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Commenting on the Blog Posts

Posted on Aug. 13, 2014

We have many followers who get posts delivered and on top of that have many more readers who come to the site to read particular posts. Our readership has grown exponentially in the just over one year period that the blog has been in existence. Many of you post comments on the blog but most do not. For those who have never gone to our comment section, we wanted to make you aware of the sometimes lively discussion occurring there and to encourage you to comment or at least browse the comments because the commenters often have important things to say that we miss in the blog post itself.

Listed below are the comments on two of our most recent posts. The first set of comments was made in response to the post on August 11 by Carl Smith entitled In Some Cases IRS Seeks to Conflict Out Lawyers Who Represented Taxpayers in CDP Hearings. The day of that post our blog set a record for site visits. Our site continues to grow and we have set the record several times over the past few months but Carl’s post put our site visits to a new level. We attribute it to the quality of his post.

The second set of comments was made in response to the post on August 1 by Professor Joni Larson. She wrote about IRS Treatment of Penalties Following a Substitute for Return. Joni’s post was also a very popular post that drew many insightful comments.

If you have not taken the time to look at the comment section of the blog before, please do. If a post raises an issue on which you can further enlighten our readers, please add a comment. If we made a mistake or missed something, we also welcome corrections. We write the posts with some haste and know we are going to make mistakes and miss important issues. Your contributions can help make the experience richer for all. Thanks to our many commenters and to our many readers.

Comments to the post on August 11 by Carl Smith entitled In Some Cases IRS Seeks to Conflict out Lawyers Who Represented Taxpayers in CDP Hearings:

Jim Malone says:

August 11, 2014 at 12:27 pm

Great post. A real potential trap. I have heard some suggest that you bring an unaffiliated person with you to avoid the problem.

Kathleen Adcock says:

August 11, 2014 at 5:14 pm

Great advice for papering the trail, as it were. Might I also suggest two mundane suggestions to the process: (i) all correspondence be sent certified with proof of delivery, with an exterior reference code to the letter within and keep copies of the envelopes, and (ii) add a standard paragraph requesting that the agent please respond with any discrepancies to the summary provided within 30 days of the signed receipt.

David C. Dodge says:

August 11, 2014 at 6:19 pm

To avoid this mess, simply do what I do on all IRS cases, conduct all IRS hearings/conferences in-person and audio record every hearing/conference as federal law permits, so that a truthful administrative record is consummated. 26 U.S.C. § 7521. In doing so, we lawyers create a 100% truthful administrative record consisting mostly of correspondence letters and the remainder audio recorded hearings/conferences which are court reporter transcribed into a written hearing transcript. Tax Court judges will be impressed, clients too will be impressed, we as tax defense lawyers need not testify as fact witness because the audio recordings and transcripts may be introduced into the evidence record. Seems to me that leaves IRS’ lawyers no ability to motion for removal/disqualification due to purported conflicts

Frank Agostino says:

August 11, 2014 at 8:40 pm

Carl writes: “Unfortunately, taxpayers represented by attorneys in CDP cases can’t all count on Frank being present at their calendar calls.” In New York City, you can – whether its me or another volunteer from the NYCLA calendar call program, we can generally get representation to assist an attorney that needs to testify on behalf of a taxpayer in a CDP case. Thank you for the kind words.

Michael Breslin CPA, Esq. says:

August 12, 2014 at 12:19 am

I handled a case in Manhattan last year and the IRS attorney was gunning to have me removed as I’d represented the client through the OIC and CDP processes. Fortunately, the judge managed the situation well and just told me to do my best to refrain from testifying at trial.

Bob Kamman says:

August 12, 2014 at 10:22 am

WWLLD? Considering the futility of CDP hearings and Tax Court cases based on IRS definition of due process, I wonder why cases are not just submitted on a written record to SO’s, who have little or no discretion anyway when it comes to following the decision-making matrix. The difference between IRS procedural formalities and kabuki is that everyone at the Japanese theatre admits that it’s just a dance.

AJ Decaria EA says:

August 12, 2014 at 12:37 pm

Another option would be to have a non-attorney, an EA or CPA, handle the administrative actions such as representing in the OIC or CDP process. I do work for several attorneys who subcontract with me for assistance in administrative matters. It would seem that would leave them free to represent in Tax Court.

Comments to the post on August 1 by Professor Joni Larson entitled IRS Treatment of Penalties Following a Substitute for Return:

Carl Smith says:

August 1, 2014 at 12:59 pm

Professor Larson writes something that I am litigating, so I want to alert people. She writes:

“Procedurally, there is an order for how contesting the penalties will play out in court. First, the taxpayer must put the penalties at issue. Usually he does this in the petition. Because Mr. Robertson questioned all the penalties in his petition, the Tax Court moved to the next step. (If he had failed to put them at issue, he would have been deemed to have conceded the penalties and the argument would have been over and the penalties would have been applicable.) ”

What Professor Larson states is what the Tax Court has held as to the interaction of section 7491(c) (putting the initial burden of production on penalties on the IRS) with Tax Court Rule 34(b)(4) (providing that any issue not pleaded is conceded). In Funk v. Commissioner, 123 T.C. 213 (2004), and Swain v. Commissioner, 118 T.C. 358 (2002), the Tax Court held that the failure to mention penalties in the petition or later in the case constitutes a concession of all penalties, excusing the IRS from meeting any burden of production on penalties under 7491(c).

In posts here in March and June, I have discussed the follow-up to the Rand case, where it appears many Tax Court judges are fixing the penalty base (per Rand) in cases where the petitions did not even mention penalties — thus, perhaps ignoring or in their minds, sub silencio, distinguishing Funk and Swain. Further, Judge Gale explicitly held, in unpublished orders in three such cases, that Funk and Swain do not apply where evidence in the record indicates that the penalty was miscomputed. Thus, sua sponte, he reduced or eliminated penalties that improperly included disallowed refundable tax credits, even though the petitions in the cases never even mentioned the penalties.

There are two companion cases in the 9th Circuit in which I am litigating the issue of the Tax Court’s refusal to fix the Rand computational issue where the taxpayers raised a contest to penalties generally, but not as to the specific lack of underpayment issue posed in Rand, Morales v. Commissioner (discussed in these prior two posts). In Morales, the briefs are all in and we are awaiting oral argument. One of our arguments, however, is that the Tax Court’s Funk and Swain holdings are wrong. Pro se taxpayers rarely mention penalties in their Tax Court petitions. We think that Congress knew this when it enacted 7491(c) and meant 7491(c) to put the burden of production on the IRS with regard to penalties any time an individual taxpayer attaches a notice of deficiency containing penalties to her Tax Court petition — even though she does not mention the penalties in her petition. We think section 7491(c) trumps Tax Court Rule 34(b)(4)’s pleading rules. After all, section 7491(c) applies “notwithstanding any other provision of this title”, and only section 7453 of Title 26 allows for the Tax Court to promulgate rules of practice and procedure. No court of appeals has ruled on this pleading question. When the 9th Cir. does rule, I will send another post to be put up here.

Bob Kamman says:

August 1, 2014 at 9:36 pm

Has anyone actually seen a Substitute for Return? All I have seen — but this is not recent — is a transcript showing return filed with zero tax (150 transcript code) and then a subsequent assessment, in the amount of the Notice of Deficiency computation (the transcript code is in the 300 series). I think this has more to do with the decrepit IRS computer system, than anything that actually is backed up by paper documents. In fact, the Intenal Revenue Manual explanation of the Automated Substitute for Return program states: (05-19-2009)

Preparing and Processing ASFR Dummy Return

ASFR generates a TC 971 AC141 which triggers a dummy return to post to the module. No paper return exists. Do not attempt to request the DLN from files or try to associate anything with it.

Jason T. says:

August 2, 2014 at 3:21 am

The IRS’s “Substitute for Return” is a misnomer. In fact, its existence violates the law.

No law allows the IRS to create a mere “Substitute for Return.” Indeed, the very nomenclature is nonsensical. The taxpayer files no return. That means nothing exists for which something else can act as a “substitute.”

In any event, if a person fails to file a required return (or files a false or fraudulent one), the IRS “shall make such return” from its own knowledge and the information it can obtain. I.R.C. § 6020(b). Cf. I.R.C. § 6012(a)(certain persons “shall” make income tax returns).

Despite the command (or even the authorization) of 6020(b), however, the IRS NEVER makes an individual income tax return for a non-filer. I have never been able to figure out why. What the IRS does, as Professor Larson indicates, is place the individual’s name and address on a Form 1040 and make a few “0” entries. That “Substitute for Return” shows no tax at all. If a tax protester filed such a return, then the IRS would declare it frivolous.

To answer Bob Kamman’s query, yes, I have seen many SFRs. His IRM reference, however, is only to the ASFR, i.e. the “Automated” Substitute for Return. The ASFR is the SFR’s equally bogus cousin.

The IRS’s deliberate failure to make an actual individual income tax return on Form 1040 for a non-filer has fueled tax protesters’ beliefs for decades. They say if the federal income tax was mandatory, then the IRS would actually make a 6020(b) return for the non-filer. And the tax protesters have a point. For all taxes, except for the federal income tax, the IRS makes a return for a non-filer that it calls a “6020(b) return.” In contrast, for the federal income tax alone, the IRS calls its creation a “Substitute for Return.” It may sometimes add in “under 6020(b),” but the point is the same: why does the IRS not make full federal income tax returns for non-filers?

To approach Professor Larson’s specific point, the courts say the presence or absence of an SFR is irrelevant to a deficiency determination. In 1996, however, it became very relevant to deficiency cases. That year, Congress enacted what is now I.R.C. § 6651(g). That section requires that the IRS make an I.R.C. § 6020(b) return before a non-filer can be liable for the I.R.C. § 6651(a)(2) addition to tax, which applies to a failure to “pay a tax shown on a return.” And as Carl Smith points out, I.R.C. § 7491(c) places the burden of producing evidence in support of that tax addition on the IRS. But the IRS still produces only the largely blank Form 1040, an examination report, and a “certification” that the whole paper pile (somehow) constitutes an actual 6020(b) return.

Full disclosure: I am well versed on this subject for a good reason. I assisted the taxpayer in the Spurlock 6020(b) cases, 118 T.C. 155 (2002) and TC Memo. 2003-124.

The latter Spurlock case compelled the IRS to stop asserting the I.R.C. § 6651(a)(2) addition to tax in all non-filer cases for nearly a year. In that time, the IRS scrambled to figure out how it could still assert that addition to tax—without, again for whatever reason, completing a Form 1040. So it added to its conglomeration of papers two “certification” forms; one for SFRs, one for ASFRs. According to the IRS, and now the Tax Court, either form produces a real 6020(b) return. Nonsense.

If the Professor, or anyone else, wishes to learn more about why the IRS approaches the 6020(b) return/6651(a)(2) issue in the way it does, then please read the Spurlock cases first. After you do that, please read Chief Counsel Notices CC-2003-019, CC-2004-009, and CC-2007-005. At least in part, Spurlock inspired each Chief Counsel Notice.

In closing, I must say I am alarmed at Professor Larson’s implication that the IRS should be able to rely on secondary evidence to meet its I.R.C. § 6651(a)(2) production burden. The failure to file a return and the failure to pay estimated tax additions are much different from a failure to pay a tax shown on a return addition. The first two tax additions require the IRS to show it possesses neither the person’s return nor any of his estimated tax payments. As applied to non-filers, however, I.R.C. section 6651(a)(2), is much different. That addition to the tax arises only when the IRS has made a return under I.R.C. section 6020(b). Without that return, though, how is the Court to determine (a) the return exists, (b) a tax is shown on that return, and (c) the exact tax amount shown on that return?

In short, evidence that an event occurred must be stronger than the evidence that an event did not occur. Account transcripts do not make the grade. As I see it, the IRS has made its “Substitute for Return” bed; now it must “lie” in it.

Joni Larson says:

August 2, 2014 at 2:04 pm

It is noteworthy that nothing in Robertson v. Commissioner suggests that whether a substitute for return can or cannot exist was at issue. The Court simply noted that one had not been entered in evidence. (However, by suggesting the IRS needed to have one in evidence to have the penalty imposed seems to suggest the court had no issue with the idea that one could exist.)

There also seems to be some confusion about the rules of evidence versus the burden of proof or burden of persuasion. FRE Rule 1004 provides a means for having secondary evidence admitted into evidence when the original writing is not available. It is an evidentiary rule. It in no way impacts or alters a party’s burden of proof or burden of persuasion.

JT says:

August 4, 2014 at 6:51 pm

In I.R.C. § 6651(a)(2) cases, FRE 1004 is irrelevant. Professor Larson merely assumes “the original writing is not available.” Her assumption is the IRS actually made a “Substitute for Return” (the purported 6020(b) return), but it could not locate it. In Robertson, the Commissioner made no such claim. In fact, I don’t know of one case since 1996, the enactment year for I.R.C. section 6651(g), in which the Commissioner made that claim.

The IRS simply failed to complete the required 6020(b) certification. Bob Kamman alludes to the reason: the IRS computed Robertson’s deficiency automatically, based on information returns others filed with respect to him; it did nothing else. See Robertson at *3.

I’m still mystified why Professor Larson thinks it good tax practice to weaken the taxpayer’s protection that I.R.C. § 7491(c) embodies.

Dermot Kennedy says:

August 4, 2014 at 8:55 am

On a tangential but related matter while I.R.C. § 6651(a)(2) which applies to a failure to pay a tax shown on a return and other code section refer to “addition to tax”, I have noticed the IRS Chief Counsel attorney in her/his Answer filed to my recent Petitions is “Denying” that there is an addition to tax and pleading instead there is a “penalty” pursuant to whatever section is listed on the Stat Notice and suggesting they will file a 37(c) Motion if I do not file a Reply to the Answer. Regardless whatever nomenclature is given to this, so long as it placed at issue in the Petition I do not see this as changing a party’s burden of proof or burden of persuasion. Has anybody seen a different outcome?

Carl Smith says:

August 4, 2014 at 10:43 am

7491(c) puts the burden of production on the IRS “in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title”. So, it shouldn’t matter whether an item is a penalty or addition to tax for 7491(c) to apply.

JT says:

August 4, 2014 at 7:07 pm

I can’t imagine that the “addition to tax” v. “penalty” distinction alone would warrant a reply, let alone a Rule 37(c) motion to compel one. As Carl Smith points out, under 7491(c), the distinction makes no difference to the production burden.

In my experience, when a SNOD asserts a 6651(a)(2) amount, that notice shows it as an “addition to tax.” You do not, though, expressly state that your SNOD mentions 6651(a)(2).

I suspect, then, that you are disputing either a 6662 (accuracy-related) or 6663 (fraud) amount(s). The Code does denominate each of those impositions as a “penalty,” rather than as an addition to tax. Again, though, it makes no difference to the Commissioner’s burden of producing evidence to support an accuracy-related penalty. On any fraud penalty, however, the Commissioner bears the burden of proving it by clear and convincing evidence.

Bob Kamman says:

August 7, 2014 at 12:00 pm

I admit that in the tax seas where I swim, automated SFR’s are the only fish. I suspect that’s true of cases that come to taxpayer clinics, also. Do field and ACS collection employees actually prepare any of these manually?

Jason T. says:

August 9, 2014 at 2:34 am

I have seen ROs prepare actual 6020(b) returns, i.e. on completed Forms 940, 941. Examiners prepare manual SFRs, generally in “high income non-filer” cases. The Examiner will correspond with the reported payor(s) to verify the accuracy of the filed information returns (because of the 6201(d) burden of production requirement). The amount(s) the payor(s) verify results in the starting point for the Substitute for Return. But you’ll never see an amount shown on the Examiner’s Form 1040 that he or she supposedly “makes” for the taxpayer under 6020(b). To me, that omission renders the resulting 6651(a)(2) failure to pay addition to tax invalid….no tax shown on a return = no addition to tax for failure to pay a tax shown on a return.

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