Two tickets to Tax Court, by way of § 6015 and Collection Due Process

August 28, 2019 by 3 Comments

Today we again welcome guest blogger Carolyn Lee who practices tax controversy and litigation in the San Francisco offices of Morgan Lewis. Carolyn represents individual and business clients, including pro bono and unrepresented taxpayers while volunteering with the low income tax clinic of the Justice & Diversity Center of The Bar Association of San Francisco.

Carolyn asks that we add a reminder about the CDP Summit Initiative she is involved with, to reform and improve the effectiveness and efficiency of collection due process procedures, benefitting everyone who engages with them. Registration is open for the upcoming ABA Tax Section meeting in San Francisco on October 4 and 5, when there will be three CDP Summit programs. In addition, there will be a CDP Summit in Washington, D.C. on the morning of December 3. Contact Summit participants Carolyn (carolyn.lee@morganlewis.com), William Schmidt schmidtw@klsinc.org, or Erin Stearns (erin.stearns@du.edu) if you would like to be involved. Christine

The recent case of Francel v. Commissioner, T.C. Memo. 2019-35, provides a wealth of tax procedure lessons.  In Francel, a denial of § 6015 relief collided with a CDP determination, resulting in two tickets to Tax Court – one more valuable than the other.

Thomas Francel was (and is) a cosmetic surgeon with a solo practice that generated almost $1 million in income to the Francel household during each of the 2003-2006 tax years in issue. Patients paid their fees in three ways: currency, cashier’s checks (together, “cash”) or credit cards. Fees were accepted by the practice receptionist who turned them over to the office manager, Sharon Garlich. Ms. Garlich entered currency payments less than $100 and cashier’s checks in amounts of $10,000 or greater in the practice’s accounting system. Credit card payments also were entered in the practice’s accounting system. Ms. Garlich gave all other cash to Dr. Francel’s wife (nameless to the Court except as “Francel’s wife”) who also was employed at the medical office. These diverted fees ranged between $194,000 and $264,000 for each of the 2003-2006 tax years.

Ms. Garlich recorded by hand in a green ledger the cash payments she gave to Ms. Francel – or to Dr. Francel if Ms. Francel was not available. The medical practice’s CPA had direct access to the practice’s accounting system. No one gave the CPA the green ledger. No one told the CPA about the cash diverted to Ms. Francel (or Dr. Francel). The Francels filed joint income tax returns. The medical practice filed its tax return as an S corporation, with income passing through to the Francels.

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The Opinion does not indicate whether Dr. Francel personally directed the use of any of the diverted fees, though there are hints he was aware some cash was held separate from the practice’s accounts. For example, Ms. Garlich testified she gave diverted fees to Dr. Francel if Ms. Francel was not at the office. Also, when Ms. Garlich discussed the practice’s cash flow problems with Dr. Francel, she testified that his solution, after speaking with Ms. Francel, was “instead of keeping all of the cash for a while they would just go ahead and put half of it into the business.” Nonetheless, Dr. Francel could have known about the unconventional (in the Court’s view) fee handling method and still have believed the income tax reporting was correct.

The facts do tell us that Ms. Francel had a drug habit, which she kept hidden from Dr. Francel. We also learned that the strain of keeping two sets of books wore on Ms. Garlich, who retained legal counsel and reported the scheme to the US Attorney’s Office and the IRS Criminal Investigation Division.

Further into the engaging 48-page Opinion we learn that Ms. Francel (and not Dr. Francel) was indicted by the US Attorney’s Office and charged with a violation of § 7201, for attempting to evade or defeat federal income tax owed. Ms. Francel plead guilty to the federal tax charges, agreeing that the total tax underpayment for the 2003-2006 tax years was $344,121. Ms. Francel was sentenced to one year and one day imprisonment with supervised release. She was ordered to pay restitution to the government in the amount of $344,124 (the opinion acknowledges the $3.00 difference). Ms. Francel paid the restitution in full, using funds from a 401(k) account she owned. The restitution payments were credited to Dr. Francel’s account since a payment by either jointly liable spouse reduces the liability owed by both spouses. As an aside, Ms. Garlich has a whistleblower claim pending related to her role in securing the collected tax.

Many more pages later, recounting the successful civil litigation brought by Dr. Francel’s medical practice against Ms. Francel for embezzlement; a divorce suit and reconciliation between the Francels (still married and working together at Dr. Francel’s practice); and the recurring appearances of the same few lawyers representing the Francels individually and together and the medical practice, as plaintiff or defense, variously, throughout the years leading to the Tax Court trial (not so subtly noted by the Court), we arrive at the procedural history section of the Opinion. It is a delight for persons interested in the finer technical points of collection due process, § 6015 relief jurisdiction and Tax Court standard and scope and standard of review.

Dr. Francel Engages with the IRS and the Tax Court.

Due to interest and other computational quirks, after the restitution was paid the Francels still owed approximately $144,400 for the 2003-2006 years. Dr. Francel submitted a Form 8857 – Request for Innocent Spouse Relief on May 18, 2015 for all four tax years. The Opinion does not include any facts about an administrative review of the 6015 request by the IRS’s Innocent Spouse unit. We only know Dr. Francel’s claim was assigned to Appeals (“§ 6015 Appeals”).

On September 22, 2015, the IRS mailed Dr. Francel a notice of intent to levy to collect the 2003-2006 income tax liabilities, despite statutory prohibitions and Internal Revenue Manual (IRM) instructions to suspend collection when a processable request for § 6015 relief is received. The Opinion provides no indication of collection jeopardy. See § 6015(e)(B)(i); IRM 25.15.2.4.2; and IRM 8.21.5.5.7. Dr. Francel timely requested a collection due process (CDP) hearing with respect to the notice of intent to levy, asserting that he was entitled to § 6015 relief. The Appeals Officer assigned to the CDP hearing request (the “CDP Appeals Officer”) paused the CDP proceedings pending the decision regarding Dr. Francel’s § 6015 request.

Dr. Francel’s request for relief was denied. A report initiated by the § 6015 Appeals Officer, unsigned and undated, was sent to the CDP Appeals Officer who reviewed the report and adopted the decision without change. (We do not know the basis for the administrative denial.) The CDP Appeals Officer had a telephone conference with the attorney representing Dr. Francel for the CDP hearing, and confirmed the § 6015 request was denied.

On February 14, 2017, the IRS mailed Dr. Francel a notice of determination following the CDP hearing, sustaining the levy collection. This notice of determination with respect to the CDP hearing was a ticket to Tax Court for Dr. Francel, to seek review of the determination.

The notice stated that Dr. Francel would receive a separate “Final Appeals Notice” regarding his rejected relief request. Presumably this communication would have been issued as Notice of Determination by § 6015 Appeals. Such a notice would also have been a ticket to Tax Court for Dr. Francel. The notice was not sent, however. Because the IRS did not issue a response to Dr. Francel regarding the Form 8857, his application for relief itself became a ticket to Tax Court. See § 6015(e).

On March 14, 2017, Dr. Francel petitioned the Court to review the February 14, 2017 notice of determination, asserting error in denying him § 6015 relief. The petition was filed within thirty (30) days of the February notice. Ms. Francel intervened to support his request for relief. (The Francels were living together again.) Ms. Francel failed to appear for trial; she was dismissed as a party for failure to prosecute the case.

Dr. Francel had two tickets to Tax Court. The § 6015 rejection, with or without a formal determination denying relief initiated by § 6015 Appeals, entitled Dr. Francel to Tax Court review under § 6015(e). In addition, the CDP determination allowed Dr. Francel into Tax Court under § 6330(d)(1).

Does it matter which ticket Dr. Francel tendered to the Court?

Two Tickets to Tax Court

Consider the § 6015(e) ticket. First, when is a petition from a 6015 ticket timely? The Court explained a petition pursuant to § 6015(e) was timely regardless of whether there was a final determination issued by § 6015 Appeals (i.e., the promised Final Appeals Notice). The clock to petition for Court review of denial of § 6015 relief starts ticking on the date the IRS mails, by certified or registered mail to the taxpayer’s last known address, notice of the Service’s final determination. The taxpayer may petition for relief not later than the 90th day after such date. Here there was no notice from § 6015 Appeals. But taxpayers are not held hostage by slow determinations of § 6015 applications. Instead, they may petition the Court for review of their requests after six (6) months have passed since the request was made to the IRS. § 6015(e)(A)(i)(II). The Court determined Dr. Francel’s petition was timely pursuant to § 6015(e)(A) because it was filed March 14, 2017; that is, significantly longer than six (6) months after May 18, 2015 when the processable Form 8857 was submitted to the IRS.

Second, what standard and scope of review apply to the 6015 ticket? In cases arising under § 6015(e)(1), the Court employs a de novo standard of review and a de novo scope of review. Porter v. Commissioner, 132 T.C. 203, 210 (2009). (As a bonus for readers, the Porter opinion includes an extensive dissent asserting the proper standard of review for § 6015 cases should be abuse of discretion (with a de novo scope of review) – written by Judge Gustafson and joined by Judge Morrison who decided this Francel case.)

The de novo standard of review and scope of review affords taxpayers the benefit of the Court’s fresh consideration of all relevant evidence. IRS determinations are not granted deference. In some instances, particularly when an administrative record is under-developed when the matter reaches the Court, de novo review can make all the difference with respect to a full hearing of the facts and law, and a decision that is correct on the merits rather than based solely on the administrative record. Unfortunately, this summer Congress limited the Court’s scope of review in § 6015(e) cases so it is no longer fully de novo. It remains to be seen how litigants and the Tax Court will interpret the Taxpayer First Act’s changes to § 6015(e). Steve Milgrom and Carl Smith raised several concerns and questions in a recent PT post.

Now turn to the § 6330(d)(1) CDP ticket to Tax Court. The default application of § 6330(d)(1) provides that a petition must be made within thirty (30) days of a CDP determination – significantly shorter than the period to request review of a § 6015 relief rejection. Nonetheless, Dr. Francel met the 30-day deadline. The Court would have had jurisdiction to review the rejection of § 6015 relief by the CDP Appeals Officer based on Dr. Francel’s § 6330(d)(1) ticket.

The advantage of one ticket over the other in this case comes into sharp relief with respect to the standard and scope of review. In contrast to the Court’s full de novo review of § 6015 matters, collection due process review is constrained. The standard of review when the liability is not at issue – which it was not in Francel – is abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 609-610 (2000), quoting the legislative history of § 6330, because the statute itself does not prescribe the standard the Court should apply when reviewing the IRS’s administrative decisions.

Even more material in CDP matters, the standard of review is abuse of discretion. Sego v. Commissioner, supra; Goza v. Commissioner, 114 T.C. 176, 181-182 (2000); Robinette v. Commissioner, 439 F.3d 455, 459 (8th Cir. 2006, rev’g 123 T.C. 85 (2004). (Of course, review is de novo if the underlying liability is properly at issue.) Also, the Court often is bound by the record rule, in that it may only consider evidence contained in the administrative record if the case is appealable to the 1st, 8th, or 9th Circuits. In cases appealable to the other circuits, the Court does not limit the scope of its review to the administrative record, following Robinette. Judge Halperin recently reviewed the messy case law on scope and standard of review in CDP appeals in Hinerfeld v. Comm’r, T.C. Memo. 2019-47. In many cases, particularly those involving self-represented taxpayers, the record rule forecloses a full hearing of relevant facts. Here, however, Dr. Francel did not suffer from lack of representation.

So for a case involving a § 6015 issue and a CDP issue, one ticket is more valuable than the other. The § 6015(e)(1) ticket offers a longer period to petition for Court review and it offers a de novo standard and scope of review. The § 6030(d)(1) ticket requires a 30-day dash to petition and it is burdened by the abuse of discretion standard and scope of review. In the Francel matter, the § 6015(e)(1) ticket would be more valuable.

In fact, the Court took jurisdiction pursuant to § 6015(e)(1) without an explanation for the selection. Perhaps it did so because the rejected request for § 6015 relief preceded the unfavorable CDP determination which sustained the § 6015 denial. Thus, Dr. Francel had the benefit of the Court’s full de novo review. This may have been small comfort, however, because the Court sides with the IRS, deciding that Dr. Francel did not qualify for any relief.

By comparison to the lead in, a fairly uneventful conclusion

From this point, the Opinion accelerates to a close with the § 6015 analysis. Fundamentally, the unreported income was attributable to Dr. Francel. Relief may not be granted under § 6015(b) or (c) for tax arising from a liability attributable to the requesting spouse. Dr. Francel’s S corporation medical practice was required to report all fees as income. As sole shareholder of the practice, Dr. Francel was then required to include the fees in his income. The question of income attribution did not rest on who was responsible for the under-reporting, or embezzlement, or criminal tax evasion.

In addition, the Court decided it would not be inequitable to hold Dr. Francel liable for the deficiencies. (Section 6015(f) permits relief even when the liability is attributable to the requesting spouse, if an analysis of the facts and circumstances establishes equitable relief is justified.) According to the Court, Dr. Francel benefitted from the unreported cash fees because Ms. Francel spent some of the cash on home improvements for the residence Dr. Francel still occupied. He also owned the car restored using the unreported income. Dr. Francel’s accumulated wealth was attributable in part to the unreported cash and the unpaid tax from the 2003-2006 tax years. These facts weighed against a grant of relief. If Dr. Francel had actual knowledge, or reason to know, of the diverted cash and unreported income as the facts imply, this would have weighed against relief as well. Not mentioned but possibly also a factor: Dr. Francel may have failed the economic hardship test because he had the financial resources to pay the liability and still maintain a standard of living well above IRS national, regional and local standards (remember, Dr. Francel continued his cosmetic surgical medical practice).

In close, what a bountiful Opinion this is, presenting facts that would be NCI-episode-worthy if there had been a dead body; a generous tutorial regarding § 6015 relief, collection due process, as well as standard and scope of Court review; and – best of all – an elegant profiling of two tickets to the Tax Court. As a bonus, for readers who teach professional responsibility for tax practitioners, I recommend mining the Opinion for an exam fact pattern regarding an attorney’s duty of loyalty and conflicts of interest, extracting the many representation scenarios the Court helpfully flags. 

Filed Under: Collection Due Process, Innocent Spouse, Tax Court Tagged With:

Collection Due Process Summit Initiative

July 18, 2019 by Leave a Comment

Today we welcome guest blogger Carolyn Lee who practices tax controversy and litigation in the San Francisco offices of Morgan Lewis.  Carolyn represents individual and business clients, including pro bono and unrepresented taxpayers while volunteering with the low income tax clinic of the Justice & Diversity Center of The Bar Association of San Francisco.  She has taken on the task of trying to reform and improve CDP after our first two decades of experience with this statute and created the CDP Summit Initiative.  The CDP Summit Initiative plans to hold sessions at several committee meetings during the upcoming ABA Tax Section meeting in San Francisco on October 4 and 5.  It also plans to hold a CDP summit in Washington, D.C. on the morning of December 3.  If you have an interest in improving CDP, here’s a chance to get involved.  Keith 

Few topics engage the tax controversy and litigation community more than the Sections 6320 and 6330 collection due process (CDP) protections as applied. The CDP community is vast – virtually anyone touched by IRS tax collection efforts including taxpayers, practitioners in firm and clinic practice environments, the IRS Collections division, the Office of Chief Counsel, the Tax Court, and the IRS Taxpayer Advocate Service (TAS). We are unified by the fact that everyone has ideas or plans for CDP’s improvement. Note, however, there is no movement to eliminate CDP. CDP indisputably offers valuable protections and procedures to the community.

Instead, there is a new movement to continue fortifying CDP through a newly launched CDP Summit initiative. The Summit objectives are three-fold: CDP education for all stakeholders to increase effective engagement; policy and procedure improvements; and transparency when change is not feasible, with an explanation. Summiteers are shamelessly piling on the years of work by Keith Fogg and Les Book and this Procedurally Taxing (PT) blog, Nina Olson and TAS, the often unheralded efforts by IRS and Office of Chief Counsel professionals, Tax Court directional Orders and Opinions, and observations by private bar practitioners. Summiteers recognize an infrastructure worthy of renovation instead of tear-down treatment. This posting is a call to join the CDP Summit initiative with input and, potentially, time and talent as a member of a Summit Working Group. More information about becoming a Summiteer closes this post.

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As commemorated by PT and others throughout last year, CDP is in its third decade. CDP’s implementation, through more than 20 million mailed CDP notices, has revealed its creaky aspects and unintentional, unproductive results in some circumstances. The community has had ample experience to identify opportunities for change, to more effectively and efficiently achieve CDP’s beneficial intent: Fairness when collecting tax due. Orderly procedures that result in progress. Sustainable, humane tax collection approaches to address outstanding tax liabilities.

New slipcovers and updated kitchen appliances have been a recurring feature of CDP’s life. Consider the ever-evolving lien and levy notices, beta tests of helpful outreach to taxpayers after a CDP request is submitted and before the case is referred to a Settlement Officer, and court Orders spurring resourceful efforts to craft sustainable collection alternatives instead of sending the taxpayer back to the street, no further along toward a sustainable collection plan than before filing a Court Petition. Generally unacknowledged is the fact that for years the IRS Collection teams and Chief Counsel attorneys have attended to many suggestions for improvement presented by TAS, PT posters and practitioners underwriting CDP impact litigation – in addition to surfacing opportunities for improvement based on their own experience. The IRM, CDP forms and related communications often change accordingly without fanfare. It is safe to say the point of these government efforts is to improve CDP processes, not torment taxpayers and their representatives. No one believes simply moving a file off a desk without progress, or with a determination that only pushes the (possibly redundant) work to someone else’s desk, is considered a successful or satisfying result by IRS Collections and Chief Counsel professionals.

There still is work to be done to realize CDP’s beneficial intent. The CDP Summit initiative is organized to press forward on an all-together-now basis, in earnest support of CDP. The Summit launched with a program of the ABA Tax Section Individual and Family Tax Committee during the 2019 May Meeting. It continues as an initiative with the active involvement of expert members of every CDP community stakeholder group. The May panelists – the Honorable David Gustafson, Judge, United States Tax Court; Mitch Hyman, Office of Chief Counsel and §§ 6320 and 6330 subject matter specialist; Keith Fogg, who needs no introduction here; Erin Stearns and William Schmidt, both Low Income Tax Clinic Directors; and me for the private tax controversy and litigation bar – are the foundation of the CDP Summit Steering Committee. We are joined by additional representatives from the IRS Office of Chief Counsel, IRS Collections and Collections Appeals, IRS SBSE Counsel responsible for Collections programs, TAS, tax academia and the private bar and tax clinics. 

How many CDP opportunities for improvement have already been captured? Almost thirty (30) from every CDP stakeholder constituency. What follows is only a sampling. Many opportunities will look familiar. Here we go: Do more, better, with CDP notices and other communications. (Note that here, the CDP Summiteers plan to join IRS and TAS notice improvement initiatives underway.) Simplify the CDP hearing request process and clarify what, if anything, is jurisdictional about CDP request submission dates. Regarding the CDP request Form 12153, keep the request simple and quick to complete and add tools for the taxpayer to understand and evaluate the value of and eligibility for collection options (link to the financial information Forms 433). For taxpayers ready to act, let them check a box on the Form 12153 seeking expedited attention. Expand the IRS beta program offering helpful support to develop sustainable collection alternatives after the CDP request and before the Appeals hearing.  Explore and test the role of the codified Taxpayer Bill of Rights (TBOR) within CDP. Clarify what is a “prior opportunity” to contest a tax liability. What about expanding the use of fee-free Appeals mediation while in a CDP or Tax Court docketed posture? Explore the use of Motions for Summary Judgment given the unforgiving abuse of discretion standard and scope of review, within the context of achieving CDP’s intended results. Are there more options for the Court to address CDP issues presented within the same standard and scope of review constraints? Should all CDP Motions for Summary Judgment be set for trial session hearings, to allow unrepresented taxpayers the opportunity of pro bono counsel and to facilitate settlement? Speaking of remand (an increasingly lively topic of interest), when might an Order of Remand be most productive? More proactively, let’s be in front of understanding the IRS’s planned uses of technology for collection within the context of TBOR.

Opportunities are being classified as Administrative (bifurcated as to point of entry to CDP and Appeals), Judicial and Remedies, with some blurring between the Judicial and Remedies classifications. Change opportunities will be administrative (for example, the IRM), regulatory (including revenue procedures and revenue rulings) and statutory. There may be proposed revised or new Tax Court Rules of Practice and Procedure. The Summit focus will be on feasible administrative and procedural change.

Because the CDP Summit is committed to impact, feasible change with significant effect is our goal. The Steering Community will prioritize opportunities. Working groups across all stakeholders will form around the priorities to explore and recommend change, or understand why change is not feasible (accompanied by possible beneficial alternatives). Education and communications will flow to the practitioner community and taxpayers including, but not limited to several CDP programs during the ABA 2019 Fall Tax Meeting (San Francisco, October 3-5).

Now to the call to action: PT readers and CDP fans, move beyond complaining in the corners and join us. Send us your ideas to improve CDP, within the boundaries of the current §§ 6320 and 6330 statutes. Opportunities within the administration of CDP, judicial engagement, and remedies leading to sustainable collection alternatives are welcome.

Consider whether you would like to be a Summiteer member of a volunteer working group addressing Administrative, Judicial or Remedies opportunities led by a fellow Summiteer. Collaborate with others across the CDP community, including IRS and Chief Counsel subject matter experts. While working group participation will be accompanied by tax geek glamour, it also will require work and time in several forms: Brainstorming, research and analysis, conference call and listserve discussion, requests to publish and present CLE programs about your efforts. We promise you the satisfaction of constructive and productive collaborative effort and outcomes will be immeasurable.

Sections 6320 & 6330 Collection Due Process Protections: Improve CDP, all together now.  Call for input and working group participation.

We look forward to hearing from you. If you have a suggestion or want to become a Summiteer member please contact Carolyn Lee at carolyn.lee@morganlewis.com; or William Schmidt at schmidtw@klsinc.org; or Erin Stearns at erin.stearns@du.edu.

Filed Under: Collection Due Process Tagged With:

Requesting Innocent Spouse Relief: How long is long enough to request relief? Not two years. Another reflection on the NTA’s recent Innocent Spouse blog

June 19, 2018 by 2 Comments

We welcome guest bloggers Robert Horwtiz, Hochman Salkin Rettig Toscher & Perez, P.C., and Carolyn Lee, Morgan, Lewis & Bockius LLP. Both Robert and Carolyn practice tax controversy and litigation in California. They each have extensive experience with section 6015 innocent spouse matters – many involving no- or low-income taxpayers. In addition, they each have a history of pro bono service including volunteering with state and county Bars and low-income tax clinics, and assisting taxpayers during the Tax Court Calendar Call. The comments and recommendations in this post are Robert’s and Carolyn’s personally, and do not represent the views of their firms or any Bar Association. 

Robert and Carolyn reached out to us after the recent post providing statistics on the timing of innocent spouse relief. They are promoting a legislative change to the innocent spouse provisions that eliminates the time limitation for requesting relief. Their proposal, as explained in detail in the post and attachment below, would eliminate a restriction on requesting relief that does not follow the spirit of the statute. In a recent post regarding time frames and notice, Carl Smith discussed Mannella v. Commissioner, 132 T.C. 196, 200 (2009), rev’d and remanded on other issue, 631 F.3d 115 (3d Cir. 2011) as well as the regulation comments that he and I and others made in response to the proposed “new” regulations for 6015 resulting from the IRS pull back of the two year rule formerly applicable by regulation to section 6015(f). Robert and Carolyn take a broader view of the problem and seek legislation to eliminate the time period entirely. Doing so lines up with the goal of innocent spouse relief. For a host of reasons, discussed below, discussed in our regulation comments, discussed by the NTA and highlighted by cases like Mannella, individuals caught up in domestic break ups need time to sort through the resulting problems in their lives. I have not met clients who postponed dealing with their tax issue out of a desire to inconvenience the IRS. Any delay usually results from factors outside the control of the applicant or factors related to the necessity to secure basic human needs such as safety, shelter, food, and employment (recall Maslow’s hierarchy of needs) before getting to the tax problem. By thinking big to address the problem, Robert and Carolyn may convince Congress to set the statute right. Keith  

Recently Procedurally Taxing commented upon the May 23, 2018 National Taxpayer Advocate (NTA) blog discussing current trends in innocent spouse (§6015) determinations of relief. Another feature of the NTA blog was her observation about the effect on application volume of the IRS’s 2011 decision to accept requests for §6015(f) equitable relief through the end of the §6502 statutory collection period – typically at least ten years. The request period for equitable relief is significantly longer than the statutory two-year request period for the other two avenues to §6015 relief, §6015(b) (traditional relief) and §6015(c) (allocated relief). We believe this is a mistake. The §6015 request period should be the same for qualifying requesting spouses regardless of the avenue to relief, and it should extend through the end of the §6502 collection period.

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The NTA noted that extending the equitable relief period from two years to at least ten years did not result in a tsunami of requests. Both the NTA and Procedurally Taxing blogs describe the judicial and legislative route to the longer period to request equitable relief. They observed that §6015(b) and §6015(c) were enacted in 1998 with a two-year request period. Also relevant to the discussion is that the earliest statutory versions of relief from joint and several liability for innocent spouses did not include a two-year limitation on the request period. Inexplicably, the two-year period was included with other, more beneficially expansive revisions to innocent spouse relief with the enactment of §6015 in 1998. The legislative history is silent about the selective limitation. Legend has it there was a concern the Agency would be overwhelmed with requests if the application period were longer. Thanks to the NTA’s research, we know this concern was unfounded.

We see no valid reason to maintain the two-year statutory period to request traditional or allocated relief. A person claiming relief as an innocent spouse under §6015(b), §6015(c) or §6015(f) should be allowed to elect relief at any time during which the IRS has authority to collect the tax underpayment. A truncated period to request relief under two of the three §6015 subsections is at odds with the character of the statute, which is to make the benefits of §6015 relief available to taxpayers who qualify on the merits of their facts and circumstances. A longer statute of limitations acknowledges the complexities of marital relations. Congress enacted three distinct legal remedial forms of §6015 relief. The two-year period to request the benefits of traditional or allocated relief effectively nullifies two §6015 subsections for many requesting spouses.

Last May, as part of the 2018 Washington DC delegation sponsored by the Taxation Section of the California Lawyers Association and the Taxation Committee of the Los Angeles County Bar, we spoke with representatives of the IRS, Treasury, and National Taxpayer Advocate, as well as House and Senate Tax committee staff members about such a change. We advocated for an amendment to §6015 to extend the period of time to request relief for §6015(b) and §6015(c) through the end of the §6502 collection period, as under §6015(f). In a happy coincidence, the Taxpayer First Act, HR 5444, had recently passed the House of Representatives without opposition and was pending in the Senate. The Taxpayer First Act is an ideal legislative vehicle to effect the proposed amendment, including as it does §11303 to codify the extended §6015(f) period to request relief through the end of the §6502 collection period. It is a noncontroversial – dare we say nonpartisan – matter to change §11303 to codify the same extended request period for all three avenues to relief.

Enactment of this simple statutory amendment will bring consistency and increased fairness relative to the statute’s first gate; i.e., the period for requesting relief. The amendment will make relief pursuant to §6015(b) and §6015(c) available to the taxpayers whom these separate forms of relief were intended to benefit, and whose requests are rejected because the two-year application period closed and they cannot qualify for equitable relief pursuant to §6015(f). The change will not increase stress on the IRS or the Tax Court, which have been administering and deciding §6015 matters for almost two decades. Any concern about an overwhelming volume of applications for relief may be assuaged based on data the NTA analyzed. (Please note that the NTA has not commented on the proposal to extend the statutory period of time to request relief from joint and several liability pursuant to §6015(b) and §6015(c).) All the other existing, rigorous requirements to qualify for relief remain the same. This proposal is not a liability give-away. It is no easy task to obtain relief.

The longer request period will make a material difference for requesting spouses who merit relief. Some clients may make a dash for a low-income tax clinic. For those clients, one might conclude the §6015(f) request period could have remained two years. No one is suggesting the NTA’s findings support that argument. However, in our experience, the current two-year request period is too short for most taxpayers dealing with unexpected erroneous tax items, typically during times of family, financial and emotional distress. We find that for every client who acts quickly on IRS collection correspondence there are many dozens more who cannot bring themselves to even open the envelope. Or the second envelope. Paralyzing panic sets in.

The two-year period for seeking relief under §6015(b) and §6015(c) can result in unduly harsh consequences for taxpayers too late to satisfy the statutory two-year period. This is especially true where the spouses do not divorce or become legally separated until after the two-year period, or begin living in separate households more than one year after collection activity begins. In addition, pro se taxpayers – the vast majority of taxpayers who might qualify for relief – likely find the two-year statute a trap for the unknowing. The unintentional adverse collateral consequences of the truncated statute of limitations to request relief pursuant to §6015(b) and §6015(c) have emerged as the law has been applied.

It is important to highlight that §6015(f) equitable relief is not a safety net for requesting spouses after the §6015(b) and §6015(c) gate shuts. Like §6015(b) and §6015(c), equitable relief under §6015(f) serves its own legal purpose, with its own raft of eligibility factors to consider. As applied, §6015(f) is not an avenue to liberally granted relief for requesting spouses who could qualify for traditional or allocated relief but for missing the two-year request period. In fact, §6015(f) expressly is intended to apply when the requesting spouse fails to qualify based on the merits of §6015(b) and §6015(c). For example, requesting spouses may fail to qualify for equitable relief because the requesting spouse has financial resources, which is a factor weighing against equitable relief. Or, the requesting spouse may satisfy the §6015(c) “actual” knowledge test regarding the erroneous item, but fall short on the highly subjective and seemingly all-embracing equitable test for “reason to know” of the erroneous item. There are many circumstances when §6015(f) would not offer a safe harbor to requesting spouses who would qualify for traditional or allocated relief if only they had applied in time.

In addition, §6015(f) as applied by the IRS often fails to serve requesting spouses. The Service simply gets the equitable analysis wrong. As recent examples, two applications for relief were rejected by the IRS Innocent Spouse unit because the requesting spouses failed to establish they suffered abuse. There is no basis in any of the guidance provided by the IRS or the courts to apply a requirement of abuse in order to obtain equitable relief. To the contrary, Revenue Procedure 2013-34 describing factors to consider when determining eligibility for §6015(f) relief expressly expanded the factual parameters pertaining to physical and emotional abuse to make relief more available in such circumstances. Unrepresented taxpayers confronted with incorrect administrative rejections may not have the wherewithal to rebut these determinations, including undertaking the next – potentially remedial but perhaps overwhelming – step of petitioning for Tax Court review.

As another collateral consequence, if the government brings an action to reduce to judgement joint liabilities against a taxpayer who may be eligible for innocent spouse relief after the two-year period for requesting relief, the taxpayer would be unable to defend based upon being an innocent spouse.

We could go on, and did go on during the DC Delegation meetings. We continue to monitor the Taxpayer First Act, with the hope that the legislation will be amended to extend the period of time to request §6015 relief for each of the three avenues to relief to be coterminous with the period of time to collect the tax. Doing so is only fair, and better serves Congress’s wish to put innocent spouses first, thus permitting the IRS to collect tax on erroneous items from the taxpayer responsible for them.

 

 

 

 

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