Collections and Hutzpah

 

An old partner of mine would have called it “hutzpah.”

The case is ridiculous, but it does give us a chance to review the tolling of the statute of limitations.

Let’s start:

·      The IRS has – barring unusual circumstances – only so much time to collect taxes from you. This period is 10 years from the date of assessment. A key concept here is that the date of assessment is not necessarily the date you filed, and that one tax year can have more than one ten-year period running concurrently (think an IRS audit a couple of years after you filed).

·      The 10 years can be interrupted (the fifty-cent word is “tolled”) for certain things, such as filing for an offer in compromise. This means that that 10-year statute can stretch to much longer than 10 years in the real world.

Let’s look at the Ward case.

The IRS determined the Wards had underreported income by $197 grand for 1996 and $209 grand for 1997. The Wards took the matter to Tax Court and lost.

The 1996 tax was assessed in November 2002.

COMMENT: Plus ten years puts one at November 2012.

The 1997 tax was assessed in December 2002.

COMMENT: Plus ten years means December 2012.

Alright, how in the world does one get to 2022 with these dates and facts?

Let’s look at the following:

(1)  Offer in compromise dated 12/27/2002

(2)  Due process hearing requested 7/15/2003

(3)  Offer in compromise dated 3/15/2004

(4)  Offer in compromise dated 12/4/2008

(5)  Due process hearing requested 12/16/2011

(6)  Offer in compromise dated 3/6/2014

(7)  Offer in compromise dated 9/23/2015

Five offers? This has the signature of tax protest and will likely go poorly with the Court.

Each offer tolls the statute. The IRS has up to two years to resolve an offer, and it is not uncommon for an offer to take a year or more to resolve. The statute is tolled while an offer is being considered. Just reviewing the dates quickly, the Wards added at almost seven years to the statute.   

Then we have the due process hearings.

A CDP is a Collections hearing and generally means that the IRS wants you to pay more tax than you think you can pay. The hearing allows one to propose a payment alternative – think a smaller monthly payment than the IRS wants. The statute is tolled during CDP, and the IRS tacks-on another 30 days to boot after the determination.

I see that just one of the CDPs added over a year and a half to the statute.

Add all the seven tolling events and the statute had tolled until the summer of 2021.

Yep, the tax years were open, and the IRS could pursue collection.

Let’s go back.

Remember I said that the Tax Court had decided the matter?

Two of the offers were to contest the tax liability.

Let’s give some background about offers.

There are three types of offers:

(1) You argue that you do not owe the tax (or at least as much). This is a "liability” offer.

(2) You argue that you cannot pay the amount due in full. Think of a “pennies on the dollar” late-night commercial and you get the drift. This is a “collectability” offer.

(3)  You argue that fair and effective and fair tax administration requires acceptance of an offer. This third type is rare. I have never done one in practice, although we presently have a client where I intend to request one. The facts are extraordinary, though, and involve financial malfeasance while the client was a minor.

A key point is that a liability offer is off the table once the Tax Court has decided. The Wards’ first and fourth offers were liability offers and were therefore invalid.

Still, the offers tolled the statute.

So, the Wards played a wild card: they argued that the IRS considered two invalid offers in order to toll the statute. The IRS was playing a cynical game to buy time, and the Wards should not be punished for the IRS’ egregious behavior.

Hutzpah!

The Court shut them down immediately:

It was Defendants who primarily benefited from these delays. While the offers remained pending, the IRS could not collect payment on the underlying assessments…. [By] filing so many offers, [Defendants] successfully blocked collections for years.”

The statute tolled. The Wards owed. The Court had little patience with people who knew just enough to muck-up the tax collection process for the better part of two decades.

Our case this time was United States of America v Walter and Virginia Ward, USDC AK, Case 3:21-cv-0056, July 6, 2022.

Not Cracking The Code

We have picked up two or three nonfiler clients this season. By itself, this does not overly concern me, although there are nasty tax traps concerning refunds and overpayments for nonfiled years. Did you know, for example, that – if you go long enough without filing – the IRS will not refund your overpayment? Nonetheless, one files, pays tax due with the IRS and carries on.

Then there is a subcategory of nonfilers that could be referred to as protestors. I have little patience for those. I recently picked up a corporate tax audit client, and it is proving to be a very difficult examination. There are several reasons, but I believe a key reason is that one of the owners may be walking this line.

I am looking at a Tax Court case decided last month: Waltner v Commissioner. This is a protestor case, and it is a bit unusual. In general, courts have given protestors short patience. This time the court took the time to go through the arguments and address them one by one.

Have you hear about Peter Hendrickson? He is a protestor himself, and he wrote a book titled Cracking the Code. It appears that Waltner studied Hendrickson closely, as the techniques he used follow the book’s recommendations.

The case concerns Mr. Waltner’s 2008 individual tax return, in which he reported zero wages, an IRA distribution, a student loan interest deduction and home mortgage interest. All in all, it came down to zero tax liability, which is understandable when you report zero wages.

Mind you, he received three W-2s, but Waltner submitted Forms 4852 (Substitute for Form W-2), reporting zero wages but showing income tax withheld. He also received a Form 1099-B (Proceeds from Broker), but crossed-out proceeds of $5,000 and inserted zero. He then wrote the following text:

This correcting Form 1099-B is submitted to rebut a document known to have been submitted by the party identified above as “Payer” and “Broker” which erroneously alleged a payment to the party identified above as …. of “gross proceeds” in connection with a “trade or business.” Under the penalty of perjury, I declare that I have examined this statement and to the best of my knowledge and belief, it is true, correct and complete.”

The IRS was having none of this and sent a letter requesting a corrected return. The IRS otherwise was going to assess a frivolous submission penalty of $5,000.

He didn’t. They did. Then they issued a notice of intent to levy.

Waltner requested a Collection Due Process hearing, submitting a 49-page brief.

COMMENT: Trust me, 49 pages is impressive.

So the Appeals officer got to read the following:

·       Waltner was not “an officer, employee or elected official of the United States”

·       He was “never an officer of a corporation”

·       He “did not receive Wages from any source”

·       He "did not work for or receive any pay from an Employer or American employer”

·       He “was not engaged in Employment”

·       He “was not an Employee”

·       He “was not engaged in Self-employment”

·       He “was not a citizen or resident of the District of Columbia or any territory or possession of the United States”

·       He “was never incorporated in Washington, D.C. or worked for any company who incorporated in Washington, D.C.”

·       He “was not a governmental unit or agency or instrumentality thereof, or a United States Person”

In addition to not understanding the rules for capitalization in the English language, he appears to be flying the tax protestor flag.

The Appeals officer warned him about frivolous arguments. Waltner did not back down. The IRS assessed him. Waltner then filed with the Tax Court.

It took months to go before the Court, during which time the two parties filed 24 motions, resulting in the Court issuing 22 orders. The maneuverings defy belief:

·       The IRS moved for admissions, meaning they wanted to know Waltner’s reasoning for the substitute W-2s. The Court, being a good sport, issued a 39-page order reviewing 44 requests for admissions and 83 supplemental requests.

·       Waltner responded with boilerplate language but not otherwise addressing the issues under discovery.

·       The IRS responded with a 993-page request for admissions.

·       Waltner filed a motion for protective order delaying discovery.

·       The IRS filed an objection. The Court accepted some and dismissed some.

·       Less than a month later Waltner filed a motion to compel stipulation. The motion was filed under an arcane procedure known as Rule 9(f).

·       The IRS responded, so the motion was discharged.

·       The IRS filed a motion to compel responses to interrogatories, which the Court granted.

·       Waltner filed a motion for reconsideration, which the Court denied.

·       Waltner sought an extension to respond to the interrogatories, which the Court granted.

·       Waltner never responded to the interrogatories. Instead he paid the $5,000 fine.

·       Waltner filed to have the IRS answer interrogatories, to which the IRS filed objection.

·       The IRS responded to the interrogatories. The Court found some acceptable and others not.

·       The IRS filed for supplemental information from Waltner.

·       Waltner filed a motion for reconsideration.

Do you see the game being played here? Rather than provide arguments, Waltner is neck-deep in Tax Court procedural minutiae. No wonder the Courts hate protest cases.

When all is said and done, Waltner lost and the IRS requested the Court to apply a $25,000 Section 6673 penalty.

The Court instead went on the discuss Cracking the Code, noting how Waltner’s arguments and techniques mirror the book. Here are some gems, for example: 

·       The federal government has legislative authority over only the District of Columbia and U.S. territories.

·       The Revenue Act of 1862 imposed a 3% tax only on federal employees.

·       Federal direct taxes which affect citizens of the several states must be apportioned (a position which predates the 16^th Amendmnet).

·       Remuneration for work is not profit and is therefore not taxable.

You get the idea.

The court could have assessed a $25,000 penalty for wasting its time, but it decided instead to impose a $2,500 penalty, adding:

Mr. Waltner has other matters pending in this Court in which he is asserting arguments similar to those presented in this case, and he has now been cautioned in both an order and this opinion. We hope that he will heed the warning.”

The Court is allowing Waltner to back down, although I am not optimistic that he will.

There are any number of reasons for not filing. There can be illness, death, emotional collapse, for example. The IRS will mitigate if not abate penalties in many cases. Protest is not one of them. This is a bad street late on a dark night, and nothing good will be found there.