Problems Facing Taxpayers with Foreign Information Return Penalties and Recommendations for Improving the System (Part 2)

We welcome back Megan Brackney for part two in her three-part series discussing penalties imposed on foreign information returns.  Keith

Reasonable Cause

For all of the foreign information return penalties, reasonable cause is a defense.  See I.R.C. §§ 6038, 6038A(d)(3), 6038D(g), 6039F(c)(2), 6677(d); Treas. Reg. § 1.6038-2(k)(3)(ii).   The IRS applies the same standards for reasonable cause for failure to file income tax returns under I.R.C. § 6651 to failure to file foreign information returns, i.e., the exercise of ordinary business care and prudence.   See e.g., Chief Counsel Advisory 200748006

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In determining whether taxpayers satisfy the reasonable cause standard, the IRS also applies the holding of United States v. Estate of Boyle, 469 U.S. 241 (1985), to the failure to file foreign information returns.  Boyle articulates a non-delegable duty to file tax returns.  In that case, the executor of an estate relied on a tax advisor to file the estate tax return, but the advisor missed the deadline.  The Supreme Court explained that determining the due date and ensuring that the return was filed did not require any special tax expertise, and that taxpayers have a non-delegable duty to make sure that their returns are timely filed.  Any other rule, according to the Supreme Court, would not be administrable.  Id. at 249.       

However, the Supreme Court specifically contemplated that a taxpayer can rely on a tax professional’s advice as to whether to file a particular return.  As stated by the Supreme Court, “Courts have frequently held that ‘reasonable cause’ is established when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return, even when such advice turned out to have been mistaken.”  Id. at 250.  Other courts have reached similar conclusions.  See e.g., Estate of Liftin v. United States, 101 Fed. Cl. 604, 608 (2011) (an expert’s advice concerning a substantive question of tax law as to whether a return was required to be filed was reasonable cause).  Accordingly, a taxpayer should be able to rely on the advice of a tax professional as to whether a foreign information return is required (as opposed to merely meeting a known deadline). 

 Challenging Foreign Information Return Penalties

Foreign information return penalties are “assessable penalties,” meaning that they are “paid upon notice and demand” and are not subject to the deficiency procedures, and thus cannot be challenged in Tax Court (with one narrow exception discussed below).  I.R.C. § 6671(a). 

The Internal Manual states that the taxpayer is entitled to post-assessment, but pre- payment, Appeals review of the penalty.  See Internal Revenue Manual 8.11.5.1.  As we will see, the IRS does not automatically suspend collection activity in order to provide taxpayers with this pre-payment right to appeal, and routinely fails to respond to taxpayers’ requests to suspend collection during their appeals.  I have recently learned that the IRS’s failure to suspend collection may be due to an error in inputting the right code.  In one case, the Service Center told me that the collection hold had mistakenly been put on the 1040 account, rather than the civil penalty account.  I do not know how often this occurs, but it is concerning that a taxpayer could be subject to levy because of this type of an error.   

In any event, as we will see below, the notice of the right to appeal is cryptic, provides a short time to submit the appeal, and does not provide the taxpayer with information on whether or how to extend this deadline if the taxpayer needs more time.  

If the appeal is unsuccessful, the taxpayer’s only option for judicial review is to pay the penalty in full and file a refund claim, and if the refund claim is not granted (or acted upon within six months of receipt by the IRS), the taxpayer could then file a refund action in federal district court or the court of claims.  See I.R.C. § 7422; 28 U.S.C. § 1346(a)(1).

If the IRS does not offer Appeals rights before issuing a final notice of intent to levy, the taxpayer can file a CDP request with IRS Appeals, and at that point, should be able to raise defenses to the penalties, such as he or she acted with reasonable cause.  I.R.C. § 6330(c)(2)(B); Treas. Reg. § 601.103(c)(1); Interior Glass Systems, Inc. v. United States, 927 F.3d 1081, 1087 (9th Cir. 2019).  If Appeals does not grant relief during the CDP hearing, the taxpayer could file a Petition for Lien or Levy Action Under I.R.C. § 6330(d), in the United States Tax Court. 

Procedures to Get Into Compliance

The IRS has established the Delinquent International Information Return Submission Procedures, which may be helpful for some taxpayers in avoiding penalties, but there is no guarantee.  A taxpayer is eligible to use these procedures if he or she has reasonable cause for not timely filing the information returns, is not under a civil examination or a criminal investigation by the IRS, and has not already been contacted by the IRS about the delinquent information returns.  Under this procedure, the taxpayer sends in the delinquent return as directed by the IRS, along with a statement of facts establishing reasonable cause for the failure to file.

The IRS makes no express promises on the outcome under these procedures, but it is generally understood by tax practitioners that the IRS will not assess penalties if there is no tax liability related to the failure to file and the taxpayer has reasonable cause.  Nevertheless, we have seen the IRS assess penalties against taxpayers who have submitted their foreign information returns under these procedures, but as the IRS provides no acknowledgement that the taxpayer attempted to use the procedure, it is unclear if this is due to mistakes in processing or is intentional. 

The Delinquent International Information Return Submission Procedures are not difficult to locate if you already know to look for them.  However, there is no reference to these procedures or links to them on the other pages of the IRS’s website that discuss the foreign information return penalties themselves.  The average layperson, and even many tax practitioners, are not aware of the procedures.  On several occasions, clients have come to us after they have received notices of penalty assessments for late filing of Form 5471 or 3520, when no tax was due and they had a reasonable cause defense to late-filing, because their CPA’s filed the forms without a reasonable cause statement in the form required by the Delinquent International Information Return Submission Procedures. 

For individuals who made non-willful errors in their foreign information reporting, the Streamlined Voluntary Filing Compliance Procedures, may provide some relief.  Also, for taxpayers who acted willfully, or are concerned that that the IRS will view their non-compliance as willful, the IRS’s voluntary disclosure practice may be an option.

Even though these procedures are available to allow certain taxpayers to limit their penalty exposure, they are not a substitute for the IRS applying the penalty provisions as required by the Internal Revenue Code and following its own administrative procedures. 

Part III will explore some examples of foreign information return horror stories.  Unlike other genres of horror, these stories do not derive from rare events, but represent the day to day conduct of the IRS in this area. These are not isolated examples, and I could have described numerous other cases of my own clients, and on an almost daily basis, I hear similar stories from other attorneys and CPA’s who are seeing the systematic assessment of significant and, sometimes life altering, penalties against taxpayers for negligible errors and delinquencies. 

Volunteers Needed at Upcoming Las Vegas Calendar Calls

Several years ago the ABA Tax Section undertook the project of covering all Tax Court calendar calls to make sure that unrepresented taxpayers had an attorney to whom they could ask questions and obtain guidance at the calendar call.  The project was a success and volunteers were secured for calendar calls in all of the cities in which the Tax Court sits; however, life is dynamic rather than static.  Recently, both low income taxpayer clinics in Las Vegas have closed.  While there is hope that one or both or a new one may reopen in the future, at the moment the Tax Court will hold calendars on January 13 (next week; this is a mixed regular and small case calendar) and February 24 (this is a regular calendar).  Volunteers are needed for both calendars in order to provide coverage for any unrepresented taxpayers who may appear.

When a similar coverage hole occurred in Honolulu six years ago, Andy Roberson jumped into the breach and covered the calendar.  The Pro Bono and Tax Clinic committee of the Tax Section hopes that one or more tax controversy specialist will quickly jump in to cover the upcoming calendars in Las Vegas.  If you are willing to help cover one of the upcoming calendars in Las Vegas, please contact the Tax Section’s Chief Counsel, Meg Newman at Megan.Newman@americanbar.org or by phone at (202) 662-8645.

Problems Facing Taxpayers with Foreign Information Return Penalties and Recommendations for Improving the System (Part 1)

We welcome guest blogger Megan L. Brackney who is a partner at Kostelanetz & Fink, LLP in New York City, and focuses her practice in civil and criminal tax controversies. Over the past couple of years, she and her colleagues have seen a significant influx in foreign information reporting penalties and have represented hundreds of taxpayers against the IRS on these issues.  She provides us with the wisdom gained from her experience.  Megan and I serve together as vice chairs of the ABA Tax Section.  I can tell from the experience of working with her what a great lawyer and counselor she is.  Keith

The IRS has been assessing more and more foreign information return penalties on taxpayers.  It is difficult to find statistics on this point, as the IRS’s reports on tax penalties lump all “nonreturn” penalties into one category, which includes failure to file Forms 1099, 8300, and other information returns, along with foreign information return penalties.  Even without the statistics, tax controversy practitioners know this to be true, as we have clients coming in with these assessments every day.  Many of these penalties are being systematically assessed, meaning that a penalty is automatically issued whenever there is a late-filed form or a form is missing information, without regard to the individual circumstances of the taxpayer.  In many cases, the penalties are wildly disproportionate to the taxpayer’s mistake, and serve no purpose other than to discourage taxpayers from voluntary compliance.

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The increase in penalty assessments has also increased the workload of IRS Appeals and there are significant delays in resolution.  As will be discussed below, while these appeals languish without any response or action, the IRS continues to move forward with enforced collection.  This is a waste of the taxpayer’s resources to be constantly receiving notices and attempting to call and correspond with the IRS, and sometimes filing multiple appeals because they have to resort to Collection Due Process (“CDP”) to stop the IRS from levying on their assets before their appeals are heard.  This is also a waste of resources for the IRS, and further burdens Appeals, as more CDP requests come in on cases that are already assigned to Appeals. 

The IRS has caused this chaos from overreacting to taxpayers who have filed late or incomplete foreign information returns while at the same time, not allocating additional resources to Appeals to deal with the additional volume, or instructing Collections and Service Center personnel as to how to handle these cases.  There are some very simple administrative fixes to these issues, which I will recommend at the end of this column. 

To provide some context, and hopefully to bring some order to the chaos, this column tells the stories of three taxpayers who have faced assessment of devastating foreign information return penalties and have been unable to get the IRS to consider their defenses, followed by ten recommendations for improvement. 

Background on Foreign Information Return Penalties

Before talking about these three illustrative cases, below is some basic information about foreign information return penalties.

 Types and Amounts of Penalties

Foreign information return penalties include penalties for failure to file:

  • Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations)
  • Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business)
  • Form 8938 (Statement of Specified Foreign Financial Assets)
  • Form 8858 (Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs))
  • Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation); Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships)
  • Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts)
  • Form 3520-A (Annual Information Return of Foreign Trust with U.S. Owner), and other forms.  (Note that Penalties for failure to file FinCen Form 114 (the “FBAR”) are not assessed under Title 26 (the Internal Revenue Code), but Title 31 (the Bank Secrecy Act).  See 31 U.S.C. § 5321.  The rules for assessment and collection of FBAR penalties are contained in 31 U.S.C. § 5321.  This column focuses only on the Title 26 foreign information return penalties and does not address the IRS’s enforcement of FBAR penalties.)    
  • See I.R.C. §§ 6038(c)(4)(B), 6038A, 6038B, 6038D(d), 6039F(c), 6677.  These penalties are related to the failure to file, or the incomplete filing, of these foreign information returns, and are not related to any tax deficiency.  Accordingly, the IRS can – and frequently does – assess these penalties even where there is no tax due as a result of the failure to file or the incomplete form.  

The penalties for not filing Forms 5471, 8938, 8858, and 8865 (to report ownership in a foreign partnership) are $10,000 for the initial failure to file the form, and an additional $10,000 for every 30-day period, or part thereof, after the IRS has notified the taxpayer of the failure to file, up to a maximum of $50,000, meaning that the IRS can assess penalties of up to $60,000 for each form.

Beginning with the 2018 tax years, the penalty for failure to file Forms 5472 have been increased to $25,000 per failure, an additional $25,000 with every 30-day period, or part thereof, after the IRS has mailed a notice of failure, with no outer limits.   

The penalty for failure to report a transfer to a foreign corporation on Form 926, or failure to report a transfer to a foreign partnership on Form 8865, is 10% of the fair market value of the transferred property, up to $100,000.

 The penalties for failure to file Form 3520-A to report a gift from a foreign person or inheritance from a foreign estate is 5% of the amount of such foreign gift/inheritance for each month for which the failure to report continues up to 25% of the foreign gift/inheritance.

 The penalty for not reporting a transaction with a foreign trust on Form 3520 is 35% of the “gross reportable amount,” increasing by $10,000 for every thirty days for which the failure to report continues up to the “gross reportable amount.”  The “gross reportable amount” is the transfer of any money or property (directly or indirectly) to a foreign trust by a U.S. person, or the aggregate amount of the distributions so received from such trust during such taxable year.  I.R.C. § 6677(c).

 As with all penalties, the IRS is supposed to obtain proper managerial approval before assessment. I.R.C. § 6751(a)(2) (“no penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.”)

Limited Ability to Offset Tax Refunds

The case of U.S. Dept. of Housing and Urban Development v. Larry Edward Wood et ux.; No. 5:19-cv-00302 (S.D. W. VA. 2019) shows a limitation on the government’s right to set off a tax claim against a debt owed to another federal agency.  The outcome here did not surprise me (except maybe that HUD was not required to pay something for offsetting a prepetition debt in violation of the automatic stay.)  The law has evolved to allow the IRS to offset an income tax refund against another income tax liability, but there is no exception in the automatic stay allowing the offset of a tax refund to satisfy the liability of another government agency (or even another type of tax.)

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Mr. and Mrs. Wood bought a mobile home in 2008.  They borrowed almost $40,000 to make the purchase.  The Department of Housing and Urban Development (HUD) guaranteed the loan.  Unfortunately, the Woods defaulted in 2014 causing HUD to cover the debt and then to come after them to satisfy the outstanding debt which by that point totaled about $23,000.  In December of 2015, HUD certified the debt to Treasury so that it could benefit from the Treasury offset program (TOP).  This paid off in early 2017 when HUD scooped up over $9,000 of a federal tax refund that would otherwise have gone to the Woods.  Perhaps because of the loss of this refund or perhaps because of other causes, or both, the Woods filed a bankruptcy petition on March 21, 2018.

Their 2017 tax refund of over $6,000 was scheduled for payment after they filed their return on March 26, 2018, but instead was sent to HUD to continue paying off the debt on the mobile home.  The Woods brought an adversary proceeding in bankruptcy court arguing that the offset of their 2017 was barred by the bankruptcy laws.  They made two arguments in support of their position.  I will discuss both below.  The argument regarding the automatic stay surprises me, as the law clearly bars offset in this situation.  The bankruptcy court held for the Woods and in this decision, the district court sustains the decision of the bankruptcy judge.

Outside of bankruptcy, the TOP offset presents no problem for HUD.  At issue here is the difference, if any, brought about by the bankruptcy code once the Woods filed their petition.

Exempt Property Argument

Bankruptcy allows debtors to claim certain property of the estate as exempt from creditors.  As a threshold matter the court looks at whether the refund is property of the bankruptcy estate.  It cites a split in the circuits in situations in which the refund is less than the amount owed to the government and decides to follow the majority rule that in all situations the refund is property of the estate.  Just because property comes into the estate, however, does not mean that it is available for creditors and Congress allows debtors to exempt certain property in order to protect that property and provide debtors with some amount of assets moving forward after bankruptcy.

BC 522 sets out the rules for claiming these personal exemptions.  BC 522 has its own exemption provisions but also allows states to opt for their own exemption rules which almost all states have done.  Some states have very generous exemption rules while others, typically states in the east heavily reliant on common law, provide more miserly exemptions for debtors.  In West Virginia the Woods could claim this refund as exempt and they did so.  The bankruptcy court determined that the exempt trumps the offset provisions in 553.  As such, the debtors could recover the refund taken from them by offset.  This does not mean that their liability to HUD is forgiven or forgotten, but only that HUD cannot take this refund while the Woods remain in bankruptcy to satisfy the outstanding debt.

Automatic Stay Argument

The court next looks at the automatic stay and its impact on the taking of the refund.  BC 362 sets out the automatic stay in paragraph (a) where there are eight separate provisions providing coverage from creditors once the debtors file their bankruptcy petition.  Subparagraph (7) stays offset during the bankruptcy case.  This provision came into the law in 1978 with the enactment of the current bankruptcy code.  It caused major headaches for the IRS because it had to turn off its computers to avoid violating the stay.  Finally, in 2005 the IRS succeeded in convincing Congress to provide some relief from this provision.  As with the relief it provided in 1994 with respect to the stay on assessment found in subparagraph (6), that really threw a wrench into the tax system, Congress did not change BC 362(a)(7) but instead added an exception to the list of exceptions found in 362(b).  In this case it added subparagraph (b)(26).  The fact that there are 26 subparagraphs in the section dealing with exceptions to the automatic stay says Congress has lots of actions it wants to continue despite the stay.

BC 362(b)(26) allows offset despite the prohibition on offset in (a)(7) but the allowance only allows offset in a narrow circumstance.  The exception “constrains the reach of the automatic stay by excepting from violating the automatic stay, the setoff under applicable nonbankruptcy law of an income tax refund . . . against an income tax liability.”  This exception to the automatic stay does not allow the IRS to offset an income tax refund against an outstanding trust fund recovery penalty or against any other type of tax debt.  Furthermore, it does not allow the offset of the income tax refund against any other type of federal debt.  Aside from the narrow allowance made plain in the statutory language, prior case law also made clear that the income tax refund could not be offset against other federal debt.  I have trouble understanding what the DOJ lawyers representing HUD thought they could argue here.  I did not pull the briefs filed to see if they had some terrific argument that does not leap out from a reading of the opinion or of the statute.

HUD also argued that equity should allow it to offset the debt based on a retroactive annulment of the automatic stay.  The bankruptcy court took only a few sentences disposing of this argument.

The case demonstrates the limited scope of the exception to the automatic stay regarding offset.  While the exception provides a significant benefit to the IRS, it provides no benefit to other federal agencies.  If they want to use TOP while an individual’s bankruptcy case exists, someone will need to go back to Congress and get (b)(26) expanded.  I don’t expect that to happen anytime soon.

How Does the Regulatory Flexibility Act Impact Tax Regulations?

In a decade in which the Administrative Procedure Act (APA) has become a mainstream topic for tax lawyers, the case of Silver v. United States, Case No. 1-19-cv-247-APM (D.D.C. 2019) decided on Christmas eve seeks to usher in for the next decade of administrative law the proper application of the Regulatory Flexibility Act (RFA) as it applies to tax regulations.  At issue in this case specifically are the regulations enacted to interpret new section 965 as enacted in the Tax Cuts and Jobs Act; however, the issue of the application of the RFA goes well beyond the specific regulations at issue in that case.

The government predictably moved to dismiss the case, asserting both a lack of standing on the part of the plaintiff and the application of the Anti Injunction Act (AIA).  The court’s decision allows the case to get past the initial procedural hurdles.  Plaintiff still must establish the RFA as a provision to which the IRS must pay much more attention.  Plaintiff’s argument raises an issue that reminds me of the early years of arguments about the APA following Kristin Hickman’s articles exposing the gap between the APA and the regulations as promulgated by the IRS/Treasury.

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Mr. Silver is a tax lawyer and a reader of PT.  Although a US citizen, he has a law office in Israel from which he dispenses advice on US tax issues.  He brought the suit because the recently enacted regulations interpreting IRC 965 create a significant recordkeeping burden.  While he did not owe any tax in 2018 as a result of this law change, he still seeks to challenge the regulations because of the burden and cost of compliance.  He was one of many who commented on the regulations and the burden they would impose on small businesses such as his.  He argues that the IRS inappropriately failed to address this burden.  Because he challenges the regulations outside of a deficiency or refund proceeding but rather in a straight up suit designed to strike the application of the regulations, the IRS began its defense by arguing that Mr. Silver lacked standing to challenge the regulations and that in any event the court lacked jurisdiction given the reach of the Anti Injunction Act.

The D.C. district court has allowed the challenge to move forward, marking a major victory for Mr. Silver.  In allowing the case to move forward and finding that Silver had standing to challenge the regs, the court found:

Here, Plaintiffs allege what is known as a “procedural injury,” that is, an injury resulting from the violation of a procedural right created by statute. See Ctr. for Law & Educ. v. Dep’t of Educ., 396 F.3d 1152, 1157 (D.C. Cir. 2005). In such cases, the redressability and imminence requirements of standing are relaxed. See Wildearth Guardians v. Jewell, 738 F.3d 298, 305 (D.C. Cir. 2013). The plaintiff need not show that “but for the alleged procedural deficiency the agency would have reached a different substantive result.” Id. at 306. Rather, she need only establish that the agency violated a procedural right designed to protect her interests, and that it is plausible “‘that the procedural breach will cause the essential injury to the plaintiff’s own interest.’” Ctr. for Law & Educ., 396 F.3d at 1159 (quoting Fl. Audubon Soc. v. Bentsen, 94 F.3d 658, 664–65 (D.C. Cir. 1996) (en banc)). In other words, “the requirement of injury in fact is a hard floor of Article III jurisdiction that cannot be removed by statute.” Summers v. Earth Island Inst., 555 U.S. 488, 497 (2009). “A procedural injury claim therefore must be tethered to some concrete interest adversely affected by the procedural deprivation . . . .” WildEarth Guardians, 738 F.3d at 305.

Plaintiffs’ alleged injury is the cost associated with complying with the TJCA’s transition tax regulations, which include certain “collection of information” and “recordkeeping obligations.”

As part of its efforts to dismiss the suit based on standing, the IRS argued that Mr. Silver’s real complaint was with the statute itself and not with the regulation.  As such, he could not attack the statute by seeking to change the regulation.  The district court disagreed, holding:

Plaintiffs are not challenging any specific regulation that might or might not be traceable directly to the TCJA. Rather, Plaintiffs allege that the agencies neglected to undertake procedural measures designed to protect small business from the burden of unwieldy and cost-intensive regulations—namely, the publishing of an initial and a final regulatory flexibility analysis, 5 U.S.C. §§ 601, 603(a), and a certification that the regulation has reduced compliance burdens on small businesses, 44 U.S.C. § 3506. Plaintiffs alleged injuries are therefore traceable to Defendants’ alleged violation of these separate statutory requirements, not the TCJA. Causation is easily satisfied.

In perhaps the most surprising aspect of the opinion, the court allowed the plaintiffs to move forward with its RFA challenge despite the broad reach of the AIA as typified by the DC Circuit’s prior opinions in Florida Bankers and Maze. (Guest blogger Pat Smith discussed Florida Bankers in two parts here and here, and Les blogged the Maze opinion here.) Readers may recall that the AIA prevents suits for the purpose of restraining the assessment or collection of taxes. The DC Circuit has previously taken a hard view on cases challenging the validity of regulations, and IRS predictably raised an AIA defense to the RFA challenge. Here, the district court suggested that courts may be willing to put the IRS to the burden of additional procedural hoops even if perhaps the AIA might ultimately prevent the court from granting the relief on the merits that Silver seeks, that is, a stay on enforcement of the regs.

With respect to the AIA, the district court disagreed with the IRS, stating:

Although “[t]he IRS envisions a world in which no challenge to its actions is ever outside the closed loop of its taxing authority[,]” the Act’s prohibition does not sweep so broadly: “‘assessment’ is not synonymous with the entire plan of taxation, but rather with the trigger for levy and collection efforts, and ‘collection’ is the actual imposition of a tax against a plaintiff.” Id. (cleaned up). Accordingly, the D.C. Circuit has refused to “read the [Anti-Injunction Act] to reach all disputes tangentially related to taxes.” Id. at 726–27. Rather, the Circuit has instructed that whether the Anti-Injunction Act prohibits a suit depends on whether the action is fundamentally a “tax collection claim,” id. at 727 (quoting We the People Found., Inc. v. United States, 485 F.3d 140, 143 (D.C. Cir. 2007)), which the court must determine based upon “a careful inquiry into the remedy sought, the statutory basis for that remedy, and any implication the remedy may have on assessment and collection,” id….
 
Plaintiffs do not seek a refund or to impede revenue collection. Instead, they challenge the IRS’s adopting of regulations without conducting statutorily mandated reviews designed to lessen the regulatory burden on small businesses. As relief, they ask the court simply to compel the agencies to do what the law requires—Regulatory Flexibility Act and Paperwork Reduction Act analyses. Tax revenues and their collection are unaffected by such relief. The Anti-Injunction Act therefore presents no barrier to Plaintiffs’ claims.

We hope to have Mr. Silver and his attorney, Stu Bassin, who has written several prior PT guest posts, write for us in the near future to expand on this brief introduction to the case.  For those interested in the issue, a good place to start is a GAO report discussing the failure of some agencies to appropriately follow the RFA.  According to the complaint in this case, the IRS regularly fails to comply with the RFA requirements.  For those interested in the specifics of this case please see the amended complaint, the motion to dismiss, the IRS brief in support of its motion and plaintiff’s brief opposing the motion.

The ability to challenge a regulation and overcome the hurdle of the AIA has become a hot issue.  Les wrote about it here in the context of CIC Services.  He has also recently added a significant discussion of the scope of AIA in the Saltzman-Book treatise, IRS Practice and Procedure at ¶1.6.  That revision is set to be published in the treatise next month. We expect CIC Services to seek cert and offer the Supreme Court the opportunity to step in and clear the murky waters surrounding the application of the AIA to challenges regarding tax regulations.  Of course, Mr. Silver’s case goes beyond raising the AIA challenge and throws down a significant challenge to the IRS practice of promulgating regulations as it relates to compliance with the RFA.  With the initial success here, it will not be surprising to see this issue raised much more frequently as parties challenge regulations.

Review of 2019 (Part 4)

In the last two weeks of 2019 we are running material which we have primarily covered during the year but which discusses the important developments during this year.  As we reflect on what has transpired during the year, let’s also think about how we can improve the tax procedure process going forward.

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Qualified offers

In BASR Partnership et al. v. United States, a tax matters partners submitted a nominal $1 qualified offer to the IRS, prevailed at summary judgment, and then successfully moved for award of litigation costs under IRC 7430. Upon appeal to the Federal Circuit, the government argued against the award, asserting, among other things, that the award was abuse of discretion because the nominal offer was not a good faith attempt at settlement. Despite the partnership context, the case has implications for low-income taxpayers, who often utilize nominal qualified offers in frozen refund litigation. If the court accepted the government’s argument, it might cost doubt on the validity of nominal qualified offers and lead to further government arguments in the low-income taxpayer context. However, the court ruled for the taxpayer, holding that the nominal qualified offer was reasonable and the award was not an abuse of discretion.  The tax clinics at Georgia State and at the Legal Services Center of Harvard Law School filed an amicus brief in this case on behalf of BASR.

See Ted Afield, Nominal Qualified Offers and TEFRA, Procedurally Taxing (Feb. 25, 2019), https://procedurallytaxing.com/nominal-qualified-offers-and-tefra/

TBOR

Another important issue is the use of the Taxpayer Bill of Rights in litigation. In Moya v. Commissioner, the Tax Court rejected the taxpayer’s TBOR-based argument in a deficiency case, looking to the history of the TBOR to find that it “accords taxpayers no rights they did not already possess”. The Tax Court may soon face such arguments outside the deficiency context and could rule differently. While thus far, the TBOR has not proven a strong support for taxpayers’ arguments, it will hopefully spur new, more taxpayer-protective changes to regulations and subregulatory guidance.

Keith Fogg, NEO – A Series of Reflections, Procedurally Taxing (July 8, 2019), https://procedurallytaxing.com/neo-a-series-of-reflections/

Keith Fogg, TBOR Provides no Relief in Tax Court Deficiency Proceeding, Procedurally Taxing (May 13, 2019), https://procedurallytaxing.com/tbor-provides-no-relief-in-tax-court-deficiency-proceeding/

Miscellaneous

Litigation of merits in bankruptcy

In Bush v. United States, the 7th Circuit addressed whether a bankruptcy court has jurisdiction to determine a debtors’ tax liability. The 7th Circuit found in the affirmative, determining that the bankruptcy court did have jurisdiction, but found that the court had no reason do so over the Tax Court, where the appellants had originally litigated the separate question of the tax liability. The 7th Circuit’s decision favors taxpayers who may have already lost (or never had in the first place) their statutory right to go to Tax Court, by providing another legal avenue for a redetermination of tax liability.

See Keith Fogg, New Circuit Precedent on Issue of Litigating Tax Merits in Bankruptcy, Procedurally Taxing (Oct. 18, 2019), https://procedurallytaxing.com/new-circuit-precedent-on-issue-of-litigating-tax-merits-in-bankruptcy/

Late e-filed returns and reliance

Generally, taxpayers cannot avoid assessment of a late-filing penalty due to reliance upon a third-party preparer, per the 1985 case United States v. Boyle. Courts have recently begun to address whether this applies to e-filing of tax returns. In Intress v. United States, the taxpayers made the argument that a late filing penalty was inappropriate, because the late filing was due to their tax preparer failing to hit ‘send’ when filing through e-file software. However, the district court was unconvinced, applying Boyle to the e-filing context and rejecting taxpayers’ attempt to avoid the penalty. Nevertheless, as e-filing becomes the dominant form of tax return filing, this issue may increasingly be litigated.

See Keith Fogg, Reliance on Preparer Does Not Excuse Late E-Filing of Return, Procedurally Taxing (Sep. 4, 2019), https://procedurallytaxing.com/reliance-on-preparer-does-not-excuse-late-e-filing-of-return/

Leslie Book, Update on Haynes v US: Fifth Circuit Remands and Punts on Whether Boyle Applies in E-Filing Cases, Procedurally Taxing (Feb. 12, 2019), https://procedurallytaxing.com/update-on-haynes-v-us-fifth-circuit-remands-and-punts-on-whether-boyle-applies-in-e-filing-cases/

Passport revocation

Passport revocation is expected to be an increasingly utilized and contested IRS enforcement technique. In July 2019, the IRS released a revision to the Internal Revenue Manual (5.1.12) that provides guidance on the passport decertification process. Currently, taxpayers with tax debts in excess of $50,000 (and satisfy other criteria listed in the IRM) are considered to have “seriously delinquent tax debts”, which can result in certification of the debt to the State Department. Taxpayers with such debts will eventually receive notices, which carry a right of appeal to the Tax Court or U.S. District Court. The IRM revision details these processes, as well as the process of reversing a passport certification to the State Department.

See Nancy Rossner, IRM Changes to Passport Decertification and Revocation Procedures, Procedurally Taxing (Aug. 27, 2019), https://procedurallytaxing.com/irm-changes-to-passport-decertification-and-revocation-procedures/

Fraud by return preparer

Another potential issue for future litigation is the question of whether tax return preparer fraud triggers the fraud exception to the three-year statute of limitations for assessment. In the most recent instance, Finnegan v. Commissioner, the 11th Circuit briefly addressed the issue but ended up ruling that the taxpayers had failed to preserve the issue for appeal. In 2015, the Federal Circuit addressed the question in a similar case, BASR Partnership v. United States, and found that the fraud exception is not triggered by third party fraud and only applies when the actual taxpayer acts with “intent to evade tax”. The Tax Court, meanwhile, has held to its ruling in Allen v. Commissioner, which held that a fraudulent return triggers the fraud exception, regardless if the taxpayer had the requisite intent or not.

See Keith Fogg, 11th Circuit Affirms Tax Court Decision Regarding Fraud by Preparer, Procedurally Taxing (July 22, 2019), https://procedurallytaxing.com/11th-circuit-affirms-tax-court-decision-regarding-fraud-by-preparer/

Last known address

Another recently litigated question is whether filing a Form 2848 with a new taxpayer address is sufficient to put the IRS on notice of the taxpayer’s last known address. In Gregory v. Commissioner, the taxpayers submitted a new 2848 and a 4868 extension request with their new address, but the IRS did not adjust its records and issued a subsequent notice of deficiency to the taxpayer’s old address. The Tax Court looked to the applicable regulation, 301.6212-2, which defines “last known address” as “the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return”. The Tax Court then found that neither the 2848 nor 4868 constituted a “return” under the regulatory definition and thus did not give notice. The court then proceeded to analyze whether the forms gave “clear and concise notice” of the address change, finding that they did not, in part because both included disclaimers that their filing will not change last known address. The taxpayers have appealed to the 3rd Circuit and are now represented by the tax clinic at the Legal Services Center of Harvard Law School.  The opening brief for the Appellant was filed on November 20.

See Keith Fogg, Tax Court Holds Power of Attorney Form Inadequate to Change a Taxpayer’s Address, Procedurally Taxing (Apr. 2, 2019), https://procedurallytaxing.com/tax-court-holds-power-of-attorney-form-inadequate-to-change-a-taxpayers-address/

Review of 2019 (Part 3)

In the last two weeks of 2019 we are running material which we have primarily covered during the year but which discusses the important developments during this year.  As we reflect on what has transpired during the year, let’s also think about how we can improve the tax procedure process going forward.

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Penalty Approval by Manager

The impact of Graev v. Commissioner, a 2017 Tax Court decision, has been felt throughout the world of tax procedure over the last two years. In Graev, the Tax Court adopted the 2nd Circuit’s holding in Chai v. Commissioner and ruled that in order to assess a penalty, the IRS generally has the burden under IRC 6751 of showing that written approval from a supervisor occurred before a Tax Court proceeding was initiated. Automatically-imposed penalties are an exception to the written approval rule. In recent affected Tax Court cases, the IRS has sought to reopen the record in order to submit additional evidence of supervisory approval, as otherwise Graev would preclude the court sustaining a penalty assessment. This is a complicated issue which will continue to drive further litigation in the near-future.

See William Schmidt, Designated Orders: Another Graev Issue and More Petitioners Refusing to Sign a Decision (5/13/19 to 5/17/19), Procedurally Taxing (July 10, 2019), https://procedurallytaxing.com/designated-orders-another-graev-issue-and-more-petitioners-refusing-to-sign-a-decision-5-13-19-to-5-17-19/

Keith Fogg, Prior Supervisory Approval Not Necessary for Late Filing Penalty Imposed Under IRC 6699, Procedurally Taxing (June 18, 2019), https://procedurallytaxing.com/prior-supervisory-approval-not-necessary-for-late-filing-penalty-imposed-under-irc-6699/

Keith Fogg, An IRC 6751 Decision Regarding the Initial Penalty Determination, Procedurally Taxing (June 10, 2019), https://procedurallytaxing.com/an-irc-6751-decision-regarding-the-initial-penalty-determination/

Keith Fogg, Automatically Generated Penalties Do not Require Managerial Approval, Procedurally Taxing (June 6, 2019), https://procedurallytaxing.com/automatically-generated-penalties-do-not-require-managerial-approval/

Keith Fogg, Tenth Circuit Agrees with Graev II – IRS Attorney Can Impose Penalties, Procedurally Taxing (May 20, 2019), https://procedurallytaxing.com/tenth-circuit-agrees-with-graev-ii-irs-attorney-can-impose-penalties/

Keith Fogg, Variance Doctrine Trumps IRS Failure to Obtain Administrative Approval of Penalty, Procedurally Taxing (May 6, 2019), https://procedurallytaxing.com/variance-doctrine-trumps-irs-failure-to-obtain-administrative-approval-of-penalty/

Government Closure

Jurisdiction of Tax Court

Government shutdowns continue to pose problems for tax procedure, and particularly for taxpayers attempting to file petitions with the Tax Court. In 2016, in Guralnik v. Commissioner, the Tax Court held that a day on which the Tax Court was closed due to a snowstorm did not hold open IRC 6330(d)’s statutory deadline based on IRC 7503 – the Saturday, Sunday and holiday rule; that the 30-day time period in IRC 6330 was a jurisdictional time period not subject to equitable tolling; and that taxpayer’s use of a better private mailing service than was included on the approved IRS list did not meeting the timely mailing rule of IRC 7502.  However, the Tax Court allowed the taxpayer into the court based on a determination that no Tax Court rule governed the circumstance when the court closed for a reason other than a Saturday, Sunday or holiday and in the absence of a rule it could keep the time period open using Federal Rule of Civil Procedure 6. That holding greatly informed the Tax Court’s treatment of petitions filed during the lengthy government shutdown of 2018-2019. Petitions due during the period of the shutdown were facially untimely, and thus the IRS sought to dismiss the resulting cases. In response, the Tax Court adopted a standard policy of issuing a generic order, requiring that the IRS supplement its motion to dismiss to address the applicability of Guralnik. In the majority of the cases, the IRS then conceded the issue and the Tax Court denied the pending motions to dismiss. Thus, in effect, Guralnik appears to govern in government shutdowns, and thus taxpayers can have their petitions treated as timely filed when delivered to the court upon the conclusion of a shutdown.

See Keith Fogg, The Broad Impact of Guralnik, Procedurally Taxing (Aug. 16, 2019), https://procedurallytaxing.com/the-broad-impact-of-guralnik/

Keith Fogg, How the Government Shutdown Impacted the Tax Court Filing Deadline, Procedurally Taxing (July 12, 2019), https://procedurallytaxing.com/how-the-government-shutdown-impacted-the-tax-court-filing-deadline/

Keith Fogg, Fallout from the Shutdown – The Odyssey of a Tax Court Petition, Procedurally Taxing (May 28, 2019), https://procedurallytaxing.com/fallout-from-the-shutdown-the-odyssey-of-a-tax-court-petition/

Jurisdiction and Equitable Tolling                                            

Myers v. Commissioner, a case decided this summer in the D.C. Circuit, is the first time that an appellate court has found a Tax Court statutory deadline to be nonjurisdictional. Myers concerned IRC 7623(b)(4), which sets forth the deadline for filing a whistleblower award petition in Tax Court. More importantly, the language of section 7623(b)(4) is a near-exact mirror of the deadline language found in the CDP deadline statute, 6330(d)(1) – which the 9th Circuit found was jurisdictional in Duggan v. Commissioner. Accordingly, the ruling for the petitioner in Myers creates a circuit split, which could very well generate a future hearing of the issue by the Supreme Court – which has consistently found statutory deadlines to be nonjurisdictional in recent years.  The D.C. Circuit has denied an en banc hear, the government has asked for an extended time within which to decide whether to make a cert petition because of the perceived circuit split.  The issue has far reaching implications for tax litigation deadlines and the ability of taxpayers with strong excuses for filing late to have their day in court.

The implication of a nonjurisdictional finding is that it allows the Tax Court to hear cases when a petition is not timely filed, if doing so would be fair under the doctrine of equitable tolling. Currently, if a taxpayer fails to timely their petition, then the Tax Court is unable to hear their case, regardless of the circumstances.  The tax clinic at the Legal Services Center of Harvard Law School filed an amicus brief in this case on behalf of Mr. Myers as it had done for Mr. Duggan.

See Carlton Smith, D.C. Circuit Denies DOJ En Banc Rehearing Petition in Myers Whistleblower Case, Procedurally Taxing (Oct. 9, 2019) https://procedurallytaxing.com/d-c-circuit-denies-doj-en-banc-rehearing-petition-in-myers-whistleblower-case/

Carlton Smith, D.C. Circuit Holds Tax Court Whistleblower Award Filing Deadline Not Jurisdictional and Subject to Equitable Tolling, Procedurally Taxing (July 3, 2019), https://procedurallytaxing.com/d-c-circuit-holds-tax-court-whistleblower-award-filing-deadline-not-jurisdictional-and-subject-to-equitable-tolling/

Gov’t Jurisdiction & closure

This past year’s federal government shutdown was the longest in U.S. history and as a result, posed many unique and challenging issues for taxpayers and practitioners. For one, as discussed at length above, it was unclear for much of the year whether the Tax Court would apply Guralnik to allow petitions due during the shutdown to be deemed timely. Perhaps more obviously, the shutdown was deeply disruptive for taxpayers engaged in collection matters with the IRS, who were unable to communicate with furloughed IRS employees. The recently-departed former National Taxpayer Advocate, Nina Olson, has in the past proposed that the IRS apply an emergency exception to the Anti-Deficiency Act to allow TAS employees to continue to work during a shutdown to assist taxpayers experiencing economic hardship. As future government shutdowns are unfortunately likely, hopefully the IRS will continue to implement reforms that will mitigate the impact of shutdowns on taxpayers.

See Bryan Camp, After The Shutdown:  Dealing with Time Limitations, Part IV — Equity, Procedurally Taxing (Jan. 31, 2019), https://procedurallytaxing.com/after-the-shutdown-dealing-with-time-limitations-part-iv-equity/

Bryan Camp, After The Shutdown:  Dealing with Time Limitations, Part III, Procedurally Taxing (Jan. 28, 2019), https://procedurallytaxing.com/after-the-shutdown-dealing-with-time-limitations-part-iii/

Leslie Book, Finding Guidance on the Effects of the Shutdown, Procedurally Taxing (Jan. 27, 2019), https://procedurallytaxing.com/finding-guidance-on-the-effects-of-the-shutdown/

Christine Speidel, The Taxpayer Advocate Service’s Role During an IRS Shutdown, Procedurally Taxing (Jan. 25, 2019), https://procedurallytaxing.com/the-taxpayer-advocate-services-role-during-an-irs-shutdown/

Bryan Camp, After The Shutdown:  Dealing with Time Limitations, Part II, Procedurally Taxing (Jan. 23, 2019),  https://procedurallytaxing.com/after-the-shutdown-dealing-with-time-limitations-part-ii/

Bryan Camp, After The Shutdown:  Dealing with Time Limitations, Part I, Procedurally Taxing (Jan. 22, 2019),  https://procedurallytaxing.com/after-the-shutdown-dealing-with-time-limitations-part-i/

Financial Disability

Stauffer and others

Recent litigation has clarified the narrow scope of the financial disability exception of IRC 6511, which suspends the statute of limitations (“SOL”) for a refund claim if an individual is “financially disabled”. In Stauffer v. Internal Revenue Service, the 1st Circuit recently ruled against the estate of the taxpayer, finding that because the taxpayer’s son held a durable POA during the period in question, the estate is not entitled to file a refund claim outside of the SOL. Similarly, in Carter v. United States, a district court recently found that an estate executor’s disability was irrelevant to the SOL consideration, because the estate was the actual taxpayer in question. Finally, in Thorpe v. Department of Treasury, another district court held against the taxpayers who tried to make a disability argument but failed to comply with any of the enumerated requirements of Rev. Proc. 99-21.

See Keith Fogg, First Circuit Sustains Denial of Financial Disability Claim, Procedurally Taxing (Oct. 21, 2019), https://procedurallytaxing.com/first-circuit-sustains-denial-of-financial-disability-claim/

Keith Fogg, An Estate Cannot Use the Financial Disability Provisions to Toll the Statute of Limitations for Filing a Refund Claim, Procedurally Taxing (Sep. 12, 2019), https://procedurallytaxing.com/an-estate-cannot-use-the-financial-disability-provisions-to-toll-the-statute-of-limitations-for-filing-a-refund-claim

Keith Fogg, Financial Disability Argument Loses Because Taxpayer Husband Did not even Allege Disability, Procedurally Taxing (Mar. 25, 2019), https://procedurallytaxing.com/financial-disability-argument-loses-because-taxpayer-husband-did-not-even-allege-disability/

CDP

Summit

The new CDP Summit initiative seeks to improve the CDP process with input from taxpayers, practitioners and IRS staff. Many ideas are on the table as potential ideas for reform. A recent case, Webber v. Commissioner illustrates the need for improvements to the actual physical CDP notices themselves. In Webber, the taxpayer was misled by the multiple IRS mailing addresses on the received CDP notice (one for the CDP appeal and one for remittance of payment) and timely filed his CDP appeal with the incorrect address – thus missing the statutory deadline. Upon later appeal to the Tax Court, the IRS initially filed a motion to dismiss but then quickly withdrew the motion, perhaps recognizing the unfair result and the potential for the Tax Court to reach the issue of the jurisdictional nature of the deadline. The CDP Summit initiative seeks to make improvements to protect such taxpayers from unfair results, which defeat the purpose of CDP as a tool for taxpayers to quickly and effectively settle disputes with the IRS.

Carolyn Lee, Two tickets to Tax Court, by way of § 6015 and Collection Due Process, Procedurally Taxing (Aug. 28, 2019), https://procedurallytaxing.com/two-tickets-to-tax-court-by-way-of-%c2%a7-6015-and-collection-due-process/

William Schmidt, Collection Due Process and Webber v. C.I.R., Procedurally Taxing (July 24, 2019), https://procedurallytaxing.com/collection-due-process-and-webber-v-c-i-r/

Carolyn Lee, Collection Due Process Summit Initiative, Procedurally Taxing (July 18, 2019), https://procedurallytaxing.com/collection-due-process-summit-initiative/

Litigating merits

Under IRC 6330(c)(2)(B), taxpayers are able to contest the merits of their underlying liability in CDP proceedings only if they had (1) not previously received a statutory notice of deficiency for the liability or (2) not had a “prior opportunity” to dispute the liability. While the first element of this provision is relatively clear, the question of what constitutes a prior opportunity has been a topic of recent discussion for practitioners. In a series of recent cases, several circuits agreed with the IRS that a taxpayer is precluded from litigating the merits in CDP hearing if they previously had the ability to request a pre-assessment hearing. The IRS has also apparently taken the position that failure to receive a SNOD is not sufficient for a taxpayer to dispute liability on the merits if the taxpayer later files an audit reconsideration request and receives an opportunity for an appeals hearing in the process.  The opinion appeared to ignore the “or” language in the statute. And in a recent Tax Court proposed opinion in Lander v. Commissioner, a Special Trial Judge has accepted this argument. The proposed opinion in Lander is interesting, as the taxpayer did not receive a SNOD but, per the opinion, was still precluded from challenging on the merits because a pre-assessment hearing had already been offered. However, the case was recently submitted to Judge Goeke on November 13th, so the final disposition of the case may change.

See Keith Fogg, More on the Muddle of CDP, Procedurally Taxing (Sep. 9, 2019), https://procedurallytaxing.com/more-on-the-muddle-of-cdp/

Keith Fogg, The Muddle of Seeking to Litigate the Merits of a Tax Liability in Collection Due Process Cases, Procedurally Taxing (Aug. 6, 2019), https://procedurallytaxing.com/the-muddle-of-seeking-to-litigate-the-merits-of-a-tax-liability-in-collection-due-process-cases/

POA

Scope

A recent case in the Court of Federal Claims provides guidance on the scope of authority conveyed by a Power of Attorney Form 2848. In Wilson v. United States, the taxpayer’s 2848 representative, upon the taxpayer’s instructions, prepared a claim for refund and signed on the paid preparer line, but did not get the taxpayer’s signature before filing. In the subsequent suit, the government filed a motion to dismiss for lack of subject matter jurisdiction, asserting that the claim had not been “duly filed” under IRC 7422. The government argued that the 2848 did not provide the taxpayer’s representative with the authority to sign and file refund claim on the taxpayer’s behalf. The court looked to the instructions on the 2848 and found significance in the form’s express inclusion of a check box for taxpayers to authorize representatives to sign returns on their behalf. The court thus found that the plaintiff had not explained why the 2848 requires express authorization for signing one form under penalty of perjury but not for another. Accordingly, the court ruled for the government, finding that the plaintiff’s representative did not have broad authority under the 2848 to sign the claim for refund.

See Tameka Lester, The Scope of a Power of Attorney: When Can a Representative Sign a Refund Claim?, Procedurally Taxing (Aug. 13, 2019), https://procedurallytaxing.com/the-scope-of-a-power-of-attorney-when-can-a-representative-sign-a-refund-claim/

Review of 2019 (Part 2)

In the last two weeks of 2019 we are running material which we have primarily covered during the year but which discusses the important developments during this year.  As we reflect on what has transpired during the year, let’s also think about how we can improve the tax procedure process going forward.

read more...

2017 Tax Legislation

The Tax Cuts and Jobs Act (TCJA) has already had significant effects on taxpayers in the first two years since its enactment. The law almost doubles the standard deduction for taxpayers, while mostly eliminating personal exemptions and limiting or eliminating certain personal deductions. Of particular relevance in the LITC context, the Child Tax Credit (CTC) was doubled from $1,000 to $2,000 per qualifying child (though only $1,400 is refundable). While the elimination of the personal exemption for dependents largely makes this a wash for many taxpayers, low income taxpayers may actually be advantaged by the change, since the CTC is partially refundable, and exemptions are of less benefit to those with low marginal rates. Finally, beginning in 2019, the TCJA eliminates the shared responsibility penalty assessed on taxpayers who fail to enroll in qualified health insurance plans under the Affordable Care Act.

The TCJA has also led to another potentially unintended consequence for some taxpayers seeking ITINs for their dependents. Since the dependency exemption is now worth $0 and because (almost) all tax benefits attributed to an ITIN dependent requires that they physically live in the United States (see e.g. IRC 24(h)(4)(B)), the IRS is now reluctant to issue ITINs to dependents outside of the US unless a specific tax benefit is demonstrated. (See W7 Instructions, “What’s New”). This causes serious problems for taxpayers that live in “non-conforming” states (like Minnesota) where a dependency exemption is still worth something on the state return, but their dependent lived in Mexico the whole year. These taxpayers can’t get an ITIN for the dependent because there is arguably no federal tax reason, and they can’t put their dependent on the state return because they don’t have a federally issued ITIN. The University of Minnesota LITC has dealt with this issue and had some success by working with a VITA site that issues ITINs. In at least one instance, the clinic was able to get an ITIN issued based on an issued position letter that argued that there was a federal benefit to an ITIN.

Leslie Book, Suggestions to Get Up to Speed on (Some) Issues With the New Tax Law, Procedurally Taxing (Dec. 17, 2017), https://procedurallytaxing.com/suggestions-to-get-up-to-speed-on-some-issues-with-the-new-tax-law/

Third party contacts

Until the TFA was enacted, a 9th Circuit case, J.B. v. United States, represented anew obstacle for IRS making contact with third-parties during an audit. During the course of the audit of the petitioner and his wife, the IRS issued a summons to a third-party (incidentally, the California Supreme Court), seeking information on compensation issued to the petitioner. The petitioner then moved to quash the summons, on the basis that the IRS failed to give reasonable advance notice of the third-party contact (in accordance with IRC § 7602(c)(1)) when it sent Publication 1, a pamphlet included with the initial notice of audit. Publication 1 is a generic publication that broadly gives advance notice of the possibility that the IRS will make contact with a third party.

The 9th Circuit held that the publication was insufficient as not reasonably calculated to inform the taxpayer of the contact. The court based its decision on a number of factors, including the two-year length between the issuing of Publication 1 and the contact, the possibility of privileged information being included in the summons, and the extensive contact between the taxpayers and IRS. Perhaps most relevantly, the court suggested in a footnote that Publication 1 alone may never be sufficient to provide reasonable notice due to its broad language and lack of certainty regarding the chance of contact.  But see, High Desert Relief, Inc. v. United States, 917 F.3d 1170, 1193 (10th Cir. 2019) (assuming, without deciding after J.B., that Publication 1, in substance, did provide sufficient notice under section 7602(c)(1)). 

Following a 2017 National Taxpayer Advocate report discussion of TPCs, Section 1206 of the Taxpayer First Act (TFA) amended IRC § 7602(c) by repealing the requirement for the IRS to provide “reasonable notice,” making J.B. less relevant.  It clarified that the IRS may provide this third-party contact (TPC) notice only if it intends to make a TPC during the period specified in the notice, which may not exceed one year.  Generally, the IRS must send the notice at least 45 days before making the TPC.  TAS has been advocating that an IDR be included with the TPC notice so that the taxpayer has a realistic opportunity to avoid a TPC that seeks new information by providing the information requested.

See Leslie Book, Ninth Circuit Rejects IRS’s Approach to Notifying Taxpayers of Third Party Contacts, Procedurally Taxing (Mar. 4, 2019), https://procedurallytaxing.com/ninth-circuit-rejects-irss-approach-to-notifying-taxpayers-of-third-party-contacts/

EITC

Special Report to Congress

Before leaving her post as National Taxpayer Advocate, Nina Olson issued a Special Report on the Earned Income Tax Credit as part of her annual report to Congress. The report makes a number of recommendations to improve administration of the EITC, notably including that the IRS develop an examination process for EITC bans and that Congress legislate whether the Tax Court has jurisdiction over EITC ban cases. Under the current situation, taxpayers are left with little recourse or due process opportunity when the IRS imposes such a ban.

See Bob Probasco, The EITC Ban – Further Thoughts, Part One, Procedurally Taxing (Sep. 27, 2019), https://procedurallytaxing.com/the-eitc-ban-further-thoughts-part-one/

Leslie Book, EITC Ban: NTA Report Recommends Changes and IRS Advises on its Application to Partial Disallowances, Procedurally Taxing (Aug. 8, 2019), https://procedurallytaxing.com/eitc-ban-nta-report-recommends-changes-and-irs-advises-on-its-application-to-partial-disallowances/

Earned Income for EITC but not for Income Taxes

Feigh v. Commissioner involved a novel issue of law: the interplay between the exclusion of Medicaid Waiver Payments from income (a change made via notice in 2014) and the EITC. The petitioners in Feigh would have been able to exclude these received payments from their income, but it actually would have made them worse off by removing the “earned income” necessary for them to qualify for the EITC and Child Tax Credit (“CTC”). The IRS rationale was that it was preventing the provision of a double tax benefit not intended by Congress. The Tax Court applied Skidmore deference to the IRS notice changing the waiver treatment and found that the notice was not persuasive that payments were excludible under IRC 131. The court then held that the IRS could not reclassify the status of the payments via notice as a means to eliminate the benefits of the EITC and CTC.

See Caleb Smith, Invalidating an IRS Notice: Lessons and What’s to Come from Feigh v. C.I.R., Procedurally Taxing (June 17, 2019), https://procedurallytaxing.com/invalidating-an-irs-notice-lessons-and-whats-to-come-from-feigh-v-c-i-r/

Innocent Spouse

Jurisdiction of District Court to hear refund

The question of whether taxpayers can bring an innocent spouse claim as part of a refund suit is an increasingly litigated issue. Under the long-time rule of Flora v. United States, taxpayers must pay their assessment first in order to bring a refund claim in federal district court. But whether such taxpayers could litigate the merits of their innocent spouse claims in such an action has been unclear. In 2018, a Texas district rejected the argument that an innocent spouse claim could proceed in a refund suit in Chandler v. United States. But in the more recent case of Hockin v. United States, an Oregon district court allowed a refund suit involving such a claim to proceed. Hockin is set for trial in early 2020 and may prove an interesting test case for this issue.  Ms. Hockin was represented by the tax clinic at Lewis & Clark and the tax clinic at the Legal Services Center of Harvard Law School filed an amicus brief in this case on behalf of Ms. Hockin.

See Sarah Lora & Kevin Fann, Innocent Spouse Survives Motion to Dismiss in Jurisdictional Fight with the IRS, Procedurally Taxing (Sep. 18, 2019), https://procedurallytaxing.com/innocent-spouse-survives-motion-to-dismiss-in-jurisdictional-fight-with-the-irs/

Carlton Smith, Another District Court Holds It Lacks Jurisdiction to Consider Innocent Spouse Refund Suits – at Least for Section 6015(f) Underpayment Cases, Procedurally Taxing (May 3, 2019), https://procedurallytaxing.com/another-district-court-holds-it-lacks-jurisdiction-to-consider-innocent-spouse-refund-suits-at-least-for-section-6015f-underpayment-cases/

Carlton Smith, Update: Can District Courts Hear Innocent Spouse Refund Suits?, Procedurally Taxing (Dec. 24, 2018), https://procedurallytaxing.com/update-can-district-courts-hear-innocent-spouse-refund-suits/

Innocent Spouse and Rev Proc.

Under Rev. Proc. 2013-34, actual knowledge of a spouse’s omission of income does not preclude equitable innocent spouse relief under IRC 6015(f). A recent case litigated by the tax clinic at the Legal Services Center of Harvard Law School has sought to reinforce the availability of equitable relief to such taxpayers. In Jacobsen v. Commissioner in the 7th Circuit, the petitioner has challenged the Tax Court’s denial of his appeal of an innocent spouse determination. The petitioner had four positive factors for relief under the statute, but the Tax Court found that his actual knowledge of embezzled income outweighed those factors thus not entitling him to relief. Oral argument was held in September 2019, and the case is currently pending.  Since the oral argument in Jacobsen two additional Tax Court cases have ruled against individuals claiming innocent spouse status where there was three positive factors and knowledge was the sole negative factor.  The Tax Court seems to be placing a heavy thumb on the scale when knowledge exists.

See Carlton Smith, Seventh Circuit to Hear First Case about Applying Latest Innocent Spouse Equitable Rev. Proc., Procedurally Taxing (July 30, 2019), https://procedurallytaxing.com/seventh-circuit-to-hear-first-case-about-applying-latest-innocent-spouse-equitable-rev-proc/