IRC Section 7122(f) Deemed Acceptance review
The United States Tax Court in Michael D. Brown v. Comm’r of Internal Revenue, at 158 T.C. No. 9, filed on June 23, 2022 ruled that the time during which the IRS Appeals Office reviews the return of an Offer in Compromise is not included as part of the 24-month “deemed acceptance” period of IRC 7122(f). The rule at issue states that “[a]ny offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of the offer.” See IRC section 7122(f). In this case, taxpayer filed for a Collection Due Process (CDP) hearing after the filing of a tax lien. Right away, the taxpayer filed for an Offer through IRS Appeals. The collection specialist that reviewed his file returned the Offer because other investigations of the taxpayer were pending. He owed about $50 million in taxes. During the actual CDP hearing, the taxpayer urged the Settlement Officer to override this decision. The Settlement Officer would not do it and proceeded to close the CDP case. It was approximately 28 months from the time the CDP hearing was filed until the IRS issued a notice of determination. Taxpayer argued that the IRS exceeded the rule for deemed acceptance and the Offer should be accepted. The Court analyzed the statute and regulations associated with it. In part, the taxpayer tried to argue that even though the Offer unit “returned,” the Offer, it was only Appeals that can make the determination to return the Offer. As such, it should be deemed accepted. The Court didn’t buy it. Rather, they point out that the relevant procedures explaining the deemed accepted provision specifically state that the “period during which the IRS Office of Appeals considers a rejected offer-in-compromise is not included as part of the 24-month period.” The Court explained that this would be true even outside of the CDP setting. In other words, if an Offer is rejected and a taxpayer Appeals that rejection, nothing about the Appeal extends the 24-month period in the rule.
IRC Section 6651(a)
The United States Tax Court in George Anton Remisovsky and Ellen Jones-Remisovsky, T.C. Memo 2022-89, filed on August 30, 2022, entered judgment in favor of the government because the taxpayer had not proved that their failure to file and pay their return was due to reasonable cause and not due to willful neglect per IRC Sections 6651(a)(1) and (2). The tax return at issue in this matter is the taxpayers’ form 1040 for tax year 2013. Taxpayer husband was a medial doctor and taxpayer wife was a retail manager. On May 25, 2016, taxpayers filed their 2013 return, after the government prepared a substitute for return for them. Ultimately, the taxpayers requested a Collection Due Process hearing after a final notice of intent to levy was issued. While reviewing a collection alternative with the Appeals Officer, the taxpayer husband alleged that alcoholism and depression was reasonable cause for failing to satisfy their 2013 tax obligations. The husband said he had been hospitalized for alcoholism in 1990 and suffered a relapse in 2012. He stated he was able to continue practicing medicine because he was a “binge drinker while active.” He also supplied a letter from a psychiatrist who was treating him for depression. The letter stated that he had a “history of being alcoholic, although he has had periods of sobriety,” and that “his cognitive capacity to comply with his financial obligations and to pay his taxes in timely fashion were severely diminished.” The Tax Court went through the standard review associated with their review of a Collection Due Process hearing. Regarding the penalty abatement issue, the court stated that to prove reasonable cause for failure to pay and file, the taxpayer must generally prove that he acted with ordinary business care and prudence and was nevertheless unable to file or pay. The Court stated that the evidence showed a generalized struggle with depression and alcoholism, but there was no testimony that the taxpayer suffered from these at the relevant times – such as early 2014 when the return was due, or in May 2016 when the return was filed without payment. Fundamentally, taxpayer husband managed to practice medicine during this time, and his spouse presented no evidence that she was unable to file or pay. As this case illustrates, abatement analysis always includes a review of when the relevant issues affected the taxpayer.
IRC Section 7122
The United States Court of Appeals for the Third Circuit in Estate of Kwang Lee, Deceased, Anthony J. Frese, Executor v. Comm’r of Internal Revenue, Case No. 21-2921 handed down an opinion on August 23, 2022 in which the Court ruled that the denial of an Offer in Compromise for estate taxes by the IRS was appropriate and that the Executor could be held personally liable for non-payment of the Estate taxes. The decedent in this matter passed away many years ago – in 2001. The Executor, Anthony J. Frese miscalculated the estate tax on the estate and ultimately received a notice of deficiency in 2006 and a formal deficiency from the IRS in 2010. However, between 2004 and 2010, the Executor distributed over $1 million in assets to the beneficiaries, including $640,000 after receiving the notice of deficiency. The Estate filed an Offer in Compromise and tried to settle for the remaining assets of the estate. The IRS rejected the Offer, arguing that their reasonable collection potential was higher than what was offered, in part because IRC section 3713(b) allows the government to hold the executor personally liable when the executor transfers property before satisfying a known estate tax. As such, the argument by the estate that the IRS Office of Appeals had abused its discretion in denying the Offer based on payment of the remaining assets of the estate, fails.
IRC Section 7345
The United States Court of Appeals for the Fifth Circuit in James Franklin v. United States et al., Case No. 21-11104, handed down an opinion on September 15, 2022 in which it affirmed the United States District Court for the Northern District of Texas as it relates to revocation of the taxpayer’s passport for seriously delinquent taxes. Plaintiff, James Franklin was found by the IRS to have not filed accurate tax returns and had not reported a foreign trust for which he was a beneficial owner. Penalties were assessed against the taxpayer and enforcement action in the form of filing a federal tax lien, levying Social Security benefits and notifying the Department of State that the taxpayer was seriously delinquent ensued. The taxpayer ultimately sued the government over these issues and argued that the passport revocation scheme of the statute violated his rights under the Fifth Amendment because it affected his fundamental right to travel internationally. This Court reviewed several Supreme Court rulings and provided the following guidance: the right to international travel can be regulated within the bounds of due process. The Court analyzed the passport revocation statute’s goals, protections and objectives…ultimately deeming the statute to be constitutional. This decision is at least the second decision of a Court of Appeals on this topic in the last year. In Jeffrey T. Maehr v. United States Department of State, Case No. 20-1124, handed down on July 20, 2021, the United States Court of Appeals for the Tenth Circuit ruled the statute to be constitutional also.
IRC Section 6330
The Tax Court ruled in Edgerton Mighty and Eulalee Mighty v. Comm’r of Internal Revenue, T.C. Memo 2022-44, filed on May 4, 2022 that a taxpayer may dispute his underlying liability in a Collection Due Process case only if he did not receive a valid notice of deficiency or otherwise have a prior opportunity to contest his liability. This is a common ruling by the Tax Court and illustrates the fact that there are limited opportunities for liability review. It is highly advised that the taxpayer take advantage of the Appeals process post IRS Exam. Alternatively, this practitioner has found that the Offer in Compromise – Doubt as to Liability works very well to work through the issues if an opportunity to review liability has been missed. In the instant case, the taxpayers were examined and under exam the IRS made three changes to their return: 1) adjusted taxpayers’ itemized deductions by $35,923, 2) adjusted deductions on schedule C by $12,605 and 3) adjusted income to account for $28,296 of other income from cancellation of debt. The IRS issued a notice of deficiency for $17,304 plus penalties and interest. Shortly after, the taxpayers filed an amendment of the return and substantiated that Chase Bank had issued duplicate 1099-C documents – one to their daughter and one to them as guarantors, for the cancellation of debt. The IRS agreed and removed this item of income from their assessment. The IRS then filed a notice of federal tax lien on the remaining debt and the taxpayers filed a request for Collection Due Process hearing in response to that notice. The taxpayers never seemed to understand why they owed the government. In spite of discussions with IRS Appeals and proceeding to Tax Court, they continued to argue that the cancellation of debt was not appropriate. Both IRS Appeals and the Court explained that they owed for other reasons. Ultimately, the ruling was going to be the same no matter what. The underlying liability could not be addressed in Appeals because they had had an opportunity to review the liability at the time the notice of deficiency was issued. The Tax Court ruled that Appeals had not abused its discretion.
The United States District Court for the Western District of Washington ruled against the government in United States of America v. Thomas Weathers, et al., Case No.: 3:18-cv-5189-BHS decided February 8, 2022 because the government failed to prove its alter ego and nominee claims by a preponderance of the evidence and failed to prove its fraudulent transfer claim by clear and satisfactory evidence. This case was commenced by the Government to reduce tax assessments to judgment and foreclose federal tax liens. The Government alleged that three entities owned or controlled by the Weathers were their nominees or alter egos and that certain properties owned by the Weathers were transferred fraudulently for their purpose of avoiding the tax lien. The Government simply got carried away on this claim. In part, the reason for that was because there were 8 other properties that the Government was successful in foreclosing through Summary Judgment Motion. In this case, however, the Court ruled that the taxpayers never had an ownership interest in the entity that owned the relevant property, they were never officers, never received personal benefit and the only funds flowing from the entity were for services that were legitimate. There was no shifting of ownership from the Weathers to the entity/owner and no evidence of actual intent to hinder or delay. This case details the factors of alter ego/nominee claims and fraudulent transfers carefully, then applies the facts of this case to those factors, clearly showing the Government fell far short of its burden to establish the claims.
The Tax Court ruled in Warren Keith Jackson and Barbara Ann Jackson v. Comm’r of Internal Revenue, T.C. Memo 2022-50, filed May 12, 2022 that it is not an abuse of discretion for IRS Appeals to sustain a proposed levy and deny a proposal of an installment agreement for a taxpayer that has failed to make required estimated tax payments. Taxpayers timely filed and failed to pay multiple years of 1040 income tax liabilities that totaled $128,095 as of 2018. Taxpayers submitted a proposal for an installment agreement. A field Revenue Officer rejected the proposal of $556 per month for the installment agreement and cited that the taxpayers had “sufficient cash or equity in assets to fully or partially pay the balance owed.” Further, that rejection stated that taxpayers needed to make estimated tax payments to qualify for an installment agreement. Given the amount of the debt and monthly proposal, this was a Partial Payment Installment Agreement which requires the IRS to address equity prior to establishment of the payment agreement. After the IRS rejected the agreement, a levy notice with appeal rights was issued. On Appeal, the IRS noted that the taxpayers did not appear to be current on estimates and that they had equity equal to $98,000 in real property. Ultimately Appeals sustained the levy because of non-response. The Tax Court in its review made clear that it has consistently held that an Appeals officer does not abuse their discretion by declining a collection alternative for taxpayers that fail to remain compliant with current taxes. The fundamental take away is that the taxpayer must fix the problem by showing they are capable of paying their current taxes, prior to seeking a collection alternative.
The Tax Court ruled in Ifeoma Ezekwo v. Comm’r of Internal Revenue, T.C. Memo 2022-54 filed May 31, 2022 that there was no error in the Commissioner’s certification to the Department of State that the taxpayer had a “seriously delinquent tax debt,” and that her passport could be revoked, limited, or an application for the same could be denied. IRC Section 7345 provides that if the IRS certifies that a taxpayer has a “seriously delinquent tax debt,” that certification is transmitted to the Department of State for action relating to a taxpayer’s passport. A “seriously delinquent tax debt” is one that is unpaid, legally enforceable, and in excess of the current threshold adjusted for inflation – currently, $55,000. It is important to note that if a taxpayer is on an installment agreement, or in currently not collectible status, they are not seriously delinquent for this purpose. This case is a straightforward fact pattern with a taxpayer seemingly in denial that they still owed the government money after levy. As such, the Court disposed of the matter quickly. Of note, the Court stated that the only determination they are allowed to make under the statute is whether the Commissioner’s certification of a taxpayer as seriously delinquent was “erroneous.” They made this point to illustrate the fact that they cannot review the underlying liabilities in a review of the certification. The Court also pointed out a couple of exclusions for debts that could be certified. One was relating to a pending Collection Due Process hearing. If timely filed, the debt associated with the periods that triggered the hearing rights would not be included in the total debt for certification purposes. Also, the Court explained that a debt for which innocent spouse relief is requested will not be part of the certification. Taxpayers who have disagreements with the government, and are close to the threshold, could pay down the liability below the current amount that triggers the certification and de-certify. Additionally, this author would note that if a case is assigned to a field Revenue Officer, there are provisions that allow them to expedite a request for decertification if a taxpayer meets an exemption – such as the placement of an installment agreement. During the pandemic, the certification process was paused. That has since restarted and taxpayers are being certified at this time.
IRC 6320 Hearing
The United States Court of Appeals for the Seventh Circuit in Craig L. Galloway v. Comm’r of Internal Revenue, No. 21-2269 decided February 9, 2022 that because the issue at hand was outside of the authority of the Tax Court to decide, then the issue also fell outside of the authority of this Court to review.
The Taxpayer in this case had an unpaid income tax liability of $64,315.43. Taxpayer submitted an Offer in Compromise which was rejected by the IRS because they believed the taxpayer could pay the liability based on the reasonable collection potential. Rather than appeal this decision, taxpayer filed another Offer in Compromise. It was rejected for the same reason. He appealed, but the decision of the Offer unit was sustained. After the appeal, the IRS issued a Notice of Federal Tax Lien Filing with rights to a Collection Due Process hearing under IRC 6320. Taxpayer requested a hearing and during that hearing the Officer advised that he could submit a new Offer directly to the Offer Unit, but that if it was the same Offer, it would be rejected. No Offer was filed and the Tax Lien was sustained. Taxpayer then appealed the decision to sustain the filing of the Notice of Federal Tax Lien to the Tax Court. The IRS won in Tax Court by correctly arguing the taxpayer was prohibited from raising a challenge to the Offer in that setting – which he was trying to do. Taxpayer then appealed to this Court. This Court indicated that their review would be based on whether there was an abuse of discretion by the settlement officer in sustaining the federal tax lien – not a review of the underlying rejection of the Offer. This was because the taxpayer had participated meaningfully in his appeal of the Offer rejection. Because the Tax Court was limited in reviewing the underlying debt, so too is this Court of Appeals.
The United States Tax Court in Mohammad A. Kazmi v. Comm’r of Internal Revenue, T.C. Memo 2022-13 filed March 1, 2022, ruled in favor of the IRS that a properly served and received Letter 1153 constitutes a prior opportunity to challenge the underlying liability and therefore a failure to appeal it prohibits the same challenge at a Collection Due Process hearing (CDP hearing). The taxpayer was issued a Letter 1153, Proposed Trust Fund Recovery Penalty, after interview by a Revenue Officer in his capacity as part-time hourly bookkeeper for his employer who had failed to pay over employment taxes. A taxpayer has 60 days to challenge a Letter 1153 by submitting a written appeal. Taxpayer did not make any effort to appeal and as such the IRS assessed him with the penalty. After issuance of a Notice of Federal Tax Lien, taxpayer filed a timely CDP request and attempted to argue that he should not be held liable for the trust fund recovery penalty. The settlement officer determined the taxpayer was prohibited from challenging the underlying liability in the CDP hearing. Taxpayer argued that a Letter 1153 does not constitute a prior opportunity to address the liability because there is no ability to seek judicial review before the Tax Court if appeals would deny the requested relief. The Court agreed that it is correct there is no opportunity to seek Tax Court relief in this instance, but under the law, the taxpayer could get judicial review by paying the tax and seeking review in the Federal District Court. As such, this does constitute a prior opportunity to seek judicial review. Lesson – always seek Appeal review after issuance of Letter 1153 if there are arguments to be made for relief from assessment.