TBOR Provides no Relief in Tax Court Deficiency Proceeding

In Moya v. Commissioner, 152 T.C. No. 11 (2019) the Tax Court rejected petitioner’s argument that she could obtain relief in a deficiency case based on her assertion that the IRS had violated her TBOR rights. The precedential opinion cites to Facebook v. IRS (blogged by Les here) and picks up where the Facebook opinion left off in finding that TBOR creates no rights that did not already exist. Because Ms. Moya relied exclusively on TBOR in seeking relief and made no assignment of error regarding the substance of the adjustment in the notice of deficiency, she loses the case entirely with the exception of some concessions by the IRS.

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Ms. Moya is a college professor. She was teaching in Las Vegas at the time the examination began. During the examination she moved to Santa Cruz, California and requested that the IRS reassign her case to an examiner in her new location. She wrote to the examiner in Las Vegas to make this request. She received no response. She called with the same result. She wrote again and received correspondence from the IRS office in Denver indicating that her case would be moved to a location near her; however, the office in Las Vegas subsequently issued a notice of deficiency without ever meeting with her. She considered this a violation of her rights to have her questions answered and the right to meet with an IRS representative at a time and place convenient to her.

The notice of deficiency reduced Schedule C expenses that Ms. Moya had claimed for each of the three years under examination. In her Tax Court petition she chose not to challenge the disallowance of the expenses or the related penalties, but simply relied on the alleged violation of TBOR as the basis upon which the court could grant relief. This decision made the court’s job easier since it merely had to focus on the TBOR arguments. The decision also serves as a reminder that petitioners in Tax Court need to put at issue in the petition (or amended petition) everything they may wish to argue in the case.

By not assigning any error to the adjustments to her returns, Ms. Moya conceded those adjustments according to the Tax Court Rules 34(b)(4) and 41(b)(1) as well as a significant amount of case precedent.

In response to Ms. Moya’s TBOR argument, the IRS essentially argued that she could not make the TBOR argument in Tax Court because the proceeding is de novo. It cited to the case of Greenberg’s Express v. Commissioner, 62 T.C. 324 (1974) in support of its position. For anyone not familiar with Greenberg’s Express, it holds that the Tax Court will not look behind the notice of deficiency. It usually comes up in cases in which the taxpayer wishes to complain about the revenue agent or the audit process and is basically a statement by the court that it will not listen to those types of arguments in a deficiency case. The taxpayer must “get over” their concerns about the way the audit was conducted and instead address the merits of the audit determination. IRS attorneys regularly cite to Greenberg’s Express, because taxpayer complaints about the audit process arise frequently in Tax Court cases. Each Tax Court judge has a canned speech for taxpayers about this issue. The point of the IRS argument regarding Greenberg’s Express was that Ms. Moya essentially made a typical argument addressed by that case, just dressed up in different clothing.

Ms. Moya countered that her argument did not simply complain about the audit, but that TBOR elevated her concerns about the audit to something actionable in the Tax Court case. She sought to find rights created by TBOR that did not previously exist.

The Tax Court finds that “the history of the IRS TBOR makes clear that it accords taxpayers no rights they did not already possess.”  The court traces the statements of the Commissioner, the NTA and the legislative history.  The court cites favorably to the Facebook decision.  It concludes that:

We think there is ample evidence in the history recited to conclude that, in adopting a TBOR in 2014, the Commissioner had no more in mind that consolidating and articulating in 10 easily understood expressions rights enjoyed by taxpayers and found in the Internal Revenue Code and in other IRS guidance.  Certainly, the Commissioner had no power to legislate any new rights.

The court focuses on the Commissioner’s administrative adoption and not on the Congressional enactment of TBOR in 2015. An argument exists that making it law added something to TBOR. The court does not address any possible additional authority that occurs as a result of the passage of the law but nothing in the statute explicitly gives rights to the taxpayer not contained in the administrative provisions of TBOR. 

After the court rejects Ms. Moya’s TBOR arguments, it engages in an analysis that the court occasionally does when someone alleges bad or wrongful actions by the IRS during the examination process to determine if the IRS actions here violated norms to such an extent that the court would take action despite Greenberg’s Express. The court determines that the alleged violations here did not reach the level that would allow Ms. Moya to go behind the notice of deficiency. To go behind the notice and overcome the precedent in Greenberg’s Express would have required a very high level of IRS misconduct during the audit. Such cases are extremely rare.

The result here does not surprise me.  Taxpayers cannot point to anything in TBOR that gives them additional rights. Without something tangible, this case does seem like an attempt to go behind the notice of deficiency, simply using different dressing to make the argument. However, the decision here does not apply to non-deficiency cases. Although the outcome in a Collection Due Process or Innocent Spouse case might ultimately mirror the outcome here, those statutes have roots in equity where the pre-court process might create a better atmosphere for a TBOR argument. Several cases currently exist in the Tax Court in which taxpayers have made TBOR arguments in non-deficiency cases. We may not have to wait long to find out if TBOR has any legs in these types of cases.

Is It Time To Reconsider When IRS Guidance Is Subject to Court Review?

I have been working on an essay that looks at the possible way that Congress could breathe more life into the 2015 codification of the taxpayer bill of rights. My essay Giving Taxpayer Rights a Seat at the Table, which is in draft form and up on SSRN, makes a relatively simple claim: before IRS issues guidance it should be statutorily required to consider whether in its view the guidance is consistent with the taxpayer rights that the IRS adopted in 2014 and that Congress codified in 2015. In making my claim, I acknowledge the limits of the current statutory taxpayer rights framework, which arguably provides no direct way to hold the IRS accountable for actions that violate taxpayer rights unless the right relates to a separate specific cause of action for its violation.*

In researching my article on taxpayer rights, I came back to a stubborn problem with the IRS guidance process and for taxpayers and third parties who believe that the IRS guidance violates a procedural requirement under the Administrative Procedure Act:  there are at times insurmountable obstacles to challenging IRS guidance for procedural adequacy. That problem has led me to think about some interesting and important articles that have addressed this issue in the past few years.

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In the tax world, unlike other areas of federal law, statutes like the Anti-Injunction Act and the Declaratory Judgment Act, have proven formidable barriers to test the adequacy of IRS fidelity to for example the notice and comment requirements under the APA until well after the rule has been in place. In other words, a taxpayer or third party often has to wait for a refund or deficiency case (i.e., an enforcement proceeding) to argue that there was a procedural infirmity that would result in the court’s possibly invalidating the regulation or possibly subregulatory guidance.

This has contributed to some calling for a careful look at the Anti-Injunction Act, with Professor Kristin Hickman and her co-author Gerald Kerska arguing in Restoring the Lost Anti-Injunction Act in the Virginia Law Review (reviewed here by Sonya Watson) that history supports a reading of the AIA that would generally allow pre-enforcement challenges to IRS guidance. The article takes as a starting point that IRS has not always been faithful to APA requirements and not every possible challenge neatly fits into an enforcement proceeding. On top of that, as Professor Hickman has highlighted in prior work as well, it is questionable that there would be an adequate remedy in certain instances even if a court were to find a procedural infirmity in the context of a challenge that arises in a deficiency or refund case.

Despite my sympathy with a reading of current law that would allow for greater pre-enforcement challenges, there are strong legal and policy arguments against courts on their own extending the circumstances when there will be challenges to the procedural adequacy of IRS guidance. For example, expanding the opportunity for procedural challenges will naturally soak precious agency resources.  As Professor Daniel Hemel, in The Living Anti-Injunction Act in the Virginia Law Review online edition argues in an essay responding to Hickman and Kerska’s article, it would be best institutionally for Congress rather than the courts to open the door to pre-enforcement challenges.

Professor Stephanie Hunter McMahon in a 2017 Washington Law Review article Pre-Enforcement Litigation Needed for Taxing Procedures also takes up the subject of challenging IRS guidance. In her article, she sizes up the current landscape:

While Congress only permits procedural challenges late in the tax collection process, this offers little to most taxpayers. The delay in litigating procedural complaints reduces what is challenged and affects taxpayer behavior throughout the period from its promulgation until someone, eventually, challenges the procedures. In the process, delayed litigation requires that taxpayers plan their affairs under the spectre of guidance that might not survive a procedural challenge. Moreover, in deciding whether to follow the tax guidance, taxpayers must not only assess its substance but also the procedures used to create it under procedural requirements that are not consistently interpreted by the courts.

Professor Hunter McMahon drills deeper on the disincentives associated with challenging tax guidance in enforcement proceedings:

Disincentives are increased because, unlike in other areas of law that permit pre-enforcement litigation, people are not suing in post- enforcement tax litigation simply to perfect the agency’s procedures. Instead, they are suing over their own tax obligations. The personal nature of the result and that the costs are already imposed likely changes the way people perceive the litigation. With pre-enforcement litigation, a judge remanding a case to the agency to correct the procedures would be a victory. In a tax refund or deficiency case, remand is insufficient to accomplish the goal of reducing the taxes owed. If courts are likely to remand procedural matters without vacating the rule, the taxpayer has little incentive to challenge the rules because the personal outcome remains the same.

These issues are even more pernicious when the rules in question relate to lower income or marginalized taxpayers, who are less likely to be able to get to court and as Professor Hunter McMahon aptly points out may not have the means or resources to influence the guidance process in the first instance. (That latter point is indirectly highlighted by the draft article “Beyond Notice-and-Comment: The Making of the § 199A Regulations” by Shu-Yi Oei and Leigh Osofsky that Keith discussed recently).

Professor Hunter McMahon proposes a legislative fix. That fix would be to allow an amendment to the Anti-Injunction and Declaratory Judgment Act to allow for a limited time period challenges to the procedural adequacy of the guidance:

[T]his proposal would permit pre- enforcement litigation of procedural requirements and a judicial evaluation of whether the process used, including the clarity of the statement and the comment period, suffices for APA purposes.

As Professor Hunter McMahon notes, the benefit of allowing a limited time to challenge to procedural adequacy is that it could focus attention on procedural issues early in the life of the guidance, which would allow for consistency in application of the substantive rules. A second part of Professor Hunter McMahon’s legislative fix is for Congress to delineate more specifically which forms of guidance are required to go through notice and comment—she focuses on guidance that is intended to change taxpayer behavior rather than define prior action as the candidate for a default requirement to go through the notice and comment process.

Conclusion

I believe that Professor Hunter McMahon’s approach merits serious consideration. I am reflecting further on my proposal about ways to give the taxpayer rights provisions more teeth -my proposal relies heavily on the Taxpayer Advocate Service and enhancing its institutional role in the guidance process, including giving the National Taxpayer Advocate specific authority to comment on regulations (something that the NTA herself as recommended in both Purple Books that accompanied the last two annual reports). As Congress signals a further willingness to take on IRS reform issues, I believe that it should directly address the current reach of the Anti-Injunction Act and the issue of when and to what extent taxpayers and third parties should be able to test the adequacy of IRS guidance conforming to APA requirements.

As part of this approach I am intrigued by the possibility of tying in the IRS’s fidelity to taxpayer rights principles in the rulemaking process. I would be grateful for comments on my draft article or reactions to any of the issues raised in this post.

*An example of how a taxpayer right relates to a specific cause of action is taxpayer right number 7, the right to privacy, and Section 7213, which authorizes a suit for unauthorized disclosure of a taxpayer’s any tax return or return information. An example of a taxpayer right that does not so relate to a cause of action is right number 5, the right to appeal an IRS decision in an independent forum, which as we discussed last year in connection with the Facebook case does not seem to carry with it a direct way to challenge IRS action that arguably conflicts with that right.

 

 

4th International Conference on Taxpayer Rights “Taxpayer Rights in the Digital Age: Implications for Transparency, Certainty, and Privacy”

The National Taxpayer Advocate asked us to announce the upcoming 4th International Conference on Taxpayer Rights and to alert readers not only to the conference, which has become an annual event, but to the opportunity to participate as a speaker at the conference and present a paper. Les and I both had the opportunity to participate as speakers in the first conference. He also participated in the second conference and I attended the third. The conference is an excellent chance to hear about the efforts to protect and improve taxpayer rights around the world. If you have thoughts and ideas about how taxpayer rights should be protected and improved, consider writing a paper and speaking at the conference. If you just want to listen to some interesting discussions on the topic, mark the date and note that the conference has been filling up and turning away interested attendees who signed up late. The balance of this post is taken from the official announcement of the conference and its call for papers. Keith

Taxpayer rights serve as the foundation for effective tax administration. Whether expressed through a taxpayer bill or charter of rights, or a declaration of human rights, governments have long recognized that providing taxpayers with assurances of fair treatment and respect, and protections against government overreaching, further voluntary compliance. Current research is exploring the extent to which procedural justice encourages taxpayers’ willingness to comply with tax laws and obligations.

Since November 2015, the National Taxpayer Advocate of the US Internal Revenue Service has convened 3 international conferences to bring together scholars, taxpayer representatives, tax administration officials, and taxpayer ombuds/advocates, and provide a forum for a multi-disciplinary discussion of the operation of taxpayer rights in theory and practice. Videos and abstracts or papers from past conferences are available at taxpayerrightsconference.com. The 3rd International Conference on Taxpayer Rights, held in Amsterdam, The Netherlands, hosted by the International Bureau of Fiscal Documentation (IBFD) and sponsored by Tax Analysts, was fully subscribed by 160 attendees from 42 countries.

The National Taxpayer Advocate will convene the 4th International Conference on Taxpayer Rights on May 23 and 24, 2019, in Minneapolis, Minnesota. The conference is hosted by the University of Minnesota School of Law and sponsored by Tax Analysts, with technical assistance from IBFD. The 2019 conference will explore the role of taxpayer rights in the digital age, and the implications of the expanding digital environment for transparency, certainty, and privacy in tax administration.

We are currently seeking presentation and paper proposals on a range of topics. In developing proposals, the conference encourages proposals from multiple disciplines (e.g., from the fields of law, economics, psychology, anthropology,

sociology, computer science as well as from government officials and ombuds and taxpayer advocates) that address the following topics:

  • The existence and comparative analysis of taxpayer charters and taxpayer bills of rights around the world, and the foundation of taxpayer rights in human rights.
  • A comparative law analysis of the treatment of taxpayer rights, including under common law and civil law, with recommendations to establish some global common standards.
  • The impact of “big data” on the right to privacy in the context of tax administration, including a comparative global analysis of the judicial treatment of evidence obtained from leaked tax and financial documents.
  • The availability of administrative guidance (including the limits of legislative interpretation and interpretive guidance), its role in fostering compliance, and administrative or statutory vehicles for obtaining access to that guidance, as well as the methods to bring stakeholders into a constructive discussion with authorities and legislative bodies.
  • The ability of taxpayers to legitimately rely on published administrative guidance in its various forms, how such reliance is treated by tax authorities, the judiciary, and legislative bodies, and remedies for taxpayers when they relied on such guidance, to their detriment.
  • The role of “whistleblowers” in tax administration, including access to tax information, and protections for both the whistleblower and the subject taxpayer, with a comparative analysis of the approaches of different countries and other fields of law.
  • The impact of increasingly digital delivery of taxpayer assistance on vulnerable taxpayer groups, including the efficacy of different modes of communicating with taxpayers in order to promote compliance.
  • The ability of taxpayers to bring cases to court, especially in countries where taxpayers are either afraid of seeking assistance or relief, or are reluctant to bring a case against tax authorities because of cultural reasons.

PAPER SUBMISSION PROCEDURE:

To submit a paper proposal, please send the following information by December 1, 2018 to tprightsconference@irs.gov:

  • Author(s) name, contact information, and professional affiliation
  • Author(s) CV
  • Title of proposed paper
  • A 3 to 5 page abstract of the paper, in Times New Roman, 11 point, double spaced, left alignment.

Participants will be notified of their selection by January 1, 2019. Conference fees for presenters will be waived. Travel and accommodation assistance also may be available for academic presenters, courtesy of co-sponsors.

Post-conference opportunities for publication of original papers will be available, including in The Tax Lawyer and in Tax Analysts publications.

Important dates and deadlines:

Deadline for submission of abstracts: 01 December 2018

Notification of paper/presentation acceptance: 01 January 2019

Deadline for submission of slide presentations and updated abstracts: 15 April 2019

Deadline for submission of papers for publication in Tax Lawyer or by Tax Analysts 31 July 2019

Follow up on TBOR and CDP

In an earlier post, I wrote about an order in the case of Dang v. Commissioner remanding a Collection Due Process (CDP) case back to Appeals. Taxpayer opposed the remand requested by the IRS arguing that the Tax Court should just grant the taxpayer’s request for relief without the need of a remand. In a recent order, it looks like the Appeals employee took little time after the remand to reach the conclusion proposed by the taxpayer although the matter is not quite finally settled.

At issue in this case was the taxpayer’s request that the IRS levy on his retirement account in order to satisfy the outstanding tax debt. The revenue officer refused to do so and the Appeals employee said that the CDP hearing did not provide such a remedy. The taxpayer requested that the IRS levy on the retirement account because he was not yet 59 and 1/2. If he pulled the money out of the retirement account as requested by the RO and the SO, he would have to pay tax on the money withdrawn and a 10% excise tax under IRC 72(t)(1). If the IRS levies on the retirement account, the 10% excise tax does not apply because of IRC 72(t)(2)(A)(vii).

Among other arguments, the taxpayer argued that requiring him to pull the money out violated the Taxpayer Bill of Rights since it would cause him to pay more than the correct amount of tax. Requiring him to pull out the money just seemed downright stupid and unfair which no doubt motivated the Chief Counsel attorney to request the remand at the outset of the case. The second time around, Appeals seems to get the concept. The case suggests that some training might be needed and maybe a change in the IRM to make it easier for ROs to levy on a retirement account when requested to do so by the taxpayer. Without such a request, ROs must seek high level approval to levy on a retirement account. Removing the layers of approval when the taxpayer seeks the levy would make it easier for ROs to acquiesce to such a request.

The approval levels provide a barrier that explains why the employees would not readily acquiesce in what seems like a reasonable request by the taxpayer and why their behavior was grounded in logic twisted by the approval levels. The approvals levels necessary to levy on retirement accounts were created to protect taxpayers. So, Mr. Dang’s problem in getting the IRS to levy finds its roots in a procedure designed by the IRS to help but when coupled with the elimination of the penalty offered by IRC 72(t)(2)(A)(vii) ends up hurting certain taxpayers. It’s good to see that the IRS was able to work though the problem in the remand.

Because the case appears on a path to agreement, we will not have the opportunity to see what the Tax Court would do with the TBOR argument made by the taxpayer and whether the use of TBOR in this context might provide a path to remedy.

Facebook Loses Challenge in District Court

We have previously discussed the case that Facebook has brought in federal district court, where it argued that it had an enforceable right to Appeals in a matter that spun from its transfer pricing dispute that it is litigating in Tax Court.  In particular Facebook brought two claims under the Administrative Procedure Act alleging that the IRS acted arbitrarily and capriciously in refusing to refer its case to Appeals. Facebook also brought a claim for mandamus, asking the court to order the IRS to refer its tax case to IRS Appeals.

In this order, the district court has granted the government’s motion to dismiss the suit, finding that Facebook did not have standing because it failed to establish that there was a statutory right to Appeals. That absence of a statutory right led the court to conclude that it had no legally protected interest, a necessary element to prove standing. In so holding, the district court considered the 2015 codification of TBOR, and Facebook’s argument that TBOR reflected Congress’ direction to give taxpayers a statutory right to Appeals:

[W]hat the statutory TBOR did was to impose an affirmative obligation on the Commissioner of Internal Revenue to “ensure that employees of the Internal Revenue Service are familiar with and act in accord with” preexisting taxpayer rights established in other provisions of the Internal Revenue Code. In other words, the TBOR directed the Commissioner to, for example,better manage and train IRS employees to ensure that IRS employees know what rights taxpayers have and act in a way that respects those rights.

In reaching its conclusion the court emphasized that the government’s interpretation did not render the adoption of TBOR a nullity:

First, the statutory TBOR imposes duties on the IRS Commissioner to manage and train IRS employees regarding taxpayer rights. See generally Toward a More Perfect Tax System at 23–36 (discussing proposals for improved management and training of IRS employees); Amanda Bartmann, Making Taxpayer Rights Real: Overcoming Challenges to Integrate Taxpayer Rights into a Tax Agency’s Operations, 69 Tax Law. 597, 614–24 (2016) (same). Second, Facebook’s interpretation that the TBOR itself created new rights ignores the statutory language that the TBOR rights are “afforded by other provisions of this title.” 26 U.S.C. § 7803(a)(3)

It also considered the rights collectively, rather than solely focus on the right to appeal to an independent forum. That led the court to question whether the codification of TBOR should lead to the creation of substantive or procedural rights:

Facebook focuses on only one TBOR right — “the right to appeal a decision of the Internal Revenue Service in an independent forum” — but Facebook’sarguments, if they were correct, would apply to the other nine rights too. For example, the first right is “the right to be informed[.]” 28 U.S.C. § 7803(a)(3)(A). Applying Facebook’s argument, this provision must have created a new substantive right “beyond those existing prior to [the TBOR’s] codification.” A new right to be informed about what? And when? The TBOR does not say, and neither does Facebook. It is implausible that the TBOR created ten new substantive rights that it defined so poorly. The logical reading of the TBOR is not that it created some new, wholly nebulous rights, but that it created no new rights at all, and instead that Congress meant what it said when it said that the TBOR rights were rights “afforded by other provisions of this title,” not new rights created by the TBOR itself. (footnotes omitted)

The opinion also considered the APA and Facebook’s mandamus claim. The court discussed the Revenue Procedure setting Counsel’s discretion to limit access to Appeals and the agency’s decision to not refer the matter to Appeals, and held that neither constituted final agency action.

This is a quick summary and I suspect not the last we will say about this case, nor this issue. The case was discussed last week at the ABA Tax Section meeting, and advocates will continue to press courts to consider the codification of TBOR in differing settings. As I discussed on a panel with Keith and the National Taxpayer Advocate at the Tax Court judicial conference, and as Chris Rizek raised at the ABA Tax Section meeting in response to a question from Special Trial Judge Leyden, a court’s consideration of TBOR would likely differ in a CDP case, where the Tax Court reviews IRS collection actions for abuse of discretion and is required to balance the government’s interest in collecting taxes with the individual’s right that the collection actions that are no more intrusive than necessary.

TBOR and CDP

On March 20, the Tax Court entered an order remanding a Collection Due Process (CDP) case back to Appeals to consider the collection alternative requested by the taxpayer. The remand resulted from the request of the IRS over the strenuous objection of the taxpayer. That’s not the normal scenario for a remand. The taxpayer also sought to have the IRS levy, which it refused to consider at the Appeals level of this CDP case. The facts explain the reason for this seemingly topsy turvy situation. The case also involves significant arguments by the taxpayer about the Taxpayer Bill of Rights and how the actions of the IRS are abrogating those rights. Les and I discussed this case, and others, in our panel presentation this week at the Tax Court Judicial Conference. I will briefly touch on the other cases that we discussed during the panel.

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Mr. Dang is a refugee from Vietnam. After arriving in the United States and quickly integrating, he eventually went into business. Although the business had success initially, it subsequently failed. Mr. Dang had the misfortune to hire a disreputable tax advisor who got him into trouble with the IRS during the period in which the business operated. He has an outstanding liability in the neighborhood of $100,000. That amount of liability allowed Mr. Dang to have his case handled by a revenue officer.

Mr. Dang, through his counsel at a low-income taxpayer clinic, explained to the revenue officer that his IRA was the only asset he had with which he could satisfy his outstanding tax obligation. He asked the revenue officer to levy on his IRA so that he could avoid the 10% (approximately $10,000) excise tax under IRC section 72(t). After some initial resistance, he appeared to have succeeded in convincing the revenue officer to levy on the IRA; however, before the levy occurred, the IRS assigned the case to a new revenue officer and she declined to levy on the retirement account. Instead, she asked Mr. Dang to pull the money out of the IRA and pay off the debt.

Eventually, the IRS issued a CDP notice and Mr. Dang requested a hearing. At the hearing, he requested that the IRS levy on his retirement account. The Appeals employee declined to accept that levying on his retirement account could serve as a collection alternative. He denied relief and issued a determination letter sustaining the right of the IRS to levy on Mr. Dang. A Tax Court petition followed and in their answer to the petition, the lawyers at Chief Counsel IRS admitted that the Appeals employee should have considered Mr. Dang’s request and considered whether a levy on the retirement account would serve as the best way to collect from Mr. Dang. The answer filed on December 1, 2017, stated “respondent will seek to remand this case to Appeals for a supplemental Collection Due Process hearing in which the Settlement Officer’s errors can be corrected.” The answer also stated that respondent “admits petitioner’s CDP hearing was incomplete and did not properly consider all collection alternatives.”

On January 3, 2018, the IRS filed its motion to remand. In that motion, respondent said:

  1. SO True incorrectly believed this request did not qualify as a ‘collection alternative’ and was thus outside the scope of Appeals CDP hearing jurisdiction….
  2. SO True’s determination regarding Appeal’s ability to consider the request was incorrect. Appeals should have evaluated petitioners’ request to pay his liability via a levy on petitioner husband’s Individual Retirement Account and determined whether it was in the best interests of the taxpayers and the government.
  3. Pursuant to Treas. Reg. 301.6330-1€(3) Q&A-E6, taxpayer can request a ‘substitution of assets’ be considered as a collection alternative during a CDP hearing. Requesting respondent collect from a specific revenue source or asset is an acceptable ‘collection alternative’ request and should be considered by Appeals….
  4. A remand for a supplemental hearing is appropriate when it will be helpful or productive…. A remand would be helpful and productive because resolution of this issue would preserve the parties and the Court’s time and resources.”

Petitioners objected to the motion, arguing that it was unnecessary to remand the case and that the Tax Court should simply order the IRS to levy on his retirement account. In the brief filed in support of their objection, petitioners made several arguments and requested “sanctions for violating the Taxpayer Bill of Rights, unnecessarily delaying the resolution of this matter, and needlessly increasing the cost of litigation.” They stated “by refusing to levy on Petitioners’ IRA but insisting upon a voluntary withdrawal from that same IRA, RO Neville rendered meaningless the taxpayer relief enacted by Congress.” They cited to several violations of TBOR, including the right to a fair and just tax system and the right to pay no more than the correct amount of tax.

In remanding the case, the Court gave the IRS a very short time frame to hold the remand hearing and render its opinion regarding taxpayer’s request. Short time frames are a regular feature of CDP cases for taxpayers but not very often for the IRS. It will be interesting to watch this case not only for the substance of the argument that the IRS should levy upon the IRA but also for the role that TBOR might play in the ultimate resolution of the case.

In the panel discussion at the judicial conference, we not only discussed this case but discussed the case of Winthrop Towers previously blogged here, the Harris case  we blogged here and the case of Facebook previously blogged here. It is interesting that in the government brief in opposition to the relief requested by Facebook that it took time to distinguish the Winthrop Tower’s case.

As more and more litigants begin to focus on TBOR, it will be interesting to see how the rights enshrined in legislation in 2015 will impact outcomes of cases (and outcomes of administrative action.) National Taxpayer Advocate Nina Olson, who participated on the panel at the judicial conference said that she did not know how this might turn out but she was watching anxiously. She also said that quotes attributed to her in the government’s brief in opposition quoted her discussing the administrative publication of TBOR and not the legislative enactment. She indicated that by putting it into the Code, Congress changed the impact of TBOR in ways that we do not yet know.

Conclusion

In addition to the CDP and TBOR issues brought to light by this case, the case also raises the issue of levy on retirement accounts. The IRS requires that front line employees get approval two levels up in order to levy on retirement accounts. That approval process generally inures to the benefit of holders of those accounts but serves as a disadvantage to someone like Mr. Dang who wants the IRS to make the levy on his retirement account while the revenue officer does not want to go through the trouble. It seems like there should be a relatively easy path to levy upon a retirement account when it is made at the taxpayer’s request. It is also troubling that those with retirement accounts have their assets more protected from IRS collection action than poorer clients whose only retirement is social security and from whom the IRS can take 15% with no extra approval.

 

Chamber of Commerce Files Amicus in Facebook Case: In Praise of Appeals

The Chamber of Commerce, no stranger to cases challenging fundamental issues in tax procedure, has filed an amicus brief in the case I discussed earlier this week where Facebook is suing IRS due to the agency denying Facebook access to Appeals.

The amicus largely repeats the substantive arguments Facebook has made though emphasizes 1) the importance that taxpayers place on ensuring access to a fair and impartial Appeals function and 2) the cost to the system if IRS is allowed to bypass Appeals when it in its unreviewable discretion believes that decision is consistent with “sound tax administration.”

The brief highlights how taxpayers value privacy (uhh a privacy argument  in a case involving Facebook?) and unlike cases in federal court, Appeals proceedings are outside the public eye. The brief also discusses how Exam is kept in check by Appeals’ mission to settle cases fairly and on the hazards of litigation, a balancing act that Exam does not apply in evaluating possible resolutions:

Taxpayers no longer can feel confident that they will have access to an independent forum to serve as a safety valve on an overzealous examination team. Taxpayers and examination teams alike may focus more energy on convincing IRS Counsel whether it is in the interests of “sound tax administration” to permit access to IRS Appeals at the expense of devoting effort to developing the merits of the issues in the case. The effects of Revenue Procedure 2016-22 will be felt far beyond those cases in which access to IRS Appeals is actually denied.

The brief also emphasizes the Chamber’s view that IRS is trying to carve out a different path and extend dreaded tax exceptionalism:

The IRS continues to resist application of the APA, arguing in this case that “Congress has provided specific rules for judicial review of tax determinations; those specific rules control over the more general rules for judicial review embodied in the APA.”

***

Whatever the underlying merits of the IRS Appeals process, and Facebook’s claims in this case, it is nonetheless astonishing for the IRS to argue in its Motion to Dismiss that it has the authority to deny taxpayers access to an independent administrative forum in an arbitrary and capricious manner, and that taxpayers that are adversely impacted by those actions have absolutely no judicial recourse. Whatever one can say about the goals of “sound tax administration,” a system in which the IRS is above the law—the very same law that applies to all administrative agencies of the federal government—is not one that the Supreme Court has approved and is not one that this Court should approve.

The Chamber brief hangs its hat in part on the argument that the courts have been pushing back on tax exceptionalism. That to me is atmpospherically relevant, but it proves too much: administering the tax system is different from say regulating noxious emissions or ensuring airplane safety.  The devil is in the details of the particular procedures or path IRS believes warrant a separate approach.

IRS has not helped itself in this case though by promulgating essentially a standardless standard that allows Counsel to bypass Appeals that as the brief indicates allows Counsel to “mask illegitmate reasons for denying access to Appeals.” Even if in this case the reason for cutting off access to Appeals is legitimate, the lack of guidance on what should inform or explain that bypass decision generates a perception of illegitimacy, and that is not sound tax administration.

 

Facebook Asserts that TBOR Mandates Right to Appeals

Facebook and IRS are squaring off in Tax Court over billions in taxes relating to its transfer of intangible assets to Irish subsidiaries. That fight has spawned major procedural side skirmishes in a California federal district court, including battles over privilege and IRS’s refusal to allow the social media giant access to Appeals.

Perhaps in a later post I will return to the interesting privilege battles. This post is about the important legal issues in Facebook’s challenge to the IRS’s rules that allow Counsel discretion to eliminate a taxpayer’s right to Appeals.

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In its complaint that it filed last November, Facebook seeks a declaratory judgment that IRS unlawfully issued a 2016 revenue procedure that unlawfully denied its access to an administrative forum. IRS began its audit of Facebook in 2011, and Facebook repeatedly sought Appeals consideration. After Facebook declined to extend the SOL on assessment for a sixth time because IRS did not agree to provide a timetable for Appeals consideration, IRS issued its stat notice. Facebook petitioned to Tax Court and renewed its request for Appeals consideration. IRS refused, referring to the 2016 revenue procedure that allowed Counsel to bypass its right to Appeals review in its transfer pricing deficiency case in the interest of “sound tax administration.”

The case tees up Appeals role and whether taxpayers have the right to Appeals’ consideration in light of developments over the last two decades. Prior to 1998, it was generally accepted that the right to Appeals was discretionary, and the product of IRS procedural rules that IRS was not required to follow. The pre-1998 Code barely acknowledged Appeals’ role in tax administration.   When we rewrote the Saltzman and Book IRS Practice and Procedure chapter on Appeals (currently slated for another refresh this summer) we discuss how the 1998 IRS Restructuring and Reform Act of 1998 (RRA 98) changed that through a host of Code provisions that directly mention Appeals and an off Code but still statutory directive to IRS to ensure an independent Appeals function. In addition, the 2015 codification of TBOR in Section 7803(a)(3)(E) requires that the Commissioner ensure that IRS employees be familiar with and act in accord with taxpayer rights, including the “right to appeal a decision of the Internal Revenue Service in an independent forum.”

In its response to government’s motion to dismiss Facebook argues that RRA 98 and Section 7803(a)(3)(E), taken together, mean that IRS is not free to cut off Appeals’ rights as it has done via the revenue procedure (and as an aside in the IRM when it allows for bypassing Appeals in cases designated for litigation). In making its argument, Facebook claims that TBOR itself creates a substantive right. In response to the IRS view that Section 7803(a)(3)(E) does not directly provide a remedy for violations, Facebook argues that when Congress explicitly directs agency action (as it argues was done with Appeals consideration), an agency cannot dismiss that as meaningless. In addition, Facebook claims that Section 7803(a)(3)(E) justifies the court ordering a remedy for agency violations, through Supreme Court precedent that courts should not read language in statutes as “mere surplusage.”  This argument syncs with our recent guest post on the subject.

The government makes a number of arguments in response, including that TBOR merely expresses general principles and does not create binding rights, the TBOR reference to an independent forum refers to judicial and not administrative review, and that in any event Facebook does not have Article III or statutory standing to bring the litigation.

The matter is scheduled for a hearing in April. We will keep a close eye on this litigation.

Even apart from this case, the broader issue of the role of taxpayer rights in tax procedure is an issue that is picking up steam and is likely to become one of the major issues in tax procedure in the next few years. On PT Christina Thompson recently discussed Alice Abreu and Richard Greenstein’s article on taxpayer rights (which flags some of the issues in this litigation). In addition, Keith and I will be on a panel at the Tax Court judicial conference in Chicago later this month that will consider taxpayer rights, and in May Alice and I will be moderating two panels at the ABA Tax Section Individual and Family Tax Committee and Pro Bono and Tax Clinics Committee that will consider rights in controversies and include more on the Facebook litigation. One of the main promoters of taxpayer rights in tax administration, Nina Olson, is convening the third International Taxpayer Rights Conference in May.