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Penalty Abatement: Reasonable Cause 

Posted on by katemley

IRC 6724


While the taxpayer failed to succeed on its reasonable cause arguments for abatement of penalties in Dealers Auto Auction of Southwest LLC v. Comm’r, at T.C. Memo 2025-38, filed April 28, 2025, the case provides some insight regarding IRS denials of abatements based on nondelegable duty arguments.  This practitioner has had many information return penalty cases over the past few years, so it is not surprising to see a case related to a penalty associated with filing an information return. In this case, the return at issue was a Form 8300 which is required to be filed to report cash payments received by a trade or business when the cash payment is over $10,000.  The taxpayer regularly sells automobiles through an auction house and regularly receive over $10,000 cash payments from buyers.  The case explains all of their processes and filings.  Unfortunately for the taxpayer, they had a bumpy filing history.  They seem well aware of the requirement to file, but for a variety of reasons, could not completely comply.  Of interest in this summary is the Court’s commentary on the IRS position that the duty to file an information return is a nondelegable duty and thus essentially no abatement of penalties can be had.  The Court found the IRS’s argument to be “unpersuasive.” The taxpayers in this case had some facts associated with reliance on software.  The IRS argued that even if the taxpayer relied on software, it would not qualify for reasonable cause because the duty to file information returns is not delegable.  While the taxpayer ultimately failed to obtain relief, the Court made an effort to illustrate that the IRS conclusion was incorrect.  The Court stated that software malfunctions can qualify as a failure beyond the filer’s control when it is shown the taxpayer used the software correctly.  Additionally, there is no preclusion in Treasury Regulation Section 301.6724-1(c)(1)(ii) to find that a software malfunction could be a failure beyond the filer’s control, and further, the Internal Revenue Manual provides at 20.1.7.12.1(24) that failures related to software and hardware can be failures beyond the filer’s control for purposes of a reasonable cause defense. It may take effort, but the point of this is that it is possible to overcome the U.S. Supreme ruling of United States v. Boyle, 469 U.S. 241(1985) that is the IRS go to for the premise that a taxpayer cannot be excused for timely filing by relying on an agent. 

Innocent Spouse Relief

Posted on by katemley

IRC 6015


The Tax Court in Vanover v. Comm’r filed April 22, 2025 at T.C. Memo 2025-37 held that the requesting spouse should be granted partial relief under Section 6015(c) with respect to an understatement of the non-requesting spouse, but be denied relief under section 6015(b)(c) and (f) for all other items.  Seems like all of the Innocent Spouse cases are lengthy, and this one is no different at 16 pages plus 2 pages of footnotes. Most times this is due to the lengthy analysis of factors for equitable relief under 6015(f). This case is no different in format to others in that regard. What is of interest and highlighted here is the analysis under 6015(b) and (c). This case is fact heavy, from a nasty divorce that included a physical altercation, to financial mismanagement on behalf of all taxpayers, the Court did a good job of setting the scene. What’s key to know about 6015(b) and 6015(c) is that they both require understatements of income.  Whereas 6015(f) can be used if there is an underpayment of tax.  Under 6015(b), if an additional assessment arises, relief from joint liability can be had if the item is attributable to the other spouse. The requesting spouse must establish that when they signed the return, they did not know and had no reason to know that there was a possible understatement. This is the “traditional,” original form of innocent spouse relief. Under 6015(c), a requesting spouse shall be relieved from liability for deficiencies allocable to the nonrequesting spouse.   In other words, they separate the liability.  Under this provision, in order to obtain relief, you must be divorced, legally separated, or living apart for at least 12 months. The case carefully sorts through all factors of each statute, ultimately denying most relief for the requesting spouse.  Regardless, it is much more common to see equitable relief cases under 6015(f), so this review is rather helpful. 

Passports & Tax Debt

Posted on by katemley

IRC 7345


Affecting a taxpayer’s passport is a powerful tool to force filing and payment compliance, in many instances.  The Tax Court in Pfirrman v. Comm’r, filed March 18, 2025 at T.C. Memo 2025-22 walks us through the analysis.  This particular taxpayer was attempting to inappropriately challenge his underlying liability. But the case details how a passport can be used to motivate taxpayers to comply with filing and paying requirements.  This practitioner has dealt with many clients who have a high level of interest in meeting the statutory goals of IRC 7345.  Under this Code provision, if the Commissioner certifies that a taxpayer has “seriously delinquent tax debt,” then that certification is transmitted to the Secretary of State for action with respect to denial, revocation, or limitation of the taxpayer’s passport. Generally, a seriously delinquent tax debt is a federal tax liability that has been assessed, exceeds $64,000 (2025 inflation adjusted), and is unpaid and legally enforceable.  It should be kept in mind that it is entirely possible to either avoid certification, or have a taxpayer decertified as seriously delinquent, even if they owe over this amount, if they move into a compliant filing and paying status. In other words, once on a valid installment agreement, partial payment installment agreement, or placed into Currently Not Collectible, a taxpayer will no longer be deemed seriously delinquent, no matter how much they owe.  Much of the remaining part of the opinion was an explanation by the Court of the limitations of their jurisdiction under the statute. The Court may reverse certification if it is erroneous, or determine whether the IRS has failed to reverse the certification.  Should the Court find such facts to exist, it is limited to ordering the Treasury Secretary to notify the Secretary of State of such determination.  The Court lacks any further power.  In sum, find a compliant outcome and the matter will automatically be decertified to the Department of State. 

Statute of Limitations on Refunds­

Posted on by katemley

Statute of Limitations on Refunds­—IRC 6511


The Tax Court in the case of Applegarth v. Comm’r, filed December 10, 2024 at T.C. Memo 2024-107, does a good job of exploring the various statutes associated with entitlement to refunds and whether or not equitable tolling has any effect on those statutes. The IRS issued Notices of Deficiencies on two periods – 2014 and 2015, causing the Taxpayer to petition the Court.  Seems the taxpayer in this case did nearly everything correctly, except file his return timely.  For both years, he filed extensions.  And, for both years, he paid significant sums of money towards his tax debt before the due date of the extended return.  He just didn’t file his returns and ultimately the IRS sent him notices of deficiencies based on estimated taxes.  For 2014, the IRS determined there was a $4,465 deficiency, but his return reflected an overpayment of $78,472.  For 2015 the IRS determined there was a deficiency of $25,576 and the return showed an overpayment of $9,603.  While the Court explored many statutes, it is worth highlighting this one in part: 6511(a): “[c]laim for refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall 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, or if no return was filed by the taxpayer within 2 years from the time the tax was paid.”  All payments of tax were beyond the statutory time frames of this provision.  The taxpayer conceded that if these rules applied, he was out of luck. However, he attempted to argue that equitable tolling should apply. The common law concept that allows a statute to stop running for equitable reasons. The opinion is short on explanation of the taxpayer’s rationale, but through its analysis of the statutes concludes that: “in our view neither statutory provision permits equitable tolling.” 

Offer in Compromise—Deemed Acceptance

Posted on by katemley

IRC 7122(f) 


Bauche v. Comm’r, filed May 20, 2025 at T.C. Memo 2025-48 allows the Court to explore the possibility that the IRS has waited too long to review an Offer in Compromise, and thus under the statute, it is deemed accepted.  The rule in IRC 7122(f) states in part: “[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 submission of such offer.”  The taxpayer landed in a Collection Due Process hearing after issuance of a lien notice.  During that proceeding, it was determined that filing an Offer in Compromise made sense.  The taxpayer argued that the IRS did not reject its Offer in Compromise until the Settlement Officer issued its Notice of Determination, which was more than 24 months later.  The IRS argued that the Offer had been rejected when Appeals mailed the taxpayer a letter saying the IRS was rejecting the Offer, in spite of the fact that a final Notice of Determination associated with the conclusion of the Collection Due Process hearing had not been sent out.  The Court indicated that if it agreed with the taxpayer, it would have created a dilemma for Appeals because they may not have resolved all issues associated with the Collection Due Process hearing, but could be forced to issue a Notice of Determination to meet the 24 month deadline.  The Court felt that the letter issued by the IRS through Appeals regarding its rejection of the Offer, even though the Appeals hearing was not fully resolved, clearly indicated to the taxpayer that the Offer was rejected.  This illustrates the premise that part of the Collection Due Process hearing process is to entertain collection alternatives, but that is not the entire purpose. 

Tax Lien Reduced to Judgment

Posted on by katemley

IRC 6321

So, why does the government bother to reduce a federal tax lien to judgment in the federal court? The case of United States of America v. Wardle, case CV-23-20-BU-BMM handed down September 30, 2024 by the United States District Court for the District of Montana illustrates one major benefit. The USA filed suit to reduce the federal tax liens to judgment against the taxpayer, Christopher F. Wardle. Mr. Wardle owed in excess of $1 million in taxes. Mr. Wardle contended that the liens were unenforceable due to the passage of time. The taxpayer cited the general premise that the IRS has 10 years from the date a tax was assessed to collect the tax, interest and penalties. However, the Court ruled that a federal tax judgment is never subject to a time limit. Once the assessment has been reduced to judgment, the liability merges into the judgment and that liability cannot become unenforceable due to lapse of time. The Internal Revenue Manual actually describes this at Section 5.17.4.8.2.3 wherein it states that “[w]here the Internal Revenue Service has reduced assessments to judgment, it may bring a lien foreclosure action after the statutory period.” It was not part of the case, but the manual continues in this section as follows: “[w]hile obtaining a judgment extends the life of the lien for the purpose of bringing a lien foreclosure action, in order to maintain the priority of the lien in relation to other creditors, the Internal Revenue Service must refile the Notice of Federal Tax Lien as provided in IRC 6323(g).” 

Innocent Spouse Relief

Posted on by katemley

IRC 6015 (c) & (f)

The Tax Court in Jurries v. Comm’r of Internal Revenue, Docket No. 2786-20S filed May 22, 2024 held that the taxpayer failed to establish fraud as a threshold requirement for Equitable Innocent Spouse relief in this matter. The taxpayers filed a joint income tax return for 2016 as they always had, by the wife preparing the return on Turbo Tax. The wife did not show the husband the return prior to, or after preparing it, as they were separated. On the return, she deducted $42,181 as unreimbursed business expenses. On the return, she attributed some of this to herself and some to the husband. The IRS issued a refund of $12,500 which she deposited part of into her own account and part into the husband’s account. The IRS examined and disallowed the expense. After receiving this notification, the husband then filed for Innocent Spouse Relief under IRC 6015 (c), which allocates the expense as if the taxpayers filed the return separately. The IRS agreed to this allocation. Husband then wanted to pursue full equitable relief from all liability through the use of IRC 6015(f) as an affirmative defense in this case. Equitable relief requires overcoming seven threshold conditions, one of which requires the item to be attributable to the nonrequesting spouse’s income, (it isn’t), and if not, then the requesting spouse could establish fraud. Mr. Jurries contended that the fraud exception applied in this matter. Ultimately, the Court did not think fraud was established because Mr. Jurries could have accessed the return in turbo tax. Most damaging was that upon receipt of the refund, his wife deposited a portion of the refund into his checking account, rather than keeping it for herself. And, he testified that he knew he could not take this deduction on this tax return. 

Collections Statute 

Posted on by katemley

IRC 6502


The United States District Court for the Northern District of Ohio held in United States of America v. Sherri Tenpenny, Case NO. 1:24-cv-00838, entered August 9, 2024, that the statute of limitations on debt collection had not run due to the multiple Offers in Compromise filed by the taxpayer. This practitioner believes that it is critically important to know and understand the statute of limitations on collections when dealing with outstanding balances at the IRS. It should guide the decision-making process when looking at collection alternatives. In the instant case, the taxpayer owed the IRS for outstanding balances for form 1040’s from long-ago assessments. Some were assessed 15 years ago. The general rule, as set forth in IRC 6502(a) is that the IRS has ten years after an assessment to collect a tax debt. However, there are actions that will toll the statute and effectively extend it. One such action is the filing of an Offer in Compromise. The limitations for collections is tolled for the time period that the Offer is pending, plus 30 days. In this case, the taxpayer had filed four separate Offers in Compromise over the years, tolling the collection statute many times. Despite her motion to dismiss the IRS collection action based on the running of the statute, the Court allowed the IRS to pursue the debt. In any analysis of IRS debt, it is important to know whether the collection statute is currently running and what the Collection Statute Expiration Date (CSED) is for each year. When tax periods only have a few years remaining on the CSED, it many times makes more sense to either substantiate Currently Not Collectible, or set up a Partial Payment Installment Agreement. Once these collection alternatives are established, the statute continues to run and frequently that results in debt being written off by the IRS as the CSED runs. An Offer in Compromise may be the right proposal, but it should only be made in the context of the above analysis. 

Offer in Compromise

Posted on by katemley

IRC 7122


The Tax Court held in Estate of Ralph W. Baumgardner, Jr v. Comm’r of Internal Revenue, Docket No. 11343-19L, filed August 22, 2024, that the IRS Office of Appeals had not abused its discretion by rejecting an Offer in Compromise submitted by the taxpayer given the Reasonable Collection Potential (RCP) exceeded their tax debt. Taxpayers owed approximately $114,504 in tax debt. Collection efforts from the IRS resulted in the taxpayers filing an Offer in Compromise based on Effective Tax Administration (ETA). Taxpayers offered $1,825 to settle the debt. Through much procedure, the IRS adjusted its calculation of equity downwards, but continued to believe that taxpayers RCP was higher than the debt. Frankly, the taxpayers were asking for too much. This case is heavy on detail, but the primary issue relates to a couple of rental houses the taxpayers owned. In this instance, an income production issue becomes relevant as it relates to equity in the houses. In other words, should the taxpayer be expected to liquidate or otherwise account for the equity in an asset that produces income, or simply calculate the income into the financial analysis? In argument, counsel for taxpayers attempted to support their argument for negating the RCP by proposing that they would have foreseeable economic consequences relating to their future increased out of pocket health care expenses, vehicle replacement expenses and real estate considerations…including property maintenance items for their rentals that encompassed everything from plumbing and boiler repairs and maintenance to storm door replacement, vinyl siding and trim replacement, and downspout repairs.  The taxpayers’ counsel made good progress with the IRS on health care expenses, as the IRS is generally sympathetic to provable expenditures. The IRS even gave up some ground on the transportation expenses. As for future expenditures associated with the rentals, the IRS deemed them too speculative and the Tax Court agreed. This was a fairly predictable outcome.

Collection Due Process

Posted on by katemley

IRC 6320 & 6330


The United States Tax Court in J.E. Ryckman v. Comm’r of Internal Revenue, Docket No. 750-21L, filed August 1, 2024 held that it lacked jurisdiction because a Canadian citizen whose Canadian tax liability had been accepted by the IRS as a tax assessment, lacked Collection Due Process hearing rights. This is a case of first impression. This case is more relevant than it may first appear given the fact that approximately a million Canadian citizens permanently reside in the United States. The taxpayer owed the Canadian Revenue Agency about $200,000. In an effort to collect, Canada sent the IRS a mutual collection assistance request pursuant to the Canada-US Income Tax Treaty. Upon receipt, the IRS filed a notice of federal tax lien. The Treaty requires the IRS to collect an accepted Canadian revenue claim as it would a U.S. Tax assessment for which the taxpayer’s right to a Collection Due Process (CDP) hearing has lapsed. At submission of the lien to the taxpayer, the IRS notified the taxpayer that is had no right to a CDP hearing. In this case, the taxpayer filed the request anyway. The Tax Court reviewed the treaty and concluded that its provisions foreclosed the administrative and judicial protections of the CDP statutes in the case of Canadian revenue claims. While arguments were made that the CDP statute should override the Treaty because Congress adopted the CDP statues later, the Court found that argument unpersuasive. The Treaty simply dictates rights of Canadian citizens and the US statutes do not expand those rights. The Court also commented that it would be “untenable for the IRS to grant a collection alternative, such as an installment payment arrangement or an offer-in-compromise,” on behalf of the Canadian Revenue Agency. In fact, the face of the lien in this matter indicated that payments should be made to the “Receiver General of Canada, not the IRS.” The practical conclusion of the above is that clients in this situation should seek a collection alternative with their home government.