Paul L. Caron

Monday, September 16, 2019

Lesson From The Tax Court: Administrative File Notes Are Not Ex-Parte Contact

Tax collectors have an tough and lonely job.  I know.  I collected taxes for Arlington County, Virginia shortly after law school.  And when I was in IRS Office of Chief Counsel, my clients were Revenue Officers (ROs), the IRS employees whose dolorous job is to collect unpaid taxes. 

When a taxpayer receives a CDP hearing, ROs are prohibited from making ex part contacts with anyone in Appeals about the substance of the collections under review.  If the RO wants to communicate with anyone in Appeals about matters that are not ministerial, administrative, or procedural, they must give taxpayers an opportunity to participate in the discussion. Rev. Proc. 2000-43, §3, Q&A-6.   If they violate the ex-parte prohibition, then the CDP hearing becomes tainted and the ex part nature of the contact must either be cured or else the case be reassigned.  Rev. Proc. 2012-18, §2.10(1).

Not every communication from an RO to Appeals is a prohibited ex parte contact.  Last week’s case of Jason Stewart and Kristy Stewart v. Commissioner, T.C. Memo 2019-116 (September 10, 2019) (Judge Kerrigan) teaches a lesson in what does not constitute a prohibited communication from an RO to the Settlement Officer in a CDP hearing.  Details below the fold.


In 1998, Congress directed the IRS to write rules prohibiting “ex parte communications between appeals officers and other Internal Revenue Service employees to the extent that such communications appear to compromise the independence of the appeals officers." §1001 of the Internal Revenue Service Restructuring and Reform Act, P.L. 105-206, 112 Stat. 685, at 689.

Since 1998 IRS management has endeavored to fulfill both the letter and spirit of that off-Code command through various Revenue Procedures.  The two currently in force are: Rev. Proc. 2000-43 and Rev. Proc. 2012-18 (published as 26 CFR 601.106). 

One of the dangers anticipated by the Rev. Procs. is that IRS employees might salt the administrative files with prejudicial and irrelevant remarks about taxpayers.  Accordingly, Rev. Proc. says:

“the originating function should not include gratuitous comments in the case history...if the substance of the comments would be prohibited if they were communicated to Appeals separate and apart from the administrative file.  In contrast, it is permissible to contemporaneously include statements...pertinent to the originating function’s consideration of the case...even if the substance of those comments...would be prohibited if they were communicated to Appeals separate and apart from the administrative file.”   Rev. Proc. 2012-18 §2.03(4)(d).

This case is a great illustration of what that language is talking about.


Mr. and Ms. Stewart filed a return for 2015 reporting over $660,000 of “adjusted income” and zero payments of tax.  They likewise filed a 2016 return reporting almost $450,000 of “adjusted income” for which they had made one estimated tax payment but nothing else.  The IRS assessed the unpaid taxes.  I put “adjusted income” in quotes because that is the term used in the opinion. 

The opinion is silent about how much tax the IRS assessed.  But I bet it was in the low/middle six figures after accounting for interest and penalties.  It was certainly enough for the Stewarts to hire an attorney, one Eric William Johnson of St. Paul, MN, to represent them.

After the assessment and, presumably, the various automated notices, the IRS collection machine shot out a Notice of Federal Tax Lien (NFTL) and then, per §6320, sent a notice of that filing to the taxpayers, giving them that short sweet opening to request a CDP hearing.  The NFTL was for the 2015 tax year.

Request they did.  Their CDP request asked that the IRS give them an installment agreement and asserted they did not have assets to pay the outstanding liabilities. 

A mere month after they filed their CDP hearing request, Mr. Johnson (the taxpayers’ attorney, remember), received a visit from Revenue Officer J. Wagner.  You may wonder what the RO was doing trying to collect from the Stewarts when the taxpayers had asked for a CDP hearing.  The opinion is silent, but two reasons immediately occur to me.  First, the CDP request was for review of an NFTL.  Neither the applicable statute, §6320, nor the applicable regulations require the IRS to stop the levy process because of an NFTL CDP request.  See Treas. Reg. 301.6320-1(g)(2) A-G3.  Second, the CDP request here was just for the 2015 tax year.  RO Wagner, however, was apparently also looking for information to start collecting the 2016 tax year's unpaid liabilities.  Yeah.  Just because a taxpayer gets CDP review for one tax year does not mean the IRS has to stop collecting other tax liabilities.  That’s what RO’s do.  RO Wagner was doing his job. 

The meeting was apparently short and not sweet.  RO Wagner returned to the office and that very same day, July 28, 2017, sent out both a follow-up letter and a CDP levy notice for 2015 and 2016.

The follow-up letter to Mr. Johnson read in part: “You refused to provide any collection information and stated it would be provided directly to the office of appeals.  You then brusquely directed me to leave your office.”  The same day as the letter, RO Wagner made a similar entry into the administrative file, describing Mr. Johnson as “uncooperative,” “unwilling to provide financial information,” and noting that Mr. Johnson ended the visit by saying “we’re done” and directing RO Wagner out of the office. 

In response to the levy CDP notice, Mr. Johnson was quick to file a second CDP request, again asking for installment agreement.  Mr. Johnson also orally asked Appeals to put the Stewarts into the indeterminate status of “Currently Not Collectable.”  To evaluate Mr. Johnson's official CDP request and informal oral request, the Settlement Officer, SO Wert, asked Mr. Johnson for the same financial information that RO Wagner had asked.  This time Mr. Johnson was more forthcoming, providing SO Wert with a Collection Information Statement (CIS) from the taxpayers. 

If Mr. Johnson’s plan was to somehow avoid RO Wagner, the joke was on him.  A standard procedure in Appeals is to farm out CIS analysis to the field collection function.  Appeals does that through a process called an Appeals Referral Investigation (ARI).  See IRM (08-09-2017).  That is apparently what happened here because Judge Kerrigan writes “On March 1, 2018, the CIS was sent to RO Wagner.  On April 2, 2018, RO Wagner completed his investigation...and those results were shared with Mr. Johnson and petitioners.” 

Well...hello again RO Wagner! I tell you, I am beginning to like this RO Wagner fellow!  Prompt and attentive! 

After receiving Wagner's CIS analysis, SO Wert gave the taxpayers a month to respond.  Mr. Johnson apparently had no substantive response; he simply renewed the request for CNC status because, he asserted, the taxpayers “could not make monthly installment payments.”  That was not enough to convince SO Wert that the Stewarts were truly turnips.  SO Wert therefore issued the taxpayer’s ticket to the Tax Court on July 19, 2018.  The taxpayers timely punched their ticket and now Judge Kerrigan has told them their CDP delay ride was over.  All in all, that’s a pretty fast journey for a CDP case. 

Lesson: RO Wagner’s Notes Were Not Impermissible Ex-Parte Communication

In Tax Court Mr. Johnson continued to represent the taxpayers.  He argued that RO Wagner’s notes were the kind of gratuitous comments that Rev. Proc. 2012-18 says should be treated as ex part contacts because they prejudiced SO Wert against the taxpayers. 

Judge Kerrigan disagreed.  She writes: “RO Wager’s notes...were made pursuant to his duties as a revenue officer,” were “recorded...the same day that he spoke with petitioners’ representative,” and “did not address the substance of the issues or suggest any positions to be taken in petitioners’ CDP proceedings.”  She explains that makes his notes unlike administrative file comments the Tax Court has previously held to be impermissible ex parte contacts.

Judge Kerrigan shows a fine appreciation for the unlovely collection work an RO does.

Knowing that a particular representative refused to provide collection information and instead kicked the RO out of his office can help other IRS employees decide on an appropriate course of action in later collections.  For example, there is little point in taking a trusting or incremental approach with a representative who has drawn a line in the sand.  By the way, there is nothing wrong in drawing the line, either!  ROs are not your friend.  Still, the administrative notes help ROs decide how to go about discovering assets which is, after all, their job.  That is why Judge Kerrigan cites the IRM that tells ROs to document relevant information in the case history.  IRM  She understands the job.

The case history notes here are factual. They do not just label Mr. Johnson uncooperative: they give the facts underlying that label.  The letter to Mr. Johnson---also part of the administrative file---is consistent with the notes and reinforces them.  Truly, Mr. Johnson refused to give financial information and kicked RO Wagner out of the office.  Thems the facts. 

RO Wagner did a good job here.  I especially liked that the notes were contemporaneous.  Notice that was a factor that helped Judge Kerrigan decide they were not impermissible ex parte contacts. 

Tax collectors will always be unloved.  I know.  After my own stints as a tax collector and representing ROs, it took years of therapy and hard work to move from being an unloved tax collector to where I am unloved tax professor.  Oh well, plus ça change, plus c'est la même chose!

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  Don't feel bad for him.  There actually are some who do love him; they just keep their heads down.

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On Monday mornings, mostly, I always look forward to the Tax Court cases. Helps keep me sharp as I do a lot of tax resolution for clients. Bryan Camp's article was very informative and very well written. And yes there are those who appreciate lonely professors (I have my MBT and I appreciated mine).

Posted by: Gary Weiss | Sep 16, 2019 3:10:29 PM