This week’s designated post was prepared by Caleb Smith, the director of the low income taxpayer clinic at the University of Minnesota. Keith
There were five designated orders last week. Although none broke especially new ground, when looked at in conjunction three of them provide contours to important issues: namely, (1) when does an attack on the procedures of the underlying tax become an attack on the underlying liability itself in a CDP hearing? (IRC § 6030(c)(1) vs. IRC § 6030(c)(2)(B)) And (2) just how bad does the IRS record have to be before it is considered unreliable (e.g. for evidence of proper mailing)? We will take these issues in order.
Collection Due Process Hearings: Are You Arguing the Merits of the Liability or the Procedure Leading to It?
The simple answer would seem to be “if you are arguing merits, it is (c)(2)(B), if you are arguing procedure it is (c)(1).” Sometimes this is an easy decision for the Court: in one designated order last week (found here), Judge Carluzzo found an impermissible merits argument where the taxpayer was arguing that his amended return should be considered in the hearing.
Unfortunately, I’m not so sure the difference is always so easily delineated. For instance, what is a taxpayer arguing when they say “I don’t owe 2010 taxes?” It may be “I disagree with the IRS calculation for my 2010 liability” (merits) or it may be “I disagree with the IRS records of my owing 2010 taxes” (procedure). Context clearly matters. In a previously discussed designated order a pro se taxpayer made essentially that argument (“I don’t owe”). The Tax Court found the IRS records so shoddy on that point as to be insufficient. That is all well, and seems to be a procedure issue… EXCEPT that the order compelled the IRS to explain the REASONS for the assessment, not if the proper assessment procedures were followed. This seems to be plainly a merits issue, unless the assessment is either so arbitrary as to offend the APA (which maybe applies?) or there was no “determination” in the SNOD per Scar.
So, to return to the question slightly altered, what is a taxpayer arguing when they say “I don’t owe because of procedural anomalies?” This, more or less, is a distillation of what the taxpayer was arguing in one of last week’s designated orders: Huminski v. C.I.R., docket no. 16614-16L (here). Sounds distinctly procedural (perhaps that is tipped by using the word “procedural”?) Yet the court finds this (in conjunction with numerous other tax-protestor type arguments) to be an argument on the merits (c)(2)(B) and therefore disallowed because the taxpayer clearly received the SNOD. In fact, Judge Armen mentions numerous times that he is somewhat surprised (or that it is “notable”) that the taxpayer does NOT raise arguments about the income resulting in the liability: see pgs 3, 7, and 10 of the order. Nonetheless, Judge Armen says that the taxpayer “couches his argument in terms of the invalidity of the assessment” (procedure) but really is attacking the liability (merits). Again, context matters in determining if it is a (c)(1) or (c)(2)(B) style argument. The thrust of the taxpayers argument -to the extent that a coherent one can be discerned- appears to be that an SFR is not a valid return (in fact, is fraud perpetrated by the IRS) since it lacks the taxpayer’s signature and consent. This, I think, is an excellent example of where merits and procedure blur: likely merits if it is whether SFRs are invalid per se, procedure if it is arguing that the particular SFR protocols were not followed.
In this case the outcome likely would be the same whether the Tax Court treats it as a (c)(1) or (c)(2)(B) attack… but that may not always be true. A taxpayer arguing that procedures weren’t followed puts those procedures squarely at issue, and appears to require a “harder look” from the Court. Conversely, one that (impermissibly) argues merits without raising the procedural issue will likely lose based on the boilerplate IRS settlement officer “verification that applicable law and procedure have been met” with a summarily produced Form 4340. In other words, a proper procedure argument may require something of a look behind the Form 4340, whereas a merits argument may not. And looking into the IRS records (or lack thereof) more and more appears to be a winning approach… See previous post here.
So how bad can the IRS records be to prove mailing? Bentley v. C.I.R., Docket # 20337-16S (found here).
Where the IRS fails to send mail certified, they put themselves in serious peril for proving delivery date. (See post here, finding jurisdiction for a CDP appeal because the timeliness could not be determined from the IRS records.) In Bentley, however, the IRS did use certified mail and it ended up making all the difference.
The facts are commonplace: the IRS sent duplicate SNODs to the taxpayer (including, it appears, to their last known address). The taxpayers filed a petition in tax court a few months after the filing deadline had passed, and the IRS moved to dismiss for lack of jurisdiction. Very straightforward. In addition to very clear loser-arguments (“the SNOD refers to Form 1040A rather than Form 1040”), the taxpayers argue that the SNOD was not mailed in accordance with the proper procedures -not, in fact, that it wasn’t mailed to last known address, but that per Knudsen v. C.I.R., the record wasn’t sufficient to show that the SNOD was properly mailed. In fact, the taxpayer’s have a decent argument that the IRS certified mail list is not sterling, and Judge Armen notes that it is “less than ideal” in that it: (1) doesn’t indicate that the items of mail were SNODs and (2) has mismatched years for the mailing: one list as 2015, and the other as 2016. Nevertheless, the IRS prevails. This is largely because of the USPS tracking information that corroborates the mailing of the SNODs. Thus, “even if [the IRS] failed to comply with certain provisions of the Internal Revenue Manual […] the defects asserted by petitioners are not so substantial” as to render the IRS certified mail list unreliable. That there doesn’t even appear to be an argument from petitioners that the SNOD was sent to the wrong last known address probably makes this an easier case. Nonetheless, it is yet another example of the anomalies that seem to surface whenever one puts IRS records at issue.
Remaining Designated Orders: ESOPs and Pro Se Appeals
I will not go into detail on an order granting summary judgment to the IRS on the question of whether a particular ESOP was a qualified plan under IRC § 401(a). Those interested in such subject matter can find the order here.
The last designated order (found here) that I will give only passing mention involves the Tax Court working with a Pro se taxpayer. It is interesting as a glimpse into the world of the Tax Court working with the unrepresented (in this case, construing a 10 page letter to the Tax Court as a notice of appeal). It is difficult to say from the record available whether this party would have benefitted from (or been receptive to) counsel: the bench opinion issued in November of 2016 indicates that the taxpayer believed he was “targeted” by the IRS and was unwilling to file delinquent tax returns. Read in context it may be seen as a testament to the professionalism and patience of many Tax Court judges, going the extra mile to be fair to those without legal training when they exercise their day in court.