The case of Dodd v. Commissioner, T.C. Memo 2019-107 shows what happens when the Appeals employee handling a CDP case works too efficiently and when the Appeals employee may not have the right background to handle the issue presented. The uber efficiency results in a second remand and demonstrates both the flaws in handling cases too efficiently but also why CDP can take time to complete. The case also raises questions, for me at least, concerning why the Chief Counsel attorney cannot fix the problem and must keep sending the case back to Appeals in the hopes that the Appeals employee will “get it.”
Ms. Dodd works as a secretary at a law firm. She filed the Tax Court petition pro se even though she worked for and from the opinion continued to work for a law firm whose finances created her tax problem. She reported a large tax liability on her tax return. The court described her recitation of the issue as follows:
She explained that most of the liability arose from a $1,073,312 gain on the sale of real estate owned by an LLC of which she was a member. She alleged that she had received none of the sale proceeds, all of which had been wired to a bank to pay off a line of credit of the law firm for which she worked. She stated that she had erroneously reported this gain on her 2013 return and wished to resolve this issue at the CDP hearing.
Once you overreport a tax liability, unwinding it can create nightmares and this case provides another example of the problem of trying to say “I shouldn’t have reported that.” The IRS does not like to let go of taxes the taxpayer has once said she owes. Because the CDP case involves amounts reported on a return that the taxpayer wants to reduce, she can have the merits of her liability considered in the CDP case based on the reasoning in Montgomery v. Commissioner, 122 T.C. 1 (2004).
I do not know where Ms. Dodd lives but the Appeals office in Memphis hears her CDP case. Based on the Chief Counsel attorneys handling her case, my guess would be she lives somewhere near Washington, D.C. I have not had good experiences with the Memphis office of Appeals but will spare you the details here. My guess is that Ms. Dodd would say the same thing.
The court provided the following statement about the initial correspondence sent from Appeals to Ms. Dodd:
On January 12, 2017, the SO sent petitioner a letter scheduling a telephone conference for February 28, 2017. The letter informed petitioner of the paperwork she needed to complete in order for the SO to consider collection alternatives. The letter did not address petitioner’s contention that she did not owe the tax liability and did not invite petitioner to file an amended return.
At the hearing the Settlement Officer notes that Ms. Dodd had not provided collection alternatives, made no mention of her underlying liability and issued a determination letter three days after the hearing denying her CDP request. When she filed a Tax Court petition, her case landed in the hands of Chief Counsel attorneys who immediately recognized the problem and asked the court to remand her case to appeals for a do over. As discussed before, the Chief Counsel attorneys who recognized the problem and who would know what to do to fix the problem have not been granted the authority by the client to fix the problem as they would do in a deficiency case. So, when the Tax Court grants the remand, the case goes back to the same Settlement Officer in Memphis would did not understand the case the first time around.
The Settlement Officer worked the remand case quickly and for that deserves credit. Within a month of the remand a letter went out scheduling another hearing:
On June 13, 2018, the SO sent petitioner a letter scheduling a telephone conference for July 10, 2018. That letter consisted of three pages of single-spaced text and closely resembled the letter scheduling the original hearing. But the June 13, 2018, letter included an additional bullet point stating: “Your 2013 tax liability was determined based on the documents you submitted and the return that was filed by you. If any figures were in error, please submit a Form 1040X Amended return by 07/03/2018 for my review.” The letter did not request documentation supporting the entries appearing on any amended return petitioner might submit, and it did not warn petitioner of any negative consequences if she did not submit the amended return before the hearing.
Ms. Dodd did not file an amended return within the three weeks provided. Based on the court’s description of her response to the Settlement Officer, I can see where the SO would have frustrations. At this point the case has been around for a while and Ms. Dodd has not prepared an amended return or gathered up the information to present her case. On the other hand, she has raised a merits issue that seems on its face very meritorious. Another problem with CDP in this situation is that the SO in Memphis probably has little idea of what to do with the merits issue and has only a collection background. So, one confused pro se person is talking to a collection person about a merits issue while the court and the Chief Counsel attorneys stand on the side tapping their toes.
The SO quickly sends out another determination letter. Back in Tax Court the Chief Counsel attorney moves for summary judgment and the taxpayer says:
[s]he did not receive and could not possibly have received $1 million from a real estate transaction in 2013 because “the only income she had was her salary working as a legal secretary in a law firm.” She states that she needed to get advice on the procedures for completing an amended return and did not have time to secure such advice before the supplemental hearing. She also states that she had questions about the implications of filing an amended return for other taxpayers involved in the LLC transaction (apparently including the law firm for which she worked).
This makes sense even if it does not completely prove her case. The Tax Court judge denies the summary judgment request and sends the case back to Appeals a second time and in resending it provides much more detailed instructions:
petitioner had clearly explained to the SO her position–namely, that she did not receive any of the LLC’s real estate proceeds because 100% of the proceeds had been wired to her law firm’s bank to pay off her law firm’s line of credit. Petitioner even told the SO the name of the bank in question. That being so, submission of an amended return omitting $1 million of sale proceeds would not have added much to the SO’s sum of knowledge. To get to the bottom of the “underlying liability” issue, the SO needed information supporting the facts that petitioner alleged. But the SO’s June 13, 2018, letter did not request factual information that would support petitioner’s position. That letter simply asked petitioner to “submit a Form 1040X Amended return by 07/03/2018 for my review.” And the letter did not indicate that petitioner’s failure to submit an amended return by that deadline would preclude her from challenging her underlying liability. Petitioner appears to have come to the supplemental hearing with questions about the procedures for (and consequences of) filing an amended return. But rather than address those questions or provide petitioner with additional time to supply the information that was needed, the SO closed the case the very next day. We think this action was unreasonable, particularly in light of respondent’s acknowledgment that the SO pulled the trigger too quickly the first time around.
We can all hope that on her third visit to Appeals, Ms. Dodd and Appeals figure out her correct tax liability for the year at issue. Maybe the lawyers at her firm could give her a hand in working through the tax issue. Maybe the lawyers in Chief Counsel can give the Appeals person with a collection background a hand in working through the tax merits issue. Maybe the judge will not need to provide further instructions. Maybe there’s a better solution to the problem than having a pro se taxpayer work with a Service Center Appeals employee with a collection background to figure out a complicated tax merits issue.
The case points to problems in the system that should have been resolved by this point. The CDP summit initiative seeks to address some of the systemic problems that continue to exist in CDP 20 years after enactment. When enacted CDP represented a radical departure to prior collection practices. The IRS has not worked out all of the wrinkles. This case points to another wrinkle it needs to work out.