Trust Fund Recovery Penalty 

IRC Section 6672

The United States Court of Appeals for the Fifth Circuit ruled in United States of America v. Charles I. Williams, DDS, as Executor of Mary C. Williams, at Case No. 20-10433 filed July 6, 2021 that Charles I. Williams, acted “willfully” within the meaning of the statute and that the district court’s ruling indicating the same was affirmed. As such, Mr. Williams was held personally liable for the trust fund recovery penalties under section 6672(a) of the Internal Revenue Code. Mr. Williams owned and operated several dentistry practices. After not paying employment taxes, the government pursued collections. The central issue in the case was whether Williams acted willfully to allow for personal liability under the statute. Personal liability against responsible persons can attach under the statute when the person is a responsible person who willfully fails to turn over the withheld taxes. Willfulness requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent. The Court explained that evidence showed that the responsible person had knowledge of payments to other creditors after he was aware of the failure to pay withholding tax is sufficient to show willfulness. Mr. Williams had argued that he was in a mental fog and could not have willfully spurned his tax obligations. Further he argued that he had turned over his businesses’ tax duties to his bookkeeper and another individual. The Court ruled that he was in fact willful because he knew of the unpaid payroll taxes and yet decided to pay private creditors instead of the IRS. 

Worker Classification

IRC 3121(d)

The United States Tax Court ruled in Bell Capital Management, Inc. v. Comm’r of IRS at Docket No. 21714-07 filed June 14, 2021 that the IRS reclassification of Petitioner’s President, Ron H. Bell, as an employee was correct. The IRS used Code section 3121(d), which describes individuals who are considered employees regardless of their status under common law. In particular, the IRS and Court focused on the Treasury Regulations at Section 31.3121(d)-1(b) relating to Corporate Officers. That provision states that “[g]enerally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation.” In this case, the petitioner admitted he was an officer. However, many years before the periods associated with the case, the Petitioner moved Mr. Bell from an employee to a leased position and entered a contract for personal services. Mr. Bell continued to render the same services before and after the lease which could not be deemed to be minor services. The Court ruled that because of these factors and the fact that Mr. Bell received indirect remuneration through the leasing company, he could be appropriately classified as an employee. 

Administrative File Rule

RRA98 section 1001(a)(4)

The United States Court of Appeals for the Eighth Circuit ruled on June 8, 2021 in Jason Stewart, Kristy Stewart v. Comm’r of Internal Revenue at Docket No. 19-3786 that the taxpayer was not entitled to a new Appeals hearing because the Revenue Officer included notes and correspondence about a meeting with the taxpayers’ attorney in the official file that was later made available to the Appeals Settlement Officer who ultimately reviewed the case. Over time there has been an attempt to “preserve” the independence of settlement officers in appeals from other parts of the IRS, the Court explains. The IRS Restructuring and Reform Act of 1998 (RRA98), further attempted to secure this goal. Independence generally includes separation of investigation and adjudicative functions. It has been ruled that certain comments and statements, particularly about the credibility or demeanor of a taxpayer or their representative and their level of cooperation, are generally prohibited. In this case, the Revenue Officer appeared unannounced at the taxpayers’ attorney’s office. Notes about the meeting, including comments from the lawyer that he would not supply financial information to the Revenue Officer on request, but would only supply it to IRS Appeals, were included in the file for Appeal’s review. A letter from the Revenue Officer was placed in the administrative file the same day indicating that the lawyer refused to provide financial information and directed the IRS Officer to leave. The taxpayers argued that they should have a new hearing and further that the Collections Division should have ceased any continued pursuit of financial information once the Appeal’s request was submitted. The Court disagreed. Relying on an exception set out in Rev. Proc. 2012-18, the Court ruled that the inclusion of the notes was allowed because they were contemporaneous statements pertinent to consideration of the case. These statements were deemed reminders of the need to get financials and what kind of effort might be required to do so. Additionally, the Court ruled that it was not inappropriate to continue investigation after the filing of a due-process hearing. Rather, the Court ruled that even though Appeals was involved, it would be necessary for the field Revenue Officer to continue to gather financial information and work with the taxpayer, so that the IRS could properly evaluate matters during the Appeal’s hearing.

Passport Revocation

IRC Section 7345 

The United States Court of Appeals for the Tenth Circuit in Jeffrey T. Maehr v. United States Department of State, Case No. 20-1124, handed down an opinion on July 20, 2021 in which it ruled in a case of first impression nationwide that the federal government’s statute to force taxpayers to address their tax delinquencies or suffer withdrawal or revocation of their passport until the delinquency is addressed, was in fact constitutional. The taxpayer in the case attacked the law on three grounds: 1) that it violated substantive due process, 2) that is runs afoul of the principles announced in the Privileges and Immunities clauses, and 3) that it contradicts caselaw concerning the common law principle of ne exeat republica. The law at issue was passed by Congress as part of the Fixing America’s Surface Transportation Act (“FAST Act”) in 2015. A certification of delinquency must be transmitted by the IRS to the Department of State. Taxpayers may avoid or decertify by coming into compliance through the establishment of an installment agreement, a Partial Payment Installment Agreement, or even a determination of Currently Not Collectible. This case is an interesting read for the constitutional scholar but doesn’t change the statute at issue. 

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.

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 5.8.5.18(1), 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.   

Updated Guidance from the IRS on Innocent Spouse Relief

When married taxpayers file a return, they may elect to file that return jointly with their spouse.  Sometimes that is a mistake – a big one!  When filing a joint return, the Internal Revenue Code provides that both spouses will be jointly and severally liable for the tax, penalties and interest.  This blog has reviewed the various options available to spouses requesting that they be relieved from liability on the return. Just click on “Innocent Spouse Relief” under “Posts by Category” for a general  review.  Lately, we are seeing the IRS take action to update their analysis of Innocent Spouse Applications.

General guidelines provide that understatements of tax may qualify for relief under so-called “innocent spouse” or “separation of liability” provisions, while underpayments may only qualify under “equitable relief” provisions.  All three of these are under the umbrella of “innocent spouse relief” provided by the Internal Revenue Code.

Of note, earlier this year, the IRS updated internal guidance. One change made to internal guidelines earlier this year was to clarify provisions relating to actual or constructive knowledge of the understatement of tax.  Basically, in order to qualify under this particular type of Innocent Spouse relief, it is necessary to show that the requesting taxpayer did not know about the understatement and had no reason to know of the understatement.  If this requirement isn’t met, then the requesting spouse doesn’t qualify.  However, if the requesting spouse can establish that he or she was the victim of domestic abuse prior to the time that the return was signed, but did not sign the return under duress, and as a result of the prior abuse, did not challenge any of the items on the return for fear of retaliation, then the IRS will not review the requirement of showing that the requesting spouse did not know or did not have reason to know of the understatement.

Normally, the IRS will review the following factors to determine if the requesting spouse knew or had reason to know of the understatement, absent a showing of abuse: 1) the nature of the erroneous item and the amount of the erroneous item relative to the other items, 2) the couple’s financial situation, 3) the requesting spouse’s educational background and business experience, 4) the extent of the requesting spouse’s participation in the activity that resulted in the erroneous item, 5) whether the requesting spouse failed to inquire, at or before the time the return was filed, about items on the return or omitted from the return that a reasonable person would questions, and 6) whether the erroneous item represented a departure from a recurring pattern reflected in prior year’s returns.

The IRS has pending the finalization of procedures that weigh abuse in a spousal relationship more heavily in the analysis of relief under Innocent Spouse provisions.  Some of the changes mentioned here are based in internal guidelines associated with working applications for relief and acknowledge the proposed official guidance.  Should you have questions about Innocent Spouse relief, don’t hesitate to contact our office.