So you think the IRS should give you money and you have the opportunity for a CDP hearing… Returning to my wrongful state tax levy example may help illustrate the problems with throwing up one’s hands and cursing Greene-Thapedi for CDP’s futility.

As a refresher, in my earlier post I stated that if I had a case where the IRS took a state tax refund without giving the (legally required) prior notice, I would demand that money back in a CDP hearing. In the comments, Carl noted that every court thus far has found that the Tax Court does not have refund jurisdiction. Carl also compared the statutory language of Tax Court CDP jurisdiction (IRC § 6330(e)(1)) with that of the Tax Court’s refund jurisdiction in deficiency cases (IRC § 6213(a)). On his reading (and having no small amount of knowledge on the area of all things jurisdictional), Carl speculated that the Tax Court also likely wouldn’t find it had the injunctive grant of power to return the improperly levied state refund.

Perhaps.

In my prior two posts I think I’ve explained why I don’t think that’s the case. But let’s leave that alone for now. Instead, let’s focus on everything that would happen before actually getting to the Tax Court.

How CDP Cases Actually Play Out – Multiple Chances for Remedy

If the facts are abundantly clear that the IRS did not send the proper, legally required notice prior to levying on my state tax refund, it is possible that the CDP hearing will end without ever needing Tax Court involvement. Perhaps you get a reasonable Settlement Officer who takes seriously their statutory obligation to investigate that “the requirements of any applicable law or administrative procedure have been met.” IRC § 6330(c)(1). Clearly, they were not followed in my hypo.

Admittedly, it is an open question of whether the IRS should necessarily have to give back the state tax refund just because the applicable rules were not followed. Perhaps the IRS could make some sort of harmless error argument, if I really don’t have a good alternative to levy. But it is also pretty easy to come up with facts where the IRS’s own policies would suggest that they shouldn’t have levied -for example, if the levy would cause (or exacerbated) economic hardship.

Importantly, it is also clear that the IRS “can” give a state refund back to the taxpayer. The IRM suggests that there are a number of situations where it may be appropriate to return a state tax refund levy (see IRM 5.19.9.3.7). The IRM also suggests returning the refund if there was a finding of economic hardship. See IRM 5.1.9.3.5.1(8).

So with the right facts and a reasonable Settlement Officer the IRS just might agree to give you back the improperly levied proceeds in their (favorable) determination letter. Obviously, being provided the relief you sought, you would petition the Tax Court thereafter, and no Tax Court involvement would ever take place.

The system (in this case, buoyed by a truly “Independent Office of Appeals”) works!

Indeed, this is precisely what I suggested in my post on the CP504 Notice, where I mentioned the value of CDP while also (in the same sentence) mentioning the limitations on refund jurisdiction in Tax Court. Simply put, you can get a refund in an administrative CDP hearing that you may never get “ordered” in CDP litigation.

But what if the Settlement Officer issues an unfavorable notice of determination? Good news: you still don’t (yet) need the Tax Court to order a refund. You just need reasonable IRS Counsel after your petition.

Believe it or not, even huge bureaucracies like the IRS are ultimately made up of people -most of whom want to do the right thing. I’ve had multiple petitions on CDP determinations where there is a plain error made by IRS Appeals. On the egregious cases I’ve had, when IRS Counsel gets the petition they ask me, “what can we do to fix it?” Sometimes IRS proposes a fix that the Tax Court would not be able to order on its own. As an example, I had a CDP case where IRS Counsel proposed removing penalties as a fix, even though (in our posture) there was no possible way of the Tax Court providing that remedy.

Of course, the obvious next question is “but what if IRS Counsel doesn’t agree with you?” Well, then you just may get to a Tax Court order. But even still, I think the Tax Court can play an important role without directly ordering a refund.

Doing the Right Thing, With the Right Motivation

Back to the Schwartz opinion from my first post…

In Schwartz the Tax Court found that the petitioner didn’t owe for two years (2006 and 2007) but did owe for others. Accordingly, the conclusion of the opinion states that the Tax Court does “not sustain the proposed levy for those years.” What are the consequences of this opinion?

I suppose you could read it extremely narrowly: the IRS cannot levy for 2006 and 2007. That’s it.

Or you could read it more accurately: the IRS cannot levy and should adjust their accounts to show no balance due for those years.

There is a subtle difference between the two.

Theoretically, if the order didn’t require the IRS to adjust the account balance but only said “the IRS cannot levy” for 2006 and 2007 the IRS could still maintain that there is a balance due, and even offset against it, effectively collecting while not running afoul of the Tax Court order. This would read an opinion (and order) as only pertaining to the propriety of a levy, and not addressing the underlying rationale.   

But it is unthinkable to me that the IRS would fail to adjust the accounts, not least of all because the opinion makes explicit that the Tax Court has found no balance due. So it shouldn’t really matter if the ensuing order tacks that on… but therein lies the rub.

As I said before, Tax Court opinions matter. And this is why remands aren’t a useless remedy. I ended my first post with the hypo where the Tax Court finds that the IRS erred in failing to credit the taxpayer’s account with $5,000 on a $3,000 liability. Conceptually, not that different from Schwartz or even the issue in Melasky… albeit in my hypo, the Tax Court has a favorable finding for the taxpayer.

What happens next?

The Tax Court opinion finds that the IRS erred in failing to credit money to the taxpayer’s account. But the Tax Court order only remands the case to IRS Appeals to address this error in a supplemental hearing: it does not “order” a refund.

The opinion, frankly, should be enough to get you where you want to go. When the Tax Court kicks the case back to Appeals, the IRS should get the (literal and figurative) memo. It will either make the adjustments required of the opinion’s reasoning or be stuck in a doom-loop of remands for errors of law in its supplemental determinations.

In my experience, this is actually a pretty non-controversial understanding of how the Tax Court works in CDP, even on “vanilla” collection issues. The Tax Court almost never “orders” specific relief (e.g. “the IRS must accept this Offer,”), but rather remands solely on abuse of discretion (e.g. “the IRS abused its discretion in rejecting this Offer,”). Where taxpayers ask for more, they usually don’t get it, even when they clearly win on abuse of discretion. See, for example, Antioco v. Commissioner, T.C. Memo. 2013-35 (Judge Holmes finding abuse of discretion, but not ordering the IRS to enter into an installment agreement).

Conclusion: Maybe You Don’t Need an Order of Refund, or Even Refund “Jurisdiction”

The IRS’s mission isn’t to cling tightly to as much money as it can that comes through its doors. And the IRS attorneys I’ve worked with likewise don’t tend to see this as their job. I am confident that if I had a court opinion saying “IRS you were wrong to take this money,” the IRS wouldn’t say “But we’re keeping it until you can find a judge to specifically order us to give it back.”

It is, perhaps, a hassle that the Tax Court can’t or won’t act as a one-stop shop to order these refunds, and that a particularly recalcitrant IRS employee could force the taxpayer to seek redress in federal district court. But I don’t think this is what happens in most instances.

At the administrative level, the IRS can surely make the changes to its accounts “behind the scenes” in CDP, and without the Tax Court expressly ordering them to do so. I expect that’s how most CDP cases resolve.

But even at the Tax Court level, it is important to recognize that the parties can enter decisions that provide more detail and more protection than just “the Notice of Determination is (or is not) sustained” without running into jurisdictional traps. Indeed, going beyond the limited jurisdictional issues before the Tax Court judge is what negotiating “below the signature” stipulations is all about (PT posted a helpful IRS guide on that issue here).

And while it might not be a Tax Court “order,” having stipulations dealing with the future actions of the parties (e.g. “the IRS will credit Petitioner’s account with $x”) is not too shabby.  

The TIGTA report contains three recommendations to the IRS on how to improve the (non-EITC) correspondence exam process. To me, however, those recommendations are the least interesting and least consequential aspects of the report. They largely boil down to minor recommendations on how the IRS change their selection criteria taxpayers based on prior exams. I’ll touch a bit on that in my practitioner-focused later post.

But what I found more important, and more eye-opening, are the numbers that the TIGTA report lays out. The numbers show just how much less the IRS is working with (in terms of employees) and just how much less the IRS is bringing in (in terms of tax assessments). But they also suggest that the IRS is doing “less with less” at least in part because of inefficient resource allocations. Let’s take a look at some of the statistics…

Doing Less with Less: Massive Drop in IRS Compliance Personnel

One number that jumps out is the Compliance Personnel reductions the IRS has had to contend with. By the numbers, there are 15,000 fewer enforcement employees (a drop of over 25%) from 2010 to 2018, resulting in a 40% reduction in exams.

This mind-blowing statistic largely serves as the impetus for the TIGTA report. We should take as a given right now that the IRS is stretched extraordinarily thin. Accordingly, the focus shifts to the best use of these preciously limited resources. And there is certainly room for improvement.

Over a quarter of the IRS correspondence exams closed between 2017 and 2019 had “no impact on net dollars recommended.” This means that the audit resulted in either “no-change” (i.e. the return was correct) or “no-pay” (that is, the return was wrong but the taxpayer hasn’t made payments on it).

Assuming, as is historically accurate, that a large percentage of the “no-pay” taxpayers stay no-pay, you are looking at a sizeable waste of exam resources going towards returns that will never bring any money into the fisc. Yes, I know there are important reasons to audit beyond just bringing in money like encouraging voluntary compliance. But perhaps, given the resource allocation constraints alluded to above, we should focus our attention on auditing returns that do both: encourage compliance and bring in money. They just might exist…

Doing Less with Less: Trending Towards More Low-Income Exams

Looking at the trends from 2017 to 2019, the numbers are either baffling or appalling. In 2017 the very rich (total positive income (TPI) of $1 million or more) comprised 3% of all non-EITC Correspondence Exams. That same year, the merely well-to-do (TPI of $200K to $1 million) comprised 10% of those exams. The less-fortunate (TPI less than $200K) comprised 86% of those exams. By 2019 the less-fortunate comprised 91% of non-EITC correspondence exams while the very rich only comprised 1% and the well-to-do 8%.

From a pure collectability standpoint this doesn’t make much sense. As noted in the TIGTA report, “despite a lower level of collectability for lower income taxpayers, the relative percentage of non-EITC correspondence examinations [for lower income taxpayers] continues to increase.” But there are other reasons this surprised me.

I talk to my students about why it is our clients are at a significantly higher risk of audit than, say, the students themselves are likely to be when they presumably become upper-middle income lawyers. The answer generally hinges on the Earned Income Tax Credit. I generally bring up the Pro Publica articles here and here. I also recommend as further reading (that is to say, something that maybe one of my students would be interested in but doesn’t have the time to read) the excellent Lawrence Zelenak law review article here. The simple bullet points, as far as I’m concerned, is that low-income EITC returns get audited more because (1) the method of audit is inexpensive and (2) the EITC is sometimes conceptualized as a quasi-welfare-style benefit (that is, a cash transfer) which flares up a greater sense of cheater-detection. Of course, the PT team has also dug into these exact issues here. And the problem of EITC as being an improper payment here.   

This TIGTA report, however, adds an unfortunate wrinkle to my explanation. How do I explain that the trend is to audit relatively low-income taxpayers at a higher rate than high-income earners when (1) the method of audit is the same for both groups (correspondence exam) and (2) there are no “welfare-style benefits” at issue?

There may be some innocuous explanations for this trend. It is possible that high income returns raise fewer flags because they tend to have better tax return preparers. That is obviously just speculation on my part, but I do tend to see middle-income earners falling in the “donut hole” of tax preparation where they don’t qualify for free services and it economically doesn’t make sense to hire someone (competent).

Another, more testable explanation is that the types of issues that are likely to be subject to correspondence exams are, again, simply more likely to be found on low-and-moderate income taxpayer returns. Itemized deductions are highly audited and may not be an issue for high-income because of the AMT. Similarly, Schedule C expenses from sole-proprietors are highly audited (in fact, “Form 1040 Schedule C Issues” were the second most audited project code in the report. They can also be quite time consuming…). However, they may not be an issue for high-income because wealthy (sophisticated) taxpayers are more likely to have a partnership or other entity for their business income. I would think that the wealthier taxpayers are more likely to file the Schedules that come after C… specifically, Schedule D, Schedule E, and Schedule K-1. Those schedules do not appear in the list of top correspondence exam project codes, possibly because there just are few returns listing them or possibly because they don’t lend themselves to correspondence exams. It is also possible that these issue would require more training and time than the IRS invests in examiners, which is a paradigm shift in itself.

Doing Less with Less: Assessing Much, Much, Much Less Tax…

Let’s let the numbers speak for themselves: the value of correspondence exam assessments decreased 52% from 2015 – 2019.

Read that again, please, after your brain has pieced itself back together.

In 2015 the IRS had proposed assessments of $7.3 billion from correspondence exams. In 2019, the proposed assessment value declined to $3.5 billion. Yes, you may recall that there has been a 40% decrease in total correspondence exams from 2010 as compared to 2018, but that is over a longer time-period than 2015 – 2019 and can’t explain the full difference. I think this number is the best indication that there are some inefficiencies factoring into the IRS doing less with less.

Going Deeper into the TIGTA Report

The TIGTA report implies that there are two different ways the IRS could more efficiently run its exam resources. First, the IRS should emphasize certain sources of selected exam cases. Second, the IRS should emphasize certain types of issues. Presently, the IRS does not (by TIGTA’s estimation) emphasize the most efficient sources of exams or the most efficient issues.  

What correspondence exams take the least amount of time and result in the highest value assessments? Perhaps as no shock to those in the tax community it is far-and-away exams on “non-filers.” The average assessment for non-filer exams from 2017 – 2019 is a shocking $28,102. By contrast, the average assessment for Schedule C Issues was only $4,576 and also took significantly more time than non-filer exams did.

It is impossible to determine how much income the average non-filer would have to result in an assessment of $28,102. But for frame of reference in 2018 a single individual with no dependents would have to earn over $140,000 in wages to have that type of income tax due (granted they would need significantly less self-employment income to hit that same assessed tax number). Anecdotally, that amount of wage income is consistent with the tax-protestors I come into contact with. They are rarely low-income.

TIGTA does not specifically “recommend” more exams of nonfilers but does note that “Schedule C issues were less productive than other issues, such as nonfiler issues.” I imagine (and sincerely hope) that the IRS would be quick to examine more nonfiler issues, but that there is simply a smaller pipeline of nonfiler cases. Perhaps that is something increased information reporting from banks could have fixed were it properly focused on upper-income earners.

It should be noted that PT has written about the nonfiler issue multiple times in the past, including the IRS’s essential abandonment of the “Automated Substitute for Return Program.” There is nuance to the issue, including how much how is actually collected from nonfilers (here).  

Which gets to the second issue: the source of return examination selections. Some sources are more productive (in terms of assessed dollars) than others. The IRS has multiple different methods of selecting returns for correspondence exam. There are the “Compliance Data Environment (“CDE”) filters. There are the Dependent Database (“DDB”) and Discretionary Exam Business Rules (“DEBR”) filters. And there are also “referrals” from other, non-Exam IRS functions. Guess which brings in the highest average assessment?  

Far and away, it is from referrals. And it isn’t even close.

Referrals brought in an average assessment of $16,941 as compared to $3,132 from DDB/DEBR and $4,195 from CDE. Oh, and referrals take significantly less time, too: 0.74 hours as opposed to 2.09 from DDB/DEBR and 1.79 from CDE.

On seeing these discrepancies my first thought was that referrals must comprise a small amount of correspondence exams. But that is not so. In fact, referrals are the second most common source of case selection: 33% of the total cases (244,269) from 2017 – 2019 were referrals. The most common source (CDE) was 353,064.

Conclusion: Opportunities for Doing (A Little) More with Less

From the outside looking in it seems clear that the IRS should (1) focus more on non-filer issues and (2) rely more on referrals for case selection. But the outside looking in usually distorts the true picture, so I will reserve at least some of my judgment on the grounds that there are likely many factors I am not privy to.

That said, the IRS does not, in my opinion, have a great record when it comes to efficient use of its resources. Let me close with an example from a recent conference.

During a presentation from the IRS, the speaker said that Collection Statutory Expiration Dates (CSEDs) are listed on taxpayer transcripts, and that she’d “show us where.” CSEDs are an issue of frequent concern to tax practitioners, particularly since the IRS often (systemically) makes mistakes in its calculations. Keith has written (here) about these mistakes and how unhelpful the IRS sometimes is when you ask for a CSED (here). Tantalized at the words of this IRS presenter, I picked up my pen, ready to learn something new and amazed that I hadn’t already known that the CSED was on the account transcript…

So my expression was not unlike a child tearing the wrapping paper off a box of new socks when I saw the presenter’s slide. Yes, the CSED is on the transcript (along with the ASED and RSED). Only not the transcript that is made available to practitioners pulling them online. The proposed solution was to call the IRS for the CSED or make a FOIA request.

Let me repeat that: instead of giving practitioners the information upfront, the IRS adds an extra step that (1) ties up an IRS employee and (2) wastes the taxpayer/practitioner’s time. Why? If the IRS is willing to give out their calculation of the CSED, why not do it upfront? What I hear from the IRS when they explain their decision is: “Well, we could give you this information and save everyone time and improve customer service but… what if instead we just didn’t?”

Perhaps there is something behind the scenes that I just don’t appreciate (yes, IRS technology is not great). But to an outsider it certainly appears sometimes that the IRS shoots itself in the foot to make bad situations worse -in audit selection no less than in customer service decisions. Hopefully their resource constraints may force a re-evaluation of some of these decisions, so that they may “do more with less.”

The Pittsburgh Tax Review takes the reflection on Nina’s impact one step further by dedicating an entire issue to the subject.  The issue was recently posted online and will come out in print later this spring.  The articles expand upon Nina’s impact from several angles.  Professor Danshera Cords sets up the issue with a nice overview and an introduction of the articles:

We open with Nina E. Olson’s own reflections on the experiences leading to her appointment as the NTA and the office’s evolution under her leadership.36 Although she has completed a long and storied career as the NTA, Nina continues to be a “force of nature” and is pursuing a new avenue of advocacy as the Executive Director of the Center for Taxpayer Rights.

Professor T. Keith Fogg, who has known Nina since before she became his student at Georgetown University Law Center, discusses the history of the office of the NTA. Professor Fogg then explores the evolution of low income tax clinics and how they expanded during her tenure.

Special Trial Judge Diana Leyden, who served as the first New York City Department of Finance Taxpayer Advocate, discusses Nina E. Olson as a servant leader. This essay uses the idea of a servant leader as a lens through which to view Nina’s role in increasing state and local taxpayer advocates’ influence.

Professor Leslie Book’s essay considers the influence that Nina E. Olson’s thinking and writings about procedural due process have had on tax administration. In this essay, he explores how she used her belief in procedural justice to create a more taxpayer-centered system that improved tax administration, benefiting countless taxpayers.

My own essay explores Nina E. Olson’s strategic and successful use of the NTA’s annual reports to Congress to make a case for systemic legislative change. This essay considers how Nina used her platform as NTA to advocate for all taxpayers, not just the most vulnerable, and for adequate IRS funding. Each of these were essential elements to improving tax administration.

Professor Francine Lipman discusses how Nina E. Olson used the platform of the office of the NTA to create access to justice for millions of taxpayers through leadership on an issue. Professor Lipman explores how Nina used the office to fight for low-income taxpayers’ rights to obtain just treatment for EITC claimants. In the end, this encompasses all aspects of the role of the NTA, from direct advocacy for changes of law and policy to the inspiration and motivation of employees to the solicitation of volunteer pro bono lawyers to represent those who still need assistance navigating a complex and inhumane system.

The issue closes with a very heartfelt essay by Caroline Ciraolo, an attorney in private practice, discussing the influence Nina E. Olson has had as a mentor and role model in her career and how her shaping of the local TAS offices has aided tax practitioners.

For those of you interested in tax administration and the impact of one person on tax administration over the last quarter century, this special edition of the Pittsburgh Tax Review will allow you to see that impact.

Neither the blog tributes in 2019 nor this special law review edition in 2021 mark the end of Nina’s impact on tax administration.  Watch the Center for Taxpayer Rights grow and begin to exert influence.  While she built the Community Tax Law Project in relative obscurity 30 years ago, she commands too much attention today for the Center to grow in obscurity.  Just as this law review reflection comes out twenty years after Nina became the National Taxpayer Advocate, twenty years from now there may be a need for another special edition on her impact in the next stage of her career.

As a postscript: we received this message from alert reader Bob Rubin and pass it along for those representing employers who may have deferred payment of payroll taxes during 2020:

We deferred paying the employers’ share of the FICA tax during the depths of the COVID crisis.  We paid the deferred FICA tax last December pursuant to instructions from the Service.  We received a notice of adjustment reflecting an overpayment equal to the deferred FICA tax we paid.  According to our payroll service, IRS told it no process exists for the handling of payments of the deferred FICA tax, which is why the payment is reflected as an overpayment on the 4^th quarter 2020 account.  If a refund check is computer-generated, we are supposed to write VOID on the check and send it back.

The opinion is quite short since the reasoning is spelled out in detail in the opinions regarding other forms of Tax Court jurisdiction.  The court provided guidance regarding when it will allow withdrawal:

In making the determination whether a petition should be dismissed, we should consider whether the other party would lose any substantial right by the dismissal. Durham v. Fla. E. Coast Ry. Co., 385 F.2d 366, 368 (5th Cir. 1967). We conclude that respondent is not prejudiced if we treat the instant proceeding as if it had never been commenced. See Wagner v. Commissioner, 118 T.C. at 333-334 (“[T]he granting of a motion to dismiss without prejudice is treated as if the underlying lawsuit had never been filed.”). In the absence of any objection by respondent, we will allow petitioner to withdraw its petition in accordance with FRCP 41(a)(2). We will grant petitioner’s motion to withdraw its petition and dismiss this case.

The story is different for petitioners who file in Tax Court based on a notice of deficiency.  In deficiency cases the taxpayer cannot escape the Tax Court, if the court has jurisdiction over the case, without receiving a decision regarding the correct amount of tax for the year(s) at issue.  The Tax Court’s decision in Estate of Ming, 62 T.C. 519 (1974), held that a taxpayer petitioning the Tax Court under IRC 6213 may not withdraw the petition in order to avoid the entry of decision.  The reason for not allowing withdrawal in a deficiency case concerns the impact of IRC 7459.  Although the Mainstay case does not discuss section 7459 due to its reliance on the prior precedent in other areas of similar jurisdiction, the concerns raised by that section continue to control the ability of a petitioner to depart the Tax Court after filing a petition in a deficiency case.

Petitioner in Mainstay was represented by occasional guest blogger Bob Rubin of Boutin Jones in Sacramento, California.  Bob and I started in the same branch of the Refund Litigation Division of Chief Counsel’s Office (a division now folded into Procedure & Administration) back in the winter of 1977. 

In 2010 the IRS filed notices of federal tax lien (NFTLs) against the Webbs in the jurisdiction where they lived and owned a home.  In 2013 the Webbs jointly filed what must have been a chapter 7 bankruptcy petition.  On their schedules they listed all of their assets and liabilities including their home.  They must have claimed a homestead exemption for all or part of the equity in their home based on Indiana laws.  The exemption varies from state to state, and I did not go and look up the available exemption in Indiana.  On November 4, 2013, the bankruptcy court granted the Webbs a discharge.  The court doesn’t lay out the facts in a way that makes it easy for me to state the years for which the Webbs owed taxes when they filed their petition, but it seems that they owed for several years and that the years were fairly old making them susceptible to discharge.

After the bankruptcy discharge, on February 10, 2014, the IRS abated the tax liabilities and released the tax liens.  The discharge requires the IRS to not seek to collect from the taxpayers any discharged liabilities; however, it does not prevent the IRS from collecting liabilities from property to which its lien attaches.  Apparently, the IRS acted first to avoid violating the discharge injunction and they, two years later, came to the realization that the Webbs retained property after the discharge to which the federal tax liens attached.  After coming to that realization, the IRS needed to reverse the abatement of the taxes and revoke the release of the federal tax lien.  It reversed the abatement in 2016 and revoked the releases in 2017 to 2019.

People filing chapter 7 bankruptcy may spend little time with a lawyer discussing what precise debts will survive bankruptcy.  If they do have this discussion, it often does not include the distinction between discharging the personal liability on the underlying tax and the survival of the lien.  So, many debtors in the Webbs position would expect their tax liabilities to go away and when the IRS wipes away the liabilities immediately after bankruptcy, the action reinforces their expectations.

It is not surprising that the Webbs would react with shock and dismay as the IRS reverses the abatement of their tax liability and reinstates its liens.  Unfortunately, the IRS can do this and their arguments failed.

Discharge of Liens

The Webbs first argue that the IRS cannot reinstate the liens because the tax liabilities were discharged.  This argument fails and it should.  This argument does not make a distinction between the effect of the discharge on their personal liability for the tax debt versus the effect on the lien encumbering their property.  A bankruptcy discharge can wipe out a personal liability but does not affect a lien interest.  The court establishes that the IRS validly established the liens prior to bankruptcy and then describes the law regarding the survival of liens including tax liens.

Reversal of Abatement

The Webbs next argue that the IRS could not reverse the abatement of the assessments because the tax liabilities were discharged.  This argument also fails because the lien interest allows the assessment to survive (or to be reinstated.)  According to the court the IRS did not cite to cases that established this exact point, but it did find other cases regarding reversal of abatement that supported the IRS position.

Revoking the Lien Release

The IRS regularly releases liens it later regrets releasing.  The Webbs continue to argue that the IRS cannot revoke the release because of the effect of the discharge.  IRC 6325(f)(2) allows the IRS to revoke a release if it releases a lien “erroneously or improvidently.  Here, the IRS stated that it acted erroneously or improvidently in releasing the lien initially.  The court finds that the IRS followed the appropriate procedures in reinstating the lien.  Therefore, the court finds the refiling of the liens after the revocation of the release to properly reestablish the liens.

Limitations on Scope of Liens

When the IRS filed its claim in the chapter 7 case it claimed a secured amount of $12,357.00 and a general unsecured amount of $383,527.99.  I cannot say exactly why the IRS filed its claim with those amounts but it normally calculates the equity of its liens based on the statements in the debtor’s schedules.  The IRS does not perform a separate analysis of the value of the debtor’s property in filing its claim form.  Here, the Webbs’ argument is that if the court allows the IRS to reverse the abatement and reinstate its liens, the IRS can only assert a lien interest in the amount listed on its claim.

The court discusses the cases cited by the Webbs but not any cases the IRS might have cited.  It concludes that the IRS can pursue its lien claim in the amount of $395,884.99 the full amount of the lien.  This does not mean that the IRS will collect that amount.  The case does not provide enough information to allow speculation on the amount the IRS will ultimately collect on its lien claim but it could be much closer to $12K than $395K.  The IRS can only collect from assets in existence at the time of the bankruptcy filing.  It cannot collect from the Webbs personally.  Its lien claim does not come ahead of the first mortgage on the Webbs’ home. 

The lien claim probably matches the amount of the Indiana homestead exemptions plus whatever increases in value have occurred with respect to the assets the Webbs protected using their homestead exemption.  Not only does the discharge limit the IRS in the assets from which it can pursue to satisfy the debt but the discharge makes it difficult for the IRS in other ways.  It must make sure that in reinstating the assessment its computer does not offset subsequent refunds due to the Webbs.  In cases of this type the primary available asset of any value may be the Webbs home.  The IRS must now navigate the issues regarding administrative seizure and sale of a home or bring a suit to foreclose its lien on the home.  The IRS does not go after people’s homes that often though certainly it can do so.

The Webbs were right to want to prevent the reassessment of the liability and reattachment of liens but had little defense to this action, which can cruelly come after the victory party they may have held upon receipt of the discharge.  I expect that having gone this far the IRS will pursue collection from their home but that brings another case.  This case simply reestablished the liens.  It did not enforce them.