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  He alleged that he would lose his job if the NFTL was not withdrawn.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.

Failure to File Returns

I.R.C. section 6651

The United States Court of Federal Claims granted summary judgment in favor of the IRS to sustain penalties in the case of Shih-Fu Peng and Roisin Heneghan v. The United States, No 16-1263T, Filed October 24, 2018. The plaintiffs were assessed late filing penalties in relation to their 2012 tax return. They allege that their return was filed late due to four reasons: 1) The father of one of the taxpayers died in July 2012, 2) their child was born in January 2013, 3) The grandmother of one of the taxpayers died in October 2013, and 4) their accountant was at times unresponsive while trying to prepare their 2012 return. Of course the Court applied the standard of I.R.C . 6651(a)(1)-(2) in determining if relief was appropriate – was the failure to file due to reasonable cause and not due to willful neglect? Their argument relating to the accountant failed as they only argued that he was the reason they did not file their extension. Ultimately, their return was filed after the extension due date. As such, even if they were correct, their return was still filed late. As for the other events that delayed the taxpayers’ filing, the Court indicated that it has recognized personal hardship as reasonable cause for failure to timely fund under some circumstances – such as an illness or debilitation that, because of its severity or timing, make it virtually impossible for the taxpayer to comply. The Court also explained that a taxpayer could supply evidence of incapacity caused by mental or emotional circumstances. Unfortunately for these taxpayers, it was not clear that their life events made it “virtually impossible,” for them to comply with the filing deadline. As such, no relief was granted.