Happy Thanksgiving Taxatturkeys

Depositions in Tax Court

Unlike in district court where depositions play an integral role in litigation, depositions in Tax Court occur with much less frequency.  The Tax Court recently issued an order allowing the IRS to take the depositions of two witnesses via Zoom in the case of Oconee Landing Property, LLC et al v. Commissioner, Dk. No. 11814-19 (Nov. 8, 2021).  Since these orders do not come along very often and we have never blogged about depositions in Tax Court, this presents a good opportunity to discuss the issue.


In almost 45 years of practice before the Tax Court, I have never taken a deposition.  When I worked for Chief Counsel, I was deposed a couple of times in non-Tax Court cases and I have been deposed once since becoming a clinician, but that was because I was serving as an expert witness.  So, my knowledge of depositions is low.  In addition to never conducting a deposition, I do not remember any member of my office taking a deposition in a Tax Court case.  Depositions may have become more frequent since I left Chief Counsel, but I am not convinced that they have.  In an earlier era, it was almost impossible to get one authorized unless you could show the person to be deposed was going to become unavailable, usually because of impending death.  The Tax Court rules have loosened up over the years, allowing depositions in other situations, but the general default is to stipulate rather than to build the case through depositions as would occur in a district court case.

Tax Court Rules

The Tax Court has several rules that address depositions:

Title VII                      Discovery

Rule 74 – Depositions for Discovery Purposes: This rule provides in subsection (b) that a party can take a deposition with the consent of all parties.  Basically, the same group agreement that governs the stipulation process.  The rule contains several sub-rules requiring proof of the agreement and other steps that must be taken.  Subsection (c) allows a party to take a deposition without consent.  This can only happen after the case is set for trial or assigned to a specific judge.  The rule puts restrictions on the situation in which it can occur and provides that taking such a deposition is an extraordinary method of discovery.  The rule sets out the steps the party must take in order to take someone’s deposition and provides a procedure for another party to object.

Title VIII        Depositions to Perpetuate Evidence

Rule 80 – General Provisions: The general provision essentially says to comply with the other paragraphs of this title to the Rules

Rule 81 – Depositions in Pending Cases: The person seeking to take the deposition must file a detailed application, including the questions to be asked if it is a written deposition.  This rule is quite long and contains a process by which the parties can stipulate to an agreement to take the deposition and it covers video recorded depositions.

Rule 82 – Depositions Before Commencement of Case: Taking the deposition requires making an application to the court setting out why you want to do it and alerting the parties that the Tax Court can hold a hearing before it allows the deposition.

Rule 83 – Depositions After Commencement of Trial:  Short and sweet rule that says it’s possible to do this if the court finds it appropriate.

Rule 84 – Depositions Upon Written Questions: Seems a lot like interrogatories to a single individual.  Requires an application to the court attaching the questions.

Rule 85 – Objections, Errors, and Irregularities:  Liberally allows fixing problems if something goes wrong with deposition in the nature of a foot fault.

The Specific Effort to Depose

The case in which the IRS requested the opportunity to take depositions is a conservation easement case.  The IRS seeks to depose James and Mercer Reynolds using the procedures established in Rule 74(c), which creates the most difficult test for the party seeking to take the deposition to overcome.

The property subject to the easement was acquired by the Reynoldses in November 2003. They held the property until 2014, when they contributed it to Carey Station, LLC (CS), in exchange for membership interests in CS, of which they effectively owned 100%.

On December 21, 2015, CS contributed the property to Oconee in exchange for a 99% membership interest in Oconee. Two days later, petitioner purchased a 97% interest in Oconee from CS for $2,440,000. The same day, petitioner made a $1.3 million cash contribution to Oconee.

Eight days later, on December 31, 2015, Oconee donated a conservation easement over the property to the Georgia Alabama Land Trust. The deed of easement was recorded the same day. Oconee at that point was owned 97% by petitioner, 2% by CS, and 1% by Carey Station Manager, LLC.

Oconee timely filed Form 1065, U.S. Return of Partnership Income, for its 2015 tax year. On that return it claimed a charitable contribution deduction of $20,670,000 for its donation of the conservation easement.

The IRS disallowed the claimed charitable contribution deduction, issued a final partnership administrative adjustment (FPAA) and petitioners filed in Tax Court contesting the disallowance and allowing all of us to see their tax situation.

The IRS attorney asked if the Reynoldses would participate in a “transcribed informal interview.”  They declined.  The IRS attorney then sent the Reynoldses notices of deposition and subpoenas to which they objected and which form the basis for this order.  The IRS relies on Tax Court Rule 74(c), which provides that the taking of a deposition of a non-party witness is an extraordinary method of discovery.  The rule permits it when the testimony sought is relevant, the testimony is not privileged and the testimony cannot be obtained informally – back to the Tax Court’s preference for cooperation among parties.

The court finds that the Reynoldses have relevant information that is not privileged.  As the owners of the property for 10 years prior to the multiple transfers at the end of 2015, the court presumed they participated in the negotiations leading to the transfer and that they would know whether the purchase was arm’s length.  I am not reading all of the responses filed in this case so I cannot say with certainty why the Reynoldses would not cooperate informally.   They may not have the same incentive to get to the right tax answer that the government should have.  The court notes that in addition to providing information regarding the value of the property, they could also provide background regarding prior efforts to sell the property.

Basically, the Reynoldses seemed to say that the IRS was not trying hard enough to get the information it wanted from them informally.  The court found that their rebuff of the IRS request to informally sit down and talk in a transcribed interview opened the door to the deposition request, even pointing out that the IRS did not ask that the interview be conducted under oath.  In effect, though the Court does not cite to this case, the IRS met its Branerton responsibility with the informal request.  The Reynoldses counter that responding to the deposition will be unduly burdensome and expensive.  The court doesn’t mention that they should be good for some attorney’s fees based on the benefit from the conservation easement but instead points out that the deposition will take place over Zoom, cutting their cost and time to attend.

I am not sympathetic with the Reynoldses and perhaps that colors my view of their arguments.  If they want the IRS and the court to be able to get to the bottom of their tax issue, an issue they created and a petition they filed, they should cooperate in providing information.  Perhaps they are concerned that the more the IRS and the court know about the details of the conservation easement, the less likely they will walk away from the Tax Court case with the claimed benefits.  Kudos to the Chief Counsel attorneys for trying to gather this information which will assist in better framing the case for the court.

A case like this seems to make it easy for the Tax Court to order depositions, but the relative ease with which Judge Lauber gets to what seems to be the obviously right conclusion is not necessarily the norm in Tax Court.  Because the Tax Court has a long history of being reluctant to grant depositions, I am not surprised that the Reynoldses make these arguments.  As I said at the start, my knowledge of depositions in the Tax Court is limited and not first-hand knowledge.  I hope that the outcome here has become or will become normative.  The information is needed, though it’s easy to understand why the Reynoldses may not want to provide it.

Briefs in the Boechler Case

The Boechler case involves the issue of whether the time period for filing a Tax Court petition in a Collection Due Process case is jurisdictional or a claims processing rule.  Last week I provided a link to the excellent brief written on behalf of the petitioner.  Also last week, the Supreme Court set the oral argument in this case for January 12, 2022.

Yesterday, seven days after the filing of the petitioner’s brief, amicus briefs were due in support of the petitioner.  Four amicus briefs were filed in support of petitioner’s position that the time period is not jurisdictional.  For those following this issue, the briefs are provided here.

The Tax Clinic at the Legal Services Center of Harvard Law School filed an amicus brief on behalf of the Center for Taxpayer Rights and the National Consumer Law Center.  This brief focuses on the issue of equitable tolling.

Skadden Arps filed a brief on behalf of Federal Tax Clinics, Legal Aid Groups and Tax Professors.  This brief argues that treating the time period as jurisdictional undermines Congressional intent and disproportionately harms low income taxpayers.

The National Taxpayer Union Foundation and National Federation of Independent Business Small Business Legal Center filed an amicus brief arguing that tax exceptionalism is an anachronism and that even if tax law is special the result should be greater tax protection through doctrines such as equitable tolling.

Regular Guest Blogger and procedural expert Lavar Taylor filed an amicus brief arguing that tax exceptionalism should not prevent equitable tolling, the IRS has argued for and received equitable tolling beneficial to it, and many statutory deadlines in the Code are amenable to equitable tolling and CDP especially so.  Lavar also spends time pointing out the impact of the lack of equitable tolling on individuals living abroad given the extremely short time for filing the petition in CDP cases and the mailing issues for those overseas.

What’s in a Name?

Identifying and addressing implicit and explicit biases are necessary to ensure that every taxpayer and tax professional recieves the benefits of “The Right to Quality Service” and “The Right to a Fair and Just Tax System.”  This free ABA outreach event at the ABA’s 38th National Institute on Criminal Tax Fraud and the Eleventh Annual National Institute on Tax Controversy will start by reviewing how tax professionals can identify bias.  The panelists will then discuss the role of the Taxpayer Advocate Service, the IRS Office of Equity, Diversity & Inclusion and the United States Tax Court in ensuring that taxpayers and tax professionals receive the full measure of procedural and substance due process necessary to protect civil rights – including the rights of disabled and Limited English Proficiency taxpayers.  You can RSVP for the event by clicking https://conta.cc/3Dhpgt6 or emailing Frank Agostino at FAgostino@AgostinoLaw.com.  For more information about the National Institute click ambar.org/CTF2021 or email Donna Prather Williams, Meetings Manager, ABACLE, Donna.Williams@americanbar.org

Chief Counsel Notice CC-2022-001 tells us to look for a new name on some documents coming out of that office.  A little over a year after the election and more than 300 days since inauguration, the new administration has not appointed anyone to serve as the new Chief Counsel.  So, the top non-political appointees continue to run the agency.  The former Chief Counsel resigned, as per tradition, when the new administration began.  The team in place at the top of Chief Counsel is quite good and quite experienced but there is some benefit to having a political appointee in place rather than individuals who must essentially work two jobs for extended periods of time.

Perhaps it’s difficult to replace the Chief Counsel because it took so long for Congress to approve the prior Chief Counsel.  Through no fault of his own, the prior Chief Counsel, Michael Desmond, had his nomination held up for quite some time as described here and here despite the fact that he was a former guest blogger for PT and had many other qualifying years of experience.  It’s not easy to put your professional life on hold for such a long period only to find your nomination is delayed because a Senator is unhappy about an IRS regulation you had nothing to do with.  Maybe the administration cannot find someone willing to go through the process or maybe it’s not trying.

Over at the Department of Justice Tax Division it seems that the White House, no matter who occupies it, no longer wants to appoint a leader.  Chief Counsel Notice CC-2022-002 tells us to look for a new name on some documents coming out of that office. The acting head, Dave Hubbert, is fantastic.  When I was District Counsel in Richmond, he was my lawyer as the head of the civil trial section of the Tax Division that covered Virginia.  I could not have asked for a better lawyer to handle the cases coming out of my office.  He is undoubtedly doing a great job running the Tax Division, but it’s now been seven and a half years since there was a political appointee at the Tax Division.  Why is it so hard to find someone to do this job?


This leads back to the Chief Counsel Notice.  The subject of the notice is the new signature block, but the legal substance of the notice concerns the time period that limits having someone carry the title as Acting Chief Counsel (or Acting Deputy Attorney General.)  The notice explains the law:

Principal Deputy Chief Counsel and Deputy Chief Counsel (Technical) William M. Paul assumed the position of Acting Chief Counsel on January 20, 2021 upon the resignation of former Chief Counsel Michael J. Desmond. See Chief Counsel Notice 2021-003, Chief Counsel Signature Block (January 19, 2021); Chief Counsel Notice 2017-002, Designation of the First Assistant to the Chief Counsel (December 29, 2016). By operation of the Vacancies Reform Act of 1998 (5 U.S.C. § 3345, et seq.), Mr. Paul’s 300-day tenure as Acting Chief Counsel expires as of November 16, 2021. In addition, under the Vacancies Reform Act, no one may serve as Acting Chief Counsel until a nominee has been named by the President. Therefore, as of November 17, 2021, and until a nominee for Chief Counsel is named by the President, there will be no Acting Chief Counsel for the Internal Revenue Service. Instead, the duties and responsibilities of the Chief Counsel will be shared between the Principal Deputy Chief Counsel and Deputy Chief Counsel (Technical), and the Deputy Chief Counsel (Operations) for matters under their respective jurisdictions. Upon the nomination of a candidate for Chief Counsel by the President, the Principal Deputy Chief Counsel and Deputy Chief Counsel (Technical) will resume the position of Acting Chief Counsel.

In Chief Counsel’s Office the structure at the top has two deputies immediately under the political appointee, each controlling a portion of the workforce.  Mr. Paul, the Principal Deputy Chief Counsel and Deputy Chief Counsel (Technical), heads the part of Chief Counsel principally targeted at producing guidance.  Most of the employees in the National Office would eventually report up the management chain to him.  Ms. Drita Tonuzi, the Deputy Chief Counsel (Operations), heads the part of Chief Counsel that principally handles litigation.  Some of the National Office employees and essentially all of the field office employees report up the management chain to her. 

Since the clock has run on the current period during which someone can carry the title of Acting Chief Counsel, the Notice basically explains that they will each get their names on the signature block as the representative of the agency depending on the correspondence or other matter needing a formal signature.  Because Ms. Tonuzi heads up litigation, her name will now appear in documents signed by Chief Counsel in the Tax Court.  Because some documents were signed prior to November 17, 2021, using the former signature block, the Notice provides:

If a Tax Court document has been signed by a petitioner or petitioner’s representative (e.g., stipulated decision, stipulation of facts, or joint motion), but has not been sent to or e-filed with the Tax Court before November 17, 2021, the document need not be re-executed.

When Chief Counsel’s office writes to the leaderless (from a political appointee perspective) Tax Division, the person whose name appears on the correspondence will depend on which division of Chief Counsel sends the letter.  If sent by one of the divisions reporting to Mr. Paul, his signature will appear.  If sent by a division reporting to Ms. Tonuzi, her signature will appear.  I suspect the Tax Division will see many more letters with her signature because of the nature of the work referred to the Tax Division.  If regulatory guidance is issued, Mr. Paul’s name will appear much more frequently, though not exclusively.

Maybe it doesn’t matter that many readers will start to see a lot more of Ms. Tonuzi’s name until the President decides to appoint someone to become Chief Counsel, but sometimes knowing why you see a particular name provides a bit of comfort.  As long as you see these names, you also know a job opening exists for which you might want to apply.  Maybe someday the administration will appoint a new Chief Counsel, and a new head of the Tax Division at the Department of Justice.

Cursive! Foiled Again

Bob Kamman provided another Tax Court order worth a brief mention but mostly worth the great title that he also provided.  Here, the parties use the wrong font for the petitioner’s signature and the Court sends the decision back to be redone.

While this may seem picky, there’s a slippery slope that the Court avoids with the seemingly picky enforcement of the rules.  Before the adoption of the font rules but faced with a page limitation, I know of one Chief Counsel attorney who submitted a brief with a small font and narrow page margins in order to express the full merits of the government’s case.  Actions like that cause reactions and the order today keeps the parties from moving away from strict guidelines designed to make the rules the same for everyone.  While it may not really matter whether the font used is cursive or not, once the Court stops policing this type of font fault others will surely follow.

Decision documents are almost always prepared by IRS Chief Counsel attorneys.  So, that part of this wrong use of the font surprises me a bit.  Because these documents are almost always prepared by one party and because that party knows the rules even though many petitioners and petitioners’ counsel do not, the standardization usually occurs through this process.

In my first year of practice before the Tax Court as a new Chief Counsel attorney, I had a decision document returned for a different though still memorable reason.  This was back before computers and easy to correct documents, though the mistake had nothing to do with computers and everything with me, and I suspect my secretary, not exactly knowing what we were doing as we were both too new to do anything other than follow the example in the book we were provided without thinking about spacing. 

I submitted a decision document in which the typed name of the judge came either immediately below or almost immediately below the last line of the decision.  No room really existed for the judge to sign above their name.  The document came back to me to prepare another decision document that had sufficient room for the judge to sign in the normal spot and not place their signature below their name or to the side of their name or write their signature in microscopic letters.  In the process I learned the reason for the decision document and that the fact that the petitioner and my boss had signed it was not the end of the line.  A good lesson that typing the document inaccurately seared into my memory.

Here is the order returning the decision document that contained the offending font:

Magda Helene Polack,  Petitioner


Commissioner of Internal Revenue. Respondent

Docket No. 22554-21S


On November 10, 2021, the parties filed a proposed stipulated decision for the Court’s consideration. Upon review thereof, the Court notes that petitioner’s signature on the proposed decision was made using cursive font, which is not acceptable by the Court. Information regarding acceptable imaged or digitized signatures is available on the Court’s website under the “Case Management” section of the “Frequently Asked Questions About DAWSON” available at www.ustaxcourt.gov/dawson_faqs.html.

For cause, it is

ORDERED that the parties’ proposed stipulated decision, filed November 10, 2021, is hereby deemed stricken from the Court’s record in this case. It is further

ORDERED that, on or before December 14, 2021, the parties shall file a revised proposed stipulated decision.

(Signed) Maurice B. Foley

Chief Judge

Senators Question Commissioner About Company Offering Fee-Based Access to IRS Phone Lines

It is not news to our readers that the IRS struggles to answer the calls it receives. This frustrates taxpayers and practitioners alike. It interferes with the IRS’s ability to serve taxpayers and impedes taxpayers from understanding and meeting their responsibilities. To help address this problem, a private company, enQ, offers a fee-based service that “drastically reduces the hold time in reaching an IRS agent.”

How does it do this? According to its web-site, it was founded by an MIT trained engineer and “employs proprietary breakthrough patented technology.” The service offers a number of fee-based plans that range from about $100 to $300 a month. While directed at practitioners, it is also available to taxpayers.  To obtain a detailed understanding of the way the service works read the Forbes post cited below.  Essentially, the person who buys the services gets to jump the line of persons waiting to talk to the IRS by riding the coattails of a robo-call.

The service is controversial.


At Forbes in Is A Private Company’s Automated Dialing Making It Impossible To Reach The IRS?Amber Gray-Fenner wrote a terrific blog post that discusses the service and situates the controversy. As Amber notes, the service implicates issues of fair play and access.

Should phone access to the IRS be dependent on resources and ability and willingness to pay?

Earlier this week Senators Cassidy, Menendez, Young and Warner wrote a letter to Commissioner Rettig. The senators criticize the service and question whether the robo-call approach that enQ apparently uses reduces the quality of phone service for those who do not use the service. The senators also question whether the Service could use Section 7212 to address the problem. That is a criminal statute used when there is an attempt to interfere with administration of internal revenue laws. As the senators explain, “being able to call the IRS is a free, public service that should be available on an equal basis. Paying to receive preferential access to the IRS should not be permitted.”

While criminal prosecution seems a bit far-fetched, the letter highlights how the IRS inability to answer phone calls is inconsistent with fundamental taxpayer rights. The bottom line is that there should not be a need for a service like enQ. The letter ends with a request for the IRS to take steps that would limit the need and demand for the service:

Finally, we ask that you take necessary action to dramatically improve the quality of service called for in the Taxpayer Bill of Rights. Hold times should be measured by minutes, not hours. The percentage of calls answered should be in the high double-digits, not the high single-digits. Improving service should be an utmost priority to the IRS.

Returning to In Person Tax Court Proceedings

We reported earlier that the Tax Court in August issued a press release saying it intended to return to in person proceedings, at least for some of the trials, in January, 2022.  That announcement also provided rules for requesting remote proceedings once the Tax Court returned to in person proceedings.  The impression from the announcement was that the court would continue to hold Zoom hearings upon the request of one or more of the parties.  Certainly, in situations where putting documentary evidence into the record during trial is unnecessary or when having a hearing on a motion, the Zoom option seems quite appropriate and a benefit brought to us by the pandemic.

As the time draws nearer for the return to the courtroom, the court has issued a press release, copied below, which provides guidance for persons coming into the court once it does reopen.  This guidance, however, relates to the Tax Court’s building in DC and not to the other 73 locations where the court sits around the country.  The Tax Court has a dedicated courtroom in about 40% of those locations and shuffles around a bit in the cities in which it does not have a dedicated courtroom depending on which courtrooms the Circuit administrator can provide to the Tax Court.  Whether the Tax Court has a dedicated courtroom in one of the cities outside of D.C. or takes the courtroom made available by the Circuit, the rules governing entry into the building in which the courtroom is housed will come from the courthouse/building in which the Tax Court’s permanent or temporary courtroom is housed.  It’s possible that some buildings may adopt different rules than the ones adopted by the Tax Court and copied into this message below.

It would be nice if the Tax Court might provide a link to the website for each locality with the calendar notice so that parties can prepare for whatever restrictions will exist in their venue.  In some places where the Tax Court holds its hearings, it already took quite some time to navigate building security and arrive in the Tax Court courtroom.  It may take even longer with the enhanced safety procedures.  If you are going to an in person hearing, you should leave plenty of time to get to court. 

The Tax Court seems to be limiting entrance to their building to those who have been vaccinated or received a recent negative test for COVID.  I can foresee pro se petitioners, and maybe others, who do not carefully read the rules prior to calendar being turned away for failure to bring proof of vaccination or proof of a negative test.  I am not complaining about the Tax Court’s rule, which is logical and designed to protect the safety of all, but, like many things about the pandemic, it will present challenges for some.

Undoubtedly, more announcements will come out as we countdown to reopening.  The Tax Court has done a pretty good job of pivoting to Zoom and the virtual courtroom over the past year.  Now, it will be tested again as it pivots back to mostly in person operation but with some vestiges of remote proceedings continuing.

Washington, D.C. 20217

October 5, 2021


On August 27, 2021, the Court announced that, in its Winter 2022 Term, the
Court expects to begin conducting in-person proceedings. A limited number of in-
person special sessions have been scheduled. To provide guidance with respect to
in-person proceedings, the Court has posted a new publication, Court Standards
and Protocols to Protect Public Health (reproduced below), to its COVID-19 Resources page. A summary of the Washington, D.C. courthouse protocols is attached to this press release.

The Court has also issued Administrative Order 2021-02, Washington, D.C.
Courthouse Access. The Administrative Order provides information specific to the
Washington, D.C. courthouse for the purpose of observing in-person proceedings.

If you have any questions, contact the Public Affairs Office at (202) 521- 3355.

Effective October 5, 2021

United States Tax Court Summary of Standards and Protocols

Applicable to Entry for Any Visitor to the Washington, D.C. Courthouse

Public Access for Scheduled In-Person Proceedings

In-person Court proceedings in Washington, D.C. are open to the public and press. Individuals are permitted courthouse entry, subject to the Court’s COVID-19 protocols, on a first-come, first-served basis until the courtroom has reached physical distancing capacity. When courtroom capacity is reached, no additional
visitors are admitted. Visitor access is restricted to designated areas in the Court. Members of the press are included in the definition of “visitor.”

COVID-19 Vaccination or Negative Test Result

Upon arrival, visitors are required to show proof of full vaccination or a negative test result from a test taken within 72 hours. The Court will not handle, retain, or copy these documents.

Face Coverings

All visitors are responsible for providing their own properly fitting mask and wearing it at all times when in the courthouse. The presiding judge may exercise discretion and allow a testifying witness or examining counsel to remove their masks, under certain circumstances.

Contactless Check-in for Contact Tracing

To support contact tracing, the presiding judge may provide a QR code to trial participants in advance of the trial to allow registration of attendance. The QR code is also posted outside the courthouse and courtroom for all participants and visitors to access the registration form from a mobile device.

Court Visitor Health Screening

Before entering the courthouse, all visitors are asked to self-certify that the answer to each of the COVID-19 health screening questions is “no.” Signage with the questions is located on the exterior of the courthouse near the entrance doors. If the answer to any of the screening questions is “yes,” the visitor should not enter the courthouse.

All visitors are required to check their temperature upon arrival. A temperature check machine is located outside of the Court Security Office. If the visitor registers a temperature of 100.4o Fahrenheit or higher, the visitor should exit the courthouse.

Courtroom Procedures
Court visitors are required to maintain appropriate physical distancing. Signage and demarcations provide physical distancing directions for gallery seating.

Major Change to Offer in Compromise Policy

The only bad thing about the change in IRS policy in Offers in Compromise (OIC) is that it comes too late for me to change a forthcoming law review article on offset.  The inability to update the article which is headed to press matters little.  The new policy regarding offset in OICs represents a significant shift in collection policy for the benefit of taxpayers with accepted offers.  Kudos to the decision makers behind this policy shift.  A recent blog post from the National Taxpayer Advocate sets out the shift in policy and does a nice job of providing background as well as summarizing the new policy.  This post seeks to complement the information provided by the NTA but is somewhat duplicative.  Christine wrote a two-part blog post on offers and refunds, here and here, if you want more background on this subject.


Offsets after OICs

Section 7122 gives wide discretion to the IRS to enter into an OIC with taxpayers when the IRS finds that doing so serves the best interest of the government.  As we have discussed previously, the IRS generally declined to enter into OICs until a shift in policy three decades ago brought about by the lengthening of the statute of limitations on collection.  Once it decided to accept OICs as a regular part of its collection arsenal, it took the IRS some years to refine the process.  As it did so, it developed language in Form 656, the form on which the taxpayer submits the OIC itself, which committed taxpayers to foregoing the refund for the year in which the IRS accepted the OIC.  If you actually read the entire Form 656 you find it contains many provisions regarding the taxpayer’s commitment in accepting the OIC.

 The specific language developed by the IRS regarding the commitment of the taxpayer to give up their refund in the year of the OIC acceptance is found on page 5 of the form in section 7(e), which states:

The IRS will keep any refund, including interest, that I might be due for tax periods extending through the calendar year in which the IRS accepts my offer. I cannot designate that the refund be applied to estimated tax payments for the following year or the accepted offer amount. If I receive a refund after I submit this offer for any tax period extending through the calendar year in which the IRS accepts my offer, I will return the refund within 30 days of notification.

This provision surprises many taxpayers.  It has caused our clinic to carefully explain to taxpayers what to expect.  The offset sometimes comes a year or more after the acceptance of the offer if the IRS accepts an OIC early in a calendar year.  We would counsel clients to try to manage their taxes for the year of the offer acceptance so that they did not have a refund or, if they did, the refund was small.

Even though the IRS rarely accepted OICs prior to the change in its policy in 1992, it did have an OIC program.  In the Sarmiento case, discussed below, the clinic traced this language back to at least 1964.  At that time, however, refundable credits did not exist and the policy as originally designed would not have been intended to claw them back after OIC acceptance.

The policy fell hard on individuals receiving refundable credits as Congress pushed more and more benefits into the hands of individuals through the tax code.  For some individuals, the offset could take the earned income credit and child tax credit of several thousand dollars even though these refundable credits did not really constitute a tax refund as much as a benefit payment through the tax code.  Because of the way the offset operated in this situations, authors of this blog and others have criticized the taking of these refunds as part of the OIC process. 

Taxpayers have essentially no leverage to negotiate the terms of an OIC.  Even when aware of this provision in the offer contract and aware that it meant the taking of a large refund generated because of refundable credits, taxpayers could not negotiate their way out of the situation.

Now, for OICs accepted after November 1, 2021, the IRS will forego taking the post-OIC acceptance refund for the year of acceptance.  It will still take refunds for the periods leading up to the acceptance of the OIC (subject to the discussion of Offset Bypass Refunds (OBRs) discussed below.)  The benefit to taxpayers varies based on the amount of refund they might have received for the year of OIC acceptance.  The NTA’s blog has some statistics on this; however, the individuals receiving significant refunds based on refundable credits, usually among the poorest of the taxpayers receiving acceptances, will definitely benefit.

The new policy does make clear that the IRS expects to offset any refunds related to pre-OIC acceptance tax years.  This policy makes sense.  It prevents taxpayers from delaying the submission of amended returns until after an OIC acceptance in an effort to circumvent having the refund offset.  In this way, the policy operates similarly to the requirement that taxpayers disclose their interest in potential lawsuits and other claims not yet turned into a definite amount at the time of making the OIC.  The IRS should receive these monies or at least know about them and make a judgment.

Prior Litigation on This Issue

Carl Smith took on the language when he served as the director of the Cardozo Low Income Taxpayer clinic.  Through litigation, the clinic tried to limit the refund offset in the year of acceptance to refunds that were not from refundable credits in Sarmiento v. U.S., 678 F.3d 147 (2d Cir. 2012), and its companion case, Maniolos v. U.S., 469 Fed. Appx. 56 (2d Cir. 2012).  At the time, the OIC language stated that the IRS could keep “any refund, including interest, due to [the taxpayer] because of overpayment of any tax or other liability, for tax periods extending through the calendar year in which the IRS accepts the offer.” Carl and the clinic argued that, in the plain English in which the OIC was written (which they argued should apply instead of Codespeak), a refundable credit is not from any overpayment, and the policy reasons for the offset of refundable credits made no sense from both a history and policy perspective.  The clinic’s brief stated:

Support for this colloquial-English interpretation is found in the alteration that has happened in the particular language regarding “additional consideration” from the time of the 1964 OIC at issue in Robbins Tire & Rubber Co, Inc. v. United States, 462 F.2d 684 (5th Cir. 1972).  The Robbins Tire OIC provided that the United States could retain “any and all amounts of money to which the proponent may be entitled under the internal revenue laws, due through overpayments of any tax or other liability, including interest and penalties, made for periods ending prior to or during the calendar year in which this offer is accepted.”  Id., at 686.  This prior OIC language —“any and all amounts of money to which the proponent may be entitled under the internal revenue laws”—was later replaced in the version that each of the taxpayers signed with the more colloquial English words “any refund, including interest, due to me/us . . .”

Carl notes that the policy reasons for offsetting refunds from actual overpayments make sense as a means of stopping people from overpaying estimated tax payments in the year of OIC acceptance, just to get the excess back after an OIC is accepted based on assets lowered by the excess payments. 

While the policy surprisingly still allows this creative tax planning, the old policy allowed creating planning to avoid having a refund – unless your refund resulted from a refundable credit.  In that sense, the new policy just trades off on incentives and, in my experience, a relatively small number of individuals submitting offers engage in this type of planning. 

The Second Circuit ruled that the word overpayment in the OIC had to be read as defined in the Tax Code, which included refundable credits.  The litigation did cause the IRS to rewrite the OIC form to eliminate the words “because of overpayment”.  Carl says that during the litigation the IRS Director of Collection Policy told Carl he was curious about the cases and would be following them.  Carl felt the IRS sounded open to the ideas at issue in the litigation, though the IRS eventually did not change policy and in fact made the language more airtight to be able to keep all overpayments.

Offset Bypass Refunds

The NTA’s blog describes OBRs.  Something we have done before here in the most visited post of any every written by this blog.  The NTA’s blog announces a new policy regarding OBRs and OICs which appeared on the IRS website two weeks ago with little fanfare.  If a taxpayer files a return during the time an OIC is pending, the IRS will offset any refund generated by the return up to the amount of the outstanding liability.  Previously, a taxpayer with hardship who needed this refund to pay the rent or electricity could not take advantage of the OBR process while the OIC was pending.

OBRs have come under some criticism recently.  TIGTA criticized them in a report discussed by Les in a post here.  Les and I participated in an ABA Tax Section comment that focused on OBRs and made several suggestions seeking to make them more taxpayer friendly and accessible.

The new policy allows the taxpayer to submit a request for an OBR even while the offer is pending.  Like the policy of offsetting refunds described above, it is another step in the right direction for protecting taxpayers and especially low income taxpayers.  Under the new policy, the IRS will process the OBR just as if the taxpayer had not filed an OIC.  This does not mean that the taxpayer will necessarily receive the refund, or the full amount of the refund, but does give the taxpayer a fighting chance to receive at least a part of the refund during a time of real need.

The NTA’s blog gives an example of how OBRs work.  The blog does not cite to IRM provisions regarding the new policy because those have yet to be written.  It notes that this process is not well known and not easy to find.  The post concludes by saying that TAS is trying to prod the IRS to be more forthcoming about this process:

We continue to encourage the IRS to provide educational material on IRS.gov explaining the benefits of OBRs, the economic hardship requirements, and what taxpayers need to do to timely request an OBR. With the upcoming filing season, we encourage the IRS to get the OBR message out by leveraging its relationships with the public.

No doubt improvements could occur, but I applaud the IRS for acknowledging that taxpayers who have submitted an OIC may need an OBR just as much as those who have not made such a submission.  Because the OBR process itself remains difficult and somewhat opaque, I do not expect that this policy change will open the floodgates.  It will, however, allow some taxpayers in need to find relief.