The IRS Caught Dumping A Collection Case

Let’s look at a taxpayer win on an issue not known for taxpayer wins.

Thomas Hamilton was an attorney and Edith Hamilton was a chaplain. They filed a 2016 tax return showing tax due of almost $72 thousand. They however did not pay the tax in full.

The IRS assessed.

The IRS then issued a Notice of Federal Tax Lien (NFTL) to secure its assessment.

This presented a procedural option: the Hamiltons could request a Collection Due Process (CDP) hearing. If they could work-out a payment agreement perhaps they might avoid the lien. Liens can be embarrassing.

They requested a CDP hearing.  

The IRS Settlement Officer (SO) asked for a lot of information, including:

(1)  Proof of 2018 estimated tax payments

(2)  Their 2017 personal tax return

(3)  Six months of bank statements

(4)  Three months of pay stubs

(5)  Proof of various expenses for the preceding three months

The SO also wanted the law practice to catch-up on its (mostly payroll-related) tax returns from 2015 through 2017.

The SO did stagger some of the due dates for the above: some were due on October 17, others were due October 24. The hearing itself was November 15, 2018.

The Hamiltons did not provide any documents by October 24.

Oh oh.

They did write a letter on October 31, explaining that their (now) previous bookkeeper failed to keep many documents, a fact which came to light as they were trying to comply with the SO’s request. They hired a CPA, who was helping reconstruct records as well as representing them during the CDP hearing. Finally, they had reordered online bank statements and would forward the requested documentation as soon as possible. They reiterated their desire for a payment plan.

Let me retract the “oh oh” comment, although they should have responded – in some manner - by the October 17 date.

Why? To discourage the SO from thinking that they were stalling.  

Between November 2 and November 15, the Hamiltons sent five faxes totaling hundreds of pages. They sent bank statements, copies of bills and some (but not all) of the payroll tax returns for the law practice.

The day before the hearing they also faxed personal and business financial information (Forms 433-A and 433-B) as well as a copy of their 2017 individual tax return and its electronic acceptance by the IRS.

The SO had spent no time on the case from October 1 to the date of the hearing, when she spent an hour preparing beforehand.

At the hearing the SO pressed on the following:

·      They had not filed their 2017 individual tax return.

·      They had not provided proof of their expenses.

·      They were not making 2018 estimated tax payments.

·      They had not filed payroll returns for the law practice.   

The CPA chimed in:

·      They had filed their 2017 tax return and provided proof of electronic acceptance by the IRS.

·      They had provided bank statements and documentation for the vast majority of their expenses.

·      They would be current with their 2018 estimated taxes as soon as the following month.

·      They had file some of the payroll returns the SO was considering unfiled.

The SO said she would recommend filing the NFTL.

Mr Hamilton requested additional time to provide the missing information.

The SO said: no chance.

The IRS sustained the filing of the NFTL for 2016 and also rejected their request for an installment agreement.

Sheesshh. That CDP hearing blew up.

And so we get to Tax Court.

Let’s set up the issue:

·      There was a proposed lien

·      To which taxpayers requested a CDP hearing

·      And got turned down for not complying with the SO’s documentation requests

You can take one of these to Tax Court, but it is very tough to win. In short, you must show that the IRS was capricious and abused its discretion. 

The Court went through the file:

1. The Hamiltons sent an 11-page fax on November 9. The fax included one of the payroll tax returns the SO considered missing.

    The SO had included the fax cover sheet in her record.

    But not the other 10 pages.

    One wonders how accurate the SO’s records were.

    Human error, one supposes.

2. They had filed their 2017 individual tax return and had faxed the SO a copy. They had also informed her of this filing at the hearing.

    But the SO had included the non-filing as a reason for her bounce.

    Odd.

3. Between November 2 and the November 15 hearing date, they had sent at least five faxes, totaling hundreds of pages of financial documentation

    But the SO said they had not provided documentation.

    Here is the Court:

The failure of the administrative record to capture some documents makes us question the completeness of the administrative record that the settlement officer considered and that we are reviewing.

    And here the case turned.

    The third strike.

The Court pointed out that the Hamiltons made efforts to keep the SO apprised – of the bookkeeper debacle, of the request for copies of documents and bank statements. They asked the SO to apprise them of any questions or issues while they could still react.

Then the Court emphasized that the SO had not even looked at the file until the day of the hearing.

The hearing where she nonetheless chastised the Hamiltons for not having provided all the paperwork.

Here is the Court:

She did not take them up on that offer; her doing so would have allowed the Hamiltons to address any issues before the November 15, 2018 hearing.”

The Court continued:

… the settlement officer made up her mind after a cursory one-hour review of the Hamiltons’ materials and failed to give proper consideration to the issues they raised …”

The cumulative effect of the settlement officer’s conduct in this case was to deprive the Hamiltons of fair consideration of their issues and concerns. The Hamilton’s conduct was by no means perfect, but it reflected consistent cooperation and good-faith effort throughout the CDP process.”

The SO’s decision was found arbitrary and lacking sound basis in fact or law.

The case was returned to IRS Appeals for another hearing.

The SO had gotten the case off her desk.

But she had not done her job.

And there you have a rare taxpayer win in the CDP arena.

Our case this time was Hamilton v Commissioner, T.C. Memo 2022-21.

Part Time Bookkeeper, Big Time Penalty

 

We filed another petition with the Tax Court this week.

For a client new to the firm.

Much of this unfortunately was ICDIM: I can do it myself. The client did not understand how the IRS matches information. There was an oddball one-off transaction, resulting in nonstandard tax reporting. Stir in some you-do-not-know-what-you-do-not-know (YDNKWYDNK), some COVIDIRS202020212022 and now I am involved.

I am looking at case that just screams YDNKWYDNK.

Here is part of the first paragraph:

This case is before the Court on a Petition for review of a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, dated February 13, 2018 (notice of determination). The notice of determination sustained a notice of federal tax lien (NFTL) filing (NFTL filing) with respect to trust fund recovery penalties (TFRPs) under section 6672. The TFRPs were assessed against petitioner for failing to collect and pay over employment taxes owed by Urgent Care Center, Inc. (Urgent Care), for taxable quarters ending June 30 and September 30, 2014 (periods at issue), resulting in outstanding liabilities of $6, 184.23 and $4, 190.77, respectively.

That section 6330 is hard procedural, and it is going to hurt.

Mr Kazmi was a bookkeeper. He worked part-time at Urgent Care. Urgent Care did not remit employment taxes for a stretch, and unfortunately that stretch included the period when Mr Kazmi was there.

We are talking the big boy penalty, otherwise known as the responsible person penalty. The point of the penalty is to migrate the tax due to someone who had enough authority and responsibility to have paid the IRS but chose not to.

Mr Kazmi had no ownership interest in Urgent Care. He was not an officer. He was not a signatory on any bank accounts. He had no authority to decide who got paid. At all times he worked under the authority of the person who owned the place (Dr Senno). What he did have was a tax power of attorney.

Folks, I probably have a thousand tax powers of attorney out there.

Sounds to me like Mr Kazmi was the least responsible person (at least for payroll taxes) at Urgent Care.

The IRS Revenue Officer (RO) thought otherwise and on December 16, 2015 issued Mr Kazmi a letter 1153, a letter which said “tag, you are a responsible party; have a nice day.”

From what I am reading, this was a preposterous position. I generally have respect for ROs, but this one is a bad apple.  

Still, there are consequences.

Procedurally Mr Kazmi had 60 days to challenge the 1153.

He did not.

Why?

He did not know what he did not know.

A little time passed and the IRS came for its money. It wanted a lien. It also wanted a vanilla waffle ice cream cone.

Mr Kazmi yelled: Halt! He filed for a Collection Due Process (CDP) hearing. In the paperwork he included the obvious:

I am just a part-time bookkeeper. I am not responsible for collection or accounting or making payments for any tax payments for Urgent Care.

Makes sense.

Doesn’t matter.

He did not know what he did not know.

Let’s talk about the “one bite at the apple” rule.  In the current context, the rule means that a taxpayer cannot challenge an underlying liability if he/she already had a prior opportunity to do so.

One bite.

Mr Kazmi had his one bite when he received his letter 1153. You remember – the one he blew off.

He was now in CDP wanting to challenge the penalty. He wanted a second bite.

Not going to get it.

CDP was happy to talk about a payment plan and deadbeat taxpayers and whatnot. What it wouldn’t do was talk about whether Mr Kazmi deserved the penalty chop to begin with.

I am not a fan of such hard procedural. The vast majority of us will go a lifetime having no interaction with the IRS, excepting perhaps a minor notice now and then. It seems unreasonable to hold an average someone to stringent and obscure rules, rules that most attorneys and CPAs – unless they are tax specialists – would themselves be unaware of.

Still, it is what it is.

Does Mr Kazmi have any options left?

I think so.

Maybe a request for reconsideration.

Odds? So-so, maybe less.

A liability offer in compromise?

I like that one better.

Folks, it would have been much easier to pop this balloon back when the IRS trotted out that inappropriate letter 1153.

Mr Kazmi did not know what he did not know.

Our case this time was Kazmi v Commissioner, T.C. Memo 2022-13.

  

Owing Partnership Tax As A Partner

 

We have wrapped-up (almost) another filing season here at Galactic Command. I include “almost” as we have nonprofit 990s due next month, but for the most part the heavy lifting is done.

Tax seasons 2020 and 2021 have been a real peach.

I am looking at a tax case that mirrors a conversation I was having with one of our CPAs two or three days ago. He was preparing a return for someone with significant partnership investments. The two I looked at are commonly described as “trader” partnerships.

The tax reporting for trader partnerships can be confusing, especially for younger practitioners. A normal investment partnership buys and sells stocks and securities, collects interest and dividends and has capital gains or losses along the way. The tax reporting shows interest and dividends and capital gains and losses – in short, it makes sense.

The trader partnership adds one more thing: it actively buys and sells stocks and securities as a business activity, so to speak. Think of it as a day trader as opposed to a long-term investor. The tax issue is that one has interest, dividends and capital gains and losses from the trader side as well as the nontrader side. The trader partnership separates the two, with the result that trading dividends (as an example) might be reported somewhere different on the Schedule K-1 from nontrading dividends. If you don’t know the theory, it doesn’t make sense.

The two partnerships pumped out meaningful taxable income.

What they did not do was pump out equivalent cash distributions. In fact, I would say that the partnerships distributed approximately enough cash to pay the taxes thereon, assuming that the partner was near the highest tax bracket.

The client had issues with the draft tax return.

Why?

There was no way he could have that much income as he did not receive that much cash.

And therein is a lesson in partnership taxation.

Let’s take a look at the Dodd case.

Dodd was the office manager at a D.C. law firm. The firm specialized in real estate and construction law.

She in turn became a 33.5% member in a partnership (Cadillac) transacting in – wait on it – the purchase, leasing and sale of real property. The other 66.5% partner was an attorney-partner in the law firm.

Routine so far.

Cadillac did well in 2013. Her share of gains from property sales was over a $1 million. Her cash distributions were approximately $200 grand.

Got it: 20 cents on the dollar.

When she prepared her individual return, she included that $1 million-plus gain as well as partnership losses. She owed around $170 grand with the return.

She did not send a check for the amount due.

The case has been bogged-down in tax procedure for several years. The IRS wanted its tax, and Dodd in turn requested Collections (CDP) hearings. We have had three rounds of back-and-forth, with the result that we are still talking about the case in 2021.

Her argument?

Simple. She had never received the $1 million. The money instead went to the bank to pay down a line of credit.

This is going to turn out badly for Dodd.

At 30 thousand feet, partnership taxation is relatively intuitive. A partnership does not pay taxes itself. Rather it files a tax return, and the partners in the partnership are allocated their share of the income and are themselves responsible for paying taxes on that share.

The complexity in partnership taxation comes primarily from how one allocates the income, as tax attorneys and CPAs have had decades to bend the rules.

Notice that I did not say anything about cash distributions.

Mind you, it is bad business to pump-out taxable income without distributing cash to cover the tax, but it is unlikely that a partnership will distribute cash exactly equal to its income. Why? Here are a couple of reasons that come immediately to mind:

·      Depreciation

The partnership buys something and depreciates it. It is likely that the depreciation (which follows tax rules) will not equal the cash payments for whatever was bought.

·      Debt

Any cash used to repay the bank is cash not available to distribute to the partners.

There is, by the way, a technique to discourage creditors of a partner from taking a partner’s partnership interest. Why would a creditor do this? To get to those distributions, of course.

There is a legal issue here, however. Let’s say that you, me and Lucy decided to form a partnership. Lucy has financial difficulties, and one of her creditors takes over her partnership interest. You and I did not form a partnership with Lucy’s creditor; we formed a partnership with Lucy. That creditor cannot just come in and force you and me to be partners with him/her. The best the creditor can do is get a “charging order,” which means the creditor receives only the right to Lucy’s distributions. The creditor cannot otherwise vote, demand the sale of assets or force the termination of the partnership.

What do you and I do in response to the new guy?

The creditor will have to report Lucy’s share of the partnership income, of course.

We in turn make no distributions to Lucy - or to the new guy. The partnership distributes to you and me, but that creditor is on his/her own. Sorry. Not. Go away.

As you can guess, creditors are not big fans of going after debtor partnership interests.

Back to Dodd.

What did the Court say?

No matter the reason for nondistribution, each partner must pay taxes on his distributive share.”

To restate:

Each partner is taxed on the its distributive share of partnership income without regard to whether the income is actually distributed.”

Dodd had no hope with this argument.

Maybe she would have better luck with her Collections appeal, but that is not the topic of our discussion this time.

We have been discussing Dodd v Commissioner, T.C. Memo 2021-118.

How To Forfeit an IRS Collection Due Process Hearing

I am looking at a Tax Court case.

I presume it was an act of desperation by the taxpayer, otherwise it makes no sense.

Let’s say that you get yourself into a quarter million dollars of tax debt.

You know the Collection bus is coming. You probably should get ahead of it, but it escapes your attention.

You receive IRS notice LT-11.

You are in the Collections sequence.

Let’s talk about the general order of tax collection notices.

   CP-14      Balance Due

   CP-501    Reminder Notice 

   CP-503    Reminder Notice

   CP-504    Notice of Intent to Levy

   LT-11       Notice of Intent to Levy and Notice of Your 

                   Right to a Hearing

Some observations:

First, you are deep into the machinery at this point. There were at least 4 notices sent to you before you received this one.

Second, a levy means that someone is going to take your stuff. This is different from a lien. The IRS can put a lien on your house, as an example. The lien will sit there, damaging your credit along the way, but it will not spring to action until you sell the house. A levy is not so nice. The IRS can drain your bank account with a bank levy, or it can divert (some of) your paycheck with a wage levy.

Third, you have taxpayer rights in response to receiving a LT-11, but there is a time limit. If you respond within 30 days you have full rights; respond after 30 days and you have lesser rights.  Granted, depending on the situation, it may be that both the 30 and 30-plus varieties will have all the rights you need.

You may wonder what the difference is between the CP-504 Notice of Intent to Levy and the LT-11 Notice of Intent to Levy. It is confusing. I wish the IRS used different wording on these notices, but it is what it is.

The difference is the type of Collections rights the taxpayer has. Both the CP-504 and LT-11 give you rights, but the rights under the LT-11 are more expansive.

An appeal under a CP-504 is referred to as Collection Appeal Program (CAP). An appeal under a LT-11 is referred to as Collection Due Process (CDP). There are differences between the two, and a huge difference is that the CAP is non-appealable whereas the CDP is.

If you want the safety net of a possible appeal, you are waiting until the LT-11.

BTW do not assume that all CPAs know this notice sequence and its significance. All CPAs have had some tax education, but not all CPAs practice tax or – more importantly – practice tax procedure to any meaningful extent. Tax procedure is rarely taught in school, and – to a great extent – it is learned through mentoring and practice.  

Our protagonist (Ramey) had several businesses, and he used the same address for all of them. There were other businesses at this address, so I presume we are talking about a shared office space facility. Anyway, the IRS sent the LT-11 notice, return receipt requested. The notice was delivered and someone signed the receipt, but that someone was not Ramey’s employee.

At this point, I am thinking: no big deal.

There is a 30-day time limit if one wants to request a CDP. The 30 days lapsed.

Oh, oh.

Mind you, there is a fallback option if one exceeds 30 days, but the downside is that any decision under the fallback is non-appealable.

Ramey wanted the option to appeal.

He figured he had a card left to play.

The IRS notice has to meet several requirements under Section 6330 before the IRS can actually levy. The notice has to be:

(1)  Given in person;

(2)  Left at the dwelling or usual place of business; or

(3)  Sent by certified or registered mail, return receipt requested, to such person’s last known address.

Ramey argued that he had not signed for the mail, and the person who did sign did not have authority to sign on his behalf.

Seems like weak tea.

The Court agreed:

Mr. Ramey’s chief complaint appears to be that multiple businesses use that address, so mail might be accepted by the wrong person. But, even if that is so, Mr Ramey does not explain how the IRS could have taken this fact into account. Mr Ramey is free to organize his business affairs as he sees appropriate, including by choosing to share a business address with other businesses. But, having made that choice, and having provided the IRS an address shared by multiple businesses, he cannot properly complain when the IRS uses that very address to reach him.”

Ramey blew the 30- day window. He failed to protect his right to appeal to the Tax Court.

The Court correctly pointed out that Ramey still had options. He could, for example, pay the underlying tax, request a refund, and appeal the denial of that refund request in District Court, for example.

So why the fuss about the 30 days?

One does not have to pay the tax before being allowed to file in Tax Court. One however does have to pay the tax in order to file with a District Court or the Court of Federal Claims.

Ramey owed a quarter of a million dollars.

Our case for the home-gamers was Ramey v Commissioner 156 T.C. No. 1.

Abatement Versus Refund

 

I was contacted recently to inquire about my interest in a proceduralist opportunity.

That raises the question: what is a proceduralist?

Think about navigating the IRS: notices, audits, payment plans, innocent spouse claims, liens and so on.  One should include state tax agencies too. During my career, I have seen states become increasingly aggressive. Especially after COVID – and its drain on state coffers - I suspect this trend will only continue.

I refer to procedure as “working the machine.” This is not about planning for a transaction, researching a tax consequence or preparing a tax return. That part is done. You have moved on to something else concerning that tax return.

Less glamorously, it means that I usually get all the notices.

Let’s go procedural this time.

Let’s talk about the difference between an abatement and a refund.

Mr Porporato (Mr P) filed a return for 2009. He owed approximately $10 grand in taxes.

He did not file for 2010 or 2011. The IRS prepared returns for him (called a Substitute Return), and he again owed approximately $10 grand for each year.

COMMENT: He had withholding but he still owed tax for each year. He probably showed have adjusted his withholding, but, then again, he went a couple of years without even filing. I doubt he cared.

The IRS came a-calling for the money, and Mr P requested a Collection Due Process hearing.

COMMENT: I agree, and that is what a CDP hearing is about. Mind you, the IRS wants to hear about payment plans, but at least you have a chance to consolidate the years and work-out a payment schedule.

There was chop in the water that we will not get into, other than Mr P’s claim that he had a refund for 2005 that was being ignored.

So what happened with 2005?

Mr P and his (ex) wife filed a joint 2005 return on June 15, 2006.

Then came a separation, then a divorce, then an innocent spouse claim.

Yeeessshhh.

He amended his 2005 return on March 29, 2010. The amended return changed matters from tax due to a tax overpayment. The IRS abated his 2005 liability.

There you have the first of our key words: abatement.

Let’s review the statute of limitations (SOL). You generally have three years to file a tax return and claim your refund, if any. Go past the three years and the IRS keeps your refund. There are modifiers in there, but that is the general picture. We also know the flip side of the SOL: the IRS has three years to examine your return. Go past three years and the IRS cannot look at that year (again, with modifiers). Why is this? It mostly has to do with administration. Somewhere in there you have to close the matter and move on.

Let’s point out that Mr P amended his 2005 return after more than three years. The IRS still reversed his tax due.

Can the IRS do that?

Yep.

Why?

An IRS can abate at any time. Abatement is not subject to the restrictions of the SOL.

Abatement means that the IRS reducing what it wants to collect from you.

But the result was an overpayment.

Mr P wanted the IRS to refund his 2005 overpayment – more specifically, to refund via application of the overpayment to later tax years with balances due.

This is not the IRS reducing what it wants to collect. This is in fact going the other way: think of it as the IRS writing a check.

Wanting the IRS to write a check ran Mr P full-face into the statute of limitations. He filed the 2005 amended outside the three-year window, meaning that the SOL on the refund was triggered.

I get where Mr P was coming from. The IRS cut him slack on 2005, so he figured he was entitled to the rest of the slack.

He was wrong.

And there you have the procedural difference between an abatement and a refund. The IRS has the authority to reduce the amount it considers due from you, without regard to the SOL. The IRS however does not have the authority to write you a check after the SOL has expired.

Another way to say this is: you left money on the table.

Our case this time was Porporato v Commissioner (TC Summary Opinion 2020-24).

Requesting A Payment Plan With Over $7 Million In The Bank

Sometimes I wonder how people get themselves into situations.

Let’s take a look at a recent Tax Court case. It does not break new ground, but it does remind us that – sometimes – you need common sense when dealing with the IRS.

The Strashny’s filed their 2017 tax return on time but did not pay the tax due.

COMMENT: In and of itself, that does not concern me. The penalty for failing to file a tax return is 10 ten times more severe than filing but not paying. If the Strashny’s were my client and had no money, I would have advised the same.

The 2017 return had tax due, including interest, of over $1.1 million.

COMMENT: Where did the money go? I am curious now.

In June, 2018 the IRS assessed the tax along with a failure-to-pay penalty.

In July, 2018 the Strashny’s sent an installment payment request. Because of the amount of money involved, they had to disclose personal financial information (Form 433-A). They wanted to stretch the payments over 72 months.

COMMENT: Standard procedure so far.

Meanwhile the IRS sent out a Notice of Intent to Levy letter (CP90), which seemed to have upset the Strashny’s.

A collection appeal goes before an IRS officer settlement officer (or “SO,” in this context). In April, 2019 she sent a letter requesting a conference in May.

COMMENT: Notice the lapsed time – July, 2018 to April, 2019. Yep, it takes that long. It also explains while the IRS sent that CP90 (Notice of Intent to Levy): they know the process is going to take a while.

The taxpayers sent and the SO received a copy of their 2018 tax return. They showed wages of over $200,000.

OK, so they had cash flow.

All that personal financial information they had sent earlier showed cryptocurrency holdings of over $7 million. Heck, they were even drawing over $19,000 per month on the account.

More cash flow.

COMMENT: Folks, there are technical issues in this case, such as checking or not checking a certain box when requesting a collection hearing. I am a tax nerd, so I get it. However, all that is side noise. Just about anyone is going to look at you skeptically if you cite cash issues when you have $7 million in the bank.

The SO said no to the payment plan.

The Strashny’s petitioned the Tax Court.

COMMENT: Notice that this case does not deal with tax law. It deals, rather, with tax procedure. Procedure established by the IRS to deal with the day-to-day of tax administration. There is a very difficult standard that a taxpayer has to meet in cases like this: the taxpayer has to show that the IRS abused its authority.

The Strashny’s apparently thought that the IRS had to approve their request for a payment plan.

The Court made short work of the matter. It reasoned that the IRS has (with limited exceptions) the right to accept or reject a payment plan. To bring some predictability to the process, the IRS has published criteria for its decision process. For example, economic hardship, ill health, old age and so on are all fair considerations when reviewing a payment plan.

What is not fair consideration is a taxpayer’s refusal to liquidate an asset.

Mind you, we are not talking a house (you have to live somewhere) or a car (you have to get to work). There are criteria for those. We are talking about an investment portfolio worth over $7 million.

The Court agreed with the IRS SO.

So do I.

Was there middle ground? Yes, I think so. Perhaps the Strashny’s could have gotten 12 or 24 months, citing the market swings of cryptocurrency and their concern with initiating a downward price run. Perhaps there was margin on the account, so they had to be mindful of paying off debt as they liquidated positions. Maybe the portfolio was pledged on some other debt – such as business debt – and its rash liquidation would have triggered negative consequences. That approach would have, however, required common sense – and perhaps a drop of empathy for the person on the other side of the table – traits not immediately apparent here.

They got greedy. They got nothing.

Our case this time was Strashny v Commissioner.

The Freak Tackles The IRS

Let’s go hard procedural on this post.

He played defensive end in the NFL with the Tennessee Titans and Philadelphia Eagles from 1999 to 2010. At 6’4”, 260 pounds, 86-inch wingspan and 4.43 forty, NFL fans remember him as “The Freak.”

Jevon Kearse is in the tax literature.

It looks like a business deal went bad, because in 2010 he claimed a $1,359,000 bad debt deduction.

The IRS bounced it. The IRS now wanted over $430 thousand in tax. They issued a Notice of Deficiency (NOD) on May 11, 2012.

COMMENT: Procedurally, the IRS issues a NOD (also known as a SNOD) before it can officially assess the additional tax. Once assessed, the IRS can bring all its collection powers to bear.

Problem: Kearse says he never received the NOD.

Let us start our walk through IRS procedure.

Once assessed, the IRS sent Kearse a Notice of Federal Tax Lien.

COMMENT: One has the right to request a hearing (called a Collection Due Process hearing) in response.

Kearse requested a CDP hearing, at which he asserted that he never received the NOD and presented an offer in compromise (liability – for the home gamers) for $1.

COMMENT: There are three flavors of offer in compromise. The one we are talking about is when there is substantial doubt that the assessed tax is correct. At $1, that is exactly the point Kearse was making.

IRS Appeals tuned him down, and off to Tax Court they went.

A taxpayer has the right to challenge the underlying tax liability in a CDP hearing IF he/she never received the NOD or otherwise never had a chance to dispute the proposed assessment. This is a procedural requirement, and the Court can bring it up even if the taxpayer fails to.

Responsibility now shifted to the IRS. The Appeals officer had to prove that the IRS properly mailed the NOD. There are two general ways to do this:

(1) Reviewing an internal IRS document management system

(2) Reviewing a postal Form 3877 or an equivalent mailing list with date stamps and/or initials.

The IRS said they did the first option: they reviewed the internal system.

Kearse’s tax attorneys also got the Appeals officer to stipulate that she could not produce a Form 3877 or otherwise prove the mailing of the NOD.

NOTE: We will come back to the importance of a “stipulation” in a moment.

There is a second procedural issue here: the IRS can rely on its internal system unless the taxpayer alleges that the NOD was not properly mailed.

Which is what Jevon Kearse had done. The IRS could not rely on option (1).

Incredibly, the IRS finally found the Form 3877, explaining that the eventual success had resulted from an update to their systems.

The Court bounced the Form 3877.

What ….?

It has to do with the stipulation. You see, a stipulated fact is treated as conclusive evidence. It cannot be changed, barring extraordinary circumstances.

The IRS had to argue extraordinary circumstances.

And we have the third procedural issue: the IRS failed to do so.

Meaning the IRS was bound by its stipulation that it could not prove the mailing of the NOD.  

The IRS attorney flubbed.

Jevon Kearse won.

What a freak case.

Estimated Taxes Matter

Sometimes I read a case and I wonder if the most interesting part was not included.

There is a couple – a doctor and a financial consultant - who are not keen on paying their taxes. Here is a quick recap:

          Year            Tax           Withheld         Due

          2014         $70,018      $24,148         $45,870

          2015         $58,293      $11,677         $45,995

          2016         $52,474      $20,230         $32,244

          2017         $37,001      $11,720         $25,281

This is not rocket science. Chances are that one person has withholdings and the other person is supposed to pay estimated taxes. No estimated taxes were paid. The solution? Simple: (1) pay estimated taxes, or (2) increase the other spouse’s withholdings to compensate for the lack of estimated taxes.

On November, 2016 the IRS sent a Notice of Intent to Levy.

COMMENT: This tells you the taxpayers had been in the system for a while.

The taxpayers requested for a Collection Due Process Hearing.

COMMENT: Good step. The CDP is a chance to halt the IRS automated machinery and allow the taxpayers an opportunity to speak with an Appeals Officer about their specific situation.

The taxpayers were interested in collection alternatives, including:

(a)  an installment agreement

(b)  an offer in compromise

(c)  a “cannot pay balance” status

Seems to me they covered the bases.

They did not submit financial data with the CDP request, but they did later when the Appeals Officer requested. Their information showed monthly income of $25,317 and monthly living expenses of $17,217, leaving a monthly net of $8,100.

The IRS wanted the $8,100.

Surprise factor: zero.

The taxpayers balked, arguing that it was beyond their means.

COMMENT: How can the $8,100 be beyond their means, if that is the amount they calculated? The likely reason is that the IRS has tables for certain expense categories, such as transportation. Say that you have an expensive monthly car payment. You will bump up against that limit, and good luck getting the IRS to spot you more. Mind you, the IRS says that it will consider specific circumstances, but they do not consider them for long. You may find yourself having to trade-down on your car or pulling your kid from private school.

The taxpayers indicated they were going to file an offer in compromise.

They did – eight months later.

COMMENT: Folks, seriously, do not do this. If you are hip deep in a CDP hearing with the IRS, it is a very poor decision to stall.

The Appeals Officer – not willing to wait the better part of a year – sustained the proposed levy.

Next stop: Tax Court.

From the Court we learn that the taxpayers withdrew the offer in compromise because they were “unable” to make estimated tax payments.

Huh?

Folks, this act is fatal. Here is a requirement for an offer:

“Proof of sufficient withholding or estimated tax payments”

The Tax Court’s purview can be broad or narrow, depending on the issue. If there is an issue of tax law, the Court generally has broad powers. This case was not an issue of tax law; rather it was an issue of IRS procedure. Did the IRS follow its own rules? To phrase it another way, did the IRS abuse its authority?

This narrows the Court’s reach – a lot.

It means the Court is not reviewing whether the taxpayers should have received an installment plan, an offer in compromise or whatnot. Rather, the Court is reviewing whether the IRS abused its authority by not allowing said installment plan, offer in compromise or whatnot.

The Court decided the IRS had not.

Why?

“Proof of sufficient withholding or estimated tax payments”

To me, the take-away question is: what are these people doing with their money?

Our case this time was Reid v Commissioner.