Penalty Abatement

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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.  

Liability Review by IRS

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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.

Appeal Rights and Trust Fund Recovery Penalty

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Letter 1153

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.

Installment Agreements and Tax Liens

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I.R.C. Section 6320

Federal Tax liens may remain in place where a taxpayer’s liability during her installment agreement period is above the amount the IRS requires in the Internal Revenue Manual (IRM), the U.S. Tax Court ruled in Jill Beth Savedoff v. Comm’r of Internal Revenue, filed August 31, 2020 at Docket No. 4346-18L. The taxpayer created liabilities from self-employment on two different tax periods. She established a payment agreement, but defaulted. The IRS filed a Notice of Federal Tax Lien (NFTL). The taxpayer filed a Collection Due Process (CDP) hearing request on the basis that her installment agreement was wrongfully terminated and the lien notice was not properly served. Apparently, the taxpayer moved and did not receive a notice of the filing of the lien. The Court ruled that the taxpayer did not provide the IRS with a clear and concise notification of a different address. As for the lien withdrawal, the Court reviewed the guidelines allowing for the withdrawal of a NFTL. The taxpayer essentially argues that the lien should have been withdrawn if a second installment agreement was established. Both the Tax Court and Treasury Regulations provide that nothing requires the IRS to withdraw the NFTL because of the establishment of an installment agreement. While there are provisions to withdraw the NFTL if the balance is less than $25,000 and the taxpayer establishes a direct debit installment agreement, the taxpayer in this situation simply owed more and when offered to establish a direct debit installment agreement, passed on that option. 

Offer in Compromise

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I.R.C. Section 7122

The United States Tax Court in Swanberg v. Comm’r of Internal Revenue handed down an opinion on August 25, 2020, as docket No. 10266-19L, in which it ruled that the IRS had properly included taxpayer’s Veterans Affairs benefit and excluded his life insurance premium in calculating an ability to pay for Offer in Compromise purposes. This matter was started in a Collection Due Process hearing filed as a result of the issuance of a Final Notice of Intent to Levy. The taxpayer submitted a collection information statement reflecting monthly income of $6,352 and expenses of $6,854. On review, the Settlement Officer noted that the taxpayer’s bank statements reflected a disability benefit from the VA. The Officer increased his income by the amount of this benefit. Further, she disallowed a $600 per month expense for whole life insurance. The Taxpayer argued that his VA benefit should not be included since it was not taxable. The Court ruled that the Settlement Officer had abided by the provisions of the Internal Revenue Manual (IRM) regarding these issues. The IRM provides that all household income will be used to determine taxpayer’s ability to pay. Income is included even if not subjected to taxation. Furthermore, the IRM supports disallowance of the whole life insurance expense. No abuse of discretion was found by the Court. 

Lien Withdrawal and Collection Due Process Hearing

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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.

Collection Due Process Hearing

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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.

Failed Installment Agreement Proposal

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Collection Due Process Hearing

In Richard H. Levin and Linda D. Levin v. Comm’r, T.C. Memo 2018-172, Filed October 15, 2018, the Tax Court ruled that IRS Appeals had acted appropriately in denying taxpayers’ proposal for an installment agreement and sustaining IRS Collections proposed levy action. Taxpayers created a liability for tax year 2010 of $468,696, prior to assessment of penalties and interest. Taxpayers’ representative proposed a payment agreement to the IRS wherein taxpayers would pay their liability within four months. During that time, taxpayers made a $50,000 payment. The IRS issued a final notice of intent to levy, at which point the taxpayers requested a Collection Due Process hearing with IRS Appeals. There is a lengthy narrative in this case regarding the details of financial information. During this time, the Appeals office indicated that the taxpayers must remain compliant with their current tax liabilities in order to qualify for a payment agreement. Taxpayers also requested a face to face meeting with IRS Appeals. IRS ultimately agreed to the face to face meeting – which caused a lengthy delay of over a year. Rather than take advantage of the time to liquidate assets and pay down the tax debt, taxpayers liquidated one of their four homes and paid off other creditors in an amount in excess of the IRS debt – approximately $575,000. These creditors included State taxing authorities and credit cards. They additionally capitalized taxpayer husband’s new law firm in the amount of $281,000. Persistently during negotiations with the IRS, the taxpayers’ representative argued that the filing of a tax lien would have a detrimental effect on taxpayer husband’s ability to earn income in his law firm. The Court ruled that the taxpayers “have repeatedly chosen not to prioritize payment of their 2010 outstanding Federal income tax liability. Indeed their failure to use net proceeds of $843,293 from the sale of their Los Angeles, California home to pay their 2010 liability was particularly brazen.” The Tax Court confirmed the reasonableness of the Appeals’ Settlement Officer to file a notice of Federal Tax Lien and to reject the taxpayers’ proposed installment agreement.