Last week many of the PT bloggers spoke at the ABA Tax Section Fall Meeting. One of sessions discussed recent developments relating to innocent spouse relief. This post provides a brief update on how the IRS and the Tax Court are grappling with the Taxpayer First Act’s changes to the innocent spouse provisions.
We have blogged before about the Taxpayer First Act’s changes to the innocent spouse provisions. After the TFA was enacted on July 1, 2019, Steve Milgrom and Carl Smith flagged many questions raised by the legislation. 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.
The changes discussed at the ABA meeting affect how the Tax Court reviews IRS decisions on innocent spouse relief. Steve Milgrom explained:
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 …. 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.
The Taxpayer First Act added a new paragraph to section 6015(e):
(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.
This new standard applies “to petitions or requests filed or pending on or after the date of the enactment” of the Act, which was July 1, 2019. At the ABA meeting, IRS speaker Julie Payne reported that between 300 and 350 standalone innocent spouse cases are generally pending in U.S. Tax Court at any given moment. All of those cases are now subject to the new standard. The question of how the new language applies is an immediate one for the Court and the Service. The Tax Court must decide not only how it will conduct trials, but how to address cases that have already been tried but are pending the court’s decision.
I will not repeat the points made and questions identified by Carl and Steve but I encourage readers to review the PT post of July 9 and the comments on that post for an understanding of the many ways in which the new statutory language is problematic.
Several Tax Court judges have responded to the Taxpayer First Act by issuing orders to the parties, asking the parties to address the effect of the Act on their case. William Schmidt links to one of these orders by Judge Copeland in a recent Designated Order post. Similar orders were issued by Special Trial Judge Leyden and by Judge Thornton, and there are likely others by now.
Judge Leyden issued the first of these orders on July 24 in Grady v. Commissioner, Docket No. 016411-17S, and the first IRS response was filed in that case on September 23. (Ms. Grady is self-represented.) Additional filings were due in other cases on October 4 and October 10. I do not have copies of those submissions but would welcome them if any enterprising readers would like to order them from the Tax Court. Thanks to Sheri Dillon and Francesca Robbins of Morgan Lewis for obtaining the Grady filing at short notice last week, in time for discussion at the Tax Section Meeting. The other cases are:
- Rubin v. Comm’r, Docket No. 26604-14 (J. Thornton) – response due 10/4.
- Bargeron v. Comm’r, Docket No. 019828-17 (J. Thornton) – response due 10/4.
- Robinson v. Comm’r, Docket No. 12498-16, (J. Copeland) – response due 10/4.
- Morales v. Comm’r, Docket No. 25380-18S (J. Leyden) – response due 10/10.
The IRS speakers at the Tax Section meeting did not discuss the Taxpayer First Act submissions, as the matter is the subject of ongoing litigation, and the Service has not formalized its position. However, Respondent’s submission in Grady is instructive of the Service’s current litigating position. I recommend reading the full response, but are the highlights.
Respondent’s Position in Grady
On the standard of review, Respondent agrees that the Taxpayer First Act is clear: the standard of review is de novo in all cases brought under 6015(e). The Tax Court does not review the IRS’s determination for abuse of discretion but instead reaches its own determination of the appropriate relief. This applies to all avenues for relief under 6015, including traditional innocent spouse relief under 6015(b), separation of liability under 6015(c), and equitable relief under 6015(f).
The scope of review is the tricky part. Even though the Tax Court is to come to its own conclusions, the new statutory language appears to limit the evidence that the Tax Court can consider in making its determination. New 6015(e)(7) says the Tax Court’s de novo review “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.” Respondent’s filing takes each in turn.
The administrative record
Congress did not define what it means by the administrative record here. In Grady, Respondent submits that the term should have essentially the same meaning as it does in Collection Due Process cases. The Treasury regulations at section 301.6330-1(f)(2) Q&A-F4 define administrative record as
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) …
In applying this definition to the innocent spouse context, Respondent notes
Obvious changes might include substituting “IRS or IRS employee” for “Appeals Officer or employee” and removing references to section 6330, as appropriate. Relevant documents could include: tax returns; notice of deficiency; documents where petitioner acknowledges deficiency (e.g., form 4549, statement of income tax changes); account transcripts; Form 8857 and any attachments; any documents submitted by petitioner; any documents submitted by [the] non-requesting spouse; CCISO’s or Appeal’s final determination; allocation/attribution worksheets; any statement of disagreement by petitioner and/or non-requesting spouse; CCISO’s or Appeal’s workpapers; Integrated Collection System (ICS) history, or financial information.
Newly discovered or previously unavailable evidence
Respondent turns to the dictionary to interpret the terms “additional” “newly discovered” and “previously unavailable.”
Combining these various dictionary definitions suggests the scope of review should encompass supplementary evidence of which a party was recently made aware, but could not get or use before. Applied specifically to innocent spouse claims, the plain meaning suggests that the scope of review is limited to evidence not already provided or existing in the administrative record, of which the party introducing the evidence became aware since the administrative determination, and which the party introducing the evidence could not have obtained and provided before the administrative determination.
In a footnote, Respondent further suggests
As to words of the statute that denote timing, i.e. “newly” and “previously,” (e)(7)(B), these are perhaps best understood with reference to the administrative determination. Accordingly, “newly” would cover the period of time after the administrative determination, whereas “previously” would encompass the time period before the determination.
Next steps
What does all this mean for Ms. Grady, in Respondent’s view?
As to the specific case in issue here, as a result of the amendment, it may be necessary for the parties to either agree what constitutes the administrative file and whether other evidence presented at trial was newly discovered or previously unavailable, or if the parties cannot agree, to hold a supplementary hearing to determine whether the Court is in full possession of the administrative record, and whether any evidence presented to the Court was not newly discovered or previously unavailable under section 6015(e)(7)(B).
This will not be welcome news to Ms. Grady.
Initial Thoughts
As others have commented, limiting the Court’s scope of review while setting a de novo standard of review makes very little sense, particularly in equitable relief cases and cases in which abuse is a factor. Unfortunately, taxpayers seeking relief will be caught up in delays and litigation over these provisions.
At the Tax Section meeting, attendees suggested that the parties simply waive any evidentiary objections under the Taxpayer First Act, at least as to cases that have already been tried. The Robinson trial took place over a year and a half ago, in February 2018. The Grady case was tried a year ago. In the interests of the efficient resolution of cases, and in fairness to the self-represented petitioners for whom further proceedings could pose a hardship, the parties could agree to have the Court decide the case based on the evidence submitted.
The administrative record was another topic of discussion. In many cases, the administrative record is simply poor, and it is not possible for the court to reach a de novo determination without fleshing out what happened in the administrative proceedings. Innocent spouse cases are fact-intensive and involve taxpayers telling nearly their entire life story to the examiner. Unfortunately, phone calls between the spouses and IRS and Appeals employees are not recorded and there is no reliable transcript of what was said. IRS employees’ case notes vary in quality, and taxpayers are not allowed to record these calls themselves.
Les recently noted that “last year’s Tax Court’s discussion of exceptions to the record rule in Kasper (the whistleblower case) will be even more important” in the context of the Taxpayer First Act. In a post on Kasper last year, he discusses the issue in the context of general administrative law principles. Les noted:
What makes Kasper one of the most significant tax procedure cases of the new year is that in reaching those conclusions it walks us through and synthesizes scope and standard of review and Chenery principles in other areas, such as spousal relief under Section 6015 and CDP cases under Section 6220 and 6330.
In what I believe is potentially even more significant is its discussion of exceptions within the record rule that allow parties to supplement the record at trial. To that end the opinion lists DC Circuit (which it notes in an early footnote would likely be the venue for an appeal even though the whistleblower lived in AZ ) summary of those exceptions:
• when agency action is not adequately explained in the record;
• when the agency failed to consider relevant factors;
• when the agency considered evidence which it failed to include in the record;
• when a case is so complex that a court needs more evidence to enable it to understand the issues clearly;
• where there is evidence that arose after the agency action showing whether the decision was correct or not; and
• where the agency’s failure to take action is under review
Established exceptions to the record rule in other contexts may provide some relief in cases where the administrative record falls short of what is reasonably necessary for a de novo determination. For example, where it is clear from the record that a specific contention was made during the administrative process, but the IRS case notes do not adequately describe the testimony given, the Tax Court may be able to take testimony on that specific point.
This post has barely scratched the surface of the Taxpayer First Act issues the Tax Court will grapple with in pending innocent spouse cases. We will continue to blog about developments in this area as they unfold.