There were four designated orders this week, but only two that will be discussed in any detail. For the incurably curious, the two designated orders that will not be discussed can be found here (order to respond to a motion for summary judgment) and here (order granting IRS motion for summary judgment). The two orders that will be focused on concern Collection Due Process (CDP) hearings, and somewhat bizarre administrative moves by the IRS.
Penny-Pinching or Oversight? IRS Failure to Send Letter by Certified Mail Dooms Summary Judgment Motion
Dkt. No. 15248-16L, Security Management and Integration Company v. C.I.R. (order here)
The IRS has been trying to get this case dismissed for lack of jurisdiction since August, 2016 –filling supplemental motions in January and March of this year. Alas, all of those hours spent appear to be for naught, largely on the basis of the IRS’s failure to send a critical letter by certified mail. Whether this is the embodiment of the adage “penny-wise, pound-foolish” or just a simple mistake with redounding consequences is not clear from the available documents, and left to the reader’s biases.
As is often the case, the IRS begins with a challenge to Tax Court jurisdiction due on timeliness grounds. There are essentially two “timeliness hurdles” for getting into tax court on a Collection Due Process (CDP) case. The first hurdle is requesting the administrative CDP hearing within 30 days of the notice of intent to levy or notice of federal tax lien (IRC 6330(a)(3)). The second hurdle is filing a petition with the tax court 30 days after receiving a “notice of determination” from the IRS following that hearing (IRC 6330(d)). The IRS tries to argue both of these hurdles apply… and likely could have won on the second, if not for their paltry record-keeping.
As to the first hurdle, the IRS proclaims that the taxpayer cannot get into court because they didn’t get a notice of determination (which only issues from a timely CDP request). The Tax Court makes short work of this argument. Under Craig (discussed previously here and here) if the taxpayer timely requested a CDP hearing (as the Court so finds) the “decision letter” is a notice of determination, despite whatever the IRS may call it.
First hurdle: cleared. As we’ll see, it may well be a hurdle that ends up biting the IRS.
But at first blush the second hurdle appears daunting for the tax payer. The IRS “decision letter” was dated April 6, 2016. The petition to the Tax Court? Not filed until July 5, 2016… considerably more than 30 days.
The Court finds that at least one letter was sent to the correct address (hedging their bets, the IRS sent multiple), so it would seem extremely unlikely that the taxpayer could argue they timely filed a petition in response. Except that this is a summary judgment motion to dismiss for lack of jurisdiction, and the IRS record is not nearly what it needs to be.
In fact, all the IRS can rely on to show that the date the decision letter was sent is the date printed on the letter (apparently not the postmark). Not infrequently, I have had cases where the date printed on an IRS correspondence is questionable, and would appear to have been dated well before it was actually placed in the mail. It isn’t particularly difficult to imagine a letter being prepared (and dated) at one time, and then placed in a queue only to be mailed when some later event takes place. This happens all the time when a letter is prepared but needs approval before being sent. Such circumstances are ones that Judge Carluzzo can likely envision, yielding his reluctance “to find that [the notice of determination] was mailed as dated.” Without the date on the notice holding any water, the argument devolves into “he-said-she-said” between the IRS and the taxpayer. That isn’t enough to win on summary judgment, and it isn’t enough for the IRS to show that the petition was not timely.
If only the IRS had some other evidence to show the date the notice was mailed… like, say, a certified mailing list. And this is where we return to the initial problem: the IRS (apparently mistaken) belief that the first timeliness hurdle was never met. For a timely CDP request, the IRS will generally send a notice of determination by certified mail. See Treas. Reg. 301.6330-1(e)(3) Q&A-E8. I was able to find no such regulation or internal policy for the IRS with regards to decision letters. Because the IRS didn’t think the CDP request was timely, they may not have thought that there was a reason to care much about proving when the decision letter was sent: the taxpayer couldn’t get into court no matter how quickly they respond to a decision letter that fails the first timeliness hurdle. Internally, when the IRS believes it is conducting an “equivalent hearing” it is supposed to investigate and make a “separate timeliness determination” about the request. See IRM 188.8.131.52 and 184.108.40.206. It is obvious, however, that this safeguard isn’t foolproof. The IRS may do well to better recognize these shortcomings (especially that the notice dates on many of its letters are not that convincing) and adjust its procedures accordingly.
I have seen some lawyers (and students) that appear a bit trigger happy with certified mailing, desiring a paper trail where proof of a mailing date is somewhat irrelevant and the certification proves nothing of the contents of the parcel. I would say reasonable minds can differ on the virtue of certified mailing in many cases. But where statutory deadlines are (or may be) at play, it is unthinkable that one would forego a certified mailing paper-trail. This is, if nothing else, a reminder to the IRS (and practitioners) of the perils that may follow such oversight.
“Trust Us, He Owes” Not Good Enough for IRS Summary Judgment Motion in CDP
Dkt. No. 27754-15L Walker v. C.I.R. (order here)
In the previous order, we saw the problems of a paper trail the IRS created for itself by failing to use certified mail. Here, that record-keeping problem resurfaces: in this case, by an administrative record so paltry that -by the IRS own admission- it “remain[s] unclear” why additional tax was assessed.
This order deals with an IRS motion for summary judgment against a pro se taxpayer that appears to want to argue (1) I don’t owe the tax, and (2) I filed some of those tax returns the IRS is saying that I didn’t. Argument (2) is fairly factual, and not a great candidate for summary judgment where the IRS records aren’t up to par. In this case, they aren’t exactly sterling, or at least they are suspect enough to allow for a genuine issue of law or fact (and thus, not suitable for summary judgment). Issue (1) is usually a good candidate for summary judgment, since the ability of a taxpayer to argue the merits of “I don’t owe the tax” is frequently unavailing in a CDP hearing. If the taxpayer previously had an opportunity to so argue the tax or received an SNOD, summary judgment will (likely) ensue. But what if you are not arguing the merits of the tax, so much as the fact that the IRS records are so bad they can’t properly show that you should owe it? When a taxpayer says “I don’t owe the tax,” can that be construed as arguing the merits of the tax (forbidden), or the procedure of the assessment (allowed)? This order may slightly blur those lines.
I think this order can stand for two different takeaways, depending on your preferred viewpoint. The first focuses on statutory requirements of a CDP hearing. The IRS is required to review that “the requirements of applicable law or administrative procedure have been met.” IRC 6330(c)(1). Under this viewpoint, focused mostly on tax procedure, some indicia of why the IRS assessed the tax is a component of verifying that applicable law was followed. This order simply clarifies what goes into the statutory requirement of IRC 6330.
The second potential takeaway is that general APA considerations and case law are creeping more and more into the tax arena, and are particularly amenable to CDP hearings. This is a slight twist on the notion that the IRS simply failed in its statutory obligations. Consider the question this way: if, on remand, IRS Appeals sufficiently verified that the IRS followed the proper deficiency procedures in assessing the tax (issued an SNOD, etc.) would that be enough? Or, would the IRS need to look at the substance of the SNOD (beyond such things as proper address) as well? If the latter is required (and in this case IRS Appeals is specifically ordered to identify “the reasons for the assessment”) it seems to implicate the sort of judicial review of deficiency notices in CDP cases that the Tax Court has balked at in deficiency cases (most notably, in QinetiQ (discussed here and here among many other places)). At the collection stage, and even assuming the deficiency procedures were properly followed, the IRS can’t get by with a “trust us, they should owe” assessment. One imagines that there must be a record somewhere in the bowels of the IRS explaining why they believe the taxpayer owes an additional $24,562. Special Trial Judge Daniel Guy Jr. rightly requires the IRS to make such a showing.
Of course, CDP is a relatively new aspect of the tax code and role of judicial review within it is still being hammered out. On remand, is all that IRS Appeals required to do is show that there was some rationale for the assessment in the administrative record (“we thought he had more taxable income”)? Or could that rationale thereafter be challenged for being arbitrary and capricious (an abuse of discretion)? Questions to ponder this holiday weekend…