We tend to think of the statute of limitations on collection as expiring ten years after assessment absent something extending it like bankruptcy or an offer in compromise. Even the ten year period is relatively new. The statute of limitations was only six years prior to 1990 when Congress amended 6502(a)(1) without any prompting from Treasury and raised it to ten because it thought that would generate more revenue from people who owed taxes. Unfortunately, the change has the primary impact of leaving debt on the books longer but provides little assistance in collecting taxes most of which go uncollected if the IRS cannot succeed in the first two years.
We also tend to think of tax merits litigation in district courts of divisible taxes and penalties as sort of the equivalent of tax merits litigation in Tax Court. The taxpayer does not exactly have a prepayment forum but generally has to pay very little in order to get a day in court. What we do not tend to think about is the collection consequences of litigating the tax merits of a liability in district court rather than Tax Court from the perspective of the amount of time it gives the IRS to collect the tax. When the taxpayer loses a Tax Court case, the loss allows the IRS to assess and starts the ten year period. When the taxpayer losses a district court case, the IRS already has an assessment but the loss gives the IRS a judgment against the taxpayer and that ushers in a different time period that taxpayers might not have factored into the equation when they embarked on contesting their responsible officer penalty or other divisible tax liability.
I looked at this issue in order to respond to a friend who was dealing with IRS attempts to collect the tax after the twenty year period of the judgment. Though the infinite time period to collect gets brief mention in Chapter 14 of Saltzman and Book, it bears discussion in a post for those who may not have encountered it previously. The judgment has the ability to preserve and extend the federal tax lien as well as the priority offered by filing notice back to the original date of filing. The time period for extension of the lien is 20 years and the government has the option to pick up an additional 20 years.
Aside from the way the judgment allows the extension of the priority of the federal tax lien during the extra time created by the judgment, the underlying liability gets preserved forever. Perhaps the best case to examine the way the judgment works here is Beeler v. Commissioner. In that CDP case the IRS obtained a judgment against the taxpayer as a result of litigation regarding the trust fund recovery penalty (TFRP). A judgment can also occur because the IRS brings an action to reduce the assessment to judgment or the IRS obtains a judgment in connection with another type of collection suit such as foreclosing the tax lien on property.
Taxpayers bringing refund suits generally do not worry about the creation of a judgment because they have already paid the liability. Even a partial victory results in the return of money in most cases. The exception occurs in cases in which the refund suit contests a divisible tax. Here, the taxpayer has usually paid only a small fraction of the assessed liability. Anything but a complete victory in a refund suit contesting divisible taxes will almost always result in a judgment in which the taxpayer still owes the IRS. This possible outcome should not deter someone who believes they do not owe the tax because the possibility of eliminating the assessment generally outweighs the negative result if a loss creates a judgment. Still, the possibility of a judgment may cause some taxpayers with the right to bring a refund suit to contest a tax assessment of a divisible tax to pause and calculate whether the opportunity for relief from the assessment outweighs the burden of a judgment with its long lasting effect. The difference in impact between judgment that occurs following a divisible tax refund suit and the ability to simply assess that occurs after a Tax Court case raises questions about the reason for the disparity and why Congress does not simply open the doors of the Tax Court to create parity.
The most common refund suit for divisible taxes arises in the context of the TFRP. Persons tagged by the IRS with the TFRP regularly bring suit to contest that assessment. So, cases involving this penalty provide the most likely circumstances in which a taxpayer will have a judgment rather than simply an assessment. TFRP cases, however, frequently involve assessments against more than one responsible person. One or more of the assessed persons in this situation may decide that no point exists in contesting the TFRP and the burden of the potential judgment outweighs the possible benefits of success. Co-responsible officers do not control their own fate in this matter, however, because the bringing of a suit by one of the responsible persons will often cause the Department of Justice to bring a third party complaint against the other responsible offers and join them into the refund suit. So, accepting responsibility does not avoid the possibility of a judgment in the TFRP context where multiple responsible officers exist.
These facts occurred in the Beeler case where Mr. Beeler brought the refund suit contesting the TFRP assessments made against him and two other individuals. The two other individuals were brought into the suit by the Department of Justice. The timeline for the case is somewhat interesting. The liabilities related to unpaid employment taxes in 1981 and 1982. The IRS did not assess the liabilities until 1985. According to a GAO study, this delay is typical of the time the IRS has historically taken to make TFRP assessment. I have written before about the consequence of the lengthy delay before assessment. Mr. Beeler brought the refund action on November 17, 1986. The SDNY rendered its opinion on August 18, 1995 and the judgment on September 1, 1995 for over $150,000. I could not tell how what appeared to be a simple, fact based refund suit concerning the TFRP could take almost 9 years. Absent the refund suit, the collection statute of limitations from the assessment basically ran before the case was decided.
Because he lost the refund suit, the IRS had a judgment against Mr. Beeler and the other two responsible officers. He did not satisfy the judgment. In the Tax Court opinion Judge Goeke states that the “account transcripts for Mr. Liebmann and Mr. Ross [the other two responsible officers] on or about November 11, 2007, and May 27, 2002, respectively, contain entries which read: ‘Statute Expired-Clear to zero and Uncollectable Amount Owed.” I do not know why the IRS zeroed out the account of the other two responsible parties against whom it also had a judgment. As discussed below Mr. Beeler did not appreciate this action since any payments by the other two responsible parties would have reduced or eliminated his liability. Because the CDP case decided in 2009, almost 30 years after the original non-payment of the trust fund taxes, did not get dismissed as moot, I also assume that Mr. Beeler still owed all or part of the $150,000 liability stated in the judgment which would have grown considerably larger with interest over the following 14 year period.
On February 29, 2000, the IRS filed a certificate of release regarding the notice of federal tax lien it had filed against Mr. Beeler in New York. On February 22, 2001, it filed a certificate of release regarding the notice of federal tax lien it had filed in Sarasota, Florida. Despite filing the lien releases and despite writing off the liabilities of the other responsible officers, the IRS continued to collect from Mr. Beeler and sent him a notice of intent to levy on September 25, 2006. He filed a request for a hearing and argued that the lien releases evidenced that he no longer owed the liability – a position that lines up well with the language of IRC 6325(a) which provides for lien release when “The Secretary finds that the liability for the amount assessed, together with all interest in respect thereof, has been fully satisfied or has become legally unenforceable…” Unfortunately for Mr. Beeler, the lien release does not mean the liability has actually been satisfied or become legally unenforceable. It means that the notice of federal tax lien is no longer effective which the IRS conceded. The Court stated that “the issue here is whether the Forms 668(Z) [the lien release form] extinguished the tax liability. Petitioner’s contention that the Forms 668(Z) indicates that his liability has been satisfied is incorrect. The underlying tax liability is not extinguished when a NFTL filed pursuant to section 6323 is released.” The Court provides numerous cites in support of this conclusion.
Mr. Beeler also argued in the CDP case that the IRS had a duty of consistency regarding the other responsible officers and that his liability should be written off because the IRS wrote off their liabilities. The Court rejected this argument as well finding that the IRS is free to collect from any of the responsible officers as it sees fit. While it provides only cold comfort, Mr. Beeler does, after Congress passed 6672(d) in 1996, have the ability to sue his fellow responsible officers for contribution. The lengthy delay of the TFRP case at least gives him this right he would not have had prior to that amendment.
That still leaves the issue of the judgment and how the IRS can still be collecting on an assessment made in 1985 24 years later in 2009. The Court found that “respondent’s commencement of this proceeding [the original assessment] within the requisite 6-year period under section 6502(a)(1) served to extend the period for collection until petitioner’s liability is satisfied; petitioner has not satisfied his liability.” To get to this result the Court examined the changes made to section 6502 in 1988 in the first Taxpayer Bill of Rights. Judge Goeke explains the purpose of the change in the law: “In 1988 Congress amended section 6502 so that a court proceeding filed by the United States during the 6-year period extended the collection period until any liability was satisfied. Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, sec. 1015(u), 102 Stat. 3373. The purpose of the 1988 amendment was to conform liens and levies. Before the amendment, a judicial proceeding would not toll the limitations period for levies, but would for liens.” The legislative history provides: “the 1988 amendment was to conform section 6502 so that a court proceeding filed during the 6-year period would keep the collection period open. H. Conf. Rept. 100-1104 (Vol. II), at 5-6 (1988), 1988-3 C.B. 473, 495-496.”
Because the judgment creates an unlimited period of time within which the IRS can collect against Mr. Beeler, his refund suit will haunt him for some time to come. If the IRS did not collect the tax within the first 24 years after assessment, it seems likely that its failure will continue.