Innocent Spouse Relief and the Administrative Record

Steve Milgrom, an attorney who is the Litigation and Volunteer coordinator for San Diego Legal Aid, brings us today’s guest post. I wrote about Steve’s remarkable presentation at an ABA meeting last December where the audience begged him to finish telling the story of his CDP case about which we had blogged here and here. His CDP case involved an effort to convince the IRS to levy on the client’s retirement account. Today, we are fortunate to have Steve writing about the new additions to the innocent spouse provisions.

Carl Smith discussed his concerns about the proposed innocent spouse legislation in the Taxpayer First Act here and here back in April before it became law. He has some other concerns about it that dovetail with the concerns expressed below by Steve in this post. Carl’s concerns include:

First, what happens if the taxpayer brings suit after 6 months, but before the administrative record is completed and a NOD issued? The record may be minimal (the 8857 and a response by one or both spouses). As I read the statute, there will have been no determination to be reviewed; therefore, the Tax Court creates a de novo record. Thus, it would be best practice always to file a Tax Court petition after 6 months of filing the 8857 — if the IRS determination has not been made yet. This means that all 8857s should be sent certified mail, return receipt requested to establish the exact date of 8857 filing. Section 7502’s mailing rule doesn’t apply, since there is no time deadline to file an 8857.

Second, assuming that there was an NOD issued, how does a non-requesting spouse’s contradiction of a requesting spouse (typically on knowledge or significant benefit) get resolved without the judge being able to hear both spouses in court? Typically, the NRS’s statement is just made part of the administrative record.

Third, note that the prior litigation had only been over the scope of review of (f) cases under (e) proceedings. See, e.g., Porter I and Wilson. But, the new (e)(7) refers to determinations “under this section” (i.e., the complete 6015 — (b), (c), and (f)). This upends all case law under (b) and (c) going back to 2000, when the Tax Court did its first case under (e) and held that the scope of the evidence under (b) and (c) was de novo.

Fourth, this makes it virtually impossible for the NRS to usefully intervene first at the Tax Court stage. If the NRS has something to say, he or she better do it at the administrative level in writing.

After reading the concerns expressed by Steve and Carl, I feel that Congress has created another 6751 type situation in which the court will grapple with the language of the new provision and how it fits into the overall scheme of the innocent spouse provisions. I am also concerned that individuals seeking relief under the innocent spouse provisions will suffer unnecessarily because of these changes.

Keith

My daughter tells me I have a habit of burying the lede. To avoid repeating that mistake, here it is: Congress just stacked the deck against taxpayers trying to overturn a decision by the IRS to deny innocent spouse relief.

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On July 1, 2019 President Trump signed the Taxpayer First Act  (TFA) into law. One provision of the TFA, section 1203, makes procedural amendments to the innocent spouse rules, revisiting 10 year old decisions of the Tax Court in the two Porter cases, which Carl Smith discussed recently here. The new provision defines the scope and standard of review that govern the Tax Court’s review of an IRS determination. Basically, “scope of review” deals with what the court will consider in making its decision, what evidence it will look at. A court’s “standard of review” defines how much deference to give to the decision (determination) made by, in tax cases, the Commissioner.

In Porter I the Tax Court dealt with the scope of review. The government argued that the Court was limited to reviewing the administrative record. The Court rejected this limitation and held that they would hear the case de novo, meaning it would conduct a trial and decide for itself what the facts were. Then in Porter II the Court dealt with the proper standard of review in 6015(f) equitable relief cases. Prior to Porter II the Court had been using an abuse of discretion standard of review for 6015(f) cases and a de novo standard for 6015(b) and (c) cases. In Porter II Court decided that the 2006 amendments to 6015 warranted reconsideration of the standard of review and held that the standard should be de novo in all 6015 cases. Ms. Porter, proceeding pro se, had won very important protections for her fellow taxpayers.

Having lost in the Tax Court, the battlefront moved to Congress. While it took 10 years for Congress to enact legislation on the subject, in my opinion the new law is anything but Taxpayer First. Here is the new 6015(e)(7):

(7) STANDARD AND SCOPE OF REVIEW.—Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon—

(A) the administrative record established at the time of the determination, and

(B) any additional newly discovered or previously unavailable evidence.

The first part of the new law provides that the Tax Court is to give no deference (de novo standard of review) to the decision made by the Commissioner. That’s good news and codifies the current practice of the Court.

Before I get to the second part of the change, a little background. Innocent Spouse cases come before the Tax Court in two different postures, with or without a prior determination having been made by the Commissioner. They arrive with a prior determination when a taxpayer files a request for relief on Form 8857 and the Commissioner partially or fully denies the request. The Tax Court also has jurisdiction to hear innocent spouse cases without a prior determination when it is pled as an affirmative defense in a deficiency action or where a stand alone Petition for relief is filed in situations where Form 8857 was filed with the IRS but 6 months has passed without a final determination by the Commissioner.

I suspect the majority of cases arrive via the Form 8857, final determination path. It is in this universe of cases, where the Commissioner has rejected a request for relief, that Congress overturned the Court’s ruling in Porter I and has done great harm to taxpayer rights. In these cases Congress has tied the Court’s hands by limiting what facts it can consider when it engages in de novo review. The new wording requires Court’s decision to be made using the administrative record. Instead of the current Tax Court practice of having a full trial, with examination and cross-examination of witnesses, weighing the credibility of the witnesses testimony, and deciding based solely on the evidence presented to it during the trial, the Court is now to decide the case using the sterile record created during the administrative phase of a request for relief.

According to my research this is the only instance in the Code that the phrase “administrative record” is used. While this is certainly not a new concept in the law, courts are still entertaining arguments over what the administrative record consists of. See In re United States, et al., 138 S. Ct. 371 (2017). Questions that are regularly litigated regarding the administrative record (typically in non-tax cases) include: is the material proffered the full record; who decides what goes into the record; what materials in the agencies possession are relevant; did the agency decision maker consider matters not in the record; and does the record include evidence both supporting and contrary to the agencies decision. This presupposes you know who made the decision. Unlike the recent administrative decision case before the Supreme Court, where the issue was the decision of Commerce Secretary Wilbur Ross to add a citizenship question to the 2020 census, in tax cases I have found that the decision is sometimes made by an unknown manager, not the person that heard the evidence.

Then there is the biggest problem with the record rule as applied to IRS proceedings: little or no record exists of oral statements made by either the IRS or the taxpayer. While some cases can be document heavy, not everything in a person’s life is memorialized in writing. Spousal abuse cases are a serious part of innocent spouse jurisprudence. Sometimes there are police reports or medical records that corroborate allegations of physical abuse. However, the reality is that most abuse, physical and psychological, happens behind closed doors. Evidence of abuse is going to include a heavy component of potentially conflicting testimony. Will this make it into the administrative record in a compelling fashion?

It takes great strength and courage for an abused spouse to talk about the abuse they suffered. Written descriptions of the abuse never, never, convey the true nature of what happened. To get any real understanding of what actually took place you have to hear the parties’ descriptions and observe their body language as they are testifying. This happens at a trial. It is certainly not pretty and isn’t what I thought I would be dealing with when I decided to study tax law instead of family law, but alleviating the financial cost of separating from an abusive spouse is important work that has become a part of tax controversy practice.

How is the record made in these cases? All innocent spouse cases are referred to the IRS specialty unit in Kentucky. Since few taxpayers live in the Covington Kentucky area the opportunity for face-to-face meetings with the IRS is very limited. The record is going to be made by correspondence and phone interviews. The decision maker has no opportunity to observe body language. Advocates have no opportunity to cross examine witnesses. No one is sworn in front of someone wearing a black robe, which at least one Chief Counsel lawyer has explained tends to focus the mind. The IRS has almost complete control over the narrative in the record. You want to record the call so there is an accurate record? Forget it, the IRS prohibits the practice. Are people with a stake in the outcome (the abusive spouse who may end up with sole responsibility for the tax liability) more likely to shade the truth in an unrecorded private phone call with the IRS? In most spousal abuse cases the abusive spouse’s action led to the unpaid taxes in the first place.

The IRS creates a great deal of the administrative record in what are called case notes. Do case notes accurately reflect what happened? Is there the possibility that they present a skewed view? After all, unlike in a court where you have an independent reporter, the IRS personnel creating the record can be the same person making the decision that the Tax Court is then called upon to review. Or even worse, the person creating the record is doing so for the purpose of convincing their Manager that the decision they are recommending is correct. The record is not being made by a neutral party for the purpose of memorializing the evidence, it is made by someone who is advocating a particular outcome.

Then there is the question of what is included in the “administrative record” that the Court is to review. In the Declaratory Judgment Rules the Tax Court has its own definition of “administrative record” (see Rule 210 (b)(12)), which makes no provision for dealing with oral communications. In the CDP regulations, Treasury takes a broader approach:

Q- F4. What is the administrative record for purposes of Tax Court review?
A- F4 . The case file, including the taxpayer’s request for hearing, any other written communications and information from the taxpayer or the taxpayer’s authorized representative submitted in connection with the CDP hearing, notes made by an Appeals officer or employee of any oral communications with the taxpayer or the taxpayer’s authorized representative, memoranda created by the Appeals officer or employee in connection with the CDP hearing, and any other documents or materials relied upon by the Appeals officer or employee in making the determination under section 6330(c)(3), will constitute the record in the Tax Court review of the Notice of Determination issued by Appeals.

26 CFR § 301.6320-1

I’ve had occasion to review IRS case notes of meetings and telephone conversations in which I was a participant. Let’s just say that sometimes it appears that the person making the notes was part of a different conversation.

The adoption of the record rule is going to have a major impact on innocent spouse cases. After a few years of watching it play out in Tax Court it is unlikely anyone will conclude that the effect of the new law was to put taxpayers first. Nina, please come back!