Free Tax Court Lunchtime Webinar Starts Soon!

Today PT’s own and my Villanova Law School colleague Christine Speidel is part of a lunchtime Tax Court webinar series. The event highlight changes to Tax Court practice made in response to the COVID-19 pandemic. It starts in ten minutes, at noon ET, is free, and registration is here

In addition to Christine, the panel includes Chief Judge Kathleen Kerrigan; Judge Cary Douglas Pugh; Judge Emin Toro; Sheri Dillon, Morgan Lewis & Bockius LLP;  Michael Garrett, IRS Office of Chief Counsel; and Andrew Tiktin, IRS Office of Chief Counsel. 

Creativity Is Not Always Rewarded

In June, the Tax Court issued a division opinion in Chavis v. Commissioner, 158 T.C. No. 8, a Collection Due Process case.  The taxpayer, proceeding pro se, raised three arguments.  I’m going to put them in a different order than the Court did, saving the best for last.  First, she sought to challenge the underlying liability.  The IRS argued and the court agreed that she had a prior opportunity to dispute it, even if she hadn’t taken advantage of it.  Under the current status of the law, that result was anticipated, although many of us wish that either the IRS or Congress would change that. 

Second, she requested “currently not collectible” status and withdrawal of the notice of federal tax lien.  Given that the Settlement Officer disagreed and that the abuse of discretion standard applied, you already can guess how that was decided.

Finally, she raised a different – and creative! – argument concerning why she shouldn’t have to pay.  My guess is that this argument is why the Court issued a division opinion instead of a memorandum opinion; it’s also why I chose to write this post.  I’m not sure that argument would have ever occurred to me or that I would have raised it if it had occurred to me.  I’m also not surprised that the argument lost; it was certainly a long shot.

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Background

Ms. Chavis and her former husband worked, as the Secretary and President respectively, at Oasys Information Systems, Inc., a C corporation.  The business address for Oasys was Ms. Chavis’s home address.  Oasys withheld payroll taxes from employees’ wages but never paid the taxes over to the government.  The amount was substantial enough that the IRS pursued trust fund recovery penalties under section 6672 against both Ms. Chavis and her former husband.  The IRS issued Letter 1153 Notice of Trust Fund Recovery Penalty to both Ms. Chavis and her then-husband on July 13, 2015, proposing to assess $146,682 against each of them.

The Letter 1153 informs responsible parties that they can appeal to the local Appeals Office within 60 days and provides detailed instructions on how to do that.  Ms. Chavis did not appeal.  On November 16, 2015, the IRS assessed.  She and her husband divorced in 2016 and the IRS apparently collected some of that amount from the husband.  The IRS filed a notice of federal tax lien on May 29, 2019 and issued Ms. Chavis a collection notice stating her right to a CDP hearing.  She timely requested a hearing and, when Appeals ruled against her, filed a Tax Court petition.

The first two (my order) arguments

These were the easiest for the Court to dispose of. The decision that Ms. Chavis could not challenge the underlying liability was expected.  For assessable penalties, an opportunity to dispute the liability at Appeals is treated as sufficient.  Judicial review in a pre-payment forum – Tax Court – is not required.  The IRS and the Court consider that a settled issue, unfortunately, for assessable penalties, including the TFRP.  If you’d like a refresher on why that’s a bad result, start with a couple of posts (here and here) by Keith.  Ms. Chavis had that opportunity to go to Appeals; she acknowledged receiving the Letter 1153 and signed the return receipt.  So the court didn’t consider this argument.

Similarly, the collection alternatives that Ms. Chavis suggested – CNC status and withdrawal of the NFTL – were rejected by the Settlement Officer and the Court easily concluded that the rejection was not an abuse of discretion.  The SO found that she could pay $1,685 per month toward the liability.  Ms. Chavis argued that the calculation of $1,685 per month available income was “unreasonable and not economically feasible.”  As the Court noted:

In determining this figure, the SO calculated allowable monthly expenses by reference to local standards prevailing in the Missouri county where petitioner resided. . . . The SO was authorized to rely on those standards in assessing petitioner’s ability to pay, and it was her burden to justify a departure from the local standards. . . . Petitioner has not satisfied that burden.

However, it appears that the real issue may have been assets rather than income.  The SO had disallowed home mortgage expenses of $1,611 because Ms. Chavis had not proved that she had no equity in the home.  See IRM 5.16.1.2.9(1): “An account should not be reported as CNC if the taxpayer has income or equity in assets, and enforced collection of the income or assets would not cause hardship.”  Ms. Chavis argued that she did not have “access” to any equity, but she hadn’t submitted evidence during the CDP hearing.  She lived in Missouri, so the court’s review was limited to the administrative record per Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006).

The request to withdraw the NFTL also failed.  The Court reviewed the conditions under which a withdrawal is authorized, in section 6323(j), and concluded that all but one either clearly did not apply or had not been asserted by Ms. Chavis.  For that final condition – that withdrawal would facilitate the collection of the tax liability – Ms. Chavis had not presented any evidence in the CDP hearing.

Creativity!

Those arguments didn’t prevail but Ms. Chavis had one more up her sleeve.  You’ve probably guessed even if you didn’t read the opinion.  She was married at the time the TFRP was assessed.  Both she and her then-husband were liable for the entire amount.  What does that suggest?  Relief from joint and several liability under section 6015!

Ms. Chavis checked the box for innocent spouse relief, among others, on her request for a CDP hearing on May 29, 2019.  In July 2019, she submitted Form 8857 to the Cincinnati Centralized Innocent Spouse Operation.  CCISO told her within a few weeks that she did not qualify for section 6015 relief, but Ms. Chavis still argued for it (unsuccessfully) during the CDP hearing.  It’s not clear whether she also argued for it in her response to the government’s motion for summary judgment.

As noted above, the Court rejected the challenge to the underlying liability because Ms. Chavis had a prior opportunity to dispute it.  An innocent spouse claim is a defense against, rather than challenge to, the underlying liability and therefore is not precluded under section 6330(c)(2)(B) from review as part of the CDP hearing. 

As the court pointed out, subsections (b) and (c) of section 6015 both reference the taxpayer filing a joint return (i.e., income tax) and provide for relief for an understatement or deficiency with respect to that return.  Because the deficiency in this case arose from TFRP for the corporation’s payroll taxes, subsections (b) and (c) would not apply.  However, subsection (f) does not include such a reference to a joint return. 

This may remind you of the situation several years ago with respect to the statute of limitations for innocent spouse claims under subsection (f).  The Code provided a two-year statute of limitations for subsection (b) and (c) claims but did not specify a statute of limitations for (f) claims.  So, the IRS and Treasury issued a regulation to establish a two-year statute of limitations for (f) cases as well.  The Tax Court ruled that regulation was invalid, interpreting the “audible silence” by Congress as an indication there should be no statute of limitations for (f) cases.  Despite success in appeals to Circuit Courts, the IRS backed down and decided to limit (f) claims only by the ten-year statute of limitations for collection in section 6502.  The Taxpayer First Act later established, at section 6015(f)(2), a statute of limitations: if unpaid, before the section 6502 collection statute of limitations expires, or if paid, before the section 6511 refund claim statute of limitations expires.  It still doesn’t say anything about income tax or joint return in subsection (f). 

Would the Tax Court refuse to import the “income tax only” provisions in (b) and (c) to (f)?  Unfortunately for Ms. Chavis, the answer was no.  The Court concluded easily that 6015(f) applies only to income tax.  The caption for section 6015 is “Relief from joint and several liability on joint return.”  Captions don’t always carry a lot of weight, but there was much, much more:

The Commissioner has specified, in Rev. Proc. 2013-34, 2013-43 I.R.B. 397, the procedures governing equitable relief. These procedures confirm that subsection (f), like subsections (b) and (c), applies only to joint income tax liabilities. See Rev. Proc. 2013-34, § 1.01, 2013-43 I.R.B. at 397 (“This revenue procedure provides guidance for a taxpayer seeking equitable relief from income tax liability. . . .”). Indeed, the IRS will not consider a taxpayer’s request for equitable relief unless she meets seven “threshold conditions,” one of which is that the “income tax liability from which the requesting spouse seeks relief” is attributable to the non-requesting spouse. Id. § 4.01(7), 2013-43 I.R.B. at 399. Another condition is that “[t]he requesting spouse [must have] filed a joint return for the taxable year” for which relief is sought. Id. § 4.01(1).

There is more than just a Revenue Procedure:

Although a TFRP liability is a form of “unpaid tax,” section 6015(f) applies only to unpaid taxes or deficiencies arising from joint income tax returns. See Treas. Reg. § 1.6015-1(a)(1)(iii) (stating that section 6015(f) applies only to “joint and several liability for Federal income tax”); H.R. Rep. No. 105-599, at 254 (1998) (Conf. Rep.), reprinted in 1998-3 C.B. 747, 1008 (stating that section 6015(f) applies only to “any unpaid tax or deficiency arising from a joint return”).

That seems very persuasive support for the conclusion that section 6015 relief is not available for the TFRP.  Since section 6672 is an assessable penalty not subject to deficiency procedures, there is no judicial review of the validity of the penalty in Tax Court at all.  Although this seems very clear, apparently it had never been decided by the court, which might explain why this was a division opinion instead of a memorandum opinion.  Ms. Chavis seems to be the first one to ever argue in Tax Court for innocent spouse relief from the TFRP.

TFRP is also a divisible tax, so at least the Flora rule is not as much of a hurdle to judicial review, and there’s a right of contribution in section 6672(d).  However, it’s still a nasty penalty and difficult to challenge once you don’t head it off at the interview stage.

Standard/scope of review – CDP versus innocent spouse

The opinion states the standard of review for CDP cases as follows:

Where the validity of the taxpayer’s underlying liability is properly at issue, we review the IRS’s determination de novo.  Goza v. Commissioner, 114 T.C. 176, 181-82 (2000). Where the taxpayer’s underlying liability is not properly at issue, we review the IRS’s decision for abuse of discretion only. Id. at 182.

That comes pretty much straight from the legislative history of the IRS Restructuring and Reform Act of 1998, which enacted the CDP hearing process of section 6330.

The court previously considered stand-alone innocent spouse cases under section 6015(e) de novo for both the standard of review and the scope of review.  Porter v. Commissioner, 132 T.C. 203 (2009).  The Taxpayer First Act of 2019 specified both the standard of review (de novo) and the scope of review (limited to the administrative record plus “any additional newly discovered or previously unavailable evidence”) in new section 6015(e)(7).  The Chavis petition was filed on September 23, 2020, after the effective date of section 6015(e)(7).  For more on the complexities of TFA and innocent spouse relief, start with Christine’s posts here and here.

So, we have two different standards/scopes of review – for CDP and for stand-alone innocent spouse cases.  Which applies when dealing with an innocent spouse claim in a CDP hearing? standard and scope of  It doesn’t matter for this case; although the court included the discussion under a section labeled “Abuse of Discretion,” it also noted in footnote 2:

We need not decide whether the SO’s resolution of petitioner’s spousal defense challenge should be reviewed de novo rather than for abuse of discretion. We would decide this issue the same way under either standard because (as explained in the text) it presents a purely legal question.

It does matter, though, when taxpayers have an innocent spouse claim with respect to income taxes in a CDP case. 

A quick check of Effectively Representing Your Client Before the IRS turned up Francel v. Commissioner, T.C. Memo 2019-35, which had already addressed this same scenario.  The taxpayer in that case filed a request for innocent spouse relief before receiving the final notice of intent to levy.  The request for a CDP hearing asked for innocent spouse relief.   The court concluded that it had jurisdiction with respect to the innocent spouse issue under both section 6330(d)(1) and section 6015(e).  The IRS argued that the standard of review should be abuse of discretion and the scope of review should be limited to the administrative record.  (Dr. Francel lived in Missouri, as did Ms. Chavis, so the Eighth Circuit’s decision in Robinette applied.).  The court concluded that both the standard of review and the scope of review would be de novo because the petition was (in part) a petition under section 6015(e)(1).  

Francel was decided (a) before the Taxpayer First Act, which restricted the scope of review in innocent spouse cases, and (b) in one of the three circuits that restrict the scope of review to the administrative record in a CDP case.  After the Taxpayer First Act, and in one of the other circuits, it’s possible to have a situation in which:

  • The standard of review is more favorable to the taxpayer under section 6015(e) – de novo – rather than under section 6330(d)(1) – abuse of discretion.
  • The scope of review is more favorable to the taxpayer under section 6330(d)(1) – de novo – than under section 6015(e) – limited evidence beyond the administrative record.

In a situation like that, how should the court evaluate the standard and scope of review?  All or nothing, whether section 6330(d)(1) or section 6015(e)?  Or mix-and-match, with the most favorable to the taxpayer for both standard of review (section 6015(e)) and scope of review (section 6330(d)(1))?

Footnote 2 in the Chavis case, quoted above, avoids deciding which standard and scope of review would apply in these situations.  It didn’t matter for Ms. Chavis’s situation.  Now that we have the Taxpayer First Act, will the court want to re-visit this question in a future case where the decision on the merits is not a purely legal question?

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.

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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.)

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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.

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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
20158
201613
20177
201810
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 30 days 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.

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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.

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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.