Seeking First Time Abatement Through Collection Due Process

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In Kelly v. Commissioner, TC Memo 2022-73 petitioner sought to use Collection Due Process (CDP) as a means to obtain first time abatement.  First time abatement was not the only issue in the case but seeking to have the Tax Court decide that the IRS had improperly administered its policy granting relief seemed a stretch.  We have talked about the issue of first time abatement in prior posts here and here.  These were some of the first posts written for this blog.  The policy has been around for many years.  It is a popular policy but one that leaves taxpayers dissatisfied when the IRS uses it instead of using another basis for abatement, like reasonable cause, so that the taxpayer can preserve the first time abatement for another filing.  I wrote a post about reversing first time abatement where the IRS later realized it had granted abatement in derogation of its policy.

I did not look at the underlying pleadings filed but was struck that the case did not involve a discussion of prior opportunity.  With penalties, the IRS often gives the taxpayer an opportunity to go to Appeals if the first line denies the request for penalty abatement.  If the IRS gives that opportunity, the taxpayer cannot raise the merits of penalty abatement in a CDP case.  Here, there was no discussion of prior opportunity but just a discussion of the merits of the penalty request.

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During the years at issue, 2013-2015, Mr. Kelly was a securities broker in New York City making over $1 million each year.  He did not timely file his returns for these years.  At the end of 2017 he filed his 2013 and 2014 returns reporting tax of more than $500k each year without remittance to which the IRS added failure to file, failure to pay and estimated tax penalties.  In early 2018 he filed his 2015 return without remittance but reporting a tax due of more than $400,000 to which the IRS added penalties.

The IRS sent CDP notices of intent to levy and filed notices of federal tax lien (NFTL) which also triggered CDP notices.  He timely requested a hearing seeking an installment agreement, withdrawal of the liens and abatement of the penalties.  The Settlement Officer explained during the CDP hearing that first time abatement was a non-starter because he had been delinquent before including in 2012.  Mr. Kelly also requested abatement based on reasonable cause.  He explained that his wife spent money lavishly and he went through a divorce in 2015 which caused him experience financial hardship, emotional problems and depression.  The SO rejected this request as well citing to his history of non-filing, his high income and his lack of a payment protocol.

Mr. Kelly also ask for lien withdrawal because the NFTL put a mark on his securities license which might impact his business.  The SO was not moved by this argument either.

Finally, Mr. Kelly proposed a partial pay installment agreement; however, he was not current on his 2019 liability causing the SO to reject this request and issue the notice of determination.  In the Tax Court case the IRS sought summary judgment. 

The Tax Court agreed with the SO that he did not qualify for first time abatement because he had unreversed additions to tax within three years of the year for which he sought the application of this policy.  I was a bit surprised that the Court ruled on the first time abatement issue and consider that a victory for taxpayers even if it did not help Mr. Kelly in this instance.

Next, the Court looked at the alternate argument of reasonable cause.  The Court said he faces a “decidedly uphill battle in attempting to show reasonable cause.”  It noted that his excuses, the initiation by his wife of a divorce and resulting depression, only occurred at an unspecified time near the end of the three year period of non-payment.  Mr. Kelly provided no explanation for his history of non-compliance while making over $1 million each year.  His high income also made his other excuse, financial hardship, difficult to understand.  Despite the fact the Court sees little chance of success on these arguments, they present factual issues in dispute and not ones suitable for summary judgment.

The Court then found the SO satisfied the statutory requirements of 1) verification – concluding the IRS properly notified Mr. Kelly of the NFTL filing; 2) rejection of the partial pay installment agreement – concluding the rejection met the IRM guidelines due to his ongoing failure to comply and history of non-compliance; 3) lien withdrawal – concluding that Mr. Kelly’s allegations that the liens would adversely impact his future income were “entirely speculative”  and even if not speculative reflected decisions within the control of the IRS not the Court; and 4) balancing – concluding that the size of the liabilities, his repeated failure to file returns or even to make modest estimated tax payments supported the conclusion the SO did not abuse his discretion.

The outcome here is unremarkable, but the number of different arguments made by Mr. Kelly give others an opportunity to see the many ways a taxpayer can attempt to attack a collection action.  His long period of non-compliance and high dollar liabilities make Mr. Kelly an unsympathetic figure for the relief he requests.  Still, he provides us with a roadmap to the many types of arguments available.  The Court’s careful look at both the statute and the IRM shows that the IRS needs to take care to follow its internal procedures as well as Congressional instructions if it hopes to prevail in support of its collection decisions when faced with a well-funded and well-crafted argument attacking those procedures.  Most petitioners in this circumstance will not have the resources Mr. Kelly had to attack the IRS actions, but his unsuccessful attempts show others with better cases where they might go to find relief.

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