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Jeopardy Assessment Abated in Former Senator Fumo’s Case

Posted on July 22, 2014

Last fall I wrote about former Senator Fumo here, here, and here as a way to introduce jeopardy assessment and jeopardy levy.  I noted at the time that the IRS took an amazingly long time to make a jeopardy assessment against him.  I stopped writing about the case in part because the slowness of the IRS in making the jeopardy assessment was matched by the slow movement of the jeopardy case in district court.  Watching a jeopardy case unfold in slow motion differs from the norm in these cases but perhaps brings its own lessons to situation.  The district court in Philadelphia has now decided that the IRS did not meet its burden with respect to jeopardy.  This means that the assessment the IRS has made in the case, the levies, the “regular” and nominee liens will all disappear with the possibility that at the end of the Tax Court case they will spring back.

The district court correctly criticized the IRS for the pace of the jeopardy case.  It also found that the explanation given by former Senator Fumo regarding the transfer of money from his bank accounts as well as the transfer of real property made business sense or made enough business sense to provide a basis for abating the jeopardy assessment.  I found myself agreeing with the court as to the cash but not agreeing as to the real estate and occasionally the court made statements that left me wondering if it understood what was going to happen as a result of this decision or what might happen.  In the end, the court seemed convinced that former Senator Fumo or his son or his fiancée still had enough assets to pay the taxes should the Tax Court permit assessment of the proposed deficiencies and that his prompt payment of the significant restitution amounts suggested he would promptly pay any tax liability the Tax Court might determine he owes.

In this post I primarily focus on the impact of the slow decision by the IRS to pursue jeopardy and how that timing seemed to impact the Court’s decision.  This is part of a two part post in which the second post will address the decision itself and how the statute might have led to this decision by failing to distinguish between the current need for a lien as opposed to a levy.

To reset the scene on this case, the IRS has proposed assessments against him for three different types of tax liabilities:  income tax for the years 2001-2005; excise taxes related to self dealing with an exempt organization he controlled for the years 2002-2004 and gift taxes for transfers in 2009.  On March 16, 2009, a jury found him guilty of 137 counts of conspiracy, fraud, obstruction of justice and aiding and abetting the filing of false tax returns of a tax-exempt organization.  His received a prison sentence of 61 months has paid over $4 million in fines, penalties and restitution in connection with the conviction.  The timing and length of the prison sentence matter with respect to the defense to the jeopardy and the timely payment of the fines, penalties and restitution also seemed to favorably influence the court.

As normally happens in criminal cases involving taxes, the IRS did nothing on the civil liabilities stemming from former Senator Fumo’s behavior until the conclusion of the criminal case.  Here, that decision may not have been routine since the tax charge played such a small role in the overall criminal case.  Nonetheless, shortly after the conviction the IRS assigned a revenue agent to examine former Senator Fumo’s income taxes.  The agent began his investigation in 2009 and concluded it in 2012.  I have been involved with or observed a lot of post conviction examinations but cannot remember one that went this long.  The agent explained in his affidavit that his examination was slowed by serious family issues.  This means that his manager decided that the case did not require expeditious handling and could wait for the agent’s return.  The manager may have had few options but that did not come out.  The fact that the statute of limitations on assessment had long since passed and fraud must keep it open took off some of the normal time pressure in an exam.  The court noted that the IRS could have reassigned the examination if it had significant concerns about its ability to collect the taxes.  Not only did the examination take four years but it resulted in a “regular” statutory notice of deficiency because no one at the IRS was paying any attention to the property transfers former Senator Fumo was making during this period.

I pause here to say this this demonstrates a serious flaw in the way the IRS does business.  It assigns cases to revenue agents who pay no attention to what the taxpayer does with assets during the months or years they engage in examination of the taxpayer.  Even where it has a taxpayer convicted of fraud, even where the proposed liability totals millions of dollars, and even when the case takes forever to come to completion, the IRS goes around with its head in the sand making no effort to determine if it should worry about collection.  Most of the transfers here took place in 2009.  Had former Senator Fumo wanted to hide assets, the IRS gave him three or four years, while it slowly examined him, to do so.  This business practice coupled with the amazing length of the examination convinced the district court that it should abate the jeopardy assessment even in a situation where doing so put the IRS collection at risk.  The IRS should consider assigning revenue officers to monitor taxpayers in high dollar, high risk, high profile cases so that it does not end up embarrassed like this.

Revenue agent’s jobs do not involve caring about collection.  So they do not.  They had so little concern they let the case languish in audit for four years while paying no attention to what former Senator Fumo did with his assets.  Only when the hometown newspaper ran a series of articles gathering information from public records did someone at the IRS, after the issuance of the statutory notice of deficiency, wake up to the fact that collection of the liability the IRS had invested many hours in developing may be at risk.  This business model, which pre-dates the changes to the IRS in 2000 deserves attention.  Slow moving audits producing high dollar deficiencies should not have only revenue agents who have no systemic reason to care about collection assigned to them.

The IRS spends a lot of potentially wasted resources on such audits because it does not keep its eyes on the assets.  Had it paid attention to the asset transfers and made the jeopardy assessment in 2009, I think this case has a different outcome but this is not the only high dollar case where no attention gets paid to the taxpayer’s assets until the slow moving revenue agents and potentially the slow moving Appeals Division and slow moving Tax Court finish their work.  The IRS does not have enough resources to have a revenue officer watch every case it audits, but it should have enough resources to have them watch cases like this one.  The business model needs tweaking and this case should serve as a wake-up call.

The relatively new restitution based assessment provisions may change this equation in cases in which the court orders restitution based on tax violations.  In those cases the IRS will have the opportunity to immediately assess following the restitution order and immediately begin collection.  Even in those cases, the IRS should consider assigning a revenue officer no later than the time at which the conviction occurs so that the revenue officer can begin gather information about the assets.  Cases involving criminal convictions where the taxpayer has significant assets deserve significant attention.  The IRS needs to devise a better strategy that includes collection at an early point.

I have swerved from discussing the court’s analysis to rant about slow audits and non-existent collection concerns.  In the next post concerning former Senator Fumo I will explain why I think the district court mostly got it right in deciding to abate the jeopardy assessment but seemed to fail to understand what abating the assessment will do to the protections the IRS has put in place following its wake call in this case.  Because the abatement of the assessment leaves the IRS with no protections from property transfers except to bring actions after the property sales and potentially after the dissipation of the proceeds of those sales, I have more concerns about the future collection of any liabilities determined assessable than the district court seemed to have.

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