On March 20, the Tax Court entered an order remanding a Collection Due Process (CDP) case back to Appeals to consider the collection alternative requested by the taxpayer. The remand resulted from the request of the IRS over the strenuous objection of the taxpayer. That’s not the normal scenario for a remand. The taxpayer also sought to have the IRS levy, which it refused to consider at the Appeals level of this CDP case. The facts explain the reason for this seemingly topsy turvy situation. The case also involves significant arguments by the taxpayer about the Taxpayer Bill of Rights and how the actions of the IRS are abrogating those rights. Les and I discussed this case, and others, in our panel presentation this week at the Tax Court Judicial Conference. I will briefly touch on the other cases that we discussed during the panel.
read more...Mr. Dang is a refugee from Vietnam. After arriving in the United States and quickly integrating, he eventually went into business. Although the business had success initially, it subsequently failed. Mr. Dang had the misfortune to hire a disreputable tax advisor who got him into trouble with the IRS during the period in which the business operated. He has an outstanding liability in the neighborhood of $100,000. That amount of liability allowed Mr. Dang to have his case handled by a revenue officer.
Mr. Dang, through his counsel at a low-income taxpayer clinic, explained to the revenue officer that his IRA was the only asset he had with which he could satisfy his outstanding tax obligation. He asked the revenue officer to levy on his IRA so that he could avoid the 10% (approximately $10,000) excise tax under IRC section 72(t). After some initial resistance, he appeared to have succeeded in convincing the revenue officer to levy on the IRA; however, before the levy occurred, the IRS assigned the case to a new revenue officer and she declined to levy on the retirement account. Instead, she asked Mr. Dang to pull the money out of the IRA and pay off the debt.
Eventually, the IRS issued a CDP notice and Mr. Dang requested a hearing. At the hearing, he requested that the IRS levy on his retirement account. The Appeals employee declined to accept that levying on his retirement account could serve as a collection alternative. He denied relief and issued a determination letter sustaining the right of the IRS to levy on Mr. Dang. A Tax Court petition followed and in their answer to the petition, the lawyers at Chief Counsel IRS admitted that the Appeals employee should have considered Mr. Dang’s request and considered whether a levy on the retirement account would serve as the best way to collect from Mr. Dang. The answer filed on December 1, 2017, stated “respondent will seek to remand this case to Appeals for a supplemental Collection Due Process hearing in which the Settlement Officer’s errors can be corrected.” The answer also stated that respondent “admits petitioner’s CDP hearing was incomplete and did not properly consider all collection alternatives.”
On January 3, 2018, the IRS filed its motion to remand. In that motion, respondent said:
- SO True incorrectly believed this request did not qualify as a ‘collection alternative’ and was thus outside the scope of Appeals CDP hearing jurisdiction….
- SO True’s determination regarding Appeal’s ability to consider the request was incorrect. Appeals should have evaluated petitioners’ request to pay his liability via a levy on petitioner husband’s Individual Retirement Account and determined whether it was in the best interests of the taxpayers and the government.
- Pursuant to Treas. Reg. 301.6330-1€(3) Q&A-E6, taxpayer can request a ‘substitution of assets’ be considered as a collection alternative during a CDP hearing. Requesting respondent collect from a specific revenue source or asset is an acceptable ‘collection alternative’ request and should be considered by Appeals….
- A remand for a supplemental hearing is appropriate when it will be helpful or productive…. A remand would be helpful and productive because resolution of this issue would preserve the parties and the Court’s time and resources.”
Petitioners objected to the motion, arguing that it was unnecessary to remand the case and that the Tax Court should simply order the IRS to levy on his retirement account. In the brief filed in support of their objection, petitioners made several arguments and requested “sanctions for violating the Taxpayer Bill of Rights, unnecessarily delaying the resolution of this matter, and needlessly increasing the cost of litigation.” They stated “by refusing to levy on Petitioners’ IRA but insisting upon a voluntary withdrawal from that same IRA, RO Neville rendered meaningless the taxpayer relief enacted by Congress.” They cited to several violations of TBOR, including the right to a fair and just tax system and the right to pay no more than the correct amount of tax.
In remanding the case, the Court gave the IRS a very short time frame to hold the remand hearing and render its opinion regarding taxpayer’s request. Short time frames are a regular feature of CDP cases for taxpayers but not very often for the IRS. It will be interesting to watch this case not only for the substance of the argument that the IRS should levy upon the IRA but also for the role that TBOR might play in the ultimate resolution of the case.
In the panel discussion at the judicial conference, we not only discussed this case but discussed the case of Winthrop Towers previously blogged here, the Harris case we blogged here and the case of Facebook previously blogged here. It is interesting that in the government brief in opposition to the relief requested by Facebook that it took time to distinguish the Winthrop Tower’s case.
As more and more litigants begin to focus on TBOR, it will be interesting to see how the rights enshrined in legislation in 2015 will impact outcomes of cases (and outcomes of administrative action.) National Taxpayer Advocate Nina Olson, who participated on the panel at the judicial conference said that she did not know how this might turn out but she was watching anxiously. She also said that quotes attributed to her in the government’s brief in opposition quoted her discussing the administrative publication of TBOR and not the legislative enactment. She indicated that by putting it into the Code, Congress changed the impact of TBOR in ways that we do not yet know.
Conclusion
In addition to the CDP and TBOR issues brought to light by this case, the case also raises the issue of levy on retirement accounts. The IRS requires that front line employees get approval two levels up in order to levy on retirement accounts. That approval process generally inures to the benefit of holders of those accounts but serves as a disadvantage to someone like Mr. Dang who wants the IRS to make the levy on his retirement account while the revenue officer does not want to go through the trouble. It seems like there should be a relatively easy path to levy upon a retirement account when it is made at the taxpayer’s request. It is also troubling that those with retirement accounts have their assets more protected from IRS collection action than poorer clients whose only retirement is social security and from whom the IRS can take 15% with no extra approval.
IRS does receive requests to levy on IRA accounts. Very often the taxpayers intent is simply to avoid the 10% withdrawal penalty as this blog notes. However, in many cases the delinquent taxpayer is requesting levy of the IRA account to avoid some other forfeiture such an impending divorce decree, (I’d prefer the IRS over my spouse receive the funds). What is paramount is that any levy on an IRA, whether the TP requests it or not, must be in the best interest of the government. Very often, the investigation into the assets of the TP leads the Revenue Officer, then the Settlement Officer to the conclusion that the government (not just IRS – but government) is not better off levying the IRA account which might prove to be the taxpayers only real measure to fund retirement. In this case the taxpayer being newer to America most probably did not have sufficient equity or SSA credits to fund the retirement thereby leading the IRS to the conclusion not to levy. Of course the IRS will always accept voluntary payment of the IRA funds should the TP choose to withdrawal, but based on the limited information available here, the IRS made the correct call IMO. The Settlement Officer certainly may have neglected to document that the IRA was considered as an alternative, but most probably made the correct decision not to release the IRS levy on other assets in favor of a levy on the IRA.
The IRS was not trying to preserve Mr. Dang’s retirement assets. The revenue agent did not follow the procedures called for in the IRM and decide a levy was inappropriate. She basically said it was too much work and her superiors would probably not approve a levy so she wasn’t going to waste her time trying. However she had no problem demanding that he take a voluntary early withdrawal, thereby upping the tax cost by 10%. The refusal to levy combined with the demand for a voluntary withdrawal is an end run around the taxpayer protections built into the IRM and effectively repeals the relief from the 10% additional tax that Congress enacted in response to levies on retirement assets by the IRS.
Most taxpayers dealing with the IRS without representation would not be aware that the revenue officer was acting improperly and might succumb to the intimidation tactics being applied.