Warren Buffet Calls for Expanding EITC: Tax Administration Impact Highlights There is No Free Lunch

This post originally appeared in the Forbes PT site on May 26, 2015.

One of the hot button political issues of the day is income inequality. The stagnation of low-income workers’ wages has focused attention on policies to offset that, such as possibly raising the minimum wage or boosting tax benefits. Last week, Warren Buffet in an Op-Ed piece in the Wall Street Journal chimed in, first situating inequality in today’s economy:

That mismatch is neither the fault of the market system nor the fault of the disadvantaged individuals. It is simply a consequence of an economic engine that constantly requires more high-order talents while reducing the need for commodity-like tasks.

He then offers his views that a better approach to inequality is to increase the EITC rather than boost the minimum wage:

The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers. Payments to eligible workers diminish as their earnings increase. But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check.

In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.

As this is not a macroeconomics policy blog, I leave it to others to discuss the causes costs and possible solutions to the inequality Mr. Buffet speaks of.

This is, however, a tax procedure and administration blog, and much of what Mr. Buffet says, as well as some of the response it has drawn, sweeps in issues of tax administration. I will discuss some of those issues in this post, including overclaims, identity theft and program participation.

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Error, Fraud and Identity Theft

First, in couching support for expanding EITC, Mr. Buffet does note some issues with EITC, most of which relate to the IRS’s administering the program.

He discusses how “[f]raud is a big problem; penalties for it should be stiffened.”

While there is no doubt that EITC suffers from a considerable overclaim rate (I discussed recent data on EITC overclaims in IRS Issues New Report on EITC Overclaims) the statement may lead some to believe that the overclaims are all attributable to fraud; GAO and others looking at the EITC overclaim issue identify multiple sources of noncompliance; only one is fraud. Moreover, as my fellow Forbes contributors Kelly Erb and Janet Novack note there are already in place some of the most draconian penalties on the books for fraudster EITC claimants, including a 10-year ban on fraudulent claims, a penalty I have discussed in the past year in The Ban on Claiming the EITC: A Problematic Penalty. EITC fraud penalties will do little to address the underlying compliance issues.

As a practical matter, it is hard to push for expanding the EITC when IRS has a hard time relative to other transfer programs in stopping erroneous claims. For example, my Forbes colleague Janet Novack states,

Its already substantial size–as much as $6,242 for parents with three or more qualifying children and $5,548 for those with two kids–combined with pressure for the Internal Revenue Service to administer the credit on the cheap, has set off a tsunami of identity theft tax fraud that has swamped both the IRS and some of the very workers the EITC is supposed to help.

Janet (looking to Keith’s Senate testimony from this spring) suggests that Congress should get the IRS tax administration house in order through adequately funding IRS, regulating preparers and accelerating the reporting of information returns to give the IRS a fighting chance to administer the program.

Many articles focus on EITC error costs without considering the program’s reduced direct administrative costs; Janet’s post also sensibly compares the differences across programs, noting that IRS spends only about 1% to administer the EITC. I offer some more on this issue. EITC given lack of upfront eligibility administrative mechanisms is much cheaper to administer than other transfer programs such as TANF and SNAP (food stamps). Congressional testimony this year from the NTA (at page 26) lays this out nicely.

I couId not agree more that if Congress asks IRS to do more in terms of delivering benefits through expanding the EITC it needs to give the agency the tools to do the job right. A major part of the allure of having IRS in the mix is the low administrative costs Yet that figure is misleading, as Janet notes (also referring to Keith), we are just pushing costs on other parties, including the claimants who struggle in the audit process and all of us as IRS is pressured to audit EITC claimants at perhaps a far higher rate than it should given that most of the individual tax gap stems from the underreporting of income among self-employed taxpayers.

How does identity theft fit in with this? As to identity theft, it is a huge problem for the tax system. Yet, identity theft is a problem that is quite different from the EITC compliance problem. Only a small amount of EITC overclaims is due to identity theft; the overwhelming majority of EITC error is due to the misclaiming of qualifying children who do not reside with the claimant.

[Update: Since posting this story yesterday IRS revealed that it was subject to a major breach that allowed data thieves access to tax return information of over 100,000 people. The breach led to IRS sending over  $50 million in fraudulent refunds before it detected the problem. The news highlights the challenges that identity theft presents to the tax system (and our economy overall).]

We are going to run posts discussing identity theft in greater detail, but for now I note that the identity theft problem is mainly due to IRS issuing refunds before it has access to third party documentation that would allow it to prevent issuing refunds to the wrong person. From the 2015 GAO report Additional Actions Could Help the IRS Combat the Large Evolving Threat of Refund Fraud:

[Fraudulent Identity Theft] refund fraud takes advantage of IRS’s “look-back” compliance model. Under this model, rather than holding refunds until completing all compliance checks, IRS issues refunds after conducting selected reviews. While there are no simple solutions, one option is earlier matching of employer-reported wage information to taxpayers’ returns before issuing refunds. IRS currently cannot do such matching because employers’ wage data (from Form W-2s) are not available until months after IRS issues most refunds. Consequently, IRS begins matching employer-reported W-2 data to tax returns in July, following the tax season. If IRS had access to W-2 data earlier—through accelerated W-2 deadlines and increased electronic filing of W-2s—it could conduct pre-refund matching and identify discrepancies to prevent the issuance of billions in fraudulent refunds.

EITC errors mainly relate to the misclaiming of qualifying children, and in particular their residence. To claim an EITC with children, claimants need not only the taxpayer’s SS# but also the children’s numbers. That makes most EITC claims more difficult for identity fraudsters. Moreover, IRS filters addressing possible EITC errors add another layer of defenses making it less likely for identity fraudsters to get their illicit refunds.

There are administrative and legislative tools available to combat identity theft, including changing the time which IRS issues refunds or accelerating the filing of third party data. No doubt that the possibility of credit driven refunds attracts identity fraudsters to our tax system, but dummying up tax returns with phony withholding amounts that take advantage of the IRS’s lack of early access to information returns is the main tool of the identity theft fraudster.

Whether Congress expands EITC or not, the identity theft problem will persist and get worse, unless Congress and IRS take actions to reverse its look back compliance model.

Participation and Filing

In Buffet’s piece in the WSJ, he also discusses how “[t]here should be widespread publicity that workers can receive free and convenient filing help.”

The statement brings attention to one challenging aspect of housing a benefits’ program in the tax system. Benefits’ programs in other areas tend to have an application process that revolves on a greater ex ante review process through the form of case workers and government bureaucrats reviewing eligibility before doling out benefits. The tax system essentially has assumed (with safeguards like document matching and the threat of audit) that taxpayers on their own or increasingly through assistance like software or commercial preparers are accurately preparing their eligibility statements in the form of tax returns.

The tax system’s approach has substantial costs, one of which is that claimants often have to pay third parties to get their claims (tax returns) in; the market has stepped in in the form of software and commercial preparers, both of which are major players in the tax administration landscape. The issue of return prep costs warrants a separate post but suffice to say claimants often pay dearly to get access to their refunds. For example, the National Consumer Law Center earlier this year released its annual study on preparation and related costs. It looks at EITC and goes through the various charges in addition to return preparation charges. As to the specific charges for return preparation (separate from ancillary fees, like fees for quicker access to cash from the refund, which in the last filing season to over $424 million) the report notes that mystery shopper testing has documented preparation fees up to $400 or $500 per return. The GAO in an April 2014 study found that the fees charged for tax preparation varied widely, even between offices affiliated with the same chain.

Despite the costs, there is, however, access to free income tax return filing. IRS through its Free File program makes free filing available to taxpayers with incomes below $60,000, but the take up on that has not been stellar and some have criticized its approach of opening up claimants to other fees. Likewise, VITA prep centers are available to help claimants prepare returns for free. All else being equal it would be better if more claimants could access their refunds without having to pay for the privilege of getting their benefits.

Despite many paying prep fees and other costs one of the aspects of the EITC thought of as a positive is its high take up rate. Yet some of the criticism of Mr. Buffet’s plan also focuses on that there is only an about 80% participation rate, As my Forbes colleague Kelly Erb notes, “[t]he IRS estimates that only four of five eligible taxpayers take advantage of the existing credit: nearly 20% eligible taxpayers either don’t know about it or simply don’t take advantage.”

Yet, in looking at other transfer programs, 80% participation is not bad at all and is roughly consistent with SNAP (food stamps) and much higher than TANF, which is well below 50%. But when you look at the EITC numbers more closely, the 80% figures are misleading because the participation rates are very sensitive to the amount potentially on the table for EITC claimants, i.e., the take up rates are much higher when taking into account the dollar amount of EITC eligible. For example, in a study published in the IRS 2009 research conference looking at 2005 tax year data, EITC participation rate was 88% when refunds were over $3,000 and about 90% when refunds approached $4,000 (see page 1982).

In other words, for the people whom Congress intends to benefit the most, the EITC participation rates are higher than just about any other transfer program.

One other point weaves in the themes of identity theft and participation. In Janet Novack’s post she discusses Forbes contributor Laura Shin’s reporting about a low-wage McDonald’s worker who decided against filing a tax return claiming thousands in EITC due to her being an identity theft victim. This suggests that prior victimization will chill people from claiming an EITC. IRS actually has in place procedures to facilitate victims to file current year returns, including getting a secure Identity Protection PIN. I am not aware of research suggesting that identity theft is a major barrier for eligible claimants from participating in claiming EITC, but no doubt that prior victimization may contribute to eligible claimants being wary about spending money and time on return preparation costs.

Some Parting Thoughts

As Mr. Buffet knows, there is no such thing as a free lunch. Using the tax system to deliver benefits is no silver bullet when it comes to addressing inequality. To administer the tax system as we know it today is no easy task. When Congress asks the IRS to do more, there are costs to taxpayers and the system overall. As Congress considers whether to ratchet up EITC, it should do so with the absence of rhetoric. It should also consider the tools it wants to give IRS to combat errors as well as address what costs it wants to impose on claimants and third parties. The current system passes costs on others, many of which are hidden. As with lunch, someone has to pick up the tab.

 

 

 

 

 

 

Deciding Whether to Pursue a Liability – The Differing Standard between Trust Fund Recovery Penalty Cases and Examination Cases

 

As we have mentioned before, Les, Steve and I are engaged in updating IRS Practice and Procedure by Saltzman and Book.  Last year I wrote a number of posts on Collection Due Process as I prepared to update that part of the book.  I have now created an entire chapter on CDP cases which will come out with the 3rd Edition of the book.  Now, I am beginning to update Chapter 17 which covers both transferee liability and the trust fund recovery penalty (TFRP).  So, look for more posts on those topics.  In this post I will examine a unique facet of the TFRP with respect to the when the IRS makes a decision to assess that liability.

In TFRP cases the IRS has decided that it has the ability to look at a taxpayer’s collection potential in deciding whether to set up a tax liability in the first place.  This post will examine the policy behind the decision that the IRS can use collection as a basis for not pursing a liability in TFRP cases yet it pays no attention to collection in ordinary examination cases particularly the cases involving low income taxpayers with little or no collection potential.

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The determination to purse TFRP is made under IRM 5.7.4.1, which is made as soon as possible after the initial contact (IRM 5.1.10.3) with the taxpayer and within 120 days of being assigned to a revenue officer.  IRM 5.7.4.1.1 lists the factors to consider when determining the amount of the TFRP.  After the initial contact, collectability will be determined.  IRM 5.7.5.3.1 gives the IRS the option of non-assertion based on collectability.  To assert non collectability the IRS will look to the factors listed in IRM 5.7.5.1(1).  Those factors include:

  • Current financial condition
  • Involvement in a bankruptcy proceeding
  • Income history and future income potential
  • Asset potential (likelihood of increase in equity in assets and taxpayer’s potential to acquire assets in the future

More guidelines on the impact of collectability in making the TFRP assessment follow in IRM 5.7.5.1(2) and (3), which includes:

If responsible person financial analysis shows. . . Then. . .
Any present or future ability to pay Assess the penalty and take the appropriate collection action based on an analysis of the taxpayer’s financial condition.
No present, but future ability to pay Assess the TFRP based on future income potential and possible refund offset. Prepare a pre-assessed Form 53 and file lien if appropriate.
The responsible person cannot be located or contacted but internal research identifies assets or income sources Assess the TFRP since there is a good possibility of some collection from the assets/income sources that were located.
No present or future income potential exists over the collection statute period Do not assess the TFRP since the financial analysis shows there is little prospect that the taxpayer will receive any increase in income or acquire assets that will enable the Service to collect any of the penalty.

 

The TFRP will normally not be assessed when:

  • There is no present or future collection potential.
  • Neither the responsible person nor their assets/income sources can be located

IRM 5.7.4.8 discusses whether to pursue the TFRP in Installment Agreement or Bankruptcy Situations, while IRM 5.7.4.9 analyzes TFRP in offer in compromise situations.

The focus on collectability before making the assessment in the TFRP situation stands in stark contrast the approach of the IRS in making an assessment in other situations.  The use of collection in the TFRP situation creates difficulties in reconciling the policy here regarding assessment with the Congressional policy on this type of liability expressed in the bankruptcy code.  The TFRP stands as the only tax liability incapable of getting discharged no matter how old the period for which the taxpayer owes the tax or how long ago the assessment took place.  Bad actions such as filing a fraudulent return, late return or no return can also result in a liability excepted from discharge but in those situations it is the action of the taxpayer with respect to the tax rather than the tax itself.

Given that the taxpayer cannot discharge the TFRP and the IRS has a guaranteed 10 years to collect the liability if it wants to have that period, why would the IRS choose this debt among all others to exercise a collectability determination as part of deciding whether to assess.  Why would it not save this type of determination for low income taxpayers and dependency exemption cases like the taxpayer Les wrote about on Mother’s Day?

I think that the IRS makes a distinction for TFRP taxes because this is the one tax that gets assessed by the collection division.  Employees of the collection division approach assessment with a pragmatism employees of the examination division do not.  While the IRS does not evaluate employees based on metrics (see Restructuring and Reform Act of 1998 Sec. 1204) such as how many dollars they have assessed or collected, exam employees generally measure their worth by the number and amount of assessment with little care for whether the assessment will ever be collected.  Collection officers, however, hate the thought of going through the assessment process for nothing.  As a consequence, they built into the portion of the assessment process they control a look at collection.  Nothing stops the IRS from applying this same logic to all assessments it makes.  If it did, probably a decent percentage of the assessments against low income taxpayers would go unmade.  That might be good for a system in which the IRS has limited resources.

It seems especially unsatisfactory that the one tax Congress chose to single out for the worst treatment in bankruptcy, the one tax based on the taxpayer’s breaching the trust to hold public funds for payment to the IRS, the one tax where the taxpayer responsible for non-payment nevertheless receives full credit for the unpaid withheld taxes on their individual income tax return and on the calculation of their social security benefits would be the tax that the IRS gives a break to deciding to make an assessment by looking first to its ability to collect the tax after assessment.  To limit this pragmatic approach to individuals engaged in behavior we otherwise view as reprehensible seems not to make sense.  Perhaps, the IRS should take another look at why it adopted the policy and why it only applies this beneficial approach to responsible officers who owe the TFRP.

 

Summary Opinions for the week of 05/01/15

Happy Memorial Day weekend!  We won’t be posting on Monday, but will probably be back in full force on Tuesday.  I know we have a handful of guest posts coming up on really interesting topics and I’m certain Keith and Les have some insightful things to add following ABA.

In the week of May the 1st, we welcomed first time guest poster, Marilyn Ames, who wrote on NorCal Tea Party Patriots v. IRS and disclosure of return information.

Here are the other procedure items from that week:

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  • A recent Tax Court decision brought back the analysis used by the Supreme Court almost 20 years ago on a similar but slightly distinct fact pattern.  The situation can be tough to follow at first because it plays out at the intersection of Sections 6511 and 6512.  It also involves reliance on the earlier Supreme Court decision which caused a change to Section 6512 after it was decided.  In Butts v. Comm’r, the Tax Court denied taxpayers’ request for refund as being untimely.  The taxpayers failed to file in ’07 and ’08.  In 2011 (and 2012), SNODs were issued for 2007 and 2008, and later that year the taxpayer filed for review in the Tax Court.  In 2013, taxpayers filed joint returns, claiming overpayment due to employer withholdings.  The Court stated SCOTUS reviewed an almost identical case in Lundy v. Comm’r.   The issue in both cases was if the refund amount was allowed under Section 6512(b)(3), which allows refunds of any amount paid:

(A) after the mailing of the notice of deficiency;

(B) within the period which would be applicable under section 6511(b)(2), (c), or (d), if on the date of the mailing of the notice of deficiency a claim had been filed (whether or not filed) stating the grounds upon which the Tax Court finds that there is an overpayment; or

(C) within the period which would be applicable under section 6511(b)(2), (c), or (d), in respect of any claim for refund filed within the applicable period specified in section 6511 and before the date of the mailing of the notice of deficiency.

Based on the facts in Butts and Lundy, (A) and (C) do not apply.  In Lundy, SCOTUS stated it considered:

the look-back period for obtaining a refund of overpaid taxes in the…Tax Court under 26 USC 6512(b)(3)(B), and decide[d] whether the Tax Court can awarded a refund of taxes paid more than two years prior to the date on which the [IRS] mailed the taxpayer a notice of deficiency, when, on the date the notice of deficiency was mailed, the taxpayer had not yet filed a return.  We hold that in these circumstances the 2-year look-back period in 6513(b)(3)(B) applies, and the Tax Court lacks jurisdiction to award a refund.

One difference in Butts and Lundy is that in Lundy the taxpayer made its request within three years of the filing date, whereas in Butts the request was made more than three years after the filing date.  Based on a prior version of the statute, Lundy was precluded from obtaining a refund because it was outside of two years and there was not a reference to the three year statute applicable. Section 6512(b)(3) was modified in 1997 by Congress, and now the minimum statute of limitations would be the three years from the filing date.

In Butts, under Section 6512(b)(3)(B), the Court stated it must look to the mailing date of the SNOD as a hypothetical claim date and determine if a timely claim could have been made then based on Section 6511.  This requires a review of the two year statute from the date of taxes paid, and three years from the due date of the return.  The withholdings for 2007 were treated as having been paid on April 15, 2008, while the initial SNOD was issued in June of 2011.  Since both statutes had passed, no claim for refund could be allowed.  There was a similar issue with the 2008 return.

  • Peter Hardy and Carolyn Kendall, attorneys from Post & Schell, and prior guest bloggers here at PT, have posted on Jack Townsend’s Federal Tax Crimes blog (two-timers!) on the Microsoft appeal in In re Warrant to Search a Certain E-mail Account.  The guest post can be found here, and Jack’s summary of related materials on the Stored Communications Act can be found here.  Although the post deals with a drug case, the impact could be far reaching regarding subpoena power over electronic communications in the cloud (including datacenters outside of the US).  Peter and Carolyn tie in the Service’s review of foreign accounts nicely.
  • It’s like speed dating, but it might cost more and you only get lucky if you don’t get picked.  The NY Times has an op-ed on the IRS speed audit, with agency cut backs causing reduced response time for taxpayers, which if not promptly responded to could result in important collection due process rights being forfeited.  The op-ed indicates that the IRS may be sending out follow up letters the same day as the initial letter, which the author argues is in violation of the updated taxpayer bill of rights issued last year.  When you are on the op-ed, check out the comments the NY Times has picked as important.  Carl Smith was highlighted for indicating a few other ways the tax system is failing taxpayers.  This practice may save time for the Examination Division of the IRS but pushes more cases into the collection stream which also impacts the IRS resources.
  • On April 20th, the Tax Court issued a decision in Yuska v. Comm’r, holding the automatic stay invalidated a Notice of Determination Concerning Collection Actions regarding a tax lien that was issued after the bankruptcy petition.  Importantly, the Court declined to follow the IRS’s suggestion that the Court distinguish this case from Smith v. Comm’r, which had similar facts but pertained to a levy.  The timing of events were very important in following Smith, and the Service also argued that the Court should instead follow Prevo v. Comm’r, which was a lien case where the collection action occurred before the BR petition.  In Smith, the Serviced began collection actions, and then the taxpayer filed a bankruptcy petition, followed by the Service issuing a notice of determination concerning the levy, and then the taxpayer petitioning the Tax Court for review of the levy action.  The Court held the continuance of the collection action violated the stay under 11 USC 362(a)(1).  In Prevo, the sustaining of the lien occurred before the BR petition.  As to differentiating between a lien and levy case, the Court found the administrative review of a lien was clearly part of the administrative collection process and subject to the ruling in Smith, even if future administrative review was possible. Although the Court declined to differentiate between the two in this case, Keith noted that if the stay stopped the CDP case there can be important differences.  In a lien case, the NFTL remains valid (if not enforceable) until after the stay is lifted.  In a levy case, the stay prevents the IRS from moving forward with the levy completely.  Keith didn’t read the case, and still came up with something much more insightful and helpful to add.
  • This is becoming a little like an advertisement for Jack Townsend’s Criminal Tax Crimes Blog.  Jack posted on the recent 7th Circuit case, US v. Michaud, which reviewed whether or not the IRS had authority to issue a summons in a criminal matter prior to a DOJ referral.  The statute in question is Section 7602(b) & (d), which was modified after US v. LaSalle Nat’l Bank to make it clear the IRS did have this authority.  The 7th Circuit had some additional thoughts on when the IRS couldn’t issue the summons.  Check out the post for a discussion of that point, and Jack’s always helpful thoughts on the matter.
  • Context is always important.  For instance, being suspended can be very good (we took our daughters rock climbing this weekend, and being suspended by the rope was really helpful), but it can also be pretty bad in the school, professional or corporate context.  Such was the case in Leodis C. Matthews, APC, a CA Corp. v. Comm’r, where the Tax Court held that it lacked jurisdiction  over a deficiency petition brought be a corporation (law firm) that California had suspended its corporate privileges for due to failure to pay state taxes.  Interesting point of law.  Can someone bring the petition on behalf of the corporation so it does not lose its ability to contest the tax?  Timing is also interesting.   Corp is suspended May 1, 2013, and 90 day letter is issued June 30, 2014.  Taxpayer petitions court Oct. 1, 2014 (presumably timely), and had its corporation reinstated November 26, 2014.  You would guess he was trying to deal with his state tax issue during the 90 day period.  I also wonder if there is a way to get limited rights reinstated, so that the corporation could have petitioned the Tax Court.
  • We all hear the scare tactics on the radio about how if you owe more than $10,000, the IRS is going to come and take your assets, steal your children, put you in jail, shoot your dog, etc.  We are lucky enough to know this is BS, and an effort to garner business.  Sometimes, however, the IRS can show up at your premises (probably armed), and take your stuff.  You have to owe a bit more than $10k, and the Service has to jump through a lot of hoops.  In re: The Tax Indebtedness of Voulgarelis is one such writ of entry case.  In Voulgarelis, the taxpayer apparently owed around $300k, possibly more, and ignored six notices of intent to levy.  The Service sought an order authorizing it to enter the premises and levy the tangible property, which was granted in accordance with GM Leasing Corp. v. United States, 429 US 338 (1977).
  • The Service has updated its list of private delivery services that count for the timely mailing is timely filing rules under Section 7502.  The update can be found in Notice 2015-38.  As we’ve discussed before, failure to file these rules can result in harsh results.  These results can be seemingly arbitrary when a taxpayer selects a quicker FedEx/UPS delivery method that isn’t approved, and cannot rely on the rule.
  • In information notice 2015-74, the IRS has reminded businesses of the temporary pilot penalty relief program for small businesses that have failed to properly comply with administrative and reporting requirements for retirement plans.  That program ends June 2nd.

 

How Not to Get Out of a Tax Court Case

We welcome back guest blogger Scott Schumacher.  Scott teaches at University of Washington where he is a fellow low income tax clinic director but he also finds time to direct the graduate tax program.  Because he previously worked in the Department of Justice Tax Division Criminal Section, he frequently writes on criminal tax matters and co-authors the chapter on Criminal Tax in the 6th Edition of “Effectively Representing Your Client before the IRS.”  In addition, however, he regularly writes on ethical issues.  When I saw the case he discusses below in the advance sheets, I asked him to write a post on it. 

I have had the good fortune never to observe from close quarters or participate in a disciplinary hearing, but I have had some tangential dealings with them.  Tax Court Rule 202 sets out the bases for attorney discipline in the Tax Court.  Many of the attorneys disciplined by the Tax Court have a sanction imposed because they have first received some sanction from the state court bar to which they belong.  Scott discusses a case in which the attorney’s sanction arises from his behavior before the Tax Court.  Because we have not posted on this issue previously, it seemed like a worthy subject for a post.  Keith

I have two recurring nightmares.  The first is that I miss a court date or other important appointment.  While I religiously calendar each appointment, the fear that a court clerk will contact me about a missed hearing nevertheless remains.  A different kind of nightmare, experienced by many attorneys, especially directors of low-income taxpayer clinics, is representing an uncooperative or non-responsive client.  Many low-income taxpayers are in tax trouble because they simply cannot seem to meet deadlines and provide appropriate documentation.  That doesn’t always change when they retain a lawyer.  As a result, I usually wait to enter an appearance on behalf of the client in Tax Court until I have developed a good, or at least decent, working relationship with client.  Otherwise, I may be forced to file a motion to withdraw as counsel, which can require saying some not-so-nice things about my client.

In a recent case in the United States Tax Court, an attorney visited a nightmare upon himself by both not showing up to court and failing to move to withdraw in the case.  His justifications only made matters worse. As a result, he was suspended from practice before the Court.

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The rather convoluted facts of the case can be summarized as follows:  Charles Hammond entered an appearance on behalf of the petitioners Richard & Kay Ohendalski.  The deficiency in the case was substantial – approximately $2.9 million, including tax and penalties.  The case was set to be tried before Judge Goeke in Houston, and the parties had requested a date and time certain for the trial on the second Monday of the trial session.  When the case was called, Mr. and Ms. Ohendalski were present, but their attorney, Mr. Hammond, was not.  When Judge Goeke stated to Mr. Ohendalski that he did not seem surprised that his attorney was not in the courtroom, the petitioner responded that he was not surprised and that his attorney’s absence was part of a “strategy.”  When pressed, Mr. Ohendalski said that his attorney “is not here because he felt like putting me on the stand as a witness would be bad for our case, because of the criminal investigation at the same time.”  Ohendalski apparently had been under criminal investigation by the IRS and Department of Justice Tax Division for the years at issue before the Tax Court, as well as other years.

The possibility that Mr. Ohendalski was under criminal investigation first arose during a conference call with Judge Goeke the week before the start of trial.  During that call, Hammond asked the Court to continue the case based upon the criminal tax investigation of  Ohendalski. The IRS attorney on the call responded that there was no ongoing criminal tax investigation.  This was confirmed when the case was called for trial, and IRS counsel provided a letter from the IRS Special Agent in Charge stating that the criminal investigation had been terminated and that the IRS was now seeking “appropriate civil action.”

Without Hammond present, the trial could not continue as scheduled.  Judge Goeke ordered the IRS to put on its civil fraud evidence without calling Mr. Ohendalski as a witness.  Mr. Ohendalski proceeded to file a total of nine motions and other documents, all of which had been prepared by Hammond.  The Ohendalskis then brought in their criminal tax attorney to assist them with their case.  Eventually, a basis for settlement was reached.

After the Ohendalskis’ case was resolved, the Tax Court issued an Order to Show Cause that gave Hammond the opportunity to show cause why he should not be suspended or disbarred from practice before the Court.  In his response, Hammond admitted that he had intentionally failed to appear for trial. In his defense, he asserted two reasons for his failure to appear: First, he pointed to the “ongoing corresponding criminal tax investigation” of Mr. Ohendalski “for the identical years” pending before the Tax Court, which “rendered effective representation at the civil tax trial impossible.” The Court rejected that assertion.  The Court noted that the IRS had terminated its criminal investigation months prior to the Tax Court trial, and that Hammond was told of that.  Indeed, it would be highly unusual for the IRS to be pursuing a civil tax case in the Tax Court while simultaneously continuing a criminal tax investigation.

The second reason Hammond gave for his failure to appear at trial was a “complete and abject failure in the Attorney/Client relationship” caused by the actions of his client. He stated he notified the Ohendalskis the day before trial that he “would no longer represent them, at trial or on any other matter” and that he “would not appear before the trial Court to explain why or otherwise withdraw from the case” so that he would not “poison” his clients before the Court.  The Court rejected that contention as well.

The Court held that if, as Hammond alleged, there was a complete breakdown of the attorney-client relationship, Hammond had a duty under ABA Model Rule 1.16 to withdraw as counsel.  (The ABA Model Rules of Professional Conduct apply to lawyer’s conduct in proceedings before the Tax Court.) Hammond did not file a motion to withdraw prior to trial and instead chose not to show up for the trial.  The Court found that Hammond’s strategy was to force the Court to continue the case by failing to appear.  The Court also noted that the alleged actions of Mr. Ohendalski occurred well before the trial date and there was no excuse for Hammond’s failure to appear at trial, particularly when the date and time certain for the trial was set at Hammond’s request.

Finally, the Court had “more than a little difficulty” reconciling the statements of Hammond that he ceased representing the Ohendalskis on the eve of trial with the actions of his clients.  The Court found that Mr. Ohendalski gave no indication at the start of trial that Hammond had terminated his representation, and he suggested that Hammond had not appeared as part of a “strategy.”  Mr. Ohendalski also filed a series of motions, that had been prepared in advance by Mr. Hammond, with the objective of forcing the Court to continue the trial of the case.  These motions appear to confirm that Hammond continued to represent the Ohendalskis and that his absence was indeed strategic.

After making these findings, the Court, more specifically, the Committee on Admissions, Ethics, and Discipline, found that by failing to appear for trial Hammond intentionally interfered with the trial proceeding and that he should be suspended for his conduct.

Jim Eustice once said that a corporation, at least from a tax perspective, is like a lobster pot: it is easy to enter, difficult to live in, and painful to get out of.   That metaphor can apply equally to the attorney-client relationship.  The most difficult part of many cases is not the law, or the facts, or opposing counsel, but the client.  Dealing with difficult clients and tough cases is part of being a lawyer.  Sometimes, the painful step of moving to withdraw is the only course of action. Another quote, this one from Woody Allen, is “eighty percent of success in life is just showing up.” While that may or may not be the case, Hammond has shown us that not showing up is guaranteed to result in failure.

Argument Over Furlough of National Taxpayer Advocate Set for June 2 Before the Federal Circuit

This post originally appeared on the Forbes PT site on May 19, 2015.

Between 1976 and 2013, there were 18 shutdowns of the Federal Government due to spending gaps – an average of almost one shutdown every two years. These shutdowns lasted between 1 and 21 days. As a result of the most recent federal government shutdown in October of 2013, a case has arisen that seeks to establish lines of authority within the IRS impacting tax procedure. During that shutdown, the Commissioner furloughed the National Taxpayer Advocate (NTA) and all of her staff. It also furloughed all of the Automated Call Site employees. These people deal with hardship created by IRS action.

The IRS sent them all home, meaning that taxpayers facing a hardship resulting from IRS action that may have started before the furlough occurred but played out during the time of the furlough faced a very difficult, if not impossible, task in seeking relief from the hardship created during the period of the furlough. Details about this can be found in the most recent National Taxpayer Advocate (NTA) Objectives Report. The write-up in the Objectives Report demonstrates the tax procedure issue at stake. The matter pending before the Federal Circuit set for oral argument in a couple of weeks lays out the authority issues at play when the Government seeks to interpret the Anti-Deficiency Act (the other ADA) in responding to a shutdown for lack of funds. Our collective memory of shutdowns tends to have a very short life span once the Federal Government gets back up and running, but the issue here concerns both lines of authority and what will happen to taxpayers facing hardships the next time Congress decides to cause a shutdown.

Once the furlough ended, all federal employees came back to work, were paid for the days they did not have to work, and the world seemed well again. The NTA, however, did not think that the end of the furlough put the world back into proper alignment. She feels that the Commissioner lacked the authority to furlough her and TAS staff members. Because she felt strongly enough about this, she brought suit before the Merit Systems Protection Board (MSPB). The MSPB ruled last summer that it lacked jurisdiction to hear the case because the furlough ended and restored the NTA to her position with back pay. She disagrees, and the case is set for oral argument before the Federal Circuit on June 2.

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To understand the argument of the NTA you must go to the Internal Revenue Code and the creation of her position in 1998. Congress added to the Code section 7803 as it created the new position of NTA. In establishing this position, it created one of only four positions at the IRS specifically mentioned in the Internal Revenue Code – the Commissioner (Section 7803(a)), the Chief Counsel (Section 7803(b)), the head of the Treasury Inspector General for Tax Administration (Section 7803(c)), and the NTA (Section 7803(d)). The statute requires the Secretary of Treasury to choose the NTA in consultation with Congress, the IRS Oversight Board (if he can find them, but that’s a story for another post), and the Commissioner.

When Congress decided to shut down the federal government in the fall of 2013, the Commissioner, as the head of an agency, had to exercise authority under the laws that govern government shutdowns to designate a small, elite number of essential personnel at the IRS to continue working while all other had to leave the office even if they might have donated their time to allow the government to continue to function more efficiently. When the Commissioner made this decision in 2013, he reversed the decisions made in prior shutdowns keeping the NTA working together with 47 members of her staff she deemed essential and determined that the NTA and all of the workers in TAS were non-essential to the function of the IRS under the rules governing government shutdowns.

We could argue about who is essential and who is not essential in such a situation. I had the misfortune in the 1990s to be deemed essential while everyone else in my office received what amounted to a paid vacation for many days. The NTA does not argue that the Commissioner made an incorrect choice under the rules of who should receive the essential designation though she may believe that. Rather, she argues that the Commissioner did not have the authority to furlough her. In her view only the Secretary of Treasury could make that determination since the Secretary, and not the Commissioner, chose her. She argued before the MSPB that it should enter an order stating that the Commissioner lacked authority for his decision and directing the Commissioner to change the shutdown policy going forward arguing that:

[T]he Board has the authority to:

1) order the agency to amend its shutdown policy to include a requirement  that it “obtain the personal approval and signature of the Secretary before  she is furloughed in any future shutdowns”;

2) order the agency to exempt the appellant and her staff from any future furlough when the IRS “continues to engage in the assessment and collection

of tax, . . . including the provision of relief where the protection of human life  and property are implicated, and the protection of taxpayer confidentiality  when it is deemed necessary to open mail addressed to the National Taxpayer Advocate and her employees”; and

3) make “a determination that, pursuant to 26 USC §7803(c)(2)(D), the National Taxpayer Advocate is granted sole authority, in consultation with appropriate IRS supervisory personnel, to take personnel action (including          dismissals and furloughs) against members of the National Taxpayer Advocate            staff and that, as a result, the furlough by the Commissioner of the staff of the    National Taxpayer Advocate during the October 1 through 16,2013, shutdown was illegal.”

The administrative law judge at the MSPB took a rather narrow view of the case. In his view, the end of the furlough which brought the NTA back to work and under the terms of which she received full payment for her enforced time off and full benefits for the days missed ended her ability to complain about the decision of the Commissioner. He not only ruled against the NTA saying that the MSPB lacked jurisdiction but also went a bit further:

“Finally, the appellant has failed to provide a citation to any law, rule, regulation, or case that would vest the Board with the authority to award the type of sweeping and prospective relief she seeks in this case. See Prichard, 484 Fed.Appx. 489 (Board does not have authority to award non-pecuniary damages absent statutory or regulatory authorization). Moreover, I find that her requested relief would fail to    qualify as “appropriate relief” under any standard and it appears that she is simply using and manipulating the Board process to litigate a policy dispute between herself and the Commissioner.”

The decision of the MSPB came out on July 18, 2014. She timely filed an appeal to the Federal Circuit – the appropriate place to appeal such a decision. She continues to press the same arguments that the MSPB determined it did not have the authority to decide. Before the MSPB, the Commissioner was represented by attorneys from the General Legal Services Division of the Office of Chief Counsel. Before the Federal Circuit attorneys from the Commercial Litigation Division of the Department of Justice represent the Commissioner. Lavar Taylor, a sometime guest blogger with Procedurally Taxing, represents the NTA. Although we have not discussed this case with him, perhaps we will convince him to provide insight on it at a future date.

In her reply brief, the NTA expresses concern that the government continues to view this case as a routine furlough case in which the employee has received the lost benefits through reinstatement to the prior position with back pay and benefits. She continues to press the point that the issue involves important matters on which the MSPB and the Federal Circuit have the authority to decide. From her reply brief:

In her brief, Petitioner showed that:

1. The Civil Service Reform Act ( “the Act”) does not bar the relief sought by    Petitioner from the MPSB; neither the Act nor any rule or regulation promulgated    under the Act limits to reinstatement with back pay and benefits the relief that may      be granted by the MSPB;

2. There exists an actual controversy between Petitioner and the CIR regarding      multiple issues, including: a) whether the CIR improperly furloughed Petitioner    because Petitioner was exempt from furlough under the standards set forth in the  Anti-Deficiency Act, 31 U.S.C. §1342; b) whether the CIR improperly furloughed Petitioner because any authority to furlough Petitioner resided with the Secretary of Treasury, and c) whether the CIR has the authority to furlough employees of the Taxpayer Advocate Services (“TAS”) in light of the fact that Petitioner is vested by statute wit sole authority to take personnel action against TAS employees.

3. Petitioner’s reinstatement with back pay did not render her case moot or deprive  the MSPB of jurisdiction over her appeal, since it did not resolve the issues set forth above and thus did not restore the status quo ante. The implementation of the IRS’s   FY 2014 Shutdown Contingency Plan was the first time that the CIR had asserted the power to furlough Petitioner or all of her staff. Since the end of the shutdown, the      CIR continues to assert that he has the authority to furlough Petitioner and TAS staff.

4. Even if the MSPB did not have jurisdiction to determine whether the Commissioner’s furloughing of Petitioner and TAS staff was unlawful, this Court has jurisdiction to    make such a determination; the MPSB thus had jurisdiction to make factual findings    so that this Court can rule on the merits of Petitioner’s claim.

Respondent’s Brief (“RB”), in the NTA’s view as stated in her reply brief, is remarkable in several ways. It fails to discuss the underlying facts (except in a perfunctory manner) and it fails to address key issues raised. Taking a crabbed view of the type of relief that the MSPB can grant, Respondent improperly concludes that the MSPB correctly dismissed Petitioner’s appeal for lack of jurisdiction.

The appeal by the NTA offers more than just a close look into the process of sending employees on furlough. If the Federal Circuit gets to the merits of the request, the case offers a glimpse into the authority of the Commissioner and how that authority was impacted or not impacted by the new position of NTA created in 1998. In turn, the power of the NTA impacts tax procedure because so many procedural requests regarding hardship and failure to respond go through that office. When the government shuts down and goes into core function mode yet has sent levies out across the land prior to shutdown, someone needs to be home to deal with the levies creating hardship for certain taxpayers. Hardships created by levy action represent just one very visible function that the NTA and TAS perform. Is fixing problems during a government shutdown an essential government function, or do those harmed during the shutdown just need to sit and suffer? Maybe we will soon find out.

The Un-Precedented Tax Court: Bench Opinions

In part three of his series on Tax Court cases and precedent, guest blogger Andy Grewal looks at bench opinions.  I wrote about bench opinions in a post earlier this year and I expanded on the information provided in the post by writing an article published in the Journal of Tax Practice and Procedure.  Like the memorandum opinions discussed in Andy’s second post, bench opinions do not create precedent.  Unlike memorandum opinions, bench opinions can result from regular or small cases.  For example, in my research of 222 bench opinions issued from 6/1/2011 to 1/1/2013, 92 cases were small cases and 130 were not. 

Setting aside the issue of precedent, it makes good sense to me for the Tax Court to issue bench opinions in routine type cases.  It allows the parties to quickly learn the outcome and move on.  Bench opinions in small cases make perfect sense because both bench opinions and small case (summary) opinions by statute do not carry the weight of precedent.  To encourage more bench opinions in small cases, the Tax Court could change its rules to allow judges to issue bench opinions within some relatively short specified time after the close of the trial session.  The current rules can make it difficult to use this quick resolution method because of the requirement that the opinion be issued before the session ends.  Unless the judge of a small trial calendar has down time during the session, issuing a bench opinion will prove very difficult and it may not make sense to stay in a remote location and hold a session open just to issue a bench opinion.   Bench opinions in regular cases can also provide quick feedback on routine cases but for the reasons Andy discusses, may need more oversight.

Division and Memo opinions each follow the procedures described in Sections 7459 and 7460. Those provisions generally require that, for each Tax Court proceeding, a judge issue a report (i.e., a draft opinion) and provide that report to the Chief Judge. Unless the Chief Judge determines that the entire court should review it, the draft opinion leads to a “decision of the Tax Court.” Consequently, each opinion type (Division or Memo) goes through a statutorily mandated review process and each carries the weight of the Tax Court’s decisional authority, not merely that of a single judge.

The final sentence of Section 7459(b), added in 1982, provides an exception from these general procedural requirements. Under the provision, statutory requirements will be “met if findings of fact or opinion are stated orally and recorded in the transcript of the proceedings,” subject to any limitations the Tax Court prescribes. Under Tax Court Rule 152(a), a judge may, “in the exercise of discretion,” issue a so-called oral or Bench opinion if she is “satisfied as to the factual conclusions to be reached in the case and that the law to be applied thereto is clear.” Although they may be appealed, Bench opinions, unlike Division or Memo opinions, do not receive further review from the Chief Judge. Instead, the authoring judge will read the opinion into the record prior to the close of the relevant trial session and promptly send transcripts to the parties.

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Bench opinions apparently have not given rise to the same level of controversy as Memo opinions. The case law reflects some occasions where a judge may have incorrectly decided a case via the streamlined Bench opinion process, but these circumstances seem rare. Also, Tax Court Rule 152(c) flatly denies precedential status to Bench opinions, and this substantially limits taxpayer confusion as compared to Memo opinions, regarding which taxpayers must grapple with various conflicting statements. Perhaps most importantly, Bench opinions historically have not been published or posted online. Opinions can’t cause a lot of confusion if no one can find them.

Expanded search capabilities for Tax Court opinions could change this. The court’s website now allows users to search recent Bench opinions. It’s possible that a litigant will find a favorable opinion and rely on it, notwithstanding the prohibitions contained in the Tax Court rules.

Any taxpayer reliance on Bench opinions would seemingly implicate the same constitutional issues related to Memo opinions. Just as some litigants challenged the appellate rules denying precedential status to unpublished appellate opinions, some litigants might challenge the Tax Court rules denying effect to Bench opinions.

Bench opinions, however, seem qualitatively different from Division or Memo opinions. The latter opinions follow a statutory review process and eventually lead to a “decision of the court.” Bench opinions do not actually follow any review process and, though they reflect a decision of the Tax Court, they are only deemed to satisfy the Section 7459 and 7460 procedural requirements. They thus seem roughly analogous to opinions issued by federal district judges, which do not establish any “law of the district.” Consequently, even if the Constitution mandates the precedential effect of Division or Memo opinions, it seems unlikely that that mandate would apply to Bench opinions.

Putting constitutional issues aside, functional concerns militate against the precedential status of Bench opinions. Sections 7459 and 7460 establish procedures under which the Tax Court will “decide all cases uniformly, regardless of where, in its nationwide jurisdiction, they may arise.”  Lawrence v. C.I.R., 27 T.C. 713, 718 (1957).  The statutory review provisions, which might independently establish a stare decisis requirement, do not apply to Bench opinions, which were authorized only recently.  If those opinions nonetheless bound the entire court, it’s hard to see how uniformity could be achieved.

That’s not to say that Bench opinions raise no concerns. In a recent article, Keith Fogg surveyed more than 200 such opinions and found that their use varied widely among Tax Court judges. One judge disposed of 60 cases via Bench opinion, employing them more than twice as frequently as any other judge, but several judges rarely issued them.

Given the breadth of Rule 152, under which a judge can issue a review-free Bench opinion in almost any case, some further guidance on Bench opinions would be helpful. As it stands now, the Rule leaves the decision to issue an opinion solely within the discretion of the authoring judge. Given their new accessibility, the significance of Bench opinions will likely rise, especially if practitioners uncover prior decisions addressing key issues. However, these concerns remain speculative, and practitioner feedback would be helpful on these issues.

 

 

SCOTUS Denies Cert. in Kuretski

A quick update on Kuretski from frequent guest blogger Carl Smith.

Today, the Supreme Court denied cert. to review Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), where the D.C. Circuit had held that the President’s power to remove Tax Court judges at section 7443(f) did not violate the separation of powers.  The move was not a surprise, since no other Circuit court has been presented with the issue, although the Supreme Court often takes separation of powers cases without a Circuit split.

This action now puts the ball on the section 7443(f) issue squarely in the Tax Court’s court, since lawyers at Fuerst Ittleman have, by motion, raised the identical issue presented by Kuretski in seven Tax Court dockets.  The dockets, Circuits of appeal, and judges with jurisdiction over the cases are listed here. I noted last week that the IRS has not filed responses yet to any of those motions – even in three dockets where the Chief Judge had directed responses to be filed by May 8.  At the time of this post, the Chief Judge has still not ruled on the IRS’ motion in those three dockets to extend the time of its responses to June 8, nor has the IRS filed the responses that are now more than a week overdue.  The Circuits to which any Tax Court ruling may be appealed in the seven cases are the Fourth, Ninth, and Eleventh Circuits, although two of the cases are Collection Due Process cases that should be appealable to the D.C. Circuit under Byers v. Commissioner, 740 F.3d 668 (D.C. Cir. 2014),as they do not involve any challenges to the underlying liability.

Summary Opinions for April 10th through 24th

Another slightly stale SumOp, but again full with lots of very interesting tax procedure nuggets.  This post is very heavy on the Chief Counsel Advice, much of which deals with statutes of limitations.

I also wanted to point out that you can read Keith’s acceptance speech for the Janet R. Spragens Pro Bono Award staring on page 8 of the ABA Tax Section NewsQuarterly found here.  We previously covered Keith’s honor here.

As our readers know, we at PT are big fans of tax clinics and the wonderful work the clinics do throughout the country.  Les has an article forthcoming in the Tax Lawyer on the benefits derived by students, taxpayers, and the entire tax system, which can be found here. Keith has previously written on the history of low income taxpayer clinics, and his article can be found here.

I also have to congratulate Keith on his temporary relocation over the next year.  The University of Harvard has decided to expand its array of clinics, and will be starting a low income taxpayer clinic.  Keith will be a visiting professor at Harvard for academic year 2015-2016 to set up the clinic.

And, the other tax procedure items:

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  • Last year, Les wrote about the Nacchio case involving the ex-Qwest CEO who was convicted of insider trading and directed to pay a substantial fine and forfeit the profits from the sale of his stock in the company.  Nacchio filed for a refund of tax he paid on those profits, claiming Section 1341 would allow him to treat it as if he never had the gain.  Janet Novak of Forbes on May 1st, had an update on the case found here.  The government has agreed to stipulate the facts of the case, allowing it to bypass a hearing that would have likely discussed in detail the NSA program Mr. Nacchio turned down on behalf of Qwest prior to his investigation.  Janet has a summary of the DOJ’s various arguments as to why it should win based on the law, and it is likely such an appeal is going to occur shortly.  Interestingly, on March 27th, the Service released CCA 201513003, which discusses the Service’s view as to the deductibility of the restitution as a business expense under Section 162.  The issue was whether payments in lieu of forfeiture from a deferred prosecution agreement were deductible.  The advice attached the response from the DOJ in Nacchio where it argued the same issue, although the response was not attached to the released document.  I had initially wondered if the CCA dealt with the Nacchio case, but it appears the Service has a couple cases on the issue.
  • The Northern District of California recently decided US v. McEligot, where the Court held that taxpayers did not have an absolute right to be present during a third party interview pursuant to a summons.  In McEligot, a taxpayer’s accountant refused to answer IRS questions without the taxpayer’s lawyer present. The Court found the accountant had no right to refuse because the Service would not allow the taxpayer or his representative to be involved in the interview.
  • In other CCA news, the Service has issued its position on the assessment period for the Section 6694 preparer penalty for filing a refund request based on an unreasonable position and how long the preparer would then have to request a refund of the penalty amount.  Section 6696(d) houses the statute, and there would be a three year assessment period following the alleged improper refund request.  The preparer would then have three years to seek a refund of the penalty once paid.
  • This is a depressing case.  In Gurule v. Comm’r, the Tax Court remanded a CDP case involving the sustaining of a proposed levy, and whether the Appeals Officer abused his discretion in rejecting an OIC submitted for doubt as to collectability and, in the alternative, rejected an installment agreement (the SNOD may not have been properly sent either).  The primary issue in the collection matters was whether or not the Officer properly considered the economic hardship faced by the family.  In the case, the wife and son had severe medical issues, resulting in high bills.  Wife had a neurological disease resulting in seizures and multiple brain surgeries, and son was in an accident resulting in brain injuries.  The husband had lost his job, and he was using his 401(k) to pay necessary living expenses.  The officer treated the 401(k) loan as a dissipated asset, in particular the loans taken after the taxpayers knew of the outstanding tax.  “Dissipated assets” can be included in in the reasonable collection potential, which is a policy decision to deter delinquent taxpayers from squandering assets when they have outstanding tax liabilities.  An asset, however, should not be considered dissipated if it was needed to provide for necessary living expenses (like medical bills required to keep someone alive).  The Court also directed Appeals to request petitioners to provide documents regarding the son’s death, and how that could impact their collection potential.  While the debate raged on between the Service and the taxpayer, the taxpayer took an additional loan against his 401(k) to pay for his son’s funeral, which the Service found inappropriate.  I really need to start trying to be more thankful for what I have.
  • Chief Counsel has issued legal advice regarding who is authorized to sign a power of attorney for a partnership or LLC.  The issue and conclusion are as follows:

a. Who is authorized to sign a POA appointing a representative for a partnership or limited liability company (LLC) being examined in a TEFRA partnership-level examination?

b. Who is authorized to sign a POA appointing a representative for a partnership or limited liability company for other purposes?

CONCLUSIONS:  A general partner or, in the case of an LLC, a member-manager, may sign a POA for purposes of a TEFRA partnership-level examination or for other tax purposes of the partnership. A POA can also be secured from a limited partner or LLC member for the purposes of securing partnership item information and disclosing partnership information to the POA. In the case of an LLC that has no member who is also a manager, the non-member managers may sign the POA for purposes of establishing that it would be appropriate and helpful to secure partnership item information including securing documents and discussing the information with the designated individual.

KPMG has some coverage and insight here.

  • More tolling content due to financial disability.  In very interesting Chief Counsel Advice, the Service has taken the position that Section 6511(h) does not extend the three year limitations period for net operating losses or capital loss carrybacks.  In the advice, the Service states that Section 6511(h) specifically is limited to the statutes under (a)(b) and (c).  The NOL and capital loss carrybacks are found under Section (d)(2), and therefore not extended by financial disability.