Courtney v US Illustrates Limits of Taxpayer Challenges to Allegedly Improper IRS Collection

September 27, 2022 by Leave a Comment

The recent unpublished Fifth Circuit opinion in Courtney v US nicely illustrates the challenges that taxpayers face when they allege that the IRS has taken improperly used its administrative collection powers.

Courtney pled guilty to income tax evasion from over a million dollars of improper employer reimbursements for personal expenses that he disguised to look like service payments to a company that he controlled.  After a district court restitution order, a 2012 notice of deficiency, and an assessment, the IRS began to try to collect on the unpaid taxes.

Those efforts included a levy on Courtney’s personal individual retirement account, a notice of a federal tax lien, an attempt to seize assets from an irrevocable trust which benefits his wife and children, and levies against two limited liability companies affiliated with Courtney.

In the fall of 2021, Courtney sued the IRS, seeking damages under Section 7433 for allegedly improper collection and an injunction barring further collection actions against him, the limited liability companies and the irrevocable trust.

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The district court tossed the suit for two main reasons. First, Courtney had failed to exhaust his administrative remedies before seeking damages under Section 7433. Second, it held that the Anti Injunction Act barred his demand that the IRS cease collection.  In affirming the district court, the Fifth Circuit expanded on why Courtney could not use the courts at this stage to examine the IRS’s conduct.

Section 7433 requires that taxpayers file a claim with the IRS before going to court. In responding to the government’s argument that he neglected to meet that requirement, Courtney argued that bringing an administrative claim would be futile. Some cases have held that futility can lead a court to overlook the statutory requirement to file a clam with the IRS before going to court.

In rejecting that argument, the Fifth Circuit noted that the futility doctrine is extremely narrow. Even assuming that the “IRS has been unresponsive, difficult to work with, and disingenuous of previous arrangements agreed upon by the parties” it was insufficient. Futility requires  a court to conclude that the filing of a claim would be a useless formality, and Courtney did not meet that standard.

As to the Anti-Injunction Act preventing his demand that the IRS cease collection, Courtney argued that his claims fit under the Enochs v. Williams Packing exception “which applies only if “(1) it is clear that under no circumstances could the Government ultimately prevail…[and] (2) equity jurisdiction otherwise exists.”

Both prongs are difficult to meet; the first requiring a court to prove with certainty that the plaintiff would prevail on the merits and the second requiring a showing of irreparable harm.

The Fifth Circuit declined to find that the Enochs v. Williams Packing exception applied, concluding that it was not a certainty that it would decide on the merits that the government’s collection efforts were improper. Courtney claimed that the government failed to refute his allegations that the levies against the trust and LLCs were improper. In rejecting Courtney’s claim, the court noted that while the government must prove some factual connection between the LLCs, the trust and Courtney, the taxpayer bears the ultimate burden of persuasion. Here, the government had done enough to link Courtney with the entities and Courtney himself had possession of facts necessary for a court to determine whether any collection efforts were lawful.

If Courtney had plausibly alleged that the government had obstructed his ability to prove that the government’s collection actions were improper, perhaps the court would have addressed prong two of the Enochs v. Williams Packing test.  That prong is not easily satisfied anyway, with courts often reflexively stating that refund procedures are adequate, regardless of the taxpayer’s ability to pay.

Given Courtney’s long history with the IRS, it was unsurprising that he went to court. As the opinion reflects, outside CDP, it is not easy to get a court to consider the IRS’s collection, and taxpayers must follow the preliminary path of bringing allegations of improper conduct to the agency itself.

Filed Under: AIA, Wrongful Collection

Court Awards Damages When IRS Tried To Collect Following Discharge: Pandemic No Excuse

June 6, 2022 by 3 Comments

McAuliffe v United States involves IRS mistakenly sending collection letters following a bankruptcy discharge. Following bankruptcy, IRS opens itself up to damages claims if an IRS employee willfully violates the effect of a discharge or an automatic stay.

McAuliffe concludes that the pandemic does not excuse the IRS from failing to update its records; nor does the automatic nature of the collection process, which arguably severed the actions from any one misbehaving IRS employee. While the opinion finds the IRS actions willful, it notes that unlike with other misbehaving private creditors who fail to respect a discharge, the court has little discretion over the amount of damages it can award.

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In McAuliffe the husband and wife were co-debtors in a Chapter 13 case they filed in 2016. The IRS asserted a claim for $13,624.58 relating to tax years 2010 and 2011, of which $7,230.78 was secured. Prior to the bankruptcy, the taxpayers had entered into an installment agreement, but as per the Chapter 13 case, they terminated the agreement and paid the debts through their repayment plan. The taxpayers/debtors received a discharge on September 24, 2019. As an unsecured creditor, the IRS received a 22% distribution on the $6,393.80 unsecured portion of the claim.

Things went awry after the discharge. On February 5 and March 4, 2020, the IRS sent the McAuliffes two demand letters seeking to collect the liabilities from the discharged 2010 and 2011 tax years. On March 20, 2020, Mr. McAuliffe, a bankruptcy attorney, sent the IRS a letter addressed to the IRS’s Cincinnati Service Center advising the IRS of the discharge. On August 15, 2020, the McAuliffes received another IRS collection letter, leading to their filing a motion to reopen the bankruptcy case.

The IRS did eventually acknowledge McAuliffe’s March 2020 letter, with a September 29, 2020 letter stating it would need sixty days to review the liability. Despite the letter stating that IRS needed to review the account, on September 28, 2020, IRS actually abated the assessment.

In addition to the liabilities that were covered by the discharge, the McAuliffes also owed on their 2018 tax year. The taxpayers asserted that the IRS’s mistaken belief that the McAuliffes still owed for the discharged years led to a delay in setting up an installment agreement for the 2018 liability, which led the IRS to issue a soft notice of intent to levy, threatening to seize state tax refunds.

What led to the delay in updating its account to reflect the discharge and the six-month delay in responding to McAuliffe’s March 2020 letter? IRS blamed the combination of COVID and McAuliffe sending the correspondence to the Cincinnati Service Center rather than a bankruptcy specialist.

All of this factual background leads to the main issues in the case: whether the IRS is liable for damages and if so, how much?

Is IRS Liable for Damages?

In light of the IRS actions, the debtors reopened the bankruptcy case, and sought damages under Section 7433(e) for the IRS’s mistakes. That case was stayed pending a possible administrative resolution. The IRS and the McAuliffes failed to resolve the matter within six months, teeing the matter up for the bankruptcy court.

To find a violation of 7433(e) a debtor must show by clear and convincing evidence that the IRS “had knowledge [actual or constructive] of the discharge and willfully violated it by continuing with the activity complained of.”  IRS raised a number of arguments in support of its position that the actions were not willful.

First, IRS argued that the court needed to find that a specific employee willfully violated the discharge order, rather than the entity as a whole.  Moreover, IRS, in arguing that there was no willful violation, cited to cases where courts concluded that clerical errors alone were insufficient to justify finding damages:

The IRS’s attempts to characterize the actions here as “inadvertent” in light of these cases is unpersuasive. While the IRS here failed for nearly twelve months to enter the discharge in its systems, the debtors on their own behalf called and mailed multiple notices to correct the issue. The IRS instead disregarded these warnings and continued direct attempts to collect the discharged debts.

The opinion also rejected the IRS’s attempt to deflect blame by pointing to the taxpayer’s failure to contact an IRS bankruptcy specialist rather than the IRS office that issued the collection letters:

It contravenes common sense to require a debtor who receives a notice from Cincinnati to direct a response to a Richmond office involved in the bankruptcy claim filed four years prior rather than responding directly to the office from which he received the communications.

The IRS then argued that its automatic collection notices should not be viewed as collection action, a contention the court rejected:

The IRS contends that these letters were non-threatening and should not be seen as an attempt to collect. This court disagrees. The letters state a monthly payment due immediately and threaten default if no payment is made. Further, none of the letters included a disclaimer that they are not an attempt to collect. This surely gives the appearance of an attempt to collect, whether sent to a layperson or a well-experienced bankruptcy attorney and his spouse. The court agrees with the Plaintiff that these letters serve no purpose other than to collect discharged personal liabilities.

IRS also argued that the automatic nature of the notices removed them from any one IRS employee, and thus should insulate the agency from sanctions designed to punish the agency for its employee’s misconduct:

The IRS is a federal agency within the executive branch and serves an extremely important mission. If employees and automated systems in the Cincinnati office are disconnected from the interactions of other offices, the resulting shortcomings should not be attributed to the affected Plaintiff, but to the agency responsible.

As to COVID, the court was sympathetic, but noted that there was plenty of time following the discharge and before the pandemic hit for IRS to get the taxpayers’ account fixed:

While COVID-19 is having a significant impact on all levels of the federal government, it does not excuse repeated attempts to collect on a Plaintiff doing everything possible to correct any miscommunications. At the time when the serious impacts of the COVID-19 pandemic reached the United States in March 2020, the Plaintiff was nearly six months post-discharge and the IRS still had not properly applied the discharge order to the couple’s federal tax accounts. Further, the IRS had already mailed the first two automated notices.

While perhaps one mistaken notice might not have led to a finding of liability, the repeated notices that lasted almost a year after discharge, combined with multiple taxpayer attempts to halt the collection action, led the court to conclude that the IRS’s actions were willful.

What Damages?

McAuliffe sought court costs and legal fees and damages relating to the unlawful collection attempts. The court noted that Section 7433 is the exclusive remedy for IRS failure to respect a discharge order, unlike that for other creditors, where the bankruptcy code provides more discretion. Under 7433(e), courts generally look to actual pecuniary damages, plus costs and possibly legal fees, but the awarding of fees under Section 7433 is controlled by Section 7430. (Note that Saltzman and Book, IRS Practice & Procedure, courtesy of Keith, has an extensive discussion of damages relating to wrongful collection).

As to legal fees, Mr. McAuliffe represented his wife in the proceeding, and did not charge her for the representation. He had previously been a party to the reopened bankruptcy case, but as the opinion notes, he dismissed himself as a party on the eve of the evidentiary hearing. He likely did so due to McPherson v US, unfavorable Fourth Circuit precedent under Section 7430, which bars recovery of legal fees for pro se litigants.

Instead, Mr. McAuliffe argued that he should be compensated because after his dismissal his representation of his wife resulted in lost business opportunities due to the time spent representing his wife. He also sought to distinguish the precedent that barred recovery from pro se litigants because following his dismissal he was technically no longer a pro se litigant.

The court found the lost opportunity argument too speculative, and in so doing noted that unlike cases more liberally awarding of fees purely under the bankruptcy code, its hands were tied:

The court realizes the annoyance and outright inconvenience that the Plaintiff and her husband may have suffered as a result of the IRS’s disregard for the discharge order (whether intentional or inadvertent), but any discretion which it would otherwise be afforded by the Bankruptcy Code is severely limited by relevant Tax Code provisions herein referenced.

As to his attempt to distinguish the adverse legal fee precedent, the court did not bite:

Put simply, McPherson is binding precedent in this circuit. While McAuliffe argues that the opinion applies only where an attorney seeks compensation for pro se representation, this conflation is misplaced. This court does not read the statute to apply solely to pro se representation, but applies it more broadly to the situation where the challenger seeks recovery of legal fees and no out of pocket legal expenses are incurred. Assuming for purposes of this analysis that the IRS’s position was not substantially justified, the Plaintiff nevertheless did not pay any out-of-pocket costs which would allow recovery of legal fees under 26 U.S.C. § 7430 and the precedent established in this circuit by McPherson.

As to other damages, McAuliffe argued that they felt pressure from the IRS’s issuance of notice of intent to levy relating to another year’s tax liability, leading them to accept the first offer on the sale of their house for an amount $15,000 less than its market value. The sale of the house occurred in 2021, a year after the IRS abated the assessment and unwound its mistaken failure to reflect the discharge. While it is likely that the IRS errors on the discharged debt may have led to a delay in a later year installment agreement, “the home sale a full year after the abatement is too distant in time and nature to attribute any possible damages to the discharge violation.”

The court did award the McAuliffe’s damages relating to interest and delinquency penalties on their 2018 liability. Despite 2018 not being before the court, the opinion notes that the mistake to respect the discharge of 2010 and 2011 liabilities led the IRS to be “uncooperative with the couple and unwilling to enter into any such agreement until approximately nineteen months after the original request was made. For eight months beyond the initial request (and more than a year past the discharge order) this uncooperativeness was attributable, in part or in whole, to the mistaken belief that the debtors still owed debts from 2010 and 2011.”

IRS argued that he 2018 debt was outside the court’s jurisdiction and subject to the Anti-Injunction Act.  The court disagreed, noting that it was not restraining the assessment or collection of the 2018 liability but finding that “any interest and missed payment penalties accrued from the initial March 2020 notice letter until the IRS’ eventual acceptance of the couple’s settlement offer are actual pecuniary damages that resulted from the IRS’s violation of the discharge order.”  The delay, according to the court, resulted in about an additional $500 in interest and delinquency penalties, which the court awarded to McAuliffe.

Conclusion

The McAuliffe opinion is interesting on a number of levels. The opinion discounts the government’s excuses for its mistakes. The court expects the multiple IRS offices involved with the case to communicate with each other. The court squarely rejects the IRS attempt to lean on the automated nature of the collection process to avoid liability, and it holds the IRS responsible for its delay when the taxpayers tried in good faith to inform the IRS that its actions were mistaken. While COVID complicates the question of fault, there were enough IRS mistakes prior to the pandemic to justify a finding of liability.

At the end of the day, McAuliffe walked away with not much in damages, and I suspect that case was brought mostly for the denied recovery of legal fees. While maybe it will not make the McAuliffes content, the opinion reflects judicial disapproval of the IRS and a shared frustration that the IRS should have done better.

Filed Under: Bankruptcy, Wrongful Collection

Death of Taxpayer Extinguishes Claims for Wrongful Collection and Failure to Release Lien

September 14, 2020 by Leave a Comment

The recent case of Pansier v United States addressed whether a taxpayer’s death extinguishes claims for improper collection and failure to release a lien. In deciding that the taxpayer’s death extinguished the claims, a federal district court focused on the text of Section 7432 and 7433 and the analogous statue applicable to damages for improper IRS disclosures of tax return information, as well as the principle that waivers of sovereign immunity are narrowly construed.

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A summary of the facts tees up the issue in the case. In 2017, the US sued in federal court and sought a judgment for Gary Pansier’s unpaid 1995 through 1998 assessed federal tax liabilities and for Joan and Gary Pansiers’ 1999 through 2006 and 2014 assessed federal tax liabilities. The Pansiers then filed for bankruptcy. The Pansiers then filed a separate lawsuit alleging that the statute of limitations on Gary’s 1996-98 liabilities had expired prior to the government’s collection suit. In that suit they sought approximately $28,000 in damages under Section 7432 for the IRS failure to release a federal tax lien and under Section 7433 for the IRS’s alleged unauthorized collection activities, both of which related to Gary’s separate 96-98 liabilities. 

While the Pansiers’ suit under Sections 7432 and 7433 was pending, Gary passed away. Joan filed a motion to substitute claiming that she as the surviving spouse was the sole representative and proper party in the action. The government filed a motion to dismiss, claiming that she was not the proper party, given that the alleged improper collection actions and failure to release the tax lien only pertained to Gary’s sole tax liabilities, even though some of the collection action reached marital property under Wisconsin law. 

The court agreed with the government. In reaching its decision the court looked to both statutes and their reference to the particular taxpayer:

Section 7432 provides that, when an officer or employee of the IRS “knowingly, or by reason of negligence, fails to release a lien . . . on property of the taxpayer, such taxpayer may bring a civil action for damages against the United States.”  (emphasis added). And Section 7433 states that, when an officer or employee of the IRS recklessly or intentionally, or by reason of negligence, “disregards any provision of [ Title 26], or any regulation promulgated under [ Title 26], such taxpayer may bring a civil action for damages against the United States.”  (emphasis added).

A the court notes, there is longstanding law where courts have routinely dismissed Section 7432 and 7433 claims where a party claims that improper IRS collection activities were undertaken to satisfy a spouse’s tax liability. 

The somewhat more difficult issue was whether Gary’s claims survived his death, and would allow the court under the Federal Rules of Civil Procedure to substitute Joan for Gary.  FRCP 25 provides the following: 

If a party dies and the claim is not extinguished, the court may order substitution of the proper party. A motion for substitution may be made by any party or by the decedent’s successor or representative. If the motion is not made within 90 days after service of a statement noting the death, the action by or against the decedent must be dismissed.

Pointing to the narrow language in 7432 and 7433 that allows claims only for “such taxpayer” the government opposed the motion. In deciding against Joan, the court noted that there were no cases it found that directly addressed the issue, but that courts have applied similar language in 7431 and refused to allow a substitution when the claim involved an alleged improper disclosure of tax return information. That statute also restricts suits for improper disclosure and provides:

If any officer or employee of the United States knowingly, or by reason of negligence, inspects or discloses any return or return information with respect to a taxpayer in violation of any provision of Section 6103 such taxpayer may bring a civil action for damages against the United States in a district court of the United States.

There is case law on the survivability of 7431 claims. For example, in US v Garrity,  a district court case from 2016, the government sought to collect a civil penalty from the estate of a taxpayer (as an aside whether a penalty survives death and can be collected is an important issue, one I discussed years ago in Death, Taxes and Civil Penalties: Does the Taxpayer’s Death End IRS’s Ability to Collect Penalties?, which Stephen Olsen and I discuss further in Saltzman & Book ¶7B. That issue has gotten lots of attention in recent years due in part to FBAR and other potentially large penalties). The estate in Garrity counterclaimed and sought damages under 7431 due to alleged improper IRS disclosure of return information. In deciding against the estate, the court stated that “[g]iven the clear text of the statute and the strict construction of waivers of sovereign immunity,” …”the private cause of action in Section 7431 is limited to claims brought by taxpayers whose return information has been disclosed.”

In deciding against allowing a substitution, the district court in Pansier looked to the case law under Section 7431 as well as the longstanding principle that waivers of sovereign immunity are to be narrowly construed against the government.  As such, the court granted the government’s motion to dismiss. While the government may pursue the estate for any tax liability, and even for possible civil penalties, this case shows that the government enjoys special status and is free from any consequences from alleged misconduct in collecting those taxes when the taxpayer was alive.

Filed Under: Lien, Wrongful Collection

Taxpayer’s Depression From IRS Improper Collection Action and A Claim for $34 Million in Damages

February 4, 2019 by 1 Comment

What happens when a taxpayer goes into a tailspin following mistakes that the IRS makes in connection with trying to collect taxes? Wrhel v. United States is a district court opinion out of Wisconsin where a taxpayer sought over $34 million in damages for the IRS’s wrongful collection actions. The case caught my attention because it requires the courts to consider the limits of responsibility when someone’s life goes off kilter as a result of what the court framed as relatively minor IRS mistakes.

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I will summarize the facts to get to the heart of the case. Mr. Wrhel timely filed his 2010 tax return and received a refund. Unfortunately for Mr. Wrhel he neglected to include on the return about $1,100 in gambling winnings from a casino run by the Ho-Chunk Nation.

IRS issued an automated underreporting (AUR) notice and eventually a stat notice. The problem with those notices was that they were sent to a prior address of Wrhel’s in Iowa, and not to the Wisconsin address that was on his 2010 tax return. IRS wound up assessing $287 tax on the unreported gambling winnings. IRS then sent multiple collection letters to his old Iowa address; eventually IRS updated its records and sent collection letters to Wrhel at his Wisconsin address. Wrhel sent in a payment for the bill and also had about $100 of his state refund taken as a result of the assessment.

Because Wisconsin was his last known address for tax purposes, when Mr. Wrhel  petitioned the US Tax Court, the Tax Court eventually concluded that the stat notice (and thus the assessment) was invalid, leading the IRS to abate the assessment and issue a refund. Wrhel refused to cash the refund check because he believed that the IRS had miscalculated the amount he was owed. Part of the current dispute included Wrhel’s claim that he was entitled to a greater refund, and the consequences of his failing to cash the check that the IRS had sent him. I will skip that part but basically the court said he was not entitled to a greater refund and provided some information as to how Wrhel could get a replacement refund check.

The 2010 tax dispute led to problems in future years. Following the 2010 tax situation, Mr. Wrhel did not timely file his next three years’ tax returns. That inspired a visit to Mr. Wrhel’s home from a friendly revenue officer who left “literature” and information about the IRS collection process.  While Mr. Wrhel eventually filed the returns, Mr. Wrhel did not take kindly to the visit, and he believed that it violated Section 6304, which provides that IRS employees should not engage “in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of any unpaid tax.”

This takes us to Section 7433, which provides that taxpayers may recover the “costs of the action” and “actual, direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional or negligent actions of the [IRS] officer or employee.”

What were the actions that Wrhel claimed were improper? The first related to the home visit from the revenue officer which he believed amounted to harassment. The second stemmed from the collection notices that were erroneously issued to his wrong address that also generated the improper seizure of his small state tax refund. All of this business with the IRS seemed to really upset Mr. Wrhel. His distress is apparent from his filings:

I have suffered unnecessary anxiety, unnecessary unrest, unnecessary depression which caused me an inability to effectively operate my pepperidge farm business. This was unnecessary and not fair to pepperidge farm. . . . It further has wrecked all trust, faith, and belief in the United States Internal Revenue Service.

I have no desire to continue living in this country as a direct reckless disregard by the IRS and the subsequent seizure that took place.

Part of Wrhel’s unhappiness stemmed from being contacted directly and personally by a revenue officer, which Wrhel alleged was improper. The government fought hard on this point. Its first argument was that the revenue officer visit was not collection action as it was in connection with securing the filing of tax returns and only improper collection actions are within Section 7433. While the case law narrowly defines collection action, the opinion noted that the revenue officer left information about the collection process so it concluded that the revenue officer visit was collection activity. But the visit was not improper. An improper action would occur if, for example, the agent cursed or verbally abused the taxpayer or if the IRS bypassed a representative to visit the taxpayer. The opinion notes that there was no harassment, and without a Form 2848 on file there was no need for IRS to contact a representative about its house call. So the court found that there was no 7433 violation stemming from the visit. (BTW IRS has a brief info page on its website detailing when an IRS may make a visit—an important issue in today’s world of scammers).

For purposes of its motion for summary judgment, the government conceded that the IRS’s sending of the collection notices to the old Iowa address was a negligent improper collection action. This takes us back to Section 7433, which provides for a capped recovery for “actual, direct economic damages”, as well as reimbursement for costs of the action. The cap is $100,000 for negligent violations and $1M for reckless or intentional violations. The regulations also forbid recovery for emotional distress unless the distress leads to pecuniary damages. In the lawsuit, Wrhel tried to connect his emotional distress to actual economic damages. He alleged that the improper IRS actions led to his depression, substantial medical bills, repossession of his car and his ultimate sale of his business. For good measure, there was an affidavit from a psychiatrist who corroborated Wrhel’s distress being tied to his dealings with the IRS:

“[Wrhel] does perseverate somewhat on the belief that the Federal Government has stolen money from him. . . . I am somewhat uncertain about the nature of this perseveration on the government having taken money from him. It does certainly have a certain delusional quality to it, but at the same time, Mr. Wrhel denies any other psychotic symptoms, and notably as well his concerns are somewhat rooted in truth.”).

The court though pushed back on the damages issue, essentially saying that Wrhel’s desire for substantial damages was not reasonable in light of the IRS’s minor misconduct:

So what the § 7433 claim boils down to is Wrhel’s reaction to the notices sent to the wrong address, the levy of $94 from his state income tax refund, and the IRS’s bill for about $400, all for taxes on gambling winnings that Wrhel knew that he had avoided and that he would have had to pay if not for the IRS’s mistake. No one would be happy to learn that the IRS had been trying to recover taxes and had violated its own mailing rules in doing so, but again, this was not a completely fabricated bill: Wrhel indeed failed to disclose his gambling winnings. Put another way, I take Wrhel to be contending that he should be able to recover at the very least thousands of dollars in damages because the IRS sent mail to the wrong address and then recovered about $500 from him before reimbursing him.

To consider the issue of the appropriate amount of damages , the opinion circles back to tort law, and cites the Restatement (Third) of Torts, which provides that for allegations of negligent conduct inflicting emotional harm

“the actor’s conduct must be such that would cause a reasonable person to suffer serious emotional harm. . . . Objectively, an unusually susceptible person may not recover if an ordinary person would not have suffered serious emotional harm.” (emphasis added)

The court accepted that Wrehl in fact was suffering deeply, and that the evidence suggested that the IRS conduct contributed to his suffering. Yet that did not justify substantial damages as it was unreasonable to connect the alleged harm with the relatively minor misconduct:

Wrhel’s medical records provide some support for his position that he has suffered substantial mental distress from the interactions with the IRS [citing to the psychiatrist affidavit]…. And his many filings in this court underscore his anger at the IRS. He has repeatedly said that he has lost faith in the government and that he intends to move to another country. But the substantial harm that he says he suffered is simply not the type of harm that could reasonably be expected to be caused by the IRS’s violations in this case. So I conclude as a matter of law that Wrhel is not entitled to any damages flowing from emotional distress.

At the end of the day, the court awarded Mr. Wrhel $400, which was the filing fee for his district court action. The opinion concluded by recognizing Mr. Wrhel’s anger and his sense that the IRS conduct was tied in part to some sort of conspiracy relating to his father. But, as the opinion notes, IRS collection notices stem from an automated process, and it was not clear why the system failed in his case:

[T]here is no evidence to support this [conspiracy] theory, and the government maintains that its system is automated and it does not know why the system failed in this case. Hopefully in addition to his admittedly meager $400 judgment, Wrhel can take away from this case the knowledge that the IRS is as capable of making mistakes as taxpayers are.

I doubt that Mr. Wrhel will take solace in the closing words of the opinion.

 

Filed Under: Wrongful Collection

Identity Theft Meets Student Loans and Wrongful Collection

October 5, 2017 by 1 Comment

An interesting case at the confluence of identity theft, student loans, and wrongful collection is set for oral argument in the D.C. Circuit on November 21, 2017. As with many cases we write about on PT, thanks goes out to Carl Smith for finding this case and bringing it to our attention. The case is Reginald L. Ivy v. Commissioner. Although Mr. Ivy is pro se, the court has appointed Travis Crum and Brian Netter of Mayer Brown LLP as Amicus Curiae to write in support of his position.

Mr. Ivy owed student loans and the Department of Education certified those loans to the Treasury Department for offset because he was in default. Someone stole Mr. Ivy’s identify and filed a false return claiming a refund. The IRS allowed an overpayment of $1,822, and the money was sent to DOE to pay off the student loan. I can only imagine the chagrin of the identity thief for being good enough to prepare a return that got through the IRS filters only to find out that the selected victim had an outstanding federal liability subject to the federal offset procedures.

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In August of 2013, the student loan was fully satisfied thanks, in part, to the offset of the refund on the fraudulently filed return by the ID thief. In September of 2013 Mr. Ivy learned of the false 2011 return and prepared and submitted his own return for that year. On his return, he showed an overpayment of $634.

The IRS became aware that the first return filed under Mr. Ivy’s name for 2011 was a false return and it reversed the credit which had the effect of putting Mr. Ivy into default on his student loan. When the IRS reversed the credit, it caused the “real” overpayment by Mr. Ivy to go to, or stay with, DOE. Mr. Ivy complained that he should receive his $634 refund because his student loan was satisfied and argued that in keeping his $634, the IRS acted impermissibly. He brought suit in federal district court under IRC 7433, seeking the return of his money plus damages, arguing that the failure of the IRS to send him the refund caused him to miss a payment on another debt and triggered higher interest charges on the other debt.

The IRS argued that IRC 6402(g) prohibited suit against the IRS and that Mr. Ivy would have to sue DOE on the debt. In effect, the IRS argued that it gave him his refund and that his recourse was to go against the agency that prevented him from receiving the refund, and that agency was not the IRS. This is the standard argument that the IRS makes when someone has their refund offset because of the debt of owed to another agency of the state or federal government participating in the Treasury offset program and is a logical argument because of the language of the statute. In effect, his real beef was not with the IRS which had allowed not one but two refunds on his account, but rather was with the agency seeking to collect his student loan debt.

The district court agreed with the IRS and dismissed the suit. Mr. Ivy appealed, and the Circuit Court brought in the pro bono lawyers. The briefs have been filed. Attached are the Opening Brief of Amicus Curiae and the reply brief of Amicus Curiae. The briefs were filed this summer. During the briefing, the IRS sent Mr. Ivy a check for $634 plus interest. I cannot explain why the IRS did that. The sending of the refund means that only the damages portion of the suit remains.

At issue is the interplay between IRC 6402(g) and 7433(a). Section 6402(g) provides:

No court of the United States shall have jurisdiction to hear any action, whether legal or equitable, brought to restrain or review a reduction authorized by subsection (c), (d), (e) or (f). No such reduction shall be subject to review by the Secretary in an administrative proceeding. No action brought against the United States to recover the amount of any such reduction shall be considered to be a suit for refund of tax. This subsection does not preclude any legal equitable, or administrative action against the Federal agency or State to which the amount of such reduction was paid or any such action against the Commissioner of Social Security which is otherwise available with respect to recoveries of overpayments of benefits under section 204 of the Social Security Act.

Section 7433(a) provides

If, in connection with an collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

The issue is whether there is any room left between to two statutes for Mr. Ivy to squeeze in a claim. Does the very broad bar of 6402(g) stop all action as the district court found (and as I am inclined to believe), or do the actions of the IRS with respect to the refund somehow constitute collection action on which the IRS has recklessly, intentionally, or negligently disregarded the code or regulations? So, Mr. Ivy must not only get past the bar of the first statute, he must find that sending the refund to DOE is collection activity. The amicus brief makes that argument after examining, through other cases, what is collection activity. It gets there in part because the refund is sent after an assessment, and an assessment is a predicate to collection action. But assessment, as they point out, is also a predicate to creation of an overpayment. I cannot make the leap that granting someone a refund and then sending it to another agency is collection action taken by the IRS in any sense, other than the sense covered by the jurisdictional bar of 6402(g).

The situation makes for an interesting discussion, but I cannot get past the fact that it looks like the IRS did exactly what the jurisdictional bar covers and nothing more. I would love to know why the IRS sent Mr. Ivy his refund in the end. I am curious to know if DOE is still trying to collect from him after the IRS reversed the credits. Of course, I would also like to know more about the ID thief and whether he or she, after starting this whole mess, has been caught.

 

Filed Under: ID Theft, Wrongful Collection

Sixth Circuit Holds Potential Misconduct in CDP Hearing Does Not Give Rise to Wrongful Collection Action

March 3, 2017 by 3 Comments

In Agility Network Services v US the Sixth Circuit held that a taxpayer who alleged that Appeals botched its collection due process hearing could not bring a wrongful collection action against the IRS because the hearing did not arise “in connection with any collection of Federal tax.”

In this post I will summarize the court’s reasoning and offer some observations on its approach.

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Agility Network Services involves a CDP case that did not go well. The owner of Agility Network Services (Agility Network) and her husband were employees of the company. Agility Network had overdue employment taxes; after the IRS filed a notice of federal tax lien, it requested a CDP hearing. After seven months (and according to the taxpayer only after it got Taxpayer Advocate involved because the Revenue Officer would not forward the case file), the hearing was scheduled for December 2012. Once the hearing was scheduled and held, the taxpayer did not like the manner in which it was conducted and the outcome:

[The Appeals Officer] refused to investigate the taxpayers’ assertion that they tried to make payments but that the IRS refused to accept them; [the Appeals Officer] misstated the tax code and Internal Revenue Manual while offering excuses for [the Revenue Officer’s] failure to process the taxpayers’ CDP request; Allen refused to discuss the taxpayers’ requested installment plan, reasoning that they did not make enough money to justify one; and Allen denied the taxpayers’ request to abate penalties. Furthermore, [the Appeals Officer] stated at the hearing “that she knew . . . [the Revenue Officer’s] actions were made with the genuine intent to help the taxpayers.” The taxpayers contend that this statement proves [the Appeals Officer] had an impermissible ex parte communication with [the Revenue Officer]. The hearing ended with the taxpayers having discussed only one issue of the many they had planned to raise.

In May of 2013 (about seven months after the first meeting and I think prior to the issue of a determination) Appeals scheduled a follow-up meeting. In July 2013, and pursuant to the taxpayer’s request, a new Appeals Officer met with the taxpayer. At the follow-up meeting, the taxpayer requested that IRS withdraw the NFTL and agree to a proposed installment plan. The new Appeals Officer rejected the request (and a request to record the meeting), though this Appeals Officer based his installment agreement rejection on the grounds that the taxpayer earned too much money rather than too little.

After the unsatisfactory second meeting, the taxpayer began a voluntary $5,000 month payment. It also brought an action in federal district court seeking a restraining order against the IRS to prevent enforced collection and sought damages under Section 7433 alleging that the Appeals conduct in both hearings amounted to wrongful collection action. The district court found that the Anti-Injunction Act prevented the restraining order and that the Appeals Officer’s conduct did not arise in connection with a “collection action.”

On appeal the Sixth Circuit quickly affirmed the lower court’s tossing of the restraining order request on the grounds that the Anti-Injunction Act prevented the request to restrain the government’s collection efforts.

The Sixth Circuit gave the Section 7433 issue some more attention. Section 7433 provides for damages for wrongful collection actions. As Appeals has become more involved with collection matters some taxpayers have unsuccessfully sought to use Section 7433 to recover damages for misconduct that arises in a collection case in Appeals. We have previously discussed this issue; see Keith’s post on the Antioco case Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement, which Stephen also discussed in a Summary Opinions post. In those prior posts, we noted that the district court in Antioco held that in a CDP case the Settlement Officer was not engaged in collection action but was rather reviewing the collection action. That review was not enough to bring Appeals’ alleged misconduct within the scope of a Section 7433 wrongful collection claim.

Agility Network likewise concludes that 7433 is not a remedy for alleged misconduct in a CDP hearing but has a more robust appellate court consideration of the issue. In deciding against the taxpayer, the Sixth Circuit explained that it its view Appeals’ conduct in the hearings relates to affirmative rights that a taxpayer has in the collection process, rather than the government’s collection of taxes:

The relevant question, then, is whether an IRS agent acts “in connection with any collection of Federal tax” when she conducts a CDP hearing. Under the most reasonable interpretation of the phrase, the answer is no. In common parlance, an IRS agent acting in connection with tax collection would be taking an affirmative step to recover money owed to the government. In contrast, a CDP hearing is a right bestowed upon a taxpayer, at the taxpayer’s request, to provide protection from abusive or unduly burdensome tax collection. The hearing does not help the IRS collect on a tax debt, but in fact impedes collection, at least temporarily, to the taxpayer’s benefit. 

To be sure the Sixth Circuit also acknowledged that it was possible to take a broader reading of the phrase “in connection with any collection of Federal tax” to include CDP proceedings:

Under this reading, any IRS agency action involving a person who owes a tax debt is “in connection with tax collection.” Under this interpretation, an IRS agent acts in connection with tax collection during a CDP hearing because, at that point, the IRS has already initiated the levy or lien process against the taxpayer.

It rejected that broader reading for two reasons: one, such an approach renders the language in the statute limiting the remedy to collection actions superfluous, essentially encompassing “almost everything IRS agents do. The agency exists to collect revenue, after all.”

Second, the Sixth Circuit cited the maxim that courts are to narrowly interpret exceptions to sovereign immunity, leading it to note that between two reasonable interpretations courts should opt for the one that leads to a narrower waiver.

Some Observations

I think this presents a closer case than perhaps the opinion reflects. The rationale the court uses to distinguish a CDP matter from collection action is a bit outdated. While a CDP hearing is certainly a taxpayer right that arises only if a taxpayer properly invokes the proceeding, it is a statutory right that all taxpayers enjoy in the collection process. Once invoked, Appeals has jurisdiction to compel IRS to refrain from collection and also to dictate the manner that the IRS collects an agreed and assessed liability. To argue that CDP is only an impediment to collection misstates the possible benefit that CDP is meant to provide to the government. It is not in the government’s interest to collect a tax when the IRS fails to ensure that it followed its statutory or administrative procedures.

Collection cases are the mainstay of the Appeals docket. Like it or not Appeals is part and parcel of the collection process. There is a functional partnership between Appeals and Collection. This is especially apparent in cases where the taxpayer requests a withdrawal of an NFTL, where it is in the taxpayer’s strong interest to get prompt review of the request.  It is clear in this case that Appeals’ delay in considering and deciding contributed to the taxpayer dissatisfaction.  Under CDP, Appeals is statutorily charged with ensuring that the collection action balances the need for efficient collection action with the taxpayer’s concern that the action be no more intrusive than necessary.  In a CDP hearing, especially in the context of considering the request to withdraw a notice of federal tax lien filing, Appeals’ responsibilities seem to directly relate to the IRS’s collection of taxes.

Filed Under: Collection Due Process, Wrongful Collection