Acting NTA Blog Highlights Role of TAS Recommendations on Taxpayer First Act Legislation and Challenges That The IRS Faces

Acting National Taxpayer Advocate Bridget Roberts’ recent blog post Highlights of the Taxpayer First Act and Its Impact on TAS and Taxpayer Rights discusses some of the main TFA provisions, including the impact of TFA on TAS and how many of TAS’ past recommendations have had a direct impact on the legislative changes.  While many of the provisions of TFA influence tax policy and administration rather than directly impacting tax procedure, the policy and administration changes will have direct and indirect influences on the tax procedures facing taxpayers and practitioners.

The post includes useful links to some of the major TFA changes. Some of the provisions are starting to generate litigation (see, for example, what evidence the Tax Court can consider in innocent spouse cases, a topic that PT has covered already a few times –see Christine’s discussion at TFA Update: Innocent Spouse Tangles Begin.)

In this post I will highlight the key parts of the post as well as offer some brief comments on some of the challenges the IRS faces as it marches toward meeting the TFA requirement of reporting on customer service and modernization.

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Highlights of NTA Post

First, the post is a reminder of how important TAS’s reports have been over the years as a contributing factor to legislative change. The Acting NTA notes that about 25 provisions within TFA were “recommended or strongly supported by the NTA or TAS.” The NTA blog post has a handy table with the TFA provisions, as well as links to underlying TAS work that relates to the TFA provisions.

Second, the post emphasizes that a few of the TFA changes directly implicate TAS, including the following:

  1. New rules on the next permanent NTA’s salary to limit the possibility that an NTA will face a personal financial conflict of interest when interacting with the Commissioner,
  2. A codification of the Taxpayer Advocate Directive (TAD) authority to make somewhat analogous the NTA’s ability to elevate systemic issues with its ability to raise individual case matters in Taxpayer Assistance Orders,
  3. Reducing the NTA’s annual reporting requirement on the most serious problems from 20 to 10,
  4. Requiring coordination with TIGTA on research studies, and
  5. Requiring the IRS to provide statistical support on TAS research studies, and requiring the NTA in the research reports to report in whether the IRS provided the support and determined the validity of the information.

Finally, the post praises for IRS and the way it is prioritizing implementing some of TFA’s sweeping changes, including the setting up of a dedicated “office within the IRS to oversee and coordinate the agency’s TFA implementation efforts.” While noting that the office includes the Commissioner’s Chief of Staff and executives from W&I, SBSE and IT, the Acting NTA notes one concern:

My one concern is that TAS has not been included as a core member of the TFA implementation team. Congress created the position of the NTA to serve as the statutory voice of the taxpayer within the IRS. To implement the aptly named “Taxpayer First Act,” I believe TAS should have a seat at the table to the same extent as key IRS operating divisions, particularly for purposes of implementing the TFA requirements that the IRS develop a comprehensive customer service strategy, modernize the IRS’s organizational structure, create online taxpayer accounts, and develop a comprehensive employee training strategy that includes taxpayer rights.

Concluding Brief Thoughts on TFA and Challenges the IRS Faces

In the run up to TFA and its requirement that IRS report on modernizing its structure and customer service strategy, IRS has dedicated a significant amount of time and energy around these issues. To that end see, for example the 2019 IRS Integrated Modernization Business Plan, released a few months before TFA became law this past summer. Part of the business plan had its origin in the IRS Future State initiative, as the GAO discussed in a 2018 letter with the subject Tax Administration: Status of IRS Future State Division to Senators Hatch and Wyden. That letter provides a nice historical perspective on Future State and its rebranding. Future State was a topic that inspired the recently retired NTA Nina Olson to conduct nationwide forums, which was a Special Focus in the NTA’s 2016 Annual Report to Congress.

In an era of scarce resources and rapid technological changes, tax administrators worldwide are focusing on how to efficiently deliver services. Online tools offer the promise of taxpayers able to help themselves, and minimize costly person-to-person exchanges.

Yet, one of the key themes that emerges from reading the transcripts of the 12 TAS led public forums on taxpayer needs and preferences is that there is a wide range of taxpayer resources and skills. Failing to recognize those differences when building models of service and enforcement can have an outsize impact on vulnerable taxpayers.

A Pew Research Center piece from earlier this year highlights the differing levels of access to technology across income classes, as well as the different ways that lower income individuals access the internet (see below). Simply put, lower income individuals have less access to the internet. When they do access the internet, they are often dependent on smart phones rather than tablets, laptops or desktops. The reliance on smart phones for internet access for more vulnerable taxpayers, combined with how important refundable credits are to the economic welfare of low and moderate income Americans, means that a tax system that fails to recognize the preferences and needs of these taxpayers is likely to fail to deliver quality service to many taxpayers who most need it.

This is a key challenge for those who are charged with the responsibility of ensuring that we have a 21st century tax system that delivers to all taxpayers. There is no simple way to build a world class tax system, especially one that is charged with not just collecting revenues (a herculean task in itself) but also a system that is responsible for delivering benefits that can mean the difference between living in and out of poverty.

Tax Court Proposes New Rules

On November 25th the Tax Court issued a press release announcing proposed amendments to its rules and a new fee schedule.  The amendments do not make major changes to the rules.  Essentially, the amendments make a few stylistic changes to the language of the affected rules and they replace Appendix II of the current rules with a reference to the Court’s web page and its schedule of fees and charges on the site.  The web page containing the Court’s fees has not been updated since 2016.  The proposed fee changes are contained in the press release at the end of the release.

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Based on the proposed fee changes, the Tax Court will remain one of the cheapest courts in which to file a petition.  At $60 for a petition, the cost of filing in the Tax Court has got to be one of the great bargains at this point.  For that small fee you get full access to the Tax Court no matter whether you are Google or an individual with modest income and no matter whether your case will have 100 motions or none.  There are no add ons once you are in the Tax Court.  It does not charge an additional fee for certain actions in the case.  It also regularly waives the fee with little fuss for individuals who are low income.

The biggest change occurs in the section on the “Periodic Registration Fee.”  Here is the change and the explanation:

(g) Periodic Registration Fee: (1) E The Court is authorized to impose on each person admitted to practice before the Court shall pay a periodic registration fee. The frequency and the amount of such fee shall be determined by the Court, except that such amount shall not exceed $30 per calendar year. The Clerk shall maintain an Ineligible List containing the names of all persons admitted to practice before the Court who have failed to comply with the provisions of this paragraph (g)(1). No such person shall be permitted to commence a case in the Court or enter an appearance in a pending case while on the Ineligible List. The name of any person appearing on the Ineligible List shall not be removed from the List until the currently due registration fee has been paid and arrearages have been made current. Each person admitted to practice before the Court, whether or not engaged in private practice, must pay the periodic registration fee. As to forms of payment, see Rule 11.

(2) The fees described in paragraph (g)(1) of this Rule shall be used by the Court to compensate independent counsel appointed by the Court to assist it with respect to disciplinary matters. See Rule 202(h).

Explanation

It is proposed that Rule 200(a)(2) and (3) be amended to delete references to Appendix II and replace them with references to the new Fee Schedule, which will be available on the Court’s website. It is also proposed that Rule 200(g)(2) be deleted. Code section 7475(b) describes how the Court may use periodic registration fees.

Most readers will scratch their heads trying to understand what the periodic registration fee is and when they should pay it.  A good reason for scratching your head about this fee is that only Tax Court bar members of a certain vintage will ever have paid this fee.  In my 40+ years of membership in the Tax Court bar I have paid it once.  The one time the periodic fee was imposed during my tenure, it was small but that did not stop those of us working for Chief Counsel from complaining since we had to pay it out of our own pockets.  As a government attorney you have a duty to complain about things like this.  The rule change does not signal that the court is about to impose a periodic fee again but simply provides that if it does the fee will be no more than $30 a year and the money collected will not go just to pay attorneys the Tax Court hires to go after members of its bar with possible disciplinary issues. 

For readers not intimately familiar with IRC 7475(b), the periodic fees can not only pay for hiring independent counsel but can also be used “to provide services to pro se taxpayers.”  The Tax Court regularly uses the fees to pay for costs that benefit pro se taxpayers such as paying for its web site explanations and paying for translators to assist with their cases.  By allowing the Tax Court to use periodic fees for this purpose, Congress fosters the already welcoming atmosphere that the Tax Court creates for pro se litigants.

Speaking of complaining, my one complaint about the proposed change in the fee schedule is that it does not reduce the fees for requesting copies or differentiate between parties making the requests.  The Tax Court is not a part of PACER.  Therefore, it is not a part of the ongoing litigation about the high cost of PACER fees; however, it’s interesting to note that the “high cost of PACER fees” alleged in the ongoing litigation concerning access to public documents involves fees considerably lower than the Tax Court’s fees and involves a system that routinely grants free access to documents to occasional users and users from organizations representing low income individuals.  There’s more to the issue than just fees and the Tax Court offers for free all of its orders (not only providing them gratis but providing a magnificent search feature).  Comparing the Tax Court’s public access provisions to PACER is somewhat, but not totally, apples to oranges.  Still, the Tax Court could make documents more accessible and cheaper.  As someone who regularly visits the Tax Court’s docket room to research cases on upcoming calendars in my city and for other purposes, I would appreciate a closer look at both access to and fees for the court’s documents.  We have previously written about access issues here and here.

Whose Household is It?

The IRS just issued two FAQs providing information regarding offers in compromise (OIC).  One of the FAQs is unremarkable while I find the other FAQ inadequate for reasons that I will explain further below. 

Every year in the seminar that accompanies the clinic, I devote one class to offers in compromise because so many of the clients coming to the clinic need an offer in compromise or, at least, need us to analyze whether they qualify for an OIC.  I tweak the fact pattern a little bit every year but I still use the fact pattern developed by Les Book when he ran the tax clinic at Villanova before I took his place.  The first issue presented by the case involves the taxpayer’s household.  The students do not find the IRS’ instructions clear on this point.  This year, as is typical, about half of the students found that taxpayer’s household included persons he was living with and half found that the taxpayer had a household of one.  Why do they have trouble with this basic issue?

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The fact pattern has Steve Freshstart living with his girlfriend.  Steve moved in two months ago.  Steve and the girlfriend maintain separate bank accounts.  Steve pays has $900 a month to cover his share of the rent and utilities on the apartment.  Steve buys his own food.  Steve uses his money for Steve while his girlfriend, Cindy, uses her money for herself and her two children.  Whether Steve must include his girlfriend’s finances in his offer in compromise matters not only to the computation of his allowable living expenses and ultimately his reasonable collection potential but also to his relationship with his girlfriend.

Imagine you are Cindy and your boyfriend who moved in with you two months ago now needs you to bare your financial soul to the IRS because you are living together even though your financial living arrangement seems very much like one of roommates rather than soulmates.  If Steve must ask Cindy to provide all of her financial information to the IRS just because she shares an apartment with him seems unnecessarily intrusive yet the IRS instructions lead half of my students to that conclusion.  The latest FAQs do nothing to alleviate the confusion. 

Here are the new FAQs:

Q. Does Form 8821, Tax Information Authorization, allow taxpayers to designate a third party to represent them before the IRS on an OIC?

A. No. Form 8821 does not authorize a third party to speak on the taxpayer’s behalf or to otherwise advocate the taxpayer’s position before the IRS. Form 8821 only authorizes the designated third party (appointee) to inspect and/or receive a taxpayer’s confidential information for the type of tax and the years or periods the taxpayer lists on their Form 8821. Therefore, a taxpayer’s appointee cannot represent the taxpayer in a collection matter, such as an OIC before the IRS. Taxpayers should use Form 2848, Power of Attorney and Declaration of Representative, to authorize an individual to represent them before the IRS.

Q. Does a taxpayer need to include his or her spouse’s income on the taxpayer’s Form 433-A (OIC), If the taxpayer’s spouse doesn’t owe taxes?

A. Yes. A taxpayer needs to provide information about the taxpayer’s entire household’s average gross monthly income and actual expenses when making an OIC. The taxpayer’s entire household includes all individuals, in addition to the taxpayer, who contribute money to pay expenses relating to the household, such as rent, utilities, insurance, groceries, etc. The IRS needs this information to accurately evaluate the taxpayer’s OIC. The information may also be used to determine the taxpayer’s share of the total household income and expenses and what the taxpayer can afford to pay the IRS.

 The first FAQ provides a logical piece of information, viz., that a person who does not represent the taxpayer cannot represent them in an OIC.  The Form 8821 permits the holder to receive information but has nothing to do with representation of a taxpayer before the IRS.  While I do not know how necessary it was to issue this FAQ because I have no idea how many people try to represent a taxpayer based on a form allowing them to merely obtain information, I have no problem with this FAQ.

The second FAQ provides very little information that will assist my students in deciding what to do with Cindy and her children.  In the simulated problem they have, it’s really just a question of math whether Cindy’s finances get added to Steve’s since the students do not need to interface with Cindy.  In real life the questions become much stickier.  On several occasions the clinic has encountered significant others quite reluctant to bare their finances to the IRS and quite put out with the clinic for suggesting that they must do so or their boyfriend/girlfriend will not reach the promised land of an OIC.

My view is that the IRS does not need or really want Cindy’s financial information.  At this point in the relationship she is financially a roommate rather than someone whose finances have intertwined with the taxpayer needing collection relief.  It is no more appropriate to ask her for financial information than it is to ask college roommates to provide financial information should one of the other roommates seek an offer in compromise.  Yes, she and Steve live in the same household and share the same bed but they do not share finances and that is the critical factor in requiring her financial information.

These questions can be close.  Deciding who constitute a household requires more than simply sharing space.  The FAQ would help if it made that clear and if it was written so that Harvard and Villanova law students could figure out who belongs to a household for this purpose.  If these law students cannot make that determination, imagine how hard it is for pro se taxpayers to try to work their way through this problem. 

Offset – Whose Funds Does the IRS Hold

In the recent case of Laird v. United States,  (5th Cir. 2019) the court addressed the issue of whether the IRS could offset an overpayment resulting from an attempted designated payment.  The Fifth Circuit distinguished earlier circuit precedent that the IRS could offset extra money that a taxpayer sent by creating a rule that the IRS can only do so when it applies the extra money to the tax account of the person remitting the money.  The rule makes sense but here the facts get muddy.

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If you have never represented someone who might have the trust fund recovery penalty (TFRP) assessed against them, you might wonder why one taxpayer would pay the taxes of another.  Sure, there are many good and generous people in the world and we are in the giving season, but still, the payment of someone else’s taxes is not a customary holiday gift nor an ordinary act at any time of the year.  The picture becomes clearer when the TFRP enters the picture.  Let’s look at a typical fact pattern.

Corporation A builds buildings.  It has 20 employees.  Business has been slow, but it expects a turnaround at any time.  Corporation A has a cash flow problem.  To get it through the lean times, it looks for ways to conserve cash.  One way it decides to do this is to pay its employees their salaries, otherwise they will walk, but to hold off on paying the IRS the withheld taxes and the employer’s share of FICA.  Corporation A anticipates that it will soon have a contract that will allow it to make the tax payments and has no intention of stiffing the IRS.  Unfortunately, the business downturn lasts longer than it anticipates, and some of its accounts do not pay on time.  The unpaid taxes build up for several months at which time a friendly revenue officer appears at the door of Corporation A to demand payment, or levies will occur and the responsible officers will have the TFRP assessed against them pursuant to IRC 6672.

An officer of Corporation A, Bob, decides that the best thing to do in order to avoid the consequences of non-payment of the taxes is to pay them himself.  He sends the IRS a check for the unpaid taxes and designates on the check how the funds should be applied.  Unfortunately, he miscalculates the amount of debt that brought the revenue officer to the door of Corporation A and he sends a check for too much.  While it does not happen too often that a corporate officer sends in too much in this situation, it does happen, and it did happen in the Laird case.

The IRS knew what to do with the extra money.  It applied the funds to another debt of Corporation A which had not yet reached the hands of the revenue officer or it applied the debt to the non-trust fund portion of Corporation A’s outstanding liability.  Bob did not intend to pay the non-trust fund portion of Corporation A’s debt because he had no personal liability for this debt.  He only sought to pay the trust fund portion.  He requests that the IRS return to him that portion of the check which overpaid the liability he sought to satisfy.  The IRS argued that it had the right to offset this money against other debts of Corporation A.

In the case of United States v. Ryan, (11th Cir. 1995), the Eleventh Circuit answered the question in this case by holding that the IRS could keep the extra amount of a check sent in with a specific designation; however, in Ryan the taxpayer sending the check was the same taxpayer who owed the money.  In Laird the person sending in the money, like Bob, is not the taxpayer.  The entity, like Corporation A, is the taxpayer.  The Fifth Circuit holds that this distinction makes a difference.  Here, it holds that the individual (Bob) may require the excess amount be returned to him.  In the case, however, these facts were unclear.  The Fifth Circuit could not tell the true source of the funds.  So, it remanded the case to the district court for a determination of the true payor of the funds.  If the IRS can show that the corporation really paid the funds instead of the individual, then the IRS will be allowed to offset the funds.  If the individual can show that the money was his, then the IRS must return the money to him.

The Perils of Waiting on a Summary Judgment Motion: Designated Orders, October 7 – 11, 2019

It was a light week for designated orders, with only two being issued. Since one of them was a fairly perfunctory take-down of a petitioner’s argument that the Affordable Care Act is unconstitutional (here), we’ll devote the entirety of this post to the second order. And though that order itself doesn’t break any new ground, it gives us a chance to look at the confluence of two topics that frequently arise on these august pages: primarily, Collection Due Process and summary judgment.

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American Limousines, Inc. v. C.I.R., Dkt. # 4795-18L (order here)

One of the goals of my tax clinic is for students to learn how to manage deadlines and multiple clients. With regards to deadlines, I tell my students (1) if you need more time, you should tell me sooner than later, and (2) borrowing from something told me by a fellow professor, the closer you get to the deadline the better the final product better be. To me, the order in American Limousines exemplifies the perils those two pieces of advice are meant to forestall. 

The Collection Due Process (CDP) hearing in American Limousines should be about as straightforward as they get: no tricky issues about whether petitioner is precluded from arguing the underlying liability (see here, among many others), no deep dives into the record about whether a Notice of Deficiency was properly mailed (here), no questions about application of payments (here). Nope, just your typical argument between the taxpayer and the IRS about how much they can afford to pay. 

The IRS thinks that the issues have been sufficiently hammered out in the CDP hearing and there was no abuse of discretion, setting the table for its summary judgment motion.

And yet the motion is denied. And because of this, a trial is quite likely.

Background

It didn’t have to be this way. 

Granted, there is quite a fair sum of money at issue in this case: $1,170,103 in unpaid employment taxes. The two sides are also quite far apart in their estimations of how much can be paid via an installment agreement. Petitioners proposed $2,000 a month -the most (actually more than) they say they could possibly afford. If interest rates were zero the liability would be fully paid after a mere 70 years -presumably when limousines are all self-driving. Of course, absent an explicit agreement to extend the collection statute, the IRS only has 10 years from the date the tax was assessed (see IRC 6502(a)(2)), so this plan is really a proposal to the IRS to let a lot of the debt go unpaid after the CSED stops (a “partial pay” installment agreement, in IRS parlance: see IRM 5.14.2). But hey, the IRS would get $2K a month for a while, which is better than nothing -nothing being the other proposal put forward by the petitioner (in the form of Currently Not Collectible).

The IRS isn’t opposed to the idea of an installment agreement, only on slightly different terms. Rather than $2,000 the IRS believes that an acceptable amount is in the ballpark of $22,877 a month. The difference between the two sides, it appears, mostly boils down to what should and should not be considered in the calculation of expenses and income. 

When the IRS looks at 4 months of financial statements, they believe there is money to be found. Money that can be put to back taxes. For starters, the money paid to the owner ($202,800 per year), and the somewhat artificial loss from “noncash depreciation” ($412,224 per year) could allow the company to continue to operate while paying the back taxes. Taking these numbers at face value, it would mean that petitioner has $51,252 to put towards back taxes every month. But the IRS isn’t that naive about the profitability of the limo business, so they allow an “annualized loss” of $65,953. Then, to account for “tight margins,” the IRS basically cuts in half what would otherwise be the amount of money left over each month. The result: $22,877 per month. That is the lowest they are willing to go.

But petitioner has a ready answer for this: “you forgot the $506,148 yearly principal payment I make on my fleet! And drivers tips are expenses! And limousines are a seasonable business [apparently]! And all of these are disputes about material facts, so no summary judgment!”

But is the petitioner correct? Are those the sorts of issues that can’t be addressed in a summary judgment motion in a collection due process hearing?

The IRS Motion for Summary Judgment

The IRS wanted to keep it simple in its motion for summary judgment: “Look Judge, here are the four paragraphs of reasoning Appeals provided for proposing a vastly higher monthly payment and sustaining the levy. There is no abuse of discretion in the reasoning and the outcome, so let’s just move along. Further, the Court is confined to the administrative record in reviewing the Appeals determination because of the Robinette, which should make this all-the-more summary-judgment appropriate.”

(As a side-note, potentially an important one, I couldn’t quite make-out why the IRS was arguing that Robinette applied since the case is taking place in Maryland, which would be in the 4th Circuit. As I understand it, the 4th Circuit isn’t one that follows the Robinette 8th Circuit decision. So either the IRS is mistaken that the Court should be bound by the administrative record, or they are pushing it in the hopes that they get the 4th Circuit to rule on the issue. Or, I suppose less exotically, the appellate court for American Limousines actually is one of the Robinette following circuits, and petitioners simply chose Maryland as their place of trial. See IRC 7482(b) and Les’s post here.)

The Court’s Response to the IRS Motion

One might wonder why the issues raised by petitioner in the objection to summary judgment weren’t already hammered out in the Appeals hearing, and are not therefore part of the administrative record. After all, questions about what is and is not necessary expenses seems like the very essence of what Appeals and the petitioner should have been arguing over, in a hearing that solely looked at collection alternatives.

And yet, here we are.

In the immortal words of Cool Hand Luke (actually, the Captain) what we have here is a failure to communicate. Judge Halpern refuses to grant the motion because it isn’t entirely clear what the parties’ positions really are: does the IRS object to Petitioner bringing up these installment agreement calculation arguments as being outside the administrative record? Are these arguments (and the facts relied on) outside the record? Were they properly addressed by Appeals if they were raised?

The boilerplate explanation for the purpose of summary judgment is to “expedite litigation and avoid unnecessary and expensive trials.” (Frequently, Florida Peach Corp. v. C.I.R., 90 T.C. 678 (1988)) is cited to for this proposition.) Query whether this motion for summary judgment would advance that purpose. A timeline may be helpful to see why not.

On May 30, 2019 the Court set trial for October 28, 2019. Three months later, on August 29, 2019, the IRS filed its motion for summary judgment on -essentially two months before trial. Under the Tax Court rules, this is a timely motion for summary judgment, but the absolute latest you can make it without the Court’s leave. See Tax Court Rule 121(a). One problem with such a late motion is that it doesn’t give the Court a lot of time to consider both the motion and any objection before the parties would be in Court anyway -potentially obviating the purpose of “avoiding unnecessary trials.”

And because not everything is properly sorted out in this motion (as is often the case), it makes the most sense to Judge Halpern to have the parties explain the issues at trial. This case has actually been kicking around the Tax Court docket since March 2018. After an initial remand to Appeals (on the IRS’s own motion), it was restored to the general docket more than a year ago -September 25, 2018. Then, from roughly December 2018 through the end of August, 2019, the case appears more-or-less dormant. At least from the perspective of the Tax Court docket… there is almost always other work between the parties going on beyond the scenes.

To be fair, it appears that more of the confusion in this case comes from petitioner’s objection than the IRS motion for summary judgment. Why is petitioner advocating for a $2,000 a month payment plan when they also claim they have negative cash-flow? Does the petitioner really think the error was denying Currently Not Collectible? Is the petitioner raising arguments based on what is in the administrative record? There really isn’t time to sort this out before trial would take place (roughly 2 weeks later), so continuing down the summary judgment path just doesn’t make much sense.

It is strange to me that it took the IRS this long to make the motion. Usually in CDP cases where the issue is collection, and not the underlying liability or attacks on assessment the IRS attorney’s role is essentially limited to a Summary Judgment machine. The IRM for counsel in CDP cases basically gives two instructions: (1) try to resolve the case on a pretrial motion, likely summary judgment (see esp. IRM 35.3.23.1(1) and IRM 35.3.23.8.3) and/or (2) file a motion to remand if it looks like Appeals isn’t giving you the record you need to succeed (see IRM 35.3.23.7).

In this case, the IRS had previously filed a motion to remand, way back on May 11, 2018. I’m inferring that a supplemental notice of determination was issued late in 2018, because the Court ordered the IRS to file another answer in December. This means the table should have been set for a motion for summary judgment shortly thereafter. But because the motion wasn’t filed “sufficiently in advance of trial” (like the IRM tells its attorneys to do), it was met with rejection. 

It should be noted that in the not-too-distant past the Tax Court deadline to file a motion for summary judgment simply provided that it should be made “within such time as not to delay the trial.” (See footnote 1 for Rule 121(a).) There is reason to believe that this change came about in part because of research conducted by Keith and Carl, which raised concerns about how (needlessly) long many collection cases took to reach resolution. (See “Tax Court Collection Due Process Cases Take too Long,” 130 Tax Notes 403 (Jan. 24, 2011).)  Because the petitioner may not care about the case dragging on in levy cases (generally, their goal is simply not to pay the tax anyway), the onus is really on the IRS to make appropriate summary judgment motions as early as possible when it is clear that trial isn’t needed. There isn’t much of a reason for the government to wait in such cases, and waiting only increases the likelihood of failure for exactly the reasons present in American Limousines.

Again, as I tell my students, if you wait until the last second it better be perfect. And this motion wasn’t.

The Collection Due Process Summit Initiative – 2019 Low Income Taxpayer Representation Workshop

I am here to provide an update of the Collection Due Process (CDP) Summit Initiative, which Carolyn Lee first wrote about in this post. Some of you may be aware that the American Bar Association holds a Low Income Taxpayer Representation Workshop each December in Washington, D.C. For 2019, the focus is on the Collection Due Process Summit Initiative. Anyone interested in Collection Due Process is welcome to attend. Registration is only $20 for ABA members, and $30 for nonmembers.

The meeting will be held December 3 from 8:30 to noon at Morgan, Lewis & Bockius LLP. More details are below.

The Collection Due Process Summit Initiative

The origin for the Collection Due Process Summit Initiative came about when preparing for a panel presentation for the 2019 May Tax Meeting for the American Bar Association Section of Taxation meeting in Washington, D.C. The panelists were Keith Fogg, Judge Gustafson, Mitch Hyman, Carolyn Lee, Erin Stearns and myself. Within the panel, we made a point of discussing issues with CDP to avoid complaining and with the goal of brainstorming creative ways for positive change. We also wanted to look at several areas related to CDP – the CDP notices mailed out by the IRS, the meetings with Appeals, the Tax Court process, and whether a creative solution like mediation would apply.

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Following the panel, several members of the group kept in touch. We worked to develop a core group of people to steer the Summit Initiative. With that steering committee, we discussed a set of roughly 30 issues with CDP. We took that input and people’s votes for what would be popular. We also wanted input from within the IRS of what sounded realistic. If something would not work, why not? We took the input on those 30 issues, divided into stages, and selected the top 3 to 4 for each.

It must be noted that the steering committee includes private practitioners, educators, IRS Chief Counsel, the Taxpayer Advocate Service, and LITC directors. We also have people within IRS Appeals, IRS Collections, and the Tax Court that we stay in communication with and use as sounding boards regarding their stages of CDP.

Members of the steering committee also wanted to provide further education on the CDP process. At the 2019 Fall Tax Meeting for the American Bar Association Section of Taxation meeting in San Francisco, there were 3 panels developed by the CDP Summit Initiative connected to the CDP process. The first panel, for the Young Lawyers Forum and Diversity committees, was part of the Tax Bridge on the Road, titled “What is Collection Due Process? A Practical Introduction to the Stages of CDP.” The second, for the Individual & Family Taxation committee, was called “Collection Due Process Notices: Much Needed Works in Progress.” The third panel, for the Pro Bono & Tax Clinics committee, was called “Prior Opportunities to Dispute Liability in Collection Due Process: An Oversized Reaction to Insufficient Action.”

The Workshop

While it is a goal of the CDP to promote education regarding CDP, we also want to bring discussion for change. The day will start out with some history of CDP and the Summit Initiative. From there, we turn to a panel on how to approach change with the IRS to achieve the best results. Next, we turn to breakout sessions regarding the top opportunities cited at the various stages of the CDP process. We will bring the group together to share what each group learned before turning to Keith Fogg for closing comments. We will be using the results to guide working groups next year to tackle those top opportunities at each stage.

All who are interested in CDP improvement are invited – from the private bar, Enrolled Agents, CPAs, and those attending the LITC conference that week. As you can see, Keith and others from the Procedurally Taxing website are involved with the CDP Summit Initiative. The cost is low so should not keep any of you in the area from attending – especially as it will include 2 MCLE credits and a box lunch!

2019 Low Income Taxpayer Representative Symposium
Collection Due Process Summit Initiative Workshop

December 3, 2019
8:30 a.m. – Noon

Improving Procedures for Taxpayers to Arrange
Sustainable Plans to Collect the Correct Amount of Tax Owed.

Who should attend?  Everyone interested in the efficient, effective collection of tax, via procedures that are humane for taxpayers, including the IRS (Collection, Appeals, Counsel), taxpayer representatives and the Tax Court
Date: Tuesday, December 3, 2019
Time: 8:30 a.m. – Noon (box lunches to grab and go)
Location: Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004
Registration Fee:  $30 General Registration
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AGENDA

8:30 a.m.

Opportunities for CDP Improvement: Efforts Underway by the Collection Due Process Summit Initiative.
Collection Due Process (CDP) is a bundle of IRS collection procedural protections governed by IRC section 6320 and 6330, that affect taxpayers, their representatives, the IRS, and the Tax Court. CDP provides a structured path to achieving sustainable tax collection alternatives of procedural value to taxpayers and IRS Collection professionals. However, over time, CDP as applied lapsed into policies and procedures that often inhibit a broad range of individual and business taxpayers from establishing collection alternatives to full payment of the correct tax owed, which taxpayers can maintain. In addition, CDP procedures as applied frequently create frustration for IRS Collection professionals and IRS Counsel attorneys. These developments are contrary to the express beneficial intent of the Section 6320/6330 legislation and imperil efforts to efficiently arrange sustainable methods for taxpayers to pay the correct amount of tax owed.

Change for the better is in the air, in the form of the CDP Summit Initiative established in May 2019 to support CDP and improve how it works. Summiteers include representatives of all stakeholders, as direct participants or advisory resources. Following a methodical, consensus-driven process, the Summit Steering Committee identified priority opportunities with high potential to increase the beneficial impact of CDP in application. Summit Working groups formed around the priority opportunities are in the early stages of determining objectives, strategies and tactics to result in change.

This session will update LITR participants about Summit-designated opportunities to improve CDP, why the opportunities were selected for further exploration and action, and how all stakeholders interested in the effective and efficient arrangement of reasonable collection alternatives will benefit from the Summit’s collaborative work.

The CDP Summit’s work has the support of several ABA Tax Section committees including the Pro Bono & Tax Clinic Committee and the Individual Tax and Family Committee. ABA tax meetings have provided an important platform to discuss CDP issues and solutions while educating conference participants about functioning effectively within CDP boundaries.
Moderator: Sarah Lora, Low Income Tax Clinic, Lewis & Clark Law School, Portland, OR
Panelists: Mitchel Hyman, IRS Office of Chief Counsel, Washington, D.C.; William Schmidt, Kansas Legal Services, Kansas City, KS; Erin Stearns, Low Income Taxpayer Clinic, University of Denver, Denver, CO

9:15 a.m.

Approaching Change With the IRS
This panel will identify and explain constructive ways for practitioners to work with the IRS to create positive change benefiting both the IRS and taxpayers in the area of CDP and beyond. Panelists will explore various levels of rulemaking, the scope and authority of those rules, and ways to influence those rules. The panel also will discuss tools practitioners may use to explore and understand the underpinnings of regulatory actions, such as the Freedom of Information Act, as well as effective opportunities for proposing regulatory reform. The panel will also discuss the role of the Taxpayer Advocate Service’s Systemic Advocacy Management System (SAMS) in identifying the need for systemic changes and implementing those changes.
Moderator: Matthew James, Low Income Tax Clinic, North Carolina Central University, Durham, NC
Panelists: Mary Gillum, Legal Aid Society of Middle Tennessee & the Cumberlands, Oak Ridge, TN; John B. Snyder, III, Low-Income Taxpayer Clinic, University of Baltimore, Baltimore, MD; James P. Leith, Local Taxpayer Advocate, Baltimore, MD

10:00 a.m. Break

10:15 a.m. Exploring CDP Challenges and Practical Solutions – Working Breakout Sessions
Session participants will actively explore CDP policy and procedures focusing on CDP Summit priority opportunities and potential feasible solutions. Output will further the work of Summit Working Groups to effect change and increase efficient, fair tax collection.

Workshop participants choose to attend one of three concurrent sessions:

(1) Improving IRS CDP Notices and Communications. This program will educate participants about IRS communication approaches as they pertain to CDP rights and procedures and known issues with the communications. The session leaders will facilitate an exchange of ideas for more effective messaging to increase taxpayer participation in CDP and more effective engagement with Collections at the earliest possible stage.
Facilitators: William Schmidt, Kansas Legal Services, Kansas City, KS; Jeff Wilson, Taxpayer Advocate Service, Indianapolis, IN; Beverly Winstead, Low Income Taxpayer Clinic, University of Maryland, Baltimore, MD

(2) Improving CDP Administrative Proceedings. Participants will learn about opportunities for more effective engagement with IRS Appeals, including when a taxpayer may challenge the accuracy of an assessed liability, the critical role of a record in establishing a sustainable collection alternative to immediate full payment, and procedural traps for the unwary. Participants will collaborate to identify improvements yielding more efficient and effective application of CDP through constructive interaction between taxpayers (or their representatives) and Appeals.
Facilitators: Soreé Finley, Charlotte Center for Legal Advocacy, Charlotte, NC; Susan Morgenstern, Local Taxpayer Advocate, Cleveland, OH; Erin Stearns, Low Income Taxpayer Clinic, University of Denver Sturm College of Law, Denver, CO

(3) Exploring CDP rights and procedures within judicial proceedings. Focused on improving effectiveness and efficiency for all participants in Tax Court matters, this session will analyze common petitioner and respondent approaches to litigating CDP in Tax Court. The session will explore opportunities to increase the number of taxpayers who exit litigation with a sustainable plan to collect the correct amount of tax due. Participants will discuss the Court’s authority and limits to achieving a result satisfactorily resolving the issues between the parties; typically, a collection solution for taxpayers litigating in good faith.
Facilitators: Keith Fogg, Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA; Christine Speidel, Villanova University Charles Widger School of Law, Villanova, PA

11:15 a.m. Discussion of Breakout Session Results and Identification of Next Steps
Breakout session leaders will report on results of the group discussions, focusing on pragmatic elements for IRS procedural change, practitioner performance improvement and taxpayer orderly, effective interaction with CDP. Essentially a collaborative CLE, educating the participants on best practices in applying CDP, the output will inform the strategic and educational work for the Collection Due Process Summit Initiative during 2020. Proposals will address, among other topics, an analysis of IRS CDP correspondence, taxpayer rights in Appeals, and the role of judicial review in guiding sustainable collection alternatives. This session will emphasize sharing taxpayer representative practice tips and easy-to-implement internal IRS process improvements.
Facilitators: Susan Morgenstern, Local Taxpayer Advocate, Cleveland, OH; William Schmidt, Kansas Legal Services, Kansas City, KS; Christine Speidel, Villanova University Charles Widger School of Law, Villanova, PA; Erin Stearns, University of Denver Sturm College of Law, Denver, CO

11:55 a.m. Closing remarks. Addressing the importance of critical analysis of CDP as applied and vigilant efforts to support the proper application of CDP, in order to achieve the beneficial intent of IRC Sections 6320 and 6330.
Presenter: Keith Fogg, Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA

Noon Workshop adjourns. Box lunches to grab and go.

Love, Legal Fees, and the Origin of the Claim: Designated Orders September 23 – September 27, 2019

Despite a relatively small number of orders designated during the week of September 23, they were diverse and interesting. I discuss three below, but the orders not discussed addressed: IRS’s motion for summary judgment in a case where petitioner cited the book, “Cracking the Code” to support his position (here); and a motion to stay (here) and a motion to dismiss for lack of jurisdiction (here) from petitioners in a consolidated docket case involving converted partnership items.

Docket No. 15277-17, Maria G. Leslie v. C.I.R. (order here)

This first order piqued my interest because it covers a topic that comes up in the individual income tax class that I teach every year. The order addresses the IRS’s motion for summary judgment and the case involves alimony and the deduction for legal fees under section 212. The Tax Cuts and Jobs Act separately impacted both of these issues by eliminating the income inclusion (and corresponding deduction) of alimony for divorces decreed post-2019, and by suspending miscellaneous itemized deductions (so below-the-line attorney’s fees cannot currently be deducted). The analysis in this order is still helpful and relevant to past, and perhaps, future years.

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A deduction for legal fees is allowed when the fees are incurred to produce or collect income. Since alimony is considered income by virtue of section 71(c) legal fees related to alimony could be deducted, prior to the TCJA changes. Legal fees related to other costs of divorce are not deductible, so it is important that taxpayers (or more importantly, their divorce attorneys) distinguish between the fees paid for each cause of action.

To determine whether the fees are deductible, the Court must look to the origin of the claim and not the taxpayer’s purpose or desired outcome in the case.

In this specific case, there is a lot at stake for the petitioner. Her ex-husband worked with the firm that handled the class action lawsuit against Enron and for which he received a $50 million fee after the marriage ended.

Originally, a marital settlement agreement (“MSA”) was reached which entitled petitioner to 10% of her ex-husband’s earnings. The amount received under the MSA was determined to be alimony income to the petitioner in an earlier Tax Court case.

Later, petitioner had second thoughts about the MSA and incurred legal fees in three separate proceedings: 1) to set aside the MSA for lack of legal capacity, 2) for an order to show cause as to why she should receive the percentage of earnings as dictated by the MSA nevertheless (her ex-husband deposited her percentage into a trust account for her benefit, but she was barred from accessing it), and 3) for damages for breach of fiduciary duty to her with respect to the MSA negotiations under California Family Code which allows a suit for damages if a breach by her ex-husband results in impairment to her undivided one-half interest in the community estate.

The Court looked to origin of the claim for each proceeding and determined that petitioner was only entitled to deduct legal fees for the second proceeding, because it related to the alimony income in the trust account and her ability to collect it. The IRS’s motion for summary judgment was denied with respect to this part.

The other proceedings were not entitled to a legal fee deduction because the origin of the claim in the first proceeding was related to a flaw in the MSA, and in the third proceeding arose from a duty that her ex-husband had to her as a result of their marriage. In other words, the origin of the first and third claims did not involve the production or collection of income. The IRS’s motion for summary judgement was granted with respect to these parts.

The parties were ordered to submit settlement documents or a status report by the end of November.

Docket No. 6446-19L, Wendell C. Robinson & May T. Jung-Robinson (order here)

In this order the petitioners have filed a motion for summary judgment because they believe they have already paid their 2012 liability of $88,000 with a combination of withholding and a check sent with their return. They argue that as a result of the liability being paid in full, and since the assessment statute is closed, the IRS’s proposed levy cannot be sustained.

In response, the IRS explains that the petitioners’ return contained mathematical errors, so they owed $13,267.20 more than what their return originally reflected. The IRS used its math error authority to correct the returns, so no notice of deficiency was issued. There has been considerable coverage by PT on various math error authority issues (for example: here and here) and it was an “Area of Focus” in former NTA, Nina Olson’s Fiscal Year 2019 Objectives Report to Congress.

The Court has an issue with the IRS’s use of math error authority in this case – mainly that Appeals’ notice of determination makes no mention of the mathematical corrections permitted by section 6213(b)(1), nor of whether the petitioners were notified of the corrections, as required, to give them an opportunity to request abatement. Abatement can be requested under section 6213(b)(2)(A) and doing so entitles the taxpayer to deficiency procedures.

The Court would like more evidence on this issue, so it denies petitioner’s motion.

Docket No. 17799-18L, Michael Balice v. C.I.R. (order here)

This case involves an interesting scenario in the CDP world that I have not encountered – it is one where a taxpayer timely requests a CDP hearing but is not provided with one. Keith covered the topic in 2015 (here), and in 2016 (here) after the IRS provided guidance on how its attorneys should handle the issue in Chief Counsel Notice (“CC”) 2016-008. The issue has also come up in at least one other designated order post (here).

In this order, it appears that Counsel may not have adhered its own guidance and the IRS has moved to dismiss the case alleging that the petitioner took only frivolous positions in his CDP requests for a levy and lien.

The IRS argues that the Court should grant summary judgment in their favor because they did not violate petitioner’s due process rights by denying him a CDP hearing. In the IRS’s view, petitioner had an opportunity to raise issues regarding his liability and the validity of the lien in other courts (because the DOJ had the case for a period of time) and petitioner’s request was properly disregarded because it only raised frivolous issues. IRS also argues that there is no benefit to remanding the case to Appeals, which the Court may be permitted to do, because of petitioner’s frivolous arguments and because Appeals lacks the authority to compromise petitioner’s liability due to the DOJ’s involvement.

The Court isn’t convinced by the IRS’s arguments and reviews the history of the case. Earlier on, as a result of the Office of Appeals’ view that the petitioner’s request was frivolous, it did not communicate with the petitioner in any of the usual ways. The petitioner did not receive an explanation of the process and Appeals did not request any financial information.

The only correspondence Appeals sent to petitioner was a notice of determination sustaining the NFTL (petitioner’s request related to his proposed levy was not timely). This denial of a CDP hearing is permitted under section 6330(g), but Thornberrypermits the Tax Court to review the “non-hearing” for an abuse of discretion.

That opportunity for review is potentially helpful for petitioner in this case. The Court reviews the form letter that petitioner submitted with his CDP request and nothing seems frivolous about it.  If only some portions of petitioner’s request are frivolous, then Appeals may have abused its discretion in denying the CDP hearing. The Court also identifies a section 6751 supervisory approval issue and the IRS has not demonstrated it has met its burden. As a result, rather than grant the IRS’s motion, the Court sets the motion for argument during the upcoming trial session.

Affidavits in Summary Judgment – Designated Orders: September 16 – 21, 2019

Only one order this week, but it’s a meaty one. Judge Halpern disposed of three pending motions from Petitioner in Martinelli v. Commissioner, a deficiency case. Let’s jump right in.

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Docket  No. 4122-18, Martinelli v. C.I.R. (Order Here)

So begins the tale of the brothers Martinelli: Giorgio, the Petitioner in this Tax Court case, and Maurizio, the generous yet problem-causing sibling who—according to Giorgio—created an Italian bank account in Giorgio’s name in 2011. Giorgio argues that he never had knowledge of or control over the Italian bank account; he was a mere “nominee” on the account. He first learned of the account in September 2012.

The IRS, as one might expect, alleged that Giorgio didn’t report the income from the account on his federal income tax returns for 2011 through 2016. To boot, the IRS assessed a penalty under section 6038D(d) for failure to disclose information regarding a foreign financial assets where an individual holds foreign financial assets exceeding $50,000 in value. (NB: This penalty is distinct from the Foreign Bank Account Reporting, or FBAR, penalty found at 31 U.S.C. § 5321. Unlike the FBAR penalty, the IRS may collect the section 6038D(d) penalty using its ordinary collection mechanisms, including the federal tax lien).

Petitioner filed three motions: first, a motion for partial summary judgment to determine that the Tax Court has jurisdiction regarding the section 6038D(d) penalty; second, a motion to restrain assessment and collection of the penalty while the Tax Court case is pending; and third, a motion for partial summary judgment regarding the underlying income tax deficiency.

Jurisdictional Motion

The Court rightly held that it lacks jurisdiction as to the 6038D(d) penalty. As the Tax Court likes to repeat, it is a court of limited jurisdiction. Congress must provide the Tax Court with the authority to hear particular cases. While certain penalties fit into Congress’ grant of authority under the Tax Court’s general deficiency jurisdiction under section 6211(a) and section 6214, this penalty simply doesn’t.  

Judge Halpern reviews the Court’s jurisdiction under section 6211(a). It includes taxes imposed under subtitle A or B, or under chapters 41, 42, 43, or 44. But section 6038D is in Chapter 61 of subtitle F. So no luck there.

Likewise, the penalty isn’t an “additional amount” under section 6214. Tax Court precedent has confined this jurisdictional grant to penalties under subchapter A of chapter 68. See Whistleblower 22716-13W v. Commissioner, 146 TC 84, 93-95 (2016). Failing to find a jurisdictional hook, the Court denies summary judgment on this matter, holding that the Court does not have jurisdiction with respect to this penalty.

Is this the right result as a policy matter? I think not. The IRS likely assessed this penalty during the audit of Mr. Martinelli’s tax return, in addition to the deficiency it proposed. One result of the audit is subject to challenge in the U.S. Tax Court; the other isn’t. Yet a challenge to both may rely on the same set of facts. Why require a taxpayer to litigate twice?

Motion to Restrain Assessment & Collection

The Court’s disposition of the first motion makes the second easy. If the Court can’t determine the amount of the penalty, it certainly can’t tell the IRS not to collect the penalty. This motion is likewise denied.

The Deficiency

Giorgio alleges that he was a mere “nominee” of the account, and that in fact, his brother Maurizio controlled the account. Thus, Giorgio shouldn’t be subject to tax on the interest and dividend income from the account.

Judge Halpern takes issue with the nominee argument. He notes that a nominee analysis doesn’t really fit here; that analysis is usually used to determine whether a transferor of property remains its beneficial owner. Here, the parties disagree on whether Maurizio used his own assets to fund account and then listed Giorgio as the nominee owner. This analysis would allow the Court to determine whether Maurizio had an income tax liability, but would only allow a negative implication as to Giorgio.

Instead, the Court focuses on whether Giorgio exercised sufficient dominion and control over the account. The Court asks whether Giorgio had freedom to use funds at his will. While Petitioner did submit affidavits from himself and Maurizio, there was no other evidence to show that Petitioner didn’t enjoy the typical rights of an account owner (i.e., the right to access funds in the account). So, it appears there’s still a genuine dispute of material fact regarding Giorgio’s ability to access these funds.  

Judge Halpern did, however, allow for the possibility that Giorgio didn’t have any knowledge of the account until after 2011. After all, one can’t withdraw funds from an account that remains secret from the nominal owner. Giorgio says that he didn’t have knowledge until September 2012.

Here’s where we enter a problem for the typical analysis of a motion for summary judgment. Petitioner provided an affidavit that he had no knowledge of the account until September 2012. Respondent denied this, but didn’t provide any other evidence showing that Giorgio did, in fact, have this knowledge. Under Rule 121(d), Respondent can’t rest on mere denials in response to a motion for summary judgment; instead, a party “must set forth specific facts showing that there is a genuine dispute for trial.”  

What’s Respondent to do? There may be no evidence demonstrably showing that Giorgio knew about the account. The only evidence is Giorgio and Maurizio’s affidavit.

Rule 121(e) provides a safety valve: if a “party’s only legally available method of contravening the facts set forth in the affidavits or declarations of the moving party is through cross-examination of such affiants or declarants . . . then such a showing may be deemed sufficient to establish that the facts set forth in such supporting affidavits or declarations are genuinely disputed.” In other words, Petitioner can’t simply provide an affidavit and rest on his laurels. Respondent must have an opportunity to cross-examine the affiant—in this case, Petitioner and his brother.

Thus, because Respondent showed under Rule 121(e) that they had no other way to refute the facts alleged in Petitioner’s affidavits, the knowledge issue is a genuinely disputed material fact for 2011. Whether petitioner controlled and could withdraw funds from the account is likewise a genuinely disputed material fact for the other tax years. As such, Judge Halpern denies Petitioner’s motion for summary judgment.

The case is now set for trial on February 10, 2020 in New York.