Revoking the Release of Federal Tax Lien

In Webb v. IRS, No. 1:17-cv-00058 (S.D. Ind. 2020) taxpayers get a sad lesson in the ability of the federal tax lien both to survive bankruptcy and to come back to life after release.  This is not a story of foreclosure, though that chapter may still be written, but rather a story first of what bankruptcy can and cannot do with respect to tax liens (and liens in general) and second of the power of federal tax lien revocation.  When the dust settles, the taxpayers come out of bankruptcy with their discharge, including a discharge of the federal taxes at issue, but with a home (and any other assets they have) still encumbered by the federal tax lien.

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In 2010 the IRS filed notices of federal tax lien (NFTLs) against the Webbs in the jurisdiction where they lived and owned a home.  In 2013 the Webbs jointly filed what must have been a chapter 7 bankruptcy petition.  On their schedules they listed all of their assets and liabilities including their home.  They must have claimed a homestead exemption for all or part of the equity in their home based on Indiana laws.  The exemption varies from state to state, and I did not go and look up the available exemption in Indiana.  On November 4, 2013, the bankruptcy court granted the Webbs a discharge.  The court doesn’t lay out the facts in a way that makes it easy for me to state the years for which the Webbs owed taxes when they filed their petition, but it seems that they owed for several years and that the years were fairly old making them susceptible to discharge.

After the bankruptcy discharge, on February 10, 2014, the IRS abated the tax liabilities and released the tax liens.  The discharge requires the IRS to not seek to collect from the taxpayers any discharged liabilities; however, it does not prevent the IRS from collecting liabilities from property to which its lien attaches.  Apparently, the IRS acted first to avoid violating the discharge injunction and they, two years later, came to the realization that the Webbs retained property after the discharge to which the federal tax liens attached.  After coming to that realization, the IRS needed to reverse the abatement of the taxes and revoke the release of the federal tax lien.  It reversed the abatement in 2016 and revoked the releases in 2017 to 2019.

People filing chapter 7 bankruptcy may spend little time with a lawyer discussing what precise debts will survive bankruptcy.  If they do have this discussion, it often does not include the distinction between discharging the personal liability on the underlying tax and the survival of the lien.  So, many debtors in the Webbs position would expect their tax liabilities to go away and when the IRS wipes away the liabilities immediately after bankruptcy, the action reinforces their expectations.

It is not surprising that the Webbs would react with shock and dismay as the IRS reverses the abatement of their tax liability and reinstates its liens.  Unfortunately, the IRS can do this and their arguments failed.

Discharge of Liens

The Webbs first argue that the IRS cannot reinstate the liens because the tax liabilities were discharged.  This argument fails and it should.  This argument does not make a distinction between the effect of the discharge on their personal liability for the tax debt versus the effect on the lien encumbering their property.  A bankruptcy discharge can wipe out a personal liability but does not affect a lien interest.  The court establishes that the IRS validly established the liens prior to bankruptcy and then describes the law regarding the survival of liens including tax liens.

Reversal of Abatement

The Webbs next argue that the IRS could not reverse the abatement of the assessments because the tax liabilities were discharged.  This argument also fails because the lien interest allows the assessment to survive (or to be reinstated.)  According to the court the IRS did not cite to cases that established this exact point, but it did find other cases regarding reversal of abatement that supported the IRS position.

Revoking the Lien Release

The IRS regularly releases liens it later regrets releasing.  The Webbs continue to argue that the IRS cannot revoke the release because of the effect of the discharge.  IRC 6325(f)(2) allows the IRS to revoke a release if it releases a lien “erroneously or improvidently.  Here, the IRS stated that it acted erroneously or improvidently in releasing the lien initially.  The court finds that the IRS followed the appropriate procedures in reinstating the lien.  Therefore, the court finds the refiling of the liens after the revocation of the release to properly reestablish the liens.

Limitations on Scope of Liens

When the IRS filed its claim in the chapter 7 case it claimed a secured amount of $12,357.00 and a general unsecured amount of $383,527.99.  I cannot say exactly why the IRS filed its claim with those amounts but it normally calculates the equity of its liens based on the statements in the debtor’s schedules.  The IRS does not perform a separate analysis of the value of the debtor’s property in filing its claim form.  Here, the Webbs’ argument is that if the court allows the IRS to reverse the abatement and reinstate its liens, the IRS can only assert a lien interest in the amount listed on its claim.

The court discusses the cases cited by the Webbs but not any cases the IRS might have cited.  It concludes that the IRS can pursue its lien claim in the amount of $395,884.99 the full amount of the lien.  This does not mean that the IRS will collect that amount.  The case does not provide enough information to allow speculation on the amount the IRS will ultimately collect on its lien claim but it could be much closer to $12K than $395K.  The IRS can only collect from assets in existence at the time of the bankruptcy filing.  It cannot collect from the Webbs personally.  Its lien claim does not come ahead of the first mortgage on the Webbs’ home. 

The lien claim probably matches the amount of the Indiana homestead exemptions plus whatever increases in value have occurred with respect to the assets the Webbs protected using their homestead exemption.  Not only does the discharge limit the IRS in the assets from which it can pursue to satisfy the debt but the discharge makes it difficult for the IRS in other ways.  It must make sure that in reinstating the assessment its computer does not offset subsequent refunds due to the Webbs.  In cases of this type the primary available asset of any value may be the Webbs home.  The IRS must now navigate the issues regarding administrative seizure and sale of a home or bring a suit to foreclose its lien on the home.  The IRS does not go after people’s homes that often though certainly it can do so.

The Webbs were right to want to prevent the reassessment of the liability and reattachment of liens but had little defense to this action, which can cruelly come after the victory party they may have held upon receipt of the discharge.  I expect that having gone this far the IRS will pursue collection from their home but that brings another case.  This case simply reestablished the liens.  It did not enforce them.

Latest Update on Providing Stimulus Payments to Incarcerated Individuals

A couple weeks ago I blogged about the significant victory achieved on behalf of prisoners with the grant of a preliminary injunction ordering the IRS to stop denying stimulus payments to incarcerated individuals.  As discussed previously, the denial of refunds to incarcerated individuals makes little sense when the statutory language provides no basis for excluding them.  The behavior of the IRS here allowing the payments and then deciding about six weeks after the passage of the CARES Act to exclude them also makes for a puzzling situation.  As discussed in the prior post, the judge swatted away all of the arguments made by DOJ in granting a complete victory for the incarcerated individuals.

The government appealed the case on October 1.

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On October 7, 2020, the Court issued its next ruling.  This time it focused on relief.  In its initial ruling the court asked the parties to confer and, if possible, propose agreed upon relief measures.  The parties did not reach agreement but proposed separate plans.  Once again the court did not find the DOJ argument availing. 

Website

The first issue concerned the information on the IRS website about incarcerated individuals.  The FAQ first published by the IRS in early May told incarcerated individuals they were ineligible for the stimulus payment.  The parties were not far apart on how to fix this but the IRS had not gone far enough so:

the court ORDERS defendants to update the IRS.gov website (and any other related page) to state that incarcerated individuals who have not received the advanced refund payment may provide information to the IRS to allow the IRS to consider the individual’s eligibility for the refund. The website shall indicate that individuals may file using the online non-filers tool or by mailing a simplified paper tax return to the IRS. Defendants shall update all FAQs and any other pages that discuss the eligibility of incarcerated individuals for an EIP to reflect the court’s order.

The court gave the IRS until October 8, 2020 to update its website and additionally provided:

Defendants shall also communicate to IRS employees or other federal employees who interact with the public to answer questions regarding EIP in accordance with the guidance posted on the IRS.gov website and the court’s orders.

I know the word is getting out, because we have received calls to the tax clinic from individuals seeking help for their incarcerated family or friends.  Similar messages have appeared elsewhere in LITC information site.

Communication with Prison Officials

Before the litigation the IRS had affirmatively gone out to prison officials to make it clear that incarcerated individuals should not receive the stimulus payments and to solicit their support in intercepting any stimulus payments headed to incarcerated individuals.  Reversing this message is needed not only to allow the incarcerated individuals to receive the checks but also to keep them from any disciplinary measures that might result from requesting the stimulus payment in the face of the IRS position regarding their entitlement prior to the litigation.  The parties again were not miles apart in their request, but the request made by the attorneys representing the incarcerated individuals contained significantly more detail, much of which the court adopted:

the court ORDERS defendants to distribute the following documents to all state and federal correctional facilities for which it maintains any communication channel: (1) a cover letter that includes2 the four main points addressed by plaintiffs in the proposed plan; (2) an electronic version of the simplified paper return (Form 1040/1040-SR) referred to in Rev. Proc. 2020-28 with instructions on how to complete the simplified form; and (3) legal notice, as described below.

The court did not order a specific date by which the this had to occur but ordered the parties to work together expeditiously.

Mailed Notice to Class Members

Here the parties had significant differences of opinion.  Plaintiffs’ lawyers pointed out that the IRS has a database of incarcerated individuals updated at least to October, 2019.  The IRS argued that it did not have current or last known addresses for individuals incarcerated earlier this year but how have been released.  The IRS also said:

in their opposition to plaintiffs’ motion for notice to class, defendants detailed significant obstacles to providing effective individualized notice including outdated addresses, unformatted and invalidated data, and incomplete data. Dkt. 56 at 7. Ordering the IRS to provide individualized notice would force the IRS to reallocate resources from its other commitments to disbursing advance refund payments for eligible individuals. Id. Finally, any mailed notice will not arrive in time to postmark a simplified paper return by October 15, 2020.

The Court accepted the IRS position that it did not have good addresses for everyone but ordered it to send individualized notices to everyone for whom it did have a good address by October 15, 2020.  That puts a lot of pressure on the IRS.  Of course, there is also a fair amount of pressure on the incarcerated individuals if they want to receive the stimulus payment in 2019.

Deadline to Submit Simplified Paper Returns

The IRS had already moved the deadline for seeking the stimulus payment through its portal from October 15 to November 21 but the deadline for paper returns remains at October 15.  Because of their location, incarcerated individuals will struggle to get to an online portal.  Plaintiff’s attorneys sought an ability to submit the request for the stimulus payments by paper at a later date.

The Court pointed to an IRS publication to community organizations extending the time to file by paper to October 30.  Here is a copy of that publication:

Based on the IRS granting to community organizations the deadline of October 30, the court granted to incarcerated individuals that deadline as well.  This is still a tight deadline but is feasible for many.  Of course, missing the deadline does not preclude individuals from obtaining the credit on their 2020 returns filed next year.  Since a high percentage of the incarcerated individuals do not have a return filing obligation, getting the stimulus payment through the submission of a form now provides greater relief.

As with the first order, the judge not only acted quickly but provided almost full relief for the incarcerated individuals.

Acting on the momentum of the earlier decisions, plaintiff’s attorneys filed a motion for summary judgment on September 29.  The government filed its response on October 7.  Plaintiffs filed a reply on October 9 and the Tax Clinic at the Legal Services Center of Harvard Law School filed an amicus brief on behalf of the Center for Taxpayer Rights in support of plaintiffs on that date.  Because the court has acted quickly in its prior decisions, this decision could occur very soon.

The government has not explained why it flip flopped regarding incarcerated individuals last spring (and regarding decedents).  In testimony last week, the Commissioner suggested to the House Committee before whom he was testifying that this was a question best asked of the Treasury Department.  Perhaps the IRS determination of the CARES Act was overruled by Treasury or some higher authority.  So far, this mystery remains unexplained.  Whoever in the government made the decision to flip flop on this issue in the face of very plain language in the statute is learning that at least the district court in the Northern District of California is not buying their interpretation.

Consistency and the Validity of Regulations

Guest contributor Monte Jackel discusses guaranteed payments and how differing regulations inconsistently approach whether such guaranteed payments are indebtedness. While the post highlights substantive technical issues it also flags a procedural issue: the difficulty in challenging tax regulations outside normal tax enforcement procedures. That procedural issue, present in the current teed up Supreme Court case CIC v Commissioner which is now set for oral argument on December 1, as Monte suggests and as I discussed last year in Is It Time To Reconsider When IRS Guidance Is Subject to Court Review?, may call for a legislative fix. Les

How can a guaranteed payment on capital under section 707(c) of the Internal Revenue Code be both an actual item of “indebtedness” if, but only if, there is a tax avoidance motive for purposes of section 163(j)’s limitation on business interest expense but only be “equivalent to” but not actually be indebtedness for purposes of the foreign tax credit? Well, if you are the IRS with the “pen in hand”, anything is possible.

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Section 163(j)(5) defines “business interest” for purposes of section 163(j) as “any interest paid or accrued on indebtedness properly allocable to a trade or business.” Thus, the key term here is “indebtedness”. More on that later. 

Similarly, income equivalent to interest is referenced in section 954(c)(1)(E) and in regulation §§1.861-9(b)(1) and 1.954-2(h)(2) and specifically refers to guaranteed payments on capital as equivalent to interest expense at regulation §1.861-9(b)(8). On the other hand, the very same guaranteed payment on capital is treated as actual interest expense under regulation §§1.469-2(e)(2)(iii) and 1.263A-9(c)(2)(iii). 

It is very hard to either see or to justify treating guaranteed payments on capital under section 707(c) as both actual interest expense or as equivalent to interest expense for purposes of different provisions of the Internal Revenue Code. Either a guaranteed payment represents interest on indebtedness under all provisions of the Internal Revenue Code or it does not, unless a specific provision of the Code expressly treats guaranteed payments on capital a certain way. Merely because a statute or implementing regulation treats a guaranteed payment on capital as equivalent to interest does not mean that it can be both actual indebtedness for some but not all provisions of the Code and as equivalent to but not actual interest on indebtedness for purposes of other provisions of the Code. 

The recently finalized foreign tax credit regulations, T.D. 9922, had this to say about the issue:

The Treasury Department and the IRS have determined that guaranteed payments for the use of capital share many of the characteristics of interest payments that a partnership would make to a lender and, therefore, should be treated as interest equivalents for purposes of allocating and apportioning deductions under §§1.861-8 through 1.861-14 and as income equivalent to interest under section 954(c)(1)(E). This treatment is consistent with other sections of the Code in which guaranteed payments for the use of capital are treated similarly to interest. See, for example, §§1.469-2(e)(2)(ii) and 1.263A-9(c)(2)(iii). In addition, the fact that a guaranteed payment for the use of capital may be treated as a payment attributable to equity under section 707(c), or that a guaranteed payment for the use of capital is not explicitly included in the definition of interest in §1.163(j)-1(b)(22), does not preclude applying the same allocation and apportionment rules that apply to interest expense attributable to debt, nor does it preclude treating such payments as “equivalent” to interest under section 954(c)(1)(E). Instead, the relevant statutory provisions under sections 861 and 864, and section 954(c)(1)(E), are clear that the rules can apply to amounts that are similar to interest.

OK, so the IRS is saying here that a guaranteed payment on capital is not and does not have to “indebtedness” for the item to be treated the same as interest expense under the enumerated statutory provisions. This is so without regard to there being a tax avoidance reason for the taxpayer to have used a guaranteed payment on capital instead of actual indebtedness. Technically true in the case of the enumerated provisions but does it make good policy sense or is it merely “talking out of both sides of your mouth” and, thus ultra vires? 

Take a look at how guaranteed payments on capital recently fared under the final section 163(j) regulations (T.D. 9905). The final regulation preamble had this to say about the issue:

Proposed §1.163(j)-1(b)(20)(iii)(I) provides that any guaranteed payments for the use of capital under section 707(c) are treated as interest. Some commenters stated that a guaranteed payment for the use of capital should not be treated as interest for purposes of section 163(j) unless the guaranteed payment was structured with a principal purpose of circumventing section 163(j). Other commenters stated that section 163(j) never should apply to guaranteed payments for the use of capital….In response to comments, the final regulations do not explicitly include guaranteed payments for the use of capital under section 707(c) in the definition of interest. However, consistent with the recommendations of some commenters, the anti-avoidance rules in §1.163(j)-1(b)(22)(iv)…include an example of a situation in which a guaranteed payment for the use of capital is treated as interest expense and interest income for purposes of section163(j).

Without getting into the merits of the example the IRS added to the anti-avoidance rule, suffice it to say that acting “with a principal purpose” of tax avoidance in preferring a guaranteed payment on capital to actual interest on indebtedness is a very low barrier for the IRS to meet. After all, “a principal purpose”, based on existing authority is merely an important purpose but need not be the predominant purpose and the test can be met even if there is a bona fide business purpose for using the guaranteed payment in lieu of actual indebtedness and even though the transaction has economic substance. 

But what about how the U.S. Supreme Court and the IRS itself treated a short sale for purposes of interest deductibility and the unrelated business income tax, respectively? In Rev. Rul. 95-8, 1995-1 C.B. 107, the issue was whether a short sale of property created “acquisition indebtedness” for purposes of the unrelated business income tax under section 514. The IRS concluded, in a revenue ruling that is still outstanding, that the answer was no:

Income attributable to a short sale can be income derived from debt-financed property only if the short seller incurs acquisition indebtedness within the meaning of section 514 with respect to the property on which the short seller realizes that income. In Deputy v. du Pont, 308 U.S. 488, 497-98 (1940), 1940-1 C.B. 118, 122, the Supreme Court held that although a short sale created an obligation, it did not create indebtedness for purposes of the predecessor of section 163.

In turn, the U.S. Supreme Court had this to say about what is “indebtedness” under the Internal Revenue Code (Deputy v. du Pont, 308 U.S. 488 (1940)): 

There remains respondent’s contention that these payments are deductible under § 23 (b) as “interest paid or accrued . . . on indebtedness.” Clearly [the taxpayer] owed an obligation….But although an indebtedness is an obligation, an obligation is not necessarily an “indebtedness” within the meaning of § 23 (b)…. It is not enough….that “interest” or “indebtedness” in their original classical context may have permitted this broader meaning.  We are dealing with the context of a revenue act and words which have today a well-known meaning. In the business world “interest on indebtedness” means compensation for the use or forbearance of money. In [the] absence of clear evidence to the contrary, we assume that Congress has used these words in that sense. (footnotes omitted). 

And so, the U.S. Supreme Court says that “interest on indebtedness” means “compensation for the use or forbearance of money”. A guaranteed payment on capital is a return on equity and cannot be transformed into interest on indebtedness based on some general regulatory authority under section 7805(a), no matter how abusive the IRS views a transaction. And effectively treating a guaranteed payment on capital as “equivalent to interest” but not actually indebtedness for purposes of certain enumerated provisions (such as section 901) seems to be overreaching given the mandate of the U.S. Supreme Court on an economic equivalent to interest on indebtedness at that time, a short sale. 

Can the IRS write a regulation that circumvents the dictates of the U.S. Supreme Court using a general grant of regulatory authority under section 7805(a)? I would think that the answer is clearly and obviously no. But what is the price that the IRS will ultimately pay if the results enumerated here are overruled by a court several years down the road? Other than spending taxpayer dollars unnecessarily, it does not appear that there is any downside in doing so. 

Note that this bifurcated treatment of a guaranteed payment on capital “infects” other recent regulations because in one case (T.D. 9866, the GILTI final regulations) there is an explicit cross reference to the definition of interest income and expense under section 163(j) (which presumably includes the application of the interest expense anti-abuse rule in those final regulations), and in another case (T.D. 9896, the section 267A final regulations) the substance of the definition of interest expense and the anti-avoidance rule exception were incorporated into those regulations.

How can this practice be effectively stopped? Will it require court litigation and years of uncertainty or is there a mechanism for, in effect, penalizing the IRS for taking positions that, if the IRS were a tax advisor to a client other than itself, it could not have concluded the way it does without disclosure on the equivalent of form 8275? 

Could section 7805(a) be amended to curtail this IRS practice? For example, could a sentence or two be added there to say that “the IRS cannot issue regulations or other guidance inconsistent with the literal words of a provision of the Internal Revenue Code unless Congress expressly grants that power”? 

Now, some will say that doing such a thing contravenes the ability of the courts to adjudicate tax disputes and so is perhaps unconstitutional but clearly inadvisable. Others will say that the regulatory guidance process would grind to a halt because of the forceful taking by the Congress of administrative discretion and expertise. 

I don’t think the status quo is acceptable. On the other hand, I do recognize the implementation problems. Is there any solution other than to throw up your hands in disgust and move on to something else? 

Premature Dismissal

I have written before about premature assessments which are one consequence of the closing of the Tax Court clerk’s office during the pandemic.  A separate problem also exists with respect to the timing of appeals from the Tax Court.  So, the pandemic creates problems for cases coming and going in the Tax Court.

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Some problems could result from the closure of the clerk’s office during this period because of the way that appeals from Tax Court cases occur; however, when writing to the circuit courts to explain the problem and urge them not to dismiss appeals that fell due during the period in which IRS Notice 2020-23 extended the period.  In the letter to the circuit courts, the Department of Justice Appellate Section relied on IRC 7508A and the authority of the IRS to extend time frames where an emergency exists to explain to the circuit courts when cases should not be dismissed without a careful review of the dates of filing and how they related to the extension of time granted because of the pandemic.  A copy of the letter from the Tax Section of DOJ to the Second Circuit which was docketed in the appeal of Castillo v. Commission is here

When a taxpayer loses all or part of a Tax Court case and seeks to appeal, the basics of the appeal process are found in IRC 7482 and the specific provision stating that the appeal must be filed in the Tax Court within 90 days of the adverse decision is found in IRC 7483.  Not only does the taxpayer file the appeal with the Tax Court but the taxpayer also pays the filing fee to the Tax Court.  (Unless you can qualify for a fee waive at the circuit court, which is a separate process from requesting a fee waiver with the Tax Court, the taxpayer must pay quite a bit more to appeal than to file the Tax Court case – $505 versus $60.)

The reopening of the Tax Court clerk’s office no doubt caused the clerks not only to find all of the Tax Court petitions filed during the period of the closure of the clerk’s office but also the appeals filed.  The number of appeals filed is not a high number but just as the IRS assessed taxes presuming the taxpayer did not file a Tax Court petition, the circuit courts receiving a notice of appeal that the Tax Court logged in after the pandemic could conclude that the appeal was not timely filed and dismiss it.  This caused the Appellate Section of the Department of Justice to send a letter to the Second Circuit and to the other circuits. 

The letter notifies the Second Circuit of the issue created by the pandemic and of the specific grant of additional time to file the appeal created by Notice 2020-23.  The letter notes that this process is specific to tax and that circuit courts would not be expected to know this nuanced issue regarding tax appeals.

Carl Smith suggested this post to me and provided me with some helpful things to say for which he deserves credit.  He points out that there are many different statutes of limitation (SOLs) for bringing civil and criminal appeals.  For example, the general civil appeals SOL may be found at 28 USC 2107.  Subsection (a) provides the general rule that the appellant has 30 days.  Subsection (b) allows 60 days to appeal when the government is a party.  Subsection (c) allows district courts to extend the SOL under limited circumstances.  In Bowles v. Russell, 551 U.S. 205 (2007), the Supreme Court held that, even though it would not treat the civil appeals filing deadline as jurisdictional if it were applying its current case law on a clean slate, the deadline was still treated as jurisdictional because there were over 100 years of Supreme Court cases holding the filing deadline jurisdictional (a stare decisis exception to the Court’s new rules generally treating filing deadlines as not jurisdictional).

By contrast, the period to file an appeal from the Tax Court is in IRC 7483, which generally provides 90 days from the entry of the Tax Court decision.  Unlike 2107, 7483 does not list any exceptions or extensions.  The Supreme Court has never held the 7483 filing deadline to be jurisdictional, and it is clear that the section’s language would not make it jurisdictional under current Supreme Court case law.  There are some older Circuit court opinions holding the Tax Court appeal filing deadline to be jurisdictional and more recent unpublished Circuit court opinions stating the same, but none discusses the recent Supreme Court case law’s impact on the filing deadline.

There is a special FRAP rule applicable to Tax Court notices of appeal, Rule 13.  FRAP 13(a)(1)(B) provides for a non-statutory extension of the filing deadline as follows:  “If, under Tax Court rules, a party makes a timely motion to vacate or revise the Tax Court’s decision, the time to file a notice of appeal runs from the entry of the order disposing of the motion or from the entry of a new decision, whichever is later.”  In Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019), the appellate court, sua sponte, raised the question whether it had to dismiss the appeal for lack of jurisdiction because Myers waited to file until after the Tax Court ruled on a post-decision motion to reconsider findings or opinion — at a time beyond 90 days after the decision had been entered.  The D.C. Cir. ultimately held that the appeal was timely because, following the reasoning of another Circuit, motions to reconsider should be deemed the same as motions to vacate for purposes of Rule 13(a)(1)(B).  Had the court not found the filing timely under the rule, it would have had to face the issues (raised by Myers) whether the 90-day period to file the appeal was not jurisdictional, and the DOJ waived any objection as to untimeliness by not raising this issue itself.  The D.C. Cir. deliberately declined to rule on the issue of whether the 90-day filing deadline in 7483 is jurisdictional under recent Supreme Court case law.

The recent Tax Court appeal dismissals for lack of jurisdiction have happened because some Circuits just assume that the filing deadline is jurisdictional and thus the court must independently raise the issue of timeliness.  Since courts of appeals see few Tax Court appeals, they are likely not aware that other provisions of the IRC, such as section 7508A, can provide extensions of the 7483 period — i.e., to look elsewhere before simply assuming all extensions of the 7483 period are located within the statute or Rule 13.

Update on Tax Court from Court Procedure and Practice Committee meeting

As a side note Judge Buch stated on a panel at the ABA Tax Section that the members of the clerk’s office there were working 12 hour days in order to attack the backlog of correspondence waiting for them when they returned.  I understood him to say that the clerk’s office at the Tax Court had worked its way through the backlog and was current.  This is good because he introduced a session on the Tax Court’s new case management system, which will go live in a couple months.  I hope the members of the clerk’s office at the Tax Court were well rested when they returned from the pandemic closure, because they are having to run pretty fast for the remainder of 2020 between catching up on the mail and working through a new management system.

Collection Issues Discussed at Recent ABA Meeting

As mentioned in the prior two posts, here and here, I participated in a panel at last week’s ABA Tax Section meeting on which we discussed the notices sent out with computer generated dates going back to the beginning of the IRS shut down due to the pandemic.  In addition to discussing those notices, the panel discussed a variety of additional collection issues worth their own post.  In this post I will go over the additional collection issues worth consideration.

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Premature assessment of Tax Court Cases

I wrote a post on this issue in June when the issue first caught my eye.  Read that post if you need to come to an understanding of premature assessments.  Here, I seek only to provide an update on what Chief Counsel’s office has done to address the problem.  As I mentioned in that post, Chief Counsel attorneys do a great job of fixing premature assessments brought to their attention.  Because they know of the scope of the problem caused by the pandemic, Chief Counsel’s office has taken proactive measures to find and fix any premature assessments.  They are watching the new petitions to try to catch these assessments.  They have also created an email address that taxpayers can use to send in a problem regarding premature assessments that will cause the case to be worked immediately.  The address is taxcourt.petitioner.premature.assessment@irs.gov.  They ask that this address only be used to report a problem with a premature assessment and not to report other systemic or case related problems.

Suspension of Collection Notices

On August 21, 2020, the IRS temporarily stopped sending balance due notices and announced the scope of this temporary halt. The notice does not say how long the stop will last but this is a welcome development.  As I wrote previously, even though many in the IRS collection function went back to work in mid-July, these collection individuals do not know what a taxpayer might have done during the period of the IRS closure since the IRS continues to work through its backlog of correspondence including checks, requests for an OIC and other correspondence that could impact the need for collection action or the type of collection action.  It makes sense to hold off on many types of collection action until the IRS catches up with the correspondence and knows if anything happened during the period of closure that could impact the need for collection or the type of collection needed.

Offers in Compromise

One of the areas of greatest concern to me was offers, because the tax clinic where I work submitted offers during the pandemic and as much as we try to explain to our clients the potential impact of the pandemic on IRS actions, we cannot sufficiently comfort them regarding the collection action the IRS might take while such action should be suspended during the period of the offer.  The basic problem for these clients is that the offer will not suspend collection until the IRS knows an offer exists.  It will not know of the existence of an offer until it can process its mail.  Just in the past week, the clinic has received notification of the receipt of offers mailed to the IRS six months ago.  Fortunately, in those cases no collection action occurred before the IRS opened its mail and input the receipt of the offers.

We have written before about offers timing out due to the 24-month provision in IRC 7122.  I have wondered how this period is impacted by the pandemic.  If a taxpayer mailed an offer in April 2020 that the IRS opens in October 2020, have six of the 24 months run or does the time period only start in October?  This is more of an academic question than practical one because few offers get even close to the 24-month period, but it is the kind of thing professors can debate.  A related issue is whether the statute of limitations on collection ran during the six-month period while the IRS had the offer but had not opened its mail.  My guess is that the IRS would not treat the statute as suspended during period and that it would not start the 24-month clock running until it opened the mail.

Last week the panel discussed some of the other pandemic issues with offers.  On March 30, 2020, the Director, Headquarters Collection issued a memo providing: 1) taxpayers had until July 15, 2020 to provide information to support pending offers; 2) Pending OIC requests would not be closed before July 15 without taxpayer’s consent; 3) OICs would not be defaulted if the 2018 return was not filed prior to July 15, 2020; and 4) taxpayer could suspend payments on accepted and pending OICs until July 15.  I did not see the OIC unit pushing during the period leading up to July 15.  Since that date I have been contacted by offer examiners on cases.  The examiners have been more generous than usual in the time frames for submission of additional documentation.  Frank Agostino suggested during our panel that the OIC unit had loosened its standards a bit because of the pandemic.  I have not seen enough cases to have an opinion on any change in standards, but it’s a nice thought.

Posting of Payments

The IRS had adopted a taxpayer beneficial position regarding the posting of payments received during the pandemic.  As it opens the vast backlog of mail, it gives taxpayers a payment posting date of date received by the IRS and not the date of opening.  It is also providing relief from the bad check penalty for dishonored checks received between March 1 and July 15, 2020.  It is easy to imagine that someone who sent the IRS a check in April might not be able to cover that check when processed in September or October, 2020.

Equitable Tolling

The panel briefly discussed equitable tolling and the prospect that the pandemic has brought on many opportunities for arguing equitable tolling.  Perhaps a more accurate description would be to say I used the panel as an opportunity to discuss this issue.  My fellow panelists sat politely while I talked about equitable tolling. 

There are two pending cases worth watching both of which involve an effort to have the Tax Court accept late filed CDP cases.  The Castillo case is just getting underway in the Second Circuit.  We wrote briefly about this case here (if you follow the link don’t stop just because the heading of the post concerns grand jury issues.)  So far the amicus brief filed by the tax clinic at Harvard is the only filing of substance in that appeal.  The other case to watch is in the Eighth Circuit where a petition for rehearing en banc was filed in Boechler which we discussed here.  The Eighth Circuit did not dismiss the petition out of hand but has ordered the Department of Justice to respond to the request filed by the petitioner (supported by an amicus brief from the tax clinic at Harvard.)  

Bad Dates Followed by Bad Inserts

One of the excuses the IRS put forward in conjunction with the relatively quiet announcement that it would send out a high volume of notices with bad dates involved the stuffers that it would put in each envelope. As I wrote yesterday, these stuffers explained that the taxpayer should not pay attention to the date on the letter (and in the IRS case management database) but rather rely on the stuffer for guidance on which the taxpayer must perform the statutorily mandated action related to the notice. The stuffers themselves raised some questions discussed in yesterday’s post.

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Subsequent to the sending of the letters with bad dates on July 14, 2020, the IRS announced that “whoops”, it failed to put the stuffer notice into certain of the Collection Due Process (CDP) notices it sent.  Of course, the CDP notice creates a very short window for the taxpayer to take action in order to preserve their rights.  After failing to put the stuffer notice into these statutorily mandated letters with dates that might have been two or three months before the mailing (or longer), the IRS sought to correct that mistake by sending out a subsequent letter informing these taxpayers that they had more time.  Unfortunately, this correcting letter had the wrong date for the last date to perform the statutorily mandated act.  I will let the IRS letter do the talking:

To correct this issue with the CP90, CP90C and CP297 notices, a supplemental Letter 544-C was generated on August 6, 2020 and mailed on August 7, 2020, advising taxpayers that they have until September 8, 2020 to request a CDP hearing. In some cases, the Letter 544-C advised taxpayers they had until September 7, 2020. September 7 is Labor Day and pursuant to IRC section 7503 the due date for the hearing is the next business day, which is September 8. Issuance of the Letter 544-C is posted on IDRS command code ENMOD with the literal 0544CLTR for the date generated. Refer to IRM 5.19.9.3.3, FPLP Systemic Processes and Indicators, and IRM 5.19.9.2.4, SITLP Notices, for information regarding TC 971 action codes associated with SITLP and FPLP notices.

The Memorandum for Director, Campus Collection and Director, Field Collection from the Acting Director of Collection Policy detailing the snafu is dated September 3, 2020 and is linked here.  The Memorandum does contain a copy of the supplement letter.  It is not at all clear that the envelope containing the supplemental letter included a copy of the original backdated CDP notice.  Let’s look at what these taxpayers will have received.

On July 14, 2020, the IRS mailed CDP notices to taxpayers that had queued up in its computer system for months during the period of time the IRS employees stayed home due to the pandemic.  The CDP notices could have been dated as early as March.  That CDP notice would have told the taxpayer they had until 30 days after the date of the notice to request a CDP hearing.  So, for example, a letter dated March 30 and arriving sometime in mid-July to late July would have told the taxpayer to request a hearing by April 29.  Since there was no stuffer notice in the envelope the taxpayer, who probably doesn’t subscribe to PT or the National Taxpayer Advocate’s blog or other sources of news about the millions of letters sent out with wrong dates, would possibly give up assuming it was a missed opportunity.

Then, three or four weeks later the taxpayer would receive another letter of some type stating that they had until September 7 or September 8 to file a CDP request.  (The IRS sent the “new” CDP letters on August, 7 and that’s why it calculated the last date as September 7, a Monday since 30 days from August 7 would have fallen on Sunday, September 6.  Unfortunately, the creator of the stuffer notices did not fully appreciate the calendar.  Because September 7 was Labor day, the last day to request a CDP hearing would fall on the next working day, per IRC 7503, which would be September 8, 2020.) This could have created significant confusion among the taxpayers I represent.  This is just one of the many problems created by mass mailing notices with the wrong dates.  On top of this problem the IRS is out potentially collecting on these individuals because they did not request a CDP hearing by April 29.  (Tomorrow’s post will talk about a postponement of collection for some that might have benefited these taxpayers.)

The pandemic put the IRS in a bad spot, but it is making things much worse for itself and others by sending out bad notices and by sending out its collectors before it finishes going through the backlog of mail.  It would be nice to see them push the reset button and figure out how to protect taxpayer rights during a pandemic.  By failing to include the stuffer in all of the notices and by failing to calculate the proper date on the notices the IRS compounded the mistake created by its decision to send out notices with bad dates. 

The confusion surrounding the dates on the notices and the dates on the stuffers may provide a basis for requesting a CDP hearing beyond the date on the notices.  In partial recognition of the confusion, a September 3, 2020 memo by SBSE stated that all CDP requests filed on or Before September 8, 2020 where the IRS issued letters CP90, CP 90C, or CP297 dated in the period April 3, 2020 to July 13, 2020 would be deemed timely.  The SBSE memo shows that the IRS has the ability, without even invoking IRC 7508A, to extend the time for a taxpayer to receive a CDP hearing.  The IRS should be generous in its determination of CDP requests and err on the side of accepting such requests during this period rather than reverting to its practice of denying such requests if a day late.  Similarly, taxpayers should push back if denied a CDP hearing given the confusion that has occurred because of the pandemic.

IRS Extends Time to Request Economic Impact Payment During 2020

Late today the IRS announced that the time to request an economic impact payment this year has been extended from October 15 to November 21.  There are still a fair number of people who have not requested the EIP.  The Commissioner has been making outreach efforts to provide these individuals with an opportunity before the window closes.  The additional time is limited to individuals who otherwise would not need to file a tax return.

An Update on the Post Reporting on the sending of Notices with Bad Dates

On June 30, 2020, I wrote a post discussing the IRS’s decision to send out millions of notices with bad dates.  I believe this was a bad idea for the reasons articulated in the post; however, new information suggests that the problem did not extend as far as I reported in the June post.  Last week, I was on a panel at the ABA Tax Section meeting regarding these notices.  One of my co-panelist, Julie Payne, who serves as the Tax Litigation deputy to the head of the SBSE division of Chief Counsel, had updated information on the notices I wrote about in the earlier post.  In that post I relied for my information on a post by the National Taxpayer Advocate.  Based on Julie’s information, the IRS did not send out as many notices with bad dates as was first thought.  In this post I will explain what happened in the sending of the notices with bad dates in greater detail based on the information now available to me.

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The initial reporting of this issue placed the number of notices with bad dates as exceeding 20 million.  The IRS term for these notices is backlogged.  Some have described them as backdated.  The IRS computers generated these notices during the period of the IRS shut down.  When IRS employees began returning to work, they found that the computer system had queued the notices waiting for the employees to print and mail them.  The computer had not caused the printing of the notices and the IRS had to decide whether to print them or not but, if printed, they would bear the date the computer generated the notice and not the date the IRS printed them for mailing.  The IRS decided not to print the vast majority of the notices but to regenerate those notices at a future time with a date coextensive with their mailing.

Apparently, the IRS decided to print certain statutorily mandated notices.  I imagine the IRS obtained a legal opinion concerning the printing of these notices with dates as much as three and one half months before the time of mailing.  I have not seen the legal advice rendered.  The IRS mailed most, and maybe all, of the notices with the bad dates on July 14, 2020.  These statutorily mandated notices came in three types: 1) notice and demand – letters CP14 (individuals) and CP16 (businesses); 2) math error/notice and demand combination letters; and 3) CDP levy notices – letters CP90; 90C; 297; 297-A and 297-C.  Instead of printing 20 million notices with wrong dates, it printed and mailed about 1.5 million notices from these three types.  The vast majority of the notices the IRS printed and mailed were notice and demand letters.  That makes sense because the statute requires the sending of that notice with every assessment where an outstanding balance exists.

Notice and Demand

Knowing it was sending out notices with bad dates, the IRS created an insert, or stuffer, to go in each envelope.  Each type of letter had a different insert.  The notice and demand letter had Notice 1052-A inserted into the envelope.  This notice tells the recipient that for certain liabilities, including 2019 income taxes, the IRS will not charge interest and penalties if the taxpayers pay the liability prior to July 15, 2020.  For assessments based on older liabilities or certain types of taxes, such as employment taxes, the taxpayer needed to pay by July 10 to avoid penalties.  Of course, taxpayers would receive the letter after these dates have passed if the letters, together with the inserts, were mailed on July 14.  So, the insert to the notice and demand letter would alert taxpayers that interest and penalties would not run from the date on the letter, but the insert would not have given the taxpayer the opportunity to pay prior to the time interest and penalties would begin to run.  The timing of interest and penalties here is governed by the invocation of IRC 7508A as we discussed here in Notices 2020-18 and 2020-20.  To change that timing the IRS would have had to issue another notice like Notice 2020-18 giving taxpayers more time to pay and it did not do that.

Math Error Notices

In the envelope containing the Math Error notices, the IRS inserted Notice 1052-B.  Like the notice inserted into the Notice and Demand letter envelope, this notice explains that the pandemic has caused the IRS to mail the Math Error notice later than the date on the letter and notes that the 60 days from the letter may have already run.  The insert gives the taxpayers until August 21 to respond to the Math Error notice instead of the date 60 days from the date on the Math Error notice itself.  IRC 6213(b)(2) gives a taxpayer 60 days to request an abatement of a math error assessment:

(2) Abatement of assessment of mathematical or clerical errors

(A) Request for abatement

Notwithstanding section 6404(b), a taxpayer may file with the Secretary within 60 days after notice is sent under paragraph (1) a request for an abatement of any assessment specified in such notice, and upon receipt of such request, the Secretary shall abate the assessment. Any reassessment of the tax with respect to which an abatement is made under this subparagraph shall be subject to the deficiency procedures prescribed by this subchapter.

I am concerned about this if I understand the timing of the mailing correctly. Consider an example: if the IRS computer generated a Math Error notice with a date of April 10 giving the taxpayer 60 days to respond, and thus triggering the sending of a statutory notice of deficiency, is instead sent on July 14 ((i.e., until the August 21 date I mention above). I do not understand why the recipient would not have 60 days from July 14 instead of 38 days.  I am unsure if I misunderstood the date of mailing of these Math Error notices with bad dates or if the IRS chose to give taxpayers less than the statutorily mandated time to respond to the Math Error notice or if some other explanation exists.  I do not see how the IRS could cut short the time within which the taxpayer could object to the Math Error notice no matter what date appears on the notice itself.

CDP Notices

In the envelope containing the CDP notices the IRS inserted Notice 1052-C.  This insert also explains to the taxpayer that the taxpayer should not be concerned by the date on the CDP notice itself and gives the taxpayer until August 13, 2020, to file a CDP request that will result in a hearing that will allow the taxpayer to go to Tax Court if the taxpayer does not agree with the result.  In other words, the taxpayer has until August 13 to request a CDP hearing rather than an equivalent hearing.  Here the date the IRS provides in the stuffer for timely requesting a CDP hearing perfectly matches with the timing of mailing of the CDP notice on July 14.  This provides support for the timing of the mailing of the documents on that date.

As we have discussed before, the date to request a CDP hearing is not a date that creates a jurisdictional time frame.  Taxpayers might miss this date for good reason and still request a CDP hearing.  Tomorrow, I will discuss how the IRS made mistakes in the mailing of the CDP notices and how it corrected the mistakes giving taxpayers more time to make the CDP request.  Keep in mind that even that additional time might have the possibility of extension under the right circumstances based on the arguments in the post linked above.