Taxpayers famously concentrate on attempting to get their “day in court docket” towards the evil IRS. The Unbiased Workplace of Appeals (Appeals) isn’t any court docket. It isn’t stunning, then, that taxpayers’ myopia usually leads them down the dangerously mistaken path of ignoring their alternative to go to Appeals. Immediately’s lesson teaches us one cause that could be a mistake.
In Mahammad A. Kazmi v. Commissioner, T.C. Memo. 2022-13 (Mar. 1, 2022) (Decide Paris), the IRS was looking for to gather a §6672 Belief Fund Restoration Penalty (TFRP) assessed towards the taxpayer. In a Assortment Due Course of (CDP) listening to, Mr. Kazmi tried to elucidate why the evaluation was improper towards him. He relied on the rule {that a} taxpayer can problem a legal responsibility in a CDP listening to if the taxpayer had not had a previous alternative to take action. Whereas Mr. Kazmi had been given the chance to take an administrative attraction through the prior §6672 evaluation course of, he stated that ought to not depend as a result of it didn’t give him a day in court docket. Whereas that argument might need traction in different conditions, it failed on this one. Particulars under the fold.
Background
Taxpayers can at all times get judicial overview of the accuracy of the tax assessed towards them, however can’t at all times get pre-payment judicial overview.
That’s, taxpayers at all times have the (theoretical) choice to completely pay the taxes the IRS says they owe. Then they’ll file an administrative declare for refund after which file a swimsuit for refund if the executive declare shouldn’t be profitable. The sensible downside, in fact, comes when an assessed legal responsibility is just far better than what the taxpayer will pay. In that scenario, there is no such thing as a sensible alternative for judicial overview of the assessed legal responsibility. Nonetheless, the Supreme Court docket has seemingly blessed the constitutionality of that course of. Phillips v. Commissioner, 283 U.S. 589 (1931); Flora v. United States, 362 U.S. 145 (1960). And decrease courts repeatedly reject carving out a “hardship exception” for taxpayers who can’t, really, absolutely pay the tax. See Curry v. United States, 774 F.second 852 (seventh Cir. 1985)(amassing circumstances).
For revenue, property, and reward tax liabilities, taxpayers have been in a position to get pre-payment overview since 1924, below the deficiency procedures in §6211 et seq. In truth, the Phillips and Flora choices each contain revenue tax liabilities. The provision of pre-payment judicial overview seems vital of their due course of evaluation, because it does within the circumstances refusing to create a hardship exception.
For different varieties of taxes, nevertheless, Congress has not created a constant path to pre-payment judicial overview. Notably, the §6672 TFRP procedures have by no means given taxpayers a path to pre-payment judicial overview. It’s all pay-first-litigate-later. However that’s usually no huge deal as a result of a taxpayer can begin a refund continuing with out paying all the assessed legal responsibility. As an alternative, the taxpayer simply has to pay the assessed legal responsibility for one worker for one quarter (sure, you’ll choose the bottom paid worker!) after which can begin the refund course of. See, e.g. Davis v. United States, 961 F.second 867, 870 (ninth Cir. 1992) (taxpayer paid $100 of a $69,000 evaluation to get the refund ball rolling).
In distinction to judicial overview, the chance for pre-payment administrative overview has been round for the reason that creation of the IRS in 1862. In 1927 the chance was formalized by the creation of a specialised administrative appeals operate, situated inside the Commissioner’s Workplace, and staffed by expertise Income Brokers. That was the forerunner of the present Unbiased Workplace of Appeals. A lot of the alternatives for administrative overview have been created by administrative motion.
In 1998, Appeals turned a creature of statute. §7803(e). And its portfolio expanded from reviewing disputes about legal responsibility to reviewing disputes about assortment through Assortment Due Course of (CDP) hearings. §6330. For particulars see Lesson From The Tax Court docket: Appeals Is Nonetheless Half Of The IRS, Actually! TaxProf Weblog (Aug. 19, 2019).
In 1998, Congress additionally added statutory alternatives to go to Appeals. For instance, it modified §6672(b) to create a pre-payment administrative overview course of for the TFRP. Below that course of the IRS should now give the taxpayer a discover that it’s planning to evaluate a TFRP after which give the taxpayer 60 days to take an administrative attraction. §6672(b)(2), (3).
Whereas each its identify and portfolio modified over time, Appeals’ mission has remained fixed: to settle tax controversies and stop the necessity to litigate them in court docket. See Publication 4227 (Rev. 1-2020). Whether or not the controversy is a few potential tax legal responsibility or about assortment of that legal responsibility, Appeals is ready to consider the work of the related IRS operate (Examination or Assortment) and think about the hazards of litigation in coming to a call about both the taxpayer’s legal responsibility or the IRS’s potential to maneuver ahead with assortment.
Whereas administrative overview could also be helpful, taxpayers nonetheless need their “day in court docket.” Generally taxpayer can get pre-payment judicial overview of Appeals choices. However usually they can’t.
As to legal responsibility controversies, when taxpayers go to Appeals after the examination is accomplished however earlier than the IRS points a proper Discover of Deficiency (NOD), it’s Appeals who will difficulty the NOD if it can’t settle the case. The taxpayer can then take the NOD ticket to the Tax Court docket. In distinction, when taxpayer go to Appeals below what the IRS calls its Early Referral Program, there is no such thing as a judicial overview. The Early Referral Program permits Appeals to overview one specific difficulty in controversy with out ready for all the examination to be accomplished. But when the taxpayer doesn’t like Appeals’ determination, there is no such thing as a judicial overview till after the examination is full. See additionally Rev. Proc. 99-28.
As to assortment controversies, taxpayers who well timed request a CDP listening to and are unable to resolve the dispute in Appeals will obtain one other sort of NOD: a Discover of Willpower. That, too, is a ticket to the Tax Court docket the place they’ll get judicial overview. §6330(d). In distinction, taxpayers who miss what I name the CDP Butterfly should get what known as an “Equal Listening to” earlier than Appeals. However there is no such thing as a judicial overview for that call. Treas. Reg. 301.6330-1(i).
Generally Appeals decides about each legal responsibility and assortment in the identical continuing. That may occur in CDP hearings. Whereas CDP hearings are ostensibly simply assortment disputes, taxpayers can object to the underlying legal responsibility being collected, but when and provided that the taxpayer “didn’t obtain any statutory discover of deficiency for such tax legal responsibility or didn’t in any other case have a chance to dispute such tax legal responsibility.” §6330(c)(2)(B). The place the underlying tax legal responsibility is correctly at difficulty, the Tax Court docket makes use of a de novo normal of overview, simply because it does when reviewing a Discover of Deficiency. Nevertheless it critiques all different points below an abuse of discretion normal, which suggests it simply seems to be at whether or not the Appeals determination was cheap. See Goza v. Commissioner, 114 T.C. 176, 181–82 (2000).
The Tax Court docket has been beneficiant in some methods in permitting taxpayers to contest liabilities in CDP hearings. First, the Court docket permits a taxpayer to assault a legal responsibility within the CDP listening to if they didn’t obtain the NOD. This “precise receipt” rule differs from the mailing rule for NODs. Mailing an NOD to the taxpayer’s final identified handle is enough to allow the IRS to evaluate, even when the taxpayer doesn’t reply. The theoretical shot at pre-payment judicial overview is nice sufficient. Phillips, supra. It’s completely different with CDP. The Tax Court docket has emphasised {that a} “prior alternative to dispute” means greater than a theoretical alternative. Thus, if the taxpayer can present that they didn’t really obtain the related prior discover, they get to argue about their legal responsibility within the CDP listening to. See Lesson From The Tax Court docket: When Non-Receipt Of An IRS Discover Issues TaxProf Weblog (Oct. 1, 2018). Second, the Tax Court docket has learn this language expansively to allow taxpayers to later contest even liabilities they self-reported, however left unpaid. See Montgomery v. Commissioner, 122 T.C. 1, 36 (2004).
Nonetheless, the Tax Court docket additionally interprets the “in any other case have a chance” language in §6630(c)(2)(B) restrictively to disclaim taxpayers the power to contest an underlying legal responsibility. It has achieved so by counting on Treas. Reg. 301.6330–1(e)(3), Q & A–E2, which says, in related half: “A chance to dispute a legal responsibility features a prior alternative for a convention with Appeals that was provided both earlier than or after the evaluation of the legal responsibility.” The regulation doesn’t distinguish between Appeals conferences which are or are usually not topic to judicial overview.
Software of that regulation is at this time’s lesson. Let’s have a look.
Information
Mr. Kazmi was a part-time hourly bookkeeper for an organization that didn’t pay over belief fund taxes for 2 quarters in 2014. An IRS Income Officer (RO) performed a TFRP investigation of Mr. Kazmi and concluded that Mr. Kazmi must be held answerable for the penalty.
In December 2015, the IRS despatched Mr. Kazmi a Letter 1153 telling him it was going to evaluate a TFRP towards him. That triggered his 60-day interval to take an administrative attraction. He didn’t. The IRS then assessed a $10,200 TFRP and began the gathering course of. It filed a Discover of Federal Tax Lien (NFTL) and, per §6320, despatched Mr. Kazmi a discover of that motion, giving him 30 days to request a CDP listening to. He did. On the CDP listening to his solely argument on why the NFTL shouldn’t have been filed was that he was not answerable for the assessed TFRP. He appears to have some good information to assist that argument. Decide Paris notes that he was an hourly part-time worker, that he had no possession curiosity within the firm, was not an officer of the corporate, had no energy to signal checks or authorize funds on behalf of the corporate. Op. at 2. His unhappy story was that he was just a bit part-time fish unfairly caught within the TFRP internet.
The Settlement Officer (SO) in Appeals didn’t wish to hear Mr. Kazmi’s unhappy story. Since Mr. Kazmi raised no different points, the SO issued a Discover of Willpower and Mr. Kazmi petitioned the Tax Court docket for overview.
Lesson: Take the Administrative Attraction
Decide Paris explains that Mr. Kazmi’s prior alternative to have Appeals overview the proposed TFRP precluded him from contesting the legal responsibility in a CDP listening to. The truth that he wouldn’t have the ability to get pre-payment judicial overview didn’t disable that chance from being a previous “alternative” for CDP functions. It was nonetheless a significant alternative. She depends on, adopts, and re-states the reasoning of Decide Gustafson in Bishay v. Commissioner, T.C. Memo. 2015-105, as follows:
“The shortage of alternative for judicial overview after the Letter 1153 continuing doesn’t severely prejudice the taxpayer as a result of, as now we have beforehand famous, the part 6672 penalty is divisible, so {that a} taxpayer could litigate the penalty after having paid an quantity equivalent to the tax withheld from a single worker. Thus, the taxpayer whose legal responsibility is upheld within the Letter 1153 continuing could make a small “token” fee in the direction of the part 6672 penalty, file a refund declare with the IRS, and, if the refund declare is denied, file a refund swimsuit within the Federal District Court docket or the Court docket of Federal Claims.” (inside quotes and citations omitted).
Decide Paris seems sympathetic to Mr. Kazmi. First, she notes that “[a]t this time, the Court docket declines to overturn its earlier holdings {that a} correctly mailed and acquired Letter 1153 constitutes a previous alternative.” Op. at 11 (emphasis provided). Second, she then very generously re-characterizes his rivalry that he was not a accountable individual as declare that the SO acted arbitrarily in performing their responsibility to “get hold of verification from the Secretary that the necessities of any relevant legislation or administrative process have been met.” §6330(c)(1). She then notes that the abuse-of-discretion normal meant she couldn’t substitute her personal judgment for the SO’s. “A distinction of cheap minds doesn’t rise to the extent of arbitrariness required for locating an abuse of discretion.” Op. at 12.
Remark: An Extra Rationale? Regardless of Decide Paris’ qualification “at the moment,” the Tax Court docket appears to have firmly adopted the CDP regulation’s place that all administrative appeals represent prior alternatives to contest a legal responsibility whether or not or not there may be any judicial overview of the Appeals determination. It does so seemingly on the singular rationale Decide Paris re-states: the taxpayer shouldn’t be “severely prejudiced.” This appears similar to the rationale the Supreme Court docket utilized in Philips and Flora. In these circumstances, taxpayers weren’t severely prejudiced as a result of Congress had offered for pre-payment overview. On this case, the shortage of pre-payment legal responsibility overview doesn’t severely prejudice the taxpayer as a result of it requires solely a “token” fee to (ultimately) get judicial overview of the IRS’s legal responsibility dedication.
I’d provide a further rationale for the rule {that a} purely administrative overview alternative precludes a taxpayer from disputing legal responsibility in a CDP case. It’s not simply that the taxpayer shouldn’t be “severely prejudiced.” It’s {that a} purely administrative overview remains to be a constitutionally significant alternative. That’s true even when the “listening to” a taxpayer receives lacks the adversarial construction of a court docket listening to. I blogged about that final week (“What Constitutes a CDP Listening to”). The casually cynical notion that Appeals can solely do its job below the prospect of rapid judicial overview is, I believe, misguided. My thesis is that the provision of judicial overview doesn’t considerably have an effect on both Appeals’ workload or outcomes. That’s, it was my expertise when on the within that the ROs and SOs in Appeals take their mission to coronary heart; they don’t merely rubber-stamp choices from different IRS capabilities when there is no such thing as a judicial overview. As an alternative they try to present the identical qualify of overview no matter whether or not the taxpayer can get hold of judicial overview. In fact, neither my anecdotal expertise nor anybody else’s actually proves a lot. The thesis might be examined extra rigorously if one in contrast CDP listening to outcomes with Equal listening to outcomes. That sort of examine, nevertheless, would require entry to personal knowledge. If TIGTA or TAS has performed such a examine, I’ve missed it and would admire a hyperlink. Absent such a examine now we have solely anecdotes. Nonetheless, I’d have an interest to listen to from readers whether or not and to what extent Appeals does a demonstrably higher job in CDP hearings or a demonstrably worse job in Equal hearings.
Bryan Camp is the George H. Mahon Professor of Legislation at Texas Tech College Faculty of Legislation. He invitations readers to return every Monday to TaxProf Weblog for one more Lesson From The Tax Court docket.
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