the article, “Declining Resources Have Contributed to Unfavorable Trends in Several Key Automated Collection System (ACS) Business Results.”  The fact that ACS cannot perform as well when it loses a significant percentage of its staff does not rise to the level of shocking news but the report itself provides an interesting insight in the impact of the dwindling resources and how the IRS goes about shuffling the deck chairs in what appears at the moment a losing effort at keeping up with its workload.  The report does not suggest that a tipping point is near when the lack of resources will cause a major shift in voluntary compliance.

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The report does a good job of describing ACS and how it fits into the collection system the IRS has developed. It occupies the second chair in a three part process:  1) the notice stream; 2) ACS; and 3) field collection.  The report talks about how the breakdown in ACS has, and will, continue to impact field collection and it makes some suggestions on how to lessen that impact if no resources appear on the horizon.  The descriptions and the statistics show the tough choices the IRS must make as it tries to meet workload demand in a time of significantly less resources.  Because of the reduction in staff, ACS no longer calls out to taxpayers seeking their compliance; it  has evolved into an organization that responds to calls from taxpayers receiving correspondence from the notice stream.  This description of the change in the work of ACS shows how the original goal of ACS – as a quick point of contact with delinquent taxpayers – no longer exists.  Its mission is to answer as many of the calls as it can but it cannot even cope with that mission.

The report contains several excellent charts displaying statistics on the actions of ACS. It has lost 24% of its workforce in the past three years (see Figure 2 below).  Because of issues with identity theft, the IRS has redeployed its smaller workforce to address that problem instead of using this workforce to cover as many collection cases as possible.  This, in turn, is driving some of the collection decision.  ACS issues less levies (see Figure 10 below) because it knows that when it issues levies the taxpayers will call.  I always thought that the reason for the levy was to get taxpayers to call who did not seem motivated to do so through correspondence.  The problem with having them call is that ACS then becomes overwhelmed.  The report states, “ACS management sometimes scales back issuing levies at a controlled rate in an effort to limit incoming calls to a manageable level.”

The report also details that more cases go into the Queue (see Figure 12 below). The Queue exists to warehouse collection cases no one can work.  Sending a case to the Queue does not mean that the IRS has given up on collecting the liability but just that it cannot pay attention to that case at the moment.  If the taxpayer files a refund return, the IRS will still offset the refund but absent having money fall into its lap or the taxpayer suddenly having a desire to pay the taxes about which many notices were previously sent, the taxpayer will simply not hear from anyone at the IRS while the case sits in the Queue.  A case could sit in the Queue for 10 years and then go away because of the statute of limitations on collection.  The report states that “ACS sent 12 percent more cases to the Queue during F& 2013 than during FY 2012.”

The problems in ACS and its inability to work cases impact field cases adversely simply because cases now take longer to reach the field (see Figure 7 below). I have read studies before finding that once a tax debt goes unpaid for two years the likelihood of the IRS collecting the debt dwindles to about 15%.  Now, cases do not get out of ACS to the filed until they have already aged past that point.

On average, a case is in the notice stream for nearly five months prior to entering ACS inventory. Cases that are not resolved by ACS can remain in ACS inventory for more than two years before being systemically routed to either the CFf (field collection aka revenue officers) or the Queue.  TDAs (tax delinquent accounts) that are routed to the Queue will have aged on average more than three years before being assigned to a revenue officer.  If and when these cases are eventually assigned to the CFf, they have aged and their collection potential has significantly decreased.

If revenue officers do not get cases until three years after assessment, they have a steep hill to climb to obtain payment. The original plan in creating ACS was to have speedy contact with taxpayers because quick collection means a much higher chance of success with collection.  Instead of the original plan, ACS now stands as a bar to quick collection and perhaps a bar to collection at all.  If staffing levels have fallen so far that ACS cannot do what it was designed to do and now serves as a drag on collection rather than a turbo charge, the time has come for redesign.

The report notes that the reduction in the filing of notices of federal tax liens as a result of changes a couple of years ago when the Freshstart initiate took place, may have really helped ACS (see Figure 11). After reading that ACS curtailed levy action to assist ACS responders, I almost got the feeling that those of us who thought we had done a successful job of lobbying for a better notice of lien filing policy only won because the IRS could not keep up with servicing the notices of federal tax lien filed at the lower level.

The report concludes with some dire remarks about the future of collection at the IRS. “[I]nventory continues to be routed to the ACS even when inventory cannot be worked.  When inventory is not worked or not worked timely, case dispositions may be adversely affected.  This may also have a substantial impact on the amount of Federal taxes that remain uncollected.”  The report urges IRS collection officials to align inventory routing with capabilities.  What will this mean?  If a case is headed to the Queue, routing it through ACS does not make too much difference to the action that will occur on that case.  It does not matter much if a case sits in the inventory of ACS or in the Queue if no one seeks to take affirmative action to collect.  From the taxpayer’s perspective, the location of the account between an inactive ACS and the Queue does not matter.

So, the IRS could shoot cases at Queue dollar levels straight to the Queue and not bother to load up the inventory of ACS. Because Queue dollar levels may stand at high levels, this could mean that accounts with less than $50,000 or $75,000 simply go straight to the Queue without sitting in ACS while ACS concentrates on quickly moving the higher dollar cases destined for revenue offices if ACS fails to collect.  To accomplish the direct move into the Queue, the IRS may have to raise to even higher levels the point at which it files the notice of federal tax lien or takes levy action.  Good news if you have a mid-level tax debt amount and bad news if you would like others to pay their fair share.

TIGTA reports often trouble me because they exhort the IRS to work better, faster, smarter and do not look at the system within which the IRS function works to see if better design could solve the problem more effectively. This report seems to acknowledge that the problem does not stem from the ACS not working efficiently and suggests a “better” system by suggesting a system that will move work out of ACS that cannot handle the volume in its current depleted state.  In the roughly 30 years of its existence, ACS has drawn much criticism.  If the IRS continues to shrink, ACS may simply cease to exist because it just gets in the way of collection and no longer has the ability to seek payment of tax from delinquent taxpayers.

 

TITGA ACS Fig 2TITGA ACS Fig 10TITGA ACS Fig 12TITGA ACS Fig 7TITGA ACS Fig 11