A Beneficial Effect of Inflation

The IRS increased the Collection Financial Standards on April 25, 2022. The increases reflect that we have entered a period of inflation, as the amounts have not increased by this much in a very long time.

The percentage increases between 2021 and 2022 are significantly higher than they were between 2020 and 2021 for all categories, but the biggest percentage increases were in the “Out of Pocket Health Care” and “Public Transportation” categories. 

These standards can be used in IRS collection-related matters, such requesting currently non-collectable status or an offer in compromise. Important related note: The offer in compromise booklet was also updated this month. The IRS website states that the new forms must be used if you apply for an OIC on April 25, 2022 or later.

Some of the standards can be used with no questions asked, while others serve as a ceiling (i.e. the amount that can be used is the “lesser of” the standard or what the taxpayer actually spends). For certain (and arguably, all) categories, amounts in excess of the standards are allowed if the taxpayer provides a good reason and proof.

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All of the current standard amounts are available here: IRS Collection Financial Standards.

Here are is a sampling of the changes (based on a household of one):

“No questions asked” amounts:

  • Food, Clothing, Other Items: New standard is $785, which is a 9% increase from the 2021 amount of $723. Compared to a 1% increase between the 2020 amount of $715 and 2021.
  • Public Transportation: New standard is $242, which is a 12% increase from the 2021 amount of $217. Compared to a 3% decrease between the 2020 amount of $224 and 2021.

This decrease corresponds with a more substantial increase in vehicle operating costs during the same period, and likely relates to the decreased use of public transportation during the early days of the pandemic.

“No questions asked” or “higher allowed with proof” amounts:

  • Out of Pocket Health Care under 65: New standard is $75, which is a 34% increase from the 2021 amount of $56. Compared to a 0% increase between 2020 and 2021, and a 2% increase between the 2019 amount of $55 and 2021.
  • Out of pocket health care 65 and older: New standard is $153, which is a 22% increase from the 2021 amount of $125. Compared to a 0% increase between 2020 and 2021, and a 10% increase between the 2019 amount of $114 and 2021.

“Ceiling standard” amounts (though, worth arguing for more if circumstances warrant it):

  • Vehicle Ownership Costs: New standard is $588, which is a 10% increase from the 2021 amount of $533. Compared to a 2% increase between the 2020 amount of $521 and 2021.

Local Standards such as “Vehicle Operating Costs” and “Housing and Utilities” also saw increases, although the percentage increases varied based on locality. For example:

  • Housing and Utilities (for the top three largest counties):
    • Los Angeles County (California): New standard is $2,544, which is a 7% increase from the 2021 amount of $2,367. Compared to a 1% increase between the 2020 amount of $2,335 and 2021.
    • Cook County (Illinois): New standard is $2,036, which is an 8% increase from the 2021 amount of $1,882. Compared to a 1% increase between the 2020 amount of $1,858 and 2021.
    • Harris County (Texas): New standard is $1,774, which is a 9% increase from the 2021 amount of $1,633. Compared to a 1% increase between the 2020 amount of $1,610 and 2021.

The standards are derived from various sources, such as the Bureau of Labor Statistics Consumer Expenditure Survey, Medical Expenditure Panel Survey, U.S. Census Bureau, and American Community Survey. There are at least two oddities that carry over from the previous numbers, the amount for housekeeping supplies and personal care products are less for a household of three than they are for a household of two.

Finally, the federal poverty limit was also increased earlier this year: 250% of FPL for a household of one is now $33,975, which is a 5% increase from the 2021 amount of $32,200. Compared with a 1% increase between the 2020 amount of $31,900 and 2021.

March 2022 Digest

Spring has arrived and the Tax Court has resumed in-person sessions for many locations. In Denver, we have our first in-person calendar call on Monday. I’m looking forward to it, but also need figure out if any of my suits still fit. PT’s March posts focused on issues with examinations, IRS answers, and more.

A Time Sensitive Opportunity

Loretta Collins Argrett Fellowship: The Loretta Collins Argrett Fellowship seeks to support the inclusiveness of the tax profession by encouraging underrepresented individuals to join and actively participate in the ABA Tax Section and Tax Section leadership by providing fellowship opportunities. More information about the fellowships and how to apply are in the post. Applications are due April 3.

Taxpayer Rights

The 7th International Conference on Taxpayer Rights: Tax Collection & Taxpayer Rights in the Post-COVID World: The virtual online conference is from May 18 – 20 and focuses on the actual collection of tax. The agenda and the link to register are in the post. Additionally, the Center for Taxpayer Rights is hosting a free workshop called The Role of Tax Clinics and Taxpayer Ombuds/Advocates in Protecting Taxpayer Rights in Collection Matters on May 16 and a link to register is also in the post.

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 1: Correspondence exams now account for 85% of all audits, up from about 80% in the previous two years. This post looks at data on correspondence audits and identifies a disproportionate emphasis on EITC audits which burden and harm low income taxpayers. 

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 2: This post considers the long-term goal of audits, along with recommendations for how the IRS can improve correspondence exams. Such recommendations include utilizing virtual office audits; using plain language, tailored, and helpful audit notices; and assigning the audit to one specific person at the IRS. Making correspondence audits more customer friendly could fall under the purview of the newly created IRS Customer Experience Office.

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Opportunities for Improving Referrals by VITA Sites to LITCs: Taxpayer rights could be better protected if VITA sites better understood when a referral to an LITC may be necessary and how to make such a referral. This post explores opportunities to improve this process, including a training initiative begun by the Center for Taxpayer Rights.

Tax Court Updates and Information

Tax Court is on the Road Again: The Tax Court officially resumed in-person calendars on Monday, February 28, but select calendars are still being conducted remotely. Practitioners who have recently attended in-person calendars share more information about what it’s like to be back.

Ordering Documents from the Tax Court: A “how to” on ordering documents from the Court. Phone requests are currently the only way, but in-person requests may resume once the Court reopens to the public. Both options come with a per page or per document fee.

Tax Court Proposed Rule Changes: The Tax Court has proposed rule changes which are largely intended to clean up language or more closely conform the Tax Court rules to the Federal Rules of Civil Procedure. It invites public comments on the proposals by May 25, 2022.

Tax Court Decisions

Tax Court Takes Almost Five Years to Decide a Dependency Exemption Case: Hicks v. Commissioner highlights the procedures required to claim a qualified child as a dependent when the child does not reside with the taxpayer. The case is noteworthy for the length of time it took the Court to issue an opinion, especially because there were no continuances or other reasons for a delay.

Jeopardy Assessment Case Originating in the Tax Court: The opinion Yerushalmi v. Commissioner is rare because the Tax Court reviews whether jeopardy exists in the first instance, rather than following a district court decision. The post looks at the case, the standard of review, and the facts that can be relevant to the Tax Court when it must decide whether the IRS’s jeopardy assessment was reasonable.

Tax Court Answers

Tax Court Answers: There are issues caused by requiring the IRS to file answers in small tax cases. It delays a review of the case on its merits, the process is slow and impersonal, and there are risks that a taxpayer won’t understand what the answer says. The Court should consider conducting an empirical study, engaging with taxpayer representatives, or forming a judicial advisory committee to identify best practices.

Making the IRS Answer to Taxpayers…By Making the IRS Answer: In the first of a three-part series looking at issues with IRS Counsel answers, Caleb looks at the case of Vermouth v. Commissioner. The case emphasizes the importance of the administrative file during the pleading stages of litigation. Cases involving bad answers and their impact on the burden of proof and burden of production are also discussed.

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire: Tax Court Rule 33(b) requires a signer of a pleading to reasonably inquire into the truth of the facts stated therein. To what degree are IRS Counsel attorneys required to reasonably inquire when filing an answer? This post explores that question and sheds some light on the Court’s expectations.  

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire (Part Two): Continuing the discussion of the IRS’s responsibilities under Rule 33(b), this post looks closer at the consequences to the IRS when a bad answer is filed. Caleb examines the Court’s response in cases where an administrative file was excessively lengthy or not available quickly enough and shares the lessons to be learned.

Circuit Court Decisions

Naked Owners Lose Wrongful Levy Appeal: Goodrich et. al. v. United States demonstrates the interplay of state and federal law upon lien and levy law under the Internal Revenue Code. The 5th Circuit affirmed that a taxpayer’s children had a claim against their father’s property, but only as unsecured creditors according to state law. As a result, the children’s interests were not sufficient to sustain a wrongful levy claim.

Confusion Over Attorney’s Fees in Ninth Circuit Stems from Statute and Regulation…: In Dang v. Commissioner the parties debated the starting point in which reasonable administrative costs are incurred in the context of a CDP hearing. The IRS argued it’s after the notice of determination. Petitioners argued it’s after the 30-day notice which provides the right to request a CDP hearing. The Court decided no costs were incurred before the commencement date of the relevant proceeding without deciding when that date was. The case provides another reason why the statute and regulation involving the recovery of administrative costs from administrative proceedings should be changed.

Attorney’s Fees Cases in the Ninth Circuit and Requesting a Retirement Account Levy: The concurring judge in Dang demonstrates that he understands the entire argument and finds that the exclusion of collection action from the definition of administrative proceedings is contrary to the plain language of the statute. 

Oh Mann: The Sixth Circuit Holds IRS Notice Issued in Violation of the APA; District Court in CIC Services Finds Case is Binding Precedent: The decision Mann v. United States is binding on CIC Services and is examined more closely in this post. In Mann, the Sixth Circuit found that the IRS notice at issue was invalid because the public was not provided a notice and comment opportunity. The case is significant because it is another circuit court opinion that applies general administrative law principles to the IRS.

You Call That “Notice”? Seriously?:  General Mills, Inc. v. United States involves refund claims that were made within the two-year period under section 6511, but outside of the six-month period which starts when a notice of computational adjustment is issued to partners. The Court seemingly concluded that notices, unless misleading, need only to comport with statutory requirements regardless of due process considerations. The post also evaluates and discusses the adequacy of common notices in relation to the notice of computational adjustment.

No Rehearing En Banc for Goldring: Is Supreme Court Review Possible?: The issue in Goldring was how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. The government’s rehearing en banc petition was denied leaving in place the circuit split. IRS Counsel has advised that there are thousands of similar cases, which could result in refunds of multiple millions of dollars, so it is yet to been seen if the government will petition the Supreme Court.

Challenging Levy Compliance: In Nicholson v. Unify Financial Credit Union the Fourth Circuit affirmed the dismissal of a suit to stop a levy brought by a taxpayer against his credit union. The law requires a third party to turn over the property to the IRS and then allows the taxpayer whose property was wrongfully taken to seek the return of that property from the IRS, so suing the credit union is not an effective avenue.

Offers in Compromise

Suspension of Statute of Limitations Due to an Offer in Compromise: The statute of limitations on when the IRS can bring suit to reduce a liability to judgment is at issue in United States v. Park. An offer in compromise suspends the collection statute and can give the IRS more time than a taxpayer would expect. It’s good idea to consider the risks before submitting an offer.

Public Policy and Not in the Best Interest of the Government Offer in Compromise Rejections: Cases where the IRS rejects an offer in compromise based on public policy or for not being in the best interest of the government are reviewed to better understand the reasons for such rejections. The IRS may look at past and future voluntary compliance and criminal tax convictions. The IRS should make offer decisions easily reviewable to provide more transparency in this area.

Correction on Making Offers in Compromise Public: Keith has learned that the IRS has updated the way in which the public can inspect accepted offers. It is by requesting an Offer Acceptance Report by fax or mail. The report, however, only contains limited and targeted information, so FOIA is still the only way to receive broad and general information.

Bankruptcy and Taxes

General Discharge Denial in Chapter 7 Based on Taxes: In Kresock v. United States, a bankruptcy court’s denial of discharge was sustained by an appellate panel due tothe debtor’s bad behavior in connection with his tax debts. It is seemingly unusual for a general discharge denial to occur where the basis for denial is tax related.

Miscellaneous

The Passing of Michael Mulroney: Les and Keith share remembrances of Michael Mulroney, an emeritus professor at Villanova Law School.

Congress Should Make 2022 Donations to Ukraine Relief Deductible in 2021: In order to encourage taxpayers to make donations in support of Ukraine, this post recommends that Congress create a deduction similar to the one permitted for the Indian Ocean Tsunami Act, which allowed deductions made in the current tax year to be claimed on the prior year’s return.

Correction on Making Offers in Compromise Public

On February 21, 2022, I wrote a post because of the FOIA case involving EPIC v. IRS, 128 AFTR 2d 2021-6808 (DDC 2021).  My description of the EPIC case was accurate and my conclusion on how to get information about offers in compromise from the IRS was accurate – use FOIA; however, my description of the IRS method for delivering information about accepted offers in compromise was outdated.  I thank Steve Bauman of IRS SB/SE Collection for setting me straight.

In the earlier post I wrote about the system the IRS had devised for allowing public inspection of accepted offers.  The system did not make sense to me and was criticized in a TIGTA report in 2016 to which I cited in the post.  The IRS took the criticism from TIGTA to heart and revamped the system for accessing accepted offers.  I cannot say that I find the new system very user friendly for reasons I will describe further below, but it is not a system which will cost $100,000 per offer viewed which is what TIGTA calculated was the per view cost of the prior system.

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The IRS closed the public reading rooms as the depository of accepted offers back in 2018 and now keeps all accepted offers in a computer database that inquiring persons can access through the process described below:

Public Inspection files contain limited information regarding accepted Offers in Compromise such as the taxpayer name, city/state/zip, liability amount, and offer terms. View a sample Form 7249, Offer Acceptance Report PDF, to see the information you will receive by requesting a copy of a public inspection file.

The IRS makes available for public inspection a copy of Form 7249, Offer Acceptance Report, for one year after the date of acceptance.

If you wish to submit a request, complete and send the Offer in Compromise Public Inspection File Form PDF [aka Form 15086.] We will respond in 15 business days. Fax is the preferred method; if mailing, allow an additional 5 business days for a response.

If you link to the Offer Acceptance Report, you will see that you obtain very little information about the person or the offer.  As I mentioned in my original post several years ago about making offers public, I don’t find the information the IRS chooses to make public particularly helpful for stopping the type of abuse and scandal that caused offers to be made public in the first place.  Here’s my brief discussion of the history behind making offers public:

In the early 1950s, a scandal came to light in which an IRS employee used the compromise provisions to write off the liabilities of members of the criminal element.  The employee was prosecuted (see page 148 for a brief discussion of the events) and President Truman issued an executive order requiring that the IRS make accepted offers public.  Subsequently, Congress passed IRC 6103(K)(1) which provides for public inspection and copying of accepted OICs. 

You can look at the information provided on Form 7249 and decide for yourself if that information will assist in ferreting out inappropriate offers that might cause a scandal.

Moving past the information on the publicly available form which has not changed, I need to explain how the IRS has made its offer disclosure system better.  I think it is better but still not what it should be.  Gone are the remote reading rooms.  In their place the IRS has digitized its system for storing and retrieving Forms 7249.  Now, you send a request to the IRS via fax using the inspection file form linked above.  The problem with this form is that it will only cause the IRS to send you information about offers you already know about.  The first box on the form requests you to

Identify the Accepted Offer in Compromise (e.g. offer number, name, state) as specifically as possible below.

You can only do that if you already know about the offer.  How many people are looking for offers who already know an offer exists.  Maybe lots of people but I am unconvinced.  There is now way to browse through accepted offers to try to get a sense of what was accepted.  You must make a targeted request to use the new system.

The new system eliminates the wasteful reading room.  For that it is to be applauded.  If the goal is to prevent another scandal like the one in the 1950s, I think more information needs to be provided on Form 7249 and the accepted forms need to be browsed.

The IRM was updated in December of 2019 and provides the following guidance:

5.8.8.9 (12-17-2019)

Public Inspection File

1. Public inspection of certain information regarding all offers accepted under IRC § 7122 is authorized by IRC § 6103(k)(1).

2. Treasury Reg. § 601.702 (d) (8) requires that for one year after the date of execution, a copy of Form 7249 Offer Acceptance Report, for each accepted offer with respect to any liability for a tax imposed by Title 26, shall be made available for inspection and copying. A separate file of accepted offer records will be maintained for this purpose and made available to the public for a period of one year.

Note: 

Revenue Ruling 117, 1953-1 C.B. 498 complements Treasury Reg. § 601.702(d)(8) and explains that Form 7249 serves two different purposes. First, it provides the format for public inspection, which is mandated by Executive Order 10386. Second, it satisfies the filing requirement and other criteria arising under section 7122(b).

3. For each accepted offer, a copy of the Form 7249 should be uploaded to the PIF SharePoint site. Form 7249 must be free of any PII.

4. The office that has accepted the offer will be responsible for providing the Form 7249. The PIFs should be uploaded, without delay, to the PIF SharePoint site after acceptance.

5. The PIF must be:

– Maintained for one-year.

– Uploaded in the appropriate monthly folder and designated location based on the taxpayer’s entity address at the time of acceptance.

– Created with the established naming convention for uploading documents to the PIF SharePoint site.(Offer number. Name Control. Date Accepted) i.e. (1234567890.ABCD.MMDDYY)

– If within one year of acceptance a Form 7249 needs to be corrected (e.g. to remove periods that were discharged in bankruptcy, compromise of a compromise, or to obtain the signatures required in Delegation Order 5-1), the original Form 7249 should be deleted from the PIF SharePoint site, and the corrected Form 7249 uploaded with the same naming convention

6. Due to the potential disclosure of Personal Identifiable Information (PII) the Form 7249 will be reviewed and any PII will be redacted.

7. Memphis COIC will be the centralized PIF site which will monitor and track all Form 15086 PIF requests. Requests for OIC PIF will be provided by mail or fax per the instructions on www.irs.gov, the taxpayer will complete and submit Form 15086. If a request is received to copy more than 100 pages, contact OIC Collection Policy.

Note: 

A visitors log with the Form 15086 information will be retained on the PIF Sharepoint site. The visitor log book and the Form 15086 will be maintained by Memphis COIC.

I asked Steve how someone would make a broad request.  He said that for those seeking large volumes of data that would point to trends such as numbers of offer accepted, submitting a FOIA request would be necessary.  That’s why I said at the outset that although I wrongly described the continued existence of the reading rooms, the bottom line is that FOIA may be the only way to obtain meaningful information about accepted offers (as meaningful as you can get with the information provided on Form 7249) is by making a FOIA request.  I didn’t ask and it’s not clear to me if a FOIA request can allow someone to obtain information about offers going back past one year

Aside from my continued disappointment at the amount of information available and the process for getting the information, I want to thank Steve for taking the time to set me straight.  He disclosed useful information to me about the process of obtaining information about offers.

Public Policy and Not in the Best Interest of the Government Offer in Compromise Rejections

In the first year of this blog, I wrote a post on the case of Anderson v. Commissioner, 2013-261, questioning why the Settlement Officer (SO) in Appeals did not reject a taxpayer’s offer by citing public policy grounds.  In that case the Tax Court remanded a Collection Due Process (CDP) determination because the SO’s basis for rejecting an offer of a very sick taxpayer did not provide sufficient reasoning.  I pointed out in my post that the SO could have rejected the offer based on public policy grounds, and I thought it unlikely the Tax Court would second guess such a determination by the SO on the facts of that case since the taxpayer had criminal tax convictions.

Today, I write about a case in which the IRS rejected the taxpayer’s offer as not in the best interest of the government (NIBIG), a policy-based decision but one separate from public policy rejection according to the Internal Revenue Manual as discussed below.  The Tax Court sustains the determination in a CDP case.  The case of O’Donnell v. Commissioner, T.C. Memo 2021-134, does not involve an individual convicted of a tax crime, which I think provides a strong cover for the IRS in a challenge to a NIBIG or public policy rejection, but does involve someone with a long history of bad tax behavior.  Since many offer candidates come hat in hand seeking an offer after long periods of bad tax behavior, I found today’s case interesting.  The relative ease with which the Tax Court sustained the NIBIG rejection suggests to me that it will rarely second guess such a determination by the IRS.

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I don’t know how many offers get rejected each year on NIBIG or public policy grounds.  As discussed in my recent post on the EPIC case, and the post to which it links discussing a TIGTA report with a suggestion to put this information online, public information about offers is hard to come by, making it difficult, if not impossible, to ascertain this type of information without trying a FOIA request.  Even if you get to the publicly available information, all you find is the rather sparse set of information on Form 7249 (Rev. 3-2017) (irs.gov)

No information is publicly available on rejected offers.  So, much of the information about IRS offer practice is passed from practitioner to practitioner by word of mouth.  Practices that handle large volumes of offers will have a better sense of what the IRS will accept but the information available reminds me a bit of the situation with private letter rulings.  While a prior post discusses the history behind making offers public through IRC 6103(k), that code section came into existence long before the modern offer practice at the IRS, which did not develop until 1990.  It might be time to take another look at not only how the IRS makes the information public but what information should be public.  Should the act of making an offer be public?

I mentioned in the Anderson post that at the time I wrote that post in 2013 I had recently represented an individual with a history of very bad tax behavior including a criminal tax conviction and the SO in that case had raised the specter of a public policy rejection.  Though the Villanova and Harvard tax clinics I have directed over the past decade have submitted a couple dozen offers each year, I have not since had an offer examiner or SO raise public policy as a basis for rejecting an offer.  I thought a few of the cases might have drawn such an objection based on the client’s history.  When with Chief Counsel’s Office, I reviewed hundreds of offers over a period of 15 years prior to retirement, suggested to collection that it consider a public policy rejection a few times, but rarely witnessed the IRS using public policy as a stated basis for rejection.   

So, based on my limited experience representing taxpayers, the IRS does not play the public policy rejection card very often.  Whether it formally states this as a basis for rejection, I believe that a taxpayer’s behavior giving rise to the liability for which a compromise is sought does factor into the offer examiner’s and SO’s position in unstated ways.  In the O’Donnell case, however, we have an explicit statement from the IRS rejecting his offer because of his bad behavior, allowing us to look at the reasoning behind the public policy rejection as well as the level of scrutiny the Tax Court applies in reviewing that decision.

Treas. Reg. 301.7122-1(c)(3)(ii)(A) provides that a “history of noncompliance with the filing and payment requirements of the Internal Revenue Code” indicates that acceptance of the offer would tend to undermine compliance with the tax laws.  The IRS signals that it does not want its offer examiners using this basis for rejection lightly by requiring the approval of the second level manager if the examiner seeks to reject an offer as NIBIG or on public policy grounds. 

IRM 5.8.7.7 gives details about offer rejections.  Since over half of submitted offers that pass the processability review get rejected, this IRM provision gets a fair amount of use.  IRM 5.8.7.7.1 details the basis for a NIBIG rejection while IRM 5.8.7.7.2 details the basis for public policy rejections.  I confess some confusion on the reason the IRS would choose a NIBIG rejection over a public policy rejection.  In the first paragraph describing NIBIG rejections the manual cites to Rev. Proc. 2003-71 and states:

The decision whether and when to accept an offer to compromise a liability is within the discretion of the Service. In keeping with IRM 1.2.14.1.17, Policy Statement P-5-100, an offer will only be accepted if it is determined to be in the best interest of both the taxpayer and the Service. In addition to the criteria discussed in Section 4.02, the Service may take into account public policy and tax administration concerns in determining whether an offer to compromise is acceptable.

This seems like public policy to me, but the manual clearly distinguishes between the two types of rejections.  While I mentioned above that a criminal tax conviction could provide an easy basis for a public policy rejection, the manual provision dealing with public policy rejections, IRM 5.8.7.7.3 provides

(4) An offer will not be rejected on public policy grounds solely because:

– It would generate considerable public interest, some of it critical.

– A taxpayer was criminally prosecuted for a tax or non-tax violation.

You should definitely read the manual provisions if you have a client facing a potential NIBIG or public policy rejection.  Because case law on offers only occurs in the context of CDP, the decisional law remains sparse, making the O’Donnell case all the more important for the potential insight into this type of decision that it provides.

Judge Lauber describes Mr. O’Donnell’s tax behavior in his opinion:

Petitioner failed to comply with his Federal income tax obligations for a very long time. For two decades (if not longer) he failed to file returns and failed to pay the tax shown on substitutes for return (SFRs) that the IRS prepared for him. Among the years for which he failed to meet his obligations were 2006, 2010, 2011, 2013, and 2014. The IRS for those years assessed deficiencies, additions to tax, and interest totaling more than $430,000. As of May 2016 petitioner’s outstanding liabilities for all open years exceeded $2 million.

Pretty bad but not so bad that the IRS sought to bring a criminal case against him for failure to file or evasion of payment.  As the manual suggests the IRS need not have a criminal case in order to reject based on NIBIG or public policy and a criminal conviction does not automatically result in such a rejection.

When Mr. O’Donnell submitted his offer, the IRS first rejected it because he had not paid his estimated taxes for the year of the submission.  Offer examiners love this type of rejection because it requires little effort in order to move a case off of their desk.  Unfortunately, Mr. O’Donnell’s representative wrote back and pointed out he did not have an obligation to make estimated tax payments during the year at issue, sending the offer examiner back to the drawing board.  Despite his long-term bad tax behavior, Mr. O’Donnell offered the IRS $280,000, which is not chump change and the IRS calculated that his reasonable collection potential (RCP) was $286,744.  So, his offered amount closely fit the IRS criteria.  Mr. O’Donnell’s licenses related to his insurance and financial business had been revoked so his representative argued that his future earnings potential was not at all clear. 

Upon reconsideration, the offer examiner, presumably having gotten the higher level approvals required by the manual, rejected the offer on a NIBIG basis.  Because a notice of federal tax lien (NFTL) had been filed while the offer was pending (raising serious questions why the NFTL had not been previously filed with an outstanding liability of this amount), Mr. O’Donnell took the opportunity to bring a CDP case.  The SO reviewing his case sustained the determination to reject the offer, stating:

acceptance of his offer was not in the Government’s best interest given his history of “blatant disregard for voluntary compliance.” Because offer acceptance reports are available to the public under section 6103(k)(1), the Appeals Office concluded that acceptance of petitioner’s OIC would “diminish future voluntary compliance.”

Apparently, the SO had not read my prior blog post or the TIGTA report and did not realize how few people actually read offer acceptance reports and how little those reports could possibly diminish the public’s view of voluntary compliance, but it’s hard to argue with the conclusion that Mr. O’Donnell had exhibited a blatant disregard for voluntary compliance.  Despite the determination, the SO offered a partial pay installment agreement that seemed pretty reasonable.  While orally agreeing to this offer, Mr. O’Donnell did not follow through to sign the agreement, resulting in the determination letter sustaining the filing of the NFTL.

In the Tax Court, the IRS filed a motion for summary judgment.  The Tax Court notes that it is only looking to see if the decision to reject the offer was “arbitrary, capricious, or without sound basis in fact or law.”  Mr. O’Donnell argued that he offered an amount equal to 97.6% of the RCP.  The Court cites to the NIBIG manual provisions discussed above and to Mr. O’Donnell’s long history of non-compliance while he ran a successful insurance and finance business in finding that the decision to reject the offer was “well within the guidelines set forth in the IRM. We have repeatedly held that an SO does not abuse his discretion when he adheres to published IRM collection guidelines.”

The decision does not surprise me.  I think the hardest thing for the IRS was having an offer examiner willing to get the necessary approvals for the NIBIG rejection but after that, with these facts, the result was hard for Appeals or the Tax Court to second guess.  Although the IRS’ abysmal practices in the public display of offer information makes it impossible to easily know how many times it makes a NIBIG or public policy rejection, my experience tells me it does not do so very often.  When it does, the taxpayer will struggle to overcome the determination even when offering an amount equal to the RCP.  To get this offer accepted, I think Mr. O’Donnell may have needed to have offered something high enough above the RCP to make it an offer the IRS could not refuse.

Suspension of Statute of Limitations Due to an Offer in Compromise

In United States v. Park, 128 AFTR 2d 2021-6390 (2021), aff’d 128 AFTR 2d 6394 (2021) the magistrate judge, sustained by the district court judge, grapples with the statute of limitations on collection and whether the IRS has timely brought a suit to reduce a liability to judgment.  The court determines that the IRS brought the suit timely because of the submission of an offer in compromise by the taxpayer.  The case provides the opportunity to discuss not only the way the statute of limitations works in this situation but things taxpayers should consider when deciding to file an offer in compromise.

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The collection statute of limitations (CSED) is 10 years from the date of assessment – that means each assessment, since for some taxpayer periods a taxpayer could have multiple assessments creating multiple CSEDs.  If the IRS wants to sue someone to reduce the assessment to judgment or to foreclose a tax lien or similar collection suit, it must do so within the CSED.  When that period expires, the IRS loses its ability to collect both administratively or by bringing a suit.  So, when the IRS brings a suit, the existence of an open CSED marks one of the things that it must prove.  Typically, the IRS brings these suits close to the CSED for practical reasons having to do with trying to collect administratively, if possible, before turning to litigation and because the Department of Justice Tax Division attorneys who bring these cases tend, like attorneys everywhere, to wait until the last minute before acting.

The IRS assessed a liability against Ms. Park for 2005 on October 1, 2007 and for 2006 on September 24, 2007.  The initial CSED for these liabilities runs on October 1, 2017 and September 24, 2017.  On October 31, 2018, the IRS filed suit.  Now, it must show that something kept open the CSED or it will lose quickly.  Here, both parties agreed that Ms. Park had filed an offer in compromise.  The question became how the offer impacted the CSED.

Although she submitted the offer in March of 2008, the court cited the language of Form 656 in determining the start date for the suspension of the CSED:

(k) The offer is pending starting with the date an authorized IRS official signs the form. The offer remains pending until an authorized IRS official accepts, rejects, returns, or acknowledges withdrawal of the offer in writing. If I/we appeal an IRS rejection decision on the offer, IRS will continue to treat the offer as pending until the Appeals Office accepts or rejects the offer in writing.

Here, the parties agreed that the beginning of the suspension occurred on April 17, 2008 when the authorized IRS official signed the Form 656.  Note that COVID could create a long gap between the submission of an offer and the signature of the authorized official because the authorized officials, like almost all IRS employees, stayed away from the office for months.  Finding this date will provide critical information in any contest of this type.  Usually, but not always, the beginning date does not present significant challenges.

As with many offers, the ending involved a series of steps.  The offer examiner rejected the offer on August 19, 2008.  Pre-COVID, the four-month period between formal receipt and decision was pretty normal.  This case almost perfectly reflects a normal offer submitted by the tax clinic at Harvard.  Usually, students finish up an offer in late March or early April and the offer group calls up in August requesting more information at a time when no students work in the clinic and I must do all of the follow up work to complete an offer without student assistance.  Fall semester offers almost always seem to generate a contact in May once the students leave the clinic to begin exams.

Here, Ms. Park appealed the offer rejection on September 18, 2008.  Following her appeal, a Settlement Officer sustained the rejection on February 26, 2009.  She, however, did not stop there and requested that the Appeals Team Manager look at the offer rejection.  The manager wrote to Ms. Park on July 6, 2009 also sustaining the rejection.

She argues that the offer suspension ended when the Settlement Officer rejected her offer and the IRS argues that the suspension period did not end until the Appeals Team Manager sent the rejection letter.  Here are the respective calculations:

The IRS submitted to the court its official transcript, seeking to use the transcript to prove the correctness of its determination of the July 6, 2009 date as the correct date for calculating the tolling.  It argued that the transcript Form 4340 was entitled to a presumption of correctness unless she presented some evidence to the contrary.

I don’t think the transcript should make much difference in a case like this where the facts are known.  The fact that the IRS put its interpretation of the law on an official transcript should carry no weight in assisting the court to find the right conclusion.  The real issue turns on the effect of asking for the Settlement Officer’s manager to overturn the decision of the Settlement Officer.  Does the taxpayer get that consideration during a period in which the statute of limitations has started running again, or by asking for this additional review does the taxpayer further suspend the statute?

Ms. Park cites to the Internal Revenue Manual in support of her position, but unfortunately for her the manual actually delegates the authority to accept or reject an offer to the manager and says it cannot be redelegated.  For this reason, the court rejects her argument as it should.

She next makes an argument I have seen many taxpayers make.  She argues that the IRS release of the notice of federal tax lien supports her claim that the statute had run.  The IRS counters that the lien release resulted from a mistake.  The statute allows the IRS to correct this mistake and that the release itself does not extinguish the liability.

The case is unremarkable but provides a reminder that going up the chain provides a further suspension of the statute of limitations on collection.  She made her offer early in the life of the statute and probably did not pay too much attention to the statute until many years later.  Since the taxpayer does not control when or if the IRS will seek to bring a collection suit, there is not much she can do as she tries to wait out the statute hoping that her liabilities will drop off the books.

In the clinic we do get clients who come to us near the end of the CSED as well as at the beginning.  We are reluctant to file an offer in the last year or two prior to the CSED because of the suspension it brings.  Of course, if the client wants to do an offer after a discussion of its consequences, it’s fine to do so.  It also makes a difference whether the client has the type of profile that would cause the IRS to bring a suit.  Most clinic clients have few assets so do not present the type of case likely to cause the IRS to bring a collection suit.  Before it brings such a suit, the revenue officer handling the case needs to show that obtaining the extended statute of limitations the judgment will bring has a relatively high likelihood of allowing the IRS to collect even though it has failed to do so during the initial 10 year CSED.

Making Offers in Compromise Public

I wrote a post several years ago about the public reading rooms that exist in a few cities around the country where the IRS makes public, for one year, the offers in compromise for the region covered by the city which houses the reading room.  I would be curious to learn how accessible those reading rooms have been during the pandemic considering they were not very accessible prior to the pandemic.  Because I believe very few people visited these reading rooms prior to the pandemic, I doubt that much has been lost if they have been relatively inaccessible the past couple years.  Back in 2016 when I wrote that post, TIGTA estimated that it cost the IRS about $100,000 per public viewing to maintain its Rube Goldberg system of publicly disclosing accepted offers.

TIGTA suggested that putting accepted offers online would provide a meaningful method for making offers public.  To my knowledge nothing has been done to implement TIGTA’s suggestion even though it would potentially save the IRS money while granting the public access.  Perhaps if the IRS had accepted TIGTA’s proposal, the case discussed in this post would not exist.

If you want to know more about accepted offers and are unwilling to seek to visit the public reading rooms, a better path may exist as suggested by a recent case.  This better path, if that accurately describes multi-year litigation, is not better than TIGTA’s suggestion to put this information online but may be better than cross-country travel to the well-hidden reading rooms.  Read on.

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The recent case of EPIC v. IRS, 128 AFTR 2d 2021-6808 (DDC 2021) provides another way to learn about offers in compromise – the Freedom of Information Act (FOIA).  EPIC is an acronym for Electronic Privacy Information Center.  It sent a FOIA request to the IRS seeking, inter alia, certain tax records related to offers in compromise (OICs) involving former President Donald Trump and business entities associated with him.  As you might expect, the IRS opposed this request but before it opposed the request in court it failed to respond to the FOIA request, causing EPIC to bring a suit in order to seek to have a district court order the IRS to turn over this information, some of which might have been available in the OIC reading room in Buffalo, N.Y. based on the discussion in the prior blog post and where the former President lived.

EPIC requested:

((1)) All accepted offers-in-compromise relating to any past or present tax liability of Donald John Trump, the current President of the United States.

((2)) All other “return information…necessary to permit inspection of [the] accepted offer[s]-in-compromise” described in Category 1 of this request. Records responsive to Category 2 include, but are not limited to, “income, excess profits, declared value excess profits, capital stock, and estate or gift tax returns for any taxable year,” as applicable.

Similarly, with respect to the records of business entities associated with the former President, EPIC requested:

((3)) All accepted offers-in-compromise relating to any past or present tax liability of any entity identified in Appendix A [a fifteen-page list of the business entities associated with President Trump] of this request.

((4)) All other “return information…necessary to permit inspection of [the] accepted offer[s]-in-compromise” described in Category 3 of this request. Records responsive to Category 4 include, but are not limited to, “income, excess profits, declared value excess profits, capital stock, and estate or gift tax returns for any taxable year,” as applicable.

The IRS seeks to dismiss the suit, arguing that the FOIA request fails because it falls within Exemption 3 which “allows an agency to withhold records `specifically exempted from disclosure by statute’ if the statute meets certain criteria.”  The court notes that the parties agree that the requested records would fall within the ambit of FOIA but for the exception.  It states:

Thus, whether EPIC has stated a claim turns on whether the records at issue are covered by any of the thirteen exceptions such that the IRS must disclose them, which would in turn subject them to EPIC’s FOIA request. EPIC relies on § 6103(k)(1), which provides that “[r]eturn information shall be disclosed to members of the general public to the extent necessary to permit inspection of any accepted offer-in-compromise under section 7122 relating to the liability for a tax imposed by this title.” 26 U.S.C. §§ 6103(k)(1).

The IRS argues that the exception applies because EPIC lacks the taxpayer’s consent to receive these records and has no qualifying material interest in the records as described in § 6103(e).  EPIC says it doesn’t need consent or a qualifying material interest because of the requirement to make OICs public.  The court states:

There is no basis in the statute’s text or structure to import these requirements into § 6103(k)(1), which, after all, permits disclosure to “members of the general public.”

So, the IRS next argues that (k)(1) does not create a disclosure obligation to produce records to EPIC but the court quotes from the statute that Section 6103(k)(1) states that return information “shall be disclosed to the extent necessary to permit inspection of any accepted offer-in-compromise.”

Next the IRS argues:

that the phrase “to the extent necessary to permit inspection” gives it discretion to decide both the records it must disclose and the means necessary to disclose them. The Court agrees that phrase limits the records the IRS must disclose to those necessary to permit inspection of any accepted offer-in-compromise. But the IRS’s interpretation goes further. In its view, because the Secretary of the Treasury has by regulation established Public Inspection Files and a related non-FOIA in person inspection process—and determined that nothing more is “necessary” under § 6103(k)(1)—the exception does not afford EPIC any disclosure rights under FOIA.

The court disagrees.  It sees nothing in the statute that prohibits disclosure to EPIC and finds also that case law does not support the position that the IRS has no disclosure obligations to EPIC under (k)(1).  It finds that the IRS must disclose information to EPIC “to the extent that information is necessary to permit inspection of an accepted offer-in-compromise.”  The court does, however, make it clear that EPIC cannot receive former President Trump’s tax returns as part of this request.

I don’t know if EPIC received anything in the end.  I would think that if it did we would have learned about it in the popular press.  The case is not important to me as a way to learn the former President’s tax information but as a way of opening a window to offers in compromise generally.  The court does not seem to limit the time frame of the requirement to respond to the request.  So, FOIA might allow a party to obtain offer information beyond the information for only one year provided in the remote and relatively inaccessible reading rooms.  It might allow targeted requests for OIC information regarding individuals or entities but also might allow for broad based information requests that could save someone the time and effort of getting to one of the reading rooms. 

I do not have any projects going where I want to learn about offers the IRS has accepted.  If I did, EPIC seems to have laid out a path for using FOIA to bypass the remote and inaccessible reading rooms.  Hope springs eternal that the IRS might adopt TIGTA’s suggestion to put this information online, but until it does FOIA seems a better path than frequent flier miles.

2021 Year in Review – Administrative Matters Part 2

This part includes some Tax Court administrative matters in addition to those at the IRS.  Also included in this part is a reminder of the problems with the calculation of the statute of limitations on collection, changes to the FAQ policy and the new policy on offset in offer in compromise cases.

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Collection Statute of Limitations

The NTA published the National Taxpayer Advocate Objectives Report to Congress (Fiscal Year 2022) which provides some information on the glitch causing the IRS to improperly record the collection statute of limitations.  The glitch was first publicly identified in a blog post by then-NTA Nina Olson.  In that post, Nina said the IRS was working to address a glitch that was causing the IRS computer system not to recognize the CSED in certain cases in which taxpayers had sought installment agreements.  She indicated in her post that the issue surfaced two years prior in 2016 and her office had been working to identify cases. 

Her blog post identified five different buckets of cases in which the IRS was incorrectly calculating the CSED:

  • Bucket 1 = multiple pending IAs with only one corresponding rejected IA determination
  • Bucket 2 = one pending IA and one approved IA where 52 or more weeks have passed
  • Bucket 3 = multiple pending IAs with one approved IA, where 26 or more weeks have passed
  • Bucket 4 = one pending IA with one rejected IA, at least 52 weeks later
  • Bucket 5 = one pending IA, with no other action on the IA request for at least 52 weeks

Prior to her post, the IRS had agreed to review the cases TAS identified in Bucket 3 and found that 83% had incorrect CSEDs.

In 2017, TAS identified a population of taxpayer accounts with unreversed or improperly reversed pending IAs that led to incorrect CSED calculations and erroneously added time to the tax debt collection period. TAS also found inconsistent IRS procedures related to CSED guidance. The IRS agreed to correct taxpayer accounts with erroneous CSEDs and the underlying problems that led to the miscalculations.

In July 2020, TAS identified and provided the IRS with over 6,000 taxpayer accounts with CSEDs erroneously extended by one year or more. As of December 2020, the IRS had not finished reviewing and correcting these cases. TAS has recently provided the IRS with several thousand more taxpayer accounts that appear to have the CSED incorrectly extended by a year or more. Despite efforts to find and correct unreversed and improperly reversed pending IAs, TAS continues to find errors, resulting in incorrect CSED extensions of a year or more.  Even the most sophisticated taxpayers face challenges in calculating the CSED because of its complexity, as noted in this post from several years ago. 

IRS Update on FAQs

One of most commonly utilized IRS methods of explaining the tax law when it needs to get out guidance quickly has become FAQs.  Everyone understands the need for quick guidance and the fact that because of the speed in issuing guidance through FAQs the IRS does not want to be bound by this type of guidance.  It should not be bound by this type of guidance and should be applauded for quickly issuing guidance.  The concerns come when taxpayers follow this type of guidance and then the IRS changes its position.  The IRS has taken the position that taxpayers should rely on those FAQs at their own peril, as there would be no relief if the guidance turned out to be incorrect.

On Friday, October 15, 2021, the IRS finally issued guidance addressing the controversial issue of taxpayer reliance on positions the agency announces in FAQs, which are published on its website (IR-2021-202, IRS updates process for frequently asked questions on legislation and addresses reliance concerns.  The new guidance accepts two of the three recommendations made by the National Taxpayer Advocate Erin Collins in her July 7, 2020 blogpost. But, unfortunately, the new guidance suffers from the same shortcomings that attended the NTA’s recommendations.

During the week of October 19, 2021, we published a series of comments on the FAQ guidance which you can find here, here, here and here.  It was interesting for us because it was maybe the first time we had received multiple requests to publish posts on an issue.  All of the posts provide thoughtful takes on the procedure and the IRS position regarding this guidance.

Change to Offer in Compromise Policy

The new policy regarding offset in OICs represents a significant shift in collection policy for the benefit of taxpayers with accepted offers.  Kudos to the decision makers behind this policy shift.  A recent blog post from the National Taxpayer Advocate sets out the shift in policy and does a nice job of providing background as well as summarizing the new policy.  This post seeks to complement the information provided by the NTA but is somewhat duplicative.  Christine wrote a two-part blog post on offers and refunds, here and here, if you want more background on this subject.

The specific language developed by the IRS regarding the commitment of the taxpayer to give up their refund in the year of the OIC acceptance is found on page 5 of the form in section 7(e), which states:

The IRS will keep any refund, including interest, that I might be due for tax periods extending through the calendar year in which the IRS accepts my offer. I cannot designate that the refund be applied to estimated tax payments for the following year or the accepted offer amount. If I receive a refund after I submit this offer for any tax period extending through the calendar year in which the IRS accepts my offer, I will return the refund within 30 days of notification.

Even though the IRS rarely accepted OICs prior to the change in its policy in 1992, it did have an OIC program.  In the Sarmiento case, discussed below, the clinic traced this language back to at least 1964.  At that time, however, refundable credits did not exist and the policy as originally designed would not have been intended to claw them back after OIC acceptance.

For OICs accepted after November 1, 2021, the IRS will forego taking the post-OIC acceptance refund for the year of acceptance.  It will still take refunds for the periods leading up to the acceptance of the OIC (subject to the discussion of Offset Bypass Refunds (OBRs) discussed below).  The benefit to taxpayers varies based on the amount of refund they might have received for the year of OIC acceptance.  The NTA’s blog has some statistics on this; however, the individuals receiving significant refunds based on refundable credits, usually among the poorest of the taxpayers receiving acceptances, will definitely benefit.

The new policy does make clear that the IRS expects to offset any refunds related to pre-OIC acceptance tax years.  This policy makes sense.  It prevents taxpayers from delaying the submission of amended returns until after an OIC acceptance in an effort to circumvent having the refund offset.  In this way, the policy operates similarly to the requirement that taxpayers disclose their interest in potential lawsuits and other claims not yet turned into a definite amount at the time of making the OIC.  The IRS should receive these monies or at least know about them and make a judgment.  See our full post on this issue here.

Premature Assessments

The IRS was not the only place backed up because of the pandemic.  During 2020, the IRS held off on sending out notices of deficiency because of the pandemic.  Those notices went out late in 2020 and during 2021, creating a significant increase in the number of new Tax Court petitions, especially during the first half of 2021.  The Tax Court clerk’s office, like the IRS Service Centers, is not working at full strength during the pandemic because of efforts to ensure the safety of the employees.  The combination of a much higher volume of cases to process and the pandemic work restrictions created significant delays in the processing of new petitions from the Tax Court to IRS Chief Counsel, which meant that the IRS treated taxpayers as not having petitioned the Tax Court, resulting in premature assessments or inappropriate collection.

The Tax Court could have done a better job of alerting the practitioner community to the problem earlier but eventually began putting out news releases and working with Chief Counsel to notify it of new cases even before formally processing them and serving the answers.  Both the IRS and the Court react quickly to information about a premature assessment or collection; however, the high volume of pro se taxpayers filing petitions who do not know that a premature assessment should not have occurred hinders the process of identifying all of the problem cases. 

The Court’s dedicated email address for dealing with premature assessments created is taxcourt.petitioner.premature.assessment@irs.gov.  In addition to contacting the Court, reaching out to the local Chief Counsel Office will also result in assistance in fixing a premature assessment.  On December 9, 2021, the Tax Court issued a news release focused on the number of petitions filed in 2021 and the method of filing those petitions.  By the end of November, the Court had received 33,000 petitions, a significant increase from 2020 when filings were down due to COVID suppressing IRS issuance of notices that would lead to the filing of petitions.  The increase in filings coupled with the work restrictions brought on by the pandemic have led to delays in processing petitions which we have reported on previously here and here.

To provide some perspective based on recent years, below are the statistics for filing for the previous five years.  This information is taken from page 21 of the Congressional Budget Justification for Fiscal Year 2022, submitted by the Court on April 5, 2021.  This report has quite a bit of data about the Tax Court for those interested in the Court’s budget and operations.

TAX COURT CASES FILED AND CLOSED
FISCAL YEAR                         FILED              CLOSED
2016                                      28,831                       33,038
2017                                      27,091                       29,037
2018                                      25,422                       26,259
2019                                      24,364                       21,740
2020                                      16,988                       19,568


In FY 2020, of the 16,988 cases filed, 10,061 were regular cases and 6,927 were small cases. The overwhelming majority, 95%, of the cases filed in FY 2020 were based on the Court’s original deficiency jurisdiction granted by Congress.  The mix of regular and small cases filed in 2020 veers away from the mix in recent years which has run closer to 50-50.  The percentage of deficiency cases is higher than normal, reflecting the shutdown of collection for much of the year.

Tax Court Proceedings

The Tax Court stopped holding in-person trials in March of 2020 as the world recognized the dangers posed by COVID.  It cancelled the remaining trial calendars in the Winter session that year and all of the calendars in the Spring session, using the time to develop an online platform for interacting with taxpayers and the IRS.  It held all of its 2021 trial calendars remotely using the online platform before announcing a return to in-person proceedings at the beginning of 2022.  We discuss the announcement here.  As it returns to in-person proceedings, the Court remains willing to hold remote proceedings at the request of the parties.  Many of the hearings the Court holds can occur just as effectively in a remote setting as in-person.  The pandemic may have hastened a move to hybrid court proceedings that could make the Tax Court more efficient.  It has also caused many, if not more or all, of the judges to begin interacting with petitioners on a regular basis prior to calendar call.  This is a good thing.

2021 Year in Review – Cases

Despite the ability to access most courts only remotely for much if not all of the year, 2021 still produced a number of important tax procedure decisions.  Perhaps judges could produce more opinions because they did not need to travel or to hold lengthy in-person trials.  This post shows that not all cases are Graev cases.

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Supreme Court matters

The Supreme Court handed down a unanimous opinion in CIC Services.  The Court holds that the Anti-Injunction Act does not bar a suit challenging an IRS notice that requires a non-taxpayer to provide information even though the failure to provide the information could result in a penalty.  Posts can be found  here, here, here and here.

The Supreme Court rejected the request for certiorari in Organic Cannabis v. Commissioner seeking a determination that the time period for filing a petition in Tax Court in a deficiency case is a claims processing period rather than a jurisdictional one but granted certiorari in Boechler v. Commissioner regarding the same issue but in the collection due process context.  The Boechler case will be argued before the Supreme Court on January 12, 2022.

Circuit Court matters

Coffey v. Commissioner, –F.3d – (8th Cir. 2021)  – in a case that fractured the Tax Court about as badly as it can be fractured, the Eighth Circuit, after initially projecting harmony and uniformity in its decision, fractured as well, reversing its initial decision which overturned the Tax Court’s fully reviewed opinion.  This action briefly reopened the door on the question of adequate filing of a return for purposes of triggering the statute of limitations, before reinstating the original holding through a new opinion by the panel. That new panel opinion can be found here. 

Taxpayers claimed that they were residents of the US Virgin Islands in 2003 and 2004 and filed returns with the Virgin Islands tax authority.  That taxing authority has a symbiotic relationship with the IRS and sent to the IRS some of the documents it received.  The IRS took the documents it received and concluded that M/M Coffey should have filed a US tax return.  Based on that conclusion, it sent the Coffeys a notice of deficiency.  The Coffeys argued that the notice of deficiency was sent beyond the statute of limitations on assessment since their filing with the US Virgin Islands tax authority also served as a filing with the IRS, starting the normal assessment statute.  The government argued that because the Coffeys did not file a return with the US, no statute of limitations on assessment existed.  After only eight years, the Tax Court sided with the Coffeys.  A mere three years later, the Eighth Circuit reversed in a unanimous three judge panel. 

On February 10, 2021, the Eighth Circuit granted a panel rehearing but denied a rehearing en banc.  Disagreements with the outcome of a circuit court usually result in a request for a rehearing en banc rather than a rehearing with the very panel that entered the decision.  So, this is a bit of an unusual twist in a case with many twists. After the vacating of the original opinion, the same panel issued a new opinion with some minor differences.

The result of the Eighth Circuit’s decision allows the IRS to come in many years later to challenge residence of individuals claiming Virgin Islands residence.  If the Coffeys had succeeded in this case, the procedural issue would have turned into a substantive victory, since the IRS would not have been able to make an assessment against them for the years at issue.

Gregory v. Commissioner, — F.3d – (3rd Cir. 2020) – This case was decided at the very end of 2020 so it is included here as it came out during last year’s end of year review and also because it is a case argued on appeal by the Tax Clinic at Harvard so including it provides another opportunity to showcase the work of the students.  The issue before the Third Circuit was whether the taxpayers’ use of Forms 2848 Power of Attorney and 4868 Request for Extension of Time constituted “clear and concise notice” of a change of address to the IRS pursuant to Treasury Regulation §301.6212-2.  Although filed as a non-precedential opinion, the outcome is a clear example of how the IRS cannot simply ignore the actual knowledge it has of a taxpayer’s address when issuing a Statutory Notice of Deficiency pursuant to I.R.C. §6212(b)(1), even if that taxpayer failed to follow the IRS’ prescribed procedures for changing their address. 

An odd ending to this case occurred when the Third Circuit returned it to the Tax Court.  Rather than simply entering an opinion for the taxpayers, the Court issued an order restoring the case to the general docket.  That order made no sense because the Gregorys unquestionably filed their Tax Court petition late.  This required the filing of a motion to have the court make a determination that the notice of deficiency was invalid, which it eventually did with no opposition from an equally confused government counsel.

In Patrick’s Payroll Services, Inc., v. Commissioner, No. 20-1772 (6th Cir. 2021), the Sixth Circuit upheld the decision of the Tax Court denying the taxpayer the opportunity to litigate the merits of the underlying tax because of a prior opportunity to discuss settlement with Appeals.  Guest blogger Chaim Gordon wrote about this case after the Tax Court’s decision and while the case was pending before the Sixth Circuit.  Chaim pointed out some of the novel arguments the taxpayer was making.  Unfortunately for the taxpayer, the Sixth Circuit was not buying what they were selling.

The 11th Circuit upheld the decision of the Tax Court in Sleeth v. Commissioner, — F.3d — 2021 WL 1049815 (11th Cir. 2021), holding that Ms. Sleeth was not an innocent spouse.  The Sleeth case continues the run of unsuccessful taxpayer appeals of innocent spouse cases following the major structural changes to the law in 1998. The Tax Court found three positive factors and only one negative factor applying the tests of Rev. Proc. 2013-34.  Yet, despite the multitude of factors favoring relief in each case, the Tax Court found that the negative knowledge factor required denial of relief.  This case follows the decision in the Jacobsen case from 2020 in which the Tax Court denied relief to someone with four positive factors for relief and only knowledge as a negative factor.  The pattern developing in these cases suggests that the Tax Court views the knowledge factor as a super factor, despite changes in IRS guidance no longer describing it as such.  Only economic hardship seems capable of overcoming a negative determination on knowledge.  In this post, Carl Smith discussed the Seventh Circuit’s decision in the Jacobsen case.  Both cases were argued on appeal by the Tax Clinic at Harvard.  The clinic also filed an amicus brief in the case of Jones v. Commissioner, TC Memo 2019-139, set to be argued soon before the 9th Circuit.

Lindsay v. U.S. is the latest case to apply the principle that United States v. Boyle essentially stands for the position that taxpayers have a nondelegable duty to be aware of tax deadlines. An agent’s incompetence or willful misconduct will not excuse the taxpayer from delinquency penalties.  Lindsay was incarcerated and executed a POA to Bertelson, an attorney, to manage his affairs, including filing his tax returns.  The attorney assured Lindsay he was doing so for the years 2012-15; instead he failed to file the returns and for good measure embezzled hundreds of thousands of dollars. The actions resulted in Lindsay receiving $705,414.61 in actual damages and $1 million in punitive damages.  Lindsay eventually filed his tax returns and paid over $425,000 in delinquency penalties. He filed a claim for refund; IRS rejected and he filed a suit in district court. The district court, contrary to the magistrate’s recommendation, granted the government’s motion to dismiss, citing Boyle as precluding a claim for relief. Following a timely appeal, the Fifth Circuit affirmed. In so doing, it applied Boyle to Lindsay’s somewhat sympathetic circumstances.

Tax Court

In Ramey v Commissioner, 156 T.C. No. 1 (2021), the Tax Court determined in a precedential opinion that when the IRS issues a notice of decision rather than a notice of determination and the taxpayer has filed the collection due process (CDP) request late, the Court lacks jurisdiction to hear the case.  The taxpayer, a lawyer, represented himself and pegged his arguments to last known address rather than jurisdiction.  Nonetheless, the decision expands the Court’s narrow view of jurisdiction to another setting without addressing the Supreme Court precedent on jurisdiction and its impact on the timing of the filing of documents.

Galloway v Commissioner, TC Memo 2021-24: This case holds that a taxpayer cannot use the CDP process to rehash a previously rejected offer in compromise (OIC).  Mr. Galloway actually submitted two OICs that the IRS rejected.  As an aside, from the description of the OICs in the Court’s opinion, the rejections seemed appropriate strictly from an asset perspective, since he did not want to include the value of a car he owned but allowed his daughter to use. 

The case of Mason v. Commissioner, T.C.M. 2021-64 shows at least one benefit of submitting an offer in compromise (OIC) through a request for a collection due process (CDP) hearing.  As part of his lessons from the Tax Court series, Bryan Camp has written an excellent post both on the case and the history of offers. 

Friendship Creative Printers v. Commissioner, TC Memo 2021-19: This case holds that the taxpayer could raise the merits of delinquency penalties by the backhanded method of challenging the application of payments.  Taxpayer failed to pay employment taxes over an extended period of time and failed to file the necessary returns but at some point made payments on the earliest periods.  In the CDP hearing, taxpayer argued satisfaction of the earliest periods and eventually provided an analysis showing payments equal to the tax paid.

The Court treated this as a challenge to the merits of the delinquency penalties imposed.  Unfortunately, the taxpayer did not designate its payments, which meant that the payments it made were not applied in the manner it expected and argued in the CDP hearing.  Taxpayer also looked at the transcripts without appreciating the impact of accruals not reflected in the assessed portion of the transcript but accruing nonetheless.

Reynolds v. Commissioner, TC Memo 2021-10: This case holds that the IRS can collect on restitution based assessments even when the taxpayer has an agreement with the Department of Justice to make payments on the restitution award.  Taxpayer’s prosecution resulted in a significant restitution order. He agreed to pay DOJ $100 a month or 10% of his income.  At the time of the CDP case he was not working and did not appear to have many prospects for future employment. Citing Carpenter v. Commissioner, 152 T.C. 202 (2019), the Tax Court said that the IRS did have the right to pursue collection from him.  Obviously that right, at least with respect to levy, is tempered by the requirement in IRC 6343 not to levy when it would place someone in financial hardship, but no blanket prohibition existed to stop the IRS from collecting and therefore to stop it from making a CDP determination in support of lien or levy. The case is a good one to read for anyone dealing with a restitution based assessment to show the interplay between DOJ and IRS in the collection of this type of assessment, as well as to show the limitations of restitution based assessments compared to “regular” assessments.

BM Construction v. Commissioner, TC Memo 2021-13: This case involves, inter alia, a business owned by a single individual and the mailing of the CDP notice to the business owner rather than the business.  The Tax Court finds that sending the CDP notice to the individual rather than the business does not create a problem here, since the sole owner of the business would receive the notice were it addressed to the business rather than to him personally.

Shitrit v. Commissioner, T.C. Memo 2021-63, points out the limitations on raising issues other than the revocation of the passport when coming into the Tax Court under the jurisdiction of the passport provision.  Petitioner here tries to persuade the Tax Court to order the issuance of a refund but gets rebuffed due to the Court’s view of the scope of its jurisdiction in this type of case.

The case of Garcia v. Commissioner, 157 T.C. No. 1 (2021) provides clarity and guidance on the Tax Court’s jurisdiction in passport cases as the Court issues a precedential opinion to make clear some of the things that can and cannot happen in a contest regarding the certification of passport revocation.  I did not find the decision surprising.  The Court’s passport jurisdiction is quite limited.  Petitioners will generally be disappointed in the scope of relief available through this new type of Tax Court jurisdiction. 

Other Courts

In Mendu v. United States, No. 1:17-cv-00738 (Ct. Fd. Claims April 7, 2021) the Court of Federal Claims held that FBAR penalties are not taxes for purposes of applying the Flora rule.  In arguing for the imposition of the Flora rule, the taxpayer, in a twist of sides, sought to have the court require that the individual against whom the penalties were imposed fully pay the penalties before being allowed to challenge the penalties in court.  The FBAR penalties are not imposed under title 26 of the United States Code, which most of us shorthand into the Internal Revenue Code, but rather are imposed under Title 31 as part of the Bank Secrecy Act.

The case of In re Bowman, No. 20-11512 (E.D. La. 2021) denies debtor’s motion for summary judgment that Ms. Bowman deserves innocent spouse relief.  On its own, the court reviews the issue of its jurisdiction to hear an innocent spouse issue as part of her chapter 13 bankruptcy case and decides that it has jurisdiction to make such a decision.  The parties did not raise the jurisdiction issue, which is not surprising from the perspective of the plaintiff, but may signal a shift in the government’s position since it had previously opposed the jurisdiction of courts other than the Tax Court to hear innocent spouse cases.