Making a Frivolous Argument in a CDP Case

Tax Court Judge Lauber recently rendered an opinion in Kanofsky v. Commissioner where he imposed the frivolous filing penalty in IRC 6673.  The imposition of this penalty in a Collection Due Process (CDP) case caught my eye because the IRS has the ability to turn away frivolous CDP requests without issuing a determination letter giving the taxpayer a chance to go to Tax Court.  I wondered why the IRS sent a determination letter to someone making frivolous arguments rather than issuing them a disregard letter.  After reading the opinion, I think I understand how the case got to the Tax Court.  Unfortunately for Mr. Kanofsky, he made his frivolous arguments in the Court case rather than before the IRS.

I say unfortunate because the IRS does not have the ability to impose a penalty for submitting a frivolous CDP request but the Tax Court does have the ability to impose a penalty for making frivolous arguments before that court.  Had his CDP request risen to the level of frivolous, he would not have gotten to Tax Court and the 6673 penalty would not have entered the picture.  I do not know if he can pay the underlying tax, much less the penalty he now owes, but if he had made his arguments clearer to the Appeals employee handling his case, he might have avoided the 6673 penalty.  Even though Congress gave the IRS a tool to stop frivolous CDP cases from going forward to the Tax Court, his failure to respond during the administrative process caused the IRS to treat his arguments as sufficiently meritorious to earn a determination letter.


Mr. Kanofsky first went to Tax Court to contest the underlying liability at issue in the CDP case and the trial judge issued a bench opinion.  The fact that the case was decided by bench opinion signals that the trial judge did not need to spend much time considering the case. Here is a link to a recent blog post on bench opinions.  Mr. Kanofsky appealed his Tax Court loss to the Third Circuit and then to the Supreme Court and the Supreme Court denial of certiorari and petitioner’s subsequent petition for rehearing.

Based on the Tax Court decision, the IRS gained the right to assess unless petitioner posted a bond during the appeal of the decision. The recent Tax Court opinion states that “Petitioner did not post a bond to stay assessment and collection. See sec. 7485(a).” Therefore, the IRS assessed the liability proposed in the notice of deficiency and began sending him collection notices ending with the notice of intent to levy. This gave Mr. Kanofsky the opportunity to file a CDP request which he did. In his request he stated his basis for relief as “Still in litigation, working on reducing amounts.”  This basis for relief appears reasonable on its face and especially so when he may have still had an open appeal at the time of the CDP request.  The Appeals employee handling the request reached out to Mr. Kanofsky to hold a hearing but never received a response from Mr. Kanofsky.  Therefore, Appeals issued a notice of determination denying the request for relief from levy and Mr. Kanofsky once again petitioned the Tax Court.

Congress added section 6330(g) to the Code in the Tax Relief and Health Care Act of 2006. This addition to CDP sought to stop the use of CDP hearings by individuals who only wanted to make frivolous arguments.  If it works, section 6330(g) not only keeps the IRS from having to deal with frivolous arguments beyond the initial stages of the CDP process but also keeps the Tax Court out of the hassle of dealing with frivolous arguments because the IRS can treat frivolous submissions “as if [they] were never submitted and such portion shall not be subject to any further administrative or judicial review.” (effective for CDP hearing requests made after March 15, 2007. Tax Relief and Health Care Act of 2006 § 407(f).)   Congress also created a second condition on effectiveness of the statute referencing, IRC 6702(b)(2)(A)(i) and (ii) as it created the new CDP provision making the new provision effective when the IRS published a list of frivolous positions.

The IRS has published this list, but the information on the CDP request submitted by Mr. Kanofsky was not on that list.  Since it was not on the list, the Appeals employee could not treat the CDP request as frivolous and had to issue a determination letter.  Of course, such a list can never capture everything and sending the notice of determination was appropriate.

If Mr. Kanofsky had put in his CDP request something on the list in the Notice, the Appeals employee would not have issued a notice of determination but rather would have issued a “disregard” letter.  Someone receiving a disregard letter has no right to litigate the collection of the liability in Tax Court.   The IRS and the Tax Court do not entirely see eye to eye on the effect of a disregard letter with the IRS taking the view that the Tax Court has no jurisdiction of a case petitioned following the issuance of such a letter and the Tax Court, in Thornberry v. Commissioner taking the view that it has jurisdiction to determine the merits of a non-frivolous issue. In Buczek v. Commissioner, the Court and the IRS narrowed the gap between their views a little bit but a gap still remains on the effect of a disregard letter.  I think that such a letter would, however, have protected Mr. Kanofsky from the 6673 penalty if for no other reason than the Court would have known he was making frivolous arguments as it accepted the case over the objection of the IRS but neither decided case took on this issue.

The case points out that different standards and different remedies apply to frivolous behavior at different stages of a case.  As with most things, misbehaving before a Court can bring serious consequences.  Usually, we think of the IRS imposing the penalties but this situation also points out that sometimes the role of the IRS and the Court get reversed.

Supreme Court’s Direct Marketing Case May Have Great Significance in Anti-Injunction Act Cases

We welcome back today as guest poster Patrick Smith of Ivins, Phillips & Barker. Pat discusses this week’s Supreme Court Direct Marketing Association case, which will likely influence how courts will interpret the reach of the Anti-Injunction Act.

On Tuesday of this week, the Supreme Court issued its opinion in Direct Marketing Association v. Brohl. This decision related to a suit that had been brought in U.S. district court to enjoin notice and reporting requirements that had been imposed by the state of Colorado on out-of-state internet retailers relating to sales to Colorado residents. The purpose of these requirements was to assist the state in collection of use tax on these sales.

The issue in the case was whether the district court was barred from hearing the suit by the Tax Injunction Act (TIA), which requires that certain suits relating to state taxes must be pursued in state courts rather than federal courts. The opinion held that the U.S. district court was not barred from hearing the case by the TIA.

While the decision obviously has considerable significance in its direct application, it may have equally great if not greater significance in its implications for the interpretation of the Anti-Injunction Act (AIA), section 7421(a) of the Internal Revenue Code, which imposes limitations on the types of suits relating to federal taxes that may be maintained in U.S. district courts that are quite similar to the limitations imposed by the TIA on suits relating to state taxes. The implications of the decision for the AIA are that as a result of this decision, the AIA may now be interpreted more narrowly than it has been since two significant Supreme Court decisions in 1974, Bob Jones University and Americans United.” These decisions held that a suit to enjoin revocation by the IRS of the tax-exempt status of the organization bringing the suit was barred by the AIA because of the effect the suit would have on tax revenues through the effect the suit would have on the ability of persons making contributions to the organization to claim tax deductions for the contributions.


The Direct Marketing Case Takes a Different View than Prior Supreme Court Cases

These two decisions could be read as standing for the proposition that any suit that could, if successful, have an adverse impact on the collection of federal tax revenue is barred from being heard in district court by the AIA except through the mechanism of a tax refund suit. The Direct Marketing decision clearly rejected such a broad reading of the TIA, and this rejection should be equally applicable for the AIA.

The texts of the two provisions are very similar. The TIA provides in relevant part that “[t]he district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.” The AIA provides in relevant part that, with a number of listed exceptions, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.

The Court relied on the similarities between the AIA and the TIA in its interpretation of the TIA. In addition, the Court also relied on the historical relationship between the two provisions, noting that the AIA, which was enacted originally in 1867, was the model for the TIA, which was enacted in 1937.

The Court focused on the close relationship between the TIA and the Anti-Injunction Act to give a narrow, technical reading to the terms “assessment,” “collection,” and “restrain,” all of which appear in both the TIA and the Anti-Injunction Act. The Court relied on the fact that in the Internal Revenue Code, where the AIA is located, the terms “assessment” “levy” and “collection” have very narrow and precise technical meanings that “do not include informational notices or private reports of information relevant to tax liability.” While the TIA includes the term “levy” and the AIA does not, that should not result in any significant difference in interpretation for the terms that appear in both provisions.

As the Court noted,

the Federal Tax Code has long treated information gathering as a phase of tax administration procedure that occurs before assessment, levy, or collection. ‘Assessment’…refers to the official recording of a taxpayer’s liability, which occurs after information relevant to the calculation of that liability is reported to the taxing authority. Finally, ‘collection’ is the act of obtaining payment of taxes due. ‘[C]ollection’ is a separate step in the taxation process from assessment and the reporting on which assessment is based.

Enforcement of the notice and reporting requirements may improve Colorado’s ability to assess and ultimately collect its sales and use taxes from consumers, but the TIA is not keyed to all activities that may improve a State’s ability to assess and collect taxes….The TIA is keyed to the acts of assessment, levy, and collection themselves, and enforcement of the notice and reporting requirements is none of these.

The Tenth Circuit had relied on giving the term “restrain,” which appears in both the TIA and AIA, a broad meaning, basically, the sort of meaning that Bob Jones and “Americans United” might be read as giving to the AIA, namely, that “restrain” means any action that would have an adverse effect on the collection of tax revenue. The Court in Direct Marketing very clearly rejected that interpretation, in reasoning that is equally applicable to the AIA:

[A]s used in the TIA, “restrain” acts on a carefully selected list of technical terms—“assessment, levy, collection”—not on an all-encompassing term, like “taxation.” To give “restrain” the broad meaning selected by the Court of Appeals would be to defeat the precision of that list, as virtually any court action related to any phase of taxation might be said to “hold back” “collection.”

Applying the correct definition, a suit cannot be understood to “restrain” the “assessment, levy or collection” of a state tax if it merely inhibits those activities.

The fact that the Court in Direct Marketing interpreted terms in the TIA that appear in both the TIA and the AIA by reference to the precise meaning those terms have in the Internal Revenue Code should mean that in the context of the AIA, these precise meanings are if anything even more controlling. Thus, based on Direct Marketing, it seems very clear that the broad reading of the AIA that might be taken from Bob Jones and Americans United cannot be correct.

Impact on Other Cases: The Florida Bankers Case

Thus, for example, the Direct Marketing decision should be very relevant for the AIA issue in the Florida Bankers Association case, which is currently pending in the D.C. Circuit [Editor’s Note: for Les’ take last year in PT on the district court Florida Bankers case see APA and Challenges to Agency Guidance: Florida Bankers v US and More on Halbig v Sebelius; for Pat’s prior articles in Tax Notes on Florida Bankers see here and here.]. This case involves a challenge to regulations requiring banks to report to the IRS information relating to interest earned on accounts held by non-resident aliens, even though such persons are not subject to U.S. tax on that interest. At oral argument on February 13 of this year, one of the judges on the panel, Judge Kavanaugh, the author of the D.C. Circuit opinion in Loving, focused his questioning on the possible applicability of the AIA to bar this challenge. Direct Marketing should provide strong support for the conclusion that the AIA does not apply in that case.

However, one very significant respect in which the TIA and the AIA are not similar is in the way they phrase their limitations. The TIA phrases its limitation in terms of the power of the district court to act but the AIA does not. In a recent post in this blog, Carl Smith discussed a recent Tax Court decision that represented the first time the Tax Court has acknowledged the line of Supreme Court cases in recent years that have made it clear that the courts must be more precise and analytical in their determination as to when statutory limitations on the ability to maintain an action in court are “jurisdictional” and when they are not than had been the case before this line of Supreme Court authority.

Justice Clarence Thomas, in his opinion for the Court in Direct Marketing, repeatedly referred to the TIA as jurisdictional. For more on this point see Arkansas v. Arkansas Farm Credit Services. This classification mattered in this case because the state of Colorado had not raised the TIA as an issue in the district court and in fact had affirmatively stated that the TIA did not apply. If the TIA were not jurisdictional, this would mean the TIA was waived. However, jurisdictional limitations can be raised at any stage of litigation.

I have argued previously that the AIA is not jurisdictional, based in part on the difference in the way the limitations in the two provisions are phrased. However, this issue remains to be definitively resolved by the courts.

US v Clarke Remand: Allegations of Bad Faith Still Face A High Hurdle

Late last month, the district court for the Southern District of Florida weighed in on the merits in the summons case of US v Clarke (free link not available; Case No. 11-80456, Feb 18, 2015). In a guest post last year, Stu Gibson previously discussed the 2014 Supreme Court Clarke case, where the Court reined in the 11th Circuit’s more expansive approach to allowing evidentiary hearings in light of improper purpose allegations. The case involved allegations of retaliatory summons issuance following a failure to extend (for a third time) the statute of limitations and allegations that the summons was a way to avoid discovery limitations in a Tax Court TEFRA proceeding that was commenced after the summons was issued.

The district court viewed its task as to “determine whether Respondents [the taxpayers] point to specific facts or circumstances that plausibly raise an inference of improper purpose and to determine whether the improper purposes alleged by Respondents are improper as a matter of law.”

The district court held that the respondents fell short in plausibly raising an inference of an improper purpose. It also offered its views on some of the legal questions the 2014 Supreme Court Clarke opinion declined to consider, including whether some of the allegations of improper purpose were improper as a matter of law.

I’ll discuss the district court opinion below.


Summary of Facts and Law

To refresh our memory, the district court summarizes the facts as follows:

The Government examined the tax returns of Dynamo Holdings Limited Partnership (“DHLP”) for the years ended December 31, 2005, 2006 and 2007 and proposed adjustments to debt and interest items claimed on those returns. The IRS requested and received an agreement from DHLP to extend by two year-long extensions the three year limitations period for determining tax liability. In 2010, DHLP refused to grant a third extension. The IRS issued summonses to the respondents on September and October 2010. In December 2010, still within the extended limitation period, the IRS issued a Final Partnership Administrative Adjustment (“FPAA”) that proposed changes to DHLP’s returns that would increase DHLP’s tax liability. DHLP filed suit in the United States Tax Court in February 2011 to challenge the adjustments. The IRS filed this action in April 2011 to force compliance with the summonses.

Last year the Supreme Court in Clarke reframed the standard for alleging bad faith:

As part of the adversarial process concerning a summons’s validity, the taxpayer is entitled to examine an IRS agent when he can point to specific facts or circumstances plausibly raising an inference of bad faith. Naked allegations of improper purpose are not enough: The taxpayer must offer some credible evidence supporting his charge. But circumstantial evidence can suffice to meet that burden; after all, direct evidence of another person’s bad faith, at this threshold stage, will rarely if ever be available. And although bare assertion or conjecture is not enough, neither is a fleshed out case demanded: The taxpayer need only make a showing of facts that give rise to a plausible inference of improper motive.

Rewritten Saltzman and Book Chapter 13 discusses the Clarke standard, emphasizing that the “trial court’s decision on the question of retaliation would be entitled to deference only if it asked and answered the relevant question whether respondents pointed to specific facts or circumstances plausibly raising an inference of improper motive.”

The district court in Clarke did not think the allegations pointed to specific facts or raised an inference of improper motive. To that end, it discounted the allegations relating to the IRS’s issuance of a summons to sidestep the Tax Court’s discovery proceedings. The Tax Court matter arose after the IRS issued the summons. According to the court,“[t]he validity of a summons is tested at the date of issuance, and events occurring after the date of issuance but prior to enforcement should not affect enforceability.”

As to allegations relating to the summons as being issued to punish the taxpayer for declining to extend the statute of limitations, it stated that “[i]f information remains to be gathered and the statute of limitation has expired, the IRS has no alternative but to institute a formal summons process.”

The district court also “declined to create a new rule akin to Bankruptcy Rule 2004 that bars summons enforcement once a Tax Court case or other litigation is commenced that concerns the subject of the summons.” In failing to create the rule, the district court noted the difference between TEFRA Tax Court proceedings and district court summons enforcement jurisdiction:

This proceeding and the Tax Court proceeding are not identical, however. The Tax Court proceeding involves a challenge to the adjustments to DHLP’s partnership items under IRC § 6226. The Tax Court does not have jurisdiction to consider summons enforcement proceedings, IRC § 7604(a); Ash v. Comm’r, 96 T.C. 459, 462 (1991), and the district court, in a summons enforcement proceeding, does not have jurisdiction to consider the FPAA adjustments to DHLP’s tax reporting.

In line with its inquiry, the district court considered allegations that the IRS may have acted contrary to the intent of the IRM relating to the timing of the summons: “Respondents claim that the mere timing of the enforcement proceedings relative to the issuance of the FPAA and the initiation of the Tax Court case is suspicious.” The court discounted that argument stating that they failed to offer any evidence, and that even if there was an allegation that went to violating the IRM itself the IRM generally does not create enforceable rights.


As revised Saltzman & Book opines, it does not appear that the “calculus in Clarke significantly alters the procedural terrain in summons enforcement cases.” The district court’s opinion on the remand of Clarke itself suggests that the initial view is correct. Undoubtedly, there will be more cases, and as Stu Gibson observed in his initial post on PT, the standard does give district court judges some leeway. Clarke is a useful reminder, however, that the IRS is the party with the greatest leeway when it issues a summons, with most judges loathe to turn what is largely an inquisitorial process into a full blown adversarial one.

Summary Opinions through 02/20/15

A special thanks to our frequent guest blogger, Carlton Smith, who over the last few weeks has provided us with quite a few posts.  Les, Keith and I have been extremely busy with various projects, which Carl knows, and he offered to do some extra writing to ensure the blog had quality content over that period. The posts have all been wonderful, and we are indebted to him for that.

Before getting to the other tax procedure, we wanted to provide an interesting update on a case we have been following.  Frequent readers of our blog are familiar with our coverage of the Kuretski case, which questioned the President’s power to remove Tax Court judges under Section 7443(f). As Mr. Smith stated in his December 2nd post on the topic,

This past June, the D.C. Circuit ruled that there was no separation of powers issue because (1) the Tax Court, while defined as an Article I (Congressional) court in section 7441, was really, for most constitutional purposes, an Article II Executive Agency exercising executive functions, and (2) there is no problem in the President, who heads the Executive Branch, ever having the power to remove officers of an Executive Agency.

The taxpayer has filed for cert., which has not yet been reviewed.   Miami attorney, Joe DiRuzzo (who seems to get his hands on cases with most interesting procedure issues), in late December and early January, filed Kuretski-like motions in various Tax Court cases appealable to various Circuits asking the Tax Court to declare the 7443(f) removal power unconstitutional.  In a couple of those cases, the Service was given a healthy amount of time to respond, until March 9th.  The Service has requested another sixty days to coordinate its response at the highest levels of Counsel’s office (not a direct quote, but pretty close–we can provide a copy of the motion, if you are interested).  That is a lot of time to coordinate a response, and it would be reasonable to assume this has something to do with what is or is not happening with the Kuretski.  I’m sure we will have continuing coverage as this moves forward (or doesn’t move forward).

To the other procedure:


  • Agostino & Associates have published their February 2015 Newsletter.  It is great, as normal, and congrats to Jairo Cano on being named a Nolan Fellow!  I particularly liked the first part of the article regarding the “Service’s Duty to Foster Voluntary Compliance Through IRC Sections 6014(a) and 6020(a).”
  • Do you hate it when your clients fail to pay your bills? Want to stick it to them, and force them to pay tax on the discharge of that indebtedness by issuing a Form 1099-C.  OPR thinks that might reflect negatively on your character and fitness to practice before the Service.  OPR did not provide an opinion, but found that only an “applicable entity” had to file such a form, which is defined as various government entities, “applicable financial entities” or other organizations that engage in lending.  Further, whether a debt can be discharged is a question of fact, and it “generally occurs when a taxpayer receives funds that are not includible in income, because the taxpayer is obligated to repay the obligation,” not when there is a disagreement about fees for services owed.  OPR stated that if a practitioner was not following these substantive rules, that could be problematic for the practitioner under Circular 230, as the practitioner would have a duty to know those laws before issuing an IRS form.  See in particular Circ. 230, Section 10.22(a).
  • The District Court for the Western District of North Carolina, in Carriker v. United States, has partially dismissed an accountant’s attempt to collect attorney’s fees for the accountant defending his CPA license before a state board that he claimed was related to an IRS controversy.  The Court found these were not proceedings “by or against” the United States under Section 7430.  Similarly, the Code did not provide for fees for the accountant’s time helping his lawyer on the project.  The claims related to fees for the underlying IRS controversy were not dismissed.
  • The Service issued a taxpayer favorable PLR on seeking discretionary relief for late recharacterization of a Roth IRA conversion back to a normal IRA in PLR 201506015.  Under the PLR, the taxpayer converted his IRA to a Roth, and a few weeks later invested in a company on his financial advisor’s advice.  That company, through other investments, either stole or lost the money, and fraudulent provided incorrect statements regarding the investment’s value.  Because of this, the taxpayer had no reason to recharacterize his IRA back to a Roth.  After the period for making such an election, the taxpayer found out about the fraud.  Taxpayers are, under certain circumstances, allowed to convert their traditional IRA to a Roth IRA.  This requires the taxpayer to pay the income tax due on the distribution, but no penalty.  If the value of the account decreasing significantly immediately after the conversion, taxpayers may want to recharacterize and obtain a refund of the tax due.  There are certain time limits within which the election must be made.   Under Treas. Reg. § 301.9100-3(b)(1), the Service has discretion to allow late relief in certain circumstances.  One of which is when the taxpayer “failed to make an election because, after exercising due diligence, the taxpayer was unaware of the necessity for the election.”  The Service found the fraud caused the taxpayer to be “unaware of the necessity for the election” and allowed the late election.  This is arguably a broad, taxpayer friendly, view of when a taxpayer will be aware of something and what is a necessity.
  • The Service has issued its internal guidance regarding Letter 5262-D in estate and gift audits.  This guidance discusses how the auditor should handle a case that was not settled based on how cooperative the taxpayer was.  It covers when a 30 day letter can be issued, how additional information must be requested, and when a 90 day letter must go out.  If you don’t respond to those IDRs, you are probably getting a ticket to Tax Court.
  • Next time the ABA Tax Section meets in San Francisco, we may need to take a field trip to the bar from this next case.  In Estate of Fenta v. Comm’r, the Tax Court found the taxpayer was not entitled to litigation and administrative costs, as the IRS was substantially justified (too bad, because I think the fees would have gone to a low income taxpayer clinic).   The action in this case surrounded the Lakeside Lounge, which might be this joint.  The Lounge appears to be a dive bar, that earned a substantial portion of its income from the sale of booze, largely in cash transactions.  In a fact pattern that would not be surprising to any IRS agent, it was believed that the bar was not reporting all of its income.  Below is a quick note on how the Service calculated the deficiency and on why no costs were awarded.

The taxpayer wasn’t excited to hand over the books and records, and after a few summonses, the Service determined the business was not keeping adequate books and records.  Using the invoices for the alcohol purchased by the bar, the Service applied the “percentage-markup” analysis (which the California taxing authority had previously used) to determine the under reporting of the income.  This is one of the methods used by the IRS during audits of cash intensive businesses – here is a portion of the IRS’ audit guide on the topic.  For bars, this is calculated by taking “liquor purchases divided by average drinks per bottle times average price per drink with allowance for spillage.”  There are a lot of things practitioners and the Service can quibble about in this calculation.  The Service issued its notice of deficiency, and the taxpayer petitioned the court.  Prior to a hearing, the matter was largely settled and a stipulated settlement was filed with the court.

In the instant case, it does not appear a qualified offer was made, so the Tax Court did a Section 7430(c)(4)(A) review to determine if the taxpayer substantially prevailed.  In this case, the Service largely argued that it was substantially justified in its position because Mr. Fenta failed to provide various receipts until after he filed his petition.  Once the Service received those items, it settled.  The Court agreed with the Service.  Interestingly, the Court did not indicate whether the Service argued that the settlement precluded fees.  I was too lazy (busy) to pull the briefs to see if the Service did not argue the same or if the Court found it more appropriate to only discuss the substantially justified argument.

  • The First Circuit, in In Re: Brian S. Fahey, consolidated four cases, all with the same question, which was:

whether a Massachusetts state income tax return filed after the date by which Massachusetts requires such returns to be filed constitutes a “return” under 11 U.S.C. § 523(a) such that unpaid taxes due under the return can be discharged in bankruptcy.

The Court, joining a recent Tenth Circuit decision, held “we conclude that it does not.”  The Court found persuasive the holding in Mallo v. Internal Revenue Service, where the Tenth Circuit held late filed returns were not returns for the applicable paragraph in the bankruptcy code.  Keith had a great write up of Mallo found here (comments are worth a review also).

  • From the Federal Tax Crimes Blog, Jack Townsend discusses the DOJ press release regarding another plea deal for a UBS client.  Jack quotes the release and then covers his thoughts, which are insightful, as always.  Great point about the taxpayer’s lie to the Service in a meeting potentially extending the statute on the underlying crime (and being a crime itself).

Legislative Authority to Regulate Paid Tax Return Preparers: The Focus Turns to Congress to Act

In this post, Michael Desmond of The Law Offices of Michael J. Desmond, APC discusses the prospects for a legislative response to recent court decisions enjoining the IRS from regulating paid tax return preparers and, more broadly, calling into question the scope of the IRS’s authority to promulgate practice standards under Circular 230.  This follows up on prior posts Mike has written on related topics: Is there a Future Role for Circular 230 in the IRS’s Efforts to Improve Compliance and one of PT’s most-viewed posts, Final Circular 230 Written Tax Advice Regulations. Les


Section 330 of Title 31 (“Section 330”) provides the statutory basis for the Treasury Department and the IRS to promulgate the practice standards set forth in Treasury Department Circular 230. In its present form, 31 U.S.C. § 330(a)(1) authorizes the Secretary to “regulate the practice of representatives before the Treasury.” For decades, Treasury and the IRS have relied on this statute as authority for the regulation of a wide variety of “practitioner” conduct ranging from the due diligence standards in Circular 230 § 10.22, to the fee practices in § 10.27, to the conflict of interest rules in § 10.29 and the “written advice” standards in new § 10.37. Section 330(a)(2) of Title 31 complements Section 330(a)(1) by authorizing the Secretary to sanction (including by suspension or disbarment from “practice”) a “representative” who is incompetent, disreputable, violates regulations promulgated under Circular 230 or, in certain cases, misleads or threatens a “person being represented” or “prospective person to be represented.” Treasury and the IRS have relied on this authority to regulate a list of “incompetent” or “disreputable conduct,” ranging from conviction of certain crimes to “willfully” failing to electronically file a tax return when otherwise required to do so. See Circular 230 §§ 10.51(a)(1) through 10.51(a)(18).


Both subsection (a)(1) and subsection (a)(2) of Section 330 are linked to the “practice” of a “representative,” terms that are not defined by the statute and, until recently, had not been interpreted by the courts. In 2004, Congress amended Section 31 to add a new subsection (d), which provides a negative grant of authority for the Treasury Department and IRS to regulate the rendering of written tax advice with respect to certain potentially abusive transactions. American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418, §§ 822. Neither the 2004 statute nor its legislative history address the definition of “practice” or “representative” as those terms are used elsewhere in Section 330.

Although Section 330 and its predecessor statutes have been in place largely unchanged for over a century, the government’s reliance on the statute to regulate as “practitioners” individuals who directly and indirectly interact with the federal tax system had not been subject to serious challenges until recently. Amendments to Circular 230 finalized in 2011 attempted to regulate as “practitioners” persons whose only connection to the tax system was the preparation of tax returns for compensation changed that.

Loving and Ridgely

The D.C. Circuit’s decision in Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) and the D.C. District Court’s decision several months later in Ridgely v. Lew, 2014 U.S. Dist. LEXIS 96447 (D.D.C. July 16, 2014) have introduced a new paradigm to Circular 230, calling into question key portions of the regulations and creating a watershed moment for the regulation of a broad range of tax advisor conduct. With the decisions in both cases now final, attention has shifted from the courts to Congress to address what are generally agreed to be serious compliance problems created by a system where hundreds of thousands of unregulated, unlicensed and in many cases untrained professionals assist tens of millions of taxpayers in paying and obtaining refunds of billions of dollars in taxes each year.

Summarizing Loving and Ridgely:

  • In Loving, the D.C. Circuit considered the “precise question” of “whether the IRS’s statutory authority to ‘regulate the practice of representatives of persons before the Department of Treasury’ encompasses authority to regulate tax-return preparers.” Finding no ambiguity in Section 330, the court held that it did not, walking through “six considerations [that] foreclose the IRS’s interpretation of the statute.”
  • While in Loving, the D.C. Circuit focused narrowly on newly promulgated provisions in Circular 230 that imposed testing and continuing education requirements on paid tax return preparers, the District Court’s decision in Ridgely v. Lew extends the D.C. Circuit’s holding in a context with potentially far broader consequences. While the only aspect of Circular 230 directly at issue in Ridgely was the limitation on contingent fees in Section 10.27 as applied to a CPA’s preparation of “ordinary refund claims,” the rationale of the case has wider application. The District Court equated paid tax return preparation to the preparation of “ordinary” refund claims and held that if—under Loving—the former does not constitute “the practice of representatives,” neither does the latter. And, if regulating the preparation of “ordinary refund claims” is beyond the scope of the IRS’s regulatory authority, so is regulating fee practices with respect to that activity.
  • While Ridgely was, by its terms, limited to contingent fee practices for refund claims, its rationale can be applied broadly to a wide range of conduct that Circular 230 has long purported to regulate, including due diligence, standards for written tax advice and conflicts of interest – none of which necessarily arise in the context of direct representation of taxpayers before the IRS. In sum, were it passed in its current form, S. 137 would address Loving and authorize the IRS to regulate paid tax return prepared, but it would not address Ridgely or future cases that can be expected to arise attempting to extend Ridgely to other conduct that is only indirectly related to an interaction with the IRS.
  • Although the Ridgely Court’s rationale may be a lineal extension of Loving, it does not necessarily hold up against the “six considerations” the D.C. Circuit walked through in Loving. For example, unlike paid return preparation, the IRS has historically taken the position that it can regulate a CPAs’ fee practices. Moreover, Loving does not specifically address the secondary argument rejected in Ridgely that the IRS has derivative authority to regulate all aspects of conduct for persons who are, in other contexts, admittedly agents or “representatives” of taxpayers before the IRS (i.e., lawyers, CPAs and enrolled agents who at some point have filed an IRS Form 2848, Power of Attorney). This raises an interesting theoretical question as to whether the outcome might have been different had Ridgely reached the D.C. Circuit before Loving. Regardless, the Ridgely court did extended Loving to invalidate the limitation on contingent fees in Circular 230 § 10.27 and no appeal was taken.

With the government having folded its tent, at least for the moment, on further litigation over the scope of authority under Section 330, the focus now shifts to Congress for a solution.  While the prospects for expanding the IRS’s regulatory authority in the current political environment are unclear, the need for an updated statute – even before Loving and Ridgely is not.

The Horse Act of 1884

A downside to using a statute enacted 130 years ago as the basis for any modern day regulation, much less regulation of a multi-billion dollar industry, is that the language of the statute may not be up to the task at hand. When the predecessor to Section 330 was enacted, the United States did not have a generally applicable income tax, much less an entire industry focused on paid return preparation. Reading the original statute, it is difficult to imagine that in 1884 Congress thought that it was authorizing anything remotely close to the regulation of tax return preparers. Rather, when the original statute was enacted as part of the Horse Act of 1884, Congress was focused on funding claims brought against the War Department “[f]or horses and other property lost” during the Civil War. In authorizing that funding, Congress qualified it with the proviso:


That the Secretary of the Treasury may prescribe rules and regulations governing the recognition of agents, attorneys, or other persons representing claimants before his Department, and may require of such persons, agents and attorneys, before being recognized as representatives of claimants, that they shall show that they are of good character and in good repute, possessed of the necessary qualifications to enable them to render such claimants valuable service, and otherwise competent to advise and assist such claimants in the presentation of their cases.   And such Secretary may after due notice and opportunity for hearing suspend, and disbar from further practice before his Department any such person, agent, or attorney shown to be incompetent, disreputable, or who refuses to comply with the said rules and regulations, or who shall with intent to defraud, in any manner willfully and knowingly deceive, mislead, or threaten any claimant or prospective claimant, by word, circular, letter, or by advertisement.

Act of July 7, 1884, ch. 334, 23 Stat. 236, 258-59.

Submission of claims to the Treasury Department having evolved in the past 130 years from dead horses to home buyer, health insurance and earned income tax credits, among myriad other tax expenditures, the statutory grant of authority is in dire need of an update. As the D.C. Circuit stated in Loving in holding that Section 330 did not authorize the regulation of paid preparers, “we are confident that the enacting Congress did not intend to grow such a large elephant in such a small mousehole.” 742 F.3d at 1021.

Prospects for a Legislative Response

The judicial framework of Loving and Ridgely and the historical background of the Horse Act of 1884 provide context for evaluating recent legislative proposals to amend Section 330 to authorize the regulation of return preparers. Legislation introduced in prior Congresses focused on mandating regulation where historically the IRS had been unwilling or unable to do so. See, e.g., H.R. 1528, The Tax Administration and Good Government Act , § 4 (108th Cong.).   Those earlier legislative efforts met resistance on several fronts, including a concern expressed by the IRS that it lacked the resources to effectively regulate hundreds of thousands of paid preparers, a concern expressed by existing “practitioners” that the market value of their credentials not be eroded by a regulatory stamp of approval for all paid preparers, and a concern by unregulated paid preparers over the burden that would be imposed by any regulation. With no traction on the legislative front and a growing concern over unregulated preparers, Treasury and the IRS acted on their own with the promulgation of the 2011 amendments to Circular 230 making all paid return preparers “practitioners.” This shifted the target from Congress to the IRS, but did nothing to eliminate the underlying concerns. In short order, those concerns gave rise to litigation.

In the early days of the 114th Congress, legislation was again introduced to authorize the Treasury Department and IRS to regulate paid return preparers, now with the contextual benefit of Loving and Ridgely.   On January 8, 2015, Senators Wyden (D-Ore.) and Cardin (D-Md.) introduced S.137, which would amend Section 330 to supplement the current authorization for regulating “the practice of representatives of persons before the Department of Treasury” by adding a new subsection specifically authorizing regulation of “the practice of tax return preparers” as defined in Code section 7701(a)(36). If enacted, S. 137 would overturn Loving and authorize (presumably on a prospective basis) the changes to Circular 230 finalized in 2011 that attempted to fold paid return preparers into the definition of “practitioners.” The Obama Administration takes a similar albeit less detailed approach in its Fiscal Year 2016 Revenue Proposals, which call for legislation that “would explicitly provide that the Secretary has the authority to regulate all paid return preparers.” Similar legislation was also introduced in the 113th Congress without any meaningful action being taken on it. H.R. 4470, Tax Return Preparer Accountability Act of 2014, (113th Cong. 2014); H.R. 4463, Tax Refund Protection Act of 2014, H.R. 4463, 113th Cong. (2014); H.R. 1570, Taxpayer Protection and Preparer Fraud Prevention Act of 2013, 113th Cong. (2013).

While S. 137 responds to Loving,it does not address the broader challenge to the authority of the Treasury Department and IRS to regulate conduct beyond return preparation that was called into question by Ridgely. This is a somewhat ironic result, given that the district court in Ridgely purported to simply apply the holding in Loving, interpreting the meaning of “practice of representatives of persons before the Department of the Treasury.” By adding a new subsection to Section 330 providing targeted authority for Treasury and the IRS to regulate paid return preparers, S. 137 would appear to leave untouched the Ridgely court’s holding (applying Loving) that “the practice of representatives” under current law is limited to persons having direct “representative” interaction with the IRS and does not extend broadly to fee practices for preparing amended returns even with respect to persons who, like the plaintiff in Ridgely, are admittedly “practitioners” in other contexts.

S. 137 follows a discussion draft of legislation released by then Senate Finance Committee Chairman Max Baucus in 2013 as part of a broader package of proposals to reform the administration of federal tax law. That draft “clarifies” Section 330 by adding a reference to “preparing and filing . . . tax returns” to subsection (a)(2)(D). The draft assumes the threshold conclusion that “practice of representatives” includes return preparation, an issue that would have to be addressed in light of Loving. Moreover, like S. 137, the draft legislation does not address the narrow interpretation of “practice of representatives” in Section 330(a)(1) adopted by the District Court in Ridgely.  Despite these issues, inclusion of a proposal to amend Section 330 in the prior discussion draft suggests that the issue will be addressed again by the Finance Committee as Chairman Hatch continues to push for broader tax reform in the current Congress.

Also on the legislative front, the ABA’s Section of Taxation recently issued a Report supporting a legislative response to Loving, although the Report has yet to be adopted by the ABA’s House of Delegates. Like S. 137, the Report recommends that Section 330 be amended to include “tax return preparers” (as defined by Code section 7701(a)(36)) within the scope of Sections 330(a) and (b). While the Report does not propose specific legislative language, its recommendation could be implemented by expanding the definition of “practice of representatives,” which would address the holdings of both Loving and Ridgely. The Report also recommends amendments to Section 330(d), originally enacted in 2004, to expand it beyond a negative grant of authority applicable only to written tax advice rendered in the context transactions that have the potential for abuse.


Although the near-term prospects for legislation expanding the IRS’s regulatory authority may be remote, there does seem to be a broad consensus that paid tax return preparers should be subject to some form of uniform regulation and that the IRS should be able to promulgate practice standards applicable to a broad range of advisor conduct.   Loving and Ridgely make clear, however, that the Horse Act of 1884 is not up to the task of supporting that regulatory initiative. Whether it comes as part of a broader tax reform effort, or with narrower legislation targeted at improving the administration of the tax law, legislative action at some point in time seems inevitable. Legislation introduced in the current and past Congresses provide a good start and, with some refinement, should help to ensure the shared goal of improving compliance and tax administration. Only the minor challenge of moving tax legislation stands in the way.



“Do Overs” – The Binding Effect of an Offer in Compromise

Today we welcome first time guest blogger Marilyn Ames. Marilyn and I worked together at IRS Chief Counsel’s office for many years separated by about 1,500 miles.  She is retired now and living in Alaska but assisting me in rewriting the Saltzman and Book collection chapters.  We are working on the offer in compromise section of the book and by chance I received a question from another clinic about what to do when the IRS begins auditing your client for a period covered by the offer.  This past summer I had drawn a question from another clinic about what to do when your client discovers they should have received a large refund for a period covered by the offer.  As we looked at those situations, we decided that the effect of the offer was clear under the law but perhaps not clear to those entering into the offer.  That discussion led to this post and I thank Marilyn for her efforts.  Keith  

The IRS has had the authority to compromise with taxpayers since the first income tax code, and taxpayers and the IRS have been litigating over the effect of an accepted compromise almost as long.  Usually it has been the taxpayer who has requested what my children used to call a “do over” when they played games; as in “I don’t like what happened in the move I just completed and now I want to take that move back.”  Recently, however, it appears that the IRS has begun to ask for do overs in the area of offers in compromise.


Section 7122 and its predecessors give the IRS the authority to compromise any civil or criminal case arising under the internal revenue laws. In the first reported do over case involving an accepted offer in compromise, Ely & Walker Dry Goods Co. v. United States, 34 F.2d 429 (8th Cir. 1929), the taxpayer discovered after it entered into a compromise involving its income tax liability and the fraud penalty for its fiscal year ending in 1918, that its inventory was incorrectly computed.  The parties agreed that absent the compromise, the taxpayer would be entitled to a refund.  The taxpayer argued that the compromise was only of the fraud penalty, not the tax, so the compromise was not precluded by the acceptance of the offer in compromise.  The court rejected the taxpayer’s argument, holding that the income tax liability “constituted an entire, single liability, that this single liability, treated as such by the parties, was duly compromised, and that such compromise is a bar to this action.” 34 F.2d at 432. 

Since 1929, taxpayers have unsuccessfully attempted to get a do over by distinguishing the holding in Ely & Walker Dry Goods that a compromise of a tax liability closes that tax year, and the liability cannot be reopened.  The Internal Revenue Service has agreed with that holding, both in its litigation positions and in its publicly stated policy. Treas. Reg. § 301.7122-1(e)(5) expressly states that acceptance of an offer in compromise conclusively settles the liability of the taxpayer specified in the offer, and that neither the taxpayer nor the Government will be permitted to reopen the case after an offer has been accepted unless the taxpayer has committed fraud by supplying false information or documents, or by concealing assets or the ability to pay. The regulations further allow the liability included in an offer in compromise to be reopened in the event of a mutual mistake of material fact.  The court in Rosenberg v. United States, 313 F. Supp. 28 (N.D. 1970)upheld this regulation, stating that it had the force and effect of law as it was not clearly unreasonable.

Absent fraud or mutual mistake of fact, the courts have not allowed taxpayers the requested do over. One of the more recent attempts to avoid the binding effect of an offer in compromise was made by the taxpayer in Dutton v. Commissioner, 122 T.C. 133 (2004), in which the taxpayer tried persuade the Tax Court that his claim for innocent spouse relief should be granted and he should receive a refund. The Tax Court rejected his argument that there was a mutual mistake sufficient to have had a material effect on the agreed exchange of performances.

In Revenue Procedure 2003-71, written for the purpose of describing the process for submitting and resolving an offer in compromise, the IRS emphasizes in section 8.02 that “Acceptance of an offer in compromise will conclusively settle the liability of the taxpayer specified in the offer.”  In PLR 5807022300A, the IRS stated “So long as an offer in compromise is in effect, all rights to further adjustments for the year or periods involved are waived.  For a compromise is a binding contract, conclusive against both the Government and the taxpayer.”

Despite the long-settled legal position that an accepted offer in compromise closes out all tax periods and years included in the offer, the recent case arising in one clinic suggests that the IRS seeks to give itself a de facto do over. It contacted a taxpayer with an accepted offer seeking to audit years included in the compromise.  The contact came in the form of a CP 2000 notice.  These notices are issued by the Automated Under Reporter (AUR) Function when the information returns filed with the Service do not match the information reported on the taxpayer’s return.  Presumably this is not a compromise where the IRS has discovered that there was fraud or a mutual mistake of fact, as the taxpayer has not received the letter required for a rescission IRM, Rescission Procedures (September 23, 2008) of an accepted offer in compromise. Absent fraud, it is doubtful that the existence of this potential additional liability would constitute a mutual mistake of fact that would have kept the IRS from accepting the offer in compromise, and that the compromise could be rescinded.

Apparently this is a case of the right hand and the left hand of the IRS not knowing what the other is doing, although if the IRS computer systems can match income information with returns, it would seem that the system could also be programmed to recognize the existence of an accepted offer in compromise for this tax period. The possibility exists that the AUR Function did not pick up the computer code entered in the offer case or the timing of the underreporter case came just before the offer code appeared on the account.  Since these cases are worked basically by computers rather than individuals, the timing of the offer and the AUR notices may have been ships passing in the night that no one at the IRS observed.

The Internal Revenue Manual IRM, Pending Assessments (May 10, 2013)  contains clear instructions on how to handle audits that are open when an offer in compromise is submitted for the same year, but doesn’t appear to recognize that an audit could be opened after the offer is accepted.  While a taxpayer with an accepted offer who receives a CP 2000 notice may find someone at the IRS who understands the tax year is closed, or may have competent counsel who can make the argument, the possibility exists that many taxpayers in this situation would simply pay the additional liability.  Because this has happened in only one known case, it is unclear if a systemic issue is at play or an anomaly.

One final aspect of later discovered issues in offers bears mentioning.  If the IRS discovers a tax period that should have been included in an offer in compromise but was not, and both parties are in agreement, the procedure is simply to add the additional tax periods to the original offer.  The additional liability must have been assessed before the original offer in compromise was accepted.  IRM, Overlooked Periods (April 15, 2011).  While you want to put every period in which the taxpayer has an assessed liability into an offer and you want to resolve all periods for which the taxpayer is under audit at the time of the offer, sometimes a period gets overlooked.  This procedure can fix the problem if the assessment occurred before the offer acceptance.  This procedure cannot fix the problem if the audit did not result in an assessment.  It also cannot help the taxpayer who later “discovers” they were due a refund for a period covered by the offer.  Because of the binding nature of the offer, a complete review of taxpayer’s circumstances for all open years should take place in conjunction with the submission of the offer to avoid problems of the failure to cover periods or the failure to seek a refund before it’s too late.


Taxpayer Rights: A Look Back to Congressional Testimony of Michael Saltzman and Nina Olson

An earlier version of this post appeared on the Forbes PT site on February 23, 2015.

In this post I will discuss Congressional testimony from over fifteen years ago from Michael Saltzman and Nina Olson. The testimony sheds light on some of the still-current issues that courts are confronting in collection due process (CDP) cases, a process that has its origins in some of the testimony that led up to the last comprehensive procedural reform legislation that dealt with the IRS. I will also offer some more personal thoughts on Michael, who was a huge figure in the field of tax procedure and someone who had a major impact on my life.


We are rewriting much of the treatise IRS Practice and Procedure, originally authored by the late great Michael Saltzman. With Steve and some others, I have been updating the book after Michael’s untimely passing. To help with the task, I have brought in some expert chapter authors; for example former DOJ Senior Litigation Counsel (and current editor of Tax Notes International) Stu Gibson and I co-wrote the new chapter on the IRS summons powers. Jack Townsend (who writes the premier criminal tax blog Federal Tax Crimes) took the lead on an amazing chapter on criminal tax that comes out next month. Steve took the lead on a new chapter on interest that came out last year.

Keith is taking on the lion’s share of the initial drafting in the collection chapters. Last year, we published an outstanding chapter on priority of tax claims; later this year, there will be new chapters detailing the general tax collection function, minimizing the effect of liens and levies, and a standalone chapter on CDP.

In working on the CDP chapter, it reminded me of the testimony on procedural reform that Michael Saltzman gave before the Senate Finance Committee in 1998, and I decided to go back and re-read that testimony. We have not written much about Michael in this blog, but he is a giant in the field of tax procedure. I appreciate that more and more as we wrestle with the breadth and depth of the book, and as we work to ensure that it meets the high standards that Michael himself had and demanded of others.

 Michael and Collection Rights

Allow me to say a few words about Michael. Circumstances drew me to Michael. Back in 1994, I was a student in NYU’s graduate tax program and attended his Tax Procedure class one night. I remember his talking about the Administrative Procedure Act and the IRS, and how general principles of administrative law were crucial to understanding the IRS’s adjudication and rulemaking functions. In his class, he often brought the perspective of other areas of the law in to tax procedure; he was an early advocate of moving away from a tax exceptionalism approach to tax procedure.

I had the nerve one night after class to talk with him about his lecture. In his lecture, he had talked passionately about the at the time recent Supreme Court decision in the US v James Daniel Good Real Property case. That case involves civil forfeiture and in particular whether the due process clause requires the government to provide pre-seizure notice and a meaningful opportunity to be heard. It was not a tax case, but the Supreme Court in James Daniel Good in finding that the due process clause does require pre-seizure notice and hearing rights looked to cases where the Supreme Court had moved away from defaulting to a blanket assertion of the primacy of the government’s interest. Instead, it looked to the more nuanced balancing test set forth in Matthews v Eldridge:

The Mathews analysis requires us to consider the private interest affected by the official action; the risk of an erroneous deprivation of that interest through the procedures used, as well as the probable value of additional safeguards; and the Government’s interest, including the administrative burden that additional procedural requirements would impose.

The balancing test allowed courts to consider the possibility that the government’s seizure might be wrong and also allowed a court to consider the individual’s potential interest in less invasive ways of satisfying a debt.

Michael felt that the growing trend of interposing procedural protections in the form of notice and hearing rights prior to seizure should likewise find its way into tax law. In fact, he was an early advocate of what would expand into the CDP provisions in his testimony before the Senate Finance Committee in the legislative run up to what would become the IRS Restructuring and Reform Act of 1998 (RRA 98):

Seizures of property, I know that this is an area of particular interest. I agree that high-level review of seizures will prevent abuse. I think any time you move up in the collection division, for example, that the level of abuse will decrease. But I also recommend another procedure for review of seizures. The Supreme Court has ruled that taxpayers are entitled to a pre-deprivation hearing or a prompt post-deprivation hearing as a matter of due process. This led in 1976 to the enactment of section 7429 of the code where jeopardy assessments are in fact reviewed in a probable cause type hearing. I recommend that that be done also for seizures. (page 128)

In written testimony he expanded a bit:

Accordingly, I respectfully recommend that a study be conducted with respect to the efficacy of pre-deprivation administrative review of significant seizures of tax- payer property. This could be accomplished by establishing field offices where administrative judges or U.S. Tax Court special trial judges could make determinations as to whether seizure of significant taxpayer property in any given situation is an appropriate remedy. In addition to this task, many other actions could be heard in these field offices, such as issues surrounding jeopardy assessments, John Doe summonses, and similar matters. This alternative will allow for the quick handling of these issues at a local level and at a considerably lesser expense than resort to the district courts. (page 374)

The legislative process that led to RRA has often been criticized as unfairly singling out phony IRS abuses. But in reading through some of the testimony in these hearings, I am struck by the amount of thoughtful commentary that rings as true today as it did over 15 years ago. More from Michael, this time about the importance of treating taxpayers fairly in the collection process:

In setting about reforming the operations of the Internal Revenue Service, it is worth keeping in mind, as one historian has observed, that taxes, including penalties, ‘‘must not merely be imposed; they must be justly imposed. Their efficient, comprehensive, and equitable collection is the foundation of a healthy and stable government.’’ P. Johnson, A History of the English People, p.47 (1989). It is not enough that taxpayers subject to various tax obligations, penalties, and interest, are also protected by a range of remedies in an effort to ensure that the IRS treats them fairly. Unless structural reforms and protections added to the Code result in taxpayers’ feeling that they have been treated fairly, popular attitudes toward the IRS will not change and statutory changes will do nothing more than add sterile complexity to an already complex law. I suggest that if the IRS shares the goal of fostering taxpayer trust that the IRS will treat them fairly, the need for structural reforms of the IRS will be reduced (page 368)

I smile at the thought of Michael injecting a reference from an historian into his testimony; he loved books and was a voracious reader, drawing on sources far and wide to animate his thinking on what might seem a technical procedural issue.

This broader point Michael made was echoed by testimony that current National Taxpayer Advocate Nina Olson made in the same hearings (at the time she was executive director of the Community Tax Law Project and Keith’s regular opponent in Tax Court as well as administrative cases). Nina’s testimony covers lots of ground but she started by talking about problems with the collection function and how taxpayers often felt they were getting treated unfairly:

Collections is the branch of the IRS with which low income taxpayers have the most contact. Many low income taxpayers attempt to bring up substantive issues in Collections because they have not understood their opportunities to dispute a proposed assessment at earlier stages of the examination process. Collections is, of course, a most inappropriate place to attempt to clear up matters of substantive tax law. My clients do not understand why the revenue officer is not willing to listen to their protestations that they do not owe the tax being collected. A recognition of this misconception is fundamental to an understanding of the problems low income taxpayers have with the collections branch and their resentment toward the Internal Revenue Service. This resentment goes beyond the general feeling of not wanting to pay over any of one’s hard-earned money; rather, it generates from the belief that no one is interested in learning whether the tax was correctly assessed. (page 330)

As we know, Congress in RRA 98 did quite a major overhaul of the tax collection laws. CDP in my view while far from perfect reflects Congressional recognition that the scales in collection cases had tipped too far in the government’s interest. Additional notice and hearing rights following the filing of a notice of federal tax lien and prior to levy reflected Congressional belief that taxpayers were entitled to protections similar to what other debtors enjoy. Fifteen years on and we are still struggling with calibrating the balance of these rights. In the second part of this post, I will discuss the case of Ding v Commissioner, a recent Tax Court case that brings us back to some of the points Nina and Michael raised in testimony before the Senate Finance Committee

Some Final Thoughts on Michael

What happened after I talked to Michael about the James Daniel Good case? It was late. As we were talking, I asked if we could continue the talk in a taxi home. The taxi ride changed my life. Michael took an interest in me. I had the nerve to ask if he was looking for an associate. He gave me the chance to interview at Baker and McKenzie, and I persuaded him and his partners to hire me. That began for me a three-year run learning as his associate, and getting the chance to work with him and his talented partner Barbara Kaplan on tax controversy matters. It led to me being hired as a director of a low-income taxpayer clinic and ultimately as successor author to Michael on the treatise IRS Practice and Procedure. So, thank you Michael, for your passion for the law and for your willingness to take a chance on me.

Reexamining How to Collect

Last week National Taxpayer Advocate Nina Olson blogged about collection statistics and what they might tell us.  We welcome her back to the world of blogging.  We will use her blog as a springboard for focusing on collection matters this week.

In the blog she examines the quantity of IRS collection enforcement action, primarily the filing of the notice of federal tax lien and the issuance of levies, against the amount of money collected by the IRS over a period of years. The conclusions she draws from this examination will cause you to stop and think about the best ways to collect unpaid taxes.  The expected correlation between enforcement action and increased collection dollars did not exist.

I do not want to jump too fast to say that the data the NTA displays in her blog post necessarily and inextricably leads to the conclusion that the IRS could collect more dollars if it reduced its enforced collection action but the data should make the IRS and others interested in in efficient and enhanced collection at the lowest cost with the least taxpayer pain sit up and take notice. We have all read Mark Twain’s take on the use of numbers to prove a point – “lies, damn lies and statistics” but that cautionary note does not distract from the power of the numbers the NTA has marshalled.  If we want to examine the collection process with a cool eye rather than a hot head, these numbers provide a good place to start.


The blog post does not mark the first time the NTA has written in an effort to bring about a discussion of the most effective methods for promoting compliance. In her annual reports she has written about this numerous times and from a variety of angles.  Here is a link to her annual reports to Congress. She correctly reminds us over and over that collecting from taxpayers might best occur by providing them with the information and tools to pay the proper tax up front and this might best occur if the IRS could quickly pick up the phone and answer a question or quickly respond to a written request.

She wrote with passion about the problems created by the IRS when it decided about five years ago to essentially create a default to filing the tax lien whenever a taxpayer owed more than $5,000.   I joined her in writing about that topic.  In 2012 the IRS listened to these arguments and amended its approach to low dollar collection through the creation of the Freshstart program.  The statistics presented in her blog could result from the changes the IRS adopted in that program.  It has existed now for long enough to allow some examination of its success.

So, given the background of the NTA’s writings over the past 14 years since she took the job, what is unique about the information in the blog post last week? The statistics displayed in her post provide a stark reminder that the amount of money the IRS collects through its enforcement actions may not increase as the stronger enforcement actions increase.  The empirical evidence she marshals provides the basis for a new conversation about how best to go about collecting dollars not voluntarily paid to the IRS at the time of assessment.  Where can this conversation take us?

Whether or not Congress gets its act together on how to properly fund the IRS, the agency can use these statistics to engage in a self-examination about allocation of resources. Collection of taxes is a critical and core function of the IRS.  (The NTA voiced loud complaints when Congress tried to outsource collection from the IRS because of the core governmental aspect of this work.)  We all suffer when others do not pay their fair share.  I want the IRS to collect every dollar of unpaid tax as a goal because every dollar collected reduces the need to increase taxes on those who pay willingly.  Collection of every dollar, while a lofty ideal, will never happen so the IRS must build the most efficient system for capturing every possible dollar at the least cost both in expenditures and in injury to those against whom it seeks to collect.  Notices of federal tax liens and levies take a toll on anyone subjected to them and they cost money to implement.

The NTA’s statistics suggest that the reduced enforced collection action in the past few years has not harmed collection because the amounts collected during that same period have increased. Does this mean the Freshstart program has succeeded?  Has the improving economy allowed taxpayers to pay back more than they could in the years immediately following the recession or can we find a new path for the IRS to follow in its efforts to collect?

The NTA’s blog post does not provide answers but provides a basis for a discussion. She signals that more will come shortly as she dusts off her keyboard and restarts her blogging career. The IRS will always need to use its enforcement tools on some taxpayers but when and how it decides to use those tools can have a big impact on the success of its collection program.  Let’s have a discussion about what the statistics mean.  Let’s see if a better path to successful collection exists.  Maybe it’s time to rethink how we structure collection.  These statistics provide a great starting point for the discussion.  Study them and engage in the debate.

I plan to write more about this first wave of statistics and to follow the new data she promises to release. This post seeks to alert you to the new data she has released and to the conversation she seeks to start.  As always, we welcome comments on our site and we welcome guest bloggers who want to engage in the debate here.  This is not about criticizing the IRS as it performs a core function but about finding a way for it to succeed or at least to improve during the midst of adverse times for the IRS and relatively hard times for 99% of the population.