Bouncing Documents at the Tax Court

I wrote about documents bouncing back from the Tax Court last month in connection with the Tax Court policing the timely filing of petitions.  The post caused commenter in chief Bob Kamman to pay careful attention to the orders coming out of the Tax Court and he noticed a particularly bad day for Chief Counsel’s office on June 9, 2021.  Because we do not routinely track all of the Court’s orders each day, it’s a bit hard to say when one day is worse than another.  We can look at each order to try to better understand practice before the Court.

read more...

The Tax Court has always been more likely, at least in my view, to return documents to the IRS rather than to petitioners.  This makes sense from the perspective that the IRS participates in every case.  It generally has the resources and the knowledge to correct mistakes that many petitioners do not.  When the Court sees something in a filing that is wrong or that it just does not like, it can return, or bounce, the document and tell the party, or parties, to start over.  Usually, when it does so, it provides in an order a brief explanation of the problem and how to fix it.  If a Chief Counsel office routinely receives a high volume of bounces, it is an indication that something is wrong at the office.  This can cause phone calls from the attorneys in the national office who monitor the bounces as well as calls from the area office about the problem. 

No office wants this attention.  In addition to those less than pleasant contacts, at gatherings of Chief Counsel attorneys, the national office attorneys in charge of monitoring relations with the Tax Court would occasionally read select documents to the collected group.  These documents would demonstrate serious bloopers in an effort to spur greater attention to detail.  Since Bob has identified the cases, we have the opportunity to look at a form of Tax Court bounce sheet.

Bounce #1

This case presents the same issue discussed in the Villavicencio case blogged on June 3, 2021, and discussed in a brief filed by the Tax Clinic at Harvard with the Supreme Court.  Even though the parties agreed to the outcome of the case, the Tax Court bounces back that agreement saying that it is unconvinced that it has jurisdiction.  It invites the parties to address the jurisdictional issue:

Bounce #2

The notice of deficiency included a penalty under IRC 6662; however, the decision document filed by the parties does not mention the penalty.  The Tax Court sends the document bouncing back for the parties to address all of the issues in the notice of deficiency.  Remember that when you go to Tax Court, the outcome closes out the tax year.  So, the Court wants to make sure that everything gets addressed as it signs the document closing the case.

Bounce #3

This is the kind of bounce you really hate to receive.  Here, a stipulated decision document gets bounced because it describes the IRC 6651 addition to tax as a penalty.  Many of you might think and regularly speak of the liability imposed by 6651 as a penalty.

Bounce #4 (not really a bounce)

This order shows a few things but does not really qualify as a bounce.  An order of dismissal and decision was entered in this case in September 2020, but in October 2020 the IRS moved to vacate the order.  The Court would have written to petitioner to respond to the IRS motion.  Not having received a response from the petitioner, the Court grants the order.  We don’t know why the IRS wanted to vacate the order and finding out the answer to that question would involve ordering the motion from the Court since it is not publicly available otherwise.  We don’t know whether the issue raised in the motion was difficult, causing the Court to pause for almost six months after the stated response date set for the petitioner, or whether this order was just backlogged along with other matters at the court.

Looking at these routine orders provides a glimpse of the day to day action taking place at the Court.  The majority of cases get decided with stipulated decision documents and with orders.  Decisions continue to be a small minority of case dispositions.

Technology and Taxpayer Rights

This post includes information about the IRS’s plans to use AI to assist taxpayers. For more insight on the legal risks tax administrations face from using AI-enabled systems, including risks to taxpayer rights, there is a Zoom lecture hosted by Antwerp and VIA Universities, HMRC, the Prosperity Collaborative, and the Center for Taxpayer Rights today, June 10, 2021 at 9 am ET, the link to attend is here.

The IRS’s outdated technological capabilities are well known, and the pandemic further stretched the already struggling system. Prior to the pandemic, the IRS had been tasked with examining ways to improve its technological capabilities pursuant to a provision in the Taxpayer First Act (“TFA”),  which required the IRS to implement a multi-year strategic plan for information technology by July 1, 2020 and to submit written plans for comprehensive customer-service, employee training, and organizational redesign to Congress by September 1, 2020. The pandemic delayed this submission, but the IRS submitted a combined report on all three topics to Congress in January of 2021, aptly titled the Taxpayer First Act, Report to Congress (“TFA Report”).

Tax scholars and academics have long been considering ways in which the IRS should prioritize updating its technological capabilities. In an article titled, Moving Tax Disputes Online Without Leaving Taxpayer Rights Behind, (available here), Professor W. Edward Afield asserts that if the IRS prioritizes its technological development efforts on tax controversy resolution, it could advance its customer service and enforcement goals while protecting and enhancing taxpayer rights.

The TFA Report contains some of Prof. Afield’s ideas and potentially lays the groundwork for his other ideas to be possible in the future.

read more…

Prof. Afield argues that the IRS could “increase its use of technology-based interactions with taxpayers in the controversy-resolution process” by: 1) providing more information about notices online, 2) allowing taxpayers to satisfy their tax obligations online, and 3) developing partnerships with the nonprofit and academic sectors to produce technological platforms and provide access to information and dispute-resolution tools.

1. Improved Online Information About Notices

The IRS could utilize technology to serve its goal of improving taxpayer compliance, while ensuring that taxpayer rights are protected by providing more comprehensive information about notices online. The IRS’s design choices for certain notices have been criticized as confusing to taxpayers, but that confusion is especially dangerous when a notice informs a taxpayer of proposed actions that implicate his or her due process rights. Although the IRS website contains some additional information, the most critical information about how, why and when to respond to due process related notices is not prominently displayed. As a result, taxpayers don’t exercise their rights. According to an NTA report, less than 1% to 10% of taxpayers respond to collection due process notices.

Prof. Afield references research from Prof. Morse who states, “The Service’s tendency to ‘bury the lead’ concerning critical information not only hurts taxpayers but can also negatively impact the Service, a lack of salience in a variety of Service communications limits the ability of the Service to shift taxpayer norms toward compliance and thus may increase the size of the tax gap.”

Prof. Afield argues that there are ways the IRS could explicitly encourage taxpayers to exercise their rights, such as by sharing taxpayer success stories or statistics about how many other taxpayers request collection due process hearings.

Prof. Afield argues that providing “easy-to-understand explanations to taxpayers on its website is relatively ‘low hanging fruit’ for which the service can use technology in a way that conserves resources while enhancing taxpayer rights.”

The IRS appears to agree with this in the TFA Report. The IRS plans to redesign notices by simplifying the format and providing information in a manner that is easy to read without unnecessary legal language. It also wants to provide clear information and plain instructions to the taxpayers about why they are receiving communications and what actions they need to take, including instructions for using online accounts for more detailed account information. In line with this, the IRS wants to further enhance notices with unique confirmation numbers linked to a specific taxpayer’s case and QR codes linked to additional information resources.

The IRS plans to utilize digital notifications to allow for customized notices available through online accounts and allow taxpayers opt-in to received notifications about changes, payment reminders and status updates. It’s not difficult to imagine that reminders could be created for CDP hearing request deadlines, Tax Court petition deadlines, and more.

Another way IRS is using technology to enhance taxpayer rights is by improving the access that tax professionals have to their clients’ information. The IRS wants to provide “secure access to clients account information and notices and perform other account services and representational duties through their online account.”  

A large of focus in the TFA Report is on developing multi-linguistic notices and communication capabilities.  They intend to identify necessary language translations and use data to improve communication effectiveness among different populations.

2. Enhancing Ability to Satisfy Tax Obligation Online

Prof. Afield discussed that other academic commentators and government advisory committees have recommended the development of a single online platform that integrates online services already available to taxpayers (such as checking on refunds and obtaining transcripts) and adds additional capabilities to do things such as view communications, view the status of issues, address underpayments and penalties, and respond to IRS inquiries.

The TFA Report reflects these recommendations. It proposes a more interactive and personalized online experience and expanded digital services where taxpayers can view the history of payments, refunds, amounts owe, and returns filed; update contact information and other details; utilize digital signatures; and exchange documents and communicate by chat with the IRS securely.

Prof. Afield argues that the IRS should also expand its online services to include online dispute resolution options and algorithmic decision making for collection alternatives that “rely on mathematical determinations of collectability.” Building upon the already existing technology the IRS uses for streamlined installment agreement determinations and the offer in compromise pre-qualifier tool, the IRS could develop a system that would allow taxpayers to enter information and upload documents for cases where an inability to pay is easily demonstrated. These types of cases exist, LITCs encounter them regularly.

Prof. Afield understands that algorithmic decision making is not appropriate for all cases, but a modified form of ODR could be utilized where one IRS employee is assigned to the case and the taxpayer can communicate with the assigned employee via an online portal to resolve the case more efficiently.

The IRS’s plans could lay the groundwork for more ODR options to exist in the future. The TFA Report discusses plans to use an artificial intelligence powered informational web chat to answer questions or direct taxpayers to helpful information and connect taxpayer to assistors and live support, if needed. If a chat bot cannot resolve issue, taxpayers will also have option to schedule an appointment with employees in exam and collection in-person, by telephone, or by secure video chat. One could imagine ODR possibilities arising from this, especially after the ability to upload documents and exchange information securely is developed.  IRS is open to learning and adapting based on data and information as they collect it, and has created new positions within the organization that focus on these areas.

Prof. Afield also references the work of Prof. Blank and Prof. Osofsky, who have performed extensive research in this area, were recently chosen to assist with these efforts by studying the use of automated legal guidance by federal agencies by the Administrative Conference of the U.S.

3. Nonprofit and Academic Partnerships

Using partnerships with nonprofit organization and academic institutions to fill gaps and assist vulnerable groups, is the third area Prof. Afield believes the IRS should prioritize. These partners could be tasked with developing technology that can further assist taxpayers and essentially serve as technological translators between taxpayers and the IRS. One such idea is technology that utilizes easy-to-understand questionnaires to complete a Tax Court petition or collection form; or informs taxpayers about the range of procedural options available to them based on their specific circumstances. This could reduce the demand for personal assistance, but such assistance would still be available when needed.

Relying on non-profit motivated institutions to develop and implement these types of technology could also help taxpayers more quickly while the IRS to goes through the slow and deliberate process of experimenting with different improvements.

The TFA Report states that the IRS is interested in building on existing partnerships and creating news one in order to “address issues of communication, education, transparency, trust and access to quality products and services like customized education and outreach in various languages.”

Offline, the IRS wants to expand upon this with further community outreach to community centers, cultural and faith communities and organizations, chambers of commerce, and engagements with schools. It also believes that co-locating IRS services with other government services (such as post offices, U.S. embassies) can assist the IRS in helping taxpayers to access services and resolve issues.

Online, the IRS wants to create partnerships that allow for virtual seminars, and secure and authorized data sharing opportunities amongfederal and state agencies, Security Summit25 participants, and other third parties to drive enforcement decisions, combat identify theft and improve the taxpayer experience.

Risks and Benefits

Prof. Afield also discuss the risk of overreliance on technology, such as a reduction in in-person assistance (which budget constraints have already caused), the intentional and unintentional biases in algorithmic decision making, and the risk that for-profit companies could develop ways to exploit vulnerable taxpayers, in addition to the more common concerns about data breaches and government overreach.

The TFA Report surmises that taxpayers could be more protected from identity theft if the IRS is able to request and verify taxpayer information more quickly and easily. Prof. Afield postulates that if the IRS is intentional and smart about its development and implementations, the benefits will outweigh the risk. If technological solutions are implemented carefully, they could allow IRS to better serve taxpayers, protect taxpayer rights, and meet cost and efficiency goals. The TFA Report aims for the first phase of multi-year plans be implemented between now and the end of 2022 if it receives enough funding, and even though a lot has changed, that’s still a big “if.”

More On The Implications of CIC Services

We are starting to see some fallout from last month’s CIC Services opinion. For example, Tax Notes’ Kristen Parillo discusses[$] Hancock Land Acquisitions v US , another microcaptive case. Parillo’s article explores the parties’ post CIC Services supplemental filings in a case where the taxpayer brought an action alleging that the IRS’s failure to refer its case to Appeals violated the Taxpayer First Act’s addition of Section 7803(e)(4) and its mandate that Appeals’ “shall be generally available to all taxpayers.” Immediately following the Supreme Court opinion, the government filed a supplemental brief claiming that CIC does not alter that the challenge is barred by the AIA, emphasizing that the partnership was not challenging a reporting obligation and that the relief requested was close to an assessment on the partners.

read more…

The partnership responded, claiming that its challenge squarely fits in with the three CIC factors that led the Court to conclude that the challenge was not to a tax, including that its relief looks to a remedy for alleged violations of their procedural rights and that any impact on assessment or collection is just a downstream consequence.  

Earlier this week there was also a very interesting blog post on CIC Services in Notice & Comment, the administrative law blog. The post, Do you C what I C? – CIC Services v. IRS and Remedies Under the APA, from Professor Mila Sohoni, explores what CIC Services offers more broadly for admin law purposes: 

The Court’s opinion in CIC Services throws some much-needed light on two important points of contention within that debate: what do litigants mean when they ask a court to “enjoin” a rule or “declare” a rule “unlawful” in an APA action, and what does the APA mean when it says that a court may “hold unlawful and set aside” a rule?

For readers interested in those issues I suggest reading the brief but powerful post.  The post focuses mostly on APA 706 and whether APA violations can lead to vacating regs/rules in their entirety or rather a more narrow focus on the individual plaintiff. The takeaway from the post is that there has been some uncertainty in admin law circles on the scope of a federal court’s powers when in a preenforcement action it finds that an agency (not just the IRS) violates the APA. As Sohoni discusses the Sessions led DOJ in the Trump Administration issued litigation guidelines that adopted the narrow view. Others have argued that the courts have much broader powers to enjoin agency action. Sohoni argues forcefully that CIC Services provides support for the latter view:

The opinion in CIC Services shows that the Court does not hold this [the narrow] view of the meaning of “set aside.” Throughout its opinion, the Court treats “set aside” as a type of relief. (See, e.g., CIC Servs., slip op. at 4-5 (“So the complaint asks the court to ‘set[] aside IRS Notice 2016-66 …’”); id. at 11 (“the existence of criminal penalties explains why an entity like CIC must bring an action in just this form, framing its requested relief in just this way”). Moreover, the Court not only treats “set aside” as a kind of relief, but the Court also necessarily is using the term “set aside” in its conventional sense: to mean “invalidate,” not merely to “ignore.” 

These developments are just the opening rounds on the impact of CIC Services. Stay tuned.

Limitation on Issues Taxpayer Can Raise in Passport Case

The case of Shitrit v. Commissioner, T.C. Memo 2021-63, points out the limitations on raising issues other than the revocation of the passport when coming into the Tax Court under the jurisdiction of the passport provision.  Petitioner here tries to persuade the Tax Court to order the issuance of a refund but gets rebuffed due to the Court’s view of the scope of its jurisdiction in this type of case.

read more...

Petitioner filed his case in Tax Court seeking to reverse certification, to determine he is not liable for any taxes for 2006, and to obtain a $3,000 refund.  While the case was pending, the IRS sent to the Secretary of State a reversal of the certification of petitioner as a seriously delinquent taxpayer.  After sending the letter reversing certification, the IRS moved to dismiss the Tax Court case as moot. 

This motion was consistent with prior Tax Court precedent established in the case of Ruesch v. Commissioner, 154 T.C. 280 (2020). In the Ruesch case, petitioner came into the Tax Court under the jurisdiction of the passport provision and asked the Court to determine whether the IRS had erred in certifying her as a person owing a seriously delinquent tax debt. Petitioner also asked the Court to issue a ruling to determine her underlying tax liability. The IRS had since reversed its classification of petitioner as seriously delinquent, informed the Secretary of State, and moved to dismiss the case as moot. The Court agreed with the IRS and dismissed petitioner’s case, holding that it lacked jurisdiction under IRC 7345 to determine petitioner’s underlying tax liability. The dispute did not, in the Court’s view, give rise to a justiciable controversy because no relief, other than reversal of the erroneous classification (which had already been granted by the IRS), could be granted by the court.

Based on the position of the Tax Court staked out in the Ruesch case, the Court granted the motion of the IRS but gave background on petitioner’s case nonetheless. Petitioner lives in Israel and is a dual citizen of Israel and the US. He did not file a 2006 US federal tax return. The IRS, however, had received third party information returns from three separate parties indicating that he had US income. For his convenience, the IRS prepared an IRC 6020(b) tax return for him.

I am sure that this happened after the IRS mailed him correspondence and probably several pieces of correspondence. Because of where he lived, it is likely he did not receive this correspondence. After sending a notice of deficiency, the IRS assessed the liability it had calculated and eventually the liability, because of the high dollar amount, was assigned to a revenue officer for collection. The IRS sent him a CDP notice which he did not claim.

In 2017, Mr. Shitrit filed US federal income tax returns for 2014, 2015, and 2016 showing his address in Israel. It is worth notice here that being outside of the US for more than six months triggers one of the provisions in IRC 6503 suspending the statute of limitations on collection. The IRS does not always know if a taxpayer is out of the country for more than six months but when it knows this it will input the information so that the collection statute is suspended. The IRS needs this suspension because of the difficulty it has in collecting taxes from taxpayers residing outside of the country. As we have discussed before, the IRS has only built collection language into five of the treaties it has with other countries. In countries with whom it lacks a collection treaty, the IRS can only collect if it can find assets of the taxpayer in the US. One of the benefits to the IRS of the passport provision is that it gives the IRS leverage over individuals in a situation in which it may have almost no leverage in its effort to collect delinquent taxes.

In this case, Mr. Shitrit did not owe the taxes, so the IRS did not need leverage, but the passport provision did cause him to become aware of the problem and to address it. It is unfortunate that the assessment existed since it did not exist through the fault of either the taxpayer or the IRS, but rather through the fault of a third party who stole his identity, triggering the information returns that were sent to the IRS, implicating Mr. Shitrit as someone who earned money and failed to file a return. Everything came to a head when the returns were filed in 2017 because he claimed a $3,000 refund. No surprise that the IRS offset the refund against the outstanding liability created for 2006 with the substitute for return.

Now that it had his correct address, the IRS sent him the seriously delinquent passport notice. He filed the Tax Court petition to address this notice. He retained the law firm of Frank Agostino and, although the opinion does not make this clear, I surmise that Frank’s firm figured out what happened to create the liability and took the steps to unwind the assessment, convincing the IRS that it was not Mr. Shitrit’s income. That worked well for ending the primary problem presented with passport revocation, but the small matter of the $3,000 refund still existed, and Mr. Shitrit sought to have the Tax Court make a determination that he was entitled to that refund.

The Court says that nothing in IRC 7345 establishing jurisdiction for passport revocation cases authorizes the court to redetermine a liability or to determine an overpayment. Among the other cases it cites following this statement, the Court cites to a Collection Due Process case, Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), which this blog has often criticized. See prior discussions of this issue in the CDP context here and here. There are significant differences between the passport statute and the CDP statute, making some of the criticisms of the decision in Greene-Thapedi not as applicable in this context.

Mr. Shitrit argues that despite prior decisions, IRC 6512 grants the Tax Court jurisdiction to determine an overpayment and IRC 6402 gives the Court the power to order the overpayment. The Court disagrees. Arguments regarding mootness and voluntary cessation follow, with the IRS arguing the decertification has mooted the case and petitioner arguing that voluntary cessation by one party does not necessarily moot a case.

I expect that the IRS will refund the overpayment to Mr. Shitrit as it abates the 2006 liability, since an overpayment will be sitting on that account and the taxpayer has requested the money within the applicable refund period. If it does not, then Mr. Shitrit must incur the time and expense to go back into a different court to seek an order granting him the refund. It’s unfortunate that he could not wrap everything up in one proceeding.

In Gilbert v US Ninth Circuit Weighs in on The Declaratory Judgment Act

With my colleague Marilyn Ames we are revising our subchapter on the Anti-Injunction Act in Chapter 1 of Saltzman and Book IRS Practice and Procedure to take into account last month’s CIC Services decision. Embedded in our discussion of the AIA is a discussion of its cousin, the Declaratory Judgment Act. Under the Declaratory Judgment Act, a federal court may issue a declaration resolving the parties’ competing legal rights “[i]n a case of actual controversy within its jurisdiction, except with respect to Federal taxes.

Gilbert v US is a recent Ninth Circuit opinion that discusses and applies the DJA in the context of a contract dispute between a foreign entity that owned Arizona property and the Gilberts, US citizens that bought the property. In this post I will discuss the case and the somewhat unusual path that led to the court’s finding that the DJA prevented the court from reaching the merits of the dispute.

read more…

The Gilberts entered into a contract to buy residential property in Arizona. The contract called for a $1.2 million purchase price to be paid over the course of about five years. A few years into the contract and the Gilberts informed the seller that future payments were subject to withholding under the Foreign Investment in Real Property Tax Act (FIRPTA) and the Fixed, Determinable, Annual, or Periodical income (FDAP) rules. The sellers disagreed, informing the Gilberts that they were exempt nonresidents. The Gilberts sought a declaratory judgment from a federal district court that would establish that withholding money from their agreed purchase price to pay the federal taxes required under FIRPTA and the FDAP rules was not a breach of their real estate contract.

The district court dismissed the case and the Ninth Circuit affirmed. In dismissing the case, the Ninth Circuit summarized US withholding rules. FIRPTA applies to non US sellers of US real estate and triggers a withholding requirement on a purchaser to ensure that funds to pay the required taxes are collected under FDAP rules.

The Gilberts argued that the DJA did not apply because they were seeking an order with respect to their obligations to withhold on behalf of another’s liability. Moreover, according to the Gilberts, since there had yet to be an assessment or collection of taxes, the order would not restrain assessment or collection.

The Ninth Circuit disagreed. In doing so, it noted that while the DJA’s language sweeps more broadly than the AIA (it covers all actions “with respect to taxes” rather than the AIA’s “for the purpose of restraining the assessment or collection of any tax”) courts have applied the statutes coextensively. Looking to AIA cases, the court noted that the cases do not require assessment to apply. Here, as the Ninth Circuit noted and citing the 4th Circuit case International Lotto Fund case, withholding is a method of tax collection, and there is no “justification for treating withholding from a foreign corporation as anything other than the collection of a tax.”

The opinion also acknowledges that the Gilberts were not seeking to stop the government from collecting taxes but instead “seek to comply with their asserted FIRPTA and FDAP obligations but in a way that avoids any adverse contractual consequences.” Despite that intent, the opinion concludes that the action is barred, emphasizing that a prepayment determination on FIRPTA and FDAP would be binding and undermine the standard refund procedures:

The Supreme Court has recognized that the government’s vital interest in securing tax revenues justifies a “pay-first, litigate-later” system of judicial review. See Flora, 362 U.S. at 164 & n.29. The Gilberts’ attempt to litigate the existence, or extent, of their withholding obligation before paying withheld funds to the government departs from this longstanding principle. There can be no dispute that the ultimate issue in this case is the parties’ tax obligations flowing from their real estate transaction. And even though the Gilberts are not seeking to avoid tax liability, Congress has made clear that the court lacks jurisdiction over their request for declaratory relief. 28 U.S.C. § 2201(a). 

CIC Services came out a few days before Gilbert but the Ninth Circuit does not cite it or address its impact. While withholding and information reporting are closely connected tools to address the tax gap, actions like this that have a direct impact on tax collection differ from challenges to reporting regimes. While CIC Services suggests a focus away from the downstream circumstances withholding is a method of tax collection rather than a regulatory mandate. The DJA and AIA are still formidable hurdles to consideration of disputes that relate, even indirectly, to tax liability.

IRC 7459(d) and the Impact of Dismissal

On May 20, 2021, the Court of Federal Claims decided the case of Jolly v. United States, Dk. No. 20-412.  Ms. Jolly pursued the case pro se.  The court lists the opinion as not for publication. The case involves a refund suit covering four tax years.  The court decided not to dismiss her complaint rejecting the government’s motion.  Carl Smith noticed this decision and in his email forwarding the opinion he provided much of the substance of this post. 

In amicus briefs filed by the tax clinic at Harvard in the cases of Organic Cannabis and Northern California, the clinic argued that the court should not be concerned about turning late filing of a deficiency petition into a merits issue, rather than a jurisdictional one.  The counter-argument (which the 9th Cir. accepted in Organic Cannabis) was that, if a deficiency petition is dismissed for late filing and that is a merits dismissal, then it upholds the deficiency under 7459(d), and so the Tax Court decision could present a res judicata bar to a person seeking to litigate the deficiency later by paying and suing for a refund.  In our cert. amicus brief in Northern California, we acknowledged that that was a theoretical possibility.  We noted in our brief that neither Carl Smith nor I could recall any case where a person who was dismissed from the Tax Court for late filing later full-paid the deficiency and sued for refund.  We acknowledged that it is possible such rare cases existed, but said they must be a very few since it could arise in the traditional refund context or when there is no balance due but a disallowed refundable credit and a late filed petition. 

Because of the possibility, Nina Olson, when she was the National Taxpayer Advocate made a legislative proposal to fix the jurisdiction issue, and it contains a modification to 7459(d) that would except untimely filed petition dismissals from the rule upholding the deficiency. 

The Jolly case presents the fact pattern we said we did not recall ever seeing. 

read more...

In Jolly, for the 2016 year, the IRS issued a notice of deficiency.  Jolly, pro se, late-filed a Tax Court petition, which was dismissed for lack of jurisdiction.  The IRS applied overpayments from 2018 and 2019 that were shown on the returns to the 2017 deficiency, still leaving a partial balance due for 2017.  The IRS did not apply any of the overpayments to 2016.  This is unusual because normal procedure at the IRS applies payments to the earliest period to tax, then penalty and then interest.  It is unclear why the payments were posted in this manner in the Jolly case. 

Jolly, again pro se, then filed suit in the Court of Federal Claims seeking a refund for each of the years 2016 through 2019.  The DOJ moved to dismiss all four years, though on different grounds.  It wanted the court to dismiss 2016 and 2017 for failure to full pay and wait 6 months after a refund claim to bring suit – i.e., lack of jurisdiction.  It wanted the court to dismiss 2018 and 2019 because the overpayments from those years had been applied to 2017 – i.e., failure to state a claim since she received the refund she requested on her returns for those years.  Pro se taxpayers commonly misunderstand what it means when the IRS offsets a liability.  Clinic clients regular arrive at the door complaining of one year when the IRS has granted the requested refund for the year identified by the taxpayer but taken the refund to an earlier year where the problem exists.  In somewhat confusing rulings, the court denied  the government’s motions for all years.

For 2016 and 2017, the court thinks it is important to decide whether notices of deficiency were issued for each year.  It’s not clear why it feels this way.  The court finds that a notice of deficiency was issued for 2016, but not 2017.  The court notes the IRS has lost the 2017 administrative file, and the court won’t accept at this time only circumstantial evidence of mailing.  The court says that the credits from 2018 and 2019 might have full-paid the 2016 liability and part-paid the 2017 alleged liability based on the evidence in the record at this time.  This approach seems confused.  It is implicit in the court’s ruling that if a notice of deficiency was not sent for 2017, the Flora rule doesn’t apply to the erroneous assessment of the deficiency and the credits from 2018 and 2019 can be moved from the 2017 year to the 2016 year to meet Flora.  I would have thought Flora requires full payment of an assessment, even if the assessment was not made correctly procedurally, though I have never researched case law on that issue, if any. 

In addition to this argument, what about the government argument that the taxpayer had to file a refund claim and wait six months?  Clearly, a 2019 overpayment used to finish paying the 2016 year could only have been applied as a credit in 2020, and suit here was brought in 2020.  It is very unlikely that the taxpayer filed a refund claim for 2017 between the time that the 2019 credit was posted to 2017 and then waited six months to bring suit.  In denying the motion, the court doesn’t discuss this issue.  Here’s the last paragraph of the opinion as relates to the motion for 2016 and 2017:

If Ms. Jolly’s 2017 deficiency of $6,371.76 does not exist, the math follows: applying Ms. Jolly’s 2018 and 2019 tax refund ($1,947.00 and $1,255.00, respectively) to only her 2016 assessment of $2184.81 results in a residual amount of around $1017.19.2 As there is a factual dispute underlying the jurisdictional allegation in the government’s Rule 12(b)(1) motion, the Court “weigh[s] evidence” and “find[s] facts” while “constru[ing] all factual disputes in favor of [Ms. Jolly].” Knight, 65 Fed. Appx. at 289; see also Cedars-Sinai Medical Center, 11 F.3d at 1583–84, James, 887 F.3d at 1373. Accordingly, based on the record before the Court, specifically the government’s failure to locate Ms. Jolly’s 2017 IRS administrative file, the Court finds Ms. Jolly may have paid her full tax liability before filing this lawsuit, and thus the Court has subject matter jurisdiction over her 2016 and 2017 tax refund claims. See Flora, 362 U.S. at 150.

It is also unclear why the court did not dismiss the 2018 and 2019 years for failure to state a claim.  The government argued that the claims (shown on original returns) had been paid by application of the overpayments to 2017.  A taxpayer should not be able to bring a refund suit for the year in which overpayments occurred that were used as credits against earlier-year balances due.  Such a suit could only be brought for the earlier years to which the credits had been applied.  The court seems to think that because it determines that the 2017 assessment was improper, the IRS must be deemed not to have made the credits of the refund claims shown on the 2018 and 2019 returns.  But, even if so, why didn’t the court say that the 2018 overpayment should be deemed to partly pay the 2016 deficiency, so at least there can be no overpayment suit relating to 2018?  Here’s the entire discussion of why the court denies the DOJ 21(b)(6) motion for 2018 and 2019:

The government further contends Ms. Jolly is not entitled to any recovery for 2018 and 2019 since Ms. Jolly received her 2018 and 2019 refunds as payments towards her 2017 balance. Gov’t MTD at 9–10. As discussed supra, the absence of a notice of deficiency bars the IRS from assessing a tax deficiency against Ms. Jolly in 2017, thus, the record before the Court compels a finding that the IRS possibly owes Ms. Jolly a residual amount after applying her 2018 and 2019 tax credit towards her 2016 balance. Accordingly, “accept[ing] well-pleaded factual allegations as true and . . . draw[ing] all reasonable inferences in favor of [Ms. Jolly],” the Court finds Ms. Jolly alleges “enough facts to state a claim to relief [regarding her tax refund of 2018 and 2019] that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Athey v. U.S., 908 F.3d 696, 705 (Fed. Cir. 2018) (quoting Call Henry, Inc. v. U.S., 855 F.3d 1348, 1354 (Fed. Cir. 2017)) (When deciding a Rule 12(b)(6) motion to dismiss, the Court “must accept well-pleaded factual allegations as true and must draw all reasonable inferences in favor of the claimant.”).

Jolly will struggle to win this case, but perhaps the court’s ruling will allow her to prove to the Tax Division attorney handling the case that she should not have been assessed in 2016 and that she is entitled to a refund, even if she is not entitled to bring a refund suit for four years.  Since much confusion seems to surround the 2017 year and how the assessment came to exist for that year and why the IRS offset the later refunds to 2017 instead of 2016 perhaps this pause will allow time for clearing up that issue as well. The judge seems to misunderstand the basis for refund litigation but that will no doubt be worked out over time.  The case is most notable because it represents an example of someone who missed their chance to go to Tax Court but followed through in seeking a return of the tax through the filing of a refund suit.  Although Carl and I said we did not know of a case with those facts, perhaps we should have remembered the case of Flora which had those very facts and raised the question of what happens when you miss your chance to go to Tax Court.  In the Flora case we know that the Supreme Court held, in the fact of an unclear statute and contradictory prior case law, that the taxpayer can only bring the refund suit by first fully paying the tax, making a timely refund claim, waiting for the claim disallowance letter (or the passage of six months) and then coming to court.  If you want to read more about Flora and the parallels with the Jolly case, here is an article I wrote about Flora.

DAWSON Update and Example of Tax Court Policing

Carl Smith continues to probe the Tax Court docket sheet as he has done for many years but in his retired retirement, he finds working his way through DAWSON interesting as new features arrive unexpectedly to be discovered.  The latest new feature Carl has found is one about which those of us who use the system regularly have been complaining since its inception – the inability to see the representatives.  Now, it’s possible to see who is representing each party, but you must take a step to find out.

When you arrive on the docket sheet of a case, you will not see the persons representing the parties as you did prior to the change to DAWSON; however, if you click on the “Printable Docket Record” box on the right-hand side of the page near the top of the docket sheet, you will go to a sheet that displays the representatives.  This is another step forward as the Tax Court continues to build out DAWSON.

read more...

You can test out this feature by going to this link.  The link hopefully (I use this qualifier because all of the pre-DAWSON links in our blog to Tax Court orders were broken when DAWSON came into existence.  We do not have the time and energy to fix all of the broken links and apologize for this problem.  If you know someone willing to sponsor us to hire an energetic student to work on our links, we would welcome the sponsorship and the opportunity to update the old posts on the blog.  It is also possible that we might have an energetic reader with time on their hands willing to make an in-kind donation to this free blog site and do the work necessary to update our links) takes you to the case of Villavicencio v. Commissioner. 

While Carl brought to my attention the new DAWSON feature, Bob Kamman brought the Villavicencio case to my attention.  The case makes a point that I made in a recent post in which I quoted extensively from the brief the tax clinic at Harvard filed with the Supreme Court in Boechler – the Tax Court polices the timely filing of petitions even when the IRS does not and the Tax Court will dismiss a case even when the parties are in the process of settling it.  The case also highlights the dangers of using the wrong private delivery service, highlighted most often in this blog by reference to the Guralnik case.  The case also points out a problem created by COVID and the shutdown of the Tax Court.  Although it probably does not matter here for reasons discussed below, petitioner has not yet made jurisdictional arguments of the type frequently discussed in this blog.

Three weeks before trial, Judge Greaves raised the question of whether he had jurisdiction, because the notice of deficiency was issued on March 16, 2020, and the petition was not received until July 16, 2020.  It was sent by UPS, but not by one of their acceptable methods.  See Judge Greaves’ one-page order attached.  Late deficiency petitions raise jurisdictional issues in the eyes of the Tax Court even if the IRS doesn’t file a motion to dismiss for lack of jurisdiction. 

The IRS didn’t file an answer until October 27, 2020, more than three months after the petition was filed, but this is one of those cases about which we recently wrote where service of the petition on Chief Counsel, IRS did not occur for over two months after the petition was received.  So, the answer here was timely, but if it had not been timely filed, late answers are forgivable from the Tax Court’s perspective.   

I could digress and discuss the “strike fear” memo written by Chief Counsel Meade Whitaker in the mid-1970s threatening to fire any Chief Counsel attorney who did not file their answer on time, or I could digress further and talk about the time the Richmond office which I was heading filed seven answers late at once because of a snafu, but I will not.  Instead, I will simply say that the Office of Chief Counsel generally does not like it when an answer is filed late and neither does the Tax Court, but the Tax Court does not usually punish the IRS in any way for a late answer.  To my knowledge, the Office of Chief Counsel has not fired anyone for filing a late answer.

The case is calendared for a remote trial session in New York City on June 14, but the parties lodged a proposed stipulated decision on May 13.  So, the parties are ready to settle, the Tax Court is ready to toss the case, and the taxpayer is wishing that the petition had been timely filed.  If the Tax Court decides to dismiss the case for failure to timely file the petition, my expectation is that the IRS will honor the settlement and only assess the amount of tax, if any, agreed to by the parties.  It is not my experience that the IRS would use the dismissal as a basis for assessing the entire liability and force the taxpayer in this S case to come up with full payment and file a suit in district court. 

So, even though the petition was filed late, the petition was served late, and the Court caught the problem late in the process, all should end well for the parties, but before it ends well, they must spend time responding to the order that requires them to address the timeliness of the petition.  The parties may not care about the timeliness of the petition anymore because they have figured out the right answer to the tax problem.  That does not matter because the Tax Court cares.  Should it, or should we have a system where the filing of the petition is not jurisdictional, but a claim processing issue which, if not raised by the IRS, does not bar the parties from moving forward with the case?  If the Supreme Court does not change the Tax Court’s interpretation of the statutes granting it jurisdiction, perhaps Congress could step in and fix this problem so that all bases for jurisdiction in the Tax Court are considered non-jurisdictional and not just whistleblower cases, passport revocation cases and CDP cases filed by DC residents.

Category 9 Cases the Taxpayer Advocate Service Will Accept

In TAS-13-0521-0005: Interim Guidance on Accepting Cases Under TAS Case Criteria 9, Public Policy (05/06/2021) the National Taxpayer Advocate (NTA) put out guidance on the public policy cases Taxpayer Advocate Service (TAS) will accept.  The guidance regarding case acceptance expires on May 5, 2023. Under Code Sec. 7803(c)(2)(C)(ii), Congress listed several types of cases in which TAS will assist taxpayer and gave the NTA the authority to determine additional matters in which TAS will assist taxpayers.

TAS wants to assist taxpayers in situations in which it can provide meaningful assistance but does not want to waste time where it cannot help.  A good example of a place where it cannot help has occurred because of the pandemic.  Many taxpayers want to know what has happened to their refund or other correspondence.  TAS cannot provide much assistance because in a high percentage of these cases the correspondence sits in a tractor trailer waiting for someone at the IRS to process the mail.  Until the case gets into the IRS system in a meaningful way, the situation ties the hands of TAS, making those missing or delayed correspondence cases ones where TAS cannot really provide assistance. TAS divides the criteria it uses to decide when it will assist taxpayers (“case acceptance criteria”) into nine categories. (Internal Revenue Manual (IRM) 13.1.7.2)

read more...
 

Category 9, sometimes known as the public policy assistance category, provides that TAS will assist taxpayers with cases that: 

  1. The NTA determines warrant TAS assistance due to a compelling public policy, and 
  2. Don’t meet the case acceptance criteria for any of the other eight case acceptance categories. (IRM 13.1.7.2.4)

In the recent memo the NTA shares her determination that the TAS will accept the following four issues in its public policy category.  Some of these carry over from prior determinations: 

  1. Cases involving the automatic revocation of an organization’s tax-exempt status for failure to file an annual return or notice for three consecutive years.  This one goes back for several years when the IRS first came out with his plan for purging exempt organizations that seemed to no longer exist or, at least, no longer communicate with the IRS; 
  2. Cases involving any tax account-related issue referred to TAS from a Congressional office.  Going to a Congressional office as your entrée into the IRS generally greases the skids.  TAS is especially responsive to Congressional correspondence and makes regular visits to local and national Congressional offices.  Note that even though TAS wants to do everything it can to please the Congressional offices, it creates exceptions here to reflect its utter inability to accomplish certain tasks where the IRS has not processed correspondence: 
    1. Cases involving Economic Impact Payment (EIP) issues, and 
    2. Cases involving the exclusion from income of unemployment compensation received during tax year 2020 under Section 9042 of the American Rescue Plan Act of 2021 (ARPA, ARP Act; PL 117-2), where the taxpayer who filed their tax year 2020 return before ARPA was enacted; 
  3. Cases involving revocation, limitation, or denial of a passport because, under Code Sec. 7345, the taxpayer has a seriously delinquent tax liability (i.e. a tax liability of more than $50,000, adjusted for inflation).  It added this one when the legislation because effective.  You can find blog posts by the NTA through this link even though the title of our post indicates a discussion of private debt collection.  It can make a big difference to have TAS advocating for you on this issue if you need a fix in a hurry.  Keep in mind that TAS cannot perform magic here.  The taxpayer needs to be able to show that a seriously delinquent tax liability does not exist or that the taxpayer has made the necessary payment to resolve the liability; and 
  4. Cases that have been referred to a Private Collection Agency for collection of a federal tax debt under Code Sec. 6306.  This one has been around since private debt collection returned.  Nina Olson did not like private debt collection.  She is not alone.  See here and here.  She pushed to eliminate it the first time it came into existence.  She created this exception when Congress resurrected private debt collection and it has remained on the list.

The changes to the list are really changes to criteria 2. to reflect TAS’ inability to fix something.  Keeping up with the public policy list allows you to know when you can successfully obtain the assistance of TAS to advocate for a position within the IRS.  Of course, knowing the criteria other than Number 9 can also be quite helpful.  For those needing a reminder, here is a list of the other bases for seeking TAS assistance:

Economic Burden. Economic burden cases are those involving a financial difficulty to the taxpayer: an IRS action or inaction has caused or will cause negative financial consequences or have a long-term adverse impact on the taxpayer. 

  • Criteria 1: The taxpayer is experiencing economic harm or is about to suffer economic harm.
  • Criteria 2: The taxpayer is facing an immediate threat of adverse action.
  • Criteria 3: The taxpayer will incur significant costs if relief is not granted (including fees for professional representation).
  • Criteria 4: The taxpayer will suffer irreparable injury or long-term adverse impact if relief is not granted.

Systemic Burden. Systemic burden cases are those in which an IRS process, system, or procedure has failed to operate as intended, and as a result the IRS has failed to timely respond to or resolve a taxpayer issue.

  • Criteria 5: The taxpayer has experienced a delay of more than 30 days to resolve a tax account problem.
  • Criteria 6: The taxpayer has not received a response or resolution to the problem or inquiry by the date promised.
  • Criteria 7: A system or procedure has either failed to operate as intended, or failed to resolve the taxpayer’s problem or dispute within the IRS.

Best Interest of the Taxpayer. TAS acceptance of these cases will help ensure that taxpayers receive fair and equitable treatment and that their rights as taxpayers are protected.

  • Criteria 8: The manner in which the tax laws are being administered raises considerations of equity, or has impaired or will impair the taxpayer’s rights.