One recurring lesson I teach in Tax Practice and Procedure is that you generally serve your client better by resolving their issues at the lowest level. That requires helping them be realistic in understanding the range of potential outcomes. It requires an understanding that IRS offices, such as the Office of Appeals, generally have more discretion than does the Tax Court to resolve problems. It also requires understanding that when the Tax Court reviews an IRS discretionary action, it will only change that action when it is convinced the IRS decision was bonkers or, in the dry technical terms of the law, the decision was an “abuse of discretion.” And, no, the Tax Court will not make a taxpayer’s argument for them, as we recently learned in Lesson From The Tax Court: The Tax Court Is Not Your Advocate, TaxProf Blog (Feb. 6, 2023).
Today I present a case where pro se taxpayers learned that lesson the hard way. In Ronald Powell and Cynthia Powell, T.C. Memo. 2023-48 (Apr. 17, 2023) (Judge Lauber), the taxpayers did not like the Installment Agreement offered them by Appeals. They thought they could do better in Tax Court. They thought wrong. Details below the fold.
Background: The Role of Office of Appeals
The Office of Appeals has existed in one form or another, since 1927. For a still worthwhile read, see Howard T. Martin, “IRS Appeals Division – 60 Years Old,” 39 The Tax Executive 341 (Summer 1987) (sorry but I could not find a free link; that one is to HeinOnline, which has a paywall).
In the 2019 Taxpayer First Act, P.L. 116-25, Congress codified the existence of the IRS Office of Appeals in §7803(e)(3). It’s formally titled “Independent Office of Appeals” but I’ll just call it “Appeals.” To the extent that the word “Independent” suggests that Appeals is not part of the IRS, it’s misleading. I explained why in Lesson From The Tax Court: Appeals Is Still Part Of The IRS, Really!, TaxProf Blog (Aug. 5, 2019). Taxpayer who have tried to argue otherwise have been unsuccessful. See e.g. Tucker v. Commissioner, 135 T.C. 114 (2010), aff’d 676 F.3d 1129 (D.C. Cir. 2012).
Appeals explains on its website that its “independence” is from the Exam and Collection functions within the IRS: Appeals is separate and independent from the IRS Examination and Collection functions that make tax assessments and initiate collection actions. Our mission is to resolve tax controversies—Without litigation; On a basis which is fair and impartial to both the Government and you, and; In a manner that will enhance voluntary compliance and your confidence in the integrity and efficiency of the Service.”
While its mission remains largely the same, the process Appeals uses to carry out that mission has changed over time. The biggest change was the prohibition on something called “ex parte” contacts. See Moore v. Commissioner, T.C. Memo. 2006-171, where Judge Swift gives the history of that change, noting that “in prior years, and with a great deal of effectiveness and propriety, respondent's Appeals officers generally were allowed to communicate with respondent's revenue agents and officers concerning a taxpayer's outstanding taxes.” That case teaches a good lesson in what constitutes an improper ex parte contact. The IRS then issued this Action on Decision explaining why it was disagreeing with the opinion.
These changes in procedure have turned Appeals into a quasi-judicial office. Appeals does not work a case the way it used to. Whereas before the ex parte rules Appeals would accept information from a taxpayer and work out the result, now Appeals Officers will generally kick the can back to the originating functions (Exam or Collection) to do the work. For example, if a taxpayer in a CDP hearing wants the IRS to accept an Offer In Compromise (OIC), Appeals will not decide whether the IRS should accept the OIC. Instead, Appeals sends the OIC to the IRS unit that processes all OICs and they make the decision. Only if the taxpayer then disagrees with that decision does Appeals “review” it. See Lesson From The Tax Court: The Difference Between Rejecting An OIC And Reviewing A Rejection, TaxProf Blog (July 18, 2022).
However, Appeals still considers hazards of litigation in resolving issues. That is one reason many folks like CDP because, when you catch the CDP Butterfly, it is easier to play the hazards of litigation card. But even so, when the litigation is a very light abuse of discretion review, that is a pretty low-value card.
And, as relevant for today's lesson, Appeals can and will still sometimes work some aspects of a case. We learn today that your best bet is to try and work out a deal with Appeals because just as the Tax Court is not your advocate, neither is the Tax Court going to re-do the work Appeals did to substitute its judgment for that of Appeals. Let’s take a look.
Mr. and Ms. Powell had difficulty filing their 2016 tax return. They did not submit it until until prompted by receipt of a Substitute for Return from the IRS. The IRS accepted the late-filed return and assessed the tax liability shown, as well as the additional amounts for interest (nach) and failure to file. Further, since the Powells did not pay the tax reflected on their own return, the IRS hit them with a failure to pay penalty as well.
Apparently the Powells had similar unpaid tax liabilities for their 2017-2019 tax years. But it was for the 2016 tax year that they eventually received a levy CDP notice in April 2020. They timely requested a CDP Hearing sometime.
Remember, the official purpose of a CDP hearing is to allow taxpayers to pause collection so they can explain why they are turnips and cannot fully and immediately pay the assessed tax. Taxpayers can ask for “collection alternatives,” which include an Offer In Compromise (OIC), an Installment Agreement (IA), a Partial Pay Installment Agreement (PPIA), or relegation to Currently Not Collectible (CNC) status. See Lesson From The Tax Court: No Second Bite In CDP For Rejected OIC, TaxProf Blog (Mar. 1, 2021).
And remember, the unofficial purpose of a CDP hearing is ... delay. And remember too that 2020 was the year of COVID, so that was slowing everything even more.
In their April 2020 CDP request the Powells asked for an Installment Agreement (IA). Since their tax liabilities totaled under $50,000, they were eligible for what is called a “Streamlined” IA, which basically means they did not have to submit detailed financials on Form 433-A. See IRM 220.127.116.11 (10-14-2021) (“Streamlined Installment Agreements”)
In May 2021 the Settlement Officer (SO) assigned to the case sent the Powells a letter that offered them a Streamlined IA to pay off their total outstanding liabilities for all years, which at that time amounted to about $30,500. The Powells would need to agree to pay $424/month for 92 months, some 7.5 years. If me and my calculator are working, I think that comes to $39,000 total. So I’m thinking it’s like a 6.2% rate of interest? I invite folks better at numbers than I am to correct me. The SO 's letter said if they did not think they could afford the $424/month then they could submit detailed financial statements on Form 433-A (with supporting documentation) and the SO could recalculate the IA terms.
Apparently the Powells found someone to represent them and eventually, after multiple delays, submitted the financials in late October 2021. However, it turns out that the disclosures on their unsupported Form 433-A “showed a net difference of $1,449 per month available to pay their outstanding ta liabilities—significantly more than the $424 payment required under the SO’s streamlined IA proposal.” Op. at 3. Whoops.
In early November the SO gave the Powells the option of a second Streamlined IA where they would pay $350/month for 109 months and asked for a response by mid-November. The reasons for that are not revealed in the Opinion. But unless my fat fingers messed up on my calculator that totals $38,150 . I admit I’m confused! I don’t understand why there would be less accrual of interest, etc., over a 109 month period than over a 92 month period. I invite those better at numbers than I am to explain. Regardless, am I crazy to think that the $350/month deal seems like a much better deal than the $424/month deal?
The Powells made no response by the mid-November deadline so the SO closed the case at the end of November and the IRS creaked out the SO’s Notice of Determination to green-light collection on February 1, 2022. No IA at all. Full-steam ahead on collection.
The Powells—now proceeding pro-se—petitioned the Tax Court, arguing that the SO messed up all the numbers. Seems they really did want an IA after all. Our lesson teaches us, however, that it was too late.
Lesson: Take The Deals In Appeals
Judge Lauber notes that the Powells’ failed to make any response in Court to the IRS’s Motion for Summary Judgment. That was, in and of itself, sufficient grounds to sustain the SO’s decision to greenlight collection. See Tax Court Rule 121(d). He nonetheless gives that decision an abuse-of-discretion review, from which we get our lesson.
First, Judge Lauber notes that the SO here went above and beyond what the statute requires: “it is not an abuse of discretion for an SO to decline to consider a collection alternative where the taxpayer does not put an offer on the table. In other words, it is the obligation of the taxpayer, not the reviewing officer, to start negotiations by making a specific proposal. Petitioners never made one.” Op. at 5-6. (emphasis supplied).
Second, Judge Lauber explains that in conducting an abuse-of-discretion review, “we do not recalculate a taxpayer’s ability to pay or substitute our judgment for the SO’s.” Op. at 6. Specifically, it is not an abuse of discretion for the SO “to move forward with a determination” when the taxpayers had multiple opportunities to provide information and gave only radio silence. Here, the SO gave reasonable deadlines, even waited some two weeks after the final one, and then only s...l...o...w...l...y moved to issue the Notice of Determination some three months later.
Finally, Judge Lauber notes the huge difficulty the Powells faced in attempting to argue that the SO abused discretion by offering them an IA that was some four times less per month than what their own, unsupported, Form 433-A showed as the excess of their monthly income over monthly expenses. Op. at 7.
Bottom line: You are unlikely to get a better deal in Tax Court than in Appeals. So work it out in Appeals.
Comment: SOs and other Appeals Officers do indeed mess up. They are human. They get fatigued and frustrated and commit errors. However, even when a taxpayer succeeds in convincing the Tax Court that the Office of Appeals abused its discretion, the relief given is almost always a remand. And that is ... just another chance to work it out in Appeals! See Lesson From The Tax Court: CDP Win Is Not Always A Victory, TaxProf Blog (May 28, 2019)
Editor's Note: If you would like to receive a daily email with links to each Lesson From The Tax Court and other tax posts on TaxProf Blog, email here.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each Monday (or Tuesday if Monday is a federal holiday) to TaxProf Blog for another Lesson From The Tax Court.