Last week’s case of Abigail Richlin v. Commissioner, T.C. Memo. 2020-60 (May 18, 2020) (Judge Halpern) is a textbook example of how one hand of the IRS bureaucracy might pat your back even as another hand slaps you upside the head. There, the taxpayer had received a favorable decision from Appeals in a first proceeding, but then received an unfavorable decision on the exact same issue in a later proceeding. Judge Halpern’s sturdy opinion gives us a terrific lesson on the difficulties taxpayers face in navigating a bureaucracy like the IRS. Details below the fold.
Law: The Two Possible Bites at CDP Apple
The IRS uses three main administrative collection tools to collect unpaid taxes: liens, levies, and setoffs. Today’s case involves the interplay of liens and levies with the Collection Due Process (CDP) provisions. Experienced readers will recall that the main purpose of CDP is to delay IRS collection so taxpayers can work out some alternative to indiscriminate use of the three collection tools. You can review this prior lesson if you want.
Liens: While §6321 provides that tax liens arise by operation of law, §6323 says they are not effective against four types of competing creditors until after the IRS files a Notice of Federal Tax Lien (NFTL). Thus, one important tax collection move the IRS makes is to file that NFTL. Section 6320, however, provides that within 5 days of filing the first NFTL for any given tax delinquency, the IRS must send a notice to taxpayers to give them an opportunity to ask for a CDP hearing. If the taxpayer responds within 30 days of the date of the notice, the tapxayer gets a CDP hearing with an Office of Appeals employee called a Settlement Officer (SO). If the taxpayer misses the 30-day mark, the taxpayer still gets a hearing but cannot obtain judicial review of the SO’s decision.
Levies: Section 6330 provides that before the IRS can make its first levy for any given tax delinquency, it must send another CDP notice to taxpayers. That generates a separate opportunity for a CDP hearing with Appeals.
The IRS policy is to coordinate the two CDP hearings when possible. See Treas. Reg. 301.6330-1(d). If not possible, then the regulation imposes no restrictions on the same SO conducting both CDP hearings. Nor did I see any IRM prohibition against the same SO conduction both a lien CDP hearing and a levy CDP hearing for the same taxpayer for the same tax period. See IRM 8.22.4. In contrast, the regulation provides that A CDP hearing cannot be conducted by an SO who was involved in a prior Appeals hearing for the tax periods at issue in the requested CDP hearing. Of course, the taxpayer can waive that restriction. See Treas. Reg. 301.6330-1(d), Q&A D4, D5.
Thus, as you can see, a taxpayer may actually received TWO CDP hearings for the same unpaid tax. Those hearings might be at different times and can occur in any order, depending on whether the IRS first tries to use its levy powers or first files an NFTL. Remember, however, that a taxpayer gets only one shot at protesting the amount of liability and that is at the first CDP hearing. That was the lesson in “One Plus One Still Equals One” posted on March 30th.
Even when Appeals resolves a CDP hearing, IRM 18.104.22.168 provides that Appeals retains jurisdiction to hold further hearings if (1) “ Collection does not implement Appeals' determination” or (2) “There is a change in the taxpayer's circumstances which affects Appeals' determination.”
Two hearings means that a taxpayer has two opportunities to convince the IRS to throttle back on collection. But just because the taxpayer succeeds in the first opportunity is no guarantee of success in the second. And even if successful in the second, Appeals can use its retained jurisdiction to change its mind. That is the lesson Ms. Richlin learned.
In 2006 Ms. Richlin was married to Milton Schwartz and they lived in Nevada. They divorced in January 2007. Ms. Richlin filed her 2006 return using married-filing-separately status. She reported a large tax liability (derived in part from property she had sold in January 2006) and claimed payment credits for (1) half of payments her husband had remitted to the IRS in 2006 estimated tax payments and in 2007 along with a request for extension for their 2006 liabilities, and (2) half of the overpayment reflected on her and her husband’s married-filing-jointly 2005 return. However, Mr. Schwartz’s return (filed by his Estate because he died in August 2007) also claimed all of the credits. So we had two taxpayers both claiming they deserved credit for the same dollars sent to the IRS.
In processing the returns for 2006, the IRS Campus allocated all the payment credits to Mr. Schwartz’s 2006 return. Thus her 2006 tax liabilities showed a balance due.
In 2010, the IRS filed an NFTL and Ms. Richlin timely requested a CDP hearing. She asked for two forms of relief. First, she asked for collection alternatives claiming she did not have the assets to fully pay the liability. Second, and more importantly, she wanted credit for her share of the various payments her husband had made. In 2012 Appeals decided that the Campus had erred in not crediting her for half of the payments her husband had made. The SO wrote: “The correct resolution is to credit the taxpayer with these amounts. This will eliminate the tax liability and the Notice of Federal Tax Lien will be removed.”
Both Appeals and Ms. Richlin memorialized this decision on Form 12257, which is titled “Summary Notice of Determination.” One of the provisions in the Form is that the taxpayer waives judicial review of the decision. You may think “no duh.” But the decision on whether to sign a Form 12257 can be tricky. Prof. Caleb Smith wrote this good blog post on just that subject over at Procedurally Taxing in March 2018.
When the Campus obeyed the 2012 Appeals Summary Notice of Determination, Mr. Schwartz’s estate now had an underpayment. At some time not given in the opinion, the Estate contacted the Taxpayer Advocate Service (TAS) for help and TAS went to Office of Chief Counsel for a legal opinion. The opinion was that the credits belonged to Mr. Schwartz’s estate and not to Ms. Richlin. So the Campus shifted the credits back to the Estate.
In December 2013 the IRS resumed collection from Ms. Richlin this time sending her a levy CDP notice. Once again she timely requested a CDP hearing. Once again, Appeals said the credits belonged to her. And in August 2014 she and Appeals once again signed a Form 12257.
At some point after signing the second Form 12257 in 2014, however, Appeals apparently learned of the Estate’s position, TAS’s help, and the Office of Chief Counsel’s legal opinion. Exercising its retained jurisdiction, Appeals held an additional hearing in April 2016.
After the hearing Appeals changed its mind, rescinded the Form 12257, and issued a Notice of Determination sustaining the collection of Ms. Richlin’s taxes by levy. Ms. Richlin petitioned the Tax Court, arguing that Appeals could not change its mind and, oh yeah, the Office of Chief Counsel got it wrong and the credits should be credited to her. We’ll skip that last argument. Judge Halpern’s well-reasoned rejection of it is worth reading, but is not the lesson for today.
Lesson: When Can Appeals Change Its Mind
Ms. Richlin offered three arguments on why the Tax Court should not permit Appeals to change its mind: (1) Appeals had already signed off on the second Form 12257 and that was a contract, binding on the IRS; (2) the IRM prohibited Appeals from rescinding the Form 12257 it signed; and (3) the Court should equitably estop Appeals from changing its mind, rescinding the Form 12257 and issuing the Notice of Determination.
The Court rejected all three arguments. Let’s look briefly at each because they are useful roadmaps to arguments that might, in other circumstances, actually work.
(1) Form 12257 Is Not A Contract.
Judge Halpern wrote “petitioner has not convinced us that respondent was contractually obligated, by reason of the summary notices, to refrain from any further action concerning the collection of tax from petitioner for her 2006 taxable year.” In other words: Form is not a contract. It’s a waiver of rights.
I prefer to think of it this way: whether the Form is a contract in some abstract sense is irrelevant to the question of whether it is a document that binds the IRS. The distinction between a binding contract and a waiver is sometimes difficult to see because courts treat similar-looking documents as binding contracts. For example, courts regularly treat Installment Agreements (§6159), Closing Agreements (§7121) and Offers in Compromise (§7122) as contracts and “the agency will be bound under general contract principles to honor the agreement.” Tucker v. Commissioner, 135 T.C. 114, 140 (2010).
Those documents are binding agreements because statutory provisions authorize “the Secretary” to enter into them and the Secretary has delegated that authority down the line to various IRS employees to effectuate the statutory authority. Whether you have a binding agreement with any government agency, including the IRS, is a question of authority, not perception. The classic case is Botany Worsted Mills v. United States, 278 U.S. 282 (1929) where the Supreme Court held that agreements between taxpayers and the IRS which do not satisfy the formalities set forth in the Internal Revenue Code are not to be treated as binding contracts. Wrote the Court: “Congress...did not intend to intrust the final settlement of such matters to the informal action of subordinate officials in the [IRS].” Id. at 288–89. Thus, any documents purporting to resolve issues between the taxpayer and the IRS that are not created under the authority of §7121 or §7122 (and now §6159) are not binding contracts.
That is why Forms 870 and 870-AD are also not binding agreements. They are also waivers. Sure, they can be conditional waivers, but whether the violation of the conditions creates a problem for the IRS depends on whether the violation also violates applicable statutes. See generally, Philadelphia & Reading Corp. v. United States, 944 F.2d. 1063 (3rd Cir. 1991)(violation of condition resulted in violation of statutory deficiency procedures). See also Parsons Corp. v. United States, 659 F. Supp. 48, 52 (C.D. Cal. 1987)(same)(“The Service makes a number of other arguments based on analogy to the law of contracts. All of these arguments are inapposite. The conditional Form 870–C Parsons signed was a waiver form; it was not a bilateral contract.”)(internal citation omitted).
One needs to understand the bureaucracy of the IRS just as with any other agency. Agency employees may have significant discretion pursuant to agency policy and practice, but they cannot bind the agency unless they are acting pursuant to some statutory authority. See e.g. Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 384 (1947)(“anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority.”).
There is no statutory authority for Appeals to bind the IRS with Form 12257 any more than Exam can bind the IRS with a Form 870. So it’s not a binding settlement. Appeals can change its mind.
(2) You Cannot Estop When You Did Not Rely
Ms. Richlin argued that Appeals should not be allowed to change its mind because of the equitable doctrine of promissory estoppel. That is the idea that when one party has promised something to second party and the second party has relied on that promise, the first party will not be allowed to renege on the promise. Taxpayers may estop the IRS under certain, quite rare, conditions. Judge Halpern lists them in the opinion. One of the main conditions is that some IRS employee must have made a deliberately false or misleading representation (either by an affirmative statement or a misleading silence) that the taxpayer then relied on to their detriment.
Ms. Richlin tried to sell the misleading representation in this case as either an affirmative statement that the payments would be credited to her, or at least silence that the Estate was contesting the allocation. The claimed reliance was that if Ms. Richlin had only known the credits may not be allocated as Appeals had directed, she would have been able to save assets to pay the tax.
Judge Halpern was not buying it. After all, Appeals DID in fact tell her about the Estate’s actions. “She offers no reason, however, why respondent was obliged to disclose those facts to her sooner than he did.” (Op. at 19) And because her very first CDP request had asked for collection alternatives, “her relinquishment of assets sufficient to pay the tax apparently occurred before respondent’s consideration of either the [lien] CDP case...or the [levy CDP] case.” Id.
(3) The IRM Does Not Shackle Appeals
IRM 22.214.171.124 provides that “Appeals cannot rescind a Notice of Determination (NOD) in any circumstance. Appeals may amend or revise a NOD within the 30 day period to petition Tax Court if: a. The NOD is clearly in error[;] b. The taxpayer has not petitioned Tax Court[;] c. The correction can be made within the 30 day period to petition Tax Court.”
Ms. Richlin wanted Judge Halpern to just read the the first sentence. She argued that the Form 12257 was included in the IRM’s reference to “a Notice of Determination.” Judge Halpern was not impressed. He noted that, read in its entirety, the provision was referencing regular Notices of Determination---the kind that were tickets to the Tax Court. The Form 12257 was not that kind of CDP NOD. It was a waiver form where the taxpayer was agreeing not to petition the Tax Court to review the SO’s decision.
The reason for the IRM provision is fairly obvious: it is to avoid litigation over what document is the relevant “ticket to the Tax Court.” You see that when you read further in the IRM. It instructs that should Appeals modify the CDP NOD, the modified NOD must retain the same issue date. That is so the taxpayer can solidly rely on the original NOD date to know the proper time within which to petition the Tax Court.
One of the most important lessons I try to teach my students is that the IRS is not a monolithic entity. Like any bureaucracy, the IRS is made up of many different offices performing sometimes overlapping functions. The offices are staffed by individuals with various levels of abilities and various personality traits. I tell my students: if you get an answer you don’t like from one office, find a different decision-maker. Unfortunately, it works the other way as well: even if you get an answer you do like, you might later get one you don’t.
Judge Halpern captures this idea nicely in this part of his conclusion:
“We sympathize with petitioner's frustration at having received inconsistent determinations regarding the payment of her tax liability for 2006. Respondent's handling of her case was not ideal. But we also appreciate the challenge respondent faced in adjudicating competing claims for credit of the same amounts. In an organization as large as the IRS, the right hand may not always know what the left is doing, and efforts to coordinate the treatment of conflicting claims to credit for payments and handling those claims consistently can be complicated. It would have been easier for all involved if respondent had adhered to a single position regarding the allocation of the credits. But, for the reasons explained above, Appeals was entitled to change its position regarding petitioner's entitlement to the credits.”
Appeals can change its mind.
Bryan T. Camp is the George H. Mahon Professor of Law Still in Exile at Texas Tech University School of Law