Making a Referral to a Low Income Taxpayer Clinic

If you ever have clients or friends who need assistance with a federal tax controversy issue, you need to know about Low Income Taxpayer Clinics (LITCs).  This year marks the 40th anniversary of the founding of the first LITC.  Today, about 140 LITCs exist in total with at least one in almost every state.  To find the nearest LITC, look at IRS Publication 4123 which the IRS updates annually.

This post seeks to provide you with enough information to know when making a referral of someone to an LITC may succeed and to alert you to some limitations that will prevent a successful referral.


Most LITCs operate under a grant from Congress administered by the IRS – specifically by an office within the Taxpayer Advocate Service.  The grant resulted from 1998 legislation creating IRC 7526 and the goals and limitations of clinics primarily trace themselves to the language of that statute.  Congress wanted clinics to represent taxpayers who had a controversy with the IRS and sought to have clinic assist low income taxpayers which it defined as those whose income fell below 250% of poverty.


For purposes of this provision, controversy requires some problem with the IRS beyond the problem of filing a tax return.  Typically, a controversy exists if the taxpayer has an audit, appeal from an audit or Tax Court case going in which the IRS seeks additional taxes.  It also exists if the taxpayer seeks to work out a collection alternative to immediate payment of the tax.  Controversy matters also include some affirmative actions such as refund suits or damage suits such as IRC 7433.

Controversy does not include preparation of tax returns unless the preparation of the returns directly relates to the controversy.  Taxpayers seeking assistance with the current year’s return should go to a VITA or an AARP site rather than to an LITC.  If the taxpayer seeks to obtain an offer in compromise and the taxpayer has outstanding returns, the LITC can prepare those past due returns as a part of resolving the controversy concerning the collection from the taxpayer.

Income Limitations

The income limitation placed by the statute focuses on the taxpayer’s income at the time the taxpayer seeks assistance from the LITC.  A taxpayer who previously had a more robust salary but now has no job or a low paying job may qualify for the services of an LITC even though they have not lived a life in poverty.  For 2014, 250% of poverty is approximately $29,000.  If a taxpayer has dependents, the amount of income a taxpayer may earn and still qualify for the services of an LITC increases by approximately $9,000 for each dependent.  So, it is possible that a family of four could have income slightly in excess of $50,000 and still qualify for the 250% limitation.

The income limitation in the statute does not mention assets.  A taxpayer with valuable assets but low income may qualify under the statute despite the existence of the assets.  Some clinics, particularly those affiliated with legal services, may place additional restrictions on the taxpayer’s assets as part of the qualification process.  Nothing in the grant prohibits an LITC from being more restrictive in the income limitation of prospective clients or in creating an asset test.

The statute allows LITCs to accept no more than 10% of its clients with income in excess of 250% of poverty.  In general, LITCs accept very few cases above 250% of poverty because sufficient cases exist below that amount where the clients have almost no ability to hire representatives.  An academic clinic may use this 10% window to take cases that provide a good teaching opportunity or to accept a taxpayer with a very compelling story even though the income exceeds normal guidelines.

Other Barriers

LITCs that are part of the legal services corporation (LSC) have restrictions on the cases they can take that go beyond IRC 7526.  For example, they may not represent undocumented individuals because of restrictions in the LSC grant even though IRC 7526 does not contain a similar restriction.  About half of all LITCs operate with an LSC office.  So, sometimes you may need to look for an LITC that is operated independently or that is operated as an academic clinic.

Academic clinics operate within the restrictions of the school calendar.  While they may have some staff covering cases throughout the year, their ability to handle cases during the summer or other school breaks, may be limited or almost nonexistent.  So, you may encounter times with an LITC will close intake because it has a full caseload or because of a limited number of workers.  If you get to know your local LITC director, you can develop a sense of when the LITC can or cannot handle additional cases.

Many LITCs work on a very limited budget and with limited staff.  They may limit the type of cases handled depending on the expertise of the individuals working at the LITC.

The statute creating the grant contemplates that the LITCs will represent individuals and not entities.  This creates another barrier that prevents LITCs from assisting tax exempt organizations and other potentially deserving organizations with tax problems and little income or assets to pay for assistance.


Essentially, three types of LITCs exist:  academic, LSC and independent.  Each has some strengths and weaknesses that may impact the acceptance of a referral or the work done on the case.  Academic clinics generally have a director with significant tax knowledge and the research resources of a law school.  Students work the cases and have limited hours each week to work on their cases.  So, cases generally move slowly through academic clinics but receive lots of attention.

LSC clinics operate within the structure of a larger firm working on a variety of issues impacting low income individuals.  This can provide synergy on other issues impacting the low income taxpayer.  As mention above, they can also have more restrictions on who can qualify as a client both from and income/asset standpoint and from a legal status one.  Many of the attorneys working in an LITC with an LSC organization are the only tax person within the organizations.  That can make it difficult for the attorney to develop expertise because of the lack of other tax professionals with whom to interact.  LSC clinics generally have greater research resources than independent clinics and worse research resources than an academic clinic.

Independent clinics vary greatly in their makeup.  Some operate as standalone organizations and sometimes with a specific focus that caused them to come into existence.  Others operate within the structure of another organization.  The individuals doing the tax work frequently have tax expertise but many of the independent LITCs have very few research resources.  Almost all LSC and independent LITCs use pro bono panels to assist with the cases.  So, it is possible that one of these clinics will do the intake on the case but use a local attorney who volunteers to handle the case.


When advising someone to contact an LITC, let them know that just because the LITC exists that does not mean it can take their case.  For all of the reasons mentioned above, the referral may not work; however, LITCs take many cases and may provide significant assistance to someone who would otherwise go unrepresented.  Try to get to know your local LITC so that you can assist in making appropriate referrals.  Also consider joining the pro bono panel of your local LITC.  Doing that not only assists the individual you represent but assists the LITC in meeting its matching grant requirement so that your one case may allow the LITC to help many others.


Stolen Checks and Refunds –Follow up on Hill v US

Last week I wrote about the case of Hill v US, where a prisoner named Mark Hill sought justice in the Court of Federal Claims when IRS issued his refund check to another Mark Hill. The other Mark Hill was also in prison, and prison officials mistakenly gave IRS correspondence with identifying taxpayer information to that other Mark Hill. Armed with that information, the soon to be released from prison other Mark Hill contacted the IRS, provided IRS with his address for IRS to reissue a check, and cashed the check.

The aggrieved original Mark Hill attempted to get a new check from IRS. After not getting IRS to reissue the check, he sued in Court of Federal Claims. In the post, I discussed how the Court of Federal Claims analyzed the jurisdictional issues under IRS’s obligation to refund an overpayment 28 U.S.C. § 1346(a)(1) and a taxpayer’s cause of action to seek a replacement check under 31 USC § 3343(b). In this post I return again to the jurisdictional issues in the case, as there are some cases that Hill did not refer to that identify 3343(b) as the exclusive means to get federal court jurisdiction when IRS has issued a refund check that is stolen.


I have not spent much time in the procedural world relating to stolen refunds and identity theft. The issue is a major problem for IRS, resulting in major IRS initiatives (summarized here), and DOJ prosecution initiatives (summarized here). Many schemes are sophisticated and involve international organized syndicates, as TIGTA reported last year.

The identity theft TIGTA reports on differs materially from the matter in Hill. TIGTA states that identity theft “for the purpose of tax fraud occurs when an individual uses another person’s name and Taxpayer Identification Number (generally a Social Security Number (SSN)) to file a fraudulent tax return to obtain a fraudulent tax refund.” With respect to this type of identity theft, TIGTA has reported on the challenges to the tax system; TAS often highlights issues relating to the harm that the fraud causes on innocent taxpayers (see, for example, 2014 testimony of the NTA to House Subcommittee on Financial Services and General Government of the Appropriations Committee earlier this year, starting at around page 16).

The issues in Hill v US are somewhat more straightforward than some of the issues presented in the identity theft cases TIGTA and TAS have written about. Nonetheless the jurisdictional issues are a bit more subtle than perhaps reflected in the case or my original post. As I mentioned last week, cases involving a stolen paper check generally implicate 31 USC § 3343, which addresses lost or stolen and subsequently forged and paid checks issued by the Treasury. There is a one-year limit on presentment of claims for replacement of forged checks under 31 U.S.C. § 3702(c)(1); see also 31 C.F.R. § 245.3(a) (2001). The Secretary also has a statutory remedy against the depositary bank that paid a Treasury check on a forged endorsement, subject to the statute of limitations provided in 31 U.S.C. § 3712(a)(1).

In contrast, if the taxpayer has not received his tax refund check stemming from an original return, a taxpayer can make inquiries about his check but can also sue in either district court or court of federal claims. Since an original return claiming a refund constitutes a refund claim, taxpayers who fail to receive a check from IRS from an original return may file a suit in district court or the Court of Federal Claims if they did not receive their refund within six-months of filing the claim. If IRS never issued a claim disallowance, taxpayers have an indefinite period of time to bring the suit in federal court (In matters with no claim disallowance, there had been some cases indicating that there would be an outside sol on filing a refund suit; in Chief Counsel Notice 2012-012 IRS confirmed that in its view a taxpayer may file refund suit under Section 7422 at any time at least six months after the filing of an administrative claim when the IRS has not previously issued a notice of claim disallowance and the taxpayer has not waived the requirement to receive that notice).

Courts other than Hill have found, however, that taxpayers who fail to receive a refund check that was directed to the claimant from an original return due to misconduct of a third party (such as theft) are not entitled to bring refund suits for the amount of the original misappropriated check. Rather, those taxpayers must pursue an administrative claim with the IRS for check reissuance and if not successful bring an action in federal district court or the Court of Federal Claims for the issuance of a new check.

The issue implicates the IRS’s procedural regulations under 301.6402-2(f)(1)(f). This regulation provides that when mailing checks, the “checks may be sent direct to the claimant or to such person in care of an attorney or agent who has filed a power of attorney specifically authorizing him to receive such checks.” While the regulation does not identify how the IRS determines the proper address, where IRS has sent checks to the address on the return or POA, and the checks have subsequently been misappropriated, cases such as the 1990 Tax Court case of Abeson v Commissioner and the Fifth Circuit case of Your Insurance Needs Agency v US have found in those circumstances that IRS has satisfied its obligation to issue a refund and taxpayers have to pursue a remedy under 3343.

The Your Insurance case illustrates the point. In that case, Earl, the sole shareholder of Your Insurance, hired CPA David Shand to prepare and file Earl’s and Your Insurance’s tax returns. Shand overstated the liability on all these returns and either had Earl sign them or signed them himself with Earl’s permission. Earl paid the overstated amounts, then Shand altered the returns to reflect the correct, lesser amounts and inserted his own address, allowing him to receive and convert the tax refund checks to his own use. Earl learned of the scheme in 1994, and, two years later, filed requests that IRS issue replacement checks. The IRS refused, arguing that they sent the replacement checks in good faith to the addresses listed on the returns and that Earl should have sought replacement checks from the Financial Management System, where they handled stolen Treasury checks.

Ultimately, Earl missed the 1 year statute of limitations for seeking a replacement check under 31 USC §§ 3343, 3792(c)(1) and 31 CFR § 245.3(a) (2001). Even under equitable tolling (though the court did not state whether equitable tolling would apply in these cases), Earl did not file his claim within 1 year of learning of Shand’s scheme. Thus, Earl pursued a claim for a replacement check “dressed up” as a claim for a refund under 28 USC § 1346(a)(1). As a result, the court found that the “[g]overnment fulfilled its obligation to pay the taxpayers refunds by timely issuing refund checks to the address provided on their returns.   The taxpayers thereafter failed to timely file claims for replacement checks within a year of learning that their refund checks were stolen and negotiated on forged endorsements by their accountant, much less within a year of the refund checks’ issuance.   That failure does not obligate the Government to refund tax overpayments where it has already once taken all the steps required to issue refund checks.”

It is possible that in situations where IRS has failed to exercise reasonable diligence or has otherwise contributed to the taxpayer’s failure to receive a refund check that is stolen that a court may find that the IRS has not sent a check “direct to the claimant” as the regulations require. Perhaps then a taxpayer may be entitled to bring a refund suit when a check has been stolen or lost. Why does it matter which provision the court uses to determine its jurisdiction? As Your Insurance indicates, there are differing time requirement for bringing a 3343 claim as compared to a refund claim. Moreover, 3343 does not independently confer interest to a recipient, unlike the Code, which provides for interest on overpayments.

It really did not matter much in Hill which hook the court chose to hang its jurisdictional hat, as the amount of the refund was small enough so that any additional interest that Hill might have been entitled to on top of the interest embedded in the stolen check was minimal. In addition, there was no doubt as to the timeliness of his claim under either provision –though the court’s discussion of Hill’s informally filing a refund claim through correspondence seems off the mark as his original return itself was a refund claim.

The Hill case reminds me that there is a lot for me to learn about the challenging procedural issues in cases involving refund theft. I hope to return to some of these issues in future posts.

Boeri: Not a citizen, never lived or worked in the US? IRS will still keep your money.

Last Wednesday, Les blogged about the curious case of Montiel v. US, which highlighted the confusing area of statutes of limitations on refunds for non-resident aliens.  In his post, he mentioned the Boeri case, which we highlighted in a SumOp months before, and Carl Smith referenced in a guest post on the Volpicelli “jurisdiction” case under Section 6532(c).  Occasionally, we will draft a post, which will never get put up for one reason or another.  When Boeri was denied cert by SCOTUS, we had a draft post on the case, but never posted.  Given the mention, we thought it might be good to revive the post, and describe the procedural issues.  The first revolves around one of our favorite topics, which is whether or not Section 6511(b) look back period, or other similar statutory requirements, is jurisdictional.  The second issue is the deemed payment date of withholdings for non-resident aliens under Section 6511(b)(2)(A).  Here is the post, slightly modified:

In December, the Supreme Court denied cert in Boeri v. United States, foreclosing any potential judicial remedy in an unfortunate tax case for Mr. Boeri.  As discussed below, the Service was following the statute regarding payments and refund requests, and there was not an easy way for the courts to hold for Mr. Boeri, but the facts scream for some type of equitable relief.  Although the case does not include any new law, it does present an opportunity to cover the impact of the strict construction of the look back rules under Section 6511, especially as they pertain to a foreigner who never worked or resided in the United States.


The facts of the case are as follows, and I have lifted much of this from the Federal Circuit Court of Appeals holding.  Mr. Boeri was an Italian citizen who was never a citizen of the United States, never worked in the United States, and never was a resident of the United States. Mr. Boeri was employed by GTE and Verizon for over thirty five years (located in Italy, Brazil, Argentina, and the Dominican Republic).  In 2003, Mr. Boeri accepted a voluntary buy out, and received close to $250,000 in two payments in March and August of 2004.  In those distributions, Verizon withheld around $70,500 in US income tax withholdings, Social Security tax, and Medicare Tax.  There is no dispute that Mr. Boeri was not originally liable for those taxes.  In March of 2009, Mr. Boeri filed non-resident income tax returns for 2004, seeking a refund of the taxes withheld by Verizon…And you can imagine where this was headed.

The Service responded and indicated the refund request was not timely and should have been made within three years from April 15, 2005 pursuant to Section 6511(b)(2)(A), the so called look back rule.  Section 6511(b) provides, in pertinent part:

(b)(1) No credit or refund shall be allowed or made after the expiration of the limitation prescribed in subsection (a) for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period…

(b)(2)(A)  If the claim was filed by the taxpayer during the three year period prescribed in subsection (a), the amount of the credit or refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to three years plus the period of any extension of time for filing the return…

(2)(B) If the claim was not filed within such three year period, the amount of the credit or refund shall not exceed the portion of the tax paid during the two years immediately preceding the filing of the claim.

Jack Townsend’s Federal Tax Procedure Blog has a great post on the look back rule, which can be found here.   In addition, Saltzman and Book discusses this in great detail in Chapter 11.05.

In Mr. Boeri’s case, Appeals upheld the determination, and he filed suit in the Court of Federal Claims, where he argued that the three year period does not apply, as he was not seeing a refund of a tax overpayment, but instead the correction of an erroneous withholding.  The Claims Court denied the request, indicating the three year period under Section 6511(b)(2)(A) did apply, and the refund request was not made within the period.  The Claims Court did note the non-jurisdictional nature of the three year period.  It noted that the Supreme Court refers to this as a “look back”, and it is not a statutory limitation, but rather a substantive limitation on the amount of recovery, and the Claims Court stated this was not “jurisdictional in nature” and did “not preclude the court from hearing [the] claim.”

Before I touch on that aspect of the case, the Court of Appeals spent a bit of time discussing when the withheld amounts would have been deemed to have been paid.  There was some confusion over whether this was income tax withholding on FDAP to foreigners covered by the rules of 6513(b)(3) or this was tax withheld covered by 6513(b)(1).  The appellate court held that the payments were covered by 6513(b)(3) and found that Boeri was out of luck:

6513(b)(3) applies to taxes withheld under chapter 3. Subsection (b)(3) deems taxes as paid on “the last day prescribed for filing the return under section 6012 for the taxable year . . . .” Section 6012 dictates “[p]ersons required to make returns of income.” Under the applicable regulations, Mr. Boeri was indeed required to file a 2004 tax return in order to claim a refund. See 26 C.F.R. § 1.6012-1(b)(2)(i) (stating that the regulation excepting a nonresident alien not engaged in trade or business with United States from filing a return does not apply “to a nonresident alien making a claim . . . for the refund of an overpayment of tax for the taxable year”).


The deadline for filing such   a return is found in § 6072 (“Time for filing income tax returns”). The subsection applicable to Mr. Boeri, a nonresident alien, establishes a timely filing deadline of June 15th of the following calendar year. § 6072(c) (“Returns made by nonresident alien individuals (other than those whose wages are subject to withholding under chapter 24) . . . under section 6012 on the basis of a calendar year shall be filed on or before the 15th day of June following the close of the calendar year . . . .”). Applying the June 15th deadline to Mr. Boeri’s case, his taxes were deemed paid on June 15th, 2005. § 6513(b)(3). This still places the withheld taxes outside the 3-year look-back period, although now only by nine months.


In the end, it did not make a difference whether the payment was deemed made under 6513(b)(1) or (b)(3), since the appellate court noted that the claim was filed too late under either provision, as under either provision for a nonresident like Boeri the payment date would be June 15, 2005 and he filed his claim in March of 2009, well after June 15, 2008.

Mr. Boeri’s argument that this was not a withholding of tax was largely ignored.  I have not pulled the briefs, but based on the Appeals Court holding, the majority opinion did not raise any equitable arguments, so it must not have found the arguments compelling if they were made.

At least one Judge in the Appeals Court thought the Court was being too rigid in its analysis.  Judge Newman dissented, stating that literal readings of statutes that present flagrant injustices are often condemned. The dissent highlights the fact that the IRS transcripts describe the payment as a “refundable credit”, and that the IRS FAQs indicate notice should have been given to Mr. Boeri that he had wrongly had taxes withheld.  This essentially becomes the basis of an equitable tolling argument, again highlighting the fact that the look back is not a jurisdictional limit.  The dissent also looks to some well-seasoned (real old) case law equating the taxing authority to a “taking in violation of the 5th amendment”, and states that the Tucker Act’s six year limitation period applies.  See Brushaber v. Union Pac. RR. Co., 240 US 1 (1916); Charles C. Steward Mach. Co. v. Davis, 301 US 548 (1937).    The Tucker Act is a waiver of sovereign immunity in various types of cases, including government takings.

Mr. Boeri filed pro se, and I did not review the petitions, so I am unsure what he did or did not plead.  I like the Tucker Act argument, that if the Service lacks any authority to withhold funds the normal look back does not apply (I did not research this, so it may not be that persuasive).  My initial thoughts were to equitable arguments.  This case, like so many others lately, explicitly stated that the look back (or administrative appeal requirements) was not jurisdictional; therefore, the case could be heard by the court and equitable arguments could be advanced.  Equity would seem strongly in Mr. Boeri’s favor, if an appropriate argument could be made.

Equitable tolling would be the obvious argument to research and put forward, but the case law is not behind Mr. Boeri.  The Federal Circuit has held that reading equitable tolling exceptions into tax refund cases, in light of the enumerated statutory exceptions, is inappropriate.  See Dzuris v. United States, 232 F3d 911 (Fed Cir. 2000).  Dzuris was relying on US v. Brockamp for this position, which was decided by the Supremes, and specifically held as much with regard to Section 6511(a).  There is a good chance that other courts could extend this to Section 6511(b)(2). In Brockamp, the Supreme Court held the specificity with which Section 6511 handled the time period indicated there was no equitable tolling allowed.  Brockamp involved financial disability, and in 1998 Congress responded by including a financial disability exception to the refund look back period.  Apparently, Congress did want some level of equitable tolling.

It is very important to note that Brockamp was limited to Section 6511(a), and may extend to Section 6511(b)(2).  For additional commentary on this point, I would direct readers to the comments Carlton Smith made on Les’ recent post.  It does not necessarily apply to other time limits under the Code, and equitable tolling should be considered.  For an additional summary of some recent tax and other cases where courts have reviewed equitable tolling arguments, I would direct readers to Carlton Smith’s 2012 Tax Notes article, “Cracks Appear in the Code’s ‘Jurisdictional’ Time Provisions.”

Summary Opinions for 8/15/14 and 8/22/14

In celebration of the unofficial end of summer (classes starting again),  a two week helping of the tax procedure items we did not otherwise touch on:


  • This guy may have mental health issues, so I will refrain from making (too many) jokes.  In “Ram Heram” v. US (sorry, no free link), a magistrate judge for the ED of Cal. granted the IRS’ motion for a more definite statement of the alleged collection related damages, and directed that the taxpayer could not proceed anonymously under his pseudonym.  The judge found that the taxpayer failed to show a legitimate risk in disclosing his name that could result in retaliation.  The judge discussed the five prong test under Kamehameha Schools, a 9th Circuit holding, for proceeding anonymously, which are: 1) severity of the threatened harm; 2) reasonableness of the fears; 3) vulnerability to the retaliation; prejudice to the opposing party; and 5) the public interest.  Ram alleged some serious harm, stating the government directed others to “[take] control of the property from plaintiff, and caused fire, Killing, damages and injuries [acting as a “KILLING MACHINE”].”  The taxpayer, however, failed to provide legitimate evidence of the danger, and seemed to fail reasonableness aspect of the five prong test.
  • Grover Norquist is headed to Burning Man.  Burning Man has a lot of nudity and body glitter.  Grover+nudity+body glitter = still no tax reform.
  • The Ninth Circuit has affirmed that a joint-tenant being sued for estate tax cannot contest the estate’s underlying tax assessment.  In US v. Cowles-Reed, in a very brief opinion, the Court stated that only the estate, and not an interested third party, may question the tax.
  • In Ashland v. Comm’r, the Ninth Circuit held that the tax court lacked jurisdiction to review an alleged guaranteed payment, finding that such payment would be a partnership item and properly decided under partnership-level proceeding, not a deficiency proceeding.
  • From the Tim Todd, Liberty U. tax prof, a nice write up of the split decision Bedrosian v. Comm’r, where the court held that the Service’s failure to allow sufficient time between notices in partnership TEFRA proceedings did not convert partnership items to nonpartnership items.
  • Tony Nitti on Forbes claims to have the complete guide to every tax reference in the Simpsons.  I am not sure if he has them all, but I am pretty sure it is “excellent”.  Given that one of the main characters is a billionaire energy mogul who is pretty hell-bent on maximizing profits, you would think there would actually be more tax references.
  • Judge Holmes has an interesting order this week in Renka, Inc. v. Comm’r, where he highlighted a significant Chenery issue, but failed to hold on the issue because the IRS’ motion clearly failed for other reasons.  Here is a write up by Lew Taishoff.  Mr. Taishoff indicates that the Chenery issue was not raised by the taxpayer, which could be problematic.  The underlying facts had the IRS initially making a determination regarding revocation of an ESOP’s exempt status based on 1998 circumstances, but on summary judgment basing its position on different 1999 circumstances.  Chenery states (oversimplified) that courts cannot affirm administrative action based on a different basis than the administration initially did, otherwise the court ends up acting as the agency.  We may have more on this topic over the next week or two, but for those of you who want some more background info on Chenery now, you can see Les’ post from last week on CDP cases that touches on the administrative law rule.
  • From Peter Harvey and his colleague at Post & Schell, a write up of the Fresenius Medical Care Holdings, Inc. v. US case, where the First Circuit held that silence in a False Claims Act settlement agreement regarding potential tax consequences did not preclude the company from deducting some of the payments under the agreement.  In general, no deduction is allowed for a fine or penalty paid to the government for any violation of the law – See 162(f). Compensatory damages are not included as a fine or penalty, though, and may be deductible.  As indicated in the case and article, the Court distinguished itself from the Ninth Circuit position.

A Stolen Check, Mistaken Identity and Prisoners

Rarely does a title to a post in a tax procedure blog sound like it might make a good movie. Today’s post? Well maybe. This post considers Hill v US, a case from the Court of Federal Claims involving a prisoner named Mark Hill whose $1182 tax refund was stolen and cashed by another prisoner with the same name after the prison system mistakenly delivered an IRS letter relating to the missing refund check to the wrong Mark Hill. With time on his hands, but no check, the right Mark Hill sought justice in the form of a new check. After getting the runaround from the IRS, the right Mark Hill sued the US to force it to issue a new refund check. For good measure, he also wanted interest and punitive damages.


The case involves some interesting procedural issues, including when a taxpayer’s correspondence may constitute an informal refund claim and whether the Court of Federal Claims has jurisdiction to consider stolen refund checks under 31 USC 3343 rather than the normal refund jurisdictional provisions. 31 USC 3343 deals with stolen Treasury checks generally and not tax refund checks specifically, and I had not considered it as a possible lever to get into court with the all too common problem of stolen tax refunds.

Cases involving prisoners often raise interesting tax procedural issues. Our most prolific guest blogger Carl Smith previously blogged about some of the issues in Timely Filing a Tax Court Petition From Prison. Hill raises different issues, though not necessarily ones specific to prisoners, namely how to get a refund check that someone else may have improperly taken. The facts in Hill show how challenging it is to get a refund when someone steals the check (a not uncommon problem). Here is what happened to lead up to the lawsuit.

Mark Hill received a letter from IRS in August 2008 saying that while it had received his 2007 tax return, it had misplaced it. In January 2009, IRS asked Hill to send in a newly signed 2007 return. In February 2009, Hill was sentenced to an 8-year prison term. While at a temporary facility (pleasantly called a Corrections Reception Center) in March of 2009, Hill sent in a newly signed 2007 return. By April 2009, Hill left the Reception Center to take residence at a more permanent corrections facility. In June, IRS issued the $1182 refund claimed on the 2007 return, which was returned and marked by the Post Office as undeliverable.

What happened next caused the problem at issue in the case. From the opinion itself, absent citations to the record:

The IRS then issued a refund notice and requested Mr. Hill’s current mailing address. This notice was received by prison authorities who “erroneously delivered” it to another inmate also named Mark Hill (“Hill II”),although it contained Mr. Hill’s personal information, including his taxpayer identification number and social security number, which Hill II used to impersonate Mr. Hill and obtain the refund check. The IRS was contacted via its toll-free phone number by an individual who claimed the refund and provided an address in Waverly, Ohio. On July 24, 2009, the IRS issued the refund to the Waverly, Ohio address. Hill II [the other Mark Hill] subsequently cashed the check at First Check Cash Advance, endorsing it as “Mark Hill” without the middle initial, even though it was addressed to “Mark A. Hill.”

By the fall of 2009, with original Mark Hill still not having received his check, the IRS contacted him and said it issued the check in July. Having not received the check, or knowing what happened to his refund, the original Hill submitted a Form 3911, a Taxpayer Statement Regarding Refund, trying to find out what happened. Hill eventually requested help from the Taxpayer Advocate Service, which in May 2011 provided Hill a copy of the cashed check as well as the location where it was cashed.

That information caused Hill to seek a remedy and in May 2011 he sent a letter to Secretary of the Treasury, requesting assistance in obtaining his refund. That led to his getting a letter from W&I in August 2011 stating that his check was misappropriated. In September, 2011 Hill submitted affidavits of accusation “to six separate organizations to obtain the 2007 tax refund, which led to an investigation of the Chillicothe Correctional Institution, the Institution Liaison, and Investigator from the Ohio State Highway Patrol (“OSHP”). “

He also in October 2011 completed and submitted IRS forms for “Claims Against the United States For the Proceeds of a Government Check” (FMS Form 3858 and FMS form 1133), as directed by the Financial Management Service of the Department of the Treasury and the OSHP Investigator.

After getting a request from someone from IRS requesting more information, Hill filed a complaint in the Court of Federal Claims in January 2012, after almost three years of correspondence with IRS about his refund. In its answer, the government stated that Hill is “not entitled to recover for a second time any amounts that have been already paid to him by any agency of the United States,” and that “this [c]ourt has no jurisdiction to hear Plaintiff’s claim for punitive damages . . . because the United States has not waived its sovereign immunity for such claims.” It followed with a motion for summary judgment.

Court Analysis

The jurisdictional question requires consideration of the statutory scheme for refund suits. The Court of Federal Claims has jurisdiction under the Tucker Act, 28 U.S.C. § 1491, “to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.” 28 U.S.C. § 1491(a)(1). The Tucker Act itself does not confer a substantive right to bring an action. The statutory vehicle for the substantive right is 28 U.S.C. § 1346(a)(1). That provision authorizes the Court of Federal Claims to adjudicate “[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws[.]”

The Court walked through the statutory requirements necessary to confer jurisdiction in the Court of Federal Claims for refund matters (there is concurrent refund jurisdiction in federal district courts), looking to Sections 6511, 6532 and 7422. It summed it all up as follows:

Jurisdiction is established if: (1) the taxpayer has paid his full federal tax liability for the year for which he claims a refund; (2) before filing suit, the taxpayer timely files an administrative claim for the refund with the IRS for the amount at issue; and (3) subsequently, the taxpayer timely files suit “provid[ing] the amount, date, and place of each payment to be refunded, as well as a copy of the refund claim” (citations omitted).

Just this past week, I discussed the requirement under 6511(a) for filing a refund claim within “3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later….”. In this case, the IRS seemed to acknowledge a timely (though misplaced) 2007 return. Hill thus was required to submit a refund claim by April 15, 2011. For these purposes, the court found that Hill did not submit a formal refund claim until October 12, 2011, when he submitted formal claims documents — Form FMS-3858 (Claims Document) and Form FMS-1133 (Claim Against the United States for the Proceeds of a Government Check). Nonetheless, the court treated Hill’s pattern of correspondence as establishing the submission of an informal clam prior to the April 15, 2011 deadline:

The record in this case establishes that Plaintiff made several informal claims to the IRS within the three-year period. The United States Supreme Court has held that “a [timely] notice fairly advising the Commissioner of the nature of the taxpayer’s claim . . . will nevertheless be treated as a[n effective] claim, where formal defects . . . have been remedied by amendment filed after the lapse of the statutory period.” United States v. Kales, 314 U.S. 186, 194 (1941).

This informal refund doctrine is a handy way that to avoid the strict possibly jurisdictional barrier of 6511(a) (as I alluded this week and as a comment by Carl on my post elaborated on there is an argument, however, why 6511(a) is not a jurisdictional bar and may be subject to equitable exceptions). For those wanting more on informal claims, Hill provides some examples from prior cases where the Court has found the written communication from the taxpayer was enough to put the IRS on notice.

The Hill opinion also discusses the requirements under Section 6532, which generally prevents a suit from being filed before “the expiration of 6 months from the date of filing the claim . . . unless the Secretary renders a decision thereon within that time, nor after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.” Here the formal claim was filed in October 2011, and the suit was filed in June of 2012. Since the IRS never formally disallowed the claim, there was no issue with the 2-year rule. It is possible and the court suggests that the 6-month rule in 6532 may run from submission of an informal claim (I have not researched the issue) but it would be prudent to wait at least 6 months following a submission of a formal claim to avoid an easily remediable problem.

There are a couple of other points worth highlighting. The court noted that there was a separate nontax specific statute (Tile 31 USC 3343) that created a substantive right enforceable against the US that, in combination with the Tucker Act, served as an alternate basis for the court’s jurisdiction The court summarized that provision:

To establish entitlement to relief under Section 3343, the taxpayer must establish that:

(1)          the check was lost or stolen without the fault of the payee or a holder that is a special endorsee and whose endorsement is necessary for further negotiation; (2) the check was negotiated later and paid by the Secretary or a depositary on a forged endorsement of the payee’s or special endorsee’s name; and 
(3) the payee or special endorsee has not participated in any part of the proceeds of the negotiation or payment.

The Court concluded that Hill satisfied the above and was entitled to 3343 relief. I had not thought about this provision as an alternate means of getting court review. This may come in handy if for example a taxpayer fails to meet the Internal Revenue Code-specific requirements for filing a tax refund claim or suit.

The court dismissed Hill’s claims for punitive damages but its discussion of interest is worth noting too. 3343, while authorizing replacement checks, does not allow for interest. Yet Hill sought interest. The court noted that overpayment interest is due on refunds, and allowed a limited amount of interest because the IRS in losing the return originally failed to issue Hill his refund within 60 days of the timely-filing:

Plaintiff timely filed his 2007 tax return on the “last date” for filing that return: April 15, 2008. see also 26 C.F.R. § 301.6611-1(j)(1). Interest would be allowed, therefore, if the overpayment was not refunded within sixty days, i.e., June 14, 2008. Since the IRS admitted to losing Plaintiff’s 2007 tax return, the IRS unquestionably missed that sixty-day deadline. Instead, the IRS mailed the tax refund on June 5, 2009. Thus, pursuant to section 301.6611-1(g), Plaintiff is owed interest from the date of overpayment –April 15, 2008, through at least thirty days prior to the date of the refund check — May 6, 2009, which equals 386 days, excluding the end date.

So, interest of about $7 or so will be part of what Hill should get. One more issue worth noting. Unfortunately for Hill, however, it appears that he has a debt that is subject to offset under Section 6402. In this suit, he sought a declaratory judgment that the refund/replacement check not be subject to offset. As there was no counterclaim from the government or related action in another matter, the court declined to consider the issue, considering it not ripe. 


Case Highlights Issues Relating to Refund Statutes of Limitation

Statutes of limitation are tricky. The statute of limitations (sol) dealing with refund claims is especially challenging. Last week’s Court of Federal Claims decision in Montiel v US highlights one aspect of the refund sol I had not considered, namely what happens when a nonresident taxpayer files a return as a resident alien that she later claims is mistaken, and corrects the error within three years from when the return would have been due if she filed correctly as a nonresident alien.  The problem here was that corrected filing was outside the three-year period from when the original supposedly incorrect return was filed. The case highlights the complexity in this area, and how a matter of days or months can make the difference between a refund and possibly no refund.

The taxpayer Maria Esther Montiel is a Mexican citizen who spent some time in the US and filed timely original returns for 2007 and 2008. Those returns reflected her claimed status as a resident alien. She later determined she mistakenly classified herself as a resident alien and filed refund claims for $8,772 in 2007 and $2,254 in 2008 based on nonresident alien status within three years of the due date applicable to nonresident returns (June 15), but outside the three-year window applicable to other individual returns (April 15). She filed her 2007 refund claim on June 10, 2011. IRS denied her claim in May of 2012. On June 13, 2012, she filed her 2008 refund claim. IRS also denied that claim. IRS denied the claims on the basis that the general three year sol on refund claims ran from April 15 of 2008 and April 15 of 2009, the original filing due date of the returns Montiel filed reflecting her supposedly incorrect residency. Montiel of course took a different view, arguing that her claims were timely because the sol on refund claims should run from the original tax return filing due date applicable to nonresident aliens, which is June 15.

Montiel sued in the Court of Federal Claims. The government filed a motion to dismiss the refund suit for lack of subject matter jurisdiction. In large part the main procedural issue here is whether she locked herself into one time period by filing the original return as if she were a US resident. Did the filing of the return serve as a type of admission against interest that fixes the sol or is the sol period as well as the underlying taxable nature of her status something she can change by changing her status? We think of amended returns fixing a tax problem and not an sol problem. Can an amended return fix or alter an sol? As I discuss below, the court essentially punted on these issues and denied the government’s motion to dismiss.

Before I address some of the case’s issues, a few more facts and statutory background.


Maria Esther Montiel is a citizen of Mexico who spent some time in California in both years. On advice of her tax return preparer, she filed the  original 1040s in 2007 and 2008 as if she were a resident alien of the US. She listed the address on the return as a US address of a family member and filed those returns prior to April 15 of 2008 and 2009 with the Fresno Service Center. Later, she determined that she was due a refund from those years because she in fact was a nonresident alien who spent less than 60 days a year in the US on a B1/B2 visa and should have filed a 1040NR for each year. To claim her refund, she filed refund claims through amended returns and also included original 1040 NRs for the 2007 and 2008 years prior to June 15, 2011 and 2012, respectively.

IRS denied the refund claims as untimely. It did so because the refund claims were filed after April 15, 2011 for the 2007 year and after April 15, 2012 for the 2008 year. This brings us to some general rules. Recall that Section 6511(a) contains the general rule for timeliness of refund claims. Under 6511(a), when an original retun is filed, a claim must be “filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later...”

How does residency status of the taxpayer impact the deadlines under Section 6511(a)? The court succinctly described how:

Residency status directly affects the filing deadlines set by Subsection 6511(a). Unlike citizens and resident wage earners, who must file a Form 1040, Individual Income Tax Return, with the IRS by April 15 every calendar year, see I.R.C. § 6072(a), nonresidents have until June 15 to file their comparableForm 1040NR, see I.R.C. § 6072(c). The IRS deems all timely returns as filed on their due dates, regardless of when they are actually submitted. I.R.C. § 6513(a). The statute of limitations imposed by Subsection 6511(a) begins to run on the effective filing date.

Montiel thus claimed her refund claims were timely, because they were filed within three years of the filing deadline for the nonresident alien returns. Thus the case boils down to which return due date triggers the statutory 6511(a) deadline, the 4/15 date applicable for 1040s pertaining to resident aliens that she initially filed, or the 1040 NR June 15 date that she claimed applied in the later returns?

Here is how the court further refined the issue, also providing a handy summary of the rules relating to residency status:

Whether Ms. Montiel’s refund claims were timely within the statute of limitations set by Subsection 6511(a) depends upon her resident status. I.R.C. § 7701 defines an individual as a nonresident alienif she is neither a citizen nor a resident of the United States. I.R.C. § 7701(b)(1)(B). An alien isdeemed a resident for tax purposes if she has been lawfully admitted for permanent residence or has been substantially present in the United States. I.R.C. § 7701(b)(1)(A)(i), (ii). Paragraph 7701(b)(3) stipulates that an individual is substantially present in the United States for tax purposes if she (i) was present in the United States on at least 31 days during the calendar year, and (ii) the sum of the number of days on which she was present in the United States during the current year and the two preceding calendar years (when multiplied by an applicable multiplier) exceeded 183 days. I.R.C. §7701(b)(3)(A)

Court Analysis

So how did the court resolve the matter? It essentially punted on the merits. Recall the government filed a motion to dismiss on the grounds that the court did not have jurisdiction. The court agreed that the statute of limitations dispute under 6511(a) was a jurisdictional matter. We have discussed in this blog before whether deadlines in the code truly are jurisdictional. In addition to a post this year on PT by Carlton Smith here on that topic see Carl’s Cracks Appear in the Code’s Jurisdictional Time Provisions in Tax Notes from a couple of years ago. Generally speaking, taking the cue from a bunch of nontax cases, courts have started to question whether Code deadlines are in fact jurisdictional or are more in the nature of claim processing deadlines. It is generally thought that the 6511(a) deadline is jurisdictional (though Carl raises strong reasons why courts need to think harder about this issue in light of more recent nontax Supreme Court precedent and the actual language and reasoning in the Supreme Court’s Brockamp case). Montiel considered the 6511(a) deadline as jurisdictional but not, for example, matters implicating 6511(b) (relating to limitations on the amount of a refund claim).

[t[he effective filing dates of Ms. Montiel's tax returns for 2007 and 2008 pose disputed issues of jurisdictional fact, as they ultimately determine whether or not Ms. Montiel complied with the statute of limitations imposed by Subsection 6511(a) and can now file suit for refunds.

There is a lot to be said about the court’s jurisdictional analysis, but I will save that for another day because it seems somewhat tangential to the underlying procedural sol issue. Carl’s article in Tax Notes and his prior post on the issue suggest that courts need to be careful in discussing the jurisdictional issue, and Montiel seems to have only scratched the surface.

As to the sol issue, the court avoided a decision at this stage of the case because it wanted more information than the pleadings afforded. It denied the government’s motion concluding that the facts plausibly indicated that Montiel “may well have complied” with the refund procedures, so the suit survived the dismissal motion. The case moves forward now to trial or summary judgment. As to the court’s approach in this matter, it seems like that this is a question of law that it might have been able to reach at this stage, although the IRS did also dispute if  Montiel’s 2008 claim was filed on or prior to June 15, 2012. As to the law, the court found that there was no controlling precedent, and perhaps it was looking for more briefing on the issue. The government had argued as support of its position a case that held that a taxpayer is subject to 6511 even if it mistakenly paid tax but did not file a return and was not in fact required to file a return. It also looked to venerable procedure cases like the Supreme Court case of Germantown Trust analyzing whether a taxpayer’s mistaken trust return (it should have filed a corporate tax return) constituted a return for purposes of the statute of limitations on assessment. Characterizing those cases as of “tangential relevancy” the court found that they did not support treating the claims as barred.

The taxpayer had claimed that a 2002 GCM supported her position. In that GCM, the Service considered a taxpayer who mistakenly filed an original return on a 1040 but in fact was a nonresident alien and should have filed a 1040 NR. The Service concluded that it could effectively convert the original 1040 into a 1040 NR and make concomitant adjustments without issuing a stat notice for changes that flowed from the shift to a 1040 NR, like not allowing an EITC, which nonresident aliens cannot claim. Rather than address the relevance of that analysis, the court noted that it was not precedential.

Some Additional Thoughts on the Case

On a more technical issue, it is possible that even if Montiel prevails on 6511(a), she may run into issues in 6511(b) relating to the amount that the IRS can refund even in a timely claim.  The problem would be the look-back amounts under 6511(b)(2) -- i.e., may she have failed to state a claim for failing to meet those requirements?  If she is held to have filed her claim within the 3-year period of 6511(a), then the amount that may be refunded under 6511(b) is "the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return."

This takes us down a further thicket. Section 6072 allows a non-resident alien to file on June 15, but that is not denominated an "extension" in the Code.  So, the look-back period from the actual dates she filed the claims (around June 15) would be only three years.  It would not go as far back as taxes paid on April 15 of the year following the close of the taxable year.

The opinion does not indicate when or how Ms. Montiel made her tax payments. 6513(b) provides the rules on when payments are deemed made. Section 6513(b) provides:

b) Prepaid income tax. For purposes of section 6511 or 6512--
   (1) Any tax actually deducted and withheld at the source during any calendar year under chapter 24 [IRC Sections 3401 et seq.] shall, in respect of the recipient of the income, be deemed to have been paid by him on the 15th day of the fourth month following the close of his taxable year with respect to which such tax is allowable as a credit under section 31 [IRC Sec. 31].

(2) Any amount paid as estimated income tax for any taxable year shall be deemed to have been paid on the last day prescribed for filing the return under section 6012  for such taxable year (determined without regard to any extension of time for filing such return).

(3) Any tax withheld at the source under chapter 3 or 4 [IRC Sections 1441 et seq. or 1471 et seq.] shall, in respect of the recipient of the income, be deemed to have been paid by such recipient on the last day prescribed for filing the return under section 6012 [IRC Sec. 6012] for the taxable year (determined without regard to any extension of time for filing) with respect to which such tax is allowable as a credit under section 1462 or 1474(b).

Paragraphs (2) and (3) make certain tax deemed paid on the filing date (which presumably is June 15 under 6072(c)), but paragraph (1) makes income tax withholding deemed paid on April 15.

If the refund she is seeking is from income tax withholding, she would not meet the 3-year look-back amount rule of 6511(b)(2).  A similar result arose in the Boeri case from the Federal Circuit last year involving a nonresident who had no US liability but had over $70,000 mistakenly withheld from a severance payment; his original 1040 claiming an overpayment was filed more than three years after the June 15 date that the withholdings would have been deemed paid. The refund claim itself was timely under Section 6511(a), as is always the case when the claim is made in an original return. Nonetheless, in that case the Federal Circuit (though with a spirited dissent on the equities) dismissed the suit under 6511(b) because Boeri’s taxes were deemed paid via withholding and as per 6513(b)(3) more than three years prior to the filing of his refund request.

Because it is not clear how or when Ms. Montiel paid the taxes in the years at issue, it is also not clear if 6511(b) is at issue. But it may be.

As the above hopefully shows, this case raises lots of interesting procedural issues. We will keep you posted as this case moves forward.

Postponing Assessment and Collection of the IRC 6672 Liability

IRC 6672 imposes a personal liability on those responsible for collecting and paying over to the IRS taxes held in trust. This liability goes by several names including “Trust Fund Recovery Penalty” (TFRP); 100% Penalty; and Responsible Officer Penalty. 

The code section sits in the assessable penalty chapter of the Internal Revenue Code but the Supreme Court has determined that this liability does not have the characteristics of a penalty for bankruptcy purposes. The Third Circuit has held that this liability does not have the same unlimited assessment period as other assessable penalties. (If you click on the link to the case, it will quickly become clear why the taxpayer won when you notice who was representing the taxpayer in that case.) The IRS has said that this liability does not have the same collection rules as other penalty assessments and that it will only collect the liability once even though assessments exists against multiple persons. 


The policy statement creates an interesting situation when the IRS “over collects” this liability by obtaining payments from more than one responsible person in a total amount that exceeds the liability. For example, assume that ABC Inc. fails to pay $100 of collected taxes. The IRS assesses three responsible persons, Mr. A; Mr. B; and Mr. C, $100 each for this failure. On September 1, three different revenue officers each succeed in collecting $100 from the responsible officers. One collects from Mr. A at 10:00 AM; one from Mr. B at 11:00 AM and the third from Mr. C at 1:00 PM. 

What will the IRS do with the “extra” $200 it has collected? It will return the money to Mr. B and Mr. C and keep the full amount paid by Mr. A. While this practice seems shortshigted because it encourages responsible persons not to pay, it creates opportunities for the responsible officer who understands this practice to seek to insure that one of the other responsible officers pays first. 

How does a responsible officer seek to insure the other responsible officers pay first – by slowing down the assessment and collection process against himself and by aiding the IRS in collection from the others. In seeking to slow down the assessment and collection process, a representative must take care to avoid restrictions in Circular 230 on inappropriate delay. 


It deserves note that the IRS does an excellent job of slowing down assessment without any assistance. On average, it takes the IRS about 21/2 years after the corporation’s failure to pay the trust fund taxes before the IRS makes assessments against responsible individuals. Of course, any given responsible officer wants his assessment to occur later than the assessments against other individuals also responsible for the same tax no matter how long the IRS takes on average. 

It also deserves noting that delaying the assessment benefits a responsible officer even if the IRS ultimately collects from him because interest on the liability does not start until the assessment occurs. (The link takes you to a law review article I wrote several years ago explaining the inappropriateness of the beginning point for the running of interest.) Delaying assessment postpones the day on which interest begins as well as the day on which the failure to pay penalty begins. So, the strategy of delaying assessment reaps multiple benefits under the current, seemingly misguided, system. 

Aside from avoiding or stalling the revenue officer during the investigative stage, a tactic not condoned by Circular 230 and not recommended here, availing yourself of all opportunities to appeal the proposed assessment presents itself as the simplest way to delay assessment. 

Another change in 1996 was the establishment of a process granting an automatic right to go to the Appeals Division to contest a proposed TFRP assessment. The proposed responsible officer who avails himself of this opportunity rather than consenting to assessment or failing to appeal, will delay the assessment, assuming the person cannot persuade the IRS not to make the assessment, for the length of time the case sits in Appeals. The period of time a case sits in Appeals could be fairly long – certainly a time measured in months if not years. Meanwhile, maybe the IRS will have already collected the liability from another responsible person. 


Once the IRS assesses the liability, it will send Notice and Demand followed by other letters leading up to the Notice of Intent to Levy and the offer of Collection Due Process (CDP) rights. A responsible officer trying not to be the first to pay will not voluntarily pay in response to the IRS correspondence and will request a CDP hearing. Here is another chance to sit in Appeals inventory, assuming your client qualifies for a CDP hearing and is not precluded by IRC 6330(f)(3). for several months while the IRS maybe collects from the other responsible officers. 

CDP also creates the opportunity to go to Tax Court if a satisfactory collection alternative is not reached with the Settlement Officer. The time spent in Tax Court trying to reach an appropriate collection resolution gives more opportunity for the IRS to collect the liability from the other responsible officers. 

Aiding the IRS 

The IRS policy of keeping the first money it receives creates its own mini-whistleblower statute for responsible officers. These individuals frequently know each other’s finances very well. If they provide information to the revenue officer allowing easier collection of the liability form another of the responsible officers that can enhance the likelihood that the first one to pay will be the other person. The situation might be likenedto the children’s story of the three billy goats crossing the bridge each one telling the troll to wait for the next because the next one is better. 


I think the IRS collection policies in this area create improper incentives as I have discussed in the articles linked above. It does not make sense to me from a tax administration standpoint to incentivize taxpayers to not pay or delay paying their taxes. The statute should charge interest from the moment the underlying liability arises and should give benefits to persons paying first rather than last. Nonetheless, since Congress and the IRS have created a system where a taxpayer can win by delaying, it is important to understand the incentives the system uses and work with them to the benefit of your client within the structures of the ethical rules. Paying last can subject the responsible officer to a suit from the person who does pay the trust fund taxes and another post will talk about that potential liability and the unanswered questions there. 


Final Whistleblower Regulations Create Administrative Review of Rejected and Denied Claims

Today we welcome Erica Brady as a new guest blogger. Erica is a tax associate with the Ferraro Law Firm in its Washington, D.C. office. Ms. Brady practices exclusively in the area of tax whistleblower claims. We asked her to comment on the new regulations published by the IRS last week. Keith

Final Treasury Regulations regarding Awards for Information Relating to Detecting Underpayments of Tax or Violations of the Internal Revenue Laws, also known as the Whistleblower Regulations, were published on August 12, 2014. It was a bit of a wait for the final regulations, in the end the final regulations were an improvement over the proposed version of these Treasury Regulations, which were initially published on December 28, 2012. The IRS received literally hundreds of comments on these proposed regulations. The changes made in the final regulations reflect a great many of the comments.

I am optimistic that these regulations, while not going as far as many commenters or even Senator Grassley had hoped in opening the channels of communications between the IRS and whistleblowers, will help answer the question that almost every whistleblower has: “What did the IRS do with my information?” My optimism comes from Treasury Regulation section 301.7623-3, Whistleblower administrative proceedings and appeals of award determinations, which created a new administrative proceeding by which whistleblowers may provide comments to the IRS where they believe that the IRS is improperly rejecting or denying their claim for an award prior to a final determination to reject or deny their claim for an award is made. The regulations describe this review as an administrative proceeding that begins on the day that the preliminary letter is mailed. The designation of this as an administrative proceeding allows the Whistleblower Office the ability to share necessary information with the whistleblower under section 6103(h)(4) and Treasury Regulation section 301.6104(h)(4)-1, which was finalized as part of these regulations.


The regulations are specific on when this new procedure will apply. First, the claim that was rejected or denied must have been made under section 7623(b), which means that the claim must have an “amount in dispute,” as defined in Treasury Regulation section 301.7623-2(e)(2)(i), of at least $2 million, and if the taxpayer is an individual, if the taxpayer’s gross income exceeds $200,000 in at least one taxable year. Second, the claim must have been rejected or denied within the meaning of Treasury Regulation section 301.7623-3(c) (7) and (8), respectively. Treasury Regulation section 301.7623-3(c)(7) defines a “rejection” as “a determination that relates solely to the whistleblower and the information on the café of the claim that pertains to the whistleblower.” Treasury Regulation section 301.7623-3(c)(8) defines a “denial” as “a determination that relates to or implicates taxpayer information.”

In these cases, the Whistleblower Office will send the whistleblower a preliminary rejection or denial letter that states the basis for the rejection or denial of the claim. The whistleblower has 30 days from the date the Whistleblower Office send the preliminary rejection or denial letter to submit comments to the Whistleblower Office explaining why they disagree with the preliminary rejection or denial of the claim. According to the regulations, the Whistleblower Office will review these comments and either (1) provide written notice to the whistleblower of the rejection or denial of the claim, including the basis for the rejection or denial of the claim, or (2) the whistleblower claim will be subject to the same administrative review as claims for award that have not been denied or rejected.

In cases where the whistleblower’s comments reveal a need to reevaluate the claim, the administrative procedures for review of an award are applied. This administrative procedure is described in Treasury Regulation section 301.7623-3(c)(1) through (6), but has been in place for some time now relating to claims where the IRS has approved a claim for award. The administrative review process begins with the IRS Whistleblower Office sending a preliminary award recommendation. The preliminary award recommendation is based on the Whistleblower Office’s review of the administrative claim file, as described in Treasury Regulation section 301.7623-3(e). The whistleblower has 30 day from the date the preliminary award procedure to respond by (1) consenting to the award and forfeiting their right to appeal the award determination; (2) submitting comments on the preliminary award determination that the Whistleblower Office will review and make a final award determination; (3) doing nothing and allowing the Whistleblower Office to make a final award determination; or (4) signing, dating, and returning the confidentiality agreement. By signing, dating, and returning the confidentiality agreement, the whistleblower will receive a detailed award report, which provides a full explanation of the factors that contributed to the recommended award percentage; an opportunity to review documents supporting the detailed report in the administrative claim file that is not protected by common law or statutory privilege; and respond to this information. The whistleblower has 30 days to respond to the detailed report by (1) consenting to the award and forfeiting their right to appeal the award determination; (2) submitting comments on the detailed report that the Whistleblower Office will review and make a final award determination; (3) doing nothing and allowing the Whistleblower Office to make a final award determination; or (4) requesting an appointment to review the administrative claim file. If the whistleblower chooses to review the administrative claim file, the whistleblower will have 30 days from the date of the appointment to submit comments on the detailed report and the documents in the administrative file. The Whistleblower Office will review these comments and make a final award determination. If the whistleblower disagrees with the Final Award Determination then the Whistleblower has 30 day to file an appeal with the United States Tax Court.

This new administrative procedure for rejected and denied claims could provide whistleblowers with some insight into what happened with their information and allow whistleblowers to comment on the preliminary rejection or denial. This chance to comment provides whistleblowers a chance to be heard prior to a final award determination. Until these regulations were finalized, whistleblowers would receive a generic letter telling them that their claim had been denied, without giving any basis or explanation. Once this letter was mailed, the whistleblower had 30 days to determine what they could about why their claim had been denied and if they wanted to appeal the denial by filing a petition in the United States Tax Court. Many whistleblowers have a reasonable belief that the IRS used their information based on the interactions the whistleblower had with the IRS early in the case and logically believe that in the time since these interactions that the IRS collected proceeds based on that information. As a result, many cases that are filed in the Tax Court are resolved early in the process once the whistleblower is provided with information about how the audit or investigation of the taxpayer was resolved. Now the Whistleblower Office can provide the whistleblower with the basis for the rejection or denial before a final determination is made by the Whistleblower Office to reject or deny the claim. By providing the whistleblower with the basis for the rejection or denial, the Whistleblower Office could provide the information that gives the whistleblower closure as to what happened with their information. Also, where the basis for the rejection or denial is incorrect the whistleblower has a chance to comment prior to their being a final determination. For example, where the Whistleblower Office has preliminarily closed a whistleblower’s claim prematurely, the whistleblower has an opportunity to alert the IRS to this prior to having their claim for an award closed. Or, where there is a miscommunication about who the whistleblower is and the Whistleblower Office is preliminarily rejecting the claim because of a mistaken belief that the whistleblower was ineligible to make a claim for an award, such as a federal employee, at the time the whistleblower provided information to the Whistleblower Office. By providing the whistleblower a chance to comment prior to rejecting or denying the claim, the whistleblower has a chance to correct any misinformation prior to having a final determination made.

This simple change could have a large impact on the IRS Whistleblower Program as a whole by providing whistleblowers with some information about the basis for the Whistleblower Office’s rejection or denial. This is likely to give additional insight about what happened after the whistleblower provided the IRS with information without requiring the whistleblower to appeal to the Tax Court and is likely to allow misinformation that may be causing an improper rejection or denial to be corrected before a final determination is made. Providing the basis for these decisions is likely to provide closure for some whistleblowers through improved communications with whistleblowers.