IRS Correspondence Exams: Doing Less with Less

I’m not a huge fan of the suggestion to “do more with less.” To me, it tastes like a corporate-sugar coat to otherwise clearly insipid advice: “be more efficient.” During the pandemic more than ever it should be clear that there are actual bandwidth limitations: sometimes you legitimately need more (time, resources, staff, etc.) to do more.

But that isn’t to say we should ignore inefficiencies, particularly when cuts (to budgets, staffing, etc.) all but force us to confront them. Recently Anna Gooch posted on a TIGTA report that covered some of those inefficiencies in EITC exams. Here, I will discuss another TIGTA report on the inefficiencies of non-EITC correspondence exams. As will be seen, the numbers are pretty shocking in terms of how much “less” the IRS has in terms of resources, but also in terms of how much less the IRS is doing with those resources. In a subsequent post I will drill into some more practitioner-oriented insights that can be gleaned from the report. For now, I will focus on what can be gleaned from the report on tax administration writ large.

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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.”

Pittsburgh Tax Review Highlights Nina Olson’s Career and Impact

Long time PT readers will remember that we ran a series of personal reflections on Nina in July of 2019 leading up to her retirement at the end of that month.  I will not link to all of the posts here, but they come from people who know her in several different contexts and together provide a significant snapshot of Nina’s impact.


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 4th quarter 2020 account.  If a refund check is computer-generated, we are supposed to write VOID on the check and send it back.

Tax Court Allows Withdrawal of Interest Abatement Cases

Following a series of decisions in other areas of Tax Court jurisdiction that do not involve deficiency proceedings, the court held in Mainstay Business Solutions v. Commissioner, 156 T.C. No. 7 (2021) that a petitioner who came to the Tax Court seeking a determination regarding interest abatement could withdraw the petition.  Because this is the first decision on this point regarding interest abatement, the court issued a precedential opinion.  The opinion follows the opinions regarding withdrawal of collection due process petitions in Wagner v. Commissioner, 118 T.C. 330 (2002); innocent spouse petitions in Davidson v. Commissioner, 144 T.C. 273 (2015); whistleblower petitions in Jacobson v. Commissioner, 148 T.C. 68 (2017) and transferee liability petitions in Schussel v. Commissioner, 149 T.C. No. 16 (see post here.)


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. 

Why More Taxpayers Should Pursue Attorney’s Fees through Qualified Offers

Today we welcome back guest bloggers Maria Dooner and Linda Galler, who in this post urge representatives use the qualified offer provisions more often. Statistics that Maria and Linda received though FOIA show that surprisingly few cases result in attorneys fees given the volume of Tax Court litigation. Regular readers will be familiar with some of the reasons why this may be the case – we have discussed the hurdles to winning fees in many posts (e.g. here, here, and here). Taxpayers in the Ninth Circuit may have a slightly easier time thanks to the Knudsen precedent, but the road is not easy. However, as Maria and Linda explain, there are benefits to submitting a qualified offer even if it does not result in the government paying fees. Christine

Over the past decade, advancements in data collection and analytics at the Internal Revenue Service (IRS) have led to better insights into the world of federal tax administration. The agency has significantly relied on data to enhance both criminal investigation and civil enforcement.  The ability to access and analyze IRS data also can be valuable to practitioners who desire a better understanding of the use and impact of certain procedural provisions that benefit taxpayers.

As the authors of Chapter 18 in the upcoming 8th edition of Effectively Representing Your Client Before the IRS, we requested and obtained data from the IRS regarding the pursuit and recovery of attorney’s fees through IRC 7430.  This blog post summarizes that data and offers our observations and thoughts on using qualified offers (“QOs”) for strategic, rather than monetary, purposes.


What the data show (and do not show)

There is very little data on the pursuit and recovery of attorney’s fees in tax disputes because the IRS only partially tracks it. For example, the IRS does not track the total number of cases in which recovery of administrative or litigation costs is sought under the general provisions of IRC § 7430. Nor does the IRS track or maintain any information on QOs (e.g., number of QOs submitted, number of QOs that resulted in settlement of the underlying case, number of QOs that resulted in an award, or whether an award was for administrative or litigation costs). Such information would be useful both to the government and to practitioners, and we were surprised to learn how little the IRS knows.

The IRS does track the number of cases in which the Office of Chief Counsel (Procedure and Administration) processed a payment of an award from the General Judgment Fund, which includes all cases in which attorney’s fees are awarded in cases before the U.S. Tax Court:

YearNumber of Cases
Attorneys’ Fee Awards in Tax Court Litigation

To place this data in context,  Chief Counsel reported approximately 25,000 cases for fiscal year 2018, 27,000 cases for fiscal year 2017, 30,000 cases for fiscal year 2016, and 32,000 cases for fiscal year 2015 in the U.S. Tax Court.  Consequently, the extremely low number of cases that resulted in an award of fees suggests that practitioners may be overlooking the ability to pursue an award of attorney’s fees and, we suspect, are greatly underutilizing QOs.

What is a qualified offer?

A QO is essentially a written offer made by the taxpayer to the government in a case involving the validity of a tax liability or refund. The taxpayer offers a specific amount (tax liability or refund) to resolve the taxpayer’s case. If the government rejects the offer and there is a court judgment that is equal to or more favorable (to the taxpayer) than the offer, the taxpayer can be awarded attorney’s fees. Thus, for those serious about recovering attorney’s fees, the amount detailed in a QO (which can be a dollar amount or a percentage of the adjustments at issue) should be a realistic estimate of what the taxpayer truly believes to be the correct liability or refund. Though it may be tempting, submitting an offer that is too favorable to the taxpayer (in terms of merit) will likely result in a quick rejection by the IRS and can be a waste of time for all parties.

In terms of timing, a taxpayer can submit a QO any time after they receive a notice of proposed deficiency (i.e., “30-day letter”), which provides rights to administrative review in Appeals.  While a taxpayer can submit a QO up until the day before trial begins, a taxpayer should submit a QO as soon as practical. (Under Reg. § 301.7430-7(a), a taxpayer is entitled to recover only fees incurred subsequent to the offer.) A QO is open for acceptance or rejection by the IRS for 90 days or until the date the trial begins, whichever is earlier. For QOs to be successful, taxpayers must exhaust all administrative remedies with the IRS and not unreasonably protract the proceedings, as well as satisfy a net worth requirement. 

What are the benefits of submitting a qualified offer?

As compared to pursuing costs and fees under the general provisions of IRC § 7430, QOs do not require proof that the government’s position was not substantially justified.  Proving a lack of substantial justification is often the main challenge in recovering attorney’s fees.  Therefore, a taxpayer who submits a QO (and receives a court judgment that is equal to or better than the offer), can expect a more straightforward path toward receiving an award.

The benefits of submitting QOs go beyond monetary compensation; a major benefit is quick case resolution. (The Internal Revenue Manual explicitly instructs Appeals Officers to expedite QOs.)  Efficient case resolution is equally important to LITC/pro bono and compensated attorneys.  For example, given the challenges facing the IRS at the moment, even cases with a predictable outcome can take a long time to make their way through the administrative process.  For clients of LITCs or pro bono counsel, refunds can be held up for lengthy periods, causing financial difficulties to taxpayers who ultimately will prevail.  Moreover, these cases take up unnecessary time and resources for tax professionals on both sides.  Indeed, LITCs and nonprofit organizations themselves are harmed by lengthy administrative processes; pro bono attorneys have less time and bandwidth to represent other clients while struggling to resolve what they reasonably thought were predictable cases. 

In Chapter 18 of the forthcoming edition of Effectively Representing Your Client Before the IRS,  we discuss in more detail the rules on how to submit a QO and when one is warranted.  Ultimately, we explain why QOs are the “easy way” to recover costs and fees and how they serve to encourage the settlement of tax disputes.  While a QO is not and should not be a panacea for every case, QOs should be considered in strong cases that encounter time-consuming challenges or delays in resolution through no fault of the taxpayer. 

Revoking the Release of Federal Tax Lien

In Webb v. IRS, No. 1:17-cv-00058 (S.D. Ind. 2020) taxpayers get a sad lesson in the ability of the federal tax lien both to survive bankruptcy and to come back to life after release.  This is not a story of foreclosure, though that chapter may still be written, but rather a story first of what bankruptcy can and cannot do with respect to tax liens (and liens in general) and second of the power of federal tax lien revocation.  When the dust settles, the taxpayers come out of bankruptcy with their discharge, including a discharge of the federal taxes at issue, but with a home (and any other assets they have) still encumbered by the federal tax lien.


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.

IRS Cash Pay Alternatives Impose Unnecessary Burdens and Fees on Taxpayers

We welcome guest blogger Elizabeth Maresca.  Professor Maresca runs the tax clinic at Fordham Law School.  She also serves as a Senior Legal Advisor to the National Consumer Law Center.  When I saw the IRS announcement she discusses, I reached out to the National Consumer Law Center to see if it had thoughts on this decision.  We are fortunate that Professor Maresca has provided a response.  We do not always think of taxpayers as consumers but certainly aspects of the role of taxpayer involves consuming tax services.  In that role the way the IRS handles their cases can have an important impact not only on the taxes themselves but collateral matters.  The discussion here points to a potentially negative collateral consequence of the decision for handling cash tax payments.  Keith

Earlier this summer, the IRS announced that it would allow certain “retail partners,” to accept cash tax payments for IRS.  Most disturbingly, these retail partners include payday lenders, in particular ACE Cash Express.  Payday lenders engage in practices that entrap lower-income individuals in a long-term cycle of exorbitantly-priced debt that often brings serious financial harm.  In addition, the IRS use of retail partners imposes a fee on taxpayers, and is cumbersome in that it requires internet access, takes three steps, and several days to complete.


The Perils of Payday Lending

Payday lenders typically offer their borrowers high-cost loans, often with short terms such as 14-days. The loans are marketed as a quick fix to household financial emergencies with deceptively low fees that appear be less than credit card or utility late fees or overdraft fees.  Background on the abuses of payday loans is available here and in National Consumer Law Center, Consumer Credit Regulation, 2d ed. 2015, Chapter 9.  The loans are marketed to those with little or no savings, but a steady income.

Fees for payday loans generally translate into APRs of 200% to 400%. The payday loan business model requires the borrower to write a post-dated check to the lender – or authorize an electronic withdrawal equivalent – for the amount of the loan plus the finance charge. On the due date (payday), the borrower can allow the lender to deposit the check or debit the account – or the borrower can pay the initial fee and roll the loan over for another pay period and pay an additional fee. The typical loan amount is $350. The typical annual percentage rate on a storefront payday loan is 391%.  

Rollover of payday loans, or the “churning” of existing borrowers’ loans creates a debt treadmill that is difficult to escape: The Consumer Financial Protection Bureau found that over 75% of payday loan fees were generated by borrowers with more than 10 loans a year. And, according to the Center for Responsible Lending, 76% of all payday loans are taken out within two weeks of a previous payday loan with a typical borrower paying $450 in fees for a $350 loan.

Use of Retail Partners Imposes Burden and Fees on Taxpayers

In addition to using these payday lenders as tax payment agents, the new IRS arrangement poses other problems for taxpayers.  Since as early as 2007, the IRS National Taxpayer Advocate has criticized the IRS for the lack of available Taxpayer Assistance Centers that accept cash payments from taxpayers.  Although taxpayers can still pay in cash at some of these Centers, appointment are required, and can take upwards of 30 to 60 days to schedule. 

While the IRS solution of using retail partners reduces costs for the agency, it adds significant costs and burdens on taxpayers.  There is a fee of $3.99 per payment, and each payment is limited to $1,000.  Before using a “retail partner,” the taxpayer must visit the “Official Payments” website, which effectively excludes any taxpayers who are not comfortable with using the Internet.  Emails are then sent from both Official Payments and PayNearMe.  The PayNearMe email includes a payment code that the taxpayer must print or display on a smartphone at the retail partner.  The entire process takes five to seven business days and must be completed before the payment due date.

The IRS should exclude Payday Lenders from Retail Partner Program

Unfortunately, the new IRS arrangement will almost certainly bring new customers into payday lending stores and leave them susceptible to high-cost loan products and the debt treadmill. Indeed, the individuals most likely to pay their tax liability at a retail partner have some of the characteristics – low-income, BIPOC, female, elderly – that make them prime targets for payday lenders.

The IRS should recognize that using payday lenders as tax payment agents poses a threat to low-income taxpayers. Their services can trap them in debt, and jeopardize their ability to pay their tax debts, and other necessary expenses, such as food and rent.  The IRS should stop allowing payday lenders to accept cash payments for federal taxes, but instead should provide taxpayers with safe and convenient alternatives.

Pfizer Again – On to the Substantive Issue

We welcome back guest blogger Bob Probasco with an update on the Pfizer case and its, seemingly, never ending quest for interest on a large refund.  Pfizer has moved past the procedural hurdles and onto the merits of its claim for interest.  As Bob describes below, we have not yet seen the end of the case and our continuing lessons on the payment of interest.  Keith

I’ve discussed a particular jurisdictional issue in the Pfizer case, and others, several times on Procedurally Taxing over the last two years.  That issue was whether taxpayers can file standalone suits for additional overpayment interest, in excess of $10,000, in the Court of Federal Claims as well as District Court.  (If you’re interested in this issue, the PT posts are here, here, here, here, here, here, here, and here.)  Over that period, Pfizer has moved from the Southern District of New York to the Second Circuit to the Court of Federal Claims.  The jurisdictional issue was resolved long ago, at least for this case, and the parties can proceed to the substantive issue. 

When we last visited the status, Pfizer had filed a motion for summary judgment; the government opposed that motion and sought additional discovery.  The CFC issued an opinion and order on September 14, 2020. 


The substantive issue – overpayment interest when a refund check is re-issued

The case resolves around a refund of $499,528,449.05, resulting from an overpayment on Pfizer’s tax return for 2008, which was timely filed on September 11, 2009.  The government contends that it processed six separate checks – five for $99 million each and the sixth for $4,528,449.05 – and mailed them on October 20, 2009, by first-class mail.  Pfizer contends that its tax department in New York never received the checks.  The government then cancelled the checks and executed an electronic funds transfer for the entire $499,528,449.05 on March 18, 2010, which was deposited into Pfizer’s account on the following day.

The government did not pay overpayment interest on the refund; Pfizer contends it should have. During that period, the overpayment interest rate on large balances (so-called “GATT interest”) was 1.5%.  Even at that low rate, interest on half a billion dollars would have added up; Pfizer’s complaint asked for more than $8 million, “plus statutory interest” which continues to compound. 

The legal dispute comes down to two words, italicized below.  Section 6611(b), which defines the period for which overpayment interest is paid, states in relevant part:

(b) Period  Such interest shall be allowed and paid as follows: . . .

(2) Refunds

In the case of a refund, from the date of the overpayment to a date (to be determined by the Secretary) preceding the date of the refund check by not more than 30 days, whether or not such refund check is accepted by the taxpayer after tender of such check to the taxpayer. The acceptance of such check shall be without prejudice to any right of the taxpayer to claim any additional overpayment and interest thereon.

Meanwhile, Section 6611(e)(1), which is an exception under which overpayment interest will not be paid, states:

Refunds within 45 days after return is filed

If any overpayment of tax imposed by this title is refunded within 45 days after the last day prescribed for filing the return of such tax (determined without regard to any extension of time for filing the return) or, in the case of a return filed after such last date, is refunded within 45 days after the date the return is filed, no interest shall be allowed under subsection (a) on such overpayment.

The conference report for the 1993 amendment to Section 6611(e) describes the provision as:

No interest is paid by the Government on a refund arising from an original income tax return if the return is issued by the 45th day after the later of the due date of the return . . . or the date the return is filed.

The government focuses on the word “issued” in the legislative history for Section 6611(e) and concludes that mailing the refund within 45 days avoids interest, regardless of whether the refund is delivered to the taxpayer.  Pfizer focuses on the word “tender” in Section 6611(b)(2) and concludes that it requires “that a taxpayer has some knowledge of [the refund check] and an opportunity to accept, or decline to accept, the check.”  That quote is from Doolin v. United States, 918 F.2d 15, 18 (2d Cir. 1990).  The Seventh Circuit adopted that analysis in Godfrey v. United States, 997 F.2d 335, 337 (7th Cir. 1993).  The Doolin precedent is why Pfizer originally brought the case in the Southern District of New York instead of the Court of Federal Claims.

This issue appears to have been litigated infrequently, with Pfizer only the third case to address it.  Although he didn’t seem very impressed with the government’s proffered legislative history, Judge Lettow didn’t decide the legal issue.  Material disputes of fact remained.

The Fact Issues

The government offered evidence of the Treasury’s processing and mailing procedures and that Pfizer’s checks were processed accordingly.  But an email from an IRS employee stated that “the checks weren’t sent & stopped the request.”  Further, problems with the Post Office or Pfizer’s mail handling practices might have resulted in one or two missing checks, but there were six missing checks.  That raised questions about whether Treasury’s procedures were really followed.  Pfizer also argued that the usual presumption of delivery should not apply when there is evidence that the mail was not received.

On the other side, the government wanted additional discovery concerning Pfizer’s mail practices, to challenge Pfizer’s assertion that the checks were never delivered.  A third-party contractor picked up all of Pfizer’s mail from the Post Office and took it to Pfizer’s central mailroom, to be sorted and delivered to various offices and departments.  Pfizer’s Tax Department didn’t receive the refund checks but that didn’t necessarily mean Pfizer hadn’t.  During an earlier deposition, an Operations Manager for Pfizer testified that he wasn’t aware of any complaints regarding lost, non-received, or misplaced mail.  But he hadn’t inquired into incidents of lost mail in preparation for the deposition.  The government had asked to examine a Pfizer witness concerning “all incidents in which Pfizer lost or allegedly failed to receive mail addressed to Pfizer” at that address and considered the deposition testimony insufficient.


The judge declined to resolve the statutory interpretation issue on a motion for summary judgment because neither party would have been entitled to summary judgment at this point.  The government could not win because there were genuine disputes of act concerning whether Treasury issued and mailed the checks.  Pfizer could not win because there were genuine disputes of fact concerning whether the checks were appropriately delivered to Pfizer.

As a result, the judge denied Pfizer’s motion for summary judgment and granted the government’s motion to reopen discovery.  The judge ordered the parties to file a proposed schedule for discovery and further proceedings by the end of September.  It may be a while longer before we get a ruling on the legal issue.

Making an Entity Election When the IRS is Closed

Today we welcome guest blogger Kelley Miller.  Kelley is a partner with Reed Smith in Washington, D.C.  I know her through her amazing leadership in assisting exonerees with tax problems and with filing refund claims after the passage of IRC 139F.  We have previously posted about her work here and here.  In January the ABA Tax Section honored Kelley with the Janet Spragens Pro Bono award for her work in this area.  Although I know her for her pro bono work and her leadership in the ABA Tax Section, she has a day job handling tax controversy and business tax matters.  While we have focused quite a bit on the impact of the IRS shut down and the general economic slow-down on individuals, it has also had a significant impact on business.  Kelley writes today about one aspect of the impact on business as businesses seek to follow the procedures for entity election.  Keith

An entity uses a Form 8832 to elect how it will be classified for federal tax purposes: as a corporation, a partnership, or an entity disregarded as separate from its owner. An eligible entity is classified for federal tax purposes under the default rules described below unless it files Form 8832.



Generally, an election specifying an eligible entity’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. 

An eligible entity may be eligible for late election relief in certain circumstances. 


A Form 8832 is paper-filed with the Internal Revenue Service Center based on the state or jurisdiction where the entity’s principal business, office, or agency is located. 

In addition to timely paper filing, the entity must attach a copy of Form 8832 to its federal tax or information return for the tax year of the election. If the entity is not required to file a return for that year, a copy of its Form 8832 must be attached to the federal tax returns of all direct or indirect owners of the entity for the tax year of the owner that includes the date on which the election took effect. An indirect owner of the electing entity does not have to attach a copy of the Form 8832 to its tax return if an entity in which it has an interest is already filing a copy of the Form 8832 with its return. Failure to attach a copy of Form 8832 will not invalidate an otherwise valid election, but penalties may be assessed against persons who are required to, but do not, attach Form 8832.



Yes.  Notice 2020-23 (“Notice”), which was released on April 9, 2020, provides that, pursuant to Section 7508A of the Internal Revenue Code, the Secretary of the Treasury may postpone the time for performing certain acts under the internal revenue laws for a taxpayer determined by the Secretary to be affected by a Federally declared disaster as defined in section 165(i)(5) (A). Further, under Section 7508A(a), a period of up to one year may be disregarded in determining whether the performance of certain acts is timely under the internal revenue laws.

The relief provided under section 7508A in Notice 2020-23, as well as related Notices that predated this Notice (specifically, Notice 2020-18 and Notice 2020-20) is limited to the relief explicitly provided for and does not apply with respect to any other type of Federal tax, any other type of Federal tax return, or any other time-sensitive act.

The specific relief provided under Notice 2020-23 is that any person (which includes partnerships, companies and corporations under Section 7701(a)(1)) with a Federal tax return or other form filing obligation specified in section III.A of the Notice (Specified Form), which is due to be performed (originally or pursuant to a valid extension) on or after April 1, 2020, and before July 15, 2020, is affected by the COVID-19 emergency for purposes of the relief described in section III of the Notice (Affected Taxpayer).

Note, however, that Notice 2020-23 does not include Form 8832 in the section III.A list of Specified Forms.  Therefore, the COVID-19 guidance related to timely filing of Form 8832 falls under that applicable to Affected Taxpayers.  


Yes, if the Form 8832 would be timely if filed on or after April 1, 2020 and before July 15, 2020. 

Specifically, Notice 2020-23 provides that any person performing a time-sensitive action listed in Rev. Proc. 2018-58, 2018-50 IRB 990 (December 10, 2018), which is due to be performed on or after April 1, 2020, and before July 15, 2020 (Specified Time-Sensitive Action), is an Affected Taxpayer.

Rev. Proc. 2018-58 lists 35 acts under certain statutes related to business and individual tax issues that may be postponed pursuant to Section 7508A when there has been a federally declared disaster.  Act No. 33 of this listing of 35 acts is an election under Treas. Reg. Sec. 301.7701- 3(c), which provides for the time and place for filing of a classification election for federal tax purposes.  


No, not at this time.  There is no guidance in either the Treasury Regulations, the IRM or in the

Instructions to Form 8832 (see, Page 6) as to the requirement for original signatures on Form 8832, however, last year the IRS began sending letters to filers requesting original signatures on Form 8832 in order to process the filed Forms.  

In Internal Memorandum NHQ-01-0320-0001 (“Memorandum”) (March 27, 2020), the IRS

Deputy Commissioner for Services and Enforcement announced that pursuant to IRM, the IRS would accept images of signatures and digital signatures on certain documents related to the determination or collection of tax liability.  Form 8832 was not included among the documents specifically referenced in the Memorandum.  Further, although this Memorandum did provide that “any other statement or form needing the signature of a taxpayer or representative traditionally collected by IRS personnel outside of standard filing procedures” could be signed electronically, this likely does not apply to Form 8832 since the Form is not traditionally collected by IRS personnel outside of the standard filing procedure.  


No, not at this time.  In addition to providing guidance for images of signatures and digital signatures, Internal Memorandum NHQ-01-0320-0001 allows for documents specifically referenced in the Memorandum to be provided electronically to the IRS via email.  Form 8832, however, requires original signatures and is not included in those documents referred to in the Memorandum.  At this time, the IRS has only announced that specific tax forms (Form 1139, Corporation Application for Tentative Refund and Form 1045, Application for Tentative Refund) may be temporarily fax-filed.  


As of April 15, 2020, EIN applications are not being processed by mail, telephone or fax.  The IRS locations that receive and process mail applications are closed at this time, and the IRS has turned off the fax lines that receive SS-4 forms.  Mail may be received in the Cincinnati Service Center, but we also have received returned mail sent to that Service Center late last month.  If mail is received (and not returned) there may be significant delay in processing the same.  The only available option to receive an EIN is limited to those entities with a principal place of business, or principal office or agency in any U.S. state.  These applicants may use the IRS online EIN application system.  Due to overwhelming demand, this system has been offline sporadically over the past week.  

Notice 2020-23 and the guidance related to the same provides entities an extension of time to file Form 8832.  Therefore, absent other compelling reasons, clients should take advantage of the additional time afford under the Notice.  

If a client is concerned about relying on the guidance in Notice 2020-23, an overly conservative approach might be to file a protective Form 8832 that omits the EIN.  Note that Forms 8832 for foreign entities are paper filed to the Service Center in Ogden, which is the only Service Center staffed at this time (50% capacity and not processing mail, according to several ROs that I have spoken with).  Accordingly, there is a fair chance that such a Form could be received and processed, however, even if the Form is received and processed, it will certainly be rejected for failure to include an EIN.  At the least, the entity could point to something being filed as reasonable cause basis under Rev. Proc. 2009-41.  Again, taking this action should not be necessary under the guidance of Notice 2020-23.  


The IRS Deputy Commissioner for Services and Enforcement as well as the National Taxpayer Advocate are well aware of the issue.  

In order to cure the temporary shutdown of the mail and fax processing systems, as well as the telephone operators, the IRS will either need to bring employees back to work in the Service Center or it will have to arrange for EIN applications or calls to be handled by employees who are eligible for telework.  Unfortunately, the only IRS employees who are eligible for telework are not those who currently receive and process the EIN applications.  While this may change in the near future, for now, the IRS is relying on the extension of time provided for in Notice



Telephone calls from foreign entities requesting an EIN are only worked by Cincinnati and

Ogden International Units and, as stated above, those individuals are currently not teleworking (and the Ogden Service Center is working at partial capacity).  

There could be an effort made to bring some of these persons back online through telework or in-person staffing as time goes on.  Therefore, the best advice at this time is to stay aware of news and updates from the IRS and also, to periodically attempt calling or submitting the SS-4 via fax.  

As a reminder, the relevant phone and fax numbers for a foreign entity to request an EIN are: 

  • EIN International phone number (267) 941-1099 (not a toll-free number) 
  • Hours of operation 6:00 a.m. to 11:00 p.m. Eastern time Monday through Friday
  • EIN International fax number (855) 215-1627 if faxing from within the U.S. and
  • EIN International fax number (304) 707-9471 if faxing from outside the U.S.
[As an aside, I had trouble weeks ago filing a Form 2848 to the International CAF Unit in Philadelphia, which is also closed.  On a lark, I faxed to the CAF unit in Ogden and my submission was accepted.  This is slightly different as the recording of the declaration of representative is more time-sensitive in an active matter, but if all else fails, and you want to take the most aggressive course of action, you might want to try faxing an SS-4 to the domestic fax number, provided that it is turned back on at some point, which is: Fax: (855) 641-6935.]