This week’s summary opinion in Paynter v Commissioner is a relatively straightforward case in many respects: a taxpayer habitually filed his income tax return with a balance due; IRS sent him some collection notices; and he claimed to have paid but had no proof. It is not surprising that the Settlement Officer and the Tax Court held that Paynter was still on the hook.
Some aspects of the case that stand out. Paynter is a lawyer, and he justified his practice of not paying estimated taxes because, as he said at trial, “I never have and I don’t like the process.” Moreover, the year at issue was 2006; IRS sent a balance due notice in 2007 (about $16,000 in tax) but without any explanation did not send any other collection letters until 2014.
I guess it is not that surprising that some lawyers do not have stellar tax compliance practices and at times IRS seems to not engage in best collection practices. I also think it is not that surprising that “I don’t like the process” does not amount to reasonable cause as a defense to civil penalties.
Yet the case raises a bunch procedural issues. The taxpayer made an estoppel argument against the government based on the delay in seeking collection. The opinion notes that the delay caused the taxpayer hardship and that the IRS failed to explain why it sat on the assessment for close to 8 years. Yet, the opinion discusses the high bar that taxpayers must clear to win an estoppel argument:
- the Government knew the facts of the taxpayer’s situation;
- the Government intended that its conduct be acted on or acted so that the taxpayer had a right to believe it was so intended;
- the taxpayer was ignorant of the facts; and
- the taxpayer relied on the Government’s conduct to his injury.
On top of those requirements, in the Ninth Circuit (where an appeal would lie if it were not an S case) a party seeking to invoke estoppel must also prove the government’s affirmative misconduct, which requires misrepresentation or concealment of an affirmative fact. There was no evidence suggesting the IRS’s deliberately lied or made false promises, and the court, while not condoning the IRS’s delay, concluded that it did not preclude collection. While the case was old, it was still within the 10 year SOL on collection (the opinion did note, however, that the taxpayer did not raise a possible abatement of interest claim, which would have potentially led to some consequence for the delay).
Another interesting part of the opinion is its discussion of how long taxpayers should retain records. The court took judicial notice of the fact that the taxpayer’s bank was closed and the FDIC took over as receiver (discussing as well the standard under federal rules of evidence for it to do so). Due to the bank no longer being around and his 2013 shredding of his 2006 tax records, the taxpayer claimed he could not prove with documents that he paid the tax. He testified that he was certain that he did. He recalled that in either 2007 or 2008 he went in person to the Santa Rosa IRS office and paid in full his 2006 liability. Given the taxpayer’s practice of not paying estimated taxes, filing tax returns with no or little payment, and waiting for IRS bills before paying, the taxpayer also had a bunch of years when he paid following IRS sending a balance due letter. IRS had record of those other years’ payments but no record of the 2006 payment.
The taxpayer justified his absence of documentary proof in part on IRS standards for retaining records. The opinion notes that the IRS has general standards for record retention. IRS states on its web page that there is no hard and fast rule for record retention: “the length of time you should keep a document depends on the action, expense, or event which the document records.” The IRS generally ties the discussion to records relating to proving an item claimed on the return and the general 3-year SOL on assessment, rather than proving that a taxpayer has paid and the 10-year SOL on collection. Yet this case is a good reminder that it is on the taxpayer to prove payment, and testimony alone in the absence of proof is likely not enough if IRS records do not reflect payment.
Paynter also raises some old CDP issues we have previously discussed, including whether issues of payment amount to questions of liability or collection, an issue that the Tax Court has not resolved (see footnote 9) and is relevant because in some circuits in collection cases the Tax Court is bound to the record from Appeals. At the end of the day, the Tax Court concluded that Paynter failed to prove his case under any standard.
One question that the opinion does not directly address is the IRS’s failure to meet the RRA 98 requirement for IRS to send taxpayers an annual reminder of a balance due. There is no specific remedy if IRS fails to comply with that requirement, though I suspect it may have helped Paynter if he had sought interest abatement and this seems to be precisely the kind of case Congress had in mind when adding that requirement.