Verification of Bankruptcy Action in a Collection Due Process Case

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In a recent bench opinion in the case of Brown v. Commissioner, Judge Gustafson granted partial summary judgement to the IRS on the issue of the taxpayer’s ability to contest the merits of the tax liability in the Collection Due Process (CDP) case but remanded the case to Appeals for verification that the IRS properly abated liabilities at the conclusion of a bankruptcy case.  Neither aspect of the case is surprising or remarkable but the case itself provides some insight into the failure of the IRS to follow an earlier court ruling and the failure of Appeals to even check on it.  Several years ago in a case that opened my eyes to the benefits of CDP to correct errors in the collection of taxes, the IRS and Appeals made similar mistakes following a bankruptcy case.  Because Appeals employees often have very little knowledge of bankruptcy, this case points out the need to pay careful attention in CDP cases that follow bankruptcy actions and challenge verifications where the Appeals employee fails to acknowledge the impact of the bankruptcy case.


Judge Gustafson’s bench opinion in this case is very detailed. Given that Tax Court judges must deliver bench opinions on the road during a trial calendar before it concludes, he delivers an oral opinion that takes up 17 pages of transcript involving an array of factual details that is surprising in its depth in this context.  Because it is a bench opinion, it has no precedential value as we have discussed here and here.

The petitioner, Dr. Brown, has a long history with the IRS including conviction for tax evasion for 1994 and 1995 and a subsequent bankruptcy case in which the IRS filed a proof of claim for over $3.5 million. The trustee in the bankruptcy case contested the IRS claim and ultimately the IRS and the trustee reached a settlement concerning the amount and character of the claim.  Although the IRS received significant payments from the bankruptcy estate, Dr. Brown still owed a fair amount of money.  The opinion does not discuss every aspect of the bankruptcy case but I believe all or almost all of the unpaid taxes must have been excepted from the bankruptcy discharge because of fraud or unfiled returns.  During the bankruptcy proceeding, Dr. Brown contested the liability determined by the IRS for the two years of the criminal conviction but did not contest the liability for the remaining years.  Because he had the opportunity to contest the liability for all years in bankruptcy, Judge Gustafson granted summary judgment in the CDP case with respect to his attempt to challenge the correctness of the taxes for the non-criminal years in the CDP proceeding.  He based his only challenge in the CDP case on the merits of the liability.  Since he had the prior opportunity and since Appeals had nothing else to consider, the granting of summary judgement on this issue required little discussion.

Even though Dr. Brown raised an issue in the CDP case that could not provide a basis for relief, the statute still requires the Appeals employee reviewing the case to verify that the IRS had taken the proper procedural steps with respect to the liability it sought to collect. The Appeals employee, perhaps blinded by the incorrect attempt to contest the merits of the underlying liability, appears to have completely missed this obligation; however, prior to the proceeding the attorney in Chief Counsel’s office determined that the bankruptcy unit in the IRS never abated the taxes in response to the settlement the IRS entered into in the bankruptcy case with the trustee.  As a result of that settlement, the IRS had an obligation to abate about $1 million.  Mr. Brown, representing himself, did not notice this failure and did not raise it as part of his case but Appeals should have verified the correctness of the liability and did not.  At the request of Chief Counsel’s office, the opinion remands the case to Appeals to properly verify the liability and notes that the administrative correction within the bankruptcy unit was apparently underway.

The CDP case I worked several years ago involving a bankruptcy issue was one I picked up at calendar call. The pro se taxpayers were convinced the IRS had mishandled the discharge of the taxes in the prior bankruptcy case of the husband but did not articulate the problem in a way that convinced me initially that the IRS had made a mistake.  When one spouse files bankruptcy, interest and penalties continue to run on the spouse not in bankruptcy, and I thought the taxpayers failed to appreciate that fact.  As I got into the case, however, I found that the IRS had misapplied the funds in the bankruptcy case, not mishandled the discharge, creating a huge remaining liability for the non-bankrupt spouse that should not have existed.  Fortunately, the Court continued the case to allow the clinic time to review the case.  It would not have been possible to determine the mistake within the short time frame of a calendar call.  Once I pointed out the issue to the Chief Counsel attorney, he immediately took steps to correct the problem.  Neither he, nor the Appeals employee had seen the problem previously even though the taxpayers were complaining about, albeit unartfully, the application of the bankruptcy process to their situation.

Sometimes verification of the correctness of the debt gets complex. You cannot rely on the IRS to get it right every time.  If a prior bankruptcy case exists and you do not have comfort with the application of the bankruptcy laws to the taxes, you might consider consulting with someone who can assist you in reviewing the impact of the bankruptcy matter on the liabilities.  Dr. Brown was fortunate that the Chief Counsel attorney did that for him here.  Not everyone will have that fortune.


  1. Keith,

    While I can’t say how wide-ranging it is, I think Settlement Officers at Appeals are given at least some training in bankruptcy issues and discharge. In the one CDP hearing that I had that involved a tax that should have been discharged by a prior bankruptcy, in one page, I explained to the SO why the tax had been discharged and there were no assets exempted from the bankruptcy estate that the IRS could still levy on. The SO quickly called me and agreed, and she issued a notice of determination canceling the proposed levy.

  2. Dr. Brown’s futile CDP hearing shows, once again, that the IRS Office of Appeals is incompetent, if not derelict, in its CDP verification duties.

    The Appeals Office in Brown knew bankruptcy well enough to attain its objective: sustain the proposed levy action. Appeals knew that Dr. Brown had been in bankruptcy. Bench Opn. 9:10-13. And Appeals knew enough about bankruptcy to inform Dr. Brown that his bankruptcy proceeding had given him a prior opportunity to dispute his tax liability. Bench Opn. 9:13-16. But the bankruptcy training that Carl tells us Appeals Officers receive failed to cause Appeals in Brown to think something like:

    “Hmmm…bankruptcy laws sure are complex. I’d better make sure I obtain verification from Compliance that the IRS followed those complex bankruptcy laws.”

    Keith cannot be wholly serious about how the Appeals Officer in Brown performed. At one point, he says the Appeals Officer was “perhaps blinded” by Dr. Brown’s prohibited liability challenge–to where he “completely missed this [bankruptcy verification] obligation.” The Appeals Officer may have been, as those rock philosophers, Manfred Mann’s Earth Band, regaled us, “blinded by the light.” But that light also illuminated the Appeals Officer’s path from a bankruptcy-based liability challenge decision to a bankruptcy-based verification decision.

    Appeals’ phony verification decisions must cease. The Tax Court should “name and shame” each Appeals Officer who makes those “decisions.” For our part, when Appeals Officers render phony verification decisions against our clients, we should submit RRA’ 98 1203(b)(6) TIGTA complaints and file I.R.C. § 7433 damage claims.

    If Appeals Officers decline to accord taxpayers collection due process, then we should collect them within a most uncomfortable, yet very (over)due, process.

  3. Barry Goldwater says

    “Appeals’ phony verification decisions must cease.”

    I laugh to myself whenever I read an IRS Determination Letter or Decision Letter. Not only is it a cut and paste job, but the Team Manager signature is a rubber stamp.

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