Over the years Congress has enacted various pieces of legislation that it labels “Taxpayer Bill of Rights” (TBOR). The original TBOR came in 1988 as part of the Technical and Miscellaneous Revenue Act of 1988. It was followed by a free-standing TBOR II in 1996, and then TBOR III in 1998, enacted as part of The IRS Restructuring and Reform Act of 1998.
All three of these TBORs created substantive changes in the tax laws, such as adding procedures for the IRS to follow, giving taxpayers greater access to the Tax Court, giving taxpayers the right to sue under certain circumstances, creating the Taxpayer Advocate Service, etc.
In 2015, Congress did something different. It enacted yet another TBOR but this time the substantive command was framed as an additional duty given to the Commissioner, not additional rights given to taxpayers. The new duty is to “ensure that employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title.” There follows a list of 10 nobly worded vagaries, such as “the right to quality service” and “the right to a fair and just tax system” and “the right to finality” which is somewhat in tension with “the right to challenge the position of the Internal Revenue Service” and “the right to appeal a decision of the Internal Revenue Service in an independent forum” (think Collection Delay Process). You can find the complete high-minded list in §7803(a)(3).
Taxpayers want TBOR IV to be more than pretty words. They want §7803(a)(3) to give them substantive rights. The recent case of Maria Ivon Moya v. Commissioner, 152 T.C. No. 11 (Judge Halpern) (April 17, 2019), teaches a lesson about that. The case did not directly involve §7803(b). It instead involved the administrative adoption of taxpayer rights in 2014, the year before the statute’s enactment. Still, the Tax Court’s decision here is an important lesson that presages what is likely to happen when a taxpayer tries to allege violations of the statutory TBOR IV: do not waste Tax Court opportunities to argue the merits of an NOD by complaining about procedural errors.
Ms. Moya filed timely returns for 2011, 2012 and 2013. The IRS selected the returns for examination. The audit did not go well. It appears it was a confusing and traumatic experience for Ms. Moya. According to her, IRS employees failed to return her phone calls, failed to answer her questions, mislead her as to who in the IRS was actually doing the audit, and worked her case in Las Vegas when she had moved to California.
When Ms. Moya eventually received an NOD disallowing a variety of her claimed Schedule C deductions for failure to substantiate the expenses, she filed a pro se petition in Tax Court. But she made no effort to contest the merits of the NOD’s determinations. She produced no evidence to substantiate the disallowed deductions.
Her sole basis for contesting the NOD was that the IRS employees’ conduct violated those taxpayer rights now enumerated in §7803(a)(3). She argued that NOD was invalid because it resulted from an invalid process. In particular, she said that the IRS employee actions violated: (1) her right to be informed; (2) her right to challenge the IRS; and (3) her right to a fair and just tax system.
Ms. Moya did not actually rely on §7803(a)(3) because it was not in effect during her examination. Instead she relied on a News Release the IRS had issued in 2014 and the corresponding modifications it made to Publication 1 “Your Rights as a Taxpayer.” The Pub. 1 modifications contained basically the same language that Congress put into §7803(a)(3) the next year. Ms. Moya thought the Tax Court should enforce the IRS self-binding proclamation of rights. The Tax Court thought otherwise.
The basic rule in tax procedure is that the Tax Court does not look behind the NOD. That is, the Tax Court’s focus is on the correctness of the NOD and not the process by which it was produced. Greenberg’s Express v. Commissioner, 62 T.C. 324 (1987) is likely the most commonly cited Tax Court precedent for the rule.
The rationale for the rule is that the Tax Court reviews NODs de novo. The statutory command in §6214(a) that the Court “redetermine the correct amount of the deficiency” means, to the Court, that it must base its decision on the merits of the case and not on the propriety of the administrative steps taken prior to issuance of the NOD. As the Court has explained: “To the extent that the IRS's adjustments are supported not by reason or evidence but only by ill motive, then the taxpayer's burden to prove his actual liability should be concomitantly easier, so that the IRS's motive for the adjustments is unimportant.” Bailey v. Commissioner, T.C. Memo 2012-96 at 18 (internal quotes and citations omitted).
The Supreme Court has endorsed this rule, perhaps more than the Tax Court is willing to admit. In United States v. Janis, 428 U.S. 433 (1976), the IRS based its tax liability determination on evidence gathered by the Los Angeles police during what turned out to be an unconstitutional search and seizure. The taxpayer sought to apply the exclusionary rule used in criminal cases to deter unconstitutional police conduct. The Supreme Court refused to extend the exclusionary rule to civil tax cases. In so doing it explicitly endorsed the result in Compton v. United States, 334 F.2d 212, 215-216 (4th Cir. 1964), where the Fourth Circuit held that the presumption of correctness given a tax assessment was not affected by the unconstitutional acquisition of information by state law enforcement and used by the IRS. And the Janis Court explicitly rejected the contrary holding of the Tax Court in Suarez v. Commissioner, 58 T.C. 792 (1972) (going behind the NOD to exclude unconstitutionally obtained evidence).
The Tax Court, notwithstanding Janis however, continues to cite to Suarez and maintains that it will examine the NOD process when “there is substantial evidence of unconstitutional conduct on respondent's part and the integrity of our judicial process would be impeded were we to let respondent benefit from it.” Church of Scientology of California v. Commissioner, 83 T.C. 381, 448 (1984). In the Scientology case, the Court considered (and eventually rejected) the taxpayer’s claims that the IRS had violated both the equal protection and free exercise clauses of the constitution in selecting it for audit.
Judge Halpern’s opinion in Moya also cites Suarez in re-affirming the Tax Court’s commitment to take credible allegations of unconstitutional behavior. But note this: Janis dealt with the inter-sovereign effect of state employee misconduct on federal tax determinations and the Tax Court is simply re-asserting its willingness to deal with intra-sovereign effect of federal employee misconduct on federal tax determinations. Thus, the continued invocation of Suarez over the years by the Tax Court gives us a strong signal that the Tax Court remains open to looking behind the NOD when presented with credible allegations that IRS employee misconduct has violated taxpayers’ constitutional rights.
What Ms. Moya claimed, however, was not any violation of constitutional rights, or even statutory rights. She claimed IRS employees violated rights created and announced by the IRS itself. Since the process that produced the NOD was invalid, so was the NOD. So went her argument.
The Lesson: The Tax Court Cares About Substantive Error, Not Procedural
Borrowing heavily (and why the heck not?) from a really well done district court case, Facebook, Inc. v. IRS, (N.D. Cal. 2018), Judge Halpern recounts the history of TBOR IV and §7803(b) because part of that history is indeed a story of the administrative adoption of the rights-language that Congress eventually enacted. In Facebook, the taxpayer wanted to go to Appeals after they filed their petition in Tax Court and Chief Counsel attorneys refused to make the referral. Facebook then sued for a mandamus in federal district court, arguing that the IRS had violated their TBOR IV rights. They lost. There simply is no substantive right to go to Appeals before assessment. In contrast, §6320 and §6330 give a substantive right to go to Appeals after assessment but before certain administrative collection actions.
Similarly, here, Judge Halpern very carefully explains why the IRS first adopted the TBOR formulation administratively and then how that administrative formulation found its way into TBOR IV and §7803(b). He thoroughly explains that the 10 “rights” were intended to be a restatement of existing rights, a re-framing of the various substantive rights existing elsewhere in the statutes. He concludes that “in adopting its TBOR in 2014, the IRS did not create for taxpayers any rights or remedies that they did not theretofore enjoy.”
Judge Halpern then looks for any evidence that the IRS deprived Ms. Moya of her rights to challenge the NOD in Tax Court. He finds none. So, writing for a unanimous Tax Court, he upholds the NOD.
Notice that Judge Halpern is not here talking about §7803(b) directly. Remember that Ms. Moya was basing her argument on the IRS’s administrative adoption of the TBOR restatement of rights in Publication 1. So the Moya case does not teach us a lesson about §7803(b) per se.
But Judge Halpern adds what he calls a “Postscript” to the opinion. In it he basically tells readers not to expect any different result if and when the Tax Court is asked to evaluate the role of the statutory TBOR. That makes sense and is consistent with other recent Tax Court cases that have dealt with the statutory TBOR, at least tangentially, such as the one I blogged about here last October. In that blog, I discussed a case where the taxpayer invoked the TBOR and won, but not because of the TBOR. He won because of existing rights given in §6330(c).
In sum, the Tax Court tells us in Moya that it wants taxpayers to show why an NOD is wrong because of the merits, and not because of the administrative process that produced it.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law