Sale of property owned by Third Parties where tax lien attached

I.R.C. 7403(c)

The United States District Court for the Western District of Michigan, Southern Division, in Case No.: 1:00-CV-885, Decided December 20, 2019 ruled that the government could sell a property that was sold to buyers other than the taxpayer, if the federal tax lien was attached at the time of the lien, unless the third party had a prior lien or comes within one of the exceptions of section 6323.  The taxpayer in this case put forth a handful of futile arguments regarding improper assessment of tax and invalidity of the federal tax lien.  The Court ruled on the plain language of the statutes and found that the assessment was proper, and that the lien arises at the time of assessment and continues until the liability is satisfied or becomes unenforceable due to the statute of limitations.  Therefore, the government had an interest in the property at issue before it was transferred, and the government’s interest remained intact.  The Court ordered the property sold.

Innocent Spouse Relief

I.R.C. 6015

The United States Tax Court in Jane M. Lassek, Petitioner, and Michael E. Smith, Intervenor v. Comm’r, Docket No. 25395-16, Filed October 28, 2019 provided the Petitioner (wife) with partial innocent spouse relief for one year and denied relief for another.  The liabilities at issue begin with the 2011 year in which Intervenor (husband) prepared a return and improperly characterized his 401(k) distribution in the amount of $46,477 as nontaxable.  The Service determined a deficiency of $14,996 and penalties of $3,026.  The petitioner never reviewed the return as it was electronically filed by the Intervenor. In 2012, both took distributions from their retirement and both signed the return.  They had no plan for how they intended to pay the balance.  The parties ultimately divorced and their divorce decree was silent in regards to the tax liabilities. In reviewing the years at issue, the Court ruled that the Petitioner should be granted relief for the 2011 year under I.R.C. 6015 (c) – a section that limits a spouse’s liability to the portion of the deficiency properly allocable to that spouse under 6015(d).  This is available because the tax due did not appear on the face of the return. The Court granted relief because it did not believe that the Petitioner had actual knowledge of Intervenor’s 2011 401(k) distribution.  As for tax year 2012, the Petitioner failed to qualify for relief. She admitted at trial that she would not suffer economic harm if relief was not granted.  Further, Petitioner failed because she could not reasonably believe that Intervenor would or could pay the tax liability.  This case is a good review of the multi-level and multi-factor analysis of equitable relief under 6015(f).

Preliminary Injunction instituted to enforce Internal Revenue Employment Tax Laws

I.R.C. 7402(a)

The United States District Court for the Middle District of Florida, Tampa Division, ruled in United States of America v. Askins & Miller Orthopaedics, P.A., et al. Case No: 8:17-cv-02-T-27AAS, Decided December 23, 2019, that the Defendant and all other persons and entities acting in concert or participation with them were enjoined from violating the Internal Revenue employment tax reporting and payment requirements.  More specifically, Defendant was ordered to file or cause to be filed all required employment tax returns and pay all income and FICA taxes withheld from the employees.  Further, Defendant shall segregate said funds on a semiweekly schedule in a federal deposit bank.  The order was a result of Defendant’s failure to take said action when he practiced with another entity. The Government argued there was a high likelihood of repeat activity in the future. Taxpayer’s prior business, Askins & Miller Orthopaedics, P.A. failed to deposit or made late deposits over a seven-year period.  The IRS worked with taxpayer through meetings, calls and installment agreements.  There was only sporadic compliance.  The Court indicated that where the United States demonstrates that the taxpayer has a proclivity for unlawful conduct, injunctive relief may be appropriate. Under IRC 7402(a), the United States must demonstrate: (1) a substantial likelihood of success on the merits; (2) irreparable injury will be suffered absent the injunction; (3) the threatened injury outweighs the potential damage of the proposed injunction; and (4) the injunction would not be adverse to the public interest.  The Court reviewed whether the government could be made whole through monetary relief at some point in the future. The Taxpayer’s financial status suggests that would be very unlikely.  As such, the Court ordered the injunction.

Lien Withdrawal and Collection Due Process Hearing

I.R.C. 6323(j)

The United States Tax Court in Martin Washington Brown v. Comm’r, Docket No. 8999-17L, filed December 9, 2019, held that the IRS Appeals Settlement Officers had not abused their discretion in declining to withdraw a Notice of Federal Tax Lien (NFTL), and sustained the collection action in this matter.  Taxpayer owed multiple years of 1040 income tax liabilities that totaled $35,436.  In September 2016, the IRS established a Partial Payment Installment Agreement (PPIA) for the sum of $300 per month. The IRS determined that the filing of an NFTL was necessary because the unpaid balances exceeded $10,000. Taxpayer timely sought a Collection Due Process (CDP) hearing after the filing of the NFTL.  He alleged that he would lose his job if the NFTL was not withdrawn.  The settlement officer advised that the taxpayer could meet the standards for lien withdrawal if he converted the PPIA to a Direct Debit Installment Agreement (DDIA) paying the debt in less than 60 months.  He would then have to apply for lien withdrawal on Form 12277 after three months of successful auto debits.  The taxpayer would not alter the terms of his PPIA to comply and so Appeals sustained the NFTL filing.  The taxpayer filed a Petition in Tax Court for review. The Tax Court remanded to a new Settlement Officer to address whether a lump sum payment made to bring down the balance had been accounted for in the initial conference. The Settlement Officer found that the payments calculated by the first Settlement Officer were correct and requested documentation that his employment was in jeopardy.  The taxpayer declined and decided to continue in Court.  Ultimately, the Taxpayer failed to substantiate any information regarding possible loss of employment.  The Court ruled that the Settlement Officer had not abused his discretion in sustaining the lien.  Furthermore, even if the taxpayer had established the DDIA, the Officer would not have abused his discretion by refusing to withdraw the lien as there is no requirement under the law to withdraw the lien because of an installment agreement.  This is a voluntary procedure of the Service, not a mandatory one.  Taxpayer again presented no evidence in Court regarding possibly loss of employment. The Court entered judgment for the government.

ID Theft Protection

Faxing of Transcripts Eliminated by IRS

On June 4, 2019 the IRS announced that it would stop its tax transcript faxing service on June 28, 2019.  The IRS will not fax to taxpayers, or third parties, including tax professionals.  This will apply to both individuals and businesses.  Tax professionals may ask the IRS to mail transcripts, use e-Services Transcript Delivery Services, or ask the IRS to place a transcript in the practitioner’s e-Services secure mailbox. Additionally, effective July 1, 2019, the IRS will no longer provide transcripts to third parties via Form 4506, Form 4506-T or 4506T-EZ.  Third parties will have to rely on transcripts submitted by taxpayers, or utilize the IRS Income Verification Express Service (IVES).

IRS Office of Appeals

Constitutionally challenged

In Fonticiella v. Commissioner, T.C. Memo 2019-74, filed June 13, 2019, the Tax Court ruled that IRS Appeals is not a statutorily created independent agency and the separation of powers doctrine doesn’t apply.  The court further held that Appeals is merely a part of the IRS and an Appeals officer is not an Officer of the United States because the position wasn’t established by law to which the Appointments Clause applies.  It is not entirely clear what the taxpayer’s goal in seeking this declaration is.  The taxpayer was alleging that his personal liabilities to the government were the result of embezzlement by the comptroller of his medical practice.  Ultimately, his matter came before IRS appeals and these motions were the subject of his case.  It is assumed his loss will result in further collection action against him.  IRS Appeals seems to have withstood this constitutional challenge.

Collection Due Process Hearing

Offset of refund

In Murphy v. Commissioner, T.C. Memo 2019-72, Filed June 11, 2019, the Tax Court ruled that a Settlement Officer did not abuse discretion in failing to consider a credit from a tax year not in question, to offset a liability from the year at issue.  This was a Collection Due Process (CDP) hearing that was triggered by the filing of a final notice of intent to levy issued by the IRS relating to a balance due on 2015.  The taxpayers argued that the liability could be resolved if the Settlement Officer would address a failed claim for refund on their 2011 tax period.  For the 2011 period, the IRS has filed a Substitute for Return.  Ultimately, the taxpayers filed a return on May 7, 2016 which the IRS treated as a claim for refund and denied. During the CDP hearing, the Officer explained that the 2011 tax period was not subject to a levy notice and therefore she lacked jurisdiction to address the refund claim.  The Tax Court ruled that it lacked jurisdiction over the 2011 claim for refund.  Additionally, the Tax Court ruled the Settlement Officer had not abused her discretion in handling the matter.

Dissipation of Assets

Offer in Compromise

In John F. Campbell v. Comm’r, T.C. Memo 2019-4, Filed February 4, 2019, the Tax Court ruled that an IRS Appeals officer, in the context of reviewing an Offer in Compromise during a Collection Due Process hearing, abused his discretion when including certain dissipated assets in the calculate of Reasonable Collection Potential (RCP). The Court explained that the Internal Revenue Manual (IRM) sets forth when dissipated assets should be included in RCP.  Per IRM, dissipated assets are only included in RCP where “it can be shown that the taxpayer has sold, transferred, encumbered or otherwise disposed of assets in an attempt to avoid the payment of the tax liability,” or otherwise used the assets “for other than the payment of items necessary for the production of income or the health and welfare of the taxpayer or their family, after the tax has been assessed or during a period up to six months prior to or after the tax assessment.”  The IRM instructs that the Appeals officers should use a three-year look-back period, from the date the offer is made, to determine whether it is appropriate to include dissipated assets in the RCP calculation.  The officer may look beyond this period if there is a transfer of assets within six months before or after the assessment of the tax liability.  The Court deemed it an abuse by the Appeals officer to include assets transferred 6 years before the assessment and 10 years before the Offer was submitted.  The Court was further disturbed by additional IRS allegations that the taxpayer sought to “waste his wealth,” rather than pay his tax liabilities. There was no evidence on the record, or otherwise, supporting this contention.   

Untimely Refund Claims

I.R.C. section 6511

The Tenth Circuit Court of Appeals reviewed the applicable refund statute and upheld a Tax Court ruling in Lorraine K. Linton and John R. Linton v. Commissioner of Internal Revenue, No. 18-9004 filed February 22, 2019. The IRS disallowed the Linton’s refund request for the 2008 tax year as untimely. They had paid the amount claimed as a refund more than three years and six months before they filed the return on which they claimed the refund. The Court ruled that two Code provisions govern the timeliness of a refund claim. First, the taxpayer must file the claim within three years after filing the tax return or two years after paying the tax, whichever happens later, per section 6511(a). Second, the amount of the refund is limited to the portion of the tax paid in the three years “immediately preceding the filing of the claim…plus the period of any extension of time for filing the return.” See section 6511(b)(2)(A). In this case, the taxpayers clearly filed beyond these time limits, but were arguing their CP59 response (a notice indicating there is no return filed), was an adequate claim for refund.  They made this argument because their response was within the relevant timeframe.  The Court disagreed and ruled the U.S. Supreme Court in United States v. Brockamp, 519 U.W. 347 (1997) clearly held section 6511 limitations must be strictly enforced.