The case of United States v. Barbara Holmes provides an example of how a request for Collection Due Process (CDP) relief can extend the statute of limitations on collection and keep open the ability for the IRS to bring suit that might have otherwise expired. Plaintiff’s attorney, who also happens to be her husband, may have made a reasonable decision to file the CDP request and the title of this post goes too far in suggesting that a taxpayer should never file a CDP request at the very end of the statute of limitations on collection; however, when the statute is short, careful thought about taking action, like making a CDP request or making an offer in compromise, must precede the request that will extend the statute of limitations on collection.
The facts here demonstrate the dysfunction of the IRS more than the estate and bear discussion in analyzing what happened.
Mrs. Holmes is the executrix of the Estate of Shirley Bernhardt. The estate tax return was filed on July 16, 1998 and nothing in the opinion indicates that the return was untimely. The estate tax return reported a liability of $700,024.34 which was remitted with the return. The IRS audited the return, sent a notice of deficiency and eventually settled the Tax Court case. As a result of the Tax Court case, on July 16, 2004, the IRS assessed an additional $233,309.20 plus interest; however, the assessment was erroneous because it failed to properly apply the state estate tax credit. The opinion does state how the mistake was corrected but I expect that the IRS reduced the assessment with a partial abatement. The remaining balance on the account at the time the IRS brought suit probably exceeded $200,000.
Although the opinion does not discuss it, I expect that the IRS properly issued notice and demand and then sent other letters in the notice stream. The opinion does state that on December 27, 2004, the IRS placed the case in the queue for collection by a revenue officer. The opinion in this case comes from the Federal District Court in Houston causing me to believe that the collection case would have been assigned to a revenue officer group somewhere in southern Texas. That group must be mighty shy of revenue officers because the case sat in the queue for approximately nine years. The opinion does not state whether any payments occurred during that period or why the liability remained outstanding but on August 19, 2013, the opinion states that the IRS filed notices of federal tax lien in connection with the Estate’s unpaid taxes.
The filing of the notice of federal tax lien triggers the requirement that the IRS send to the taxpayer a CDP notice pursuant to IRC 6320 giving the taxpayer the opportunity for a hearing with Appeals and the opportunity to go to Tax Court, if Appeals issues a notice of determination. The IRS has a lien under IRC 6324 for unpaid estate taxes that exists with full force without the need for the filing of a notice of federal tax lien. The IRS does not file a notice of federal tax lien for estate taxes but the estate tax lien expires after 10 years. The IRS has the ability to file the notice of federal tax lien on the assessment it made after winning the Tax Court case. Because of the gap here between the end of the estate tax lien in 2007 ten years after the death of the decedent and the filing of the notice of federal tax lien in 2013, the IRS placed the collection of the debt at risk to other creditors. The actions regarding the collection of this debt suggest a high level of dysfunction in the collection division.
The opinion then says that the IRS sent to the taxpayer on September 27, 2013 the final notice of intent to levy. This notice would give the estate separate CDP rights and trigger its own 30-day period for filing a CDP request. On October 5, 2013, the taxpayer sent to the IRS, by certified mail, a request for a CDP hearing. That request clearly came within 30 days after the mailing of the levy notice and should have triggered a CDP hearing. Assuming that nothing else had extended the statute of limitations on collection, the request for the CDP hearing also came during the 10th year after the assessment, at a time when there were about eight months left on the statute of limitations for collection.
When you get that close to the end of the statute of limitations on collection, you must carefully evaluate what you think will happen during the next eight months in order to decide if making the CDP request is in your best interest or if you think that letting the statute continue to march toward the end of the time period will bring the best result. There is no right answer because you do not know what the IRS will do during that eight months but you should have a very clear idea of what you expect to gain by bringing the CDP case if you go that route.
I do not know what benefit the taxpayer thought she might obtain by bringing the CDP case. She could not contest the underlying liability because the liability resulted from a Tax Court decision. The one benefit I see to a CDP case in these circumstances is the ability to make an offer in compromise that you have the opportunity to have the Tax Court review if you think the IRS rejected it inappropriately. I have written before that I think the IRS should not process offers in compromise from decedent’s estates for the same reasons it refuses to process offers from bankruptcy estates because a regime exists for contesting the non-payment of those types of liabilities. Even though the IRS has not adopted my suggestion, getting an offer through on unpaid estate taxes can prove very difficult because of the personal liability of the executor and the existence of the like lien on the transferred property.
For some reason, Mrs. Holmes thought that brining a CDP case would prove beneficial; however, the IRS frustrated her attempt to obtain a CDP hearing. At the time of her request, the government was in the throes of one of the many government shut downs. When the government shuts down, mail stacks up. When mail stacks up, short cuts can occur in processing the mail when the disgruntled employees return from their paid time off. For whatever reason, the CDP request was lost and this is where the case gets interesting.
The lost CDP request caused the general momentum on the case the IRS collection division was finally beginning to build to come to a standstill. The opinion does not say what happened between October 5, 2013 and May 2, 2014, just 10 weeks before the statute of limitations is set to expire if nothing suspends it. On that day, counsel for the estate sent a letter to the IRS including a copy of the original CDP request from October 5, 2013. Apparently, the May 2 letter did not convince the IRS that a timely CDP request was made by the estate because on June 2, 2014, counsel for the estate sent another letter to the IRS again arguing that the CDP occurred timely; however, this time he withdraws the CDP hearing request and instead asks for an equivalent hearing.
The estate sends a third letter on July 8 and on July 11, 2014, just five days before the statute of limitations would run on the 10-year period following assessment, the IRS sends the estate a letter saying it accepted the timely request for a CDP hearing. How nice.
The opinion does not say what happened as a result of the IRS accepting the CDP hearing request, but the parties must not have reached an agreement during the CDP process or this case would not exist. On March 10, 2015, the IRS filed suit against Mrs. Holmes individually, and in her capacity as executrix of the estate, and it filed suit against Mr. Holmes individually. The estate argued that the suit was filed out of time. The IRS argued that the estate’s timely request for a CDP hearing suspended the statute of limitations on collection and made the suit timely.
The Court found that the estate was estopped from making the argument that the misplacement of the CDP request by the IRS prevented the IRS from proving that the statute of limitations was suspended by that request. The Court ruled that the estate had a duty of consistency. It had argued with the IRS and written to it several times that it had timely filed the CDP request and it could not argue that a timely CDP request did not exist.
“The elements of the duty of consistency are (1) a representation or report by the taxpayer; (2) on which the Commissioner has relied; and (3) an attempt by the taxpayer after the statute of limitations has run to change the previous representation or to recharacterize the situation in such a way as to harm the Commissioner.” Citing to Herrington v. Commissioner.
Because of its determination regarding the duty of consistency, the Court granted summary judgment with respect to the estate; however, the Court refused to grant summary judgment against Mr. and Mrs. Holmes in their individual capacities because of missteps the IRS had made with respect to the assessment. The estate may not have any funds remaining. So, getting summary judgment against the estate provides a first step for the IRS to collect the unpaid estate tax liability but it may need to win the case against the individual defendants in order to collect the liability. This could give further opportunity to report on the case.
No matter what the outcome, the filing of the CDP request during the final year of the statute of limitations on collection kept open the time frame for the IRS to bring this suit. Maybe the IRS would have brought the suit within the un-extended time frame. We will never know. The decision of the taxpayers to request the CDP hearing may have been the correct decision, but it is one that should occur only with a careful weighing of the perceived benefits against the granting to the government of additional time and the bringing to the government’s attention a case it has allowed to languish for almost 10 years.