TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, November 20, 2017

Lesson From The Tax Court: It's Not Really Self-Assessment

Tax Court (2017)Myths are not reality, even if they do reflect basic truths.  A cherished myth in tax law is that ours is a system of “voluntary self-assessment.”  Last week’s opinion in Ramsay v. Commissioner, T.C. Memo. 2017-223 (Nov. 15, 2017), teaches a lesson about that myth.

This myth is not reality.  Despite the rhetoric of hobbyists, it is not as though taxpayers have any legal choice in the matter:  the law requires them to file returns, report their income and deductions, calculate their taxes, and pay any amounts owed when the return is filed.  IRC §§ 6201-6204.   Congress weaves together civil and criminal penalties to enforce these duties and leaves the ever unpopular IRS to swing the net.  Like Bentham’s Panopticon, the discipline of self-reporting and payment cannot be divorced from the constant coercive threat of discovery and the resulting civil or criminal sanctions.

But there is a basic truth behind the myth.  Tax administration rests on taxpayers truthfully disclosing their financial affairs and paying what they owe — through withholding or otherwise — without overt government compulsion.  It is “voluntary” in the same sense that stopping one’s car at a red light — at midnight with no traffic and no one looking — is voluntary.  It is each citizen’s self-enforcement of the legal duty that keeps both the tax and transportation systems running smoothly.  With hundreds of millions of returns filed each year, the system depends on the veracity, not the kindness, of taxpayers. 

The myth exists because of IRS decisions just after World War I to start accepting initial returns as presumptively accurate if properly filed.  For those interested I explain both the history of tax return processing, and how it started the myth in Theory and Practice in Tax Administration, 29 Va. Tax Rev. 227 (2009).

Mr. Ramsay appears to be the kind of taxpayer who helps the system work.  He filed his returns timely.  He was careful to be in an overpayment posture at the end of each year.  He cautiously directed that part of each year’s overpayment be applied to the following year’s tax liability.  He appears to be a model of a taxpayer working within the system. 

But when Mr. Ramsay made two mistakes on his 2011 return, he discovered he was unable to fix one of them precisely because ours is not a “self-assessment” system.  When a taxpayer attempts to correct a mistake by amending a return, the IRS does not use the same presumption it uses when processing the initial return.  Mr. Ramsay learned that lesson the hard way.  You can learn it by clicking below the fold.

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November 20, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink | Comments (1)

Monday, November 6, 2017

Lesson From The Tax Court: Remember The Alamo

Tax Court (2017)Last week, the Court decided Carlos Alamo v. Commissioner, T.C. Memo. 2017-215 (Oct. 31, 2017).  This is a case worth remembering for at least two reasons. First, it teaches a lesson about how sticking to your guns can get very expensive because of the accumulation of penalties and interest.  No matter how hard to work to contest a tax, penalties and interest work harder. 

In this case Mr. Alamo worked very hard to contest his 2009 taxes.  But his refusal to ever file a 2009 return resulted in some astonishing additions to his basic liability of $86,651 in unpaid taxes for that year.  The Service's levy CDP notice, issued on November 1, 2012, reflected accumulated penalties and interest of $46,474.  That equals 54% of his unpaid taxes.  And who knows what the total looks like now, some five years later.

The lesson, then, can borrow from the great American roots musician Ry Cooder’s classic “The Taxes on The Farmer Feed Us All.”  It might go like this:

We worked through Spring and Winter, through Summer and through Fall
But those penalties and interest worked the hardest of us all
They worked on nights and Sundays, they worked each holiday
They settled down among us and they never went away

The second lesson is about how the Service proves compliance with § 6212 notice requirements.  It appears that Mr. Alamo is a hobbyist, albeit more clever than most.  He tried to play the proof game.  He lost.  Still, his stubborn refusal to concede that the Service had properly sent him a Notice of Deficiency (NOD) is a great lesson in how to attack the adequacy of notice but also a warning that an obdurate refusal to cooperate during the CDP hearing can destroy the last chance to get the correct tax liability.  By insisting on his perceived “right” to make the Service prove compliance with procedure, Mr. Alamo lost this chance to get his tax liability corrected.  For more details on this second lesson, see below the fold:

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November 6, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink | Comments (0)

Tuesday, October 31, 2017

Some Positive News About The IRS

IRS Logo 2The IRS does not have an easy job.  Remember, it's NOT the "IRS Code" because the IRS is just the agency stuck with the task of carrying out the will of Congress.   And the IRS must do this job all while being a political soccer ball — and since the mid-1990's the Republican team has hogged that ball, kicking with more enthusiasm than enlightenment.  So it was nice to see a positive story about tax administration picked up by USA Today, especially because USA stories also appear in little town newspapers, like the one I read here in Lubbock, Texas (the Lubbock Avalanche-Journal:  IRS: Public-private Crackdown Slashes Identity Theft, Tax Refund Fraud, the story comes from a press release by the IRS that explained:

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October 31, 2017 in Bryan Camp, IRS News, Tax, Tax Practice And Procedure | Permalink | Comments (1)

Tuesday, October 17, 2017

The Problem Of Taxpayer Communications And The Return Receipt Requirement

Return Receipt 2Nina Olson, the National Taxpayer Advocate (as if you did not know), had a great blog last week describing a really cool study her office conducted on how to improve taxpayer compliance with the Earned Income Tax Credit (ETIC ... again, as if you did not know).

The basic idea was to see if a simple letter mailed to taxpayers who had demonstrated some identifiable error in their 2014 EITC claims would result in them making fewer errors in their 2015 EITC claims. Not only that, but the study compared that group to a control group of similar taxpayers who made similar errors but who were not sent a letter explaining where they went wrong.

Certainly, my intuition as a teacher is that when you give feedback on what students do wrong, they tend to do better. The study supports that intuition’s application to taxpayers: tell them what they were doing wrong and they will do better overall and will certainly do better than those who get no such feedback.

What struck me as particularly interesting and worth further comment was the feature of just how the Taxpayer Advocate Service sent the letter to the taxpayers. Nina gives this description:

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October 17, 2017 in Bryan Camp, Gov't Reports, Tax, Tax Practice And Procedure | Permalink | Comments (0)

Monday, October 2, 2017

Lesson From The Tax Court: When Precedent Is A Game Of Telephone

Tax Court (2017)In a fully reviewed 28 page opinion released Thursday, September 28, 2017, the Tax Court gave full attention to an important problem: when a married taxpayer files a return with an impermissible filing status (such as single or head of household) can the spouses later still elect to file jointly or do the restrictions in §6013(b)(2) apply?

The case is Fansu Camara and Aminata Jatta v. Commissioner. The opinion is worth your time not only for the well-reasoned outcome, but also for its neat demonstration of how precedent sometimes operates like a game of telephone. First I will need to sketch out the facts and holding for you. And then I will have one tax policy observation about the outcome. But I promise it won’t be 28 pages. So, if you are brave, you will continue reading below the fold.

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October 2, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink | Comments (1)

Friday, September 29, 2017

Lesson From The Tax Court: The Overlooked Power Of Offset

Tax Court (2017)Last week the Tax Court issued an opinion in Williams v. Commissioner, T.C. Memo 2017-182.  Although it involves small amounts, the opinion teaches a big lesson about the IRS power of offset

Mr. Williams filed his 2013 return reporting $503 of taxable income and withholding of $1,214.  So he claimed an overpayment of $711.  The IRS accepted his return as filed but did not refund the $711.  Instead, it used its offset powers under section 6402(a) to credit that supposed $711 overpayment against Mr. Williams' unpaid tax liabilities from 2011.  Later, the IRS audited Mr. Williams' return and proposed a deficiency of $1,403.  Mr. Williams' protest to Tax Court was not the usual one.  He agreed with the amount of the deficiency, but he thought that since there was not actually an overpayment, per the audit, then the IRS should not have credited that $711 to his 2011 liability but should instead apply it to his 2013 liability.  After all, it was part of the wage withholding for 2013.  Note that it was to Mr. Williams' benefit to pay off the most recent tax liabilities to increase the chances that the older ones would age out.

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September 29, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink | Comments (2)

Thursday, September 28, 2017

Tax Code Statutes With No Hammer?

Generally, the Tax Code contains statutory consequences for taxpayers who fail to obey statutory commands.   Most of those statutory consequences are in the form of: "Additions to Tax" found in sections 6651-6658; "Accuracy-Related and Fraud Penalties" found in sections 6662-6664; "Assessable Penalties" found in sections 6671-6725; and, of course, all the various criminal and forfeiture statutes found in 7201-7345.

But what about statutory commands imposed on the IRS?  It turns out not all such commands carry a statutory hammer.  Let me give one example.  When the IRS assesses a tax and the tax is unpaid, section 6303 requires the IRS to send the taxpayer notice and demand for the unpaid tax within 60 days of the assessment.  But the statute is silent as to what consequence, if any, should occur if the IRS sends the notice and demand later than 60 days.  Treas. Reg. 301.6303-1 provides "the failure to give notice within 60 days does not invalidate the notice."

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September 28, 2017 in Bryan Camp, Tax, Tax Practice And Procedure | Permalink | Comments (3)

Wednesday, September 27, 2017

Follow Up On § 7434 Suits For Filing False Information Returns

ABA Tax Section (2017)I previously blogged about a great panel presentation I attended at the Fall ABA Tax Section Meeting in Austin. The presentation was about how to sue someone under § 7434 for filing a false information return.

This past week one of the panelists, Stephen Olson, has blogged more about this subject here and here.  The blogs are worth calling to your attention. He dives a bit deeper into this subject to look at whether an Information Return that states the correct payment amount but is otherwise false and misleading, is sufficient to support suit under § 7434.

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September 27, 2017 in ABA Tax Section, Bryan Camp, Tax, Tax Practice And Procedure | Permalink | Comments (0)

Thursday, September 21, 2017

Suing Someone for a False Information Return

ABA Tax Section (2017)Last week I went to the ABA Tax Section Meeting in Austin and really enjoyed attending a terrific panel on Section 7434.  The moderator was Professor Leslie Book, of Villanova School of Law and the presenters were Stephen Olsen, of Gawthrop Greenwood, PC; and Mandi Matlock, of Texas RioGrande Legal Aid Inc., Austin, TX.  

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September 21, 2017 in ABA Tax Section, Bryan Camp, Tax, Tax Practice And Procedure | Permalink | Comments (2)

Friday, September 15, 2017

WaPo: The GOP's War On The EITC

EITCIn this op-ed in the Washington Post, columnist Catherine Rampell comments on a proposal in the Budget Committee Report 115-240 explaining the current budget legislation.  It's a proposal to tighten up processing of tax returns claiming the Earned Income Tax Credit (ETIC).  She writes:

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September 15, 2017 in Bryan Camp, Gov't Reports, News, Tax, Tax Policy in the Trump Administration, Tax Practice And Procedure | Permalink | Comments (7)

Wednesday, September 13, 2017

Privatizing Tax Collection: The Idiocy Continues

Congress seems to be on an unceasing quest to undermine effective tax collection (for why I choose those words see my rant here).  In what can only be described as yet another boneheaded move,  Congress included a provision in the Fixing America’s Surface Transportation (FAST) Act in 2015 that required the Service to out-source collection work to private collection agencies (PCA's).

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September 13, 2017 in ABA Tax Section, Bryan Camp, Tax, Tax Practice And Procedure | Permalink | Comments (0)

Reforming Tax Administration

The current discussion about tax reform is focused on reforming substantive tax law and not tax administration.  Last April, however, a group of tax practitioner organizations put out a paper calling for tax administration reform.  You can find the proposal on the AICPA website here.

The nine practitioner organizations include the AICPA, the National Association of Enrolled Agents, and the National Association of Tax Professionals.  Notably absent from the list of practitioner groups are the main tax lawyer organization, the ABA Section on Taxation.

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September 13, 2017 in ABA Tax Section, Bryan Camp, IRS News, Tax, Tax Practice And Procedure | Permalink | Comments (1)

Monday, September 11, 2017

Contesting Tax Liability In A Collection Due Process Hearing

Broadly speaking, tax administration (as currently structured) consists of two main functions:  determining tax liability and collecting the tax liabilities so determined.   There is, however, some overlap because taxpayers sometimes have the opportunity during the tax collection process to get a re-determination of the underlying tax liability.  The main opportunity comes in the Collection Due Process (CDP) hearing.  This is an administrative hearing conducted by the IRS Office of Appeals and is subject to judicial review by the Tax Court.   Two recent Tax Court cases — Mohamed v. Commissioner (TC Sum. Op. 2017-69) and Bruce v. Commissioner (TC Memo. 2017-172) — illustrate just how narrow this opportunity is for taxpayers.  To me, they teach the take-home lesson that the best shot taxpayers have at getting the most favorable result is to respond early and often to tax notices.  Taxpayers who wait are the taxpayers who cry.  For a lesson that Mohamed teaches about tax return preparer penalties see Les Book's great post here.  More below the fold.

 

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September 11, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink | Comments (3)

Thursday, September 7, 2017

Dealing With IRS Scammers (And How To Tell They Are Not Private Debt Collectors)

Readers will recall that Congress, in §32102 of the 2015 (FAST) Act, amended IRC §6306 to force the Service to outsource some collection inventory to private collection agencies.

Now, I have no doubt that readers of this blog are totally compliant in their taxes.   And if any happen to be delinquent in their taxes, I have no doubt they are not in the category of delinquent taxpayers who face collection from private collection agencies.   But I also suspect many readers have received questions about the program from clients, friends, family members, workplace colleagues, neighbors, and others.

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September 7, 2017 in Bryan Camp, Gov't Reports, IRS News, Tax, Tax Practice And Procedure | Permalink | Comments (0)

Wednesday, September 6, 2017

The (Lack Of) Human Touch In Collecting Taxes

The National Taxpayer Advocate Nina Olsen has a blog post here that is well worth your time to read.  It's about the Service's automated levy program called FPLP (Federal Levy Payment Program).  

One way the Service tries to collect unpaid taxes is by looking for people who owe the delinquent taxpayer money and snagging those payments.  That's called a levy.    FPLP is a computer program designed to snags payments owed by the federal government to delinquent taxpayers.  Now, some people consider it an irony that one hand of the federal government actually sends payments to many delinquent taxpayers who owe the federal government money. Notably, however, FPLP hits what are commonly viewed as "safety net" payments from Social Security and Federal Retirement programs.  So other people consider it an irony that one hand of the federal government would partially undo the safety net payments made by the other hand.

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September 6, 2017 in Bryan Camp, Gov't Reports, IRS News, Tax, Tax Practice And Procedure | Permalink | Comments (0)

Tuesday, September 5, 2017

The Tax Consequences Of Hurricane Harvey (And Other Natural Disasters)

Hurricane HarveyThe Service has put up a very useful and comprehensive webpage titled "Help for Victims of Hurricane Harvey."  The page contains excellent information about all the different actions the Service takes in response to a natural disaster and has links to all kinds of useful sites. 

The Texas State Comptroller has a similarly useful webpage that describes the state and local tax relief (such as exemption from hotel taxes).

 

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September 5, 2017 in IRS News, Tax, Tax Practice And Procedure | Permalink | Comments (2)

Monday, September 4, 2017

The Evilness Of Section 6511

Tax Court (2017)Last week, in Borenstein v. Commmissioner, 149 T.C. No. 10 (Aug. 30, 2017), the Tax Court was asked to apply Section 6511 contrary to its very, very intricate terms.  The Court declined to do so.  That meant that a taxpayer lost out on a $30k+ refund.   Ms. B. had paid about $112k in taxes by the due date of her 2012 return (April 15, 2013), but she did not file the return.  While she did get the 6 month extension she still failed to file a return by October 15, 2013.  The months went by — 22 of them— before the Service was kind enough in June 2015 to send her an NOD but was unkind in slamming her with an asserted $1.2m deficiency.   You know that drill.  Ms. B. then quick-like-a-bunny filed a return that September, showing a $79k liability.  The Service said "oh, ok, that's good" and accepted her return as accurate.  So she now only needed to get her refund, right?  Wrong.  See below the fold for why.

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September 4, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink | Comments (4)