One of my sons has been in Indonesia for several months doing research while on sabbatical. He is preparing to leave, and leaving requires that he go through a multi-step process. One of the steps involved getting the signature on an appropriate form of someone from the Ministry of Research (I may have this name wrong) and a later step involved presenting the form as part of getting the exit visa. At the later step, the person processing the exit visa insisted that in order to process the exit visa he had to have a copy of the identity card of the person signing the earlier form. This requirement was not in the instructions or the regulations. My son requested that the person call the Minister who signed off on the form. At that point the person at the exit visa office backed down. My son felt the request was part of an indirect request for a financial contribution by the person processing the exit visa. Such requests are common in Indonesia, but not in the U.S.
In the U.S., however, we are not immune from requests that do not have grounding in the code, or regulations, or even the manual. Sometimes we run into an office procedure that someone thought would be good but that makes accomplishing the transaction very difficult. A recent CDP case involved one of these made up rules. The disposition of the case demonstrates the benefit of having CDP and getting Tax Court oversight of some of the practices of the IRS. Although this case does not have the importance of the Vinatieri v. Commissioner opinion in which the Tax Court struck down the IRS rule that a taxpayer must have filed all of their back tax returns in order to qualify for hardship status under IRC 6343, it has the same flavor. The case, Houk v. Commissioner, Dk. No. 22140-15L, comes to us via designated order and not an opinion of the court.
In Houk, the taxpayer wanted to raise the merits of their tax liability in the CDP context. The Appeals Office determined that in order to properly raise the merits argument the taxpayer must submit an amended return. The description of the merits issue in the request for a hearing and the related document were insufficient to cause the Appeals employee considering the CDP case to cause them to look at the merits argument. The notes of the Appeals employee related to the CDP hearing stated:
“It appears taxpayers could be disputing the underlying liability issue. Self-assessed – Taxpayers need to file an amended tax return [i.e. a Form 1040X] for the tax period in questioned [sic].”
In the determination letter, the Appeals employee stated:
“Challenges to the liability
While you were allowed to challenge the amount and existence of underlying liability, you did not present any relevant, non-frivolous documents for consideration. The taxpayers’ 2013 tax liability was determined based on the documents they submitted. If any of the figures were in error, the taxpayers should have submitted a Form 1040X to the designated Service Center.”
The IRS filed a motion for summary judgment. The Court determined that the Houks conceded the innocent spouse and collection alternative issues mentioned in their CDP request; however, the Court found that “Appeals acknowledged, and respondent’s counsel has not denied, that the Houks were entitled to challenge their self-reported 2013 income tax liability. The record is clear that, at every turn, the Houks have raised this issue – in their Form 12153 requesting the CDP hearing, in the CDP hearing, and in their petition commencing this Tax Court case.”
The Court denies summary judgement because some of the administrative record was missing, but the remaining parts suggested that the IRS may not have considered the liability challenge because of taxpayers’ failure to submit a Form 1040X. If Appeals denied the request for relief because of the failure to submit a Form 1040X, the denial was an abuse of discretion. Because there may have been an abuse of discretion, the IRS did not show that no genuine dispute regarding the liability existed and without showing an absence of such a dispute, the predicate to a successful summary judgment request does not exist.
Nothing in the statute or the regulations requires that a taxpayer who files a return and later realizes that filing that return created a liability that is too big imposes on the taxpayer a duty to file an amended return in order to successfully challenge the liability in the CDP context. It may be more convenient for Appeals to receive a Form 1040X in order to more easily understand and process the request, but convenience is not a factor mentioned in the statute. The decision of the Court demonstrates that it will not join with the IRS in imposing made up rules in order to deny CDP relief. If the taxpayers provided inadequate proof of the reason they owed less taxes than was shown on their originally filed tax returns, Appeals could have denied CDP relief on that basis. The Houks have not won their case. They still need to prove that the return overstated their tax liability but now they have the opportunity to do that in the Tax Court case.