Guide Petition to IRS Chief Counsel: What Is My 2011 Income Tax Liability?

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The institutional memory of IRS workers concerning this incident seems no longer to exist. I had a conversation with two young attorneys from the Boston office this past year, neither of whom could even seem to contemplate the possibility that the IRS transcript could contain inaccuracies. I find this amazing. In the vast majority of cases, courts will reject such an argument, which makes the McGrew case interesting and instructive. Before I get to the facts of the McGrew case, I want to detour to my practice for testing for lost returns when I tried these cases for the IRS and to the bankruptcy issue lurking in this case.

Because I practiced primarily in Virginia and because Virginia has a state tax scheme that mirrors the federal one, even requiring taxpayers to attach a copy of their federal return to their state one, my go-to place for checking on lost tax returns was the state. I figured the loss of one return by the IRS was low but possible.

The loss of two or more returns, each allegedly timely filed, got much lower. The loss of the federal returns by the IRS and the state returns by an entirely different agency made the story one that was unbelievable. So, the first thing I did when a taxpayer said the IRS lost a tax return was ask if the taxpayer filed a state tax return with Virginia. If the taxpayer answered affirmatively, the state tax records were requested. In every case I can remember, the state tax records matched the IRS records.

Taxpayers who alleged that the IRS lost their tax returns had to allege that the state also lost their returns for the same periods. That basically ended the inquiry into the allegedly missing returns. Courts found this coincidence too powerful to ignore. No discussion of the parallel state tax return filings exist in the McGrew case, and I do not know if that is because the taxpayer had no state filing obligation or no one checked on those returns. When a taxpayer files a late return, the IRS may set that return to the side so that it can continue timely processing returns filed during the current cycle.

My experience suggests that late-filed returns have a higher incidence of getting lost in the system. The post I wrote earlier this year about a friend and family client seeking an installment agreement involved two late returns that the IRS lost. The basic IRS position is that if it goes to the trouble of filing a substitute for return for a taxpayer, sends the notice of deficiency on which the taxpayer defaults, and later the taxpayer files a Form , the Form filed in that circumstance does not satisfy the Beard test and does not trigger the two year rule in B.

The only circuit in which the IRS has lost that argument is the 8 th Circuit. Because of the loss in the Colsen case in the 8 th Circuit and because the IRS decided not to try to take that loss before the Supreme Court, taxpayers living in the 8th Circuit can file a Form after an SFR assessment and start the two year period running. So, do not get excited if you read this case and think filing returns after an SFR assessment will help your client. The IRS does a great job of keeping track of millions of pieces of paper with a focus on tax returns; however, anyone who thinks that the IRS never loses tax returns is naive.

I knew the possibility existed but doubted most of the taxpayers making the assertion. One aspect of the McGrew case that makes the lost return story more believable is that the lost return was one of multiple late returns filed many years after the due date. The other issue presented in this case is the bankruptcy issue of unfiled and late filed returns we have written about several time previously here , here and here.

This case arises in the 8 th Circuit and that is very fortunate for Ms. McGrew did not file returns for many years. Her testimony mirrors the testimony of so many people who get into a pattern of non-filing. McGrew as well. The IRS told her she first needed to file the back returns before it would work with her on a collection alternative. Her case consisted of her testimony regarding the mailing of the back tax returns. Her testimony contained many details about the mailing. The Court weighed the evidence and determined that Ms. McGrew did submit the return to the IRS and did wait more than two years after doing so before filing the bankruptcy petition.

Therefore, Ms. McGrew received a discharge of her liability for together with the remaining years for which she late-filed her returns. In a recent bankruptcy case, McGrew v. Her success provides some insight into how a taxpayer might win this argument. I have some other thoughts based on cases I have seen over the years.

For stories and investigations concerning the little problem with returns the IRS had in see here , here , here and here. The Philadelphia Service Center has moved locations. The institutional memory of IRS workers concerning this incident seems no longer to exist. I had a conversation with two young attorneys from the Boston office this past year, neither of whom could even seem to contemplate the possibility that the IRS transcript could contain inaccuracies. I find this amazing. See United States v. Valenti, F. Of course, any court, including the Tax Court, may seal as much of the record as necessary.

The Supreme Court has recognized that a right of public access must be balanced against other interests. See Globe Newspaper Co. But when is sealing necessary and to what extent? Pickard, F. Burke, F. Ochoa-Vasquez, F. This automatic and complete approach also portends serious First Amendment concerns. This prophylactic approach allows for no individualized assessment of the privacy interests at stake; while that interest is adjudicated later, this only relates to the anonymity decision, not whether to seal the entire docket.

Further, the automatic and complete sealing that occurs seems decidedly untailored.

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In my view, a more reasonable and less constitutionally problematic approach would be that of the U. Court of Appeals for the D.

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We can run through an example to see this difference. In Tax Court Docket W, the case is sealed. But, we have some insight into what occurred in this case because the Court issued a reviewed opinion in Whistleblower W v. Petitioner took the Tax Court up on its invitation and appealed the decision to the Eighth Circuit. The IRS objected to venue, because under the catchall provision of section , proper venue for whistleblower cases lies in the D. Circuit, where the case was eventually transferred. The dockets for both the Eighth Circuit and D.

Circuit proceedings are partially open to the public—or at least, the part of the public that pays for PACER access. The Eighth Circuit docket even allows for access to some underlying motions, orders, and other documents. This approach has some drawbacks, however, as petitioner revealed his identity in one of the unsealed filings.

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  8. I will not do the same on this blog, but the filing remains available to anyone with a PACER account. The D. Circuit docket, in contrast, allows for no public access to any underlying document. It does helpfully list every proceeding on the docket itself. For example, we know that after the initial briefs were filed, the D. Could the Tax Court follow suit? The Court need not amend its Rule a to do so, given that textually, it requires only that the underlying filings are sealed. If the Court is concerned about petitioners inadvertently disclosing their private information, the Court may wish to amend Rule b , which requires the filing of various identifying information on the petition itself in all cases.

    The Court could require any petitioner seeking anonymity to file an original petition under seal, while filing a redacted petition for public view. The petitions are not available online in any case, and so the Court could alternatively deny access to the underlying filings to parties who request hard copies while it adjudicates the motion for anonymity.

    Anonymity would still need to be maintained online, but only orders and opinions are available online to non-parties. For these documents, the Court would have responsibility to ensure appropriate redactions. The Tax Court, which has in the past remedied its prior opaque nature , seems to have the legal and technical ability to follow the same approach; it ought to do so.

    No big surprise here but now the Tax Court has a precedential opinion on the subject.

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    Petitioner was represented by an officer and not a law firm. The lack of professional representation probably did not impact the outcome in this case. Petitioner filed its LLC return late for the tax year without requesting permission to file late even though the individual owners did request an extension of time to file. Although petitioners initially seemed to dispute the filing of a request for extension by the LLC, in the end the parties did not dispute the fact that the return was filed late without an extension request.

    The IRS imposed the IRC penalty for late filing applicable to the situation of a late filed LLC return also known as the delinquency penalty and did not obtain written supervisory approval before doing so. The computer code on the transcript of account indicated that the IRC computer automatically imposed the penalty.

    As you probably know, the taxes reported on the return flowed through to the owners and the LLC had no taxes to pay on the return it late filed. Petitioner argued that the request for extension filed by the individual members of the LLC should suffice because it was really the tax returns of the members of the LLC where the taxes would show up after flowing through the LLC.


    Petitioner also argued that for the individuals filed an extension and the LLC did not. Even though the LLC also filed late in under precisely the same circumstances that existed in , the IRS abated the penalty for while refusing to do so for Petitioner argues that the IRS should similarly abate the penalty for based on its actions in The court explains why both of these arguments are losers.

    Since these arguments do not impact the IRC issue, I will not go into the reasons the court did not accept these arguments except to say the failure to accept these arguments came as no surprise to me. As we have discussed before in many posts, IRC b generally requires that the IRS obtain the approval of the immediate supervisor of the employee proposing the imposition of a penalty; however, IRC b 2 contains two exceptions to this general rule. First, the IRS need not obtain prior approval if the liability imposed is an addition to tax under IRC , or In situations in which the IRC computer imposes penalties without anyone thinking about it, it becomes difficult to think that the penalty served as a bargaining chip.

    The issue of the application of the exception to these facts is squarely teed up here because the IRS argued the exception applied and petitioner argued that it did not. So, the court set out to resolve this clear dispute. First, the court notes that the penalty imposed in this case, the IRC penalty, is not one of the three additions to tax excepted from prior supervisory approval in IRC b 2 A.

    So, it moves on to the issue of whether the penalty imposed here fits into the exception in IRC b 2 B as a penalty calculated through electronic means. The calculation of the penalty requires no thought concerning the appropriate amount for the circumstances. The court then notes that the IRS calculates the penalty automatically using its computer program.

    It states in a footnote that it could imagine possible circumstances in which IRC penalties might occur outside of the computer program; however, in this case that did not occur. The result here seems so straightforward that the court engages in little analysis at the end of this discussion having methodically walked through the applicable provisions. The case had two small procedural issues in addition to the IRC b 2 B issue. First, petitioner argued that the IRS should not have offset a overpayment to partially satisfy the liability prior to the conclusion of this case.

    Second, petitioner received its day in court despite the fact that the IRS treated the CDP hearing as an equivalent hearing. It did so because it demonstrated the timely mailing of its CDP request although the court does not spend time on this issue during the opinion. The opinion covers the application of IRC to one of the many penalties imposed by the Code. This particular penalty had not been the subject of a prior precedential opinion. The result should surprise no one. As we forecast when IRC burst into full blossom and as Judge Holmes has eloquently pointed out on a number of occasions, the many permutations of IRC will continue to keep the court busy for some time to come.

    Because the opinion will affect a large number of taxpayers, I commend those working in low-income tax to read it. What I hope to do in this blog post is give a little inside-baseball on the case and, in keeping with the theme of this blog, tie it in a bit with procedural issues. I frequently sing the praises of Tax Court judges in working with pro se taxpayers. This case provides yet another example.

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    My clinic received a call from the petitioners less than a week before calendar. Apparently, the Tax Court specifically Judge Goeke had recognized that this was a novel issue of law and suggested to the low-income, pro se petitioners that they may benefit from contacting a Low-Income Taxpayer Clinic for help with the briefing. By the time the client contacted me again, only a few days before calendar the IRS had moved for the case to be submitted fully stipulated under Rule The Court had not yet ruled on the motion but I mostly found the stipulations unobjectionable with one minor change, which the IRS graciously did not object to.

    After consulting with my clients the first order of business was to move to have the S designation removed -which again saw no objection from the IRS. Now the table was set for briefing on the novel issue. Nevertheless, an ever-so-brief primer on what was going on is necessary. Our client husband and wife received Medicaid Waiver Payments for the services the wife provided to her disabled non-foster child. From conversations with local VITA organizations I already anecdotally knew that some people received these payments, but since taking this case on I have come to appreciate exactly how vast the Medicaid Waiver program is.

    They were the only wages my clients had. This would be the case because such payments would be disregarded for EITC eligibility calculation altogether. Probably not what Congress or even the IRS had in mind. My clients felt like they should do something about this unfairness. This of course led to a notice of deficiency and culminated in the precedential Feigh decision. Prior to courts and the IRS agreed that such payments had to be included in income. And that sort of change is a massive bridge too far through subregulatory guidance.

    We won on that first issue handily. That sort of thing has to be done through statute. But what of the second hurdle -the fact that our client undeniably did not include the wages in gross income? Indeed, it was that aspect of the EITC statutory language and not my familiarity with Notice or Medicaid Waiver Payments which made me want to take this case from the beginning. And so our client has excluded income and the earned income credit derived from it… Impermissible double-benefit, you and the IRS brief say? I disagree. Not only does treating excluded payments as earned income apply the statutory language correctly, and more in line with what Congress would want, I contend that it is the better way to protect the integrity of the EITC.

    To see why this is you have to look again at how the EITC is calculated, and how the phase-out applies. In so doing we see that the real problem would be in disregarding excluded income altogether.

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    Note that excluded alimony payments post TCJA would not be incorporated in the means testing. In other words, it more appropriately reserves the credit only for those who working and are truly of limited means, while denying it to those who truly are not. I think Congress would approve. A little history is helpful on that point.

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    Then, in an effort to make the credit easier to compute not an effort to limit eligibility , Congress added the includible requirement as part of the Economic Growth and Tax Relief Reconciliation Act of Mostly, Congress made this change because it wanted information returns to give taxpayers and the IRS all the information needed for calculating the EITC.

    A GAO report noted that this was likely an unintended consequence see page 2 , that accrued the bulk of the benefits to those that made the most money. Congress had to make this change to fix an unintended consequence of their own statutory making. However, it would be absurd we argued to require Congress to fix an unintended consequence wholly created by the IRS through Notice Their main question is a practical one: what do we tell taxpayers now? The main issue is whether the IRS may now consider Notice completely moribund, such that there is no exclusion period and the Medicaid Waiver Payments must be included.

    The Court noted that the IRS did not raise the argument that the payments should be includible in income for my client, so it was conceded. But is the IRS stuck with that position now? Can the IRS take a position that is contrary to its own published guidance? What if that guidance is essentially invalidated? The best case on point for this sort of situation may be Rauenhorst v. Further, it does not appear to matter that Feigh essentially invalidated Notice But the final procedural point I want to make takes the long-view of things: which is that this never should have happened in the first place, because the IRS never should have overstepped its powers by issuing Notice masquerading as substantive law without, at the very least, following the rigorous notice and comment procedures required of substantive regulations.

    Had the IRS done so the tax community could well have seen this before the regulation was finalized and it could have been addressed. This may echo from my soapbox, but Notice undoubtedly caused real harm to some of the most vulnerable taxpayers. I know from conversations in the tax community that many low-income earners lost out on a credit they rightfully deserved. Nor does Judge Goeke in the opinion see footnote 7.

    But, again, tax is a complicated animal: legislating new rules should not be done lightly. Procedure, in other words, matters. Love PT, and want to show your gratitude for the fact this amazing content is free? Click here to donate to TAPS and help fund legal representation of underserved taxpayers! Read More….

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