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.

Article Review: How Can Tax Collection Be Structured to Observe and Preserve Taxpayer Rights: A Discussion of Practices and Possibilities

We welcome back guest blogger Sonya Watson who teaches at UNLV law school where she is an assistant professor in residence and the director of the Rosenblum Family Foundation Tax Clinic. As mentioned before, she is one of the new clinic professors now writing a regular feature which describes law review articles on tax procedure issues. She has selected an article I wrote a couple of years ago on taxpayer rights. Assisting her in the preparation of this post is her student, Vincent Kwan. Keith

In this article by Keith Fogg and Sime Jozipovic, the authors address the U.S. tax system and explore the rights of taxpayers in different countries for comparison. The article generally focuses its discussion on taxpayer rights and collections, but specifically on the enforcement mechanisms used by various governments.

Generally, the government’s inability to collect and enforce collection can be seen as a failure of the system that makes those who comply with tax laws feel as if others have an unfair advantage. However, the government must balance forced compliance against those who do not pay voluntarily with caution so as not to “drive [noncompliant taxpayers] to an underground economy, to discontinue producing income or to economic positions that fall through the necessary social safety net.” To properly and effectively enforce the tax laws, the government must consider the rights of the taxpayer as well as what the government can do to ensure compliance.

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According to Fogg and Jozipovic, there are three taxpayer rights that must be preserved to main an effective tax system, which include the right to be informed, the right to challenge the underlying liability and proposed collection action, and the right to a fair and just tax system. To give a more well-rounded and holistic view of the way in which the government can preserve taxpayer rights, the authors discuss the tax collection systems of the United States, England, Germany, Switzerland, Croatia, and Australia. The article highlights the differences between tax systems and taxpayer’s rights in each country, judging the efficacy of each system in protecting the rights of its citizens. The article concludes with a proposal on how to best structure the tax system to maximize taxpayer rights with an optimal collection strategy.

The authors start with the United States tax system and describe the process in detail; however, for the sake of brevity, we will note only the highlights. The collection of taxes begins with a volunteer assessment except when taxpayers fail to file a return, in which case the government will ultimately prepare a return for the taxpayer. After voluntary assessment, or an assessment that is the result of an examination, IRC Section 6303 requires the IRS to send a “Notice and Demand” letter within 60 days of the assessment, alerting the taxpayer that the collection process has begun. If the taxpayer has taxes owed, the letter states the amount of tax owed and requests payment within 10 days.

IRS collection alternatives provide debt relief for those taxpayers who are unable to pay. Collection alternatives include Currently Not Collectible status, Offer in Compromise, and installment agreements. Additionally, taxpayers can seek relief from all debts through bankruptcy by obtaining a discharge of taxes which have grown old. There is also the option of postponing and restructuring the payment of the taxes in the Bankruptcy Code’s reorganization chapters.

The Taxpayer Bill of Rights plays a large role in ensuring that IRS collections is fair and just. It mandates that taxpayers have the right to be informed and the right to pay no more than correct amount of tax. The IRS often falls short of honoring these rights. A few ways the IRS falls short is by sending taxpayers notices that are difficult to understand, by providing account transcripts that are difficult for taxpayers to read, and by failing to have adequate staff available to answer taxpayer questions about tax debt collection. To address this, the authors propose having “the IRS send taxpayers an account transcript with the annual statement of outstanding liability” and also “having an adequate phone presence with properly trained assistors who can explain the account transactions, which would ensure that taxpayers will have the opportunity to learn the basis of their liability when questions arise.” Such measures would help to ensure that taxpayers who cannot afford representation have as good a chance of obtaining a good result as those taxpayers who can afford representation. Not all taxpayers receive the same treatment when they owe taxes. Sometimes, there is discrimination of taxpayers based on who they work for, such as “encouraging” government employees to pay their federal taxes. However, doing so removes fairness from the system.

Through the Taxpayer Bill of Rights, the U.S. has tried to systematize the procedural rights of taxpayers around the world. However, due to the many differences and complexities between countries, systemization is somewhat difficult as there is great divergence in the various tax systems. The authors compare the U.S. tax system to solutions in the field of tax debt enforcement in the UK, Australia, Germany, Croatia, and Switzerland, analyzing the tax mechanism in those countries and what the U.S. can learn from them.

 

Switzerland

Unlike the U.S., where taxation is generally centralized in the federal government, there is a high level of decentralization in the Swiss tax system in that the Swiss regional entities— cantons—can implement their own taxes and their own measures of tax collection.

By relying on preventive distraints, the Swiss tax law has a developed system to prevent tax collection default. Preventive distraints can be voluntary and involuntary. Voluntary distraints exist “with the consent of the taxpayer pursuant to a compromise agreement between the taxpayer and the tax authorities.” On the other hand, an involuntary preventive distraint can only occur under certain circumstances defined by law such as “where the taxpayer has no permanent residence or headquarters in Switzerland, and where the tax authorities have objective reasons to believe that it may not be possible to collect the tax.” The term “Sicherungsverfügung” describes the administrative act that contains the reasoning of the taxing authority and the measures to apply. If the taxpayer fails to pay on time, taxing authorities utilize a preventive distraint, which permits them to take possession of “property of the taxpayers valuable enough to satisfy the tax liability, including any interest and penalties, while title to the property remains with the taxpayer.”

As far as tax debt forgiveness, there is a unified system to regulate forgiveness of federal taxes. The procedure begins with the taxpayer’s request. “If the tax authorities agree to settle the debt, they can decrease, forgive or defer the debt and as mentioned above, if they deem necessary, include a voluntary preventive distraint as requirement.”

Regarding taxpayer rights, there are few guidelines published for taxpayers and they only briefly touch on taxpayer rights. Generally, most taxpayer rights such as the right to equal treatment, the right to be informed, and the right to challenge the underlying liability, have their basis in the Swiss Federal Constitution (“Bundesverfassung”). The general provision in “article 8 of the Federal Constitution guarantees equal treatment before the law, and article 127 (2) guarantees equal treatment of taxpayers and taxation based on the economic capacity of an individual.” Also, see Article 29 (1) for procedure before a public authority, Article 29 (2), for the right to be heard in any procedure before a public body, and Article 36 (3) for the rule of proportionality. 

Australia 

Similar to the U.S., Australia primarily uses a centralized taxing authority. Regarding tax collection enforcement, if a taxpayer does not satisfy a tax obligation, the taxing authorities file a claim of summons with the court to have the court recognize that the debt is duly owed. The taxing authorities then have several methods for enforcement to seize a taxpayer’s personal and real property to satisfy a liability. Also, taxing authorities can force both corporations as well as individual taxpayers into a bankruptcy proceeding. On the extreme end, if the company [d]oes not pay or enter a payment plan within 21 days, the tax authority can place it into a liquidating procedure, also known as a “wind-up.” If this occurs, a trustee will liquidate the company and assuming sufficient assets exist, the creditors will receive payment from the liquidated assets.”

Also similar to the U.S. tax system, there are many ways to discharge a tax liability in full, including deferral rules, agreements with taxpayers, and special hardship rules. Also, taxpayers can enter into an installment plan, but the decision rests within the discretion of the taxing authorities. If there is hardship, there is a limit on certain individual taxes and duties, requiring that relief “must have a positive effect on the economic situation of the taxpayer; accordingly, a taxpayer who would be insolvent regardless of the hardship release would not be granted tax forgiveness.”

Unlike the U.S. and other countries, Australia does not have a taxpayer bill of rights. Instead, Australia has a taxpayer charter—a sort of bill of rights that taxpayers can expect in their interactions with taxing authorities. However, it is not as comprehensive as that of the U.S. Therefore, Australian taxpayers have scant rights. Three rights of significance in the charter include the right to receive an explanation of decisions, the right to fair and reasonable treatment, and the right for an independent review.

As the authors note “The European Union serves as a supranational body limited to influencing just those areas of legislation of the member states within the competences explicitly transferred to the EU.” Many aspects of European law overlap with tax collection and enforcement. Such overlap results from the EU fundamental freedoms which include the free movement of capital, the free movement of goods, the free movement of persons, and the free movement of services. In this vain, the EU’s laws limit the types and amounts of relief that its member states may provide. Additionally, the EU’s Tax Claims Recovery Act, an enforcement network covering all of the EU, affects how tax compliance is enforced. However, member nations can use their own enforcement mechanisms to collect tax debt. However, because the EU strictly limits debt forgiveness, debt forgiveness is largely the result of state aid.

Germany

The German tax collection system, like the U.S. system, is built around the country’s federal structure. Tax collection is within the competences of the Länder, the German federal states, which agree on an interstate contract, defining the basic procedures of tax collection. Germany has been a stable country economically, requiring little restricting compared to other EU states.

Enforced tax collection in Germany is executed by either the authority that issued the primary tax assessment or by any other tax authority in the country as the result of cooperation rules. Enforcement methods include seizure of personal and real property, forced insolvency proceedings in the case of corporation, and forced property evaluations for individuals. Once an assessment is made, taxpayers have limited options to protect themselves from enforced collection.

However, debt forgiveness is available based on the German Duties Act (Abgabenordung, AO), which “contains the essential material rules of tax forgiveness.” There are two main rules regarding tax forgiveness: a substantive rule contained in section 227 for tax forgiveness in cases defining application of the merits of the imposition of tax, and a procedural rule contained in the interstate agreement called a deferral agreement “Stundungserlass” which addresses forgiveness from a collection perspective.” While tax debt forgiveness is possible for every taxpayer in Germany, and the German system exhibits a good measure equitable treatment for all taxpayers, the German system is very rigid in granting the tax relief. The German Fundamental Law, “Grundgesetz,” the de facto constitution, of Germany has rules that form basis for taxpayer rights, but does not contain rules that specifically apply in matters of tax law.

Croatia

While Croatia has membership in the EU, it is the least developed country analyzed in this article. Despite reforms in recent years, it still has not achieved the efficiency and sophistication of the systems of Western European countries. This likely stems from Croatia’s economic crisis, which results from “a nation-wide high unemployment rate and significant private debt have lead in recent years to a steep increase of tax collection problems. Currently in Croatia, about 8% of the adult citizens and more than 40,000 corporations have blocks on their bank accounts.”

Regarding enforced tax collection, like in the U.S., Croatian taxing authorities in have the right to seize tangible property, funds in bank accounts, and tax refunds. Croatian taxpayers do have to receive notice about their tax debt but not necessarily the right to be heard regarding the tax debt. Only when taxing authorities fail to at least attempt to provide appropriate notice to taxpayers prior to taking collection action do taxpayers possibly have the right to challenge the decision of the taxing authority. Also like in the U.S., Croatian taxing authorities may levy a taxpayer’s salary until a tax debt is satisfied.

Unlike in the U.S., Croatia does not provide for tax debt forgiveness through insolvency (bankruptcy). Therefore tax debts remain on the books until the expiration of the statute of limitations plus four years after the statute of limitations and tax collection is not possible, or until taxing authorities decide to remove the debt from the books. However, pre-insolvency “procedure allows the creditors and the taxpayer to reach an agreement on debt forgiveness, payment plans, potential debt-equity swaps or the transfer of certain property between the taxpayer and the creditors.”

In Croatia, the constitution provides the main source of general tax principles, and in comparison to the other analyzed systems, the Croatian tax system is simpler, aiming to have a system that the citizens can understand. The Croatian General Tax Code (Opći porezni zakon), regulates the fundamental procedural issues for all types of taxes, and contains its own bill of procedural taxpayer rights. Unfortunately, only corporations may receive tax debt forgiveness in Croatia, which leaves individuals, for whom only forbearance is available, vulnerable. This policy promotes noncompliance in individuals, making them likely to work “under the table” rather than voluntarily participate in the tax system.

United Kingdom

Like the U.S., the United Kingdom has a highly developed tax system, based on a federal agency that is responsible for the collection. Also like the U.S., it has a special department for enforcement procedures. Before the taxing authority may proceed with enforced collection, there must be a fixed and determined tax liability and a demand for payment which the taxpayer refuses. Enforcement methods include seizure of income and property as well as initiation of bankruptcy proceedings. While debt relief generally may occur only through a bankruptcy proceeding, other debt relief options include forbearance and installment agreements.

The constitution of the UK is composed of various sources, such as the Human Rights Act of 1998, and the European Convention on Human Rights, which have a very narrow impact in the area of tax law and tax procedure. Instead, the UK has a separate Charter of Taxpayers’ Rights. There are many rights, such as the right to be treated even-handedly, the right to appeal, the right to “be respected,” and the right to have the taxpayer’s personal circumstances considered. UK taxpayers also have “the right to help and support to get things right [which] includes a broad right to information about which taxes are owed and why.”

Conclusions

Not surprisingly, the basis and presentation of taxpayer rights vary among countries. The right to information and equal treatment are generally accepted principles in all jurisdictions. However, “access to information and the right to protest are, albeit present in all jurisdictions, to a certain extent handled differently.” As the authors illustrate, developing a strong tax system grounded in due process is paramount to taxpayer rights. It is vital that taxpayers receive due process prior to enforced collections.

Despite the relatively advanced nature of the U.S. tax system compared to that of other countries, the U.S. system still leaves much to be desired. Even though due process exists, for some taxpayers, particularly low-income taxpayers, it can be inaccessible because the process is so complex. Looking to the German model, the U.S. should consider the “presented civil law model, which grants the taxpayers in most civil law countries a direct remedy against statutes or actions by tax authorities.” Furthermore, while a direct discrimination of a taxpayer would under most civil law constitutions be considered unconstitutional, and therefore such an approach as illegal, the problem in the United States does not lie with the case-by-case discrimination of taxpayers. It rather lies in the inherent discrimination of low-income taxpayers who do not have the same access to information and legal advice, and who therefore depend much more on an efficient tax authority for direction.

The authors propose that “one solution could be a fast-track insolvency procedure which would allow taxpayers to start over after just a few years similar to the solution in the UK. The authors further propose that more collection would be better pursued through regular tax procedure rather than collection enforcement procedures. They also not that a more accurate withholding system could prevent enforcement from being necessary. Additionally, the U.S. should consider reforming the procedures that take place before enforcement, which would help clean up the “complex system of debt forgiveness, information distribution, enforcement and taxpayer protection,” even though these procedures in the U.S. are more developed than those in other countries.