On April 5, 2018, the IRS issued CC-2018-005 providing guidance to Chief Counsel attorneys regarding how to handle IRC 7345 cases brought in Tax Court. We reported in a prior post that Deputy Chief Counsel Drita Tunuzi stated at the last ABA Tax Section meeting that the IRS would probably start issuing the notices by the end of February. The timing of this guidance syncs with the timing of the earliest Tax Court cases Chief Counsel’s office might expect based on the issuance of the revocation notices. We are unaware of any pending cases on this issue and welcome comments directing us to filings under this new provision of the code. In addition to discussing the recent guidance, I have copied below, thanks to an alert from Carl Smith, the language of a small amendment to jurisdiction of these cases.
Congress made a minor change to the provisions on the Tax Court and district court review of passport revocation decisions, taken from the Joint Committee print description of the bill:
Amendments relating to the Fixing America’s Surface Transportation Act (2015)
Revocation or denial of passport in case of certain unpaid taxes (Act sec. 32101). – The Act provides for judicial review of the Secretary’s certification that an individual has a seriously delinquent tax debt, either in a U.S. district court or in the Tax Court. The provision clarifies that the party against whom a Tax Court petition is filed is the Commissioner of the Internal Revenue Service. The provision also provides a tie-breaker rule clarifying that the court first acquiring jurisdiction over the action has sole jurisdiction, and corrects a cross reference.
Here’s the text of the changes, which can be found at pages 2804-2805 of the bill:
21 SEC. 103. AMENDMENTS RELATING TO FIXING AMERICA’S
22 SURFACE TRANSPORTATION ACT.
23 (a) AMENDMENTS RELATING TO SECTION 32101.—
24 (1) Section 7345(e)(1) is amended—
1 (A) by striking ‘‘or the Tax Court’’ and in-
2 serting ‘‘, or against the Commissioner in the
3 Tax Court,’’, and
4 (B) by adding at the end the following:
5 ‘‘For purposes of the preceding sentence, the
6 court first acquiring jurisdiction over such an
7 action shall have sole jurisdiction.’’.
8 (2) Section 7345(f) is amended by striking
9 ‘‘subsection (a)’’ and inserting ‘‘subsection
11 (b) EFFECTIVE DATE.—The amendments made by
12 this section shall take effect as if included in section
13 32101 of the Fixing America’s Surface Transportation
New Chief Counsel Guidance
The guidance starts by describing the statute and the IRM provisions that we discussed in our prior post. It provides that the IRS will rely on automated systems to identify
“every module on an individual’s account with an unpaid assessed tax liability that is not statutorily excepted from the definition of seriously delinquent tax debt or otherwise in a category excluded from certification. Once all eligible modules have been identified, the systems will aggregate the amount of unpaid liabilities. If the total is more than the statutory threshold, the taxpayer will be identified as having a seriously delinquent tax debt, and a Transaction Code (TC) 971 Action Code (AC) 641 will post to each module.
The SBSE Commissioner will certify that the identified individuals each have a seriously delinquent tax debt. The Service, under section 7508(a)(3), will postpone the certification of taxpayer serving in a combat zone or contingency operation. The Service will send a list of all certified individuals to the State Department. Once it has received notice from the Service, the State Department will not issue a new or renewed passport to a certified individual and it may revoke a previously issued passport, except for return travel to the United States…. Contemporaneously with the certification, the Service will notify individuals of their certification by sending them a CP508C notice by regular mail. The CP508C notice will list the tax liabilities giving rise to the certification by taxpayer identification number, tax period, and type and will inform the individual of the right to seek judicial review in a federal district court or the Tax Court.”
The Notice anticipates that taxpayers will raise challenges to the underlying liabilities, the period of limitations, and the scope and standard of review. It lays out the responses the Chief Counsel attorneys should make to those arguments.
Judicial Review of the Underlying Liability
The Notice takes the position that IRC 7345 does not provide for judicial review of the liability through this process. This statute does not waive sovereign immunity. A suit seeking to challenge the liability would effectively seek to restrain collection of an assessed tax and that would be prohibited by the Anti-Injunction Act. Section 7345 is not a provision providing an exception to that act.
Time for Seeking Review
IRC 7345 does not provide a period of limitations for bringing a certification action. While many people may rush to Court to avoid having their travel restricted, others may not even receive the notice sent by regular mail or may not appreciate its meaning immediately. The Notice takes the position that the general statute of limitations provided in 28 USC 2401(a) applies. This is a six year period. So, the IRS will not argue that the court lacks jurisdiction if the taxpayer brings a suit contesting certification within six years of issuance of the certification notice. The Notice also provides that taxpayers will have six years from the date grounds for reversal existed to bring an action challenging whether the IRS failed to reverse certification.
Scope of Review
IRC 7345 does not specify the scope or standard of review applicable to certification actions. The IRS takes the position that, in the absence of a statutory standard of review, the review is “confined to the administrative record, and ‘no de novo proceeding may be held. United States v. Carlo Bianchi & Co., 373 U.S. 709, 715 (1963).’” Because the IRS bases its decisions on its computer records of taxpayer accounts, it takes the position in the Notice that review is limited to the computerized records of those modules. The standard the IRS tells its attorneys that the Court should apply is whether the IRS action was “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.”
The Notice tells IRS attorneys that the title of the response to the action brought by a taxpayer under IRC 7345 should be “Answer.” The Notice directs attorneys to attach the certification letter to the answer if the taxpayer fails to attach it to the petition. Once the attorney answers the case, it will not be referred to Appeals because of the ”automated nature of the Service’s process for identifying modules and certifying individuals with seriously delinquent tax debts and because the determinations will have been verified by the assigned attorneys in answering the cases.”
This guidance together with the other guidance provided above tells you what the IRS thinks of the scope of judicial review here. The IRS expects the courts to have little to say. I expect the courts may have something to say about that even if they generally agree with the scope of review. It will be interesting to see if someone brings a Facebook-type action seeking to get to Appeals to discuss their passport certification case. The Notice begins to bring into focus the areas where the initial fights over procedure will occur.
The Notices walks the attorneys through five types of motions – Motion to Dismiss for Lack of Jurisdiction, Motion to Change Caption, Motion to Dismiss for Failure to State a Claim or Motion for Judgment on the Pleadings, Motion for Summary Judgment, and Motion to Dismiss on the Grounds of Mootness. I suspect that the IRS will crank out a Motion for Summary Judgment on almost every one of these cases given its view of the standard of review and the issues the taxpayer can raise. The other motions will be used depending on the circumstances of the case. The Notice also talks about what the attorneys should put in a stipulated decision document. It contemplates that the IRS will enter into a stipulated decision if the IRS erroneously certifies a taxpayer, a valid basis for reversing the certification exists or the taxpayer concedes the case.
Who Represents the IRS
The Notice provides the normal breakdown of representation with the Tax Division of the DOJ representing the IRS in cases brought in District Court and Chief Counsel attorneys providing representation in Tax Court. If the case is brought in District Court, Chief Counsel would provide a defense letter and the information the DOJ attorneys would need in order to properly defend the case. The Notice instructs attorneys to always use the settlement classification of “Standard.” The Standard classification in a defense letter means that the DOJ should coordinate with Chief Counsel prior to settling the case. The other classification provided in a defense letter is Settlement Option Procedure which signals to DOJ that it can settle the case without coming back to Chief Counsel. Even in cases classified as Standard, the DOJ has ultimate settlement authority. So, it must contact Chief Counsel if it wants to settle a case but it need not listen to what they say. Because this is a new basis for jurisdiction, the IRS naturally wants to know about and have a voice in any decisions made on these cases. After five or ten years, it will probably revert the process to the normal process in which the issues in the case cause the settlement classification rather than having a blanket Standard classification apply.
Coordination with the National Office
As with the Standard classification, the norm when a new statute is rolling out is to have every case coordinated through the National Office and that is what the Notice provides here. This means that if you have one of these cases it will take longer to get a settled resolution since the local attorney will need to coordinate with their counterpart in the National Office. Coordination is not a bad thing. It will provide uniformity while slightly slowing down the process.
The Notice provides clarity on how Chief Counsel’s office will handle these case. I expect that after a year or so of working with these cases, another Notice might get issued further clarifying the procedures and dealing with the situations that have arisen which no one anticipated or dealing with adverse decisional law.