The Coronavirus Shows Why We Need Equitable Tolling Legislation Now for Judicial Tax Filing Deadlines

Note that after this post below was written, at 9 pm March 18, the Tax Court issued a press release stating that its building is closed and that:

Mail will be held for delivery until the Court reopens. Taxpayers may comply with statutory deadlines for filing petitions or notices of appeal by timely mailing a petition or notice of appeal to the Court. Timeliness of mailing of the petition or notice of appeal is determined by the United States Postal Service’s postmark or the delivery certificate of a designated private delivery service. The eAccess and eFiling systems remain operational. Petitions and other documents may not be hand delivered to the Court.

Under Guralnik, this now extends — to the date the Clerk’s Office reopens — the time for filing in person or mailing a Tax Court petition.

Things are moving fast (finally) in D.C.  On March 13, the President sent a letter to three Cabinet Secretaries and the Administrator of FEMA invoking his power under the Stafford Act to declare a national emergency because of the coronavirus.  Part of the letter stated:  “I am also instructing Secretary Mnuchin to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a).”

On March 18, the IRS issued Notice 2020-17, providing for a 3-month extension (from April 15, 2020 to July 15, 2020) to “Affected Taxpayers” to pay 2019 income taxes (i.e., not any other taxes) – limited to $1 million for individuals and $10 million for C  corporations or consolidated groups.  Affected Taxpayers are defined as “any person with a Federal income tax payment due April 15, 2020” – apparently regardless of where in the world the taxpayers are located.

A paragraph in the Notice also reads:

Affected Taxpayers subject to penalties or additions to tax despite the relief granted by this section III may seek reasonable cause relief under section 6651 for a failure to pay tax or seek a waiver to a penalty under section 6654 for a failure by an individual or certain trusts and estates to pay estimated income tax, as applicable. Similar relief with respect to estimated tax payments is not available for corporate taxpayers or tax-exempt organizations under section 6655.

I take this to mean that if, say, an individual taxpayer paid $1.5 million in income taxes on July 15, the IRS will impose a late-payment penalty on $500,000 of the payment, but the IRS encourages the taxpayers to seek abatement of that penalty by explaining why the coronavirus prevented payment of that $500,000, as well.  I assume that the IRS will be liberal in granting abatements, but a taxpayer will have to ask.

The IRS has, to date, has said nothing about extending any filing deadlines, though I expect it will act on that in the near future.  

Section 7508A allows the IRS to grant payment and filing extensions of up to one year (including for making refund claims, filing refund suits, and filing Tax Court petitions and notices of appeal; Reg. § 301.7508A-1(c)(1)(iv)-(vi)) for people affected by a Presidentially-declared disaster.  However, unless the IRS extends filing deadlines to people and entities worldwide (don’t forget our overseas U.S. taxpayers and foreigners who are taxpayers in the U.S.) and with respect to all taxes, this provision would not be sufficient to help all the persons who reasonably would need extensions to file tax cases in court.  Further, even a one-year extension for all taxes may not be enough, given that it is estimated that a vaccine for the coronavirus might not be available for 18 months.

I hope at least one person reading this post is a Congressional staffer, who can get what I propose into the next round of legislation to address the coronavirus pandemic.  Taxpayers dealing with the coronavirus will understandably miss tax judicial filing deadlines, such as the 30-day period to file a Collection Due Process petition in the Tax Court under § 6330(d)(1) or the 90-day (or 150-day) periods to file deficiency or innocent spouse petitions in the Tax Court under §§ 6213(a) and 6015(e)(1)(A).  Those taxpayers should be forgiven for missing those deadlines in appropriate cases, even if they are not covered by any announced extension to file under § 7508A.  However, currently, the power of the courts to forgive late judicial filings in the tax area is, according to most courts, nonexistent.  I ask Congress to change the law to clarify that tax judicial filing deadlines are not jurisdictional and are subject to equitable tolling.

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Most courts have held that statutory tax judicial filing deadlines are jurisdictional and not subject to equitable tolling.  That’s the case despite the few appellate rulings that Keith and I have yet won holding that certain tax judicial filing deadlines are not jurisdictional and are subject to equitable tolling.  Although we hope for more, we have, to date, only two Circuit Court victories that only apply to tax filing deadlines used by very few people:  The district court wrongful levy filing deadline of § 6532(c); Volpicelli v. United States,  777 F.3d 1042 (9th Cir. 2015); and the Tax Court whistleblower award filing deadline of § 7623(b)(4)Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019).  Fewer than 200 such petitions/complaints are currently filed each year (combined) in those kinds of cases, and even all the other Circuits to have ruled on the issue of the wrongful levy deadline have ruled the other way. 

Whatever reason that impelled the Supreme Court to hold in United States v. Brockamp, 519 U.S. 347 (1997), that the refund claim filing and payment deadlines of §6511(a) and (b) are not subject to equitable tolling (including administrative problems that might arise because almost a hundred million 1994 returns included claims for refund), the problem of tax judicial filing deadlines is confined to a comparatively very small number of cases.  Currently, fewer than 30,000 tax complaints/petitions are filed annually, and the vast majority of these are filed on time.  It would not be a huge burden on the tax system if equitable tolling could be allowed for the few late-filed complaints/petitions where a plaintiff/taxpayer can give a good excuse for late filing – such as dealing with coronavirus.

If the Article I Court of Appeals for Veterans Claims can employ equitable tolling and district courts can employ equitable tolling in connection with Federal Tort Claims Act suits, I see no reason why tax suits should be excluded from equitable tolling.  So, legislation to change the tax law is urgently needed.

For filings in tax cases in the district courts and the Tax Court, if the clerk’s offices of those courts close during this pandemic, that will give automatic extensions to file initial pleadings until those offices reopen.  See, e.g., Guralnik v. Commissioner, 146 T.C. 230 (2016) (borrowing a rule from the FRCP).  But, it is not clear that clerks offices will have to close during this pandemic.  Indeed, while the Tax Court has canceled certain upcoming trial calendars, it has not (at least yet) closed its clerk’s office to hand-delivered petitions.  Indeed, the Tax Court has announced that its Clerk’s office is still open for filing petitions, though only for four hours a day.  So, Guralnik can’t apply.

Reg. § 301.9100-1 et seq. allows the IRS to extend statutory and regulatory deadlines for making elections.  But, the IRS can’t extend judicial filing deadlines. 

Equitable tolling is generally appropriate only where the defendant [1] has actively misled the plaintiff respecting the cause of action, or [2] where the plaintiff has in some extraordinary way been prevented from asserting his rights, or [3] has raised the precise statutory claim in issue but has mistakenly done so in the wrong forum.

Mazurkiewicz v. New York City Health & Hosps. Corp., 356 Fed. Appx. 521, 522 (2d Cir. 2009) (cleaned up).  Accord Mannella v. Commissioner, 631 F.3d 115, 125 (3d Cir. 2011).  While coronoavirus interference with taxpayer lives (be it illness, quarantine, tending to others who are sick, or simply not being able to access necessary paperwork because of lock-downs) would likely fall into the “extraordinary circumstances” usual reason, equitable tolling is not limited to only those usual reasons.  As the Supreme Court has said:

The “flexibility” inherent in “equitable procedure” enables courts “to meet new situations [that] demand equitable intervention, and to accord all the relief necessary to correct . . . particular injustices.”  [Hazel-Atlas Glass Co. v. Hartford Empire Co., 322 U.S. 238, 248 (1944)] (permitting postdeadline filing of bill of review).  Taken together, these cases recognize that courts of equity can and do draw upon decisions made in other similar cases for guidance.  Such courts exercise judgment in light of prior precedent, but with awareness of the fact that specific circumstances, often hard to predict in advance, could warrant special treatment in an appropriate case.

Holland v. Florida, 560 U.S. 631, 650 (2010).

The former and current National Taxpayer Advocates have agreed with my push to get equitable tolling into judicial tax filing deadlines.  NTA 2017 Annual Report to Congress, Vol. 1, at pp. 283-292 (Legislative Recommendation Number 3); NTA 2018 Annual Report to Congress, 2019 Purple Book at pp. 88-90; NTA 2019 Annual Report to Congress, 2020 Purple Book at pp. 85-87.

And, I long ago drafted legislation to accomplish this.  Here’s my draft.  No doubt Congressional staffers should give it a review, as I am no expert drafter of legislation.  I would:

Amend section 7442 to add new section (b) as follows:

(b) Timely Filing Nonjurisdictional.—Notwithstanding any other provision of this title,

  • all periods of limitations for filing suit in the Tax Court are subject to waiver, forfeiture, estoppel, and equitable tolling; and
  • an order of the Tax Court dismissing a suit for untimely filing shall not be considered a ruling on the merits and shall not preclude the litigation of any later claim or issue brought in the Tax Court or any other court.

Amend section 7459(d)’s last sentence to add before the period:  “or untimely filing”.

Amend section 6532 to add a new subsection (d) reading:

(d) Timely Filing Nonjurisdictional.—The time periods set out in subsections (a) and (c) are subject to waiver, forfeiture, estoppel, and equitable tolling.

Tax Litigation in the Discovery Phase – Business Records and Responding to Discovery Requests: Designated Orders 2/17/20 to 2/21/20

The week I reviewed for February included three orders.  The first order is a routine look at Collection Due Process.  The next two bring a theme of discovery in Tax Court.  The second order is about authentication of foreign bank records in Tax Court.  The third looks at how the Tax Court reviews discovery requests and responses.

Routine Collection Due Process

Docket No. 25954-17 L, Gary L. Shaw v. C.I.R., Order and Decision available here.

Overall, this order deals with a common theme for Collection Due Process cases in the Tax Court.  The petitioner did not file the requested income tax returns (tax years 2012 and 2016-2018).  While he requested an Offer in Compromise and checked the box for “I Cannot Pay Balance,” he did not submit either of the requested forms (656 or 433-A).  The judge found that because the petitioner was not compliant, the rejection of his proposed collection alternatives was justified and the Appeals Office did not abuse their discretion.

If repeating this helps out someone with their Collection Due Process case, I will say again that in order to advance with the IRS procedurally it is necessary to provide them the paperwork they request.

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Foreign Bank Records

Docket No. 13531-18, George S. Harrington v. C.I.R., Order available here.

At issue in this case is whether Mr. Harrington is liable for deficiencies and fraud penalties due to his alleged receipt of unreported income during 2005-2010.  The IRS filed a motion in limine in order to seek admission into evidence of business records from the United Bank of Switzerland (UBS) to prove the truth of the matters asserted.  Mr. Harrington objected on grounds of hearsay and authentication.

Now, dealing with low income Kansas taxpayers does not mean I regularly focus on Swiss bank accounts so I found it interesting to learn about interactions between the United States and Swiss governments.  In 2009, the U.S. Department of Justice came to an agreement with the Swiss government concerning “accounts of interest” held by U.S. citizens and residents.  Pursuant to the agreement, the IRS submitted to the Swiss government, under the bilateral tax treaty between the two nations, a request for information concerning specific accounts they believed that U.S. taxpayers owned.  The Swiss government directed UBS to turn over to the IRS information in UBS files concerning bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore nominee accounts beneficially owned indirectly by U.S. persons.  The Swiss Federal Office of Justice was to oversee UBS’ compliance with those commitments.  The U.S. Competent Authority received from the Swiss government information concerning numerous U.S. taxpayers.

Regarding Mr. Harrington, the IRS received 844 pages of information concerning UBS accounts in September 2011.  That material included bank records, investment account statements, letters, emails between Mr. Harrington and UBS bankers, summaries of telephone calls, and documentation concerning entities through which assets were held.

Were the UBS documents business records?  They were 844 Bates-numbered pages accompanied by a “Certification of Business Records” by legal counsel for UBS.  The certification states the records were made at or near the time of occurrence of the matters set forth by people with knowledge of those matters, they were kept in the course of UBS regularly conducted business activity, and were “made by the said business activity as a regular practice.”  The legal counsel signed under penalty of perjury.  The court admitted the documents into evidence as self-authenticating foreign business records.

Mr. Harrington argues that legal counsel cannot certify the UBS records were business records because she is not as the Federal Rules of Evidence state a “custodian of records or other qualified witness.”  The Court points out that the requirement for a qualified witness is to be familiar with the record-keeping procedures of the organization.  Legal counsel for UBS meets that requirement.

Mr. Harrington argues against the records as being part of UBS regularly conducted business activity and questions the admissibility of emails, letters, third party communications, and summaries of client contacts.  The Court notes that UBS performed client services beyond those in connection with checking accounts.  The bank helped to create trusts, corporations, and other entities to hold client investments, solicited client goals for investments, and attempted to manage the investments in order to meet those goals.  The Court finds it consistent that the bank retained records of communication with clients in their business activity.

Mr. Harrington argued that email is informal and less trustworthy than other business records.  The Court noted that it would be normal for UBS to communicate by email with their clients in the United States and around the world.

Finally, Mr. Harrington argued that the 844 pages produced also referred to additional documents.  Since UBS produced to the IRS all documents they could locate in their files pursuant to the U.S.-Swiss agreement and under supervision of the Swiss Federal Office of Justice, the Court did not see why that was problematic.  Mr. Harrington could explain why that was so or produce further documents into evidence, but he did not.

The Court granted the IRS motion in limine admitting into evidence the foreign business records.

Discovery Requests and Responses

Docket Nos. 13382-17, 13385-17, 13387-17, Adrian D. Smith & Nancy W. Smith, et al., v. C.I.R., Order available here.

To begin with, this order is 38 pages, which is at greater length than the average designated order (for example, the other two this week were 4 pages each).  The nature of these consolidated cases is not discussed in the order because it focuses on discovery requests from the IRS to the petitioners and how responsive the petitioners’ responses have been.  Since the order is lengthy, I tried to summarize as best I could to provide the procedural issues without listing items that are more important to the parties of the case.

Basically, the IRS has sent to the petitioners several sets of interrogatories and requests for production of documents.  The IRS later submitted a report to the Court stating that the petitioners have not been responsive to specific interrogatories and requests for production of documents.  Based on those failures, the IRS seeks an order imposing sanctions against the petitioners.

In reviewing the specific interrogatory responses, the Court finds that the response to one is satisfactory while the responses to the other three are unsatisfactory.  In reviewing the specific responses to the requests for production of documents, the Court finds that the two responses in question are unsatisfactory.

There is lengthy discussion regarding the details and analysis of the responses to those four specific interrogatories and two specific requests for production of documents.  The petitioners relied on Tax Court Rule 71(e) regarding sufficiency of business records to answer interrogatories.  The Court finds their reliance on Rule 71(e) inadequate.  As an example regarding interrogatory one, it is unsatisfactory because requests regarding years 2008, 2009, and 2010 received business records concerning 2007 and 2008 (but did not provide information on 2009 and 2010).  Another example is that the response regarding contractors for the second interrogatory is not complete or adequate.  Basically, partially responsive is not responsive.

The Court also notes additional litigation that involved the petitioners where the courts imposed sanctions because the petitioners were not compliant concerning orders regarding discover requests (CRA Holdings US, Inc. v. United States and United States v. Quebe).

Turning to the requests for production of documents, the Court does not find either sufficiently responsive.  With regard to the second response, the Court finds it was not in good faith.  This is because the petitioners responded first with 12 pages.  Their supplemental answer references over 25,000 pages of previously produced documents.  The Court that the response was not in good faith.  As a result, the Court partially grants sanctions.

At the end of this designated order, there are 4 pages mainly made up of the 16 individual paragraphs regarding the specific court orders in this case.  The range of court orders includes deadlines and other miscellaneous orders.  The sanctions granted with regard to the 12 pages produced by the petitioners are that the petitioners may not introduce at trial extrinsic evidence as to whether the alleged research conducted under the six sample contracts was “funded research.”

Overall, this order provides a thorough examination of whether specific discovery requests in Tax Court are responsive or not.  The order would be worth reviewing by anyone wanting to learn more on the subject.

IRS Must Implement Measures in Support of Small Businesses Through Coronavirus Pandemic

Since our last post on the Covid-19 emergency, much has happened. Today, first-time guest blogger Noah McGraw, J.D., E.A. reviews IRS options in light of the national emergency and argues for the extension of deadlines. I expect the IRS’s coronavirus response webpage to be updated shortly as the agency finalizes its response. In other news, the U.S. Tax Court has canceled its April trial sessions, and other courts are closing as well.

Unfortunately, tax issues associated with natural disasters will be important in the coming months. The ABA Tax Section has collected several resources here, including webinars and free access to the disaster chapter of Effectively Representing Your Client Before the IRS. We will highlight resources and ways our readers can help as events develop. Christine

As President Trump declares a National Emergency for the COVID-19 outbreak, this pandemic affects not only public health, but the health of the very engine of our economy, small business. We are beginning to see historic impacts from the Coronavirus on our country, and it would be in the best interest of the government and citizens to lessen economic damage by providing small business and self-employed taxpayers with much needed relief.

As of this morning the dedicated webpage, irs.gov/coronavirus, merely relays the Coronavirus will be covered by high-deductible health care plans. This will not suffice.

IRS protocol during any natural disaster should be used to allow taxpayers relief. IRM 25.16.1 provides thorough directives already in place with the Service that could be utilized for this crisis. The Service also recently declared that the citizens of Nashville would receive a reprieve after their recent tornado damage.

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While the Coronavirus pandemic may not bring physical destruction, as natural or other declared disasters, which have previously caused these rules to be invoked, the economic impact from the coronavirus will be a lasting effect felt for many months, if not years. The virus is already impacting small businesses across all industries, who have seen a reduction of revenue in only a few weeks’ time due to customer caution, fear, self- or government-imposed quarantine.

The retail, restaurant, hospitality, travel, and entertainment industries are among the hardest hit by the pandemic. These labor-intensive sectors require employment of individuals to perform work, and therefore their Form 941 payroll tax burdens may lead to layoffs. Further, once massive 941 penalties are assessed for failure to timely deposit, they often place small businesses in a financial tailspin.

Per IRM 25.16.1.1 3(a), “The objectives of the Disaster Program Office are to: a. ensure eligible taxpayers receive the appropriate level of federal tax relief when they are impacted by a federally declared disaster,” and “c. timely and effectively communicate IRS disaster relief decisions to external and internal customers.”

In consideration of the level of escalation experienced over the past week, now is the time for the Service to follow the guideline and provide taxpayers with relief on this latest disaster affecting the country.

The Service should invoke IRC Section 7508A (“Authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions”) for tax returns and liabilities at least until such time that the Coronavirus could be considered by relevant health experts to be “past the peak” of the outbreak. An additional 90 days beyond this peak would be even more helpful to those businesses who are facing extreme drops in demand for their services as individuals self-quarantine across the country.

This relief necessarily should include extending the filing date for individual and business income tax returns, the Quarterly filing date for businesses’ payroll returns, as well as the non-assessment of penalty and interest against taxpayers who are unable to meet the Federal Tax Deposit payment deadline, or the Estimated Tax payment deadlines.

Our focus as a country needs to be on the health and wellness of our immediate families and communities. If the Service does not establish a scheme of relief from penalties and interest, the economic impact to small business and employees will only be compounded. At this critical time, taxpayers do not need the additional stress of tax season and potentially racking up severe penalties and interest for not having the capacity to dedicate toward tax filings and timely payments during this historic and difficult time.

Proving a Federal Tax Lien Has Expired

In the 1980s the IRS adopted self-releasing notices of federal tax lien (FTL).  The self- releasing lien saves the IRS time and effort of going to all of the courthouses where it files liens and recording a release.  One of the problems taxpayers have with the self-releasing lien comes from the lack of a specific piece of paper, the release, demonstrably showing the end of the lien.  Other problems can result from the self-releasing lien such as the failure of the IRS to refile all of the lien notices it has on file allowing one or more of several lien notices to self-release while refiling others.  This post will not address that problem though it does pose one of the difficulties with the self-releasing system.

The IRS filed a notice of federal tax lien (NFTL) against Todd Gordon in Clearfield County, Pennsylvania in 2005.  In the recent case of Gordon v. United States, No. 3:19-cv-00187 (W.D. Pa. 2020) the court examines the situation of the self-releasing lien and resolves some confusion in the state court regarding the NFTL.

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Not to belabor the background of FTLs but to quickly cover the basics for anyone not familiar with such liens, the FTL arises with the occurrence of three things: (1) assessment of the federal tax liability; (2) proper issuance of notice and demand pursuant to IRC 6303 (mailing the taxpayer a demand letter); and (3) neglect or refusal to pay the tax.  Take note that the existence of the FTL has nothing to do with recordation of the lien.

Because only the IRS and the taxpayer know about the FTL, Congress designed protections for competing creditors to allow the smooth flow of commerce.  The 1966 Federal Tax Lien Act established the system for the filing of the NFTL and the resolution of competition between the FTL and other creditors or persons with interest, such as purchasers, in property encumbered by a FTL.  IRC 6323 requires the IRS to record the FTL by way of a NFTL in order to perfect the FTL against certain parties.  The Gordon case concerns a filed NFTL and its self-releasing feature.

Although the court does not specifically talk about Mr. Gordon’s federal tax issues, I assume that he owed some amount of federal taxes which went unpaid after assessment.  The IRS then decides whether it wants to perfect its tax lien by filing an NFTL.  That decision embodies some policy concerns regarding the amount of the liability and the likelihood of the NFTL providing a benefit to the IRS in collecting the taxes.  I discuss these issues in a paper here.

In Mr. Gordon’s case, the IRS decided to file the NFTL and appears to have recorded it in the county where he lived.  That location follows the requirement in IRC 6323 that the IRS record the NFTL in the county where the taxpayer resides in order to perfect the FTL with respect to all of the taxpayer’s personal property.  It also usually results in perfecting the FTL with respect to the taxpayer’s home since the home is located where the taxpayer lives.  The NFTL perfects the FTL with respect to any real property the taxpayer owns in the county where the IRS records it.  If the taxpayer owns real property in jurisdictions outside the county of residence, the IRS must file a NFTL in each of those counties in order to perfect the FTL with respect to the real property in those other locations.

The statute of limitations on collection limits both FTL and the NFTL.  The statute of limitations on collection lasts for ten years unless something suspends it, e.g., an offer in compromise, a Collection Due Process request, living outside the US continuously for more than six months and several other actions.  Here, the IRS filed the NFTL on September 6, 2005.  Because it normally takes several months after the assessment before the IRS files the NFTL, the statute of limitations on assessment would run from the date of the earlier assessment and not from the date of the recording of the NFTL.  Although it filed the NFTL against Mr. Gordon, the IRS did not bring suit against him nor did anything else suspend the statute of limitations on assessment.  The ten years from assessment ran at some point before September 6, 2015.  The NFTL self-released.  Release is a term of art here defined in IRC 6325(a) and it means, inter alia, that the lien is unenforceable.

Probably because the self-releasing feature of the lien does not provide a sufficiently affirmative statement of the death of the NFTL, Mr. Gordon brought an action in 2019 in the state court in the county where the IRS filed the NFTL to strike the lien.  The IRS, as it almost always does when sued in state court, removed the case to the federal district court.  The IRS does not like to engage in litigation in state courts.  After removal, the IRS moved to dismiss the case for lack of subject matter jurisdiction and failure to state a claim.  After all, the NFTL itself provided for exactly the relief Mr. Gordon sought in suing the IRS.  The IRS, no doubt, felt that defending the suit wasted its time and defeated the purpose of the time saving self-releasing feature of the NFTL.

The court states that “Gordon’s petition seeks to strike the NFTL, but all parties agree that the NFTL is no longer active, and therefore there is no active controversy over which this Court has jurisdiction.”  Mr. Gordon, however, argues that because of a judgment entered by the state court on its docket an active controversy exists.  The court disagrees with Mr. Gordon and states “this case is moot because there are no longer live issues before this Court and it is unable to effectively render relief.  The USA has also granted Gordon the relief he seeks to the extent that it can.”

The only dispute remaining is not a dispute with the IRS but with the state court which filed a judgment in error.  So, the court remands the case to the state court but with the IRS out of the picture.  I hope that Mr. Gordon can get the state court to remove the judgment.  The issue of seeking a clearer statement of release arises occasionally and taxpayers seek from the IRS some affirmative statement that the lien no longer exists rather than trying to rely on the negative implication of the self-releasing lien.  The IRS has a procedure for taxpayers to use in order to obtain a statement of the release that they could show to prospective creditors in order to clear up any uncertainty.  The provisions exists in IRM 5.12.3. I do not know if these provisions would assist Mr. Gordon in resolving his problem with the lien, but there may be others who want something more than a self-released lien to prove that the NFTL no longer actively reflects a liability owed to the IRS.

Coronavirus Cancels March Tax Court Sessions; New IRS Coronavirus Webpage

COVID-19 has hit the United States and developments are coming fast and furious. As the federal government seeks to reach a deal on a coronavirus aid package today, the IRS has created a webpage for coronavirus announcements and guidance, barred employees’ nonessential travel, federal tax filing deadlines might be extended, and much more. Bloomberg Tax reported today that the National Treasury Employees Union is concerned for employees and seeking to limit in-person help at Taxpayer Assistance Centers (link requires subscription). Meanwhile, tax professionals are struggling to find safe and effective ways to serve their clients who face serious hardships, or whose cases have deadlines that cannot be tolled or that have not yet been extended. Some VITA clinics have closed, and many firms and academic tax clinics have moved work online.

State and federal courts are taking measures as well, but policies vary widely from asking sick folks to stay home, to canceling all in-person court appearances. The U.S. Tax Court canceled its remaining March trial sessions, but so far April and May sessions remain scheduled. And, as long as the court is open for business, filing deadlines remain in force.

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Many of the tax administration and procedure problems we saw during the 2019 shutdown (discussed in many posts here) could be relevant again very soon. Last summer Keith reviewed the law on Tax Court filing deadlines looking back at the shutdown, linking to several excellent posts by Bryan Camp and others. We have also covered cases pushing (generally unsuccessfully) to expand equitable tolling in tax cases, in myriad situations.

Since the Tax Court process already takes a long time, and the cumulative effects of cancelling trial sessions are substantial, it would make sense for the Court to follow the lead of universities and law firms and conduct as much business remotely as possible during the COVID-19 epidemic.

The Tax Court is in a difficult situation, because the vast majority of its hearings and trials are held in person. Unlike some other courts, the Tax Court does not routinely hear testimony by telephone or other means. However, the Tax Court could expand this practice under Rule 143:

(b) Testimony: The testimony of a witness generally must be taken in open court except as otherwise provided by the Court or these Rules. For good cause in compelling circumstances and with appropriate safeguards, the Court may permit testimony in open court by contemporaneous transmission from a different location.

This rule seems perfectly reasonable, but it is quite broad and open to very different interpretations. Is the standard to be applied individually, based on one’s fear of the coronavirus or vulnerability to it? Or, can the court take a public health approach and determine that flattening the curve is good cause and a compelling reason to permit remote testimony no matter how young or healthy the litigant? Surely the court could take that position.

The next question is what appropriate safeguards should exist. Several years ago I was on a rules committee of the Vermont Supreme Court while the committee debated, drafted, and ultimately recommended a rule for telephone testimony in family court, which the Supreme Court adopted. (I looked up the date and was surprised to see that the rule was adopted in 2009 – time flies.) We were concerned about verifying the identity of the witness and about getting clear testimony from the witness for the record. There was no technology for video appearance so it was all done by speaker phone, on sometimes very patchy connections. (Vermont has notoriously spotty cell phone service, even on interstate freeways.) Despite some frustrating situations involving poor phone service, the rule worked fairly well and it allowed time-sensitive matters to go forward when witnesses had trouble getting to court. Last year the Vermont Supreme Court adopted a uniform rule on remote appearances in civil actions, including family court. Vermont’s procedures and standards are quite detailed and provide significant guidance to attorneys, litigants, and judges.

Several other courts allow remote appearances under various conditions. The Self-Represented Litigation Network issued a report on remote appearances in 2017, which

presents the author’s conclusions about the current state of remote appearances in the United States based on his review of existing state statutes and federal, state and local court rules on the topic and discussions with knowledgeable persons throughout the country. The report has two appendices – a compendium of all the statutes and rules …, and a technology assessment …

The Federal Judicial Center likewise issued a 2017 report on Remote Participation in Bankruptcy Proceedings. Perhaps the issue will gather additional interest and we will see updated reports on remote access to justice.

Affluent Lifestyle plus Ignoring Tax Debts Equals No Discharge

I have discussed the exception to discharge under BC 523(a)(1)(c) previously here, here and here.  These cases usually merit some discussion because they contain the kinds of facts that allow us to get a little riled up and actually root for the IRS.  The case of United States v. Harold, No. 16-05041 (Bankr. E.D. Mich. 2020) proves no exception to the general rule of these types of cases.  The IRS does not pursue this exception to discharge often but when it does the facts usually make for a mildly interesting blog post.

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Dr. Harold, the debtor here, is a medical doctor with an OB/GYN practice.  The court says that she has a successful, busy practice and works long hours.  At issue in this case are unpaid federal tax liabilities for 2004 through 2012 and 2014 which she could discharge in her chapter 7 case unless the exception for attempting to evade payment applied.  The court spends a paragraph talking about her husband, a former CPA who lost his license as a result of a conviction for a false statement on a bank loan application, bank fraud, tax evasion and filing a false return.  These actions took place prior to their marriage in 1993 and he now owns a consulting firm, Fidelity Refund Services.  Dr. Harold did not have experience in financial matters, and her husband handled all of her tax matters.

Their returns were routinely filed on extension or late.  She owed liabilities ranging from $5,000 to $42,000 for the years at issue despite averaging about half a million dollars in gross revenue from her practice during those years.  There appears to be some dispute as to the amount owed but it is at least $250,000.  During the years at issue the IRS sent at least 84 collection notices, very few of which Dr. Harold saw, because she worked long hours and her husband usually picked up the mail and handled the tax matters.  She did, however, know there were outstanding tax liabilities for many years.

The court then described the spending of money during the years at issue.  Spending drives these cases.  Many people owe the IRS but those who have enough money to spend on items that support an affluent lifestyle while not paying the taxes receive the scrutiny of the IRS in discharge cases.  The court first described the purchase of a new home in 2005 along the Detroit River waterfront.  This purchase created financial problems, because they could not sell their prior home and carried two mortgages until finally losing the original home to foreclosure in 2009.  They sent their children to private grade schools and high schools paying a total of $64,247 in tuition for their daughter and $ 89,474 for their son.  Then they sent their children to private colleges paying $118,390 for their daughter to attend Boston University and $53,088 for their son to attend Loyola University.

During these years the family took multiple family vacations to Mexico, Alaska, Puerto Rico, Orlando, Washington, D.C., Paris, Las Vegas, Hawaii, and Dubai in addition to numerous trips to go and visit colleges.  They drove expensive cars: a Jaguar, a Mercury Mountaineer, two Cadillacs, to Lincolns, a Lexus and a Harley Davidson motorcycle.  The debtors also actively sought to place their home beyond the reach of the IRS through a sale and leaseback scheme described by the court.

The court then worked through the existing Sixth Circuit law regarding BC 523(a)(1)(c) and the evidence needed to show an attempt to evade or defeat payment of the tax liability.  The court found that the evidence “overwhelmingly demonstrates that the Debtor engaged in conduct to evade or defeat the payment of her tax liabilities for the years 2004-2012 and 2014.”  The court recounted all of her pre-bankruptcy expenditures but seemed even more convinced by the post-filing efforts to insulate the family home from the federal tax lien.

Her actions convinced the court that she willfully intended not to pay her taxes.  It pointed out that all of her expenditures resulted from “voluntary, conscious and intentional choices.”  It did not matter that she delegated the handling of tax matters to her husband.  She knew his past tax issues and she knew the choices she was making regarding the non-payment of taxes.  The court applied her knowledge and action to the standards established by the Sixth Circuit in the case of Stamper v. United States (In re Gardner), 360 F.3d 551 (6th Cir. 2004).  The Gardner case established the mental state requirement of proof that the debtor had a duty to pay, knew of the duty and voluntarily or intentionally violated the duty. 

Dr. Harold argued that she did not voluntarily or intentionally violate the duty to pay her taxes because she had a strong religious need to send her children to Catholic schools and she relied on her husband to manage the family financial affairs.  The court quickly rejected these arguments.

The use of 523(a)(1)(c) to deny a debtor a discharge for willful non-payment of taxes began in a Sixth Circuit case almost 15 years after the adoption of the “new” bankruptcy code in 1978.  The case of Toti v. United States, 24 F.3d 806 (6th Cir. 1994) was the first circuit level court to approve of the use of the discharge exception in this way.  Since that time courts have struggled at times to decide both the standard for holding the taxpayer liable for the taxes and the amount of lavishness necessary to cause the bankruptcy court to say enough.  Here, the IRS clearly established that Dr. Harold went too far.  The case provides another lesson on the perils of maintaining a high lifestyle while putting off payment of taxes.  I seem to write about it every couple of years simply as a reminder that high personal expenditures while failing to pay taxes serves as a recipe for losing the ability to discharge old taxes in a bankruptcy case.

Boyle and the AWOL Return Preparer: No Excuse for Late Filing

A recent case out of the Northern District of California, Willett v United States, illustrates the difficulty taxpayers face when trying to base a reasonable cause defense to the late filing of tax returns on the conduct of their return preparer.

I will summarize the facts and the court’s analysis.

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The Willetts had filed an extension for the 2014 year. In August of 2015, they delivered their K-1s, W-2s and 1099’s to their longtime preparer, who was a CPA. After dropping off the documents, for about three months their preparer did not respond to their phone calls. In October, the preparer contacted the Willets and told them that she had been seriously ill, would prepare the returns upon her release from an extended care facility, and would pay any penalties and interest associated with the late filing.

After another month or so of not hearing from the accountant, in November Mrs. Willett visited her preparer’s house to get an update. The preparer assured Mrs. Willett that she would complete the return. Unfortunately, despite the Willetts’ repeated efforts to contact her, that was the last that time that they heard from her (she in fact passed away in early 2017).  

The Willetts alleged that by December of 2015 they actively sought a replacement but were unable to get someone until June of 2016 due to other preparers claiming that (1) they were too busy or (2) the return was too complex. By June of 2016, they found someone and hired another CPA, and they filed the return in September of 2016. 

When the Willetts filed the delinquent return, IRS assessed over $34,000 and $6,000 of late filing and late payment penalties. The Willetts paid the penalties and filed a timely refund claim, alleging that their late filing should be excused based on their reasonably relying on their longtime accountant to prepare and file the returns on their behalf.  The IRS rejected the claim, and the Willetts filed suit in federal court. 

In response to the complaint, the government filed a motion to dismiss based on Boyle.  In response to the motion to dismiss, the Willetts amended their complaint and included even greater detail about the efforts they made to contact their longtime preparer after they dropped their tax documents off in August of 2016.   

The additional facts did not help: 

The Willetts’ allegations do not sufficiently plead reasonable cause entitling them to a refund for the late-filing penalties. Their allegations illustrate that they relied on their CPA, Ms. Goode, who possessed the original copies of their tax documents, became seriously ill, and was unable to complete their 2014 tax return on time.  In their Amended Complaint, the Willetts attempt to salvage their claims by providing a detailed timeline of the failed attempts to contact Ms. Goode. However, this timeline fails to demonstrate ordinary care, because it merely illustrates the numerous attempts to contact Ms. Goode.  But those allegations plead no excuse for the late-filing other than reliance on the Willetts’ agent, which is not “reasonable cause” under Boyle.

The Willett opinion does not break new ground. It refers to a couple of cases where the Tax Court held that a nonresponsive or ill accountant does not constitute reasonable cause for late filing. 

It also distinguishes Conklin Brothers of Santa Rosa, a post Boyle 1993 Ninth Circuit case which “held, in the case of a corporate-taxpayer, that reliance on an agent can establish reasonable cause if the taxpayer shows that “it was disabled from complying timely”—e.g., where its agent’s conduct was beyond the taxpayer’s control or supervision.” In distinguishing Conklin the opinion notes  (unpersuasively) that no court has extended it to individuals. More persuasively, the opinion explains that even if Conklin’s limited exception did apply to individuals, the facts as alleged did not support a finding that the Willetts were disabled from complying with their filing responsibilities:

The Willetts seem to imply that Ms. Goode’s possession of the original tax documents “disabled” them from filing their taxes themselves, and prevented them from hiring another CPA. They allege that they made attempts to contact other CPAs, and that those other CPAs would not take them as clients. The insufficiency of these allegations is apparent when compared to other cases holding that the disability exception did not apply. In Conklin, the agent in charge of Conklin’s tax obligations, the corporation’s controller, failed to timely file Conklin’s returns.  For over two years the controller also “intercepted and screened the mail,” “altered check descriptions and the quarterly reports,” and “concealed the deficiencies by undertaking the performance herself of all payroll functions.”  Although the controller’s concealment meant that Conklin’s officers were not aware of the IRS’s penalty assessments, the Ninth Circuit held that the controller’s “intentional misconduct” was not enough to establish that Conklin was disabled from timely complying.  The Willetts’ allegations do not suggest that their agent’s misbehavior was remotely comparable to the controller’s misconduct in Conklin.

(emphasis added; citations omitted)

Conclusion

Willett is a reminder that Boyle generally will prevent a reliance defense in the context of missing a return filing deadline. While there are grounds to challenge Boyle in the context of e-filing (as we have discussed before), Boyle casts a long shadow over taxpayers seeking to escape the hefty civil penalties for late filing. While the Willetts were mightily inconvenienced by their preparer’s failure to prepare the returns and the absence of their K-1s, W-2s and 1099s, the circumstances did not excuse the tardy filing.

As Willett demonstrates, the responsibility to file rests on the taxpayer. One of the barriers that the Willetts faced was that their old preparer had their tax information returns. To be sure the government could make it easier for taxpayers to comply by, for example, seamlessly providing taxpayers access to all information returns they receive from third parties. Last summer, I signed up for an online tax account from the IRS-one of its virtues is that by the time I got around to filing last October I was able to see in one spot the information returns that the IRS had on record for my 2018 year. Of course, most financial institutions and many employers provide access to the information returns if a taxpayer no longer has the original. At some point I suspect that the IRS will make a central portal more readily available for all taxpayers, thereby reducing the burdens of compiling (or retrieving) the returns that are necessary to file.

IRS Moves to Prevent Defrauded Borrowers from Massively Overpaying Taxes Through Adoption of a New Revenue Procedure

We welcome first-time guest blogger Alex Johnson to PT. Alex is a second year law student enrolled in Harvard’s Predatory Lending Clinic.  Prior to law school Alex worked as a financial statement auditor and holds an inactive CPA license.  The Predatory Lending Clinic does amazing work.  It regularly receives press coverage for the work it does on behalf of students who did not receive the education they sought.  You can see some of that coverage here, here and here.  Keith

The IRS recently issued revenue procedure 2020-11 which extends the relief provided under three prior IRS revenue procedures: 2015-57, 2017-24, and 2018-39.  Generally, revenue procedure 2020-11 provides relief to taxpayers who obtain a Federal or private student loan discharge under certain circumstances.  It also provides relief to those taxpayers’ respective creditors who were required to file information returns and payee statements pursuant to section 6050P of the IRC.  Through this revenue procedure the IRS takes the position that all borrowers who have their loans discharged under either a closed school discharge, defense to repayment discharge, or as part of a legal settlement discharging private loans based on claims of school misconduct do not have to include the prior loan amount as gross income.  Further, to prevent confusion and simplify the process of filing taxes, entities normally required to issue a 1099-C will not have to if one of the above situations applies.

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Harvard’s Project on Predatory Student Lending (the Project) represents students asserting their rights against predatory for-profit colleges and the Department of Education.  The Project uses individual cases and class actions to assist individuals who decided to better their life through higher education but were deceived by false promises and predatory practices.  Before the IRS issued this revenue procedure, the Project had taken steps to protect their clients against burdensome 1099-Cs and guard against the possibility that they would pay unnecessary tax on cancelled debt.  In one recent case, the Project worked to obtain a Private Letter Ruling from the IRS regarding a substantial amount of institutional debt cancellation won through litigation.

Defrauded students already face an uphill battle enforcing their legal right to a loan discharge.  Because many people defrauded by the for-profit college industry have high loan balances and low income, even when they were able to discharge their loans the tax consequences could be devastating.

The IRS and consumer advocates have taken multiple steps to try and mitigate this problem.  Prior IRS revenue procedures 2015-57, 2017-24, and 2018-39 provided the same relief that 2020-11 provides, but they only applied to schools owned by Corinthian College, Inc. or American Career Institutes, Inc.  In other cases, lawyers have obtained private letter rulings from the IRS as part of a legal settlement with predatory schools.  A defrauded borrower not covered by prior IRS revenue procedures or a private letter ruling was still likely able to exclude all or substantially all of the discharged amounts based on the insolvency exclusion or disputing the debt.  However, many borrowers are not aware of how to file a form 8725 or 982 and it would be impossible for any direct assistance or advocacy group to identify or contact them all.  This leads to many former borrowers including the discharged debt as income.

Defrauded borrowers’ debts can often be in the tens of thousands of dollars before their loans are discharged.  If their taxable income increases by the amount of the discharged loan it is very likely their higher income will disqualify them from several tax deductions and credits, raising their tax bill by thousands of dollars.  For the millions of Americans who live paycheck to paycheck, an unexpected (and incorrect) tax bill of thousands of dollars can be devastating. 

IRS revenue procedure 2020-11, goes a long way to fixing this problem.  The IRS acknowledged that “most…student loan borrowers [who have debts discharged because of school misconduct or school closure] would be able to exclude from gross income all or substantially all of the discharged amount[.]” They also agree that determining which exclusions to use “would impose a compliance burden on taxpayers, as well as… the IRS, that is excessive in relation to the amount of taxable income that would result.” 

The revenue procedure is retroactive.  It is effective for federal student loans discharged on or after January 1, 2016.  If a taxpayer had student loan debt discharged due to school misconduct after January 1, 2016, and paid taxes on the discharged amount, they should be able to file an amended return to get their money back.  The IRS also announced that taxpayers will not have to amend prior year returns to reduce education tax credits they took in the past.  It should be noted that VITA tax sites will not be able to complete these amended returns as the forms required are outside of their scope of services.

We applaud the IRS for this change.  It drastically reduces risk that borrowers will overpay their taxes and at the same time reducing administrative costs to the government.