Unlicensed Chiropractor’s Retirement Account Not Exempt From Garnishment Even When Subject to Prior Child Support Order

US v Clark explores whether the government can use its restitution powers to seize assets in an individual’s retirement accounts. While not a tax case, its analysis is dependent on the meaning of Section 6334(a)(8) which exempts from IRS levy “salary, wages, or other income . . . necessary to comply” with child-support orders. 

The case involves Thomas Clark, who owes over a half million dollars in restitution stemming from Clark’s guilty plea from operating a chiropractic clinic that fraudulently billed insurance companies for services he performed without a license. 

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The Mandatory Victim Restitution Act (MVRA) allows the government to garnish a defendant’s property to satisfy a restitution order.  The restitution statute in Title 18 borrows exemptions from Section 6334, which provides that certain property is exempt from levy. 

The government sought to levy from assets in two of Clark’s retirement accounts. The Fifth Circuit has held that the MVRA generally permits the government to garnish assets held in a retirement account to satisfy a restitution order. The wrinkle was that Clark estimated that he owed approximately $1,000/month in child support. He argued that the property in his retirement accounts amounted to “other income” under 6334(a)(8) that was necessary for him to comply with his child support and thus exempt from garnishment.

The Fifth Circuit disagreed. In so doing it noted that the issue is somewhat complicated by the consequences of Clark withdrawing assets from the IRA; the withdrawal itself would trigger income tax consequences (unlike cash in a savings account). That suggests some support for Clark’s position.

Ultimately the court found for the government and relied on ejusdem generis, which provides that confronted with a list of specific terms that ends with a catchall phrase, courts should limit the catchall phrase to “things of the same general kind or class specifically mentioned.” (citing ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXTS 199 (2012)). With that canon the court looked at 6334(a)(8) as a “textbook example” of ejusdem generis leading it to conclude that “we should read “salary, wages, and other income” as “salary, wages, and other [similar] income.” 

For further support the court discussed Woods v. Simpson, 46 F.3d 21, 24 (6th Cir. 1995), which held that an inheritance was not exempt under 6334(a)(8) as it was not in the same category as salary or wages. Instead “other income” is limited to “items received by individuals for services rendered, such as bonuses, tips, commissions, and fees.”  

Conclusion

Simply put the child support exemption relates to amounts received directly from a taxpayer’s labor. Once placed in an account, the protection disappears, and the government is free to use its collection powers. 

The Clark decision finds direct support in Section 6334(c), which “provides that no property or rights to property shall be exempt from levy other than the property specifically made exempt by [Section 6334(a)].” Even if an asset itself is generating income, or would trigger income inclusion, or is funded with income which itself would have been exempt from levy, the government is not restricted from levying the underlying property. 

In 2016 I discussed a related issue in Maehr v Koskinen; in that case the taxpayer/army veteran argued that the 6334(a)(10) protection against levy as applied to veterans service related disability benefits should extend to funds in an account that were solely comprised of those benefits. Shortly after my post Keith also discussed the reach of 6334(a)(10). My post flagged the issue in Maehr; a 2018 district court opinion at 121 AFTR 2d 2018-1198 and appellate opinion we did not discuss held that Section 6334(a)(10) did not protect funds that were already paid.  I note as well that Congress has shown itself capable of using tracing method to free assets from levy—it has done so in the second round of economic impact payments and also uses broader language (“payable to or received by…” ) to protect a minimum amount of compensation from levy in 6334(a)(9).

Whistleblower Case Dismissed – Could All Writs Provision Have Saved It?

In McCrory v. Commissioner, 156 T.C. No. 6 (2021) the Tax Court issued a precedential opinion holding that McCrory came to the Tax Court before she received what the Tax Court felt was the proper ticket.  Ms. McCrory represented herself in the Tax Court case.  As discussed below, she may have had an argument that she did not make.  It’s tough for everyone when the court creates precedent based on a one sided argument.

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Ms. McCrory sent the IRS 21 separate claims for whistleblower awards in 2015.  Her claims were based on public records and alleged that the taxpayers about whom she provided information had underreported awards obtained in a litigation settlement.  She received from the IRS Whistleblower office a letter offering her an award if she agreed to accept the award in full settlement and waive her right to go to court.  The letter also offered a second option by which she would indicate disagreement with the proposed offer.  Instead of accepting the offer or indicating disagreement, she asked for access to the IRS administrative file in order to make a more informed decision.

This seemingly reasonable request pits her need for information against the requirement that the IRS keep taxpayer information confidential – a tension that exists regularly in whistleblower cases.  The IRS told her it could not provide the information she wanted, and she petitioned the Tax Court in response to the IRS letter denying her the right to information.  The letter denying her the right to information did not deny her whistleblower claim.

The IRS moved to dismiss her petition for lack of jurisdiction arguing that she filed the petition prematurely.  Essentially, the IRS argues that the Tax Court lacks jurisdiction to review its determination regarding the information she may see and even if at some point the Tax Court has jurisdiction over the issue of the information she can see, it lacks that jurisdiction prior to the time the IRS makes a formal determination regarding the amount of award she should receive, if any. As the Tax Court frames the case:

The sole issue for decision is whether the letter respondent sent to petitioner recommending a preliminary award under section 7623(a) constitutes a “determination” within the meaning of section 7623(b)(4).

The tricky thing about whistleblower cases is that the statute doesn’t say what action by the IRS constitutes a determination.  Unlike deficiency cases where the statute provides much more guidance regarding the “thing” that gives a taxpayer a ticket to the Tax Court, the whistleblower statute comes up short in this area.  The court notes:

[w]e have held that the name or label of a document does not control whether the document constitutes a determination” and that “our jurisdiction is established when the Commissioner issues a written notice that embodies a determination.” Cooper v. Commissioner, 135 T.C. 70, 75 (2010).

The Tax Court had not previously issued a specific opinion regarding the document the IRS calls a preliminary award recommendation and whether this letter could qualify as a basis for Tax Court jurisdiction.  In the Cooper case the court held that another letter that did not call itself a determination letter did provide a basis for jurisdiction. 

So, Ms. McCrory’s petition in the context of the whistleblower statute deserved a close look.  The court described her argument as follows:

Petitioner contends the preliminary letter embodied a “determination” because the letter: (1) requested that she waive her appeal rights; (2) did not indicate that the preliminary award amount would change; and (3) did not indicate that a subsequent determination would be issued.

In finding that the letter Ms. McCrory received did not serve as a determination of the type to provide it with jurisdiction, the court was not surprisingly influenced by the wording of the letter stating it was a preliminary award determination.  Even though the IRS may not have changed its mind had she checked the box declining the proffered settlement, the court found that another step needed to occur before the IRS had issued the type of determination needed to invoke its jurisdiction.  It noted that the sending of the preliminary award letter complied with the framework of the regulations under section 7623(a).

Ms. McCrory also requested that the court order the IRS to issue a determination so she could move forward and save her time and the court’s time in getting to a determination of the proper amount of her award.  The court declined to do this since it had no jurisdiction over the matter.  It said:

In the event we agree with respondent, as we have, petitioner alternatively asks that the Court either order respondent to issue a final decision or consider the preliminary award recommendation a final decision in the interests of judicial economy. As previously stated, the Court may exercise jurisdiction only to the extent authorized by Congress and is without authority to enlarge upon that statutory grant. Judge v. Commissioner, 88 T.C. at 1180-1181Naftel v. Commissioner, 85 T.C. at 529; see Phillips Petroleum Co. & Affiliated Subs. v. Commissioner, 92 T.C. at 888Section 7623(b)(4) authorizes this Court to exercise jurisdiction when a determination has been made. Kasper v. Commissioner, 137 T.C. at 41. Since we have concluded that respondent has not made a “determination”, we lack authority to enlarge upon that statutory grant by deeming the preliminary award recommendation to be a “determination” for purposes of our review. Likewise, we decline to order respondent to issue a final decision or to intervene in the whistleblower administrative process.

This portion of the opinion drew a comment from former frequent guest blogger Carl Smith.  Carl found it very disappointing to see this last sentence in a precedential T.C. opinion without a discussion of the All Writs Act.  The All Writs Act allows a supervising court to order an agency to act.  In a case years ago named Insinga, Judge Gustafson asked the parties to brief the applicability of the All Writs Act in a similar case.  In a PT post Carl wrote on the Tax Court’s Myers opinion, he discussed and linked to the order in Insinga.  Here’s from the order:

The amicus curiae (National Whistleblower Center) argues in the alternative that where an award determination has been unreasonably delayed, the Tax Court has jurisdiction–in light of § 7623(b)(4) and under § 706(1) of the Administrative Procedures Act (“APA”), 5 U.S.C. § 551 et seq.–to “compel agency action unlawfully withheld or unreasonably delayed”. Respondent counters that the APA itself confers no jurisdiction and that the mandamus statute (28 U.S.C. § 1361) by its terms gives jurisdiction only to “[t]he district courts”. Respondent is correct; but the “All Writs Act” (28 U.S.C. § 1651) applies to “all courts established by Act of Congress” (cf. 26 U.S.C. § 7441, establishing the U.S. Tax Court); and the U.S. Court of Appeals for the D.C. Circuit has held in Telecommunications Research and Action Center v. FCC, 750 F.2d 70, 75 (D.C. Cir. 1984) (“TRAC“), that, in view of the APA and the All Writs Act, “it is clear–and no party disputes this point–that” if a statute (there, 28 U.S.C. § 2342(1)) confers on a court exclusive jurisdiction to review a final agency order, then even before the final order has been issued, the court has “jurisdiction over claims of unreasonable [agency] delay”. (The D.C. Circuit would appear to be the default venue for any appeal in this case; see 26 U.S.C. § 7482(b)(1).)

We have not decided whether the reasoning in TRAC applies to the Tax Court and its jurisdiction under § 7623(b)(4). Nor have we decided whether, if the APA does not directly apply, this case nonetheless presents one of those instances in which the Tax Court, “in appropriate circumstances, borrow[s] principles of judicial review embodied in the APA.” Ewing v. Commissioner, 122 T.C. 32, 54 (2004) (Thornton, J., concurring).

We believe we ought not to reach those questions if we do not need to do so.

The issue in Insinga was rendered moot before Judge Gustafson ruled when the IRS issued a final determination letter. 

Maybe Ms. McCrory will consider doing a motion to reconsider the All Writs Act authority, though it is possible that the judge will still say he declined to issue an order, whether or not he had the power.  This may be an opportunity for someone in the Whistleblower bar to step in and assist a pro se petitioner on a matter that might have broader implications.  The opinion does not state that he lacks the power, though it is clearly implied by the sentences preceding the holding that discuss lack of power in other situations.

Taxpayer Finds Another Way Not to File a Return

Whether a taxpayer has filed a return impacts not only the statute of limitations and penalties but also bankruptcy discharge.  In December I wrote about whether a taxpayer had filed a return in the Coffey and Quezada cases each involving a situation in which the taxpayer did not file a tax return but where the taxpayer argued that what was filed with the IRS or, in the case of the Coffeys, with the Virgin Island tax authorities, constituted the filing of the return in question.  For those with a Tax Notes subscription, you can see an expanded discussion of the cases here.

Another case has come out addressing the issue of whether a return was filed.  In Harold v. United States, (E.D. Mich. 2021) the district court affirms a bankruptcy court’s order denying discharge to a debtor who sent a revenue officer (RO) his tax return for the year at issue prior to the due date of the return but never filed the return with the IRS at the appropriate service center.  The court determines that delivery of the return to the revenue officer under the circumstances of this case did not satisfy the requirement of the taxpayer to file the return.  The case demonstrates, yet again, the importance of following the correct procedures for submitting a return and the trouble that can follow if the taxpayer colors outside of the lines.

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 Mr. and Mrs. Harold requested the automatic extension of time to file their 2008 return.  Because they were engaged in collection issues with the IRS about that time, they hired a tax resolution company to negotiate an installment agreement.  On June 2, 2009, well before the extended due date for their 2008 return, their representative faxed materials to the RO assigned to the case and included in the package the first two pages of their 2008 return together with the statement that the 2008 return “was sent to the IRS for filing on June 1, 2009.”  On June 16, 2009, the representative faxed a full, signed copy of the 2008 return to the RO.  At a subsequent deposition the representative described this second sending as a courtesy copy.  The representative testified that he did not remember sending the 2008 return to the service center but that if he had done so, his practice would have been to send it by regular mail.

The Harolds did enter into an installment agreement (IA) in July of 2009.  This IA did not cover 2008 and the letter transmitting the IA made no mention of 2008.  The RO testified that she did not require the filing of post IA returns with her.  She also testified that she regularly directed taxpayers to file future returns with the IRS service center in accordance with normal filing procedure.

Fast forward to 2016 when a new RO enters the scene looking for outstanding returns from the debtors.  The debtors go back to the representative and request a copy of their 2008 return.  The rep provides a copy and says it was filed with the first RO on June 16, 2009.  The IRS assesses the liability for 2008 in 2016 when the second RO obtains the return and five days later Mrs. Harold files a chapter 7 petition.

The IRS filed an adversary proceeding seeking a determination, inter alia, that the 2008 tax liability is not discharged.  The relevant discharge provision is in BC 523(a)(1)(B).  This section excepts from discharges the taxes on a return filed late and filed within two years of the filing of the bankruptcy petition.  Here, the IRS will win, and prevent the discharge of the 2008 taxes, if the submission to the first RO fails to qualify as the filing of a return, since the submission in 2016 immediately prior to the filing of the bankruptcy petition would then become the time of the return filing.

The court notes that the Internal Revenue Code does not define the term “filed.”  It then looks to Sixth Circuit precedent found in the case of Miller v. United States, 784 F.2d 728 (6th Cir. 1986).  In Miller, the court defines the filing of a federal tax return as the time when it “is delivered and received.”  That definition, commonly known as the “physical delivery rule,” may not provide the most helpful guidance here as it relates to mailing of a return.  Mrs. Harold argues that the faxing of the return should count if the court does not believe that her representative sent the return by regular mail.

On appeal she abandoned the argument that her representative mailed the return.  Given his tepid testimony on this point, this concession makes sense.  She pins her hopes on the faxing of the return to the RO.  The IRS does not dispute the fact of the faxing of the return but only disputes the consequence.  She argues not only did faxing the return constitute filing but that doing so met a precondition to acceptance of the IA.  So, the acceptance of the IA validates the faxing of the return as a filing.

This argument sends the court to look at the Internal Revenue Manual to find the IRS internal guidance regarding the requirement for filing past due returns as a precondition to acceptance of an installment agreement.  IRM 5.14.1.2, 5.14.1.3, 5.14.1.4.2 as in effect at the time required the filing of past due returns prior to the acceptance of an IA.  The parties agreed that the IRS would not have entered into an IA if delinquent returns existed; however, the IRS argued the 2008 return was not delinquent in June of 2009 since Mrs. Harold and her husband had validly requested an extension until October 15, 2009.

Mrs. Harold makes a technical point concerning the extension in arguing that it lacked validity.  She argues the extension not only required a timely and proper request but also an extension of time for payment.  Since the time for payment had not been extended and since she owed taxes on the 2008 return, the extension was invalid and her return was delinquent in June of 2009.  Taxpayers who request an extension should pay the anticipated tax liability at the time of the request.  The failure to make a necessary payment with the request could allow the IRS to invalidate the request and treat a return filed after the statutory due date (April 15, 2009) as late.  In this case, however, the IRS transcript showed that the due date had been extended until October 15, 2009.  The RO would have looked at the transcript to determine if a delinquency existed and would have found none.  So, the filing of the 2008 return prior to the acceptance did not create an obstacle for the RO in creating the IA.  The district court followed the bankruptcy court in finding that the 2008 return was not delinquent in June of 2018.

The court then addressed whether the IRS should have accepted the fax of the return to the RO as a filing.  Everyone agreed that giving the return to the RO did not meet the IRS rules governing the proper place to file a return.  The court rejects the faxing of the return as a filing for two reasons.  First, it says it cannot presume Mrs. Harold intended the faxing as a filing in light of the language in the fax stating that the 2008 Form 1040 sent by her representative was a “courtesy copy.”  Second, the faxed return did not go to the proper place.

In rejecting the filing for the second reason, the district court disagreed with the bankruptcy court.  The bankruptcy court found that sending a return to the designated service center is not the only way to properly file a return noting that in Chief Counsel Advice 199933039 the IRS had acknowledged that if a RO requested a return they have the authority to “request and receive hand-carried delinquent returns.”  The district court says relying on the CCA is misplaced because it has no precedential value. 

I disagree with the district court’s conclusion on that point.  Giving the return to a RO or a Revenue Agent who requests a delinquent return has been and should be a recognized way to file a delinquent return.  Unless a taxpayer were given a clear caveat that an RO or RA who requested and received a delinquent return did not consider the transmittal of a return in that circumstance to constitute filing, many taxpayers would be deceived into thinking that they had filed.  The bankruptcy court got this right; however, the district court went on to say that the RO did not solicit the return here and that even if delivery to an RO who solicited a delinquent return could constitute filing, delivery without request does not.  I agree with the district court that delivery without request would not in ordinary circumstances meet the filing requirement, although even in this situation actions by the RO or RA could create an impression of acceptance as filing.

This opinion generated some good discussion among a handful of practitioners with whom I correspond on tax related bankruptcy matters.  Bob Pope noted the absence of a discussion of the one-day rule by the court.  That’s a good catch.  For anyone not familiar with the one-day rule read blog post on it here (citing to many earlier posts.)  Ken Weil notes that before filing bankruptcy Ms. Harold should have checked the IRS transcripts to make sure the 2008 liability was assessed in 2009, which would have allowed her to properly consider her risk before filing the bankruptcy petition.  He also notes he could not find a delegation of authority for an RO to accept a return, although the CCA suggests such a delegation exists.  Lavar Taylor provided an interesting war story involving a similar issue and the practices of ROs regarding returns received after requests.  Bryan Camp noted that the RO’s job has involved “collecting” delinquent returns going back to the 1860s but that he did not think the return would be considered filed until it made it to the office that made the assessment.

You do not want your client to test these waters.  Don’t give a delinquent return to an RO or an RA and expect that delivery to constitute filing.  Send a signed original to the proper service center.  Be aware of the arguments available if your client has delivered a delinquent return to an RO or RA but save those arguments for situations where you are cleaning up after someone else.

Tax Court Allows Withdrawal of Interest Abatement Cases

Following a series of decisions in other areas of Tax Court jurisdiction that do not involve deficiency proceedings, the court held in Mainstay Business Solutions v. Commissioner, 156 T.C. No. 7 (2021) that a petitioner who came to the Tax Court seeking a determination regarding interest abatement could withdraw the petition.  Because this is the first decision on this point regarding interest abatement, the court issued a precedential opinion.  The opinion follows the opinions regarding withdrawal of collection due process petitions in Wagner v. Commissioner, 118 T.C. 330 (2002); innocent spouse petitions in Davidson v. Commissioner, 144 T.C. 273 (2015); whistleblower petitions in Jacobson v. Commissioner, 148 T.C. 68 (2017) and transferee liability petitions in Schussel v. Commissioner, 149 T.C. No. 16 (see post here.)

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The opinion is quite short since the reasoning is spelled out in detail in the opinions regarding other forms of Tax Court jurisdiction.  The court provided guidance regarding when it will allow withdrawal:

In making the determination whether a petition should be dismissed, we should consider whether the other party would lose any substantial right by the dismissal. Durham v. Fla. E. Coast Ry. Co., 385 F.2d 366, 368 (5th Cir. 1967). We conclude that respondent is not prejudiced if we treat the instant proceeding as if it had never been commenced. See Wagner v. Commissioner, 118 T.C. at 333-334 (“[T]he granting of a motion to dismiss without prejudice is treated as if the underlying lawsuit had never been filed.”). In the absence of any objection by respondent, we will allow petitioner to withdraw its petition in accordance with FRCP 41(a)(2). We will grant petitioner’s motion to withdraw its petition and dismiss this case.

The story is different for petitioners who file in Tax Court based on a notice of deficiency.  In deficiency cases the taxpayer cannot escape the Tax Court, if the court has jurisdiction over the case, without receiving a decision regarding the correct amount of tax for the year(s) at issue.  The Tax Court’s decision in Estate of Ming, 62 T.C. 519 (1974), held that a taxpayer petitioning the Tax Court under IRC 6213 may not withdraw the petition in order to avoid the entry of decision.  The reason for not allowing withdrawal in a deficiency case concerns the impact of IRC 7459.  Although the Mainstay case does not discuss section 7459 due to its reliance on the prior precedent in other areas of similar jurisdiction, the concerns raised by that section continue to control the ability of a petitioner to depart the Tax Court after filing a petition in a deficiency case.

Petitioner in Mainstay was represented by occasional guest blogger Bob Rubin of Boutin Jones in Sacramento, California.  Bob and I started in the same branch of the Refund Litigation Division of Chief Counsel’s Office (a division now folded into Procedure & Administration) back in the winter of 1977. 

Why More Taxpayers Should Pursue Attorney’s Fees through Qualified Offers

Today we welcome back guest bloggers Maria Dooner and Linda Galler, who in this post urge representatives use the qualified offer provisions more often. Statistics that Maria and Linda received though FOIA show that surprisingly few cases result in attorneys fees given the volume of Tax Court litigation. Regular readers will be familiar with some of the reasons why this may be the case – we have discussed the hurdles to winning fees in many posts (e.g. here, here, and here). Taxpayers in the Ninth Circuit may have a slightly easier time thanks to the Knudsen precedent, but the road is not easy. However, as Maria and Linda explain, there are benefits to submitting a qualified offer even if it does not result in the government paying fees. Christine

Over the past decade, advancements in data collection and analytics at the Internal Revenue Service (IRS) have led to better insights into the world of federal tax administration. The agency has significantly relied on data to enhance both criminal investigation and civil enforcement.  The ability to access and analyze IRS data also can be valuable to practitioners who desire a better understanding of the use and impact of certain procedural provisions that benefit taxpayers.

As the authors of Chapter 18 in the upcoming 8th edition of Effectively Representing Your Client Before the IRS, we requested and obtained data from the IRS regarding the pursuit and recovery of attorney’s fees through IRC 7430.  This blog post summarizes that data and offers our observations and thoughts on using qualified offers (“QOs”) for strategic, rather than monetary, purposes.

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What the data show (and do not show)

There is very little data on the pursuit and recovery of attorney’s fees in tax disputes because the IRS only partially tracks it. For example, the IRS does not track the total number of cases in which recovery of administrative or litigation costs is sought under the general provisions of IRC § 7430. Nor does the IRS track or maintain any information on QOs (e.g., number of QOs submitted, number of QOs that resulted in settlement of the underlying case, number of QOs that resulted in an award, or whether an award was for administrative or litigation costs). Such information would be useful both to the government and to practitioners, and we were surprised to learn how little the IRS knows.

The IRS does track the number of cases in which the Office of Chief Counsel (Procedure and Administration) processed a payment of an award from the General Judgment Fund, which includes all cases in which attorney’s fees are awarded in cases before the U.S. Tax Court:

YearNumber of Cases
20158
201613
20177
201810
Attorneys’ Fee Awards in Tax Court Litigation

To place this data in context,  Chief Counsel reported approximately 25,000 cases for fiscal year 2018, 27,000 cases for fiscal year 2017, 30,000 cases for fiscal year 2016, and 32,000 cases for fiscal year 2015 in the U.S. Tax Court.  Consequently, the extremely low number of cases that resulted in an award of fees suggests that practitioners may be overlooking the ability to pursue an award of attorney’s fees and, we suspect, are greatly underutilizing QOs.

What is a qualified offer?

A QO is essentially a written offer made by the taxpayer to the government in a case involving the validity of a tax liability or refund. The taxpayer offers a specific amount (tax liability or refund) to resolve the taxpayer’s case. If the government rejects the offer and there is a court judgment that is equal to or more favorable (to the taxpayer) than the offer, the taxpayer can be awarded attorney’s fees. Thus, for those serious about recovering attorney’s fees, the amount detailed in a QO (which can be a dollar amount or a percentage of the adjustments at issue) should be a realistic estimate of what the taxpayer truly believes to be the correct liability or refund. Though it may be tempting, submitting an offer that is too favorable to the taxpayer (in terms of merit) will likely result in a quick rejection by the IRS and can be a waste of time for all parties.

In terms of timing, a taxpayer can submit a QO any time after they receive a notice of proposed deficiency (i.e., “30-day letter”), which provides rights to administrative review in Appeals.  While a taxpayer can submit a QO up until the day before trial begins, a taxpayer should submit a QO as soon as practical. (Under Reg. § 301.7430-7(a), a taxpayer is entitled to recover only fees incurred subsequent to the offer.) A QO is open for acceptance or rejection by the IRS for 90 days or until the date the trial begins, whichever is earlier. For QOs to be successful, taxpayers must exhaust all administrative remedies with the IRS and not unreasonably protract the proceedings, as well as satisfy a net worth requirement. 

What are the benefits of submitting a qualified offer?

As compared to pursuing costs and fees under the general provisions of IRC § 7430, QOs do not require proof that the government’s position was not substantially justified.  Proving a lack of substantial justification is often the main challenge in recovering attorney’s fees.  Therefore, a taxpayer who submits a QO (and receives a court judgment that is equal to or better than the offer), can expect a more straightforward path toward receiving an award.

The benefits of submitting QOs go beyond monetary compensation; a major benefit is quick case resolution. (The Internal Revenue Manual explicitly instructs Appeals Officers to expedite QOs.)  Efficient case resolution is equally important to LITC/pro bono and compensated attorneys.  For example, given the challenges facing the IRS at the moment, even cases with a predictable outcome can take a long time to make their way through the administrative process.  For clients of LITCs or pro bono counsel, refunds can be held up for lengthy periods, causing financial difficulties to taxpayers who ultimately will prevail.  Moreover, these cases take up unnecessary time and resources for tax professionals on both sides.  Indeed, LITCs and nonprofit organizations themselves are harmed by lengthy administrative processes; pro bono attorneys have less time and bandwidth to represent other clients while struggling to resolve what they reasonably thought were predictable cases. 

In Chapter 18 of the forthcoming edition of Effectively Representing Your Client Before the IRS,  we discuss in more detail the rules on how to submit a QO and when one is warranted.  Ultimately, we explain why QOs are the “easy way” to recover costs and fees and how they serve to encourage the settlement of tax disputes.  While a QO is not and should not be a panacea for every case, QOs should be considered in strong cases that encounter time-consuming challenges or delays in resolution through no fault of the taxpayer. 

Credit Elect Carry Forward vs. Offset

In the case of Hadsell v. United States, 127 AFTR2d 2021-808 (N.D. Cal. 2021) the taxpayer sought to apply a relatively large refund to his subsequent year’s tax liability at a time when he had an arrearage in child support.  Instead of allowing him to apply the refund as a payment toward the subsequent year’s liability, the IRS offset the refund against the past due child support.  Mr. Hadsell did not contest the fact the IRS did this nor the timing of its notification to him of the offsetting of his refund.  Acting pro se, he brought an action to set aside the offset and to obtain damages for wrongful collection.  The IRS moved to dismiss for lack of subject matter jurisdiction.

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Mr. Hadsell timely filed his 2016 return, electing to carry forward a $9,547 refund to 2017.  On July 9, 2018, over a year later and after he filed his 2017 return, the IRS notified him that it had taken the 2016 overpayment and applied it to outstanding child support obligations.  He had some liabilities in the subsequent year returns he attributed to the failure to carry forward the 2016 overpayment as he requested and to notify him in a timely manner.

The IRS argues that IRC 6402 both allows the offset in (a) and prevents a judicial review of it in (g).  Section 6402(b) also sets out the provision for crediting an overpayment toward the estimated tax payment for a subsequent year.  Section 6402(c) specifically allows, indeed requires with no discretion available to the IRS, offset of an overpayment to satisfy certain non-federal tax debts including past due child support.  While the IRS has discretion to waive offset against federal debts, as we have discussed here in describing the offset bypass refund provisions, subparagraph (c) removes the discretion if debts exist which the Treasury Offset Program (TOP) covers.

In addition to arguing the mandatory nature of the offset, the IRS argued that section 6402(g) precludes court review of offsets with its sweeping language of prohibition:

[n]o court of the United States shall have jurisdiction to hear any action, whether legal or equitable, brought to restrain or view [reductions to a taxpayer’s overpayment]

The court acknowledged the breadth of the statutory language regarding court review of offset and acknowledged that applying the offset to non-tax debt did not give rise to a claim for damages under IRC 7433, citing Ivy v. Commissioner, 197 F. Supp. 3d 139, 142 (D.D.C. 2016), aff’d 877 F.3d 1048 (D.C. Cir. 2017).  The court notes that any disputes Mr. Hadsell has regarding the past due child support must be fought with the child support agency and not the IRS.

The court finds, however, that although Mr. Hadsell has little maneuvering room with respect to the offset, he also raised issues regarding his 2017 liability that resulted in large part from the timing of the IRS offset – or at least its notification of the offset.  He claims that the IRS accepted his carry forward election, citing to Martin Marietta Corp. v. United States, 572 F.2d 839, 842 (Fed. Cir. 1978) which held that

If a taxpayer, such as plaintiff, elects to credit an overpayment to its succeeding taxable year’s estimated tax liability, that election is irrevocable and binding upon both the taxpayer and the Internal Revenue Service.

The court raises concerns that the IRS may have irrevocably accepted the credit election to carry forward the overpayment. Neither party cited authority on this point.  At what point in time does the credit election become irrevocable?  Since the parties did not adequately address this aspect of the case, the court does not dismiss the section 7433 claim.

It’s easy to understand why someone with outstanding child support would try to make the election that Mr. Hadsell made and attempt to save for himself the value of the overpayment rather than allow it to pay down his past due obligation.  Feelings can run high regarding child support payments.  I once had a clinic client who stopped filing returns because he did not want the refunds to go to his ex-spouse for past due child support/spousal support payments.

I have seen taxpayers attempt to use the credit elect carryforward of a refund to attempt to skirt the bankruptcy provisions for payment of past due debts and seek to pass the benefit of the credit to themselves rather than the creditors. See, e.g., In re Feiler, 218 F.3d 948 (9th Cir. 2000) (deeming debtor’s prepetition waiver of a NOL carryback avoidable by the trustee as a fraudulent transfer); United States v. Kapila, 402 B.R. 56 (S.D. Fla. 2008) (same).

While it’s clear why a taxpayer wants to preserve the refund for themselves by pushing it forward to apply to a future tax liability of the taxpayer and it’s easy to see why the IRS, or TOP, would want to apply the overpayment to a past due tax or other debt subject to TOP, the issue of the timing of the offset action as it relates to the government’s ability to effect the offset appears novel.  Did the filing of the subsequent year return prior to the time of the offset serve to cut off the government’s right to offset.  Could it have waited even longer?  Did it have an obligation to notify the taxpayer before the next filing season so that the taxpayer would not rely on the election and enter a cycle of problems similar to the problems that a levy could cause to a bank account with a host of bounced checks resulting?

It will be interesting to see how the court decides to limit the government’s ability to offset and whether there is or should be a time limit on the right that would otherwise exist.  We have recently updated Saltzman and Book, Chapter 14A (behind WestLaw paywall) to create a much expanded discussion of offset.  Michael Waalkes and I have just posted an article on SSRN walking through many of the issues raised by offset, including some of the issues presented by the CARES Act with its statutory waiver of almost all offset provisions as discussed here, here and here

After declining to dismiss the wrongful collection claim brought under IRC 7433, the court did dismiss the Federal Tort Claims Act (FTCA) count in Mr. Hadsell’s complaint.  The court pointed out that the waiver of sovereign immunity in 28 U.S.C. 2680  under this provision contains an applicable exception for “[a]ny claim arising in respect of the assessment or collection of any tax.”  While the offset funds went to pay past due child support and not taxes the claim arose out of the IRS’s mechanism for assessing and collecting taxes and falls within the statutory exception provided in FTCA.

No Notice to Taxpayer Required When Summons Issued to Aid in Tax Collection

Who can bring a petition to quash a summons that the IRS has issued when it is trying to get information that would allow it to collect on an assessed tax? This is the issue in Marra v US a recent case out of the district court in Washington. In Marra, the IRS issued a summons to the taxpayer’s Chapter 7 bankruptcy trustee as part of the IRS’s efforts to find ways to collect on Marra’s $ 4 plus million assessment. The revenue officer had reason to believe the trustee had compiled information that would help the IRS track down sources to satisfy the tax debt (note the bankruptcy court had recently revoked Marra’s discharge).

Marra did not want the trustee to turn over any information, claiming the sought after documents were privileged. He filed a petition to quash the summons, and the government filed a motion to dismiss the petition to quash the summons due to its belief that the court did not have subject matter jurisdiction.

I will briefly describe the issue and outcome.

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First some background. As a starting point, I note that I cover the complex summons notice rules in some detail in Chapter 13 of Saltzman and Book. Here is the nutshell version.

If the IRS issues a summons to a bank or other entity for a third party’s records, the IRS must determine whether either the taxpayer or the third party is entitled to notice of the summons.  That is important because the statutory scheme sets out that only a person required to receive notice when the IRS serves a summons can bring a proceeding to quash a summons.

There are the exceptions to the general rule that the IRS must give notice to third parties. Under Section 7609(c) he general rule is inapplicable when an IRS summons is “issued in aid of the collection of — (i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued or (ii) the liability … of any transferee or fiduciary of any person referred to in clause (i).”

The in “aid of the collection language” is broad, and read literally it would swallow the general notice rule. Courts have limited its application. A key case in this development is Viewtech v US, a Ninth Circuit opinion from 2011. There the court that applied the “issued in aid of the collection” exception and held that “a third party should receive notice that the IRS has summonsed the third party’s records unless the third party was the assessed taxpayer, a fiduciary or transferee of the taxpayer, or the assessed taxpayer had some legal interest or title in the object of the summons.”

In other words, if the other person was the assessed taxpayer or had a close legal interest to the taxpayer, then the IRS does not have to notify that other person when it is trying to get information that would help it collect against that taxpayer’s liability. That rule makes sense, at least to me, as a taxpayer who has an assessed liability has had sufficient notice of the IRS’s interest in collecting the outstanding tax, and presumably would have had ample opportunity to work something out with a revenue officer. 

Back to Marra. In light of the Viewtech standard, and that the IRS was seeking records that pertained to Marra himself, the district court concluded he was not required to receive notice and thus had no right to bring a petition to quash. 

Congress Enacts Law of Unintended Tax Consequences

We welcome back occasional guest blogger and frequent commenter, Bob Kamman.  Bob has a practice in Phoenix that provides both representation and return preparation.  Today, he comes to the rescue of the PT team that has struggled to produce content this past week due to other obligations and provides us with insights on some of the quirks created by the legislation designed to provide relief for taxpayers impacted by the pandemic.  Keith

As the latest Covid-relief legislation makes its way through the Congressional meat grinder, a couple of tax inequities continue to be overlooked. Maybe it’s not too late to correct them.

One is mostly of interest to college students and the low-income taxpayer clinics where they may seek help. The other might interest college professors considering a sabbatical year abroad.

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I) The Unemployment Trap

Many people who lost their jobs in 2020 qualified for federally-funded unemployment benefits that were more generous than those allowed by state programs. Recipients were paid $600 a week for up to 17 weeks, in addition to normal state benefits. Even college students with part-time jobs qualified, in many cases. It didn’t matter if they were under 24 years old, and still being claimed as dependents by their parents.

The $600 weekly checks ended on July 31, 2020, and would not resume until this year. Meanwhile, some people had continued eligibility for state benefits, and for other Covid-related compensation.

Enter the dreaded Kiddie Tax.

Since 1986, children with unearned income of more than a certain amount have been taxed on it at the same marginal rate as their parent(s). This prevented high-bracket adults from shifting investment income to their low-bracket kids. But back then, it only applied to children under age 14.

Congress eventually applied the law to older “children,” including full-time students up to age 23 who were not providing at least half of their support with their own earned income. Their earnings are taxed at the usual rates, but their unearned income is taxed at the higher parental rate. And unemployment is considered unearned income.

Tax practitioners this filing season are finding it not unusual for young unemployed college students to bring in Forms 1099-G showing five-figure amounts for unemployment compensation. If federal tax was withheld at all, it was mostly at a 10% rate. If $10,000 was received, $1,000 was withheld. But if the student must use the higher tax rate of, for example, 24%, the tax could approach $2,400 and the balance due IRS even after withholding, nearly $1,400.

If earned at a job and reported on a Form W-2, none of the $10,000 in wages would be taxed because of the $12,400 standard deduction.

Is this what Congress intended? Probably not.

Will it be fixed by pending legislation? Predictions are welcome in the Comments section below.

II. Welfare for Expatriates

If our unemployed students in the example above must pay IRS another $1,400 on their “unearned” unemployment compensation, what will the federal government do with it? Maybe, send it to one of their instructors.

Suppose you have a job offer from the Sorbonne to teach in Paris for a year at a salary of $180,000. Would it help, if the Treasury added another $1,400 tax-free? And that much for your spouse, also. That’s how the “Economic Impact Payments” have worked in the last two rounds.

They are based on AGI, after the exclusion for income earned abroad. That amount in 2021 is a maximum of $107,600. Then the $1,200 and $600 payments were not reduced unless this post-exclusion AGI exceeded $75,000 – or $150,000 on a joint return. All you must do to claim the exclusion is meet the “physical presence test:” stay overseas more than 330 days out of any 12-month period. (You also have to show that you have not kept your “tax home” in the United States, but for many academics those rules are not onerous.)

Paris is too expensive on $180,000 a year? Try Auckland. Cost of living in New Zealand is lower, and there is less virus around once they let you in.

Of course, educators are just a small minority of the Americans who benefit from this loophole. Half a million taxpayers claim the Section 911 exclusion each year, according to IRS estimates based on 2016 returns.

Are Covid disaster-relief payments for well-paid Americans living abroad what Congress intended? Probably not. A bipartisan group of 16 senators in early February sponsored a budget resolution amendment that promised to target stimulus checks to low- and middle-income families. It passed 99-1.

How simple would this be to fix, with a sentence that defines AGI as the amount before the foreign earned-income exclusion? Very.

Will that happen? Again, your predictions are welcome.