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 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 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.