Madoff Fallout Continues in Tax Court

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An earlier version of the following post appeared on the Forbes Procedurally Taxing site on December 8, 2014.

Bernard Madoff’s sister-in-law recently filed suit against the IRS. The suit stands out not only because the name of the taxpayer and the infamy of her brother-in-law (See Patricia Hurtado Peter Madoff Admits Aiding Brother’s Ponzi Scheme, Bloomberg (June 30, 2012)Walter Pavlo, Peter Madoff Gets What He Expected – 10 Years Prison, Forbes (Dec. 20, 2012), but because the suit reveals an incompetence that makes me wonder if Appeals is capable of achieving its self-described goal of becoming more judicial. Its actions in this case and others suggest that it is far from judicial. I feel sorry for Ms. Madoff, who has likely had to incur substantial costs to prove what should not have required a federal lawsuit to establish. While she may ultimately lose on the merits of the tax issue she seeks to raise, the Appeals division of IRS mishandled her attempt to raise the correctness of the underlying liability in this collection case, foisting the issue off on the Tax Court prematurely.

Her Collection Due Process (CDP) Tax Court case results from a notice of intent to levy. Following receipt of that notice she timely requested a hearing with Appeals. In a determination letter, Appeals rejected Ms. Madoff’s proposed alternative to levy.

The determination letter issued by Appeals in response to her request for a CDP hearing demonstrates a lack of quality. I thought this level of quality was reserved for low-income cases in which the taxpayers represented themselves. In some ways seeing that a relatively high dollar case with an excellent representative would receive a determination of this quality made me feel better that my clients received the same treatment. Of course, one never feels great when viewing work of poor quality. Perhaps I should celebrate that all taxpayers receive equal service from Appeals.

I do not intend this post to simply serve as a bashing of Appeals. Appeals, like the rest of the IRS, faces severe financial constraints. I get it. Still, this case, the Antioco case, other cases we have blogged, and cases I see coming through my office point to a problem that should not occur at the top level of the IRS food chain. See Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement, Procedurally Taxing (Dec. 1, 2014). Appeals considers itself almost judicial officers. See Appeals Judicial Approach and Culture Project (AJAC) Implementation, Procedurally Taxing (Sept. 4, 2014). To have others join in that perception, it needs to produce written products that support such a status. Ms. Madoff’s case will not advance that ball.


The determination letter appears to contain two serious flaws. First, it mischaracterizes Ms. Madoff’s attempt to discuss the merits of the underlying liability. Second, it mischaracterizes the exchange between the settlement officer (SO) and the representative if the allegations stated in the petition accurately depict the exchange. Because of the surrounding circumstances, the description of the exchange in the petition makes much more sense.

In her CDP case Ms. Madoff sought to address the merits of the liability underlying the collection action. Because the petition and the determination letter do not describe the situation with sufficient detail to allow certainty, I make some assumptions concerning the merits case. I requested information from Ms. Madoff’s representative but did not receive it due to Ms. Madoff’s understandable desire for privacy. I respect that decision and apologize for inaccuracies resulting from my assumptions.

The liability at issue here stems from the closing of two IRA accounts in the name of Ms. Madoff that the government took as a part of the forfeiture proceedings relating to the criminal sentence of her husband. When she filed her CDP request on April 30, 2014, Ms. Madoff alerted the IRS in Form 12153 (the request for the CDP hearing) that she might amend her 2012 return, the return for the year at issue, and seek a refund based on a recently decided Court of Federal Claims case, Nacchio v. United StatesSee Insider Trading and Forfeiture of Millions in Stock Gains Runs into Section 1341 and Issue Preclusion, Procedurally Taxing (Mar. 17, 2014). The petition states that the amended return was filed on June 17, 2014 and that “if accepted, will reduce her tax liability to zero.” At the time of filing the petition she alleges that the IRS had not yet processed the amended return.

Without getting too far into the substance of the amended return, Ms. Madoff claims that she should get a credit recomputation under Section 1341 for the amount of the forfeited assets based on the reasoning of the Nacchio decision and that such a credit would eliminate her tax liability. In other words she would get to decrease her liability in later year by the amount of the tax increase as a result of the inclusion in the earlier year (restoring an amount previously received under a claim of right). The determination letter states that the “tax portion was paid when return prepared and filed.” That leads me to believe that the liability at issue in the CDP case stems from a penalty or from the early distribution excise tax imposed by IRC 72(t). The important issue here centers on the fact that the liability results from a position taken on the original return that Ms. Madoff has not previously contested. The Tax Court has held that a taxpayer who did not previously have the opportunity to contest a liability, even if the taxpayer self-reported the liability, may raise the correctness of the liability in a CDP case. See Busche v. C.I.R., T.C. Memo. 2011-285Montgomery v. C.I.R., 122 T.C. 1 (2004). A recent case also made clear that if Appeals considers the appeal of the denial of a refund claim simultaneously with a CDP hearing, the hearing on the refund claim is not a prior opportunity to contest the liability. See Mason v. Commissioner, 132 T.C. 14 (2009)see also Litigating the Merits of a Trust Fund Recovery Penalty Case in CDP When the Taxpayer Fails to Receive the Notice, Procedurally Taxing (Dec. 4, 2014).

In Ms. Madoff’s case Appeals determined that “[Ms. Madoff] submitted an amended tax return to the Service Center in which [sic] is under review for acceptance. This is considered a prior opportunity in challenging the tax liability.” Yes. This SO considers the mere submission of an amended return, even though the amended return had not yet received any form of review – much less Appeals review – to bar Ms. Madoff from consideration of the merits of her case. As discussed in Mason,the Tax Court permitted a merits case to move forward to Tax Court under IRC 6330(c)(2) even where the Appeals officer simultaneously considered the merits in a separate refund matter. The circumstances here cannot possibly fit within the statutory language applicable to denying a merits review since no SO, or any IRS employee, has considered the merits of the argument in Ms. Madoff’s amended return. This determination ignores the statute and cites nothing in support of its decision.

Moving on from the bad substantive determination, the determination letter only gets worse because of the complete misunderstanding of the position of Ms. Madoff’s representative as seen when comparing the petition with the determination. In the petition Ms. Madoff’s counsel alleges that she requested the CDP case pause to allow consideration of the amended return. The petition states,

Petitioner’s counsel provided the Appeals Officer with a copy of the amended return for 2012, and requested that respondent stay the Collection Due Process Hearing until after the Service had acted on the amended return because petition may have no tax liability for 2012. Petitioner further requested, alternatively, that she be afforded an opportunity to submit an Offer in Compromise based on extreme hardship and exceptional circumstances.

Contrast that with the determination letter which states, “Your representative, Megan Brackney, represented to the Settlement Officer, Ms. Perez, you agree with the case resolution described below.” The description below says, “The taxpayer agrees to full pay the balance due of $128,585.43 by October 28, 2014.” The phone lines between New York City and Fresno must have had a lot of static that day.

Is it an abuse of discretion to ignore the taxpayer’s request in such a cavalier way? I hope so. At the time I reviewed the file the IRS had not yet filed an answer in this case. One hopes the answer simply requests an immediate remand and does not simply deny all of the facts alleged for lack of knowledge. This case raises serious issues concerning the ability of Appeals to properly perform their work.

Appeals should seek to have the taxpayer sign a consent form if the taxpayer agrees to full payment as the disposition just as it has taxpayers sign a consent agreeing to a deficiency. Appeals has a form, Form 12256 and the Internal Revenue Manual (IRM) states that Appeals will use this form when it requests taxpayers sign to withdraw their case when they no longer seek to pursue a CDP hearing. The IRM also provides that Appeals uses Form 12257 when it requests that a taxpayer waive their right to a judicial hearing. The petition and determination letter do not make clear if Appeals sought Ms. Madoff’s signature on either of these forms. If Appeals sought consent to terminate the CDP hearing or to waive the determination letter leading to a judicial hearing and she refused, that should signal the need for a determination of something other than agreement with the determination. If Appeals did not seek Ms. Madoff’s signature on either of these forms, it should consider creating a similar form when a taxpayer agrees to the determination – particularly a decision to fully pay the liability. This is not the first case I have seen in which an SO has stated the taxpayer agreed to full pay as the disposition and the taxpayer has stated no such agreement existed because the taxpayer still disagrees with the outcome.

What does it mean when the determination finds the taxpayer agrees and the taxpayer does not agree? Is that an automatic remand so that Appeals can actually make a determination? Why does Appeals make this type of determination without documenting the concession? Is this what a judicial officer would do?


  1. Carl Smith says

    I don’t disagree with a word Keith said. When I headed the Cardozo Tax Clinic, I nearly always was sent a Form 12256 or 12257 when I came to a resolution either with an Appeals Account Resolution Specialist before a CDP hearing or with an SO after a CDP hearing. Those forms are how one usually closes a CDP case that is agreed. There were a few times when the SO did not send me one of those forms, even though we agreed on the SO’s prospective ruling (such as CNC status). But in those notices of determination, the SO never included a statement that the taxpayer agreed with the determination. Thus, I still had a right to appeal to the Tax Court, though, naturally, I did not choose to.

    On the great irony front, I have watched with frustration as Appeals claims now to be engaged in judicial actions. When I litigated the Tucker case, the government position was that Appeals was just an extension of the Collection people at the IRS and under the thumb of Counsel, as well, so Settlement Officers or their bosses had no need to be appointed under the Appointments Clause, as they exercised no significant discretion. The government lawyers got the D.C. Circuit to accept this canard of lack of discretion. Perhaps someone else will raise this Appointments Clause discretion issue in another Circuit (in a CDP case where the underlying liability is at stake, so venue there is proper) and quote to the court the many ways in which Appeals itself now says it acts independently and judicially.

  2. If Ms. Madoff’s submission of an amended return bars her from challenging her tax liability in a CDP case because it represents a “prior opportunity” to do so, then the IRS must be required to accept amended returns. I like that new concept.

    As a rule, I find two problems with Appeals’ CDP determination notices. The first is Appeals’ NODs too often contain ultimately inapplicable “cut and paste” language.

    In Ms. Madoff’s case, her attorney undoubtedly pledged full payment if the IRS rejected her amended return. After all, as Keith reports, her intent was to “seek a refund based on a recently decided Court of Federal Claims case….” Full-payment, of course, is a prerequisite to a refund claim/suit.

    Apparently, however, the IRS has yet to accept or reject Ms. Madoff’s amended return. Under these circumstances only, I suspect, is the NOD’s full-payment language inapplicable. Nevertheless, the language remains and confusion reigns.

    The second problem I experience with CDP determination notices is they rarely receive proper Appeals Team Manager review. Even though the Appeals Team Manager makes the actual determination, that determination is merely a rubber-stamp of the Appeals Officer’s proposed determination. Whether the final determination process is a judicial-like or a mechanical-like one, it should receive far better quality control.

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