Proving the Liability – The Presumption of Regularity

I am not sure, but I don’t think we have written about a case from Guam since Les cited one in a post during our first month of existence as a blog.  The case of Government of Guam v. Guerrero, No. 19-16793 (9th Cir. 2021) gives us a chance to make up for lost time regarding tax law and Guam.  Perhaps the first issue to address concerns why we care about Guamanian tax issues.  We care because their tax code essentially mirrors our, similar to other territories, and procedural issues regarding their tax issues decided by the 9th Circuit could impact similar issues arising from the U.S.

At issue in the Guerrero case is whether the government of Guam kept adequate records to prove the liability it asserted and to prove that the statute of limitations remained open for it to act.  The court makes a decision regarding the presumption of regularity that could easily apply to the IRS.  For that reason, this circuit court opinion matters.

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Guam’s Department of Revenue and Taxation (DRT) determined that Mr. Guerrero owes about $3.7 million in unpaid taxes for 1999-2002.  He filed his returns late for those years.  The dispute concerns when the taxes were assessed.  The court states:

the official records are missing, likely due to water, mold, and termite damage at the storage facility where they were housed.

This suggests that Guam does not maintain its tax records on a computer system.  That’s surprising.  Maybe the antiquated IRS system is not the worst system in the world.

The court says that after assessment the DRT filed tax liens (I assume the court meant to say the DRT filed notices of federal tax liens) on various parcels of real property (I assume the DRT simply filed notices against Mr. Guerrero and the liens attached to his real property along with his other property.)  After filing the liens, DRT brought this case to foreclose the liens on the real property to which the liens attached.

Mr. Guerrero asserts that DRT cannot prove that it timely assessed the taxes against him.  DRT acknowledges that it does not have the original certificates of assessment, but invokes the presumption of regularity relying on the DRT procedures:

Guam’s evidence that the Department timely assessed Leon Guerrero’s taxes instead consists only of the Department’s internal documents rather than the certificates of assessment. Guam argues that these internal documents are sufficient evidence that the Department assessed Leon Guerrero’s unpaid taxes in January 2006 and sent the relevant notices before the three-year statute of limitations expired. Guam relies on the Department’s internal registers (record lists of delinquent taxpayers) known as TY53 and TY69 registers, as well as an internal transmittal sheet sent to the collections branch after the TY53 and TY69 notices were sent to Leon Guerrero, to demonstrate both that it followed standard procedure for purposes of the presumption of regularity and to show the assessment dates.

At a meeting on March 10, 2006, DRT learned that the notices of assessment did not reach Mr. Guerrero but instead went to his ex-wife’s address.  During the meeting, DRT gave Mr. Guerrero final demand and notice of intent to file a lien and he signed an acknowledgment.  This meeting took place about two weeks before the expiration of the assessment statute of limitations.  The court describes the testimony of the DRT officials who testified at the two-day trial explaining the system for making assessments and notifying taxpayer.  The statutory scheme, and much of the system, mirrors the system in the U.S. used by the IRS.

Because the assessment certificate itself is missing, DRT seeks to prove that it timely made the assessments in question by some other means, here the presumption of regularity.  The court notes:

We have held that a public actor is entitled to the presumption of regularity where there is some evidence that the public actor properly discharged the relevant official duties, which an opposing party must rebut with clear, affirmative evidence to the contrary….

As previously observed, whether the presumption applies or has been rebutted with clear and affirmative evidence to the contrary are mixed questions of law and fact that may be reviewed for clear error. The clear error standard is significantly deferential, and clear error is not to be found unless the reviewing court is “left with the definite and firm conviction that a mistake has been committed.”

Here, the 9th Circuit is not deciding the case as an initial matter but as a reviewing court.  It finds that the district court did not make clear error but it also finds that the district court’s opinion was “opaque and did not adhere to the proper steps of the analysis.”  So, the 9th Circuit sets out to explain the proper steps for making a presumption of regularity determination.

First, it should have considered if some evidence existed to support timely assessment of the taxes.  Instead, the district court determined the presumption was automatically available.  Despite this misstep, the testimony of the DRT officials did provide evidence in support of a timely assessment.  The district court should have explicitly stated that it relied upon the credibility of the DRT witnesses.

Next, the court should have examined whether Mr. Guerrero rebutted the presumption that could be drawn from the testimony.  At the trial level, he did not argue that the records presented were inaccurate.  Therefore, he waived that argument.  He failed to build the type of record he needed to build at the trial level.  The arguments he does make that are not waived by his prior actions are insufficient to cast adequate doubt on the records of the DRT.

The opinion leaves the impression that no one had a good idea what they were doing at the trial level but that DRT had enough on the ball to put into the record evidence supportive of a conclusion that a timely assessment occurred.  The presumption here is one on which the IRS may need to rely if its records are destroyed or it otherwise suffers a degradation of its system.  The court provides a bit of a roadmap for someone trying to attack a record like an assessment.  Certainly, the attack should be straightforward and clearly done at the trial level.  Mr. Guerrero should have sought the testimony of individuals who could talk about the impact of the lost records and how it cast doubt on the correctness of the entire system.  The importance of an expert testifying on this point to counteract the testimony of the government officials cannot be overstated.  Unless the government officials were destroyed on cross, Mr. Guerrero needed to give the court something to cause it to pause before presuming DRT handled the case correctly.  He gave the court nothing to go on and the 9th Circuit finds that significant.

The dissent picks up on some of the errors by DRT and offers a roadmap for how Mr. Guerrero might have attacked the validity of the assessment.  The dissent provides good lessons for those who find themselves in this situation trying to combat a presumption of this nature.  The case leaves me a little concerned about the use of the presumption of correctness in this situation to prove the timeliness of the assessments.  Like the dissent, I felt the majority made some leaps to get to the favorable result for the DRT.

BC 507(a)(8)(C) Priority Prevents Discharge under BC 523(a)(1)(A)

Last week I wrote about the case of Lufkin v. Commissioner, T.C. Memo 2021-71, in which the Tax Court ruled on the impact of filing bankruptcy on the statute of limitations.  In that post, I mentioned that Bryan Camp wrote about the case as part of his Lessons from the Tax Court series, which alerted me to the decision.  In that same post Bryan also wrote about Barnes v. Commissioner, T.C. Memo. 2021-49, which Judge Lauber decided on May 4, 2021.  As with the Lufkin case, Bryan has a good write-up, and he provides good bankruptcy background information.  I will try to add a little additional color to the case.

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The Barnes case shows what happens when a taxpayer goes into bankruptcy while still contesting a liability.  As taxpayers learn, the result does not favor the taxpayer in a situation in which the unresolved liability gets resolved after the bankruptcy filing and the resolution allows the IRS to assess an additional amount.  The Tax Court must work through the bankruptcy provisions to get to the correct result which it does as it demonstrates again that bankruptcy discharge issues can find their way into Tax Court decisions requiring the Tax Court judges to understand bankruptcy law as they rule on tax collection issues.

When Mr. and Mrs. Barnes entered bankruptcy, they were still waiting for the Tax Court to make a decision on their 2003 liability.  They filed the Tax Court petition in 2008 and tried the case in June 2009.  They had submitted their briefs in the case when, on July 26, 2010, before the issuance of an opinion, they filed a chapter 11 petition.  The filing of the bankruptcy petition stayed the Tax Court proceeding and would have caused the Tax Court judge working on the opinion in their case to hold onto the opinion.  While the automatic stay stops the Tax Court proceeding, I don’t know if Tax Court judges interpret it as stopping them and their clerks from working on the case, or if it just stops them from issuing an opinion.  My guess is the latter, but I have not spoken with a Tax Court judge about how strictly the Tax Court interprets the stay.  Perhaps the Tax Court judges interpret the stay to require them to completely stop working on the opinion until the stay lifts, or perhaps there is a split among the judges regarding how they interpret the stay when it comes into existence during the opinion-writing stage of a case.

In any event, the existence of the unresolved Tax Court case means that as to the liability at issue in the Tax Court, the debt in the bankruptcy court for that unresolved liability would receive priority status under BC 507(a)(8)(A)(iii) because the liability was not yet assessed but was assessable. Here, the Barnes filed a chapter 11 case, which requires in BC 1129 that they commit in their plan to fully pay all priority claims.  The IRS participated in the plan and filed a proof of claim; however, it failed to include in its claim the 2003 liability.  The Barnes could have filed a claim on behalf of the IRS for 2003 or could have included 2003 in their plan, but the plan did not include the 2003 liability.  It’s hard to know whether this was oversight by one or both of the parties or a calculated decision.  The Barnes may not have wanted to commit to paying the $50K or so the IRS thought was due and may have been stretched to come up with a plan that would have paid it over time.  The IRS may have preferred to collect outside of bankruptcy and not lose the interest it would lose if paid through bankruptcy.  In any event, 2003 was not addressed.

Note that chapter 11 cases for individuals occur relatively infrequently.  If this were a chapter 11 filed by an entity, an oversight of this type could have ended the IRS’s hopes for any recovery on 2003 because of the super discharge available in chapter 11 to entitles.  That super discharge is not, however, available to individuals who must look to BC 523(a) for the discharge provisions and that’s where the Barnes lose their case with respect to the tax.

The chapter 11 plan, silent as to 2003, was confirmed.  The Tax Court says the automatic stay remained in place while the debtors made their plan payments.  In November 2011, the IRS filed a motion to lift the stay to allow the Tax Court case to move forward, which the bankruptcy court granted.  On April 2, 2012, the Tax Court entered its opinion.  Although the Barnes appealed the Tax Court opinion to the D.C. Circuit, they, like 99.9% of Tax Court petitioners who appeal, did not post a bond to stay assessment.  The IRS assessed on August 1, 2012.  The IRS eventually filed a notice of federal tax lien which allowed the Barnes to make a collection due process (CDP) request, which eventually led to the second Tax Court opinion regarding 2003 – this one only 18 years after the tax year, though the delay was not due to the Tax Court, which had acted reasonably expeditiously in both cases.

The Barnes’ first argument in the CDP case was that the 10-year statute of limitations on collection had ended before the IRS filed the notice of federal tax lien.  This argument makes absolutely no sense given that the assessment date for the 2003 liability is in 2012.  The Tax Court was gracious in noting that the collection statute remained open.

Next, the Barnes made another argument that made no sense – that the 2003 liability was discharged by the bankruptcy case.  Again, the Tax Court graciously pointed out that the liability was entitled to priority because it was not yet assessed but still assessable at the time of the bankruptcy petition.  Since they were represented, I am surprised by both arguments.

The Barnes requested an offer in compromise, but the IRS determined they had the ability to fully pay the debt.  Since they did not agree with that determination or did not want to pay the debt in full, the IRS determined the filing of the notice of federal tax lien was valid and the lien did not need to be released or withdrawn.  The Tax Court sustained this determination by ruling for the IRS in response to a motion for summary judgment.

Tax and penalty liability do not travel on the same discharge path in BC 523.  The penalty for late filing and the penalty for accuracy were discharged because they are governed by BC 523(a)(7) rather than 523(a)(1).  The provision for penalties essentially allows their discharge if three years has passed from the due date of the return at the time of the bankruptcy filing.  The Tax Court notes that these two penalties were discharged.  The interest on the penalties would likewise be discharged just as the interest in the tax would not.

Note that if the Barnes had owed taxes based on their return and not their deficiency case, the taxes owed which were shown on their return would have been discharged subject to an argument regarding the one-day rule, which the IRS would not raise and which the D.C. Circuit has not decided.  It’s possible for a taxpayer having liabilities that arise at different points in time to achieve different discharge results based on the timing of the liability vis a vis the timing of the filing of the bankruptcy petition.

If you have not read one of the many posts regarding the one-day rule, you can read one here which links to others.  The late filing of the 2003 return could itself have posed a basis for losing the ability to discharge any taxes due on 2003 had they filed bankruptcy in the 1st, 5th or 10th Circuits.  No one raised that argument in this case, and I mention it just because there was a late filing penalty assessed.

Tolling the Statute of Limitations by Filing Bankruptcy

The case of Lufkin v. Commissioner, T.C. Memo 2021-71, puts the Tax Court in a position to rule on the impact of filing bankruptcy on the statute of limitations.  The taxpayers raise arguments not only regarding the collection statute of limitations but also the validity of the underlying assessment, which gives me the opportunity to discuss the impact of bankruptcy on the collection statute, which is significant, and on assessment, which after 1994 is rather small.  Bryan Camp wrote about the case as part of his Lessons from the Tax Court series which alerted me to the decision.  He provides some general background on bankruptcy which may also be helpful.

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The important IRC sections when working out these statute of limitations issues are (1) §6501(a) which provides the general three year time period for assessment after the return filing date; (2) §6502(a) which provides the general rule that the IRS has 10 years to collect after assessment: and (3) §6503(h) which “suspend[s] [the period of limitations] for the period during which the Secretary is prohibited by reason of such case [a bankruptcy case and the automatic stay] from making the assessment or from collecting and—(1) for assessment, 60 days thereafter, and (2) for collection, 6 months thereafter.” 

Assessment

Before 1994, the tolling in 6503(h) created a significant issue.  BC 362(a)(6) prohibits assessment during the period that the automatic stay is in effect.  A literal reading of this provision prohibits the IRS from assessing a self-reported tax on a return which would also prohibit the IRS from issuing refunds to debtors in bankruptcy while the automatic stay remained in effect.  This could prevent a debtor in a chapter 13 case from receiving a refund for five years absent a court order lifting the stay.  The language of BC 362(a)(6) provides an example of legislation that fails to consider the functional role of assessment.

For the 16 years from the passage of the Bankruptcy Code in 1978 until the change to 362(b) in 1994, the IRS arguably violated the automatic stay millions of times because it decided that Congress could not have intended to keep it from assessing returns where an overpayment existed.  So, it made the assessment of tax shown on the return and refunded to the taxpayer the overpayment resulting from the excess credits.  After almost two decades, the IRS, with significant assistance from the Tax Division of the Department of Justice, which had contacts in the Judiciary Committee, persuaded Congress to allow it to assess.  Congress did not, however, remove the restriction on assessment from 362(a)(6).  It still exists.  Instead, it neutered it by expanding the exception to the stay in 362(b)(9).

There exists one remaining area in which bankruptcy can suspend the statute of limitations on assessment.  It results from BC 362(a)(8), which prohibits taxpayers from commencing or continuing a Tax Court proceeding while the stay is in effect.  This provision can suspend the statute of limitations on assessment if the taxpayer has received a notice of deficiency and files a bankruptcy petition prior to the 90th day and prior to filing a Tax Court petition.  In this situation, the combination of the prohibition on filing the Tax Court petition, which suspends the 90-day period for timely filing a Tax Court petition, and the suspension of the statute of limitations on assessment caused by the notice of deficiency suspends the statute of limitations on assessment.  The suspension could be lengthy.  This suspension can also easily cause confusion since it operates through the intermediary of the notice of deficiency suspension.

For bankruptcy petitions filed after October 20, 1994, when the amendments to the bankruptcy statute occurred, the only way the automatic stay suspends the statute of limitations on assessment is through this two-step procedure triggered by the notice of deficiency.

Collection

The suspension of the statute of limitations on collection operates in a much more straightforward manner.  BC 362(a)(6) stays collection of pre-petition liabilities as well as assessment.  This prohibition on collection triggers the suspension of the statute of limitations on collection and lasts for the period during which the automatic stay exists plus, pursuant to IRC 6503(h), an additional six months.  To calculate the impact of the stay on collection, you must know when the stay begins and when it ends.  The beginning part is easy.  The stay begins the moment the debtor files the bankruptcy petition.  The ending of the stay creates more challenges.  It depends on the type of bankruptcy.  Generally, the stay will come to an end when the debtor receives a discharge or when the bankruptcy case comes to an end.  This could be several years in a chapter 13 case with a five-year plan.  Some debtors, like the Lufkins, file multiple bankruptcy cases, which can make the calculation trickier.

Before getting to the facts of the case, note that the docket here was interesting and different from the typical pro se case.  This was Mr. Lufkin’s second Tax Court CDP case.  He filed one in 2013 which he settled on a basis not available to see on the electronic Tax Court docket sheet.  He filed the current case in 2017.  In both cases, he took the offensive, filing his own motions for summary judgment and for other reasons.  Unlike his first case, which resulted in a settlement of some type, in this case, he went to trial.  The trial occurred before Judge Ruwe in June of 2019; however, Judge Ruwe retired in November 2020 before rendering an opinion.  So, the case was reassigned to Judge Greaves.

The taxes at issue in this case were employment taxes filed on Form 941.  Mr. Lufkin is a lawyer and the taxes arose from his law practice for the third and fourth quarters of 1998.  With taxes that old, which were assessed in 1998 and 1999, it’s easy to understand why Mr. Lufkin would argue that the statute of limitations had expired.  He also argued that he was not liable for these taxes.

Applying the assessment and collection statute suspensions to the Lufkin’s facts, Judge Greaves found that because Mr. Lufkin filed multiple bankruptcy petitions between 2000 and 2011, the statute of limitations on collection was suspended for a sufficiently long period to allow it to remain open when the IRS issued the notice of intent to levy.  Since Mr. Lufkin responded to that notice by requesting a Collection Due Process (CDP) hearing, he further suspended the statute of limitations on collection.

Mr. Lufkin made two arguments in the CDP hearing.  First, he argued that he was not liable for the taxes because another entity had assumed the debt.  The court does not spend much time with this argument and it shouldn’t.  Even if another entity assumed the debt, it would not relieve Mr. Lufkin of his liability for the debt.  Since he offered no evidence on this issue, the decision was easy.  It’s worth noting that the court did allow him to raise the merits of his employment tax liability since it would have been assessed without the issuance of a notice of deficiency.  The court did not perform any analysis regarding his ability to raise the merits.  So, I assume that the IRS did not object to the procedural issue of his raising this debt.

With respect to the statute of limitations argument, the court notes that its precedent regarding review of this type of challenge is ambiguous.  This might be considered a merits challenge in which the court would review the evidence de novo or it might be considered something the court reviews on an abuse of discretion standard.  Because the court finds it does not matter here which standard applies, it does not stop to sort out the correct answer.

The court does not perform an analysis of the impact of each of Mr. Lufkin’s bankruptcy petitions during the 11-year period between the assessment and the notice of intent to levy but states “even under a conservative calculation, more than 10 years had not elapsed” on the statute.  Probably, the IRS brief performed the analysis based on each bankruptcy petition.  It’s easy to believe that the court was correct if there were multiple petitions and this is one downside of going into bankruptcy repeatedly, since each filing triggers, at a minimum, a six-month extension of the statute of limitations on collection, even if the stay in bankruptcy is quite short.

In addition to challenging the statute of limitations, Mr. Lufkin challenged the verification by Appeals.  He argued that they had destroyed records regarding the assessment and this “amounted to a violation of procedural due process under the Thirteenth Amendment to the Constitution.”  For those of you who specialize in tax and not constitutional law, the Thirteenth Amendment abolished slavery and involuntary servitude.  It will not surprise you to learn that this argument failed with the court, which stated that Mr. Lufkin had failed to establish a nexus between the Thirteenth Amendment and his tax case.

As Bryan mentions in his post, the primary lesson here regards the impact of filing bankruptcy petitions on the statute of limitations.  Several actions can suspend the statute of limitations on collection.  I wrote recently that the IRS is having trouble correctly calculating the statute of limitations on collection primarily related to installment agreements.  Here, the IRS has plenty of cushion and easily turns back an argument based on the limitations period.

IRS Whiff on Timeliness of Refund Claim Prevents Payment of Refund If Taxpayer Fails to File Suit Within Two Years

What happens if a taxpayer timely files a refund claim, IRS denies the claim because it mistakenly believes that the claim is untimely and the taxpayer fails to files a refund suit within two years? To top it off, IRS, outside the two-year window for filing suit, realizes that it made an initial mistake in rejecting the claim on SOL grounds?

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A recent email released as Chief Counsel Advice describes this scenario. As the email notes, that the IRS later acknowledges the claim as timely does not grant the IRS the power to reconsider its earlier denial if the two year period for filing suit in federal court has passed. 

A quick statutory background on refunds. As to filing a suit, Section 7422 authorizes a suit for refund for taxpayers who believe they have overpaid taxes (or are entitled to an excess of refundable credits). Section 7422 authorizes such a suit only once the taxpayer has submitted an administrative claim for refund with the Service. Section 6532 prevents suits 1) until at least six months have passed after filing the claim (unless there is an earlier denial) or 2)  “after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.”

The email/advice does not provide the underlying facts but as many readers (and my suffering procedure students learn) is that the 6511(a) and 6511(b) SOL refund rules and limitations on amount can be tough.  The email flags that the timeliness of the claim issue in question relates to Section 7503, which provides rules for when the last day for performing an act falls on a weekend or holiday.  The advice acknowledges that the  refund claim was in fact timely when taking into account Section 7503.

As the advice notes, if a taxpayer has not in fact filed suit, under Section 6514(a)(2) a refund issued after the two-year period in 6532 is considered erroneous. As such, the taxpayer is out of luck unless there was some procedural defect with the IRS’s denial of the refund, such as a failure to be sent to the proper address or a failure to send by certified or registered email. 

What would happen if the IRS had issued the refund after the two-year period had lapsed?  Then the payment would be an erroneous refund, allowing the IRS to recover under erroneous refund procedures, leading to yet another complex set of rules that delight tax professors and annoy students and taxpayers alike.

The situation highlights the at times unfairness of the SOL rules. Whether the time period for an action is jurisdictional or generally subject to equitable exceptions is a topic we have discussed frequently. Bryan Camp has thoroughly discussed these issues in a recent Tax Lawyer article where he explores why he believes the refund suit rules in Section 7422 and Section 6532 are not jurisdictional.  To that end see also a PT post from Carl Smith discussing a district court case from the ED of Washington where the court equitably tolled the 6532(a) filing deadline, citing the Volpicelli case from the 9th Cir. holding that the 6532(c) wrongful levy suit filing deadline is not jurisdictional and is subject to equitable tolling. The brief CCA does not go down this rabbit hole, but I note that IRS does not accept Volpicelli, and this topic is one courts will continue to address.

Additional OIC Comments Not Specifically Related to the Mason Case

When Bryan was writing his post, we had an exchange about OICs.  Some of the comments I provided to him I might have provided in posts over the years, but I will state them here in case we have new readers or old readers with memories like mine.  Most of these comments relate to the history of OIC provisions or the IRS administration of the OIC.

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The Current OIC Program

Although Congress authorized the IRS to compromise collection cases in the 1860s, the IRS very rarely did so.  In Virginia when I started working in Chief Counsel’s office in 1980, one RO in the state was assigned to work offers.  He would travel the state working the offers and reject every offer after careful consideration.  I think what was happening in Virginia was happening across the US.  Then in 1990, Congress extended the statute of limitations on collection from 6 to 10 years.  I was working in the National Office at the time in the group of attorneys specializing in collection matters.  I watched firsthand the reaction to the change in the statute of limitations, which came as a surprise to the IRS.

The extension from 6 to 10 years was an idea that Congress had to collect more money without having to say they raised taxes.  They could score this as something which would bring in dollars and use that score to reduce taxes elsewhere or spend more money and have it look as though the event was revenue-neutral.  We see the same discussion today as Congress debates whether to give the IRS more money so it can collect billions of additional dollars.  While I think the IRS could use more money, the amount it will collect as a result of receiving more money is tricky to predict.

When Congress changed the statute of limitations on collection in 1990, it did not consult with Treasury or the IRS.  Had they been consulted, Congress would have learned that the IRS collects very little money after the first two years.  The bill got passed at a time when Congress, and therefore the IRS, was very concerned with the Accounts Receivable due to the IRS and was asking lots of questions about how the IRS could reduce the ARDI (I can’t remember all of the acronym.)  The IRS even had an executive whose only job was to reduce accounts receivable. 

The IRS knew that the extended statute of limitations was going to cause the ARDI to balloon because of the uncollectable accounts that were going to stay on the books four years longer.  So, it started casting about looking for fresh ideas to reduce it and one of them was to actually accept offers instead of rejecting them.  It was the wild west for the first few years as the IRS tried to get its policy completely lined up.  In the mid-1990s an excellent attorney, now an IRS executive, Carol Campbell, created the income and expense guidelines as well as the exempt asset guidelines based on IRC 6334.  In 1998, Congress came behind and codified some of the things going on, including requiring the IRS to have income and expense guidelines which it had already created.  So, the current OIC program is less than 30 years old and resulted not from a change in the statute but from a change in administration because Congress gives the IRS almost complete discretion in OICs.

OICs for Low-Income Taxpayers

One of the few restrictions placed upon the IRS as the IRS codified additional OIC provisions in 1998 was the requirement that it not reject OICs simply because the taxpayer did not offer some minimum amount.  This restriction is located in IRC 7122(c)(3).  You can give credit for that code section primarily to Nina Olson and partially to me.  Nina had a Tax Court case with my office back when she directed the Community Tax Law Project in Richmond, Virginia.  The IRS had determined that the taxpayer owed a lot of money.  The case had a messy factual background that was going to require a lengthy and difficult trial. 

If the IRS won, it was unlikely to collect anything from the taxpayer, whose business had ended and who had spent time in prison.  I suggested that, instead of a trial, she concede the liability and we compromise the debt.  Nina liked the idea, but we fought over the compromise because I wanted a minimum amount to make the effort worthwhile.  Subsequent to the case but not long thereafter, Nina was asked to testify before Congress.  In her testimony to Congress leading up to the 1998 changes, she convinced Congress that requiring a minimum amount to compromise the debt of a low-income taxpayer was wrong.  Her testimony resulted in the passage of IRC 7122(c)(3), for which I claim partial credit since I was the person at the IRS who “inspired” her testimony.

OIC Stats

For those who can peek behind the paywall, David Van Den Berg recently wrote an article for Law 360 building on the current National Taxpayer Advocate’s comments regarding OICs in the mid-year report.  In her report, she provides stats on the declining number of OICs over the past decade. According to the NTA, fiscal year 2020 marked the seventh consecutive year of decline in OIC receipts, and total OIC receipts for FY 2020 were the lowest they had been since 2008.  She states that TAS is looking for ways to increase the number of successful OICs.  Unemployment is a big driver of receipts.  Perhaps the unemployment situation caused by the pandemic will cause many more OICs. 

In his article, David mentions that the IRS is considering investing in robotics and exploring digitization of the OIC forms as well as creating an ability to submit the OIC online.  I mentioned to him when he contacted me about the article that I would like to see the IRS articulate its goals for the OIC program as part of deciding whether it has too many or too few OICs.  It started the modern program over 30 years ago as a reaction to a surprise change in the statute.  It started the program to reduce accounts receivable rather than to necessarily benefit collection or benefit taxpayers as a whole.  With a tightly crafted goal for the program, it would be easier to determine if it was meeting the goal for accepting offers rather than just saying a goal exists to increase the number of offers.

Levy on Social Security Benefits: IRS Taking Payments Beyond Ten Years of Assessment Still Timely

Dean v US involves a motion to dismiss a taxpayer’s suit alleging that the IRS recklessly disregarded the law by continuing to levy on a taxpayer’s Social Security payments beyond the ten year SOL on collections.  The magistrate concluded that the IRS’s actions were not improper and recommended that the case be dismissed. The district court approved the recommendation and Dean timely appealed to the 11th Circuit, which affirmed the district court.  The case nicely illustrates how the ten-year collection period does not prevent collection beyond the ten-year period when there is a timely levy relating to a fixed and determinable income stream.

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Dean owed over two million dollars for tax years 1997-2005. IRS assessed the liabilities in 2007; IRS recorded a notice of federal tax lien shortly thereafter. In 2013, IRS served a levy on Dean and the SSA for the unpaid tax. Following the levy, SSA began paying over all of the benefits slated for Dean to the IRS. I here note as a tangent that this differs from the federal payment levy program under 6331(h), which authorizes an automatic 15% levy on certain federal benefits, including social security. IRS is not precluded from issuing continuous manual levies, as it did here, where it could take all of the benefits, subject to exemptions that the taxpayer establishes as per 6334(a)(9).

In 2017, with the CSED expiring, IRS filed a certificate of release of federal tax lien stating that Dean had “satisfied the taxes,” that the lien was “released,” and authorized the proper IRS officer to “note the books to show the release of this lien.” IRS also abated the assessments.

Dean at this point believed that the levy on his social security benefits should have stopped. When it did not, he filed a complaint in federal court alleging that the levy was an unauthorized collection action and he sought over $64,000 in damages.

Unfortunately for Mr. Dean, as the magistrate noted, the argument does not “hold water” (allowing me gleefully to link to the great Joe Pesci and Marisa Tomei scene in My Cousin Vinny).

The regs under Section 6331 describe the relationship between a levy and fixed and determinable payments: “[A] levy extends only to property possessed and obligations which exist at the time of the levy.” 26 C.F.R. § 301.6331–1(a). “Obligations exist when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date.” Id. 

An obligation is fixed and determinable “[a]s long as the events which gave rise to the obligation have occurred and the amount of the obligation is capable of being determined in the future …. It is not necessary that the amount of the obligation be beyond dispute.” United States v. Antonio. 71A AFTR 2d 93-4578], *6 n. 2 (D. Haw. Sept. 24, 1991). Numerous cases establish that Social Security benefits are a fixed and determinable obligation of the SSA and are subject to one-time levies. 

As the lower court opinion discusses, the 2013 levy created a custodial relationship between IRS and the SSA and as such the benefits came into constructive possession of the IRS. The regs under Section 6343 also provide that “a levy on a fixed and determinable right to payment which right includes payments to be made after the period of limitations expires does not become unenforceable upon the expiration of the period of limitations and will not be released under this condition unless the liability is satisfied .” 26 C.F.R. § 301.6343-1(b)(1)(ii).

The Eleventh Circuit also helpfully explains the relationship between the levy and the benefits, directly refuting the claim that the collection occurred after the expiration of the SOL:

Instead, the IRS seized his entire Social Security benefit—that is, his “fixed and determinable right to payment” of his Social Security benefit in monthly installments—immediately upon issuing the notice of levy in June 2013. 26 C.F.R. § 301.6343-1(b)(1)(ii); see Phelps, 421 U.S. at 337. Having seized his entire benefit before the expiration of the collection limitations period, the IRS was not required to relinquish it after the period expired. See 26 C.F.R. § 301.6343-1(b)(1)(ii).

The lower court opinion also nicely discusses the lack of legal significance of the IRS’s abatement of the assessment and issuance of the release of federal tax lien. Both events did not change that Dean owed an underlying tax.  As to the abatement, taxpayers are liable for the tax regardless of whether there has been an assessment. While the release of the federal tax lien affects the IRS’s security interest, it did not release the levy and had no bearing on the underlying tax debt.

More Clarity on CSED Problem

In January of this year I wrote about a problem with the Collection Statute of Limitations (CSED) that my clinic encountered.  In our quest to resolve the CSED problem, we involved the Local Taxpayer Advocate office.  It confirmed that the CSED had run, despite the fact that the taxpayer’s account was still open, and told us there was a glitch in the system; however, we were not told what the glitch was.  A strong suspect for the glitch has now been identified.

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

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

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

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

Three years later and five years after the problem was identified, the recently published objectives report contains Objective 16 which is “CONTINUE ADVOCACY EFFORTS TO CORRECT ERRONEOUS COLLECTION STATUTE EXPIRATION DATES DUE TO PENDING INSTALLMENT AGREEMENTS.”  This section of the report states the following:

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

In July 2020, TAS identified and provided the IRS with over 6,000 taxpayer accounts with CSEDs erroneously extended by one year or more. As of December 2020, the IRS had not finished reviewing and correcting these cases. TAS has recently provided the IRS with several thousand more taxpayer accounts that appear to have the CSED incorrectly extended by a year or more. Despite efforts to find and correct unreversed and improperly reversed pending IAs, TAS continues to find errors, resulting in incorrect CSED extensions of a year or more.

I did not include the footnotes contained in this quote, which primarily refer to emails between TAS and an unidentified part of the IRS.

I assume without being sure that the problems described in the Objectives Report detailing a continuation of the issues first publicly identified in the NTA blog post in 2018 resulted in the problem in the case in my clinic.  Now that we know the problem has continued long after it was identified and brought to the attention of the IRS and that it appears to be widespread for those taxpayers who entered into a failed installment agreement, all practitioners should be on the alert for IRS efforts to continue collection past the expiration of the statute of limitations.

This is not a problem that should be ongoing.  The IRS should have fixed this problem long ago.  It should be affirmatively notifying taxpayers and affirmatively refunding money to them.  A high percentage of installment agreements fail.  Employees of the Automated Call Sites routinely convince taxpayers to enter into installment agreements that the taxpayer cannot support over the long haul and taxpayers routinely have a rosier forecast for their financial future than turns out to be the case.  It’s easy to imagine even the best planned installment agreements failing in large numbers over the past 16 months given the impact of the pandemic on employment.

The IRS needs to make public announcements on what it is doing to fix this problem and how it is going to put taxpayers back in the right position.  A problem like this has a disproportionate impact on low income taxpayers who generally lack representation and lack the knowledge to challenge the IRS calculation of the CSED.  Even the most sophisticated taxpayers face challenges in calculating the CSED because of its complexity, as noted in this post from several years ago.  For this problem to continue for half a decade after it was brought to the attention of the IRS is unacceptable.

Calculating the Collection Statute of Limitations

I want to mention a problem with the collection statute of limitations (CSED) that my tax clinic recently encountered.  The response of the IRS to an inquiry about the CSED surprised me.  I have heard from some people at the IRS that there is a problem with CSED calculation within the IRS; however, I lack any certainty regarding that problem.

The calculation of the CSED has been quite difficult for some time.  Patrick Thomas wrote an excellent post on the issue almost six years ago.  We have given the issue insufficient attention.  The recent sending of notices with the wrong dates raises the issue of the CSED since some of the notices sent can impact the CSED and the IRS records now contain dates known to be wrong.  

This post is the story of one case but I fear it reflect broader problems.

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The tax clinic has a client who owes taxes for the years 2006-2009.  In looking at her transcripts, we calculated that the statute of limitations on collection (CSED) had run for three of the years but the transcripts still showed the periods as open.  I asked the student handling the case to call the practitioner line to obtain from the IRS the dates it calculated for the CSED.  I did not necessarily intend to rely on the date calculated by the IRS but did want to know and understand its calculation.

The person answering the phone told the student that the student should calculate the CSED based on the transcripts.  The person did not offer a CSED nor offer to assist in calculating the CSED.  I did not find that to be a helpful answer.  In fact, I found it shocking.  Perhaps it simply reflects the response of one employee who lacked training or who had other issues, but I expected the employee to easily retrieve and transmit this information. The IRS should have a calculation of the CSED on its system and should provide it upon request.  In my opinion it should provide it on the account transcript so that ascertaining the date calculated by the IRS would not necessitate a call.  I might or might not agree with the date provided by the IRS, but it should not hide the ball on this.

Because I still wanted to know why the IRS considered the CSED open for periods I thought had expired, we asked again a different way.  The clinic contacted the Local Taxpayer Advocate (LTA) and asked it to ask the IRS to provide us with the CSED for these years.  I try hard never to contact the Local Taxpayer Advocate.  Not because the LTA is unhelpful but because I think the LTA is overworked and that the clinic can resolve most problems without adding to the LTA’s burden.  The clinic receives a grant under IRC 7526 to assist low income taxpayers and calling the LTA to assist those taxpayers in anything but extraordinary cases seems like copping out on the purpose of the grant.  In the case of a disagreement regarding the CSED there is no easy way to contest a conflict in the calculation. 

It took a couple months to receive a response from the LTA.  The response confirmed the CSED had run for three of the years.  This matched our calculation.  More surprising and more disturbing, the advocate indicated that there was a “glitch” in the CSED system.  In addition to confirming for us the CSED, the LTA office also set out to have the taxes abated for the three periods for which the CSED had run but which still appeared open on the transcript.  My relieved client set out to pay the liability on the remaining period.

I did not receive a further description of the glitch other than that it existed.  I would be interested in any insight readers might provide on this and caution anyone with a CSED issue to carefully review the transcripts to make sure that the statute is still open.

If a glitch exists in the CSED calculation system at the IRS, that could cause it to continue to collect when it should not.  That would be a serious breach of taxpayer rights.  Few taxpayers are represented.  Almost no taxpayers and probably relative few practitioners can correctly calculate the CSED if actions such as installment agreements, collection due process, bankruptcy or other statute suspending actions occur.  We rely on the IRS to correctly calculate the statute and to abate the liability if the statute has run.

The pandemic has made it very difficult for the IRS to administer the many tasks under its writ.  It has performed many tasks well under adverse circumstances.  I know that the IRS does not intentionally want to make a mistake regarding the CSED.  The refusal of the IRS employee to answer the question about the CSED and the response from another IRS employee that there is a glitch in the calculation of the CSED raises significant concerns. 

In the most recent post regarding the sending of notices with wrong dates I initially included a couple paragraphs about the CSED issue discussed here, but those paragraphs were carved out for a later post, this one.  As occasionally happens with our hastily prepared posts, a sentence alluding to the CSED issue remained in the post which caused a reader, Ken Weil, to write me, as he and other readers occasionally do when I say something that doesn’t make sense or doesn’t fit in the context.  I wrote him back explaining the mistake and he responded with the following concerns about the CSED, and its close cousin the assessment statute of limitations (ASED), stemming from his bankruptcy and collection based practice:

The lack of CSED transparency has been an issue for years.  Fran Sheehy and I both asked Nina [Olson] in person at an ABA Tax section meeting to make this an issue.  I’m pretty sure we did this more than once.

Within the past year, the IRS has started posting ASEDs and CSEDs in at least one account entry, so that is a step in the right direction.

I find that I almost never agree with the IRS CSED calculation.  Most of the time the differences are not large, and I often attribute the difference to the uncertainty over installment-agreement-request tolling. …

So, yes, it is a problem.  And, no. I do not know how to deal with it.

I don’t know how to deal with it either.  I certainly don’t want to contact the LTA every time I have a concern.  The calculation can be difficult.  The IRS needs to get it right.