The work done by the IRS Accounts Management function serves an important but often overlooked role. This part of the IRS must keep the IRS books and records straight. With hundreds of millions of accounts to manage, keeping the data correct on each account provides a challenge. The recent Summary Opinion in the Collection Due Process case of Fagan v. Commissioner, T.C. Summary Opinion 2017-61 provides a glimpse of what happens when things go wrong. Without having the transcripts for a 20-year period, it is not possible to tell exactly how things went wrong over that two decade period but the IRS messed up the account to a sufficient degree that the judge holds for the taxpayer on the issue of payment, finding that the IRS simply did not properly keep its books.
In addition to my description of the case in this post you might look at the Comment provided on August 12, 2017, by Bob Kamman which provides further insight on this case. As we have mentioned several times before, a number of people write comments on our posts which provide additional detail and insight on the cases discussed. Bob’s comment is someone unusual in that he commented on the case before the post went up. We might have asked him to let us use the comment as a guest post had this post not already been drafted. In addition to reminding readers to check out the comments section of the blog, we also remind you that we welcome guest posts.
Mr. Fagan worked as a lawyer in Buffalo for many years before retiring to Florida for the easy life. He thought he had resolved his tax problems before he went into retirement and, no doubt, did not enjoy learning that tax issues that arose about a decade before he retired continued to plague him after he reached the Sunshine State. Based on the description in the opinion, his tax problems may have started with a divorce in the mid-1990s. Anyone who practices in this area knows that divorce frequently serves as a trigger for tax problems. Life breaks out of settled routines and the many moving parts occurring during a divorce often have a way of washing over into tax issues. Additionally, divorce can make it difficult for the IRS in managing a taxpayer’s account. Liabilities reflected on a joint account may transition from the master file account holding the joint liability and get split into mirrored accounts in the non-master file system. I cannot tell if the divorce played a role in Mr. Fagan’s tax account problems but, if it did, I would not be surprised.
Mr. Fagan owed some individual income tax liabilities starting in 1996 and he owed some employment tax liabilities arising from his law firm. He ended up in a CDP case in the Tax Court. In that case he reached a settlement with Chief Counsel’s office that the decision document in the case memorialized. The decision document binds the parties. It required Mr. Fagan to make installment payments of $2,125 for twelve months which he did. Once he did that, the IRS should have removed all of the liabilities covered by his first CDP case. For reasons unexplained, and maybe unknown, it did not.
When Mr. Fagan filed his 2011 return, he had a liability of $2,346.46 and he asked the IRS to apply $2,900 he had overpaid as a result of the IRS misapplication of payments on his account. The IRS did not do this. In 2013, he received notice of more taxes and interest for the years covered by the first CDP case. He convinced the IRS that its notice was incorrect. While he convinced the IRS of the incorrectness of that notice, the IRS seized $8,700 of his funds and he convinced the IRS to return that money as incorrectly seized. The opinion recounts several other missteps by the IRS because it could not get the account corrected.
In his second CDP case, which relates to the $2,346 liability for 2011, he does not contest the liability but argues that the IRS misapplied payments which, had they been properly applied, would have satisfied this liability. The Court makes a point of saying that Mr. Fagan is “not claiming an overpayment or credit.” Of course, if he were claiming an overpayment, the Court would tell him that it has no ability to order the overpayment because of its decision in Green-Thapedi. From the facts presented, it appears that Mr. Fagan may have had an overpayment of the difference between $2,900 and $2,346. The decision does not go there because of the expression that he did not request an over payment of this difference.
The IRS, having made numerous account errors spanning almost a decade, did not concede this $2,346 case and avoid the embarrassment of exposing its inept account management in this case but instead insisted on arguing that it could apply overpayments in whatever manner it saw fit. While the IRS position is essentially correct, it misses the point here. The Court finds “we agree with petitioner that his payments cover the amount due for 2011 and that it was an abuse of discretion for respondent to pursue collection.”
So, Mr. Fagan completely wins this CDP case. Will this be the end of his problems? Perhaps the next case we read about Mr. Fagan will be his suit against the IRS for unauthorized collection if it continues to make errors in his account. This is the kind of case I would occasionally see when I worked in Chief Counsel’s office and someone’s account got badly messed up. When you have an account that is badly messed up, there are a few wizards at the Service Centers in accounts management that can fix it; however, if you do not get to one of those wizards and the account continues to be handled by one employee after another who fails to take the time and effort to do the spade work to fix all of the problems in the account, then you get a problem such as Mr. Fagan had. What I cannot understand here, and it may be because of a lack of information, is why Chief Counsel moved forward with this case to the point of obtaining such an embarrassing opinion.