Lazy Mid-Summer Tips and Traps: Designated Orders August 12 – 16, 2019

It was a fairly lax mid-August week at the United States Tax Court. There were only three (non-duplicative) designated orders issued. One was a common example of the taxpayer simply not giving the IRS anything to work with in a CDP hearing and won’t be discussed (found here). The other two, however, provide a few useful tips and traps of general application worth noting.

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What Time-Zone Determines Timely (Electronic) Filing? NCA Argyle LP, et. al. v. C.I.R., Dkt. # 3272-18 (order here)

One of the more interesting tidbits from this week’s designated orders was buried in a footnote. The order above mostly dealt with an objection to the IRS’s motion for a deposition that (petitioners felt) came way too late to be fair (i.e. one month before trial). But it isn’t the timing of IRS’s motion that is interesting, but the timing of the petitioner’s objection. 

When the IRS moved to compel depositions the Court ordered petitioners to file any response by August 14. I’m assuming this case involves big dollars, because petitioners are partnerships and LLCs represented by expensive law firms in California. Those law firms are probably very busy, with lawyers working very late hours. So they figured they’d electronically file their response on August 14th at 10:04 pm… Western time.

And why not? The “Practitioners’ Guide to Electronic Case Access and Filing” stated (but has since been changed as a result of this order) at page 42 that “A document is considered timely filed if it is electronically transmitted no later than 6:00 a.m. Eastern time on the day after the last day for filing.” [Emphasis added.] In other words, the petitioners had almost six more hours to get their response in, if you take the practitioner’s guide seriously.

Alas, in the hierarchy of legal authority the “Practitioner’s Guide” is a step below Tax Court Rule 22. That rule states (effective November 20, 2018) that “A paper will be considered timely filed if it is electronically filed at or before 11:59 p.m., eastern time, on the last day of the applicable period for filing.” [Emphasis added.] Petitioner’s response was filed 10:04 p.m. the day of the filing deadline… but only on western time. We live in an east coast dominated country (take it from a mid-westerner). In the time-zone that matters, the response was late by a solid hour and five minutes. 

As a side-bar, it is important that other courts have different rules than the Tax Court. For example, as discussed here one preliminary difference is that Federal District Court determines the effective date of a complaint based on receipt, and not when it is mailed. Second, other courts (including Federal District Courts not located in Washington D.C.) are unlikely to set a deadline of 11:59 Eastern Time. The Federal District Court for Minnesota provides that an electronic document is timely if submitted “prior to midnight on its due date.” See page 4 of the ECF User Guide here. Though a time-zone is not provided (which midnight are we talking about?) one would surmise the Central Time zone, since the next rule covering timely paper filing sets the deadline at 5:00 p.m. Central Time on the due date. These rules from the ECF User Guide comport with the Federal Rules of Civil Procedure, which provide that for calculating the “last day” you generally look to the time zone in the court you are filing with. See FRCP Rule 6(a)(4).

So, bringing it back to Tax Court, is the West Coast law firm response thrown out for being filed out of time? Judge Buch is not one to stand on such formalities, stating that “no one was prejudiced by the 65 minute delay” and allowing it to stand.

Nonetheless, while this slight timeliness issue does not end up causing any problem for the parties in this case, it is important to recognize how different it would be if the deadline at issue was “jurisdictional.” As both Carl and Keith have extensively written about, based on the Tax Court’s current interpretation of the law, Judge Buch’s hands would be tied: deprived of jurisdiction, he would also be deprived of the ability to excuse the timeliness issue (say, for lack of prejudice, or more likely equitable tolling).   

Who To Ask For Help: Tax Court Isn’t a One-Stop Shop. Crawford v. C.I.R., Dkt. # 4318-18L (order here)

We have previously seen that the Tax Court is reluctant to stand-in as a federal district court on FOIA issues (see post regarding Cross Refined Coal, LLC here) or dismiss a case where it is up to the bankruptcy court to amend the stay (see post regarding Betters v. C.I.R., here). In the above order we have a similar issue involving the enforcement of a federal district court injunction. 

Essentially, the petitioner in this case has received informal Tax Court assistance (that is, no entry of appearance under Rule 24) from someone the IRS doesn’t much care for. And likely for good reason: the individual assisting the petitioner is associated with the Williams Financial Network, currently under indictment for a $5 million fraud scheme. The IRS accordingly has enjoined all individuals associated with that entity from “representing people before the IRS.” Of course (or as sometimes needs to be explained to taxpayers), the Tax Court is not the IRS so those individuals are not (technically) prohibited from representing petitioners before the Tax Court if they otherwise meet the requirements of Rule 200

(As an aside to new tax court practitioners, don’t overly concern yourself with the reference to a “periodic registration fee” in the rules to practice. Once, in a fit of stress, I called the Tax Court to see if I was current on the fee (I couldn’t ever remember paying) and was told they hadn’t actually required it for decades.)

It isn’t clear if the individuals associated with the Williams Financial Network meet the requirements of Rule 200 (I’d bet they don’t), but that isn’t really the problem. The problem is that the IRS asks the Tax Court to essentially make up rules and exercise power it probably doesn’t have: that is, the IRS asks Judge Buch to order that the individuals helping the petitioner be prohibited from doing so when the case is remanded to IRS Appeals. Judge Buch declines to do so: the Tax Court wasn’t the court that issued the injunction, and the Tax Court has no rules on who can represent people before the IRS, just who can represent them before the Tax Court. 

In other words, if Williams Financial Network violates the district court injunction it’s not the Tax Court’s problem, and not their place (or power) to fix it. 

Impact of Fraud Penalty on Only One Spouse

The case of Chico v. Commissioner, T.C. Memo. 2019-123 points out the benefits to the “good” spouse when the other spouse files a fraudulent tax return.  The case follows earlier Tax Court precedent established in the non-precedential case of Said v. Commissioner, T.C. Memo. 2003-148.  Because of the interplay of the fraud penalty and the accuracy related penalties, the “good” spouse gets a pass on penalties on the return.  While this outcome has nothing to do with the innocent spouse provisions, it has the effect of leaving the “good” spouse free of penalties when the fraud on the return relates only to the other spouse.  Thanks to our fellow blogger Jack Townsend for bringing this case to my attention.

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Mr. Chico ran several businesses including a return preparation business.  He filed returns that failed to report income from several sources and otherwise contained errors that caused the IRS to assert the fraud penalty.  When the IRS asserts the fraud penalty on a joint return, it must prove fraud of each spouse in order to have the fraud penalty apply to both spouses.  Here, Mr. Chico’s knowledge of the businesses and of return preparation made him the obvious target of the penalty while the IRS could not overcome the showing that Mrs. Chico had little knowledge of the matters on the return.  So, the court found the fraud penalty with respect to Mr. Chico but not his wife.

The finding of the fraud penalty against Mr. Chico did not end the pursuit of penalties by the IRS.  As it normally does, the IRS had asserted the lesser penalties in the accuracy penalty provisions of IRC 6662 against both husband and wife.  Here, the issue of penalty stacking comes into play.  The IRS cannot hit someone with the fraud penalty and the accuracy related penalty.  It can either obtain the fraud penalty or the accuracy related penalty but not both.  Because of the anti-stacking provision found in IRC 6662(b), the Tax Court found that it could not impose an accuracy related penalty against Ms. Chico since doing so would create a stacking of penalties.

IRC § 6662(b) states the following as it pertains to the imposition of accuracy-related penalties on underpayments.  The IRS may not stack penalties when any of the following apply:

  • When a penalty is imposed under IRC § 6663 (fraud penalties)
  • When a penalty is determined as being a “gross valuation misstatement” as defined under IRC § 6662(h)(2), the portion of the underpayment shall be penalized 40 percent in total (and not an additional 40 percent to the standard 20 percent penalty)
  • When a penalty is determined from a nondisclosed noneconomic substance transaction as defined under IRC § 6662(i), the portion of the underpayment shall be penalized 40 percent in total (and not an additional 40 percent to the standard 20 percent penalty)

Treas. Reg. 1.6662-2(c) is the anti-stacking provision in the CFR as it pertains to accuracy related penalties:

A. If a portion of the underpayment of tax shown on a return is attributable to both negligence and a substantial understatement, the accuracy-related penalty would apply only once at the 20 percent rate to this portion of the underpayment. The examiner should assert the penalty that is most strongly supported by the facts and circumstances and write up the other as an alternative penalty position.


B. The penalty is applied at the 40 percent rate on any portion of the underpayment attributable to a gross valuation misstatement. Any penalty at the 20 percent rate that could have applied to this portion is not asserted except as an alternative penalty position.


C. A penalty is applied at the 75 percent rate on any portion of the underpayment attributable to civil fraud. Any penalty that could have applied to this portion at the 20 or 40 percent rate is not asserted except as an alternative penalty position.

IRM 20.1.5.3.3.1 No Stacking Provision (12-13-2016) sets out the anti-stacking rules for IRS employees to follow. 

The application of the anti-stacking penalties allows Mrs. Chico to avoid having any penalty for filing an improper return assessed against her.  Although the IRS sought the accuracy related penalty against her it does not seem inclined to pursue the issue into the circuit courts to overturn the position stated by the Tax Court that imposing the lesser penalty on the spouse not liable for fraud creates impermissible stacking.  In the absence of a court challenge, the IRS must go to Congress and seek a change in the stacking rules to allow assessment against the spouse who did not commit fraud or forgo any lesser penalty against that spouse in these circumstances.

The spouse who did not commit fraud may still suffer because of the fraud.  Unless that spouse obtains innocent spouse relief, that spouse will owe all of the additional tax assessed as a result of the audit.  Unless the spouse who did not commit the fraud has no withholding and makes no estimated tax payments during the year, that spouse may have to repeatedly apply for injured spouse relief in subsequent years if the couple receives a refund of taxes since the IRS will likely take the whole refund to satisfy the penalty liability of the fraudulent spouse.

Here, the Chico’s filed a joint petition.  Two attorneys are listed in the opinion as representing the taxpayers.  It is not clear if one was representing Mr. Chico and the other Mrs. Chico or if they were both representing both parties.  This is a situation in which the attorneys must be careful because the interests of Mr. and Mrs. Chico do not align. 

This is also a situation in which Mrs. Chico was fortunate to have representation.  Without representation she has little chance of catching the mistake made by the IRS in seeking to impose a lesser included penalty on her.  Perhaps the Tax Court Judge would always or almost always catch this mistake and protect the unrepresented party but that puts a great deal of pressure on the judge which does not belong there.  Just because Tax Court judges do a good job of catching these issues and protecting unrepresented taxpayers does not mean that this is a perfect system.  An unrepresented taxpayer could end up owing a penalty which the IRS should not have imposed.  Even the accuracy related penalty would have been almost $40,000 for the three years at issue in this case.  That would have been a steep price for the unrepresented spouse to pay.

The court stated:

Respondent has not asserted fraud penalties against Ms. Chico but alleges that she is liable for the section 6662(a) accuracy-related penalty for each year at issue.

I interpret the court’s statement to mean that no penalty was asserted against Ms. Chico in the notice of deficiency but the attorney in Chief Counsel’s office decided to pursue the penalty after the filing of the petition.  If I have interpreted the situation correctly, it looks like the notice writers at the IRS read the IRM but the Chief Counsel attorney and supervisor did not or maybe Chief Counsel’s office does not agree with the decision in Said.  If I interpreted the situation correctly, maybe it’s time for a new Chief Counsel notice assuming that Chief Counsel’s office now agrees with this outcome.

Innocent Spouse, Abuse of Discretion, and Remand: Designated Orders 8/5/19 to 8/9/19

My August week of designated orders brought four orders in different areas. The topic range includes innocent spouse (with the question of application under the Taxpayer First Act), collection due process and remands. One of the remands has an abuse of discretion issue.

Taxpayer First Act and Innocent Spouse
Docket No. 12498-16, Beverly Robinson v. C.I.R., Order available here.
In her first designated order, Judge Copeland brings up how the Taxpayer First Act affects a pending innocent spouse case. Carlton Smith blogged about this issue in Procedurally Taxing previously here. Carlton’s article discusses the implications of the Taxpayer First Act section concerning innocent spouse cases, specifically IRC section 6015(f) cases.

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This order concerns a case that already went to trial on February 5, 2018. The parties filed a joint stipulation of facts and a joint first supplemental stipulation of facts. The petitioner moved to admit Exhibit 58-P and it was admitted into evidence. Each party called witnesses in support of their arguments. The entire administrative record was not presented or received into evidence. The trial was before Judge Chiechi, who has since retired. The case was reassigned to Judge Copeland. After trial, on July 1, 2019, the Taxpayer First Act was signed into law. The relevant portion to this case is below.

Section 1203(a)(1) of the Taxpayer First Act of 2019 (TFA) amended IRC section 6015(e) to add a new paragraph (7):

(7) STANDARD AND SCOPE OF REVIEW. — Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon —
(A) the administrative record established at the time of the determination, and
(B) any additional newly discovered or previously unavailable evidence.

TFA section 1203(b) states those sections apply to “petitions or requests filed or pending on or after the date of the enactment of this Act.”

Judge Copeland issued this order, stating that the parties shall file a response to the order addressing the effect of sections 1203(a) and (b) of the TFA on this case.

At first, I thought the judge wanted the parties to do research on the TFA and how its innocent spouse provision applied in general to their case so I would have directed them to Carlton’s article. However, I reread the order and realized just what she meant concerning the TFA’s application to their case.

The case was pending on the date the TFA was enacted. Now, normally the Tax Court would review the innocent spouse determination de novo based upon (A) and (B) listed above. However, the administrative record was not introduced or received into evidence, which is part of subsection (A) above. What to do in this case? Let the parties make their arguments about the matter. Thus, the judge ordered the parties to submit their responses on or before September 4, 2019.

As a follow-up – on August 30, the IRS filed an unopposed motion for an extension of time. That motion was granted to give the IRS an extension of time to October 4.

Takeaway: Applying the Taxpayer First Act will open up several questions for years to come. Since the Taxpayer First Act specifically discusses Tax Court review of innocent spouse cases, this may be a prominent issue moving forward in designated orders. They should still read Carlton’s article.

More Innocent Spouse
Docket No. 10341-18, Jeffrey C. Elliott v. C.I.R., Order available here.
Pamela Elliott filed a motion for leave to file a notice of intervention in this innocent spouse case. Normally, she could have intervened as a matter of right. However, she filed the motion after the 60-day window during which she could intervene and requests leave to do so at this late time. Her reasoning is that “she was not represented by counsel and did not understand her procedural rights,” adding that the “interests of justice favor allowing her request.”

The Court reviews factors regarding Ms. Elliott’s motion for leave to file a notice of intervention. The first factor is the length of time she knew or should have known of her interest. Ms. Elliott waited a year so that factor weighs against her. The second factor is the prejudice the parties may suffer by her failure to intervene earlier. Mr. Elliott did not provide proof of additional fees he would suffer, the docket in this case has been inactive, and the parties have sufficient time to prepare for an October 2019 trial so it is determined that the parties will not suffer prejudice from her failure to intervene earlier so that factor weighed in her favor. The third factor is the prejudice she will suffer from a denial of her motion. Because she will be affected by the decision on innocent spouse relief, she would suffer prejudice by not being able to participate in the trial and that factor weighs in favor of granting the motion. The fourth and final factor is any unusual factors weighing in favor of finding timeliness. There are no issues affecting timeliness, but the parties are involved in another Tax Court proceeding (2957-19) involving similar issues. On balance, the factors allow for Ms. Elliott to be granted the relief she sought.

The Court grants her motion for leave to file a notice of intervention, ordering to amend the caption and serve her with the proper notice and pretrial order so she may prepare for trial.

Takeaway: It is not recommended to file documents after a deadline has passed. However, factors may allow for the Court to grant an individual the relief sought.

Abuse of Discretion for Installment Agreement Notice
Docket No. 2018-17L, Don R. Means v. C.I.R., Order here.
The petitioner is a retired airline pilot who claimed deductions based on participation in tax shelter programs. Audits of those schemes resulted in the IRS disallowing the deductions and deficiencies for 7 tax years. The Tax Court entered final judgments in 2013 regarding the aggregated assessed tax and associated accrued interest to be, respectively, $102,765 and $76,498. Mr. Means entered into a $500 monthly installment agreement in February 2014. The IRS terminated the agreement in May 2016. In July 2016, the IRS issued a Notice of Intent to Levy. Mr. Means filed a Form 12153 to request a Collection Due Process hearing. In the form and also by request to the settlement officer, Mr. Means requested an explanation of the termination of the installment agreement.

Termination of an installment agreement must be preceded by a 30-day notice that provides an explanation to the taxpayer. There were inconsistencies in the administrative record so it was unclear that the notice requirement under IRC section 6159(b)(5) was met or that such notice was provided to Mr. Means (though there is an indication that Mr. Means, his ex-wife, or both, failed to provide the IRS updated financial information, which led to the termination).

The Court cannot agree with the settlement officer’s determination that legal and administrative procedures were met. Therefore, the conclusion is that the determination sustaining the proposed levy was an abuse of discretion. The Court remands the case to Appeals for a supplemental hearing. On remand, if Mr. Means did not have proper notice, he should either be allowed to continue the installment agreement or receive the proper notice due, with the right to appeal.

Takeaway: Consistent procedure is necessary for the IRS so that a taxpayer receives proper due process. If the administrative record is inconsistent about notices, it is more likely for the Court to decide there was abuse of discretion.

Collection Due Process, Remand, and Summary Judgment
Docket No. 25904-16SL, Chinyere Egbe & Sheila Daniels Egbe v. C.I.R., Order and Decision available here.
To begin, petitioners received an IRS notice of deficiency for tax years 2012 and 2013. They did not petition the Tax Court based on that notice.

Next, the IRS issued to the petitioners a Final Notice of Intent to Levy and Notice of Your Right to Hearing for the 2013 tax year. The petitioners submitted a form 12153 to request a collection due process (CDP) hearing.

The settlement officer assigned to the case worked with the petitioners and their representative. The officer granted them an extension of time and did not receive any requested financial documents. However, he told their representative that they qualified for a streamlined installment agreement of $275 per month. The representative agreed to get back with the settlement officer after discussing with the petitioners. The petitioners made two payments before realizing the agreement was not in effect and then terminated their relationship with the representative because of not communicating acceptance of the installment agreement to the IRS.

The IRS issued a notice of determination to the petitioners not to grant relief from the proposed levy action. The petitioners filed a timely petition to the Tax Court concerning the notice of determination, also checking the box for a notice of determination concerning innocent spouse relief (which did not apply) and indicating the notice was for tax years 2012 and 2013 (when it was only for 2013).

The IRS filed a motion for summary judgment, which the Court denied. The Tax Court remanded the case to IRS Appeals for a further administrative hearing so the IRS could provide petitioners a supplemental CDP hearing. The Court dismissed tax year 2012 and the innocent spouse claim from the case.

The same settlement officer held a further CDP hearing. He informed the petitioners they could not challenge the liability for tax year 2013 because they received a valid notice of deficiency and that they had accrued an additional liability. The settlement officer proposed an increased installment agreement and they accepted, signing form 433D.

The IRS issued to the petitioners a supplemental notice of determination related to tax year 2013, determining that the proposed levy is not sustained because they agreed to a $600 per month installment agreement.

Following the supplemental notice of determination, both parties were to file status reports but only the IRS filed one. The Court scheduled the case for trial on the September 23, 2019, docket for New York, New York. The IRS filed a motion for summary judgment, with the settlement officer’s statement in support. The petitioners filed their objection to the motion for summary judgment.

In the Court’s analysis, the petitioners did not show there was a genuine issue for trial. Since the petitioners were in an installment agreement, the IRS did not sustain the proposed levy. The Court granted the motion for summary judgment because there was no genuine issue of material fact and removed the case from the September calendar.

Takeaway: To some degree, I think the petitioners had bad representation, but I think the biggest problem was a lack of understanding of IRS and Tax Court procedure. What are some indicators? They did not petition the Tax Court regarding the liabilities for 2012 and 2013 from the notice of deficiency. They (or their representative) did not respond or communicate with the settlement officer for the CDP hearing. They did not fill out their Tax Court petition correctly based on the original notice of determination.

I find that clients do not understand the difference between the various notices that provide them access to the Tax Court. Generally, the notice of deficiency allows them to contest the liability while a notice of determination concerning collection action is about abuse of discretion in a CDP hearing. It is critical to know what lane you are in to argue correctly and find success in the Tax Court.

Taxpayer Protection Program Sidesteps Right to Representation

We welcome guest blogger Barbara Heggie. Barb is the Coordinator and Staff Attorney for the Low-Income Taxpayer Project of the New Hampshire Pro Bono Referral System. In the most recent Annual Report to Congress, the National Taxpayer Advocate identified the high false positive rate associated with the IRS’s fraud detection systems as the fifth most serious problem affecting taxpayers. The IRS took steps to improve its refund fraud program for the 2019 filing season; the results were not fully in at the time of the National Taxpayer Advocate’s 2020 Objectives Report. In today’s post, Barb walks us through a recent false positive case from her clinic. She identifies IRS procedures that pose a high barrier to successfully passing through the verification process, particularly for taxpayers who need assistance from a representative. Barb suggests the IRS ought to make changes to comport with a taxpayer’s right to representation. Christin

I had my first encounter with the IRS’s Integrity & Verification Operations (IVO) function last month. It did not go well.

I had prepared a 2017 return a few weeks earlier for a disabled, fifty-something client in recovery from substance abuse, and he’d been anticipating receipt of a small overpayment. His main source of income that year had been Social Security, but he’d also had a few hundred dollars in wages. His payroll withholding, plus a bit of the Earned Income Credit, had added up to an early fall heating bill here in New Hampshire.

Instead of a refund notice, we each received a copy of a Letter 4883C from the IVO Taxpayer Protection Program; his return had been flagged, and he needed to verify his identity. Given this client’s severe anxiety concerning the IRS, I studied the letter and prepared to make the call alone. I anticipated no issues; I had all the documentation the letter required, including the flagged return, the prior year’s return, and all supporting forms and schedules for each.

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Once on the line with IVO, however, things quickly got strange. Following the preliminary, “normal” authentication, the customer service representative (CSR) asked me to answer these questions three: “What is your client’s place of birth? What is his mother’s maiden name? And what is his father’s middle name?” I had none of this information and have never asked such things of my clients, save for the place of birth for an ITIN application. I don’t collect birth certificates as a matter of course.

Interestingly, Letter 4883C did warn of “questions to verify your identity” – but then listed the documents to have on hand. Hence, I believed those documents would be the basis for the verification questions. The letter “encourage[s]” the client “to be available . . . on the call” with an authorized representative, but it fails to explain why that might, in fact, be essential.

Had I studied more than the 4883C letter, I would have realized that the call would involve “high risk authentication procedures,” necessitating “Additional Taxpayer Authentication.” IRM 21.1.3.2.3(2); 21.1.3.2.4(2); 25.25.6.4. Once in the land of Additional Taxpayer Authentication, the caller is subject to the TPP HRA IAT disclosure tool; that is, the Taxpayer Protection Program High Risk Authentication Integrated Automation Technologies Disclosure tool. IRM 25.25.6.4(2). This tool, in turn, generates a series of authentication questions for the taxpayer, the answers to which cannot easily be guessed by anyone else, including the taxpayer’s authorized representative. Tantalizingly, the IRM provides a long list of possible questions to ask in the ITIN identity theft context – possibly the same as those asked of SSN holders – but they’re all masked against public consumption. IRM 25.25.6.4(8).

Thus, if I had thought to read the IRM before placing the verification call, I wouldn’t have had a clue what questions might be asked. But I would have realized the futility of making the call without my client on the line.

And, so, I flunked the call. When I explained my client’s situation and offered to call right back with the answers, the CSR informed me that I had already used up my “one chance” to resolve the issue “the easy way.” The two hard ways were: (1) attending an in-person meeting with the client at a Taxpayer Assistance Center (TAC), or (2) verifying his identity by mail. Both methods required the authentication documentation originally requested, as well as two forms of identification. The CSR stated that he was making the mail-in option available to my client only because of his severe anxiety.

My client did, eventually, verify his identity at a TAC with the help of a volunteer attorney who was kindly working with him to reduce his anxiety about the IRS. Fortunately, both the client and the volunteer had only a few minutes’ drive to reach the TAC. But conversations with practitioners on the ABA Low-Income Taxpayer Clinic (LITC) listserv reminded me that this is often not the case. To receive a legitimately-claimed refund – already months late – a rural client may need to jump through ever-more burdensome hoops, such as an unpaid day off from work and an expensive tank of gas.

Clients lacking English fluency doubtless find further barriers standing in their way in such a system. One LITC colleague recalled an incident with IVO in which she and her low-English client participated in the call together via speaker phone, yet the CSR forbade this attorney from speaking for her client. Other LITC staff have recounted similar experiences. All such scenarios seem contrary to the authentication provisions of IRM 25.25.6.3.1(3)(1), which explicitly states that “the POA is authorized to act on behalf of the taxpayer.”

My client’s identity verification scenario was arguably less egregious than these. Moreover, in the context of the enormously costly, vastly complex problem of identity theft, overbroad rule-writing is understandable, if not optimal. Getting it right is as difficult as it is critical. And yet, as retired National Taxpayer Advocate Nina Olson wrote in her June 20, 2019, NTA blog post, “the soundness and effectiveness of any tax administration is measured by the trust its taxpayers have that they will be treated fairly and justly.” Overbroad IRM provisions can lead to an erosion of this trust in the system – a system which relies primarily on voluntary compliance.

More particularly, the procedures that led to my authentication difficulty violate the client’s right to retain representation. The right to retain representation implies, of course, the right to have a representative speak and act for the taxpayer. Any limitation on this right should come with justification, such as the need for a taxpayer to sign certain documents under penalties of perjury. Even then, the taxpayer holds the right to authorize a representative in certain exigent circumstances. See 26 CFR 1.6012-1(a)(5).

In the case of an IVO identity verification, IRM 25.25.6.3.1(3)(1) has the practical effect of limiting the representative’s authority, but without justification. This provision directs the CSR to “follow all instructions in the IRM as if the POA is the taxpayer.” (Emphasis added.) However, because the POA is not, in fact, the taxpayer, the POA cannot answer questions specifically designed to be answerable solely by the taxpayer. Thus, this IRM provision deprives the taxpayer of the chance to have a representative resolve the identity verification issue. Given the misleading nature of Letter 4883C, a taxpayer and representative may lose their “one chance” to make a speedy verification over the telephone and instead be forced to do so in person at an IRS office.

Security concerns provide no justification for this provision. A high level of security can be maintained by asking the representative to answer such questions as only the representative can answer. After all, the only two people addressed in a Letter 4883C are the taxpayer and the representative. And, presumably, if the IRS knows your client’s place of birth, mother’s maiden name, and father’s middle name, the IRS has the same information on you. As Sir Galahad discovered – alas, too late – the only correct answers to personal questions are your own personal answers.

The right to retain representation is part of the Taxpayer Bill of Rights (TBOR), found in IRC §7803(a)(3) and IRS Publication 1. As last year’s Facebook case emphasized, however, Section 7803(a)(3) specifies that various “other provisions” of the Code afford these rights. Thus, the Facebook court concluded, “no right was a new right created by the TBOR itself.” Rather, TBOR is more concerned with training and management of IRS employees, according to the United States District Court, N.D. California, San Francisco Division. Keith Fogg takes the discussion a few steps further in his forthcoming Temple Law Review article:

Perhaps more important than litigation is the role TBOR can play in shaping policy decisions at the IRS. It could play a major role in the regulations issued and in the sub-regulatory guidance that governs everyday life at the IRS. . . TBOR also has a role to play in internal discussions at the IRS which shape so much of the administrative process. If TBOR can alter the culture at the IRS to incorporate taxpayer rights as a major component of each policy decision, it will become an important part of tax administration whether or not it becomes an important part of litigation.

Several discussions on this topic can be found in Procedurally Taxing here, here, and here.

It may be that a bit of policy-shaping and culture-altering may come of the authentication tribulation my client and I experienced. I submitted a request on the representation issue in the Systemic Advocacy Management System (SAMS), #41352, and got a sympathetic reply from the analyst assigned to it. After a couple of weeks, she reported back that the issue had been elevated to the Revenue Protection Team, with the goal of finding ways “to make the system move more smoothly.” Moreover, she said, the issue would be added to the CSRs’ training package. With luck, all changes will be made with an eye to TBOR.

Prison Mailbox Rule Doesn’t Apply to Refund Claims

In what the court thinks is apparently a case of first impression, a district court has held that a refund claim that arrived at the IRS more than three years after it was due is not timely under the “prison mailbox rule”.  Whitaker v. United States, 2019 U.S. Dist. LEXIS 165345 (N.D. Fla. 9/26/19), adopting magistrate’s opinion at 2019 U.S. Dist. LEXIS 166975.  The court also holds (following precedent in the Fifth Circuit which a court in the Eleventh Circuit had to follow) that the common law mailbox rule cannot apply because it has been superseded by section 7502.  Circuits are split as to the latter holding. Further, the court holds that the taxpayer did not make out a factual case for equitable estoppel to apply to the IRS.

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Facts

During 2012, the taxpayer, a single individual, performed some work for which he was eventually sent a Form W-2.  But he did not timely file a return for 2012 until sometime in 2016. 

The taxpayer says he filed an original Form 1040-EZ before he got a copy of the Form W-2.  The original return showed no tax liability for the year, but sought refund of (1) $446 that the taxpayer claimed had been withheld as income taxes from his wages and (2) an EITC of $475.  The taxpayer was incarcerated in 2016 and claims that he handed his original 2012 return to prison authorities for mailing on March 25, 2016 – within the 3-year lookback period of section 6511(b).  (Since it was an original return containing a claim, the return would have been timely under the 3-year look-forward rule of section 6511(a), so the issue is whether the 3-year lookback rule of section 6511(b) regarding the amount of taxes paid has been satisfied.)

The taxpayer says that in late April 2016, he first obtained a copy of the Form W-2 for 2012 and only then learned that no income tax withholding had been done on his wages.  He prepared an amended return, therefore, removing the portion of the prior claim for withheld income taxes.  The amended return still sought an EITC refund of $475.  The taxpayer handed this amended return to prison authorities for mailing on April 21, 2016.

The IRS says that it never received the original return, but on April 30, 2016, it received the amended return and filed it as of that date.  The IRS denied the claim as untimely.

The taxpayer brought suit on the $475 refund claim in the district court for the Northern District of Florida.  The DOJ moved for summary judgment that the amount of the claim was limited under section 6511(b) to $0.  The taxpayer cross-moved for summary judgment, arguing that the claim should be deemed filed on March 25, 2016.  The taxpayer supported his motion with an unsigned note purportedly from “Classification Counselor Mrs. Doll.” In that unsigned note, Mrs. Doll stated that “[o]n 3/25/16 Mailroom Staff Ms. Bailey sealed, timestamped and post-dated the 2012 tax return. This is logged in the legal/privileged mail log.”   The taxpayer also submitted a copy of his original return, his amended return, and affidavits of inmates who helped or observed him preparing his 2012 tax return.  The taxpayer did not, however, submit the envelope in which the original return was mailed or any proof of its mailing by registered or certified mail.

Holdings

The magistrate’s opinion that was later adopted by the district court judge begins by taking the position that a timely-filed refund claim is necessary to the district court’s jurisdiction, citing United States v. Dalm, 494 U.S. 596, 609 (1990).  As an aside, Keith and I have been arguing recently that Dalm is no longer good law on these points – that under more recent Supreme Court case law, both the filing of an administrative claim (required by section 7422(a)) and its timely filing (required by section 6511(a)) are merely mandatory claims processing rules not going to the court’s jurisdiction.  See Gillespie v. United States, 670 Fed. Appx. 393, 395 (7th Cir. 2016) (not deciding issue, but noting that current Supreme Court case law on the distinction between subject matter jurisdiction and mere claims processing rules “may cast doubt on the line of cases suggesting that § 7422(a) is jurisdictional”, including Dalm.).

Without discussion, the magistrate’s opinion then mentions the further tax amount paid look-back requirements of section 6511(b) and overall treats compliance with that subsection as a nonjurisdictional matter.  As another aside, most courts today, without noting it, still treat compliance with section 6511(b) as a jurisdictional matter.  However, the Federal Circuit has held that the issue of how much tax was paid during the lookback period of section 6511(b) is not jurisdictional.  See Boeri v. United States, 724 F.3d 1367, 1369 (Fed. Cir. 2013), on which Stephen blogged here.  So, the magistrate in Whitaker unknowingly aligns himself with the Federal Circuit.  By moving for summary judgment, the parties also seem to align with the Federal Circuit, since, if compliance with section 6511(b) is jurisdictional, the DOJ should, instead, have moved to dismiss for lack of jurisdiction under FRCP 12(b)(1).  It is odd, though, that sometimes in the opinion, the magistrate seems to equate compliance with section 6511(b)’s payment rules as also jurisdictional, but yet grants the DOJ summary judgment that he refund is limited to $0 – a merits holding.

Third, in applying the lookback rules of section 6511(b), the court is supposed to look at how much tax was “paid” in the 3-year period before the claim was filed.  The statute limits the refund to those taxes paid within the lookback period.  But, Whitaker’s claim is now solely predicated on the EITC, which, of course, he never actually “paid”.  Over a decade ago, while the director of the tax clinic of the University of Connecticut, now-Tax-Court-Special-Trial-Judge Leyden argued to the Second Circuit that there is no time limitation under section 6511(b) on EITC claims because they were never “paid” by the taxpayer.  In Israel v. United States, 356 F.3d 221, 225 (2d Cir. 2004), the court held that the EITC should be treated as “deemed paid” by the taxpayer on the April 15 following the end of the tax year, just like withholding and estimated taxes under section 6513(b)(1) and (2) are treated as paid on that date.  The magistrate in Whitaker cites and applies Israel.  Thus, he deems the EITC “paid” on April 15, 2013, so the amount of the claim allowable is limited to $0 if the claim was filed after April 15, 2016.  Aside:  I wonder why no one has ever litigated the Israel issue in any other Circuit?  As I see it, the Israel opinion’s reasoning is something like “ipse dixit”.

The magistrate in Whitaker then notes that section 7502(a) provides a timely-mailing-is-timely-filing rule for, among other things, refund claims.  But, that rule doesn’t benefit Whitaker, since it only extends the filing date when there is a postmark on the envelope that shows the envelope was mailed on or before the last date to file.  There is no envelope in the record, let alone one bearing such a postmark.  The court also notes the special rule under section 7502(c) that could deem evidence of the date of mailing by registered or certified mail as the date of the postmark under subsection (a), but there is also no evidence in the record as to registered or certified mailing of an envelope.

Next, the magistrate considers the possibility that the common law mailbox rule (allowing for parol and other extrinsic evidence of mailing) has not been eliminated by section 7502 or the regulations thereunder.  The court notes the existing split among the Circuits about whether the common law mailbox rule survived the enactment of section 7502 and the recent ruling of the Ninth Circuit in Baldwin v. United States, 921 F.3d 836 (9th Cir. 2019), that regulations under section 7502 have abrogated all case law holding that the common law mailbox rule still survives the enactment of section 7502.  We blogged on Baldwin and that case law split here.  As an aside (boy, am I abusing the privilege of asides), the Baldwins filed a petition for certiorari on September 23, 2019 at Supreme Court Docket No. 19-402, a copy of which can be found here.  In the petition, they argue that the Court should revisit the correctness of its opinion in National Cable & Telecomms. Assn. v. Band X Internet Services, 545 U.S. 967 (2005), where it held that regulations may overrule preexisting case law where the case law was not predicated on the court holding the statute’s language unambiguous.  In the alternative, the petition argues for Brand X to be limited so as not to permit regulations that overrule common law case law like the mailbox rule.

The district court in Whitaker is located in the Eleventh Circuit, which has not taken a precedential position regarding the continued existence of the common law mailbox rule since the passage of section 7502 or the enactment of the regulations thereunder.  However, the magistrate notes that the Fifth Circuit in Drake v. Commissioner, 554 F.2d 736, 738-39 (5th Cir. 1977), held the common law mailbox rule to no longer exist after section 7502.  Since that opinion was issued before the Eleventh Circuit was carved out of the Fifth Circuit in 1981, Drake is thus binding precedent on district courts in the Eleventh Circuit under Bonner v. City of Prichard, 661 F.2d 1206, 1209-10 (11th Cir. 1981), and the common law mailbox rule proof offered by Whitaker can be of no use to him.

Next, and most novel, the magistrate considers whether the “prison mailbox rule” applies to assist Whitaker.  The court apparently finds no case law on whether the prison mailbox rule can apply to tax refund claims.  In the following passage, the magistrate declines to extend the prison mailbox rule to tax refund claims:

The Supreme Court created the prison mailbox rule when it held that — for purposes of Rule 4(a)(1) of the Federal Rules of Appellate Procedure — a notice of appeal that a pro se prisoner sought to file in a federal court of appeals should be considered filed on the date the prisoner delivered it “to the prison authorities for forwarding to the court clerk.” Houston v. Lack, 487 U.S. 266, 275, 108 S. Ct. 2379, 2385 (1988); Daker v. Comm’r, Ga. Dep’t of Corrs., 820 F.3d 1278, 1286 (11th Cir. 2016). In reaching its decision, the Court reasoned that the word “filed” was ambiguous insofar as neither Rule 4(a)(1) nor the applicable statute set “forth criteria for determining the moment at which . . . ‘filing’ has occurred.” Houston at 272-76, 108 S. Ct. 2383-85; Bonilla v. United States Dep’t of Justice, 535 F. App’x 891, 893 (11th Cir. 2013). Additionally, in creating the prison mailbox rule, the Supreme Court never stated that the rule applies to every document a prisoner seeks to mail. Rather, the rule announced by the Supreme Court applied only to notices of appeal submitted to federal courts of appeals, and was subsequently codified consistent with that limitation. See Fed. R. App. P. 4(c).


Other courts expanded the rule announced in Houston v. Lack to apply the prison mailbox rule to other court filings. See Edwards v. United States, 266 F.3d 756, 758 (7th Cir. 2001) (per curiam) (noting that courts expanded the prison mailbox rule to include many other types of court filings). This expansion was codified to apply to appellate documents and habeas petitions filed with federal courts. See Fed. R. App. P. 25(a)(2)(A)(iii); Fed. R. Bankr. P. 8002(c); Rules Governing Section 2254 Proceedings For the United States District Courts, Rule 3(d); Rules Governing Section 2255 Proceedings For the United States District Courts, Rule 3(d).
Consistent with its historical roots, in the Eleventh Circuit, the prison mailbox rule is limited to filings made to courts. See Williams v. McNeil, 557 F.3d 1287, 1290 n.2 (11th Cir. 2009) (“Under the ‘prison mailbox rule,’ a pro se prisoner’s court filing is deemed filed on the date it is delivered to prison authorities for mailing.”) (emphasis added); Garvey v. Vaughn, 993 F.2d 776, 783 (11th Cir. 1993) (holding that the prison mailbox rule announced in Houston applies to pro se prisoners seeking to file in federal courts complaints under 42 U.S.C. § 1983 and the Federal Tort Claims Act) (emphasis added). Plaintiff has not cited any authority demonstrating that the prison mailbox rule applies to tax returns submitted to prison officials for mailing to the IRS.


Furthermore, the Supreme Court’s holding in Fex v. Michigan strongly suggests that the prison mailbox rule does not apply generally to all documents a prisoner seeks to mail to government entities. 507 U.S. 43, 47, 113 S. Ct. 1085, 1089 (1993). In that case, the prisoner sought to apply the prison mailbox rule to a request for disposition under the Interstate Agreement on Detainers that he had provided to prison officials to mail. Fex, 507 U.S. at 46, 113 S. Ct. at 1088. In determining the date the document was “caused to be delivered,” the Supreme Court did not apply the prison mailbox rule and instead held that the document was “caused to be delivered” on the date the prosecutor’s office and court received the request, and not on the date the inmate gave the request to prison officials for mailing. Fex, 507 U.S. at 47, 113 S. Ct. at 1089.


Other courts have noted that “the prison mailbox rule does not apply when there is a ‘specific statutory or regulatory regime’ governing the filing at issue.” Crook v. Comm’r of Internal Revenue Serv., 173 F. App’x 653, 656 (10th Cir. 2006) (quoting Longenette v. Krusing, 322 F.3d 758, 763 (3d Cir. 2003)); Smith v. Conner, 250 F.3d 277, 277, 279 (5th Cir. 2001); Nigro v. Sullivan, 40 F.3d 990, 994-95 (9th Cir. 1994). More specifically, when the particular statute defines the term “filing” or “filed” — as § 7502 essentially does — courts have seen no reason to usurp a statutory or regulatory definition by resorting to the prison mailbox rule. See Crook, 173 F. App’x at 656 (interpreting the word “filed” defined in Section 7502(a)(1) of the Internal Revenue Code); Smith, 250 F.3d at 279 (holding that the court “shall resort to Houston if the rule does not clearly define filing” and in all other cases the court “will enforce the regulations as written”); Nigro, 40 F.3d at 994 (noting that the prison-mailbox rule did not apply because the administrative regulations defined the word “filed” as “when the receipt is issued.”).  [Emphasis in original.]

Finally, Whitaker had argued that the government should be estopped from arguing for the section 6511(b) limitation in this case. It is well-settled that jurisdictional conditions are not subject to estoppel (just like they are not subject to waiver, forfeiture or equitable tolling).  Dolan v. United States, 560 U.S. 605, 610 (2010).  Since the magistrate appears not to treat section 6511(b) compliance as jurisdictional, this presents him with the question of whether estoppel could apply to the assertion that section 6511(b)’s conditions were not met. The magistrate states:

Plaintiff asserts that Defendant should be estopped from invoking § 6511’s three-year deadline because the IRS sent him a disallowance letter — dated and sent to Plaintiff on May 5, 2017 — in which the IRS incorrectly stated that May 15, 2016, was Plaintiff’s (already expired) deadline to file his claim for 2012 taxes. (Doc. 56-13 at 2). Plaintiff intimates that he relied on this letter (Doc. 56-13), even though the IRS issued this letter on May 5, 2017, more than a year after the deadline to file his return had expired (April 15, 2016), and long after the date Plaintiff claims that he sent his initial 2012 tax return to the IRS (March 25, 2016).


“The question of whether equitable estoppel is ever available against the federal government is unresolved,” but it is clear that the party asserting estoppel against the government has a heavy burden. Ferry v. Hayden, 954 F.2d 658, 661 (11th Cir. 1992) (citing Heckler v. Cmty. Health Servs., 467 U.S. 51, 61, 104 S. Ct. 2218, 2224 (1984)).  [footnote and some citations omitted; emphasis in original]

The magistrate does not decide whether estoppel could ever apply to section 6511, but details exhaustively why the facts alleged by Whitaker could not give rise to estoppel in any event.

Observations

I wonder if Whitaker will appeal his loss to the Eleventh Circuit?  The case only involves $475 plus interest from March or April of 2016 to date. 

Whitaker proceeded pro se in the district court and got the district court $350 filing fee put on an installment agreement so he could proceed in forma pauperis.  He is obligated to pay 20% of his income out of his “inmate account” towards the full $350 fee, over time.  He has so far paid $139.66 towards the fee.  Could he get the $505 appellate filing fee waived? 

Does anyone admitted to the Eleventh Circuit want to represent him?  (He appears to be quite the prison litigator, having filed numerous papers in the district court citing case law.)  In his motion for summary judgment, he argued for the application of the common law mailbox rule and estoppel.  In order for him to prevail in the Eleventh Circuit on the mailbox rule, he would need an en banc panel that decided to no longer follow the Fifth Circuit’s controlling Drake opinion holding that the common law mailbox rule has been supplanted by section 7502.  That is pretty unlikely.  And the Supreme Court in Baldwin is not being asked to resolve that Circuit split about the common law mailbox rule – merely to hold that the regulation under section 7502 doesn’t overrule any Circuit Court that has already held that the common law mailbox rule still applies after section 7502.  So, a taxpayer victory in Baldwin won’t be enough help Whitaker.

Whitaker’s case might have been a good litigating vehicle for the Israel issue of whether the section 6511(b) limits apply at all to EITC claims.  If section 6511(b) doesn’t apply, then all the issues decided by the magistrate on whether Whitaker mailed too late go by the wayside as irrelevant.  But, I have read Whitaker’s motion for summary judgment, and he doesn’t argue that section 6511(b) doesn’t limit EITC claims. It appears he has waived that Israel issue.  Too bad.

The EITC Ban – Further Thoughts, Part Three

Guest blogger Bob Probasco returns with the third and final post on the ban for recklessly or fraudulently claiming refundable credits. Part Three tackles the ban process.

The first two parts of this series (here and here) addressed judicial review of the EITC ban. The National Taxpayer Advocate’s Special Report on the EITC also made several recommendations about improvements during the Exam stage. The report is very persuasive (go read it if you haven’t already). In Part One, I quoted Nina’s preface to the report, which says that she is “hopeful that it will lead to a serious conversation about how to advance the twin goals of increasing the participation rate of eligible taxpayers and reducing overclaims by ineligible taxpayers.” Part Three is my small contribution to the conversation, concerning the ban determination process.

About that “disregard of rules and regulations” standard

The ban provision refers to a final determination that the taxpayer’s claim of credit was due to “reckless or intentional disregard of rules and regulations.” This standard seems to have been imported from section 6662, although there it covers not only reckless or intentional disregard but also negligent disregard. It seems a strange standard in this context, though.

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The accuracy-related penalty regulations, § 1.6662-3(b)(1), state that disregard of rules and regulations is not negligent, let alone reckless or intentional, if there is a reasonable basis for the return position. But the definition of reasonable basis, § 1.6662-3(b)(3), cross-references the types of authority, § 1.6662-4(d)(3)(iii), applicable to determining whether there was substantial authority for a return position. And those are legal authorities. Arguably, the “disregard of rules and regulations” standard – for the EITC ban as well as the accuracy-related penalty – carries with it an unexamined implication that the facts are known and indisputable; only the application of the law to those facts is at issue.

Such a standard may make a lot of sense with respect to the accuracy-related penalty, at least for sophisticated taxpayers with good records. Those of us who deal a lot with low-income taxpayers and the EITC, however, know that often the credit is disallowed because the taxpayer’s proof is not considered sufficient. It’s a factual dispute, rather than a dispute as to what the law means.

Osteen v. Commissioner, 62 F.3d 356 (11th Cir. 1995) has some interesting discussion of this distinction in the context of the substantial understatement penalty. The very first sentence of the case mentions “certain tax deductions attributable to their farming and horse breeding operations,” so we know that section 183 is going to be the focus. The taxpayers, both of whom were employed full-time, were breeding and raising Percheron horses with the expressed intent to train them, show them, use them to operate a horse-powered farm, and then sell them. The Tax Court opinion, 66 T.C.M. 1237 (1993), determined that the taxpayers did not have “an actual and honest objective of making a profit,” and the Eleventh Circuit concluded that the court’s determination was not clearly erroneous.

The penalty discussion took much longer than the analysis of the profit objective issue. The Tax Court had rejected the petitioners’ penalty defense, which was based on substantial authority, and that puzzled the Eleventh Circuit:

The application of a substantial authority test is confusing in a case of this kind. If the horse breeding enterprise was carried on for profit, all of the deductions claimed by the Osteens would be allowed. There is no authority to the contrary. If the enterprise was not for profit, none of the deductions would be allowed. There is no authority to the contrary. Nobody argues, however, not even the Government, that because the taxpayers lose on the factual issue, they also must lose on what would seem to be a legal issue.

The court reversed on the penalty issue and said that “substantial authority” for a factual issue is met if a decision in the taxpayers’ favor would not have been clearly erroneous:

If the Tax Court was deciding that there was no substantial authority because of the weakness of the taxpayers’ evidence to establish a profit motive, we reverse because a review of the record reveals there was evidence both ways. In our judgment, under the clearly erroneous standard of review, the Tax Court would be due to be affirmed even if it had decided this case for the taxpayers. With that state of the record, there is substantial authority from a factual standpoint for the taxpayer’s position. Only if there was a record upon which the Government could obtain a reversal under the clearly erroneous standard could it be argued that from an evidentiary standpoint, there was not substantial authority for the taxpayer’s position.
 
If the Tax Court was deciding there was not substantial legal authority for the deductions, we reverse because of the plethora of cases in which the Tax Court has found a profit motive in the horse breeding activities of taxpayers that were similar to those at hand.

For those interested in the “factual issue versus legal authority” question, there was also an interesting article by Bryan Skarlatos in the June-July 2012 issue of the Journal of Tax Practice & Procedure: “The Problem With the Substantial Authority Standard as Applied to Factual Issues.”

This is not directly applicable to the EITC ban but a similar approach seems reasonable. A determination in Exam to disallow the EITC often merely means “the taxpayer didn’t prove that she met the requirements,” rather than “the taxpayer didn’t meet the requirements.” But I suspect that some or many of those who make the ban determination proceed with an assumption, implicit if not explicit, that the former is the equivalent of the latter. If the taxpayer doesn’t meet her burden of proof, that may suffice for denying the credit in the conduct year but may not be enough to impose the ban for future years.

For example, one of the three scenarios in IRM 4.19.14.7.1 (7), used as a starting point to help determine whether the ban is appropriate, addresses situations in which the taxpayer provided insufficient documentation but “indicates they clearly feel they are eligible, and is attempting to prove eligibility and it is clear they do not understand.” In those circumstances, the technician is supposed to “[c]onsider the taxpayer’s lack of understanding” before asserting the ban. There is no reference to the relative strength or weakness of the support offered. That formulation strongly supports an assumption by the technician that (understanding the rules + insufficient documentation), rather than (understanding the rules + not meeting the requirements), is sufficient to assert the ban. If so, that’s a problem.

Recommendations for a revised ban recommendation process

The Office of Chief Counsel issued Significant Service Center Advice in 2002 (SCA 200245051), concluding that neither the taxpayer’s failure to respond to the audit nor a response that fails to provide adequate substantiation is enough by itself to be considered reckless or intentional disregard of rules and regulations. That conclusion is also set forth in IRM 4.19.14.7.1 (1): “A variety of facts must be considered by the CET [correspondence examination technician] in determining whether the 2-Year Ban should be imposed. A taxpayer’s failure to respond adequately or not respond at all does not in itself indicate that the taxpayer recklessly or intentionally disregarded the rules and regulations.”

But, as the Special Report points out, the guidance in IRM 4.19.14.7.1 (7) is erroneous and/or woefully inadequate for the CET’s. And research described in the National Taxpayer Advocate’s 2013 Annual Report to Congress showed an incredibly high error rate in the ban determination. The Special Report recommends that the IRS develop a ban examination process independent from the audit process, modeled on other means-tested programs, to improve accuracy and provide adequate due process protections. The report also mentions several recommendations from earlier annual reports. For example, in the 2014 Annual Report to Congress, the NTA recommended (again) that a single IRS employee be assigned to work any EITC audit in which the taxpayer calls or writes to respond.

The Special Report didn’t, and couldn’t, define the appropriate process in depth. That is something that the IRS, in consultation with TAS, will have to develop, and it may take a significant amount of time. But while we’re waiting for that, here are suggestions for some specific parts of a revised process that would be on my wish list.

First, the ban determination process should incorporate the concept of the strength of evidence for and against eligibility. The ban should be asserted only when the evidence against eligibility is significantly stronger than evidence for eligibility. The inability to provide evidence for eligibility is not equivalent to deemed evidence against eligibility. And some types of evidence against eligibility will be stronger or weaker than other types.

Second, the process for determining eligibility for the credit should expand the types of evidence that can be submitted and considered, which in turn will affect the relative strength of evidence to be considered during the ban determination phase. The standard audit request and the IRM 4.19.14-1 list focus on third-party documents. Third-party documents are strong evidence but they’re not the only evidence; they’re just the only evidence Exam seems to accept. The IRS experimented with allowing third-party affidavits in test cases from 2010-2013. Starting with tax year 2018, taxpayers can submit third-party affidavits (signed by both the taxpayer and the third party) to verify the residency of qualifying children (IRM 4.19.14.8.3). Why not for other aspects of the eligibility determination? Why not talk directly with the taxpayer and assess credibility?

This is a pet peeve of mine. It’s frustrating to receive a notice of deficiency (because the technician did not accept other types of evidence) and then get a full concession by the government in Tax Court (because the IRS attorney understands the validity of testimony as evidence). I like getting the right result but would prefer to avoid the need to go to Tax Court, delaying the resolution. As the Special Report points out, the IRS cannot properly determine whether to assert the ban without talking to the taxpayer. If a technician/examiner is talking to the taxpayer for that, and assessing their understanding of the rules and regulations, why not also accept verbal testimony (or statements by neighbors and relatives) and evaluate credibility, to accurately evaluate the strength of the evidence for eligibility and therefore the propriety of imposing the ban?

Conclusion

The Special Report would, if its recommendations were implemented, transform a critically important benefit to low-income taxpayers. Nina, Les, and the rest of the team did a fantastic job. It will be a long, hard fight to achieve that transformation but it will be worth it.

The EITC Ban – Further Thoughts, Part Two

Guest blogger Bob Probasco returns with the second of a three-part post on the ban for recklessly or fraudulently claiming refundable credits. In today’s post Bob looks at legislative solutions to the issue of Tax Court jurisdiction.

My last post summarized previous arguments by Les and Carl Smith that the Tax Court lacks jurisdiction to review the proposed imposition of the EITC ban and then examined what the Tax Court is actually doing.  Some cases have ruled on the ban, but some cases have expressed uneasiness about this area and have declined to rule at all.  Congress has clearly stated its intent that judicial review would be available, but it’s appropriate to clarify that by an explicit grant of jurisdiction – preferably in a deficiency proceeding for the year in which the alleged conduct – the taxpayer intentionally or recklessly disregarded rules and regulations – occurred.  The National Taxpayer Advocate’s Special Report on the EITC recommended that Congress provide an explicit grant of jurisdiction to the Tax Court to review the ban determination.  This post offers suggestions – some sparked by Tax Court decisions and/or previous posts here on PT – about exactly how that should be implemented.  The point at which recommendations turn into legislation is a danger zone where flawed solutions can create problems that take years to fix.

Grant Tax Court jurisdiction in a deficiency proceeding for the “conduct year,” not the “ban years”

Les explained the benefits of this approach in his “Problematic Penalty” blog post.  Ballard saw the “attractiveness,” as do I.  It’s even more attractive today.  Although challenging the ban in a proceeding with respect to the conduct year is a better solution, back in 2014 taxpayers at least would have the opportunity to challenge the ban in a proceeding with respect to the ban year. (The “conduct year” is the year for which the taxpayer recklessly or intentionally disregarded rules or regulations to improperly claim the EITC and the “ban year” is a subsequent year for which the taxpayer cannot claim the EITC.)  As Les pointed out, and the Office of Chief Counsel explained in 2002 guidance (SCA 200228021), summary assessment procedures were available for post-ban years (for failure to re-certify) but the IRS would have to issue a notice of deficiency to disallow EITC in a ban year.  But since then, summary assessment authority for the ban years was added by the PATH Act of 2015, in section 6213(g)(2)(K), and the IRS is using it.  There is still an opportunity for judicial review after a summary assessment, but that opportunity has a lot of problems, as described in the Special Report.

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The Special Report, Part IV, also recommends changes in summary assessment authority, under which some adjustments are not subject to the deficiency procedures, for an initial determination in the conduct year that the taxpayer is not entitled to the EITC.  Although I’m not entirely sure, I think the report is not recommending any change to the summary assessment authority under section 6213(g)(2)(K) for automatic disallowances in the ban year.  That’s understandable, as normally the correct application of the ban will be straight-forward and not require a separate examination in the ban year.  But there may some instances where the ban shouldn’t be applied automatically.  I’ll return to that below in the discussion of the application of the determination in the ban year.

Require that the proposed ban be set forth in a notice of deficiency for the conduct year

Of course, judicial review will be difficult if not impossible unless imposition of the ban is explicitly asserted and at issue in a case for the conduct year.  In all seven of the Tax Court cases discussed in my last post, the ban was explicitly asserted in an amended answer (Taylor) or the NOD itself (the other cases).  But that doesn’t always happen.

Carl Smith mentioned, in comments to the “Ballard” blog post, seeing a lot of cases where the ban was imposed by letter (presumably Notice CP79) rather than NOD.  I’ll quote his final sentence:

I wonder why some 32(k) sanctions are imposed by a simple letter and others (though apparently very few) are imposed in notices of deficiency.

My answer might be along the lines of: “Because the IRS thinks it can do that, unless Congress explicitly says otherwise, and it’s easier.”  My experiences with the EITC ban have made me more cynical.

My experience is consistent with Carl’s.  In just the past couple of years, my clinic has had four cases in which the IRS imposed the ban and issued Notice CP79.  Only one of the NOD’s explicitly stated the intent to impose the EITC ban.  In the other three cases, there was no indication whatsoever. 

In fact, in one case, there was an indication that an examiner had decided not to impose the ban.  After the NOD was issued, the taxpayer provided additional information and received a response from the IRS declining to change the proposed tax increase.  The letter included Form 886-A Explanation of Items that, again, did not propose the ban.  It also included a separate attachment, explaining why the additional information provided was insufficient.  That attachment stated at one point (emphasis added):

For future reference on the EITC BAN (Earned Income Tax Credit Ban) – The ban was considered.  If you continue to claim XXXXXXX for the credit and disallowed for no relationship, you could be subject to a 2-year earned income tax ban if you are found reckless and intentionally disregard the tax laws, rules and regulations.  You must meet the relationship test, residency test, age test and support test to be eligible for the credits.

That certainly sounds as though the determination required for the ban had not been made when the NOD was issued.  Nevertheless, when the taxpayer failed to file a petition timely, the IRS imposed the ban.

Given all the evidence that the IRS is asserting the ban without ever mentioning it in a notice of deficiency, the grant of jurisdiction to the Tax Court should be carefully crafted.  It should include not just jurisdiction to review the determination but also incorporate safeguards like those found in Section 6213(a) for tax assessments:

  • The determination required by section 32(k) is not a final determination until: (a) a notice of deficiency setting forth the determination has been properly mailed to the taxpayer; and (b) the expiration of the 90-day or 150-day period or, if a petition is filed in Tax Court, the decision of the Tax Court has become final.
  • Any disallowance of the credit in subsequent years based on the ban, before the determination is final, can be enjoined by a court proceeding, including in the Tax Court, despite the Anti-Injunction Act.

Applying the ban in the ban year

The cases I discussed in the last post suggested some specific issues that may need to be addressed when legislation is drafted to grant Tax Court jurisdiction to review the ban.  The first is obvious and fairly straight-forward.  Congress may need to modify section 7463(b) to specify that the determination in a small case with respect to the ban will be treated as binding for a proceeding in a future ban year.

How do we address the problem (discussed in Ballard and Griffin) that the court may not know yet whether the ban even had an effect in the ban years, because (for example) the taxpayer may not yet have filed returns claiming the credit for those years?  I don’t consider this concern an insurmountable obstacle.  Consider an analogy to the TEFRA partnership rules.  Under those rules, the court makes a redetermination of proposed adjustments on one return (the partnership’s).  The effect of that adjustment on other returns (the partners’) is authorized by provisions for computational adjustments.  The redetermination might turn out to have no effect on the partners’ returns, but the court doesn’t have to consider that in making its ruling in the partnership proceeding.

Currently, any credit claimed in the ban years can be disallowed automatically through the summary assessment authority in section 6213(g)(2)(K).  I don’t like that solution and think that instead Congress and/or the IRS should consider an approach similar to that in TEFRA: providing for some assessments without requiring a notice of deficiency in the ban year, but in other circumstances requiring a notice of deficiency because new fact determinations are needed.

Why might new fact determinations be needed?  Primarily because some exceptions or limitations should be carved out.  An all-or-nothing approach simply doesn’t make sense all the time.  What if:

A. The credit was reduced, but not disallowed, because some of the taxpayer’s earned income was disallowed.

B. The credit was claimed for 3 children and was only disallowed with respect to one.

C. The credit was disallowed because Husband’s earned income could not be verified.  Husband later married Wife, who has earned income and children from a previous marriage, and filed a joint return.  (See page 48 of the Special Report.)

Should we consider for future years, in situations like those: (A) allowing the credit but solely with respect to the taxpayer’s earned income from a Form W-2; (B) allowing the credit solely with respect to the children who qualified in the conduct year; or (C) allowing the credit but solely with respect to Wife’s earned income and qualifying children?

Lopez (situation A) suggested that there might be an exception for a partial disallowance:

It would appear that our findings will result in the reduction of petitioner’s claimed earned income tax credit for each year, but we expect that the credit will not be entirely disallowed for either year.  Consequently, we make no comment in this proceeding regarding the application of section 32(k).

A recent CCA (situation B) mentioned in Les’s blog post, however, concluded that partial disallowance was enough to trigger the ban.  The CCA’s reasoning was that section 32(k) doesn’t prohibit imposition of the ban for partial disallowances; thus, any disallowance is enough to trigger the ban.  “Disallowance” is not explicitly restricted to “total disallowance.”

Fair enough, but that doesn’t seem to be how Lopez interpreted the statute.  I don’t think it is entirely clear under current law.  Section 32(k) doesn’t refer to a disallowance (without explicitly specifying “total”) in the conduct year; it refers to the taxpayer’s “claim of credit” due to disregard of rules and regulations.  If the taxpayer could not legitimately claim any credit at all, that could meet the requirement (if done intentionally or recklessly).  In Lopez, was the “claim of credit” contrary to rules and regulations?  Or was the “claim of [at least some amount of] credit” consistent with rules and regulations but the amount excessive?  Lopez suggests the latter.  Does the answer depend on the reason for the excessive amount?  These questions deserve more thought.  The conclusion in the CCA may not be the best answer.

Another wrinkle came up in Griffin.  The court found the taxpayer was not entitled to EITC at all for 2013 because the taxpayer did not establish that any of the claimed dependents met the necessary tests.  However, the court found the taxpayer might be entitled to EITC for 2014, subject to applicable AGI limitations and thresholds after adjustments, because one of the two dependents claimed as qualifying children did meet all of the tests.  Should the ban be imposed if the taxpayer is not entitled to the EITC at all for one year but is entitled to at least some EITC in another year included in the same NOD, particularly if it’s the latest year included in the NOD?

Even if the CCA above is correct, current law is not immutable.  Congress should consider carving out exceptions or limitations to the ban.  If it doesn’t, we can try to change the law by persuading a court concerning the proper interpretation of the statute.  If the law changes, either through Congress or a court decision, we may want to use a more nuanced approach, like that in TEFRA, rather than blanket summary assessment authority.

Conclusion

This finishes my discussion of judicial review.  Establishing robust judicial review with all the flourishes will provide significant protection to low-income taxpayers who claim the EITC.

Some protection but, given current IRS practices, not enough.  Not all cases even go to Tax Court, so our primary goal should be to reduce the need for judicial review by improving the ban determination process in Exam.  The Special Report offered several suggestions along those lines.  I have some additional thoughts, coming up in Part Three of this series.

The EITC Ban – Further Thoughts, Part One

Guest blogger Bob Probasco returns with the first of a three-part post on the ban for recklessly or fraudulently claiming refundable credits. In today’s post Bob looks at how the Tax Court has addressed the ban. Part Two will suggest legislative solutions to the issue of Tax Court jurisdiction. Part Three tackles the ban process.

As Bob mentions, in the recent Special Report to Congress on the EITC that I helped write, we flagged the ban as an issue that potentially jeopardizes taxpayer rights. The Senate Appropriations Committee in a committee report accompanying the IRS funding for FY 2020 directs the IRS to “make the elimination of improper payments an utmost priority.” S. Rep. No. 116-111, at 26-27. At the recent Refundable Credits Summit at the IRS National Office that I attended IRS executives explored ways to reduce overpayments (in addition to increasing participation and improving administration more generally). The ban is part of the IRS toolkit. As Bob highlights today, there are fundamental questions concerning the path that taxpayers can employ to get independent review of an IRS determination. Les

One of Nina Olson’s last acts as National Taxpayer Advocate was the release of the Fiscal Year 2020 Objectives Report to Congress.  Volume 3 was a Special Report on the EITC; Les discussed it in a recent post.  If you are interested in issues affecting low-income taxpayers, you’ve probably already read it.  It’s definitely worth your time.  Kudos to Nina and to Les and the rest of the team that worked on the Special Report.  There are a lot of innovative, creative suggestions, backed up by thorough research, that would not just improve but transform how the IRS administers this program.

Nina’s preface to the report says that she is “hopeful that it will lead to a serious conversation about how to advance the twin goals of increasing the participation rate of eligible taxpayers and reducing overclaims by ineligible taxpayers.”  In that spirt, I’d like to offer my small contribution to the conversation, with additional thoughts about some of their suggestions.  The entire Special Report is important, but after a client’s recent “close encounter of the worst kind” with the EITC ban of section 32(k)(1), I have a particular interest in Part V.  This post will address the need for judicial review and what the Tax Court is actually doing.  Part Two will provide some further thoughts about how the Tax Court’s jurisdiction (when clarified by Congress) should be structured.  Part Three will address suggested changes to the ban determination process.

Does the Tax Court have jurisdiction to review the imposition of the ban?

Congress clearly envisioned the opportunity for pre-payment judicial review.  According to the legislative history for the Taxpayer Relief Act of 1997, “[t]he determination of fraud or of reckless or intentional disregard of rules or regulations are (sic) made in a deficiency proceeding (which provides for judicial review).”  H. Conf. Rpt. 105-220, at 545.  But there is no jurisdictional statute that clearly and unequivocally covers this, at least not until the ban is actually imposed in a future year.

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The question of Tax Court jurisdiction has been discussed here on Procedurally Taxing several times: 

I will follow Les’s terminology and refer to the year in which the taxpayer recklessly or intentionally disregarded rules and regulations by claiming the EITC as the “conduct year,” and to the subsequent years in which the taxpayer is not allowed to claim the credit because of the ban as the “ban years.”

Les and Carl Smith advanced arguments, in the “Problematic Penalty” and “Ballard” blog posts, that the Tax Court does not have jurisdiction to review an EITC ban in a deficiency proceeding for the conduct year.  The Tax Court has jurisdiction to redetermine the amount of a deficiency stated in a notice of deficiency as well as accuracy-related penalties applicable to the understatement, but explicitly does not have jurisdiction to determine any overpayment or underpayment for other years.  Although the EITC ban looks somewhat like a “penalty,” it does not fall within the scope of penalties that are treated like taxes, which are limited to Chapter 68.  Ruling on whether the ban was valid, in a deficiency proceeding for the conduct year, would therefore be a declaratory judgement for which the court has no jurisdiction.  The ban years will only be subject to the court’s deficiency jurisdiction if/when a notice of deficiency is issued with respect to them.

What has the Tax Court actually been doing?

I’m persuaded by Les’s and Carl’s arguments.  The Tax Court may not be, though.  It has addressed the issue of the ban in seven cases to date: Campbell v. Commissioner (2011 decision concerning 2007-2009 tax years), Garcia v. Commissioner (2013 decision concerning 2008 tax year), Baker v. Commissioner (2014 decision concerning 2011 tax year), Ballard v. Commissioner (2016 decision concerning 2013 tax year), Lopez v. Commissioner (2017 decision concerning 2012-2013 tax years), Griffin v. Commissioner (2017 decision concerning 2013-2014 tax years), and Taylor v. Commissioner (2018 decision concerning 2013 tax year).  All were either summary opinions, bench opinions, or orders granting a decision for the government when the taxpayer did not participate.

I’m not going to go into a lot of detail here concerning the cases.  The PT blog posts above have already discussed Campbell (in the blog comments only),Garcia, Baker, Ballard, and Taylor – only Lopez and Griffin appear to be new here.  (The Lopez case was actually discussed here, but that was with respect to an earlier order dealing with a different issue.)  But I do want to summarize how the Tax Court responded to the issue, with a couple of additional observations.

Campbell and Taylor imposed the ban, when the taxpayers did not respond to a Motion to Dismiss for Lack of Prosecution and a Motion for Default Judgment respectively, without any discussion of jurisdiction to do so.  In addition to the jurisdictional issue, it’s noteworthy that there was – or could have been – evidence supporting a determination of intentional or reckless disregard of regulations.  In Taylor, as previously noted in William Schmidt’s blog post, the court granted a motion to deem Respondent’s allegations, including those relevant to civil fraud and the ban, as admitted when the Petitioners did not respond to the amended answer.  (Because the ban was apparently not proposed in the notice of deficiency but was instead asserted in the notice of deficiency, the government would have the burden of proof.)  In Campbell, Respondent filed a motion to show cause why statements in a proposed stipulation of facts should not be deemed admitted.  The court granted the motion, Petitioners did not respond, and the court could have deemed those statements (which presumably would have covered the ban) as admitted.  Instead, the court simply granted the motion to dismiss for lack of prosecution.

These decisions to impose the ban demonstrate an interesting quirk.  The Office of Chief Counsel issued Significant Service Center Advice in 2002 (SCA 200245051), concluding that neither the taxpayer’s failure to respond to the audit nor a response that fails to provide adequate substantiation is enough by itself to be considered reckless or intentional disregard of rules and regulations.  That conclusion is also set forth in IRM 4.19.14.7.1 (1): “A variety of facts must be considered by the CET [correspondence examination technician] in determining whether the 2-Year Ban should be imposed. A taxpayer’s failure to respond adequately or not respond at all does not in itself indicate that the taxpayer recklessly or intentionally disregarded the rules and regulations.”  In these cases, and assuming the taxpayers were equally uncooperative during the audit, arguably the IRS should never have asserted the ban.  But that’s during the audit.  If the IRS does assert the ban, challenging that in Tax Court (if the taxpayer remains uncooperative) opens the door for deemed admissions supporting the ban.  It’s better to cooperate.

Garcia and Baker disallowed the EITC but concluded that claiming the credit was not due to a reckless or intentional disregard of rules and regulations and therefore that the taxpayers were not subject to the ban for following years.  Reliance on a paid return preparer was significant for both decisions.  Neither case discussed the court’s jurisdiction to rule on the validity of the proposed ban.

Ballard and Griffin declined to rule on the ban.  Both made the same argument: there was no information in the record as to whether returns had been filed, and whether the EITC had even been claimed, for the ban years.  Further, both pointed out that any ruling in an S-case is not precedential in any other case.  It was questionable whether a ruling in a proceeding with respect to the conduct year would have any effect at all in the ban years.  Ballard seemed to suggest that this factor was the most critical:

Respondent made that determination for the year in dispute here, but the determination obviously has no consequence to the deficiency determined in the notice – the consequences of the determination take effect in years other than the year before us.  Normally, in a deficiency case the Court is reluctant to make findings or rulings that have no tax consequences in the period or periods presently before us.  Nevertheless, we can see the attractiveness in making the determination in the same year that the earned income credit is disallowed albeit on other grounds and we have addressed the issue in other non-precedential opinions, see
Section 7463(b).
 
In this case not only does the application of section 32(k) have no tax consequence to Petitioner’s Federal income tax liability for the year before us, the record does not reveal whether a finding or ruling on the point would have any Federal tax consequence in either 2014 or 2015.

The court “is reluctant,” rather than “has no jurisdiction,” and even that is qualified as “normally.”  The court’s concern may have been jurisdiction but the language in the opinion suggests that the court might have been willing to rule if the record included appropriate information about the future years.  As far as I know, though, Campbell, Taylor, Garcia, and Baker also did not have such information in the record.

Ballard did, however, rule that the petitioner (who relied on a paid return preparer) was not liable for an accuracy-related penalty for negligence.  That strongly suggested that the ban should not apply; if the taxpayer was not negligent with respect to erroneously claiming the EITC, how would the IRS demonstrate the higher culpability of “reckless or intentional”?

Lopez also declined to rule on the ban, for a slightly different stated reason.  The IRS had disallowed the total gross receipts reported on Schedule C, eliminating the earned income required for claiming EITC.  The court allowed gross receipts in an amount less than the taxpayer had claimed.  With respect to the ban, it said:  “It would appear that our findings will result in the reduction of petitioner’s claimed earned income tax credit for each year, but we expect that the credit will not be entirely disallowed for either year.  Consequently, we make no comment in this proceeding regarding the application of section 32(k).”

Thus, in four cases the court ruled on the ban – two upholding it and two rejecting it – apparently without considering the jurisdictional issue.  Although Ballard, Griffin, and Lopez all declined to rule on the ban, none of them simply stated that the court had no jurisdiction with respect to the proposed ban.  Ballard and Griffin pointed out that a decision would not be precedential in an S-case.  The court, however, explained the primary justification not as lack of jurisdiction but what appears to be more like a concern about ripeness.  Lopez, on the other hand, did not mention that a summary opinion has no precedential effect for any other case.  Although far from clear, that decision sounds as though it assumed an implicit requirement for the ban – that it applies only when the credit was improperly claimed, not when it was properly claimed but in an excessive amount.  (I’ll return to that point in my next post.)

Despite the court (sometimes) being willing to rule on the issue, it would be better if the court’s jurisdiction to do so were firmly established.  The lack of explicit jurisdiction creates a serious problem.  What happens if the IRS asserts the ban in a notice of deficiency, the court disallows at least a portion of the EITC, but the court does not rule on the ban?  I suspect that the IRS will impose the ban in the future years.  It would be interesting to know what happened to Mr. Ballard, after the strong hint in the bench opinion. 

The taxpayer could still contest the validity of the ban in a deficiency proceeding for a ban year; that clearly would come within the scope of section 6214.  But the “Problematic Penalty” blog post pointed out pragmatic problems with that solution, which lead Les to conclude that it wouldn’t make sense from a policy perspective.  Since that blog post, an additional problem has arisen, making that solution even worse.  Summary assessment authority for the ban years was added by the PATH Act of 2015, in section 6213(g)(2)(K), and the IRS is using it.  Although the taxpayer still has an opportunity for judicial review after a summary assessment, the opportunity is less obvious than with a notice of deficiency and may be missed by unrepresented taxpayers.  It also comes with a shorter time to respond.

Thus, we are left with two alternatives for Tax Court review of the assertion of the ban.  Doing so in a deficiency proceeding for the conduct year is by far the best alternative and is consistent with Congress granting summary assessment authority for the ban years.  I suspect that is what Congress had in mind, but if so, it forgot to clearly grant jurisdiction.  Reviewing the assertion of the ban in a deficiency proceeding for a ban year has the advantage of fitting within the Tax Court’s existing jurisdiction but is a horrible solution for a number of reasons. 

Even if the court were willing to rely on the legislative history as implicit jurisdiction to address the ban in a deficiency proceeding for the conduct year, it would still be worthwhile to establish appropriate guidelines.  There are some obvious questions about exactly how the entire process should work.  Setting those guidelines proactively in legislation or regulation would also be helpful for the vast majority of these cases that never make it to Tax Court. 

The Special Report recommends a ban determination process independent of the audit process.  That is a great idea that would go a long way in solving some of the problems the report points out.  But for simplicity, and in case the IRS is reluctant to implement the Special Report’s recommendation, Part Two will discuss how Tax Court jurisdiction could be structured within the framework of a deficiency proceeding for the conduct year.