Anderson v. Commissioner – Public Policy Determination as Defense to Collection Due Process Challenge

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In the Anderson case decided this week, the Tax Court determined that the Settlement Officer (SO) in Appeals did not create a sufficient record regarding the taxpayer’s health issues and remanded the case for clarification stating “Because it is not apparent from the notice or [the SO’s] notes whether Appeals properly considered petitioner’s health in rejecting the doubt as to collectability –special circumstances offer and the effective tax administration offer, we lack sufficient information to make a determination as to whether Appeals abused its discretion in rejecting petitioner’s last offer.”

The decision points out one of the significant benefits of Collection Due Process (CDP) which is the ability to have a court review of an offer in compromise.  In offer cases outside the CDP process, court review remains unavailable and the decision of the agency is final.  By making an offer in compromise with a CDP case, the taxpayer obtains the benefit of court review making possible the outcome here that the IRS must go back and look at the offer again or at least document the rejection more completely.  Anyone making an offer in compromise that has the opportunity to make it in the CDP context should take note of decisions like Anderson.

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While the case offers a reminder of the procedural advantages of making an offer during a CDP case, the facts make me wonder why the IRS did not make it easy on itself by simply rejecting the offer on public policy grounds. The court cites to the relevant portion of the regulations that offered an easy out for the settlement officer. See relevant IRS Manual Provisions hereTreas. Reg. 301.7122-1(c)(3)(ii)(A) provides that a “history of noncompliance with the filing and payment requirements of the Internal Revenue Code” indicates that acceptance of the offer would tend to undermine compliance with the tax laws.  In IRS-speak, this provision forms the basis for rejection of offers on public policy grounds.  If the IRS had rejected the offer on public policy grounds, clearly stated, I doubt that the Tax Court would have second guessed the decision.

In this case the taxpayer was convicted of criminal tax evasion for one year and filing false returns for three subsequent years.  Criminal tax convictions are not a dime a dozen.  Mr. Anderson engaged in very serious tax wrongdoing.  Additionally, the case includes much discussion of the value of his interest in a condominium placed into a trust in 1995 – the year after the last of the four years of his conviction for felony tax crimes.  With this background, why would not the settlement officer simply say to Mr. Anderson that “you are not the taxpayer with whom we want to enter into an offer in compromise because of your history as a taxpayer.” 

I recently had a client with very similar circumstances to Mr. Anderson for whom I filed an offer in conjunction with a CDP case.  The SO in my case raised the concern about public perception of my client’s behavior and indicated that he would seek a public policy rejection if we did not reach an agreement.  It was clear that the SO with whom I dealt did not want to make a public policy rejection because to do so required approval at a high level within Appeals.  He was happy when we reached an agreement that did not require him to invoke the public policy rejection procedures. 

I suspect the same internal administrative considerations that caused the SO in my case to seek to avoid the public policy rejection colored the decision of the SO in the Anderson case.  I also suspect that the criminal tax convictions weighed heavily in the determination not to accept the offer of a very sick individual with a potentially messy title issue in real property. 

If the settlement officer will not face up to the public policy issue presented by the facts of this case, then she deserves to rework the case.  The prior criminal conviction hangs over this case coloring every decision she makes.  She should acknowledge that and go through the process of a public policy rejection or provide significant explanations concerning why she will not accept an offer that otherwise may appear favorable given the impact of the taxpayer’s health on his long term ability to pay excess monthly income and given the clouded title issue.

Another issue in the case is fascinating if I am accurately reading it.  The opinion states that “On August 25, 2008, respondent assessed against petitioner’s account for the 1991 year [the first of the four years of his felony tax convictions] a civil tax fraud penalty of $23,104 and interest of $53,385.”  It took over 16 years after the due date of the 1991 return for the IRS to assess the fraud penalty for a year in which Mr. Anderson was convicted of tax evasion giving rise to the essentially automatic imposition of the fraud penalty through collateral estoppel.  That’s a long time unexplained in this record and unnecessary to the outcome of the case.  I will discuss the issue of the delay between the tax year and the assessment date in criminal cases in the series involving Senator Fumo, whose attorney complains vigorously about the late appearance of the IRS on the scene in his client’s case.  I will also discuss the possible change in this outcome for criminal tax cases decided after the 2010 amendment to the assessment provisions allowing assessment of restitution awards.  While there is an unlimited statute of limitations stemming from fraudulent items on a return, waiting 16 years to make an assessment almost never has a good outcome for the collection of the tax.  This case is another illustration of that principle.

 

Comments

  1. John Ryskamp says:

    You say:

    the facts make me wonder why the IRS did not make it easy on itself by simply rejecting the offer on public policy grounds. The court cites to the relevant portion of the regulations that offered an easy out for the settlement officer. See relevant IRS Manual Provisions here. Treas. Reg. 301.7122-1(c)(3)(ii)(A) provides that a “history of noncompliance with the filing and payment requirements of the Internal Revenue Code” indicates that acceptance of the offer would tend to undermine compliance with the tax laws. In IRS-speak, this provision forms the basis for rejection of offers on public policy grounds. If the IRS had rejected the offer on public policy grounds, clearly stated, I doubt that the Tax Court would have second guessed the decision.

    I will tell you why this not going to be used in the future. The reason is Thornberry v. Commissioner, which establishes a Fifth Amendment Due Process right to the Collection Financial Standards in conjunction with Collection Due Process. The Court is soon going to rule that this conjunction is the policy of the maintenance of CFS facts, such as housing, medical care, etc. Buttressed by numerous U.S. Government policy changes raising the level of scrutiny for such facts. The Affordable Care Act raised the level of scrutiny for medical care above minimum scrutiny. The Supreme Court just raised the level of scrutiny for property above minimum scrutiny. The Service itself just included student loans and state taxes in the CFS, because it was irrational to keep them out.

    You are still living in the West Coast Hotel/Carolene Products scrutiny regime. But that regime is over, and those cases, and a slew of others keeping many facts in the political system–Lindsey v.Normet, Berman v. Parker, DeShaney v. Winnebago County–are no longer good law.

    The Constitutional regime has changed, and in the new regime, it is laughable to suggest the Commissioner could do anything but maintain CFS facts by asserting “public policy grounds” or any of those ridiculous notions from tax law’s past.

    You do your clients a disservice by not pressing the Court to enforce more thoroughly the CFS. Today taxation exists for only one purpose: to maintain CFS facts. This is the doctrine behind Custom Stairs and, in the Bankruptcy Court, in In re Andrew Bush Johnson.

    What hole have you been living in? The question you ought to ask yourself is: what legal test was used to include facts in the CFS?

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