I mentioned in my last blog post that Drita Tonuzi spoke at the Pro Bono and Tax Clinic committee meeting of the ABA Tax Section meeting on September 20, 2013. In addition to asking the audience for feedback on the issue of representation, she solicited comments on collection activity related to the newly proposed regulation on the innocent spouse provisions. See the proposed regulation here. As with the issue of representation, this is a positive development.
The issue of collection activity drives the timing of requests for innocent spouse relief. Section 6015(b) and (c) relief is restricted to those who request relief within two years of the beginning of collection activity. The proposed regulation continues taking the view that sending a notice of intent to levy, or at least sending some versions of that notice, begins collection activity for purposes of starting the two year period to request innocent spouse relief. The proposed regulation goes further than the prior regulation on this subject to provide that sending the notice of intent to levy required by IRC 6330 in collection due process cases (CDP) starts the collection period even if the intended recipient does not receive it. In adopting this position, the regulation cites to the case of Manella v. Commissioner, 631 F.3d 115 (3d Cir. 2011).
I believe that in selecting certain notices of intent to levy as triggers for the running of the two-year period to request relief, the proposed regulation mistakes correspondence for collection. Additionally, I believe that even if sending certain letters labeled notice of intent to levy constitutes collection activity, holding that the mailing of the CDP notice meets this test even if the taxpayer does not receive the notice undercuts the very purpose of CDP.
First, the IRS has more than one letter that it sends entitled Notice of Intent to Levy. The requirement to send such a notice predates CDP and stems from IRC 6331(d). The purpose behind the statute draws from the administrative authority given to the IRS to levy without obtaining court approval. Congress felt that a specific notice to the taxpayer alerting the taxpayer of the potential forthcoming levy action should occur prior to this significant administrative action. In 1998 Congress created the CDP process and added another notice requirement prior to levy. The notice requirement in 6330 and the requirement in 6331 can, and usually are, satisfied by the same letter. The title of the letter is Notice of Intent to Levy. While the IRC 6331 letter simply gave the taxpayer notice that the IRS might levy, the CDP letter gives the taxpayer additional rights including the right to request a hearing with the Appeals Division and the right to go to Tax Court.
The IRS monitors the effectiveness of its correspondence in generating payments. The notice of intent to levy has traditionally raised a fair amount of money because the taxpayer reading this letter becomes rightfully concerned that bad things will happen soon. Since the letter works to raise money, I presume the IRS decided at some point to use the same title in other circumstances than just the required notice under IRC 6331 and 6330. It now uses this faux notice of intent to levy to notify taxpayers that it may take their state refund. Nothing requires the IRS to send such a notice of intent to levy but I can tell from my client’s reactions to this letter that it does effectively raise concerns in many people.
The proposed regulation does not state whether faux notice of intent to levy letters also start the two year period for requesting innocent spouse relief. I suspect the faux letters do not. I also suspect that few if any taxpayers would know the difference between a real and a faux notice of intent to levy letter. The decision of the IRS to use the effective fund raising title “Notice of Intent to Levy” on letters not required by the statute raises concerns about using certain letters with that title to trigger the collection activity time frame in IRC 6015(b)&(c). While I am concerned about the way the IRS titles its letters, my bigger concern is that a letter, whether a real of faux notice of intent to levy, is not collection activity.
The IRS sends out many letters. The “real” notice of intent to levy letter is generally the fourth collection letter in a stream of letters. I have no statistics but suspect that only a small fraction of the people receiving the notice of intent to levy letter actually become the subject of a levy. While letters with this title raise concerns with some taxpayers, many others simply treat this letter like all of the other dunning notices they receive. Nothing on the letter alerts them to the fact that it starts a time period running for requesting innocent spouse relief. Few taxpayers would realize that one of the letters in a series of letters (more than one of which might carry this title) would have that effect. For this reason I think that the IRS should not treat a letter as collection activity. I think that it should treat the levy as collection activity (or an offset or a suit).
Even if the IRS should treat one of its many letters as collection activity, the proposed regulation raises a second issue – whether mere mailing of the letter without receipt – triggers the running of the two-year period to request relief. While a decent argument exists that the taxpayer will not know that certain of the letters sent labeled “Notice of Intent to Levy” will trigger the running of the period to request innocent spouse relief so it does not really matter if the taxpayer receives the letter that does trigger the running of the time period, it still seems perverse to determine that not receiving the letter will start this period.
When Congress created CDP, it did so in large part to address the concerns that many complaints received in Congressional offices about the IRS stated that the IRS engaged in collection activity when the taxpayer did not even know they owed the tax. In essence, these taxpayers told their representatives that they did not receive the notice of deficiency giving them the right to contest a proposed deficiency in Tax Court prior to the assessment and the beginning of collection activity. In response to those concerns, Congress placed into the CDP statute a second opportunity to go to Tax Court to contest the underlying liability for those who never received the notice of deficiency even though mailing the notice of deficiency to the taxpayer’s last known address gives the IRS the right to make the assessment. Congress knew that many taxpayers did not actually receive the correspondence sent to their last known address for a variety of reasons.
In the proposed regulation, the IRS now takes the position that the very statute created to provide a safety valve for those who did not receive the notice of deficiency mailed to their last known address will serve as a trigger for the running of the period to request innocent spouse relief even if the taxpayer does not receive the notice of intent to levy. It seems wrong to use the non-receipt of the CDP notice of intent to levy as a trigger mechanism when the sending of this particular notice exists in large part to give an opportunity to correct the non-receipt of the notice of deficiency. But that is not the worst part of the proposed regulation.
The proposed regulation, in support of its position that non-receipt provides sufficient notice, cites to one of the saddest cases the IRS could have found: Mannella v. Commissioner. The Manella case involves an abused spouse. One of the ways her husband abused her was to prevent her from seeing the incoming mail. So, Ms. Manella never saw her CDP notice because of an abusive situation and the proposed regulation holds that case up as the authority for cutting off innocent spouse relief. Instead of choosing an abusive situation to support cutting off the right to relief, the IRS should have taken the opportunity to acknowledge the abusive situation as a circumstance where the letter would not serve as a trigger.
Ms. Manella, and others, benefit from the position taken by the IRS in 2011 and continued in the proposed regulation that IRC 6015(f) does not have a two-year time frame. I do not want to lose sight of the change in position by the IRS in (f) cases that provides a safety valve for individuals in her position. Still, citing the Manella case as support for the position that non-receipt of the notice of intent to levy still triggers the running of the period for certain innocent spouse relief highlights the inappropriateness of using correspondence as a collection activity triggering the cut off of relief.