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Extending the Statute of Limitations on Collection

Posted on Apr. 6, 2023

In a pair of recent cases, taxpayers argued unsuccessfully that before the IRS brought suit against them the statute of limitations on collection had expired. We have written before about the difficulty in calculating the statute of limitations in collection cases and about the government’s penchant for bringing the cases close to the statute expiration period. You can find earlier posts here, here, here and here. If a taxpayer is uncertain whether the statute of limitations on collection has expired prior to the bringing of the suit, there is little downside to the taxpayer of putting the government to its proof regarding the statute of limitations. The government almost always wins these cases because the lawyers in Chief Counsel and Department of Justice Tax Division do a good job at calculating the statute. In the two cases I will discuss today, the government attorneys again calculated the time period correctly though different statute of limitation provisions governed each case. In both cases the taxpayers raised as a defense to suspension of the statute the IRS failure to suspend collection when it should have.

In United States v. Sparkman, No. 5:21-cv-00788 (C.D. Cal. 2023) the taxpayer owed over $600,000 stemming from a Tax Court decision in 2005, Sparkman v. Commissioner, TC Memo 2005-136.  He substantially reduced his liabilities in the Tax Court case but still had a sizable liability which he did not pay.  Because of his outstanding liability and the inability of the IRS to collect on it administratively, the government filed a suit in May 2021 seeking to reduce the liability to assessment.

After the Tax Court decision, Mr. Sparkman appealed to the 9th Circuit and continued to seek redress in the Tax Court where there are just as many docket entries after the decision as before. More importantly for purposes of this case, the IRS sent him a CDP levy notice in August 2006 and he timely requested a hearing. The IRS issued a determination letter in March 2008. Running on a parallel track was a CDP lien notice just a couple months later and a determination letter issued at the same time as the letter issued with respect to the levy. He timely filed Tax Court petitions with respect to both determinations and the Tax Court issued decisions on both in December 2009.

In January 2012 he sought an installment agreement. The discussion regarding the installment went on for some time. The decision details all of the back and forth which principally centered around the view of the IRS that he should sell some property to pay down his debt. In June of 2013 a deal was struck regarding an acceptable installment agreement amount and in January 2014, he began to make the payment. In making the payments, Mr. Sparkman designated them to be applied to his 2007 liability which was assessed in 2013 after an audit. This designation violated the installment agreement since it essentially meant he was not making payments on the liabilities covered by that agreement. The IRS terminated the installment agreement in March 2016.

The IRS framed the issues as follows: 1) whether the CDP hearings and Tax Court cases suspended the statute of limitations on collection and 2) whether the installment agreement request and subsequent discussions also suspended the statute. Mr. Sparkman argued that the IRS failed to honor his CDP request and engaged in illegal collection activities. Without deciding if the IRS engaged in illegal collection activities, which it said was irrelevant, the court found that the CDP request and Tax Court case suspended the collection statute of limitations for the period stated by the IRS. This was a relatively simple and straightforward calculation that really raised no new issues.

With respect to the installment agreement suspension, things get a little stickier as is normal with this basis for suspension of the collection statute. Section 6502 suspends the statute for the period during which a proposed installment agreement is pending and for 30 days immediately following the termination of an installment agreement. Treasury Regulation 301.6331-(4)(a)(2) provides that an installment agreement is pending when accepted for processing. The court cited to “IRS Practice and Procedure” at 15.06[1] to find the three circumstances supporting acceptance for processing: 1) a request for an installment agreement is received before a case is referred by the IRS to the Department of Justice; 2) the request contains sufficient information for the IRS to decide if the proposal is acceptable and 3) the IRS has not returned the proposed installment agreement. Mr. Sparkman said the installment agreement was not pending for the entire period because at some points in the discussion the IRS told him his proposal was unacceptable; however, the court finds that there was an ongoing negotiation for 546 days leading to the acceptance of the installment agreement.

This is murky water. The court finds a period most beneficial to the IRS. I cannot say that it is wrong but only that the concept of pending installment agreement is one that places a heavy burden on parties trying to nail down the statute of limitations.

A second case decided was decided not long after Sparkman. The case of United States v. Colasuonno, No. 7:21-cv-10877 finds that the government timely filed a suit to collect based on the suspension of the statute of limitations caused by a bankruptcy filing. The IRS brought this suit on December 20, 2021, seeking to reduce its liability to judgment. Mr. Colasuonno has a substantial liability for Trust Fund Recovery Penalty and was successfully prosecuted in conjunction with the liability. He filed a chapter 7 petition on July 24, 2009. Because the TFRP liability is entitled to priority status no matter how old it is and because BC 523(a)(1)(A) excepts from discharge all taxes entitled to priority status, the bankruptcy had no ability to assist him in removing the TFRP liability. Nonetheless, it suspends the statute of limitations on collection since the bankruptcy automatic stay prevents the IRS from pursuing collection which it is in effect. He received a discharge in the bankruptcy case on June 8, 2011. The discharge would lift the automatic stay with respect to collection action against Mr. Colasuonno though not necessarily against assets in the bankruptcy estate.

Similar to the argument made by Mr. Sparkman, Mr. Colasuonno takes the position that the IRS should not receive the benefit of an extended statute of limitations by virtue of the bankruptcy because it violated the automatic stay and sought to collect from him by filing a notice of federal tax lien after the filing of the bankruptcy petition. The IRS argues that if it violated the automatic stay Mr. Colasuonno could bring an action against it with respect to the violation but that has nothing to do with the statute extension caused by the filing of his bankruptcy petition. The court analyses the relevant statutory provisions and agrees with the IRS. It finds that Mr. Colasuonno’s remedy for a stay violation is to bring a specific suit for an injunction and/or to recover damages caused by the violation but that he cannot use the stay violation to change the statutory calculation of the time of the suspension. Calculating the suspension of the statute based on the period of the bankruptcy stay, the court finds that the suit was timely filed.

I agree with the decision of the court here as well. It is unfortunate for both defendants that they did not, or allegedly did not, receive the full measure of the stay on collection that they should have received by filing a CDP or bankruptcy case. They have the right to be compensated for the IRS missteps but that right does not stop the clock on a suspension described by statute. These cases point out the different actions by a taxpayer that can suspend the statute of limitations on collection as well as the conclusion that the suspension goes into effect whether or not the IRS complies with the reason for granting the suspension.

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