IRS Not Giving Up on Thorny SOL Issues When Taxpayer Fails to Backup Withhold

An issue that is often litigated is whether and when a return is deemed filed for purposes of starting the SOL on assessment. In today’s post, I will discuss Quezada v US and the IRS’s decision to publish an Action on Decision disagreeing with the Fifth Circuit.

We have not discussed AOD’s though we have discussed the Quezada case a few times. The most recent is here, where Keith reviewed how the Fifth Circuit held that the Form 1040 filed by the Quezadas and the Forms 1099 issued by his business to its workers that omitted the workers’ tax identification numbers started the running of the statute of limitations for backup withholding.  As readers may know, the Code requires payers to backup withhold at a rate of 24 percent on reportable payments for a payee that refuses or neglects to provide a correct TIN

An AOD is the Service’s way of notifying the public and its employees about the Office of Chief Counsel’s litigating position. When the IRS loses in a circuit court case, as in Quezada, or a precedential Tax Court opinion, if Counsel disagrees with the opinion, an AOD discusses the reasons why. The AOD lets the public and practitioners know that taking a position consistent with the opinion will lead to the IRS challenging the position if the matter is appealable to a different circuit.

Back to Quezada.

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As Keith discussed, the Fifth Circuit based its holding on the view that the combination of Quezada’s 1040 and the business’ deficient 1099’s provided the IRS with sufficient information to determine potential backup withholding liability:

The court decides that the Forms 1040 and 1099 did provide the IRS with enough information to create an informal Form 945.  The forms filed contained enough data to show he had a backup withholding liability.  The Forms 1099 showed the amount paid and the person paid thus allowing the IRS to calculate the amount of backup withholding that Quezada should have made.  Case over.

The AOD that Counsel issued this past February flatly disagrees with the Fifth Circuit’s discussion of the IRS’s ability to determine backup withholding liability based just on the 1040 and Form 1099:

The omission of a payee’s TIN on a Form 1099-MISC does not conclusively establish the payor’s liability for backup withholding. Instead, backup withholding liability arises from the failure to obtain a payee’s TIN, which is not evident on the face of the Form 1099-MISC. I.R.C. § 3406(a)(1)(A); Treas. Reg. § 31.3406(a)-1(b)(1)(i).

As the AOD notes, if upon making payments to the workers the taxpayer had obtained the workers’ TIN but mistakenly omitted the number, there would be no backup withholding liability. In addition, as the AOD notes, the Service could not determine the extent of the liability just by the taxpayer’s filed 1040 and 1099’s.

As Keith discusses in his post, the Fifth Circuit and IRS disagreed about how to apply the 1944 Supreme Court Lane-Wells opinion.  The AOD does not go so far as arguing for a per se rule that would prevent the SOL from running when there is no return filed for the tax liability at issue, but it takes the view that Form 945 is needed for the SOL to start running on backup withholding liability:

Under Lane-Wells, it is inappropriate to treat a payor’s Form 1099-MISC information returns reporting payments to payees, in combination with the payor’s individual income tax return, as “the return” that triggers the running of the period of limitations for assessing backup withholding liability. This is because: (1) the Forms 1040 and 1099-MISC are separate returns that neither reference nor rely upon each other for either return to be complete; (2) neither the Form 1040 nor the Form 1099-MISC requires reporting backup withholding liability; and (3) the Service has prescribed a separate Form 945 for a payor to report backup withholding liability and that is the form to which it looks in determining whether such liability exists.

Conclusion

The Inspector General has reported taxpayers avoiding payment of billions of dollars in backup withholding. TIGTA noted that IRS was developing a cross-functional working group to analyze current backup withholding policies, so the compliance issue is on IRS’s radar.

Of course the Inspector General’s disclosure two weeks ago revealing that IRS destroyed millions of filed information returns does not atmospherically contribute to liberally allowing IRS to chase taxpayers who themselves make mistakes relating to returns akin to information returns (for that bombshell, see A Service-Wide Strategy Is Needed to Address Challenges Limiting Growth in Business Tax Return Electronic Filing at page 2).

This AOD tells us that IRS is likely to press the issue. Stay tuned.

March 2022 Digest

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

A Time Sensitive Opportunity

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

Taxpayer Rights

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

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

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

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

Tax Court Updates and Information

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

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

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

Tax Court Decisions

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

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

Tax Court Answers

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

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

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

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

Circuit Court Decisions

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

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

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

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

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

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

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

Offers in Compromise

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

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

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

Bankruptcy and Taxes

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

Miscellaneous

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

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

Suspension of Statute of Limitations Due to an Offer in Compromise

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

January 2022 Digest

A lot has happened in the tax world since the year began, then filing season began last week, and the ABA Tax Section 2022 Virtual Midyear Meeting began yesterday. There are no signs that things will slow down soon, except for (maybe) IRS notices.

Procedurally Taxing will continually provide comprehensive updates and information, but if you fall behind with your reading or struggle to keep up- I’ll be digesting each month’s posts from here on out.

January’s posts highlighted the NTA’s Report, the ongoing impact of the pandemic, and recent Circuit splits.

National Taxpayer Advocate’s Report

NTA Report Released: Essential Reading: The Report is available and contains new features, including an enhanced summary of the Ten Most Serious Problems and a change in the methodology used to determine the Most Litigated Issues.

What are the Most Litigated Issues and What’s Happening in Collection?: A closer look at the Most Litigated Issues. EITC issues are often petitioned but rarely result in an opinion, suggesting that most are settled before trial. In Collection, lien cases referred to the DOJ have declined substantially over the years corresponding with the decline in Revenue Officers and resources.

Who Settles Cases – Appeals or Counsel (and Why?): An analysis of data on the number of Tax Court cases settled by Appeals or Counsel. An increasing percentage of settlements are handled by Counsel, but why? Possible reasons and possible solutions are considered.

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Where Have Tax Court Deficiency Cases Come from in the Past Decade?: Most deficiency cases have come from correspondence exams of low- and middle-income pro se taxpayers. The focus of IRS examinations over the past decade has influenced the cases that end up in Tax Court. A shift in focus may be coming as IRS seeks to hire attorneys to specifically combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes.

The Melt – Cases That Drop Away in Tax Court: Around 20% of Tax Court cases get dismissed each year- likely due, in part, to untimely filed petitions. Also due to a failure to prosecute, that is the petitioner abandoned the process somewhere along the way. Ways to address this issue are worth exploring, such as increasing access to representation and implementing a model utilized by the Veterans Court of Appeals.

Supreme Court Updates and Information

Who Qualifies as Press and the Boechler Supreme Court Argument Today: Being consider a member of the press comes with benefits, including the option to attend Supreme Court arguments with a press day pass when Covid-restrictions end. In lieu of being there in person, real-time broadcast links of Oral Arguments are made available on the Supreme Court website.

Transcript of Boechler Oral Argument: A link to the transcript of the Boechler Oral Argument is provided and Keith shares his in-person experiences observing the Supreme Court and the options available to others who are interested in doing so when Covid-restrictions end.

Pandemic-Related Considerations

Refund Claims and Section 7508A: A well-informed analysis of the disaster area suspensions under section 7508A and the refund lookback limits. Does the language in section 7508A allow for an extended lookback period? The IRS Office of Chief Counsel doesn’t think so, but TAS has recommended that Congress amend section 6511(b)(2)(A) for that purpose, and there is an argument that a regulatory solution is already available.

 Making Additional Work for Yourself and Others: The IRS has been cashing taxpayer payments without acknowledging receipt of the associated return. This improper recordkeeping resulted in the IRS sending CP80 notices to taxpayers requesting duplicate returns. This created more work for the IRS, practitioners, and clients. The IRS, however, recently announced it would stop doing this, as summarized directly below.

IRS Announces Stoppage of Notice to Paper Filers Who Remitted Payment and Tax Court Announces Continued Zooming: The IRS will stop requesting duplicate returns from paper filers who remitted payments with their original returns. Members of Congress also made specific requests to the IRS with the goal of providing relief to taxpayers until the IRS backlog is resolved, including temporarily halting automated collections, among other things. The Tax Court announced all February trial sessions will be by Zoom.

Practice and Procedure Considerations

“But I’ve Always Done It That Way!” Practitioner Considerations on Subsequent Year Exams: A TIGTA recommended change to IRS procedure may increase the audit risk for taxpayers who do not respond to audit notices. There is no blanket prohibition on telling clients about audit rates and general likelihoods of audit, so practitioners should be able to advise their clients of this potentially emerging risk and ways to avoid it.

New Rules in Effect for Refund Claims For Section 41 Research Credits Raise A Number of Procedural Issues: New rules for research credit refund claims require extensive documentation which increases costs and the risk of a deficient claim determination. Procedures for determinations were issued at the beginning of the month and have generated concern among practitioners because a determination cannot be challenged with a traditional refund suit and because the IRS modified regulatory requirements without utilizing formal notice and comment procedures.

Tax Court News

Tax Court Going Remote for the Remainder of January[and February]: January calendars (and now February, as mentioned above) scheduled in-person sessions have switched to remote sessions due to ongoing Covid-concerns.

Tax Court Orders and Decisions

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return: The Court in Soni v. Commissioner, allowed the tacit consent doctrine (where facts and circumstances led to finding of consent on the part of a non-signing spouse) to apply to returns, power of attorney authorizations and forms 872. The doctrine could be expanded in future cases, so it should be kept in mind when representing innocent spouses.

Timely TFRP Appeal?: The administrative 60-day deadline to respond to TFRP notices is discussed in an order requesting that the IRS supplement its motion for summary judgment. The origin of a deadline is important. Jurisdictional deadlines are different from administrative deadlines, and cases involving administrative deadlines can be reviewed for abuse of discretion.

Circuit Court Decisions

Eleventh Circuit finds Regulation Invalid under APA: The Eleventh Circuit, in Hewitt, calls into question who has the burden to show that a comment made during a notice and comment period: 1) was significant, and 2) consideration of it was adequate. The Tax Courts says it’s the taxpayer, the Eleventh Circuit says it’s the IRS, but what does this mean for everyone else?

The Fifth Circuit Parts Ways with the Ninth Circuit Regarding the Non-Willful FBAR Penalty: A difference in statutory interpretation results in a recent split between the Ninth and Fifth Circuits over whether the non-willful penalty under section 5321(a)(5)(A) should be assessed on a per-form or per-account basis. The Ninth Circuit held that legislative history, purpose, and fairness support a per-form penalty, but the Fifth Circuit held that Congress’ intent and the objective of the penalty support a finding that it’s per-account.

Goldring is Back with a Circuit Split: The Fifth Circuit addresses how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. It held “a taxpayer is liable for interest only when the Government does not have the use of money it is lawfully due.” This contrasts with other Circuits which have decided that the law allows the IRS to begin computing interest when an amount is “due and unpaid.”

Polselli v US: Circuit Split on Notice Rules for Summonses to Aid Collection: A recent Sixth Circuit decision continues a circuit split on a fundamental issue in IRS summons practice: does the IRS have to give notice when it issues a summons on accounts owned by third parties in the aid of collecting an assessed tax? The Sixth, Seventh and Tenth Circuits read section 7609 notice requirements and its exclusion without limitations, which contrasts with the Ninth Circuit’s more narrow interpretation.

D.C. Circuit Narrows Tax Court Whistleblower Award Jurisdiction: The D.C. Circuit overturns Tax Court precedent by holding that the Tax Court lacks jurisdiction over appeals of threshold rejections of whistleblower requests. Since all appeals of whistleblower cases go to the D.C. Circuit, the Tax Court is bound by the decision unless the Supreme Court takes up the issue. 

Liens and Judgments

Local Taxes and the Federal Tax Lien: The effect of the Tax Lien Act of 1966 was reiterated in United States v. Tilley.  Section 6323(a) sets up the first in time rule of law, but 6323(b) provides ten exceptions, including one for local property taxes, which allows a local lien to defeat a federal tax lien even when the local lien comes later in time.

Tax Judgments and Quiet Titles: Tax judgments can benefit the IRS beyond the 10-year federal collection statute of limitations. Boykin v. United States, like Tilley, involves real property held by nominal owners. The taxpayer brought suit to quiet title, the IRS counterclaimed that the money used to purchase the property was fraudulently transferred, and the taxpayer argued that a state statute of limitations prevented the IRS’s argument. The Boykin Court disagreed with the taxpayer relying upon Supreme Court precedent that state statutes do not override controlling federal statutes.

Bankruptcy and Taxes

Diving Beneath the Surface of In re Webb: An in-depth analysis of a technical bankruptcy issue that can impact taxes involving an election under section 1305, which allows postpetition tax claims to be deemed prepetition claims. The classification of the claims impacts whether a subsequent IRS refund offset violates a debtor’s rights.

Refund Claims and Section 7508A

Bob Probasco, a regular guest poster, has joined Procedurally Taxing as a contributor. In today’s post, Bob unravels the intersection of the suspension rules of Section 7508A and the refund lookback limits in Section 6511. Les

In normal years, the President may make multiple regional disaster declarations; in 2020, we had a nationwide disaster declaration related to the COVID pandemic.  Our work environments and financial security were affected dramatically, as were IRS operations.  The IRS generally provides taxpayers broad-based relief under section 7508A after such disaster declarations.  That has resulted in more than a few PT blog posts on the complexities of those provisions (see herehere,herehere, and here for just the tip of the iceberg; you can find several more if you go to the top of the blog webpage and type “7508A” or “7508A(d)” into the Search box).  

The National Taxpayer Advocate submitted her 2021 Annual Report on January 12, 2022.  As Les noted, it really is required reading for those interested in tax administration.  Alas, I’ve fallen behind in my reading, but someone brought one particular legislative recommendation in the 2022 Purple Book to my attention.  The #10 legislative recommendation (starting at page 30) proposes an amendment to avoid problems arising from the interaction between section 7508A and refund claims.

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The problem and the proposed fix

As we all remember, there are two different statutes of limitations with respect to refund claims in section 6511.  Section 6511(a) describes how soon a refund claim must be filed – three years after the return was filed.  (If the refund claim is not filed by then, it will still be timely if paid within two years of a payment by the taxpayer.  That option is not relevant to this discussion.)  That deadline is clearly one that the IRS has discretion to suspend.   § 301.7508A-1(c)(1)(iv).  For the pandemic, the IRS exercised that discretion in Notice 2020-23.

But there is the second limitation.  Section 6511(b)(2) limits how much the taxpayer can recover, even from a timely filed refund claim.  When the claim is timely filed within three years after the return was filed section 6511(a), section 6511(b)(2)(A) limits the amount of the recovery:

If the claim was filed by the taxpayer during the 3-year period prescribed in subsection (a), the amount of the credit or refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return. 

If you filed your tax return for 2018 (without an extension) late on June 10, 2019, a refund claim will be timely if filed by June 10, 2022.  A refund claim timely filed on June 10, 2022, can only recover amounts paid by June 10, 2019: three years preceding the date the refund claim was filed and without adjustment because there was no extension of time to file.  For many taxpayers, most if not all payments (withholding, estimated taxes, or payment with return or extension request) will have been made on or before April 15, 2019, and are deemed to be paid on that date.  Thus, the taxpayer has very limited if any recovery on that timely filed refund claim.

Ah, but for 2019 tax returns, we had until July 15, 2020, to file returns, as a result of a determination by the Secretary of the Treasury pursuant to section 7508A.  If we filed our return on July 15, 2020, it was timely because of section 7508A.  If we later file a refund claim on July 15, 2023, the refund claim would satisfy the first limitations requirement, in section 6511(a).  Thus, both the return and the refund claim were filed timely.  Oops!  The “lookback” period is “3 years plus the period of any extension of time for filing the return.”  Section 7508A doesn’t extend the deadline for filing returns.  It suspends or postpones it.  And it doesn’t change the fact that most payments were deemed paid on April 15, 2020.  A suspension is not an extension.  So the lookback period only goes back to July 15, 2020, but payments of withholding or estimated taxes were deemed paid on April 15, 2020.  Result – limited or no recovery after a timely-filed return and a timely-filed refund claim.  Of course, that’s probably not what Congress had in mind – maybe Congress didn’t consider it at all – but Chief Counsel Advise 2020-53013 concluded that’s exactly what would happen.  

Thus, the Taxpayer Advocate Service recommended that Congress amend section 6511(b)(2)(A) to increase the lookback period by the period of any postponement of the filing deadline under section 7508A.  The legislative recommendation makes perfect sense and I whole-heartedly agree with it.  Unfortunately, that leaves us dependent on Congress.  Even if the proposed fix is enacted, it may take a while.  In the meantime, taxpayers may be losing legitimate refund claims because they didn’t understand the Service’s interpretation of the rules.  The deadline for refund claims associated with 2019 tax returns is still more than a year away, but some taxpayers received section 7508A relief for their 2018 tax returns and the deadline for refund claims for those returns is only three months away.

Non-legislative fix?

While we wait to see if Congress will enact the NTA proposal, is there anything that the IRS could do in the meantime to solve the problem?  I think perhaps there is, although TAS may have already discussed non-legislative fixes with the IRS and been rebuffed.  And we still want the statutory fix as much more certain.

We’ve mostly focused on declarations under section 7508A as postponing filing and payment deadlines.  The actual language of Section 7508A(a) states that the Secretary “may specify a period of up to 1 year that may be disregarded in determining” three things:

(1) whether any of the acts described in paragraph (1) of section 7508(a) were performed within the time prescribed therefor (determined without regard to extension under any other provision of this subtitle for periods after the date (determined by the Secretary) of such disaster or action),

(2) the amount of any interest, penalty, additional amount, or addition to the tax for periods after such date, and

(3) the amount of any credit or refund.

The first two are fairly obvious, but how does disregarding a period of time change the determination of the amount of a credit or refund, instead of just whether the refund claim was timely??  The only thing I can think of offhand – other than overpayment interest, for which that period specified by Treasury is explicitly not disregarded – is the lookback limitation for refund claims.

The regulations include an example where section 7508A relief was granted to disregard a period including the refund claim deadline.  See § 301.7508A-1(f), Example 5.  A timely refund claim for 2008 would normally have to be filed no later than April 16, 2012.  Due to an earthquake, the IRS determined that deadlines from April 2, 2012, through October 2, 2012, were postponed to October 2, 2012.  That included the section 6511(a) deadline for filing a refund claim.  The example concluded that the lookback provision was effectively changed by section 7508A(a)(3).  The specified period was disregarded for purposes of the lookback provision.

Moreover, in applying the lookback period in section 6511(b)(2)(A), which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is disregarded under paragraph (b)(1)(iii) of this section [which duplicates the statutory language].

Moreover, in applying the lookback period in section 6511(b)(2)(A), which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is disregarded under paragraph (b)(1)(iii) of this section [which duplicates the statutory language].

It’s notable that the regulation just states that the specified period is disregarded, rather than any distinction between “suspension” or “extension” that the CCA relied on.  Although they were not dealing with the same fact pattern, the regulation and the CCA seem fundamentally at odds.  (There’s no discussion of the regulation in the CCA, so perhaps the author didn’t check it.  That’s easy to understand; email advice by its very nature cannot require the same depth of careful analysis and review.)  Before concluding that we have a regulation that we can rely on, though, there are a few questions to address.

First, does the suspension of the lookback period determined in the regulation depend on it being explicitly stated by the IRS in its determination under section 7508A, or is it an automatic result of the determination of that specified period? The example doesn’t mention an explicit statement in the determination; it only references the regulation language that duplicates the statutory language.  There was no mention of the lookback period in Notice 2020-23, which perhaps suggests that the IRS normally doesn’t make such an explicit statement about the lookback period.  That in turn perhaps suggests that the IRS considers the result as automatic and need not be stated in the determination.  It’s not entirely clear, but before having researched it further I think the better answer is that it’s automatic.

Second, does the result in the regulation only apply if a disregarded period includes the deadline for the refund claim (fact pattern in the regulation) or also if a disregarded period includes the deadline for filing the original return (fact pattern in the CCA)?  The CCA didn’t try to distinguish the regulation, but perhaps it could/would have.  

The rationale for a longer lookback period in the former situation is that, absent the disaster, the taxpayer could have filed the refund claim within three years of timely filing the return and satisfied the lookback rule.  The rationale for a longer lookback period in the latter situation presumably would be different.  A disaster in the year that the return was filed wouldn’t make it more difficult for the taxpayer to file the refund claim three years later.  I think the rationale rests on the disadvantage to taxpayers who are familiar with the basic 3-year statute of limitations for refund claims (often widely publicized by the IRS and tax practitioners each year) but unaware of the lookback rule.

So, there’s some uncertainty.  I would certainly be willing to argue in court for the result proposed by the NTA, even without a fix.  The regulation ties the language of section 7508A(a)(3) to the lookback limitation for refunds.  The “amount of any credit or refund” in the statute is not explicitly limited to a refund claim filed during that disregarded period.  Section 6511(b)(2)(A) is structured so that the taxpayer’s refund is not limited if she files her return timely and files the refund claim timely.  Why should that principle be invalidated because the taxpayer was in a disaster area when the return was filed?    

But I would feel more comfortable with at least a regulatory fix, while we’re waiting for a legislative fix.  The IRS could amend the regulation to provide an example reaching the result described by the NTA, and perhaps state explicitly the effect on the lookback rule in any determinations pursuant to section 7508A.  Perhaps the IRS could reconsider that CCA from 2020.  

In determining the language for the legislative and/or regulatory fix, Congress and/or the IRS will also have to answer a third question.  For the 2019 tax year, for which the return is due in 2020 and a refund claim would have to be filed in 2023, which determinations by the IRS disregarding a period pursuant to section 7508A will have that same effect on the lookback period?  A determination with respect to a disaster in 2023 that includes the deadline for filing a refund claim?  Yes, per the existing regulation.  A determination with respect to a disaster in 2020 that includes the deadline for filing the return?  Yes, per the NTA’s recommendation.  What about disasters in 2021 and 2022?  Draft carefully if you want to exclude those.

Tax Judgments and Quiet Titles

I have written before about the effect of the IRS obtaining a judgment with respect to a tax assessment.  In Boykin v. United States, No. 5:21-cv-00103 (W.D.N.C. 2022), the fact that the IRS had a judgment carries the day in a contest with a taxpayer involving a quiet title action.  The case provides no great revelations but shows how obtaining a judgment can benefit the IRS many years past the normal 10-year statute of limitations.

Between this case and the Tilley case I recently blogged from the Middle District of North Carolina, it appears that the Chief Counsel office in North Carolina has been busy in pursuing collection against taxpayers using real property held by nominal owners, with both opinions coming out on January 4, 2022.

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Mr. Balvich owed the IRS for 1999 through 2006.  The IRS filed an action to reduce the assessments to judgment in 2019 and obtained a judgment on August 6, 2020.  In bringing an action of this type, the IRS must sue before the collection statute expires.  The opinion in the current case doesn’t spell out the status of the statute of limitations on collection of the assessments for the years at issue, but something must have caused the statute to be open for each of the years at the time the IRS brought the suit.  It could have been that the assessments for those years occurred many years after the close of the tax year, or that Mr. Balvich filed bankruptcy or made a CDP request.  Many possibilities exist for the statute on collection to still remain open 20 years after the end of the tax year.

The plaintiff in the quiet title action, Rebecca Boykin, began a relationship with Mr. Balvich in 2010 and eventually married him in 2015.  She worked as an administrative assistant at a company owned by Mr. Balvich.  When they got married, he gifted to her a 50% interest in his medical services business.  He and the business also, according to the IRS, put up the money to buy real property in Boone, North Carolina in which Ms. Boykin is the record owner.  On March 20, 2019, the IRS filed nominee liens encumbering the Boone property.  I have discussed nominee liens previously here

After Ms. Boykin brought suit to quiet title seeking a declaration that the nominee liens were invalid, the IRS filed a counterclaim arguing that the money used to purchase the property was fraudulently transferred from the taxpayer who sought to place his property out of the reach of the IRS.

She argued that the North Carolina Uniform Voidable Transaction Act barred the IRS argument regarding the fraudulent transfer claims because it placed a four-year statute of limitations on such claims.  The district court graciously described her argument as misguided.  It pointed to the Supreme Court case of United States v. Summerlin, 310 U.S. 414, 416 (1940), where the court held:

It is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights.

The court followed the Supreme Court cite with a string cite of federal circuit court cases following the Summerlin case and swatting back arguments similar to Ms. Boykin’s that have been made in the eight decades following the Supreme Court’s pronunciation.

Piling on to Ms. Boykin’s legal woes, the court explained further that the judgment obtained by the IRS took its time period for seeking a remedy against this property outside of the mere 10-year period into the much longer period provided to the holder of a judgment:

Additionally, when the United States has obtained a timely judgment, its “subsequent efforts to enforce the liability or judgment against a third party will be considered timely.” United States v. Anderson, 2013 WL 3816733, at *2 (M.D. Fla. July 22, 2013) (holding that civil action to collect federal income taxes of an Estate from the Estate’s beneficiaries as a result of transferee liability under the Uniform Fraudulent Transfer Act was not time barred by the ten-year statute of limitations found in 26 U.S.C. § 6502(a)); see also United States v. Worldwide Lab. Support of Illinois, Inc., 2011 WL 148196, at *2 (S.D. Miss. Jan. 18, 2011) (holding that the ten-year statute of limitation period of “Section 6502 is inapplicable” to an action “against an alleged transferee in aid of collecting a judgment already obtained against the taxpayer”)

The decision here does not mean that the IRS has proven there was a fraudulent transfer, but only that she cannot dismiss the counterclaim based on the statute of limitations.  Perhaps she will concede, knowing that the IRS can prove a fraudulent transfer or fight the next battle in the effort to retain ownership of the property.  I hope that she does not choose to appeal this decision and add to the long string of cases holding that the Supreme Court meant what it said in holding that state statutes of limitations do not override the controlling federal statute here.

Who Qualifies as Press and the Boechler Supreme Court Argument Today

When Les and I went to the last Tax Court judicial conference, we were told that we needed to follow the rules of the press at the conference which involved, inter alia, not attributing comments to specific speakers so everyone felt comfortable in the space.  It felt funny to be treated as part of the press, but there can be advantages.  Recently, a FOIA request was made in which PT asked to be treated as the press to obtain expedited treatment.  A request was also made by PT regarding early receipt of the National Taxpayer Advocate’s annual report.  The IRS agreed to both requests.  With thousands of subscribers, millions of page views, and a body of posts, I think it is fair to say that we qualify as the press and there is some court precedent supporting bloggers as members of the press as well as blog posts suggesting bloggers are members of the press.

Today, the Boechler case is being argued in the Supreme Court.  The issue is one the Harvard Tax Clinic has been working on for six years, and I wanted to attend the hearing.  The problem with attending the hearing is that because of the pandemic the justices would just as soon not sit in a room filled with hundreds of strangers, so the hearings before the Supreme Court at present are ones in which only essential Court personnel, the litigants and the press can attend. 

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Press Passes

A nice Tax Court judge who heard me talk about my desire to watch the Boechler oral argument suggested to me that perhaps I should seek to attend the hearing as a member of the press.  After all, no news outlet has provided more coverage of this case than PT, even if our audience may not be as large as some news vendors.  So I thought why not ask.  It turns out the Supreme Court has two categories of press passes – day passes and hard passes.  There’s a reason they are called hard passes.  They are definitely hard to come by.  Here is a list of the persons holding hard passes.  No bloggers on there, not even someone from the SCOTUSblog. For a SCOTUSblog post on the case, look here.

I thought I might have a shot at a day pass, and maybe I did; you can see the requirements here with additional details here, and I had a need to report from the Court for all of you – our faithful readers, but unfortunately the current restrictions only allow members of the press with hard passes and not day passes.  When I spoke to the friendly person at the Supreme Court about attendance, I did not get warm fuzzy feelings that she was interested in having me attend, but she did point me to the broadcast of the argument.  I pass along to any of you who have not listened to Supreme Court arguments but who might be interested in listening to this morning’s argument that same possibility.

The Argument

If you go to this link at 10:00 AM ET this morning, you should be able to hear the oral argument.  Melissa Sherry of Latham & Watkins is making the argument for the petitioner.  She and her team of Caroline Flynn and Amy Feinberg, a former student of the Harvard Tax Clinic who argued this issue before the 4th Circuit while a student and this case before the 8th Circuit remotely during the pandemic, have done an outstanding job of briefing the case.  I anticipate Melissa will make an excellent argument.  When I have had the opportunity to go to the Supreme Court in person in the past and see oral arguments, the person arguing for the Solicitor General’s office has always done an excellent job.  I expect no less today.

I provided links to the opening brief by the petitioner and the amicus briefs in this post.  Here are the answering brief of the government and the reply brief of the petitioner for those of you interested in a complete set.  At the ABA Tax Section mid-year meeting which starts at the end of this month, I will join Bryan Camp, Kandyce Korotky and Amy Feinberg on a panel taking place on February 2, 2022, from 12:30 – 2:00 PM ET to discuss the case and its possible impact.  You can register for the meeting here.

The Tacit Consent Doctrine May Extend Far Beyond Signing a Joint Return

We welcome back my colleague, Audrey Patten for a discussion of a recent case providing an expansive view of the tacit consent doctrine.  Audrey has developed a significant docket of innocent spouse cases and is currently working with Christine to write the third edition of A Practitioner’s Guide to Innocent Spouse Relief.  Look for their book coming out later this year.  Keith 

For those of us with many innocent spouse cases, it is common for clients to point out that they may not have actually signed a joint return.  Such clients’ position is that they should therefore be absolved of any joint liability derived from the return.  It is well established case law, however, that a missing spousal signature does not automatically negate the validity of a joint return.  While the burden will be on the IRS to prove a return with a missing signature is valid, the doctrine of tacit consent holds that if the facts and circumstances show that a non-signing spouse intended to file a joint return, a return the taxpayer did not actually sign can still meet the criteria for a valid joint return.  But how far can the doctrine of tacit consent go? On December 1, 2021, the Tax Court issued a memorandum opinion in Soni v. Commissioner that extends the tacit consent doctrine beyond the joint tax return context to encompass tax matters handled by the other spouse, including powers of attorney and extensions of the statute of limitations. The application of tacit consent in areas beyond the validity of a joint return is what makes the Soni case significant.

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Soni is not an innocent spouse case.  Rather, Om Soni and his wife, Anjali Soni, filed a tax court petition that challenged the validity of a Notice of Deficiency issued on a joint return they filed for tax year 2004 (for clarity, the parties’ first names will be used throughout).  Two questions presented in the case were whether the joint return was valid and whether the limitations period for assessment of tax had expired before the notice issued.  (The other two questions were challenges to the imposition of penalties under I.R.C. §6501 and §6651 and are beyond the scope of this discussion). The Court found that tacit consent on the part of Anjali was dispositive of both issues.

Om was a businessman who engaged in a variety of ventures.  Anjali was a homemaker and, aside from some marginal passive income, did not make any money.  By her own testimony, the marriage was very traditional and she expected her husband to handle all financial matters, including the couple’s taxes.  She lived an affluent lifestyle.  There were no allegations of any domestic abuse. Om for his part, often delegated personal business, including handling IRS related mail, to his employees.  The couple also had a grown son who would discuss his parents’ tax matters with his father and assist with preparing documents.  Anjali, again by her own testimony, never reviewed any tax returns because such documents made her nervous.  She also never signed any returns herself.  She even testified that she left documents “for days and days. Because I don’t feel like reading papers like this.”  She also testified, regarding her husband, that “I trust him with everything…whatever he does, I do trust him. I never discuss his business with him.”  Anjali would sometimes collect mail left at the house, but only sort out her magazines.  Any IRS correspondence she would immediately pass to Om or her son without opening it.

For the 1999 through 2004 tax years, an accounting firm prepared all of the couple’s joint income tax returns. Om would review the returns, but not Anjali.  For the 2004 return, the couple’s son physically signed his mother’s name onto the return, without first showing her the return.

Om’s businesses suffered losses during 2004. In 2006, the IRS began auditing the 2004 return.  In 2008, the IRS received a Form 2848, authorizing a representative named Mr. Grossman to act on behalf of the Sonis.  The signatures on the form were dated in 2006.  Anjali did not sign the Form 2848 authorizing Mr. Grossman to represent her, but her signature was present.  It later turned out that Mr. Grossman was in the habit of signing his clients’ names onto Forms 2848 for them.  In 2015, the IRS received a set of two Forms 2848, authorizing the couple’s son to represent Om and Anjali.  Om signed his Form 2848.  Anjali did not personally sign her Form 2848.

Over the next several years, a total of eight Forms 872 (including one Form 872-I), “Consent to Extend Time to Assess Tax,” were filed with the IRS.  The first two were signed by Mr. Grossman as the representative.  The remaining six were signed by Om for himself and by the son on behalf of Anjali.  Neither Om nor his son ever discussed Form 872 or 872-I with Anjali.   The extensions ultimately extended the period of limitations for assessment of tax to December 31, 2015.  As a result of the extensions, the IRS argued it was still within its limitations period when in March 2015 it mailed a Notice of Deficiency of $642,629 for tax year 2004.

The first argument raised by the Sonis was that the 2004 tax return itself was invalid as a joint return because, not only did Anjali not sign the return, but her signature was placed on the return by her son.  The Court provides a useful review of the rules for establishing the validity of a joint return.  First, it points out that if a spouse does not sign a return, the burden is on the IRS to prove it was valid.  However, the lack of signature can be overcome by showing that the parties intended to sign a joint return.  Even if the non-signing spouse did not explicitly state that she wanted to file a joint return, the facts and circumstances can lead to a finding of validity under the tacit consent doctrine.  Since tacit consent is a facts and circumstances analysis, the fact that the signature was written by the son also does not, by itself, negate the validity of the return.  Common factors in the tacit consent doctrine include whether the non-signing spouse had filed a separate return, whether there was a prior history of filing joint returns, whether the non-signing spouse had objected to the return after it was filed, and whether there was a pattern of one spouse handling the financial matters.

All of these factors weighed in favor of tacit consent in this case.  Anjali repeatedly testified that she did not review the returns by choice because she expected her husband to handle them.  She did not file any returns on her own and there is no record of her contacting the IRS to object to the joint filing.  The couple had also been consistently filing joint returns for the prior five years. These facts were supplemented by Anjali’s admissions that she chose not to review the returns.  The Court was able to confidently find that the 2004 joint return was valid via the tacit consent doctrine.

However, the opinion moves into more complicated territory when determining whether the extended time periods for the IRS to assess the return were valid.  To do this, the Court first reviews whether the Form 2848 appointing Mr. Grossman as a representative was valid as to each of the Sonis and then it discusses whether the eight Forms 872 were also valid as to each spouse.  As the Court acknowledges, “[t]he Code treats married taxpayers who file jointly as one taxable unit; however, it does not convert two spouses into one single taxpayer.  Spouses filing a joint return are separate taxpayers, and each spouse has an absolute right to extend or not extend the time within which to assess…A waiver to extend the period to assess a deficiency is valid only as to the spouse who signs the waiver.”

The Court first finds that Om’s signature on the Form 2848 was valid.  It then uses common law agency principles to find that, as to the first two extensions signed by Mr. Grossman, Om had delegated that authority because he treated Mr. Grossman as his representative throughout the time period in question.

But how does this extend to Anjali?  Common law agency principles would not work here because there is no evidence of Anjali directing Mr. Grossman to act as her representative.  Instead, the Court states, because Anjali gave Om “tacit consent to handle tax matters…we might be able to rely on that authority to conclude Om authorized Mr. Grossman’s representation of Anjali.”  The only further analysis the Court makes on this point is to note that Anjali remained silent as to the representation, thus allowing the IRS the impression that Mr. Grossman represented both parties, and therefore making his signatures on the first two Forms 872 valid. The Court’s conclusion is that “[b]ecause Om authorized Mr. Grossman’s representation, Anjali also tacitly consented, through Om’s agency.”

The Court takes this position a step further by then finding that the next six Forms 872 signed by Om and by his son signing on behalf of Anjali, without her direct knowledge, were also valid on the basis that Anjali had tacitly consented to letting Om handle all financial matters and that she never showed any due diligence in becoming involved in resolving the couple’s tax matters.  The Court found that “[w]hile Anjali may not have expressly given her husband authority to sign specific forms, it was well understood that Anjali gave him implied authority to act on her behalf.”

The specific facts in this case, particularly Anjali’s own testimony that she did not want to deal with any tax matters and trusted her husband to handle them, convinced the Court that she had given Om a blank check for any decisions made regarding taxes.  In doing so, however, the Court took the specific doctrine of tacit consent as applied to confirming the validity of joint returns and converted it into a general concept of “tacit consent to handle tax matters,” with only limited further analysis.  This expansion of the doctrine raises concerns, especially as to cases that may not have such clear spousal testimony as to the consent.  If a spouse has indeed given tacit consent to a joint return, it does not automatically follow that they have tacitly consented to each and every decision the other spouse later makes regarding that return.  The consequences of a broad reading of the tacit consent doctrine could be quite severe to a taxpayer’s individual rights and rigorous analysis should be required to justify such conclusions.

A reason that does support this decision concerns the impact of the documents on the IRS.  The IRS relied on the signed document to extend the statute and, in the case of the return, to assess the liability.  If one taxpayer can come back later after the statute has expired and say I did not sign this and did not consent to filing this, then the IRS is put in a bad position.  Here, the Court seemed to find that the burden to undo the potential harm of having the statute extended should fall on Anjali.  That does not necessarily seem wrong on the facts in the Soni case, but this presents a difficult situation that can also come up in other contexts, such as the filing of joint Tax Court petitions in situations where one spouse is claiming they have the other spouse’s authority to file a joint petition. 

It thus remains an open question as to how far the tacit consent doctrine can be expanded in future cases.  Specifically, if one party is passive in the circumstances surrounding a tax liability, how far should the IRS or the Tax Court go to make sure that the other party is on board?  In the interim, the major takeaway from this case is that spouses will not get very far in arguing that they are absolved by having taken a head in the sand approach to joint tax matters.