THE IRS COLLECTION PROCESS: WHAT YOU NEED TO KNOW TO ADVISE YOUR CLIENTS

THE IRS COLLECTION PROCESS: WHAT YOU NEED TO KNOW TO ADVISE YOUR CLIENTS Presented by the American Bar Association Section of Taxation, Criminal Justice Section, Government and Public Sector Lawyers Division and Center for Professional Development

American Bar Association Center for Professional Development 321 North Clark Street, Suite 1900 Chicago, IL 60654-7598 www.americanbar.org 800.285.2221 CDs, DVDs, ONLINE COURSES, DOWNLOADS, and COURSE MATERIALS ABA self-study products are offered in a variety of formats. Find our full range of options at www.shopaba.org Discuss This Course Online Visit http://www.americanbar.org/groups/cle/course_content/cle_discussion_boards.html to access the discussion board for this program. Discussion boards are organized by the date of the original program, which you can locate on the preceding page of these materials. The materials contained herein represent the opinions of the authors and editors and should not be construed to be the action of the American Bar Association Section of Taxation, Criminal Justice Section, Government and Public Sector Lawyers Division or Center for Professional Development unless adopted pursuant to the bylaws of the Association. Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only. 2014 American Bar Association. All rights reserved. This publication accompanies the audio program entitled The IRS Collection Process: What You Need to Know to Advise Your Clients broadcast on August 5, 2014 (event code: CET4DFD).

TABLE OF CONTENTS 1. Presentation Slides 2. How is the IRS Doing? According to Taxpayer Advocate Reports Frances D. Sheehy 3. The Collection Due Process Hearing and Appeal Sara G. Neill 4. Unpaid Federal Tax Liabilities The Bankruptcy Option (The Taxpayer Controls!) Wm. Robert ( Bob ) Pope, Jr. 5. Survey of 2013 CDP Cases Updated January 1, 2014 (112 Cases Reviewed) Frances D. Sheehy 6. 6. Survey of Dischargeability Recent Cases 2013 (176 Cases Reviewed) Frances D. Sheehy

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The IRS Collection Process: What You Need to Know to Advise Your Clients Tuesday, August 5, 2014 2:00 3:30 PM Eastern Sponsored by the ABA Section of Taxation, Business Law Section, Criminal Justice Section, Government and Public Sector Lawyers Division and the ABA Center for Professional Development www.americanbar.org www.abacle.org The Panel Wm. Robert Pope, Jr. ( Bob ) Dennis Brager Frances D. Sheehy (Moderator / Bankruptcy) (Appeals Judicial Approach and Culture ) (Taxpayer Advocate Review and White & Reasor, PLC Brager Tax Law Group Late Filed Return in Bankruptcy) One American Center, Suite 1100 10880 Wilshire Blvd., Suite 880 Law Offices of Frances D. Sheehy 3100 West End Avenue Los Angeles, CA 09924 5481 Wiles Road, No. 502 Nashville, TN 37203-1348 dbrager@bragertaxlaw.com Coconut Creek, FL 33073-4217 (615) 383-3345 (310) 208-6200 fsheehy@att.net (954) 449-9880 Sara G. Neill Christin Bucci (CDP Hearing OICs and Installment Agreement) (CDP Hearing OICs and Installment Agreement) Capes Sokol Goodman & Sarachan P.C. Bucci Law Offices, P.A. 7701 Forsyth Blvd., 12 th Floor 2600 North Andrews Avenue St. Louis, MO 63105 Ft. Lauderdale, FL 33311 neill@capessokol.com christin@buccilawoffices.com (314) 721-7701 (954) 764-4440 1

OBJECTIVE: IRS Collection Options How to Use and How to Litigate! Only two IRS Collection Options Without any Judicial Review Uncollectible Status: 53 the Transaction Code CAP Hearing Request to Not File Notice of Tax Lien OBJECTIVE: IRS Collection Options How to Use and How to Litigate! Innocent Spouse: Tax Court Review Offers-in-Compromise and Installment Agreements Tax Court Review: Appeal -- Only After Collection Due Process Hearing 2

How is the IRS Doing? According to: Taxpayer Advocate Reports 2011 - Currently 3

2011 Collection Issues Lien Filing Personal TP contact Levy on Social Security 2012 Collection Issues: Improve Telephone & Correspondence Online Services Delays in 2848 processing RO role not being used effectively ACS increase service and effectiveness Lien Filing policies Early intervention for victims of failed payroll services 4

2013 Objectives Improve small business fresh start Improve criteria in lien filing Use collection resources (RO s) prudently Re-evaluate focus of collections field oper. 2014 Objectives Collection policies & procedures SB TP Safeguards for TP facing foreclosure Improve federal levy program re: hardship Eliminate procedural barriers to IA & OIC 5

2013 Good News Lien filing and withdrawal Small business IA s Streamlined OIC s and IA s Fresh start OIC terms- Student loans, state tax debt, unsecured pmts 2013 Bad News Small business IA s declined Identify barriers to SB IA s and OIC s Liens based on facts/circumstances Meaningful, fair, realistic lien criteria Train employees on new lien rules Inadequate resources for fresh start Focus of collection field operations 6

2014- Good News OIC s higher acceptance rate Fewer liens filed More liens withdrawn New safeguards for judicial foreclosures Hardship levy release even if unfiled returns 2014 Bad News Collection philosophy training IA s declined Few IA s and OIC s Identify barriers to new policies ACS not effective with SB Levies on social security if unfiled returns IRS procedures narrow use of IA and OIC 7

Offer-in-Compromise and Installment Agreements: Collection Due Process Hearing And The Appeal Taxpayer s Right to Notice and a Collection Due Process Hearing I.R.C. 6330 and 6331 The CDP Hearing Request Practical tips for completing Form 12153 What should be attached? Offer in Compromise? Installment Agreement request? Other? Suspension of collections and statute of limitations 8

The CDP Hearing Face to face or in person? Materials submitted? Recorded? Client attend? Can witnesses be subpoenaed/examined? The benefit of having two representatives present AJAC Notice of Determination NOD issued at conclusion of the CDP hearing advises taxpayer of right to seek judicial review of decision Tax Court has exclusive jurisdiction over CDP appeals Can you work with the Settlement Officer to define the issues in the Notice of Determination? Do you work with the Settlement Officer when you are having the hearing to decide how you want the Notice of Determination to read? NOTE: Tax Court will only consider an issue that was properly raised in the CDP hearing 9

Tax Court Review of the NOD Standard of review Abuse of discretion Dalton v. Commissioner De Novo Scope of review Practical considerations at and subsequent to the CDP hearing with litigation in mind Results: Best Do Over? 10

BANKRUPTCY TAX MYTHS #1 Must have a bankruptcy purpose other than tax claim NO #2 Bankruptcy Judges do not like or understand tax cases NO BANKRUPTCY TAX MYTHS #3 Bankruptcy Lawyers do not understand tax issues, or tax litigation! NOT A MYTH Your Job! #4 Tax Lawyers do not understand bankruptcy tax litigation NOT A MYTH My Job! 11

Bankruptcy Objectives A. Discharge: Full Absolution!! Exception: Notice of Federal Tax Lien ERISA Qualified Not Property of Estate COMPLICATED Bankruptcy Objectives B. Deferred Payment: Ch. 13 3 Years Automatic (2 more if you ask) Ch. 11 5 Years -- Prepare 12

Bankruptcy -- Tax Objectives C. Bankruptcy Court Tax Litigation Objection to Claim (11 U.S.C. 502(b) And FRBP 3007) Motion to Determine Liability (11 U.S.C. 505) Complaint to Determine Dischargeability (11 U.S.C. 523) TAXES DISCHARGEABLE IN BANKRUPTCY (Applicable in 7, 11 or 13) Timing Rules (Bankruptcy Filing After) 11 USC 523(a)(1) And 507(a)(8) 3 Year Rule: Due date of return 507(a)(8)(A)(i) (as Extended) December 12, 2013 2010 and earlier GONE 2 Year Rule: Late filed returns, 523(a)(1)(B)(ii) (After date of filing) 240 Day Rule: New assessments, 507(a)(8)(A)(ii) (Not on return) 13

Bankruptcy Discharge Prohibited BANKRUPTCY DISCHARGE Made a Fraudulent Return; or ( 523(a)(1)(C)) Willfully attempted, in any manner, to evade or to defeat to pay ( 523(a)(1)(C)) Trust Fund Taxes ( 507(a)(8)(C)) Not Assessed but assessable taxes ( 507(a)(8)(A)(iii)) Collection After Bankruptcy? Secured Tax Liability [Even if Discharged] Only if Notice of Federal Tax Lien filed before bankruptcy. IRC 6321, 6322 Limited to pre-petition assets (including appreciation) Not Discharged Of Course! 14

When Does the Debtor Get a Discharge? 1. Chapter 7 When the court enters the discharge order, 727. [3 to 6 months after petition filed] 2. Chapter 13 After the last plan payment is made, unless there is hardship, 1328. [3 to 5 years] 3. Chapter 11 After the last plan payment is made. [Or Plan confirmed provides otherwise] CHAPTER 7 Individual Assume Discharge ADVANTAGES a. Certainty:?* b. Short timeframe pre-petition assets c. Post-Petition: New Income and assets Not subject to tax claim/or lien DISADVANTAGES a. Pass means test b. Tax Lien: Remains on (only matters if exempt) c. Lose all assets Not Exempt 15

Debt Limits CHAPTER 13 BEST USE: Cannot discharge all tax (or significant lien problem), but can pay out non-dischargeable portion. ADVANTAGES a. Certainty -- YES b. Keep property c. Lien: Value Capped d. Interest does not accrue post-petition on dischargeable DISADVANTAGES a. Plan payments 3-5 yrs. b. Lien remains c. All post-bankruptcy income goes to plan d. Possible default All tax stays Restructure Debt The Plan CHAPTER 11 USE: Extended Pay Out Orderly Liquidation Deal with Creditors ADVANTAGES a. Certainty b. Pay % unsecured c. Keep property d. No debt limits e. Debtor is Trustee f. Flexibility of Plan DISADVANTAGES a. Expensive b. Substantial Reporting c. Post-Petition: Income assets of the estate d. Plan Defaults Tax Remains e. Non-Taxpayer f. Creditors More Active, including IRS 16

GOLD MINE Lawyer and Client Individual Tax Only CHAPTER 11 ADVANTAGES a. Certainty b. Keep property c. Keep tax attributes d. Pay portion of unsecured e. Lien released at end f. Automatic stay stops levy g. Lien value capped DISADVANTAGES a. Plan payments 3-5 yrs. b. Lien stays until end c. Post-bankruptcy income goes to plan d. If default all tax stays e. Debt limits f. SOL suspended g. Defend objections to Plan, discharge, and exemptions Late-Filed Returns -- Discharged in bankruptcy? Or Not Discharged in bankruptcy? 17

Code Sections I. 11 U.S.C. 523(a)(1)(B)(i) 2 Year Rule II. 11 U.S.C. 523(a)(19) hanging para. Return = satisfying non-bankruptcy law requirements, including filing requirements Returns prepared pursuant to I.R.C. 6020(a), stipulation to judgment, final order NOT return made pursuant to I.R.C. 6020(b) Case Law Part One In re Colson, 446 F.3d 836 (8 th Cir. 2006) Returns filed after IRS assesses under 6020(b) Are dischargeable if they meet certain criteria U.S. v. Hindenlang, 164 F.3d 1029 (6 th Cir. 1999) Returns filed after IRS assesses under 6020(b) Are not dischargeable because they serve no tax purpose 18

Case Law Part Two Creekmore v. IRS, 401 B.R. 748 (Bankr. N.D. Miss. 2008) After-filed return is non-dischargeable unless late 6020(a) return McCoy v. Mississippi State Tax Comm n, 666 F.3d 924 (5 th Cir. 2012) Any late return is non-dischargeable IRS Re-Thinks Position Chief Counsel Notice CC-2010-016: Late-filed return filed 2 years before bankruptcy Dischargeable Return filed by IRS pursuant to 6020(b) Non-Dischargeable Return filed by TP after IRS assesses pursuant to 6020(b) Dischargeable only as to tax greater than IRS assessment 19

Still Confusion States are following McCoy late = non-dischargeable IRS is usually following CC-2010-016 Except: Perry v. US, (Bankr. M.D. Ala. 2012) Some courts don t follow McCoy Smythe v. US, (Bankr. W.D. Wash. 2012) Late returns can be dischargeable Conclusion Timely returns filed 3 yrs. before bankruptcy Dischargeable Late returns filed 2 yrs. before bankruptcy Dischargeable Late returns filed 2 yrs. before bankruptcy after IRS assesses Dischargeable to extent of additional tax May be dischargeable Unfiled returns Non-dischargeable 20

Appeals Judicial Approach and Culture (AJAC) DENNIS N. BRAGER CERTIFIED TAX SPECIALIST STATE BAR OF CALIFORNIA BRAGER TAX LAW GROUP A PROFESSIONAL CORPORATION 10880 WILSHIRE BLVD, SUITE 880 LOS ANGELES, CA 90024 (310) 208-6200 FAX (310) 478-8030 www.bragertaxlaw.com www.taxproblemattorneyblog.com Appeals Mission Resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Internal Revenue Service. 21

Appeals Independence Section 1001 (a) of the IRS Restructuring and Reform Act of 1998 (RRA 98) specifies that the IRS reorganization plan must Ensure an independent appeals function within the Internal Revenue Service, including the prohibition in the plan of 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. 43 Appeals Judicial Approach and Culture (AJAC) History Project initiated several years ago in response to concerns raised by internal and external stakeholders, including Appeals employees. Policy Changes December 2012: two Trust Fund Recovery Penalty (TFRP) related changes. July 2013: Interim Guidance issued on 12 policy changes (see AP- 08-0713-03). November 2013: Interim guidance rescinded, and incorporated into various IRM August 11, 2014: AJAC Phase II effective. 22

Appeals Judicial Approach and Culture Overview Procedural changes are being implemented to improve efficiency and perceptions of Appeals independence. Returns Appeals to a quasi-judicial approach in case management so it can fulfill its mission of resolving disputes in an impartial manner without performing Compliance roles. Appeals hearing officers are not investigators or examiners. Instead, Appeals hearing officers are tasked with weighing the merits of each parties positions and litigation prospects. AJAC: No New Issues Appeals will not raise new issues - Policy Statement 8-2 Nondocketed cases A "new issue" is any issue identified by Appeals, i.e., not raised during Compliance's consideration. See IRM 8.6.1.6.1 (11-14-2013). Only exception in non-docketed cases is if the taxpayer raises new issues. Revised policy marks a significant change from the previous policy, under which Appeals could raise a new issue if the grounds were substantial and the potential impact on the tax liability was material. IRM 8.6.1.6.2: "Appeals will not raise new issues and will focus dispute resolution efforts on resolving the points of disagreement identified by the parties. The Appeals process is not a continuation or an extension of the examination process." 23

Appeals Judicial Approach and Culture Changes to TFRP Case Procedures - IRM 8.25.2.4.1 effective 12/02/12 Appeals will limit consideration of facts supporting the Government s position to the contents of the TFRP administrative file Appeals employees will not perfect, solicit, or prepare an IRS Form 4180 (Report of Interview with Individual Relative to TFRP Penalty or Personal Liability for Excise Taxes). If relevant new information is submitted that requires investigative analysis then Appeals will give SB/SE 45 days to investigate, and inform Appeals of their findings. IRM 8.25.4.2(6) (effective Aug. 10, 2014). 47 Collection Appeal Program No Judicial Review!! IRM 8.24.1 Actions that Can be Appealed by a taxpayer, or a third party. Levy or seizure action that has been or will be taken. A Notice of Federal Tax Lien (NFTL) that has been or will be filed. The filing of a NFTL against an alter-ego or nominee's property. Denials of requests to issue lien certificates, such as subordination, withdrawal, discharge or non-attachment. Rejected, proposed for modification or modified, or proposed for termination or terminated installment agreements. A modification of an installment agreement can involve a proposal by the IRS or the taxpayer. Disallowance of taxpayer's request to return levied property under IRC 6343(d). Disallowance of property owner's (third party's) claim for return of property under IRC 6343(b) (request for return of wrongfully levied property). For more information, see Pub 4528. 24

CAP Appeals does not consider collection alternatives under CAP E.g. Taxpayer requests a levy release on the basis of economic hardship, but has an unfiled return. If Appeals determines under IRC Section 6343(a)(1)(D) that the levy should be released; however it will not consider further case resolutions such as CNC or an IA. Collection Due Process Cases IRM 8.22.4.2.1 Appeals Policy 1. Resolve fair and impartial to the Government and the Taxpayer... based on the facts and law known to Appeals during the time of the hearing. 2. Statement of Tax Court s Standard of Review for non-liability CDP Cases Are the factual and legal conclusions [in Appeals Notice of Determination] reasonable, not whether those conclusions are correct. Dalton v. U.S. --!! Appropriateness of Appeals ultimate decision 25

Collection Due Process Cases IRM 8.22.4.2.1 Appeals Policy 3. CDP Files: Should contain sufficient information for determination Not sufficient : Cannot be returned as premature referral Appeals Options: Inadequate Information Request from Taxpayer Issue an ARI (Appeals Request for Information) to Collection to secure and verify information Collection Due Process Cases The Dalton Standard* Administrative Procedure Standard of Review: Deference to Appeals Burden of Proof: Taxpayer must show that Notice of Determination arbitrary and capricious to overcome deference to Appeals reasonableness. *Dalton v. U.S., 682 F.3d 149 (1 st Cir. 2012). Tax Court s review of CDP Hearing reversed. Tax Court did not limit review as to whether IRS position in Notice of Determination was reasonable. 26

Collection Due Process Cases A Practitioner s View: Appeals CDP determination on the information available subject to Dalton standard of review Can Settlement Officer act arbitrarily and capriciously by failing to request additional information? Practitioner must submit information before hearing to set up arbitrary or capricious Collection Due Process Cases How Do You Use The Dalton Standard: What would be arbitrary and capricious? Ignoring financial information submitted by the Taxpayer Practitioner must assure complete record before Appeals before CDP hearing 27

Offers in Compromise Appeals review of non-cdp OICs: Recurring Themes No new financial statements: Appeals will not contact the taxpayer to secure an updated financial statement if the information is less than 12 months old (as of the date received in Appeals), or if the information has become outdated as a result of IRS delay. If Appeals needs updated financial information from the taxpayer, an updated Form 433-A and/or 433-B is not necessary. "Pen-and-ink" changes to the existing Form 433-A/B are sufficient. IRM 8.23.3.3(7) Appeals will not search for new assets: Only assets documented by Collection will be considered. IRM 8.23.3.3.2.1(5) Offers in Compromise Appeals will not value an asset in excess of value determined by Collection. 8.23.3.3(4). A case will not be returned as a premature referral where Collection did not fully develop certain issues. Weigh Collection s development of the issue versus information and testimony provided by the taxpayer, and make the decision based upon those factors. IRM 8.23.3.3(5). Only review the appeal for the specific issues that are in dispute. The taxpayer may present new issues during Appeal. IRM 8.23.3.3.1.2 (effective Aug. 10, 2014). If new information submitted is complex it may be necessary to request an ARI; however, many items such as new household bills, account statements, and paystubs can be reviewed by Appeals without the use of an ARI. Id. 28

IRM Section 8.23.1.3(2) Non-CDP-OIC Appeals Primary Obligations Include: Advise the taxpayer of what is needed in order for the offer to be properly evaluated and/or accepted and provide a reasonable opportunity to submit supplemental information or documentation that the taxpayer or the Appeals hearing officer believes is necessary to properly evaluate the offer and/or make the offer acceptable. If an offer cannot be accepted, communicate the reason(s) why and discuss alternatives (such as installment agreements and CNC status) that can be pursued with Compliance, including explaining any forms or documentation required for consideration of these alternatives. Appeals Responsibilities Differ between Collection Due Process (CDP) and Non-CDP Offer in IRM Section 8.23.1.1 In a non-cdp Offer case, Appeals should not re-work the offer rejected by Compliance. Appeals will consider those items in dispute at the time of rejection. IRM Section 8.23.1.3(3). The Appeals process in an OIC case is not an extension of the Compliance OIC process. The role and mission of Appeals are different from that of Compliance. Appeals' personnel must employ Appeals' standard conference and settlement practices for all work streams, including OICs. IRM Section 8.23.1.3(1). Appeals may not close a non-cdp offer case rejecting an OIC without first offering the taxpayer an opportunity for a conference without regard to whether or not the taxpayer is in current compliance. IRM Section 8.23.1.3. 29

Appeals Responsibilities Differ between Collection Due Process (CDP) and Non-CDP Offer in IRM Section 8.23.1.1 (Cont.) Appeals must also strive to accommodate a taxpayer's reasonable request for an in-person conference. IRM Section 8.23.2.2. However, if the review shows that the taxpayer is not in compliance with filing or payment requirements or the entire liability is clearly collectible and the taxpayer presents no special circumstances, the offer's rejection may be sustained without transfer. IRM Section 8.23.2.2.1. However, Appeals is not required to reject an OIC because a previously unfiled or delinquent IMF return produces a new liability. IRM Section 8.23.2.6. In the case of a taxpayer who is not in filing or payment compliance, if an opportunity has not been given to the taxpayer to correct the issue of noncompliance, then an opportunity should first be given to the taxpayer to resolve the matter. IRM Section 8.23.2.2.1(5). Appeals Responsibilities Differ between Collection Due Process (CDP) and Non-CDP Offer in IRM Section 8.23.1.1 (Cont.) IRM Section 5.8.7.2.2.2 states that a processable DATC offer must be returned by Compliance when the investigation reveals the taxpayer does not have sufficient estimated tax paid or income tax withheld to cover the current year estimated tax due. Compliance is required to give the IMF taxpayer an opportunity to make up the missed estimated tax payment(s) or withholding underpayment before returning the offer. If Compliance failed to give the taxpayer this opportunity the case must be returned to Compliance for solicitation of the payment. Appeals should attempt to get the taxpayer into compliance with estimated tax payments only in certain circumstances. IRM Section 8.23.2.4.1. 30

Appeals Responsibilities Differ between Collection Due Process (CDP) and Non-CDP Offer in IRM Section 8.23.1.1 (Cont.) Appeals employees will only consider assets documented previously by Collection in the offer case file. Appeals will not identify and value any additional assets. Appeals will only consider Items in dispute where the Taxpayer and Collection did not reach an agreement. IRM Section 8.23.3.3.2.1(5). Appeals employees will not revise the value of an asset to an amount that is higher than the value previously determined by Collection, unless the taxpayer voluntarily provided such information to Appeals. IRM Section 8.23.3.3.2.1(6). General Factors to be Considered by Appeals in All OICs IRM Section 8.23.1.3(6) The success, or lack thereof, of prior collection efforts against the taxpayer. The advantage of the taxpayer's future compliance, secured through acceptance of an OIC. Such factors are not stand-alone bases of acceptance of compromise, but should be considered in developing a frame of mind that is open to compromise. 31

Consider Potential Bankruptcy If the taxpayer states an intent to file bankruptcy if the offer is not accepted, consider whether any of the tax liability can be discharged. A hazards approach may be used, based upon the degree of risk determined to exist that the taxpayer would file bankruptcy. IRM Section 8.23.3.3.2.3. The value of future income is an asset that may be lowered based upon the perceived degree of risk of the taxpayer filing a Chapter 7. Consider Potential Bankruptcy (Cont.) Some general determinations to make are as follows: which liabilities are dischargeable if the taxpayer has dischargeable non-tax debts if the taxpayer has any prior history of bankruptcy filing the overall age of the liabilities the success of the Service's prior collection efforts against the taxpayer any assets that would be excluded from a bankruptcy estate and encumbered by the statutory lien does the taxpayer qualify for a Chapter 7 discharge based upon the "means test" any NFTLs already filed on assets that would be exempted from a bankruptcy estate 32

Clarifications and Standards Applicable to All OICs The taxpayer is not required to make periodic payments on either a regular basis or in equal amounts. IRM Section 8.23.1.4.1(5). The IRS no longer requires that installment agreements in effect prior to receipt of an OIC remain in effect while an offer is being considered. IRM Section 8.23.1.4.1(11). Clarifications and Standards Applicable to All OICs (Cont.) If an amended Periodic Payment Offer is secured, the 24-month period during which the taxpayer must pay the Periodic Payment Offer begins the date the amended offer is accepted. The taxpayer is still required to make the proposed periodic payments while the amended offer is being considered, but the 24-month period to make such payments doesn't begin until the date the offer is accepted. IRM Section 8.23.1.4.1(3). 33

Clarifications and Standards Applicable to All OICs (Cont.) There may be situations based on the facts and circumstances of an individual taxpayer in which the local and national standards would result in the taxpayer not having adequate means to provide for basic living expenses. In such cases Appeals may allow for additional amounts. IRM Section 8.23.3.1(7). It is appropriate to ensure accruals of interest and penalties are taken into consideration when considering whether or not the liability can be paid in full. IRM Section 8.23.3.3.2.2(2). Clarifies Appeals authority to accept an OIC even if Counsel disagrees. IRM Section 8.23.4.2.2. AJAC (Phase II) Set forth in IRS memo AP-08-0714-005 (Release date July 10, 2014) Effective for collection cases, collection information statements, and significant information received by Appeals after August 10, 2014. To be incorporate into the IRM Mostly very detailed procedural changes Bob Pope White & Reasor, PLC Dennis Brager Brager Tax Law Group, A.P.C. 34

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FRANCES D. SHEEHY, ESQ. LAW OFFICE OF FRANCES D. SHEEHY 5481 WILES ROAD, Suite 502 COCONUT CREEK, FLORIDA 33073 954-449-9880 FAX: 954-449-9758 EMAIL: FSHEEHY@ATT.NET Board Certified Tax Lawyer 2014 IRS COLLECTION WEBINAR August 5, 2014 HOW IS THE IRS DOING? ACCORDING TO TAXPAYER ADVOCATE REPORTS 2013 Annual Report with Respect to Collections: In 2013, five of the 25 Most Serious Problems Encountered by Taxpayers were collection-related issues: A.Hardship Levies, 4 Years After Vinatieri v. Commissioner, IRS Still Levies on Taxpayers it Acknowledges are in Economic Hardship and then Fails to Release Levies. IRS uses automatic levy on social security even though Tps are earning less than 250% of poverty level and are presumed to be experiencing economic hardship. Then fails to release them. IRS should consider hardship issue prior to levy. B. ACS Case Selection and Case Processes Result in Poor Collection Yields and Poor Case Resolution, Harming Taxpayers. With 47% fewer levies than 2012, ACS collected slightly more, but transferred 3 times what it collected to other functions. IRS should segment taxpayers, train some ACS personnel to resolve small business cases, require all to advise taxpayers of all alternatives. C. IRS Collection Procedures Harm TP and Cause Lost Revenue. ACS failed to resolve 85% were not resolved in the notice process, causing delay in resolution. IRS should assign TF cases to employees with power to resolve them, use conditional IA s for business taxpayers not in compliance. D. The IRS Lacks a Plan to Resolve TP Accounts with SOL Extensions Exceeding Policy Limits. IRS required CSED extensions beyond the 5 years inappropriately, due to IRS 1991 wavier policy. IRS should abate all affected accounts by June 15, 2014. E. CDP Hearings: Current Procedures Allow Undue deference to Collections, and do Not Provide Fair and Impartial Hearings. TP s don t get to work with collections to resolve their case prior to CDP hearing. If they do, they must waive their CDP rights. Appeals doesn t understand the purpose of CDP -1-

and there are independence concerns. Appeals has no IRM guidance for CDP and uses Collections, rather than balancing rights and weighing litigation risks. IRS should try to resolve collection prior to issuing the CDP notice, if TP resolves with collection after notice, Appeals should retain jurisdiction and enter into the agreement with TP. IRM should be updated, Appeals should get training re: balancing test and hazards of litigation. The Legislative Recommendations, included: None collection specific. The Most Litigated Issues were: A. Appeals from Collection Due Process Hearings Under IRC Sections 6320 and 6330. Substantive issues as well as sanctions in 3 cases for CDP used to delay. B. Frivolous Issues Penalties Under IRC Section 6673-37 cases, TP many times escaped liability but were warned of future sanctions. Cases illustrate what conduct the courts will/will not tolerate. C. Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax Under IRC Section 7403. IRS prevailed in 30 of 34 cases. Number of cases declined by 31 percent from prior year. (Due to lack of equity because of economy?) D. Relief from Joint and Several Liability Under IRC Section 6015. These included standard of review issues, jurisdiction of District Courts, 6015(f) proposed guidelines. 2014 Fiscal Year 2015 Objectives of the Annual Report with Respect to Collections: Areas of Focus: A. Collection Update: IRS Collection of Delinquent Taxes: IRS Should Improve Collection and Maximize Compliance 1. IRS prioritizes collections based on amount rather than how old the tax is, uses ACS to file liens and issue levies without personal TP contact, with heavy handedness (liens/levies) rather than IA s and OIC s. 2. IRS should use timely interventions, personal contact, which would enhance long term voluntary compliance. B. Civil Tax Penalties: Create task force to review 130 + penalties in the Code. 1. Application of automatic penalties lowers voluntary compliance. 2. IRS should review penalty policies to ensure application of penalties is based on TP information as to applicability of penalty and whether it will enhance voluntary compliance, rather -2-

than be strictly punitive. C. Implementation of Taxpayer Bill of Rights 1. June 14, 2014, IRS adopted Taxpayer Bill of Rights (TBOR) 2. TBOR has been added to the IRS website 3. TAS will work with IRS to implement TBOR and integrate it into IRS operations. 2014 - the Good News: a. 2013 had 47% fewer levies than 2012 (?sequester?) b. Suits to reduce liens to judgment and/or foreclose decreased by 31% from 2012 c. IRS adopted the Taxpayer Bill of Rights 2014 - the Bad News: a. IRS levies on Social Security and doesn t release levies even when hardship b. ACS failed to resolve 85% of cases c. IRS failed to abate tax where CSED extended beyond the 5 year IRS policy d. IRS still sends CDP notices without trying to resolve with TP, and require TP to waive CDP rights. e. Appeals has no IRS guidance for CDP s -3-

THE TAXPAYER BILL OF RIGHTS The Right to Be Informed Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes. The Right to Quality Service Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service. The Right to Pay No More than the Correct Amount of Tax Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly. The Right to Challenge the IRS s Position and Be Heard Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position. The Right to Appeal an IRS Decision in an Independent Forum Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals decision. Taxpayers generally have the right to take their cases to court. The Right to Finality Taxpayers have the right to know the maximum amount of time they have to challenge the IRS s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit. The Right to Privacy Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing. The Right to Confidentiality Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information. The Right to Retain Representation Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation. The Right to a Fair and Just Tax System Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels. -4-

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THE COLLECTION DUE PROCESS HEARING AND APPEAL Sara G. Neill Capes Sokol Goodman & Sarachan, P.C. Saint Louis, Missouri I. INTRODUCTION A common response of taxpayers with tax collection problems is to ignore the IRS and all of its computer-generated notices. Many taxpayers simply add unopened notices to the growing pile of notices which were previously received; other taxpayers throw the notices directly into the trash can. The certified notices may never be signed for or picked up at the post office. Ignoring the IRS is not a recommended strategy for dealing with a federal tax collection problem. Eventually the IRS can and may file federal tax liens, levy bank accounts and wages, and/or seize physical assets including retirement accounts, and personal property. The taxpayer who chooses to ignore the IRS for too long will relinquish his/her collection due process rights. Under the collection due process provisions of the Internal Revenue Code, a taxpayer has the right to request a hearing with the IRS Appeals Division which may suspend certain collection efforts by the IRS. Such hearing is commonly known as a CDP hearing. The Code requires the taxpayer to be notified of the right to request a CDP hearing in two separate instances: (1) After the IRS files a notice of federal tax lien ( NFTL ) with respect to the taxpayer s property and (2) before the IRS levies on the property. 1 The CDP hearing may be used to challenge an underlying tax liability in circumstances where the taxpayer has not had a prior opportunity to dispute the liability, the amount of tax and even the existence of tax after a bankruptcy. 2 The taxpayer may also raise spousal defenses, and/or propose collection alternatives. 3 The most commonly accepted collection alternatives are to persuade the IRS that the taxpayer is currently not collectible, enter into an installment agreement, or negotiate an offer in compromise. The IRS appeals officers who hear CDP cases usually are former revenue officers and must follow the same guidelines as a collection officer; however, they have resolution as their main focus. Of great significance, if the taxpayer is unable to resolve the collection matter 1 I.R.C. 6320(a)(1), 6330(a)(1). 2 I.R.C. 6330(c)(2)(A),(B); Becker v. Commissioner., TC Memo 2010-120; Johnson v. Commr., TC Summ.Op 2010-69; Mueller v. Commissioner, TC Memo 2010-10; Barnes v. Commissioner, TC Memo 2010-30. 3 I.R.C. 6320(c), 6330(c)(2). 7

with the IRS through the CDP hearing, he or she will have the opportunity to file an appeal to the U.S. Tax Court. 4 The Tax Court s jurisdiction over CDP matters provides the taxpayer with some leverage in negotiating with the IRS. It can therefore be advantageous for the taxpayer who desires to enter into an Offer in Compromise or Installment Agreement with the IRS to wait to request it until the CDP notices have been received. This outline will describe the taxpayer s CDP rights, and explain the CDP appeal process and the various collection alternatives which may be used by the taxpayer and the IRS to reach a resolution of the tax collection matter. II. THE TAXPAYER S RIGHT TO NOTICE AND OPPORTUNITY FOR A HEARING Two separate collection actions give rise to the requirement that the IRS notify the taxpayer of his or her right to request a CDP hearing: (1) filing a NFTL and (2) levying of the taxpayer s property. 5 The IRS must notify the taxpayer in writing after the filing of the NFTL and before the IRS levies on any property of the taxpayer. 6 The CDP notice is required to be: 1) Provided to the taxpayer; 2) Left at the dwelling or usual place of business of the taxpayer; or 3) Sent by certified or registered mail to the taxpayer s last known address. 7 Actual receipt is not required in order for the CDP notice to be valid. 8 If the IRS fails to deliver the CDP notice as required by section 6320(a)(2), the validity and priority of the NFTL will not be affected. 9 If the IRS determines that it failed to properly deliver the CDP notice to the taxpayer, it is supposed to provide a substitute CDP notice. 10 The taxpayer s refusal to accept the CDP notice does not render it invalid. 11 The IRS must send the post-nftl CDP notice within 5 business days after the day of the filing of the NFTL. 12 The pre-levy CDP notice must be sent at least 30 days before the first levy. 13 There are a few exceptions to requirement that the IRS send the CDP notice to the taxpayer before levy action which include: State tax refunds; when there has been a determination that the collection of tax is in jeopardy; disqualified employment tax levy; and 4 I.R.C. 6320(c), 6330(d)(1). 5 I.R.C. 6320(a)(1), 6330(a)(1). 6 Id. 7 I.R.C. 6320(a)(2), 6330(a)(2). 8 Treas. Reg. 301.6320-1(a)(2) Q&A-A11, 301.6330-1(a)(3) Q&A-A9. 9 Treas. Reg. 301.6320-1(a)(2) Q&A-A12. 10 Treas. Reg. 301.6320-1(a)(2) Q&A-A12, 301.6330-1(a)(3) Q&A-A10. 11 Treas. Reg. 301.6320-1(a)(2) Q&A-A12, 301.6330-1(a)(3) Q&A-A9. 12 I.R.C. 6320(a)(2)(C). 13 I.R.C. 6330(a)(2). 8

federal tax liabilities of federal contractors. 14 Post levy procedures will apply in these circumstances. 15 The taxpayer will receive a post-levy CDP notice of the right to a CDP hearing within a reasonable time after the levy has occurred. 16 The CDP notice is in the form of a letter which includes a Form 12153, Request for a Collection Due Process Hearing. To be valid, the CDP notice issued after the filing of a NFTL must include the following information: 1) The amount of tax which remains unpaid; 2) the right of the taxpayer to request a hearing within a 30-day period; 3) the administrative appeals and procedures relating to such appeals available to the taxpayer; and 4) the procedures relating to the release of liens on property. 17 Similarly, the CDP notice issued before the initiation of levy action must include the following information: 1) The amount of tax which remains unpaid; 2) the right of the taxpayer to request a hearing within 30-days; and 3) the IRS s proposed action and the rights of the taxpayer with respect to that action including a statement which sets forth several additional items pertaining to levy and sale procedures which are set forth in section 6330(a)(3). 18 It is common for the IRS to file a NFTL at more than one recording office. In such cases, the IRS will provide separate CDP notices for each filing. 19 The IRS will not send the taxpayer a new CDP notice when a NFTL is refiled, but will send the taxpayer notification when a subsequent NFTL is filed for the same period or periods. Not all such notices will give rise to a right to a CDP hearing. 20 A taxpayer is only allowed one CDP hearing with respect to the tax and tax period(s) covered by the CDP notice. 21 When there has been an additional assessment of tax for a period (not including interest or penalty accruals) or an additional accuracy-related of delinquency penalty, a taxpayer may receive more than one CDP hearing for the same period. 22 With respect to a post-nftl CDP hearing, the taxpayer has 30 days to request the CDP hearing. The 30 days begins to run on the day after the 5 th business day subsequent to the filing of the NFTL. 23 The taxpayer has 30 days from the date of the pre-levy CDP notice to request a hearing. 24 14 I.R.C. 6320(c), 6330(f); Treas. Reg. 301.6330-1(a)(2). 15 Id. 16 Id. 17 I.R.C. 6320(a)(3); Treas. Reg. 301.6320-1(a)(2) Q&A-A9, Q&A-A10. 18 I.R.C. 6330(a)(3). 19 Treas. Reg. 301.6320-1(a)(2) Q&A-A4. 20 Treas. Reg. 301.6320-1(a)(2) Q&A-A6, Q&A-A8, 301.6320-1(b)(1). 21 I.R.C. 6320(b) and 6330(b)(2); Treas. Reg. 301.6320-1(b)(1); 301.6330-1(b)(1). See Investment Research Associates, Inc. v. Commissioner, 126 T.C. No. 7 (2006) (upholds regulations which only allow for hearing after filing of first NFTL). 22 Treas. Reg. 301.6320-1(d)(2) Q&A-D1, 301.6330-1(d)(2) Q&A-D1. 23 Treas. Reg. 301.6320-1(b)(1). 24 Treas. Reg. 301.6330-1(b)(1). 9

The IRS may not waive the statutory period in which a taxpayer must request an administrative hearing under sections 6320 and 6330. 25 If the taxpayer is in negotiations with the IRS Collection Division these discussions do not suspend the running of (or otherwise extend) the 30-day period during which taxpayers may request a CDP hearing. However, if the Collection Division may be amenable to holding a timely and properly filed CDP request to allow a Revenue Officer and taxpayer to continue trying to reach a resolution before forwarding the CDP request to the Appeals Division. If the taxpayer and/or his or her practitioner has a good rapport with the Revenue Officer, it may be a good strategy to try to resolve the matter right then as opposed to risking that the matter be assigned to a less favorable IRS employee. III. THE TAXPAYER S CDP HEARING REQUEST In order for a CDP request to be valid, it must be made in writing and state the grounds for the requested hearing. 26 The Treasury Regulations require that a request for a CDP hearing include: 1) The date of filing; 2) The taxpayer s name, address, daytime telephone number (if any), and taxpayer identification number; 3) The type of tax involved; 4) The tax period(s) at issue; 5) A statement that the taxpayer requests a hearing concerning the filing of the NFTL; 6) The reasons why the taxpayer disagrees with the NFTL and/or proposed levy; and 7) The signature of the taxpayer or the taxpayer s authorized representative. 27 While the IRS encourages the taxpayer to use Form 12153, Request for a Collection Due Process Hearing, in requesting a CDP hearing, this is not a requirement for the request to be valid. If the taxpayer requests a hearing on a frivolous basis the IRS may treat the request as if it were never submitted. 28 Notice 2010-33 provides a list of positions the IRS considers to be frivolous. Section 6702(b) provides for a penalty of $5,000 if any portion of a request for a hearing is based on a specified frivolous position, or reflects a desire to delay or impede the administration of federal tax laws. 29 While the IRS views intentional delay by the taxpayer as grounds for sanction, after the taxpayer files the hearing request, it may take several months or longer before the taxpayer receives notification that a hearing has been scheduled with the IRS Appeals Division. IV. SUSPENSION OF COLLECTIONS AND STATUTES OF LIMITATION One drawback of the CDP appeal is that while it is pending beginning on the day the IRS receives the CDP hearing request, the statute of limitations for collections, criminal prosecutions, and other suits is suspended. 30 It continues to be tolled until the date the IRS 25 See Kennedy v. Commissioner, 116 T.C. 255, 262 (2001). 26 I.R.C. 6320(b)(1), 6330(b)(1). 27 Treas. Reg. 301.6320-1(c)(2) Q&A-C1, 301.6330-1(c)(2) Q&A-C1. 28 I.R.C. 6330(g). 29 See Schlabach v. U.S., 101 Fed. Cl. 678, 684 (2011). 30 I.R.C. 6320(c), 6330(e)(1). 10

receives the taxpayer s written withdrawal of the CDP hearing request or the determination becomes final. 31 On a more positive note, while the statute of limitations is suspended, certain collection activities by the IRS such as bank levies and asset seizures are generally suspended during the pendency of the CDP appeal. 32 Circumstances when collection activities may not be suspended include: a court determines the IRS has shown good cause; the taxpayer raises only frivolous arguments; and the IRS determines that collection of tax is in jeopardy. 33 During the pendency of the CDP appeal period the IRS may file NFTLs. V. EQUIVALENT HEARING If a taxpayer s request for a CDP hearing is untimely, the taxpayer has the option to request an equivalent hearing with the IRS Office of Appeals. 34 A taxpayer has one year to submit a written request for an equivalent hearing. The one-year period begins to run the day after the end of the five-business-day period following the filing of the NFTL or, in the case of a pre-levy CDP notice, within one-year commencing the day after the date of the CDP notice was issued. 35 The taxpayer must specifically request an equivalent hearing: the IRS does not automatically treat a late CDP hearing request as an equivalent hearing request. 36 There is no requirement that the IRS suspend collection activity while the equivalent hearing is pending. Whether to suspend collection activity is determined on a case-by-case basis. 37 The procedures which apply in an equivalent hearing are generally the same procedures which apply in a CDP hearing, except that instead of a issuing a Notice of Determination, Appeals will issue a Decision Letter. 38 I.R.C. 6320 does not authorize judicial review of an equivalent hearing decision; however, the Tax Court may review denials regarding innocent spouse relief under section 6015. 39 31 Id. 32 I.R.C. 6330(e)(1). 33 I.R.C. 6330(e)(1), (2), Treas. Reg. 301.6330-1(g)(1). 34 Treas. Reg. 301.6320-1(i)(1). 35 Treas. Reg. 301.6320-1(i)(2) Q&A-17, 301.6330-1(i)(2) Q&A-17. 36 I.R.M. 5.1.9.3.2.2. 37 Treas. Reg. 301.6320-1(i)(2) Q&A-I4. 38 Treas. Reg. 301.6320-1(i)(1). 39 Treas. Reg. 301.6320-1(i)(2) Q&A-I6. 11

VI. THE CDP HEARING CDP hearings are informal in nature and may occur either over the telephone or in person, though the IRS is not required to give the taxpayer an in-person hearing. 40 If a taxpayer wants a face-to-face conference, it will most likely be held at the Appeals office closest to the taxpayer s residence. If the taxpayer is a business, the conference will be held at the Appeals office closest to the taxpayer s principal place of business. 41 The taxpayer does not have the right to subpoena and examine witnesses at the hearing. 42 The CDP hearing must be conducted by an Appeals Officer who has had no prior involvement with respect to the unpaid tax at issue. 43 At the conclusion of the CDP hearing, the Appeals Officer will issue a Notice of Determination. The Notice of Determination must discuss all issues raised by the taxpayer and should state why arguments and collection alternatives raised by the taxpayer were rejected. 44 Either before or during the hearing, the Appeals Officer who is assigned to the matter is required to verify from the Secretary that the requirements of any applicable law or administrative procedure have been met, consider the merits of the taxpayer s claims; and confirm that the issues were not raised and considered at a previous hearing or in any other previous administrative or judicial proceeding. 45 During the hearing the taxpayer may raise any relevant issues relating to the unpaid tax including: (1) spousal defenses; (2) whether collection action is proper; (3) collection alternatives; and (4) [c]hallenges to the existence or amount of the underlying tax liability if the person did not receive any statutory notice of deficiency for such liability or did not otherwise have an opportunity to dispute such tax liability. 46 VII. COLLECTION ALTERNATIVES a. Currently not collectible If the taxpayer has no assets or ability to pay, the IRS may determine the outstanding liabilities to be currently not collectible ( CNC ). 47 Before making this determination, the IRS Appeals Officer will usually require that the taxpayer provide either a completed Form 433A or 433F, financial statements for individuals, and, if appropriate a Form 433B, financial statement 40 Treas. Reg. 301.6320-1(d)(2) Q&A-D6. 41 Treas. Reg. 301.6320-1(d)(2) Q&A-D7, 301.6330-1(d)(2) Q&A-D7. 42 Treas. Reg. 301.6320-1(d)(2) Q&A-D6. 43 I.R.C. 6320(b), 6330(b)(3). 44 See Robinette v. Commissioner, 439 F.3d 455, 461-63 (8 th Cir. 2006). 45 I.R.C. 6320(c), 6330(c)(1)-(4). 46 I.R.C. 6320(c), 6330(c)(2)(A), (B). 47 I.R.M. 5.16.1; Policy Statement P-5-71. 12

for businesses, to the IRS with supporting documentation. 48 Such financial statements, known to the IRS as collection information statements ( CIS ) are considered current if less than twelve months old. 49 As set forth in the Internal Revenue Manual, the IRS has 14 different reasons available for determining an account to be CNC. 50 These reasons include: inability to locate the taxpayer or assets, expiration of collection statute of limitations, death of an individual with no collection from the decedent/decedent s estate, and collection of the liability would create a hardship for taxpayers by leaving them without the ability to pay for necessary living expenses. 51 The dollar amount and type of case govern the extent of the IRS s investigation, which may include review of the taxpayer s credit report, vehicle registrations, real estate records, wage and income information, business licenses, open audits, and passports. 52 In addition to the dollar amount and type of case, the statute of limitations on collection will dictate various IRS actions. 53 In order to request CNC the taxpayer must be in current compliance with all filing requirements. 54 A hardship CNC exists if the taxpayer can t pay reasonable basic living expenses. 55 Usually this means the taxpayer has no income or assets, or equity in assets to make payment without hardship. 56 The IRS does not need to verify 433A and B financial statements if the tax is under certain amount (which is undisclosed in the Internal Revenue Manual) and numbers appear reasonable. 57 In addition, no 433 information is needed if the tax is less than an undisclosed amount and one of the following conditions exists: a) terminal illness or excessive medical bills; b) taxpayer is incarcerated; c) taxpayers only source of income is social security, welfare, unemployment; or, d) taxpayer is unemployed with no source of income. 58 Although the IRS refrains from taking collection action while the taxpayer is deemed to be CNC, the interest and penalties continue to accrue and the Service will re-assess the ability to pay from time to time. b. Installment Agreement Section 6159 of the Code authorizes the IRS to enter into installment agreements. An Installment Agreement ( IA ) is a written agreement to satisfy tax liabilities through periodic 48 I.R.M. 5.16.1.1(3). 49 Id. 50 I.R.M. 5.16.1.1(2). 51 Id. 52 I.R.M. 5.16.1.1(3). 53 I.R.M. 5.16.1.2.2, 5.16.1.2.2.1. 54 I.R.M. 5.16.1.1(6). 55 I.R.M. 5.16.1.2.9(1). 56 Id. 57 I.R.M. 5.16.1.2.9(2). 58 I.R.M. 5.16.1.2.9(3). 13

payments. 59 In general, in order for an IA to be acceptable to the IRS, the following requirements must be met: (a) the liability must be paid in full within the collection statute of limitations, except as described below in a partial pay IA; 60 (b) the taxpayer must be in full compliance with all filing and payment obligations during the term of the agreement; 61 (c) the taxpayer must provide updated financial information upon request; 62 and (d) the taxpayer must pay a $105 fee (or a $52 fee for a direct debit IA). 63 Although the taxpayer is bound by the terms of the IA, the IRS can terminate or change the agreement if: (a) the taxpayer defaults in a payment; 64 (b) the taxpayer fails to file or pay a subsequent tax, including estimated tax payments; 65 (c) the taxpayer fails to provide requested updated financial information; 66 (d) the IRS determines that the taxpayer provided incorrect information prior to the IA; 67 (e) the IRS believes collection is in jeopardy, 68 or (f) the IRS determines that the taxpayer s financial position has changed. 69 It is much more difficult for a taxpayer to change the terms of the IA if his financial position deteriorates subsequent to the IA. The IRS must enter into an installment agreement with the taxpayer if certain criteria are met. Those criteria include: (a) the tax is not more than $10,000; (b) the taxpayer has filed all returns due in the past 5 years; (c) the taxpayer has either paid all taxes due in the past five years on time, or was in an IA; (d) the IRS determines the taxpayer can t pay in full; (e) the taxpayer can pay in full within 3 years; and, (f) the taxpayer agrees to be in compliance during the 3 year period. 70 If the IRS intends to terminate or alter an IA, it must provide the taxpayer 30 days written notice, unless a jeopardy exists. 71 Failure to provide notice could subject the IRS to a claim for damages under I.R.C. section 7433. 72 If a taxpayer has some ability to pay, but cannot pay the tax in full within the collection statute of limitations, 73 the IRS can grant a Partial Pay IA ( PPIA ). 74 Normally, the IRS will demand whatever equity is available in the taxpayer s assets as payment toward the liability. 75 In certain cases, the taxpayer may keep such equity. Those cases include situations where: 59 Treas. Reg. 301.6159-1(a). 60 I.R.C. 6159(a); I.R.M. 5.14.1.2. 61 I.R.C. 6159(b)(4)(B). 62 I.R.C. 6159(b)(4)(C). 63 Treas. Reg. 300.1(b). 64 I.R.C. 6159(b)(4)(A). 65 I.R.C. 6159(b)(4)(B). 66 I.R.C. 6159(b)(4)(C). 67 I.R.C. 6159(b)(2)(A). 68 I.R.C. 6159(b)(2)(B). 69 I.R.C. 6159(b)(3). 70 I.R.C. 6159(c). 71 I.R.C. 6159(b)(5). 72 Grant v. United States, 92 AFTR 2d (RIA) 5600 (S.D. Fla. 2003). 73 The IRS has 10 years to collect the tax from the date of assessment, absent certain events that might extend the 10 years. I.R.C. 6502(a)(1). 74 I.R.M. 5.14.2.2. 75 I.R.M. 5.14.2.1.2. 14

there is minimal equity and no loan potential; the property is owned by tenancy by the entirety and the taxpayer s spouse will not consent to a loan or sale; the assets are unmarketable; the assets will generate future income for the PPIA; economic hardship; or, any loan payment would exceed the taxpayer s disposable income and the taxpayer would not qualify for a loan. 76 To qualify for a PPIA, the taxpayer must make a good faith effort to obtain financing and be unsuccessful. 77 Prior to entering into an IA, the IRS makes a determination as to the monthly amount that the taxpayer can afford to pay. To compute this monthly amount, the taxpayer s financial information is submitted to the IRS using CIS s, as described above. In some instances, this information can be provided by telephone and facsimile. The taxpayer s gross income and actual expenses are computed. Then, based on the gross income and number of dependents, the IRS allowable expenses are computed using the IRS National Standard Expenses (NSE) for food, clothing, misc., the Local Standard Expenses (LSE) for housing, and the allowable transportation expenses. Other actual allowable expenses include court ordered payments, taxes, and insurance. Although the IRS is supposed to use the NSE and LSE as a guide rather than as an absolute, there are few instances that actual expenses in excess of the IRS allowable standards are allowed. The monthly payment amount is the difference between the gross income and the allowable necessary expenses. In certain circumstances, a taxpayer may qualify for a Streamlined IA, which expedites the processing of the IA. The Streamlined IA skips the requirements for financial analysis and managerial approval. 78 Up until 2012, to qualify for a Streamlines IA, the following criteria had to be met: the balance of the assessed amounts (not including accruals) had to be $25,000 or less; the amount must have been paid in full within 5 years, or prior to the statute of limitations, whichever was earlier; and the taxpayer must have been in full filing compliance prior to the IA. 79 In 2012, as part of its Fresh Start Initiative, the IRS instituted flexible installment agreements. The old streamlined IA s for individuals were expanded to include liabilities up to $50,000, with a payment plan of 72 months, so long as the taxpayer agrees to direct debit. Financials can be provided verbally and no manager approval is needed. For businesses, in business trust fund taxes can be full paid within 2 years without financials, trust fund assessments, with manager approval. The two year plan is also available to businesses with income tax, and for out of business entities if the tax is $25,000 or less. The new Form 9465-FS is used to request the agreements. The benefits and/or consequences of entering into an IA are: the taxpayer keeps his or her assets; the taxpayer pays the tax in full over time (except for the PPIA); the IRS will not 76 I.R.M. 5.14.2.1.2(2). 77 I.R.M. 5.14.2.1.2(3). 78 I.R.M. 5.14.5.2. 79 I.R.M. 5.14.5.2(1). 15

pursue enforced collection; 80 the statute of limitations on collection is not extended during the time the IA is in effect; the statute of limitations is extended during the time the IA is pending (from the time the taxpayer formally requests an IA until it is accepted); 81 and a federal tax lien will usually be filed unless there is justification to forego a lien. Note that the IRS may withdraw a NFTL under certain circumstances. 82 The most significant disadvantages facing a taxpayer with respect to an IA are: the taxpayer must live on a small budget during the term of the IA; interest and penalties continue to accrue; and the taxpayer must remain in compliance or face enforced collection action. c. Offer in Compromise An Offer in Compromise ( OIC ) is a written agreement entered into between the taxpayer and the IRS to satisfy unpaid tax liabilities for less than the full amount owed. 83 Section 7122 of the Code authorizes the Secretary of the Treasury to enter into such agreements. The IRS s objectives for the OIC program are: to collect the most amount of tax, at the earliest time, with the least cost to the IRS; to reach resolution in the best interests of the IRS and the taxpayer; to provide the taxpayer with a fresh start toward voluntary compliance; and to collect money which could otherwise not be collected through the collection process. 84 There are three types of OICs. First, there is an OIC based on doubt as to liability. Such an OIC are appropriate when the taxpayer can establish a genuine dispute as to the existence or amount of the correct tax liability under the law. 85 Examples of when this may occur are when the taxpayer persuades the IRS that he or she is an innocent spouse, that the deficiency is incorrect, that the trust fund recovery penalty was incorrectly assessed, or that payments were not properly applied. If the liability has been established by a final court decision or judgment concerning either the existence or amount of the liability doubt as to liability does not exist. 86 The second type of OIC is based on doubt as to collectability. The taxpayer in this second class cannot pay the full liability from assets and income, or there are special circumstances that allow the taxpayer to make a hardship offer, even though he may be able to pay. The final type of OIC is based on effective tax administration ( ETA ). In an ETA OIC, the taxpayer may be able to full pay the tax, but such payment would cause an economic hardship or there are compelling public policy or equity considerations. 87 80 I.R.C. 6331(k)(2). 81 I.R.C. 6331(i)(5). 82 I.R.C. 6323(j). 83 I.R.M. 5.8.1.1.1(1). 84 I.R.M. 5.8.1.1.4(1) 85 Treas. Reg. 301.7122-1(b)(1). 86 Treas. Reg. 301.7122-1(b). 87 Treas. Reg. 301.7122-1(b)(3); I.R.M. 5.8.11.2 and 5.8.11.2.1. 16

Each type of OIC is subject to its own requirements. The least rigorous is the first class, based on doubt as to liability. For this type of OIC, the taxpayer must file a Form 656, but the IRS does not require that the taxpayer submit CISs (Forms 433-A and/or 433-B) with the OIC. Included with the OIC must be proof to support the bases for doubt as to liability. In addition, the taxpayer must be in full compliance for all periods subsequent to those included in the OIC. The OIC cannot be rejected under the compliance requirement just because the IRS may not be able to locate a return. 88 OIC s based on doubt as to collectability are the most prevalent. To meet the initial requirements of this type of offer, the taxpayer must file Form 656, and fully completed financial statements (Form 433-A and/or 433-B) with required documentation. Upon review of the OIC, the IRS may ask for additional documentation and information. The OIC must include all outstanding liabilities, including those which are assessed and unassessed. It cannot include those taxes for which the collection statute of limitations has expired. In determining the amount of the initial offer, the taxpayer should first determine the quick sale value of the equity in the taxpayer s assets less amounts owed to secured lienholders with priority over the federal tax lien 89. Recent changes in IRS policies used to compute the equity value of assets include: income producing assets can be excluded under certain circumstances; $1,000 and living expenses can be excluded from bank account total balances; early withdrawal penalties and tax consequences are taken into account in determining liquidation values; $3,450 of car equity can be excluded if used for transportation to/from work; and dissipation of assets is limited in scope. To the net realizable equity the taxpayer should add the present value of the future income the IRS would be able to collect from the taxpayer. The practitioner is advised to consult with the Internal Revenue Manual as to how the IRS will calculate future income. The provisions were recently amended to make the OIC program more flexible and under certain circumstances the IRS may agree to consider only 12 months of future income for offers paid in 5 or fewer months. 90 Other recent changes include allowing repayment of student loans and state and local taxes, and expanded amounts and categories of allowable living expenses. For the available monthly income, up to $400 is allowed for car payments even after the car is full paid; operating expenses for older cars includes an additional $200 per month, minimum student loan payments are allowed, and state and local tax payments are allowed. In order to reach an OIC based on doubt as to collectability, the taxpayer must be in full compliance for all periods subsequent to those covered by the OIC. The taxpayer must remain 88 Treas. Reg. 301.7122-1(f)(4). 89 I.R.M. 5.8.5.4.1. 90 See I.R.M. 5.8.5.20 through 5.8.5.25. 17

in compliance for 5 years after the OIC is accepted. In addition, the taxpayer must pay a $150.00 processing fee, unless he or she qualifies as a low income taxpayer. 91 The final type of OIC is known as an effective tax administration offer ( ETA ). The filing requirements for this type of OIC are essentially the same as those listed above for an OIC based on doubt as to collectability, the only difference being that there must be exceptional circumstances which result in a determination that collection of the full amount of tax due would either: (a) create a hardship; or (b) be detrimental to voluntary compliance. That is, in the former, even though the taxpayer has the money to full pay the tax, if the tax were collected, the taxpayer would not be able to meet reasonable basic living expenses. With respect to the latter, collection would be so unfair and inequitable that other taxpayers would lose confidence in the system. 92 Notwithstanding the unwieldy amount of paper required to process a successful OIC, the odds of acceptance are weighted against the taxpayer from the get-go. The IRS will reject an OIC if: (1) all of the documents are not properly submitted; (2) the taxpayer fails to submit any additional requested documents; (3) the amount offered is less than what could be expected to be collected; or (4) there is a public policy reason to reject. 93 In addition, even though the IRS is supposed to use the National Standard Expenses ( NSE ) (food, clothing, and miscellaneous), and the Local Standard Expenses ( LSE ) (housing) as a guide, rather than an absolute maximum, there are very few instances in which any variance is allowed. According to the National Taxpayer Advocate s Report for 2003, the IRS must justify acceptance of an OIC. On the other hand, rejection needs no support, merely a rejection letter. The Tax Increase Prevention and Reconciliation Act of 2005 ( TIPRA ) amended I.R.C. 7122 to require the submission of partial payments with OICs. With respect to lump-sum OICs, 94 TIPRA requires the taxpayer to submit with the application a partial payment of 20% of the offer amount. 95 For periodic payment offers, the taxpayer is required to submit the first installment payment with the application and thereafter to comply with the taxpayer s proposed payment schedule while the Service is considering the offer. 96 None of the partial payments are refundable, but the taxpayer can designate their application on the Form 656. TIPRA authorizes the Secretary of the Treasury to issue regulations waiving the partial payment requirements. 97 91 See Form 656; I.R.M. 5.8.2.3.1. 92 I.R.M. 5.8.11.2. 93 Public policy is only supposed to be used to reject an OIC if acceptance is detrimental to the interest of the IRS, even though the amount offered is greater than the collectible amount. However, it is not to be used merely because public interest might be generated or the taxpayer was criminally prosecuted. See I.R.M. 5.8.7.7.2. 94 Defined as any offer of payment made in five or fewer installments. I.R.C. 7122(c)(1)(a)(ii). 95 I.R.C. 7122(c)(1)(A)(i). 96 I.R.C. 7122(c)(1)(B). 97 I.R.C. 7122(c)(2)(C). 18

TIPRA provides that, if a taxpayer fails to submit the required initial payment with the offer, the Service may return the offer to the taxpayer as unprocessable. 98 In the case of a periodic payment offer, the Service may treat a taxpayer s failure to comply with the proposed installment payment schedule while the offer is pending as a withdrawal of that offer. 99 Under TIPRA, an OIC is deemed accepted if it is not withdrawn, returned, or rejected with 24 months of IRS receipt. The 24 months does not include any time during which the liability at issue is the subject of a dispute in any judicial proceeding. 100 Once the OIC is accepted (unless it is a doubt as to liability OIC), if the taxpayer defaults during the five years following acceptance, the IRS will re-instate the tax, interest and penalties and re-commence enforced collection. VIII. JUDICIAL REVIEW OF A NOTICE OF DETERMINATION At the conclusion of the CDP hearing, the Appeals Officer will issue a Notice of Determination by certified or registered mail which will advise the taxpayer of his or her right to seek judicial review within 30 days. 101 If a spousal defense is at issue in the CDP hearing, the taxpayer has 90 days to petition the Tax Court. 102 The Tax Court has exclusive jurisdiction over CDP appeals. 103 The Tax Court will only consider an issue, including a challenge to the underlying tax liability that was properly raised in the taxpayer s CDP hearing. 104 Generally, the Tax Court reviews a CDP determination under an abuse of discretion standard. 105 When the underlying liability is properly at issue in the hearing, and where the determination with regard to the tax liability is part of the appeal, the Tax Court will review a matter on a de novo basis and new evidence may be submitted. 106 98 I.R.C. 7122(d)(3)(C). 99 I.R.C. 7122(c)(1)(B)(ii). 100 I.R.C. 7122(f). 101 I.R.C. 6320(c), 6330(d)(1); Treas. Reg. 301.6320-1(e)(3) Q&A-E8, 301.6330-1(e)(3) Q&A-E8. 102 Treas. Reg. 301.6330-1(f)(2) Q&A-F2. 103 I.R.C. 6320(c), 6330(d)(1). 104 Treas. Reg. 301.6320-1(f)(2) Q&A-F3, 301.6330-1(f)(2) Q&A-F5. 105 Goza v. Commissioner, 114 T.C. 181-82 (2000). 106 Id. 19

4

UNPAID FEDERAL TAX LIABILITIES THE BANKRUPTCY OPTION (The Taxpayer Controls!) Wm. Robert ("Bob") Pope, Jr. White & Reasor, PLC Nashville, Tennessee The IRS Collection Process: What You Need to Know to Advise Your Clients All rights reserved Wm. Robert Pope, Jr. August 2014 39

THE BANKRUPTCY OPTION I. OVERVIEW. A. Enlightenment, Not Conversion. 1. Tax professionals (lawyers and certified public accountants) generally will not and do not represent individuals or businesses with substantial unpaid tax liabilities. Bankruptcy lawyers have, without fear of contradiction, absolutely no interest in federal tax liabilities. As a result, the tax professional and the bankruptcy lawyer have only a fleeting acquaintance with the "tax debts" in a bankruptcy proceeding. Both of those groups may have some limited interest in the taxes to be incurred in the transaction or the impact of a reorganization in creating a tax liability or discharge of taxes; but neither will pay the slightest attention to tax debts. Today that changes. 2. The purpose of this outline and the presentation will be to acquaint the tax professionals with the options provided by the Internal Revenue Service to resolve outstanding unpaid federal tax liabilities. More importantly, this outline and my presentation have a distinct bias: A tax professional should NEVER: File a Request for a CDP Hearing Apply for an Installment Agreement Submit an Offer in Compromise BEFORE Determining the Expiration Date of the Collection Statute of Limitations AND (NOT OR) Determining if the tax liability can be discharged in bankruptcy and when. WHY? Each extends the Collection Statute of Limitations And The Bankruptcy Code Maturity Periods to Discharge Taxes [Installment Agreement only time pending or 30 days plus appeal on termination ] IRC 6331(k)(2) and (3) and IRC 631(i)(5) 40

This outline and the presentation will define the IRS options and the treatment of tax liabilities under the Bankruptcy Code. 1 Very basic bankruptcy terminology will be defined to assure a minimal background for the tax professional. II. THE IRS 2 VERSUS THE BANKRUPTCY CODE. The Bankruptcy Code contains specific provisions for unpaid tax (State and Federal). Every decision made by a taxpayer in selecting a bankruptcy option can be reviewed by a Court located in the taxpayer's home state. The entire range of options provided by the IRS rest within the sole and exclusive discretion of the administrative agency providing the options, the IRS. The only review of that agency's action will be by a court located in Washington, D.C., the United States Tax Court, and that review is limited to whether or not the agency abused its discretion. A tax professional must be familiar with the basics of the bankruptcy options. The mere referral to a bankruptcy lawyer will not be sufficient. Most bankruptcy lawyers do not know how to evaluate the discharge of federal tax liabilities or the use of other alternatives. For example, in a well known and very high profile case in Nashville, Tennessee, a well respected bankruptcy lawyer, who happened to have a masters in taxation, declined to file a bankruptcy petition to stop a foreclosure. Why? Delaying the filing for a period of some thirty (30) days would discharge a federal tax liability of over One Million Dollars ($1,000,000.00). Distraught at not being able to obtain an immediate filing, the debtor located another lawyer and described the urgency of her need to stop the foreclosure but did not disclose the tax issue. A bankruptcy was filed. If the bankruptcy had been filed two (2) weeks later, the taxes would have been discharged. They were not. The bankruptcy could not be dismissed. 1 2 Citations to sections of the Bankruptcy Code will be "11 U.S.C. ". In the transactional and in the audit world, practitioners tend to convert the IRS into the more benign "Service." In the collection universe, including bankruptcy, we deal with the IRS and the United States. No illusions! 41

III. THE IRS OPTIONS: 3 STATUTORY DEFINITIONS. A. The Collection Statute of Limitations. The IRS has ten (10) years from the date a tax liability is assessed to collect, or reduce the liability to judgment. IRC 4 6502(a). Anyone dealing with a federal tax liability must first determine the time remaining on the collection statute. Strategically, you then consider the likelihood of that time passing without affirmative action being taken by the IRS. If the United States obtains a judgment lien, on a counterclaim in refund litigation for example, that judgment may be collected for a period of twenty (20) years from the time entered. 28 USC 3201. B. Installment Agreements. IRC 6159(a) authorizes the United States to enter into a written agreement for full payment of any tax in installment payments. IRC 6159(b) contains express authority for the IRS to terminate the agreement for inadequate information, collection in jeopardy, subsequent change in financial condition, or failure to pay an installment when due or provide additional information. With those exceptions, the written agreement must remain in force. If any of those events occurs, the agreement cannot be terminated without notice to the taxpayer thirty (30) days prior to the date with an explanation. The notice does not apply if the collection is believed to be in jeopardy. 1. Mandatory Acceptance a/k/a "Streamlined (Page 3, Pub. 594). If the taxpayer has a liability of Fifty Thousand Dollars ($50,000.00) or less, determined without regard to interest, penalties, additions to the tax or additional amounts, the IRS is required to enter into an agreement for the full payment of that tax (including interest, penalties, additions to the tax or additional amounts). IRC 6159(c)(1). The agreement must provide for full payment within three (3) years. The IRS has to determine that the taxpayer is unable to pay the liability in full from current assets. The mandatory acceptance of an installment agreement has several statutory restrictions which narrow its application. To compel the IRS to accept the installment agreement, the taxpayer must not during any of the preceding five (5) taxable years have failed to file a return or failed to pay any tax shown on any such return or entered into any other installment agreement. IRC 6159(c)(2). That limits application of the mandatory installment agreement to deficiencies in tax from an audit or unpaid liabilities on a return filed over five (5) years prior to the date that the installment agreement is requested. 3 4 IRS Publication 594, The Collection Process All citations to the Internal Revenue Code of 1954 as amended will be "IRC." 42

2. Review. If a proposed installment agreement is rejected, IRC 6159(e) requires independent administrative review, if requested by a taxpayer. IRC 7122(e) allows rejection of any proposed installment agreement to go to the Appeals Division. Appeals review of the rejection of an installment agreement, when requested by the taxpayer, is not a Collection Due Process Hearing ("CDP Hearing"). There is no judicial review of the result of that hearing. C. Partial Payment Installment Agreement. The American Jobs Creation Act of 2004 amended IRC 6159(a) to authorize an installment agreement for the partial collection of an unpaid tax liability. Prior to that amendment, the statute required the "full collection" of the liability. If the taxpayer's ability to pay would not satisfy the unpaid balance (plus interest that would accrue), the IRS would request that the taxpayer extend the statute of limitations to permit "full collection" under an installment agreement. Congress terminated the IRS's ability to extend the statute of limitations for full collection by installment agreements in the IRS Restructuring and Reform Act of 1998. Adding a provision for a partial payment installment agreement, some six (6) years later, 5 acknowledges that some taxpayers cannot, within the statute of limitations, make monthly payments in an amount sufficient to satisfy the liability, and interest accruing. 1. Mandatory Review. IRC 6159(d) imposes a mandatory internal administrative review of "partial payment" installment agreements not less than every two (2) years, effective for agreements entered into on or after October 22, 2004. 2. Comparison to Offer-in-Compromise ("OIC"). The IRS permits OIC's to be paid in "deferred periodic payments," as will be discussed below. The amount of each installment for a partial payment installment agreement and the amount of each deferred periodic payment could quite easily be the same. The OIC is not subject to review for any change in financial condition. A partial payment installment agreement poses less difficulty in being approved simply because it can be reviewed and changed, as a practical matter, and as a matter of statute, must be reviewed every two (2) years. The IRS is much more likely to enter into a partial payment installment agreement than to accept an OIC to be paid in installments. Most importantly, the partial payment agreement can be approved by a Revenue Officer or a Service Center call person, and not the guards in OIC units at the Service Center. Finally, the OIC suspends the collections 5 Enactment of this statute presents a watershed moment in the evolution of thought in the IRS collection division. For the first time, the IRS obtained Congressional approval of a statutory change to permit payment of less than the full amount of the tax. 43

statute of limitations; the partial payment installment agreement does not, after approval. IRC 6331(k)(3)(B) and 6331(i)(5). D. Offers-in-Compromise. IRC 7122 authorizes the Secretary of the Treasury to compromise unpaid federal tax liabilities. Statutorily, a legal review must be issued for any OIC in excess of $50,000.00, including interest, additional amounts, addition to the tax, or assessable penalty. 1. The Statutory Nonrefundable Front Payment. Effective for offers after May 17, 2006, a taxpayer must submit twenty percent (20%) of the amount offered in a "lumpsum" offer when the offer is filed. Lump-sum offers include offers to be paid in five (5) or fewer installments. For example, an offer of $200,000.00 requires $40,000.00 with the application, whether to be paid in one lump sum or four (4) installments of $50,000.00. Offers can be made for "deferred periodic payments." Periodic payments are paid in more than five (5) payments. The first periodic payment must be included when the offer is submitted. Periodic payments must be made during the pendency of the offer, prior to its acceptance. All of the twenty percent (20%) for a lump-sum payment and all of the periodic payments will be forfeited to the IRS if the offer is not accepted or not processed. The statute contains no language authorizing the return of those amounts if an offer is determined to be non-processable or rejected. The statute also contains no language, nor does the IRS OIC Instructions (Form 656-B), to define what "period" means. See also IRS (Form 656, Section 7). Practice Note. The statutory nonrefundable up-front payment requirement on OIC's has curtailed (if not extinguished) any meaningful use of offers for "High Dollar" taxpayers. As a practical matter, funds for the offer come from third parties, relatives, friends, etc. Third parties will fund an offer if it has been accepted by the IRS. Advancing twenty percent (20%) of an offer for any significant amount with the Service's low track record on acceptance of offers makes no sense. More importantly, the experience of most practitioners in this area precludes any affirmative recommendation that the funds submitted will increase the chances of an offer being accepted. To the contrary, the IRS's record in processing and accepting offers cannot be described as anything other than abysmal. As the Taxpayer Advocate's June 2009 Report notes, offers are down by seventy-two percent (72%). 2. National Living Standards. In IRC 7122(d) Congress "requires" the Secretary to define guidelines as to whether an amount offered was adequate. "...[S]chedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses." IRC 7122(d)(2)(A). These are the tables defining allowable living expenses in computing disposable income for offers. 44

Oddly enough, Congress provided that the schedules were not to be used if it would result in the taxpayer not having adequate means to provide for basic living expenses. IRC 7122(d)(2)(B). The tables provided have been used not only by the IRS but are incorporated into the bankruptcy process of determining "means testing." 11 USC 707(b)(2)(A)(ii). Those standards can easily be viewed as just above a "poverty" existence. That perhaps is consistent with the notion of "basic living expenses." The IRS will not deviate from these standards absent real proof. A coherent explanation will not work. 3. Review. The statute requires the Secretary to establish a review procedure including allowing the rejection of any offer to be considered by the Appeals Division. That process is in place and is known as the collection appeals process, a/k/a CAP. See IRS Publication 1660. The statute contains no judicial review of that administrative hearing. If an offer is reviewed in the context of a CDP Hearing, judicial review is available. 4. "Deemed Acceptance." An offer is deemed accepted if not rejected by the Secretary twenty-four (24) months after the date of submission. IRC 7122(f). To avoid any difficulties with a parallel judicial proceeding, the twenty-four (24) months excludes any time period during which the liability to be compromised is in the judicial proceeding. E. Uncollectible Status. The IRS, upon review of appropriate collection information (Form 433-A, discussed below), can determine that an account is currently uncollectible. The transaction code "53" is then placed on the account. There is no statutory authority, merely an internal administrative procedure and policy. 6 That code will remain in place for a minimum of twelve (12) months absent some other significant event. No right exists to have that status assigned. The assignment of that status, however, precludes a notice of levy. IV. THE BANKRUPTCY CODE: THE DISCHARGE MECHANISM. A. Discharge of Debts in General. 1. Human Beings are discharged from all pre-petition obligations not specifically excepted from discharge in a Chapter 7 bankruptcy, 11 USC 727, and in a reorganization for individuals under Chapter 11, 11 USC 1141. 2. As a matter of law, entities 7 liquidated under Chapter 7 are not discharged from their debts. 11 USC 727(a)(1); Fed. R. Bankr. P. 4004(c)(1)(A). As a practical matter, after a liquidation of all of the assets, all debts, including taxes, are uncollectible from 6 7 Internal Revenue Manual 5.16.1 and Policy Statement P-5-71. See 11 USC 101 for entities eligible to file for bankruptcy protection. Identifying and dealing with the treatment of every type of entity will not be attempted in this outline or presentation. 45

the entity. The statute expressly denies a discharge. The same statute applies to Chapter 11 bankruptcies when the business of the entity is not continued, and all or substantially all of the property of the estate is liquidated. 3. Entities reorganized under Chapter 11 obtain a discharge "upon confirmation of a plan of reorganization." 11 USC 1141. 4. Human Beings restructuring their debt under Chapter 11 do not obtain a discharge on confirmation. All payments required under a plan must have been completed. 11 USC 1141(d)(5)(A). B. Objections to and Revocation of Discharge. 1. 11 USC 727 sets out grounds on which a debtor's discharge can be barred, generally for "bad" acts. Even if taxes are otherwise dischargeable, the United States can object to the general discharge on any of the grounds set out in 727. This section contains the specific restriction that a bankruptcy discharge can only be granted every eight (8) years. More accurately, a discharge under 11 USC 727 and 1141 will not be granted if the debtor received a discharge in a case commenced within eight (8) years before the filing of the current petition. 2. A general discharge cannot be denied without the filing of a complaint. 11 USC 727(c). That complaint must be filed, in a Chapter 7, not later than sixty (60) days after the first date set for a meeting of creditors. The meeting of creditors can be continued. The first date set is the date to be used. In a Chapter 11, the complaint must be filed not later than the first date set for a hearing on confirmation of a plan. Fed. R. Bankr. P. 4004(a). The Court can extend that time on motion for good cause filed prior to the expiration of the original time to file. 3. A creditor, or the United States Trustee, can request that a discharge be revoked. 11 USC 727(d). Within one (1) year after a discharge was entered, the complaint can be filed alleging fraud unknown to the requesting party until after the discharge was entered. 11 USC 727(e)(1) and (d)(1). If the debtor actually concealed property acquired after the estate was closed that it should have disclosed to the Court or refused to answer specific questions, an action can be brought within the later of one (1) year after the granting of the discharge or the date the case is closed. 11 USC 727(d)(2) and (3). V. DISCHARGEABLE TAXES. A. Are Federal Taxes Dischargeable? Absolutely!! In the bankruptcy of a Human Being under Chapter 7 or Chapter 11, all tax liabilities not defined in 11 USC 523 are discharged as a matter of law. 11 USC 727(b) and 11 USC 46

1141(d)(1)(A). The same is true for entities except no debt is discharged in a liquidation under Chapter 7 of an entity nor under a liquidating plan in Chapter 11. The term "excepted from discharge" is shorthand for the title of 11 USC 523, "Exceptions to Discharge." B. Direct Questions. 1. Does the Bankruptcy Code contain any statutory language barring the filing of a bankruptcy petition to do nothing other than discharge taxes? Response: No. 2. Is there any bankruptcy doctrine evolving from case law, not expressly included in the Bankruptcy Code, that precludes the granting of a discharge in a bankruptcy case that has no debt other than taxes? Response: No. 3. Can a taxpayer initiate a bankruptcy proceeding for no reason other than to dispute and obtain a determination as to the taxpayer's liability for a tax obligation? Response: Yes. 11 USC 505(a) grants the Bankruptcy Court express jurisdiction to determine a tax claim against a debtor (Human Being or entity) that has not previously been determined. District Court s decision to abstain not reviewable. Abstention: IRC 6672, United States v. Paolo, 619 F.3d 100 (1 st Cir. 2010). C. Taxes Excepted from Discharge 11 USC 523(a)(1). 11 USC 523(a)(1), and the unnumbered language following 523(a)(9) and prior to 523(b), define taxes that are not dischargeable. 1. Priority Taxes. All priority taxes ("Priority Taxes") are excepted from discharge, whether a claim was filed or not. 11 USC 523(a)(1)(A). Priority Taxes are defined in 11 USC 507(a)(3) through and including (a)(8) and will be discussed separately below. 2. No Return or Late Filed Return. All taxes for which a return or "equivalent report or notice" was required, and either: a. Was not filed prior to the filing of a petition; or b. Was filed prior to the filing of the bankruptcy petition but after the last date due and within two (2) years before the petition was filed. 11 USC 523(a)(1)(B). 47

What is a "return"? Defining what is a "return" for the purposes of 11 USC 523(a)(1)(B) has two (2) unique issues. The exceptions are a Substitute for Return ("SFR"), prepared by the IRS under the authority of IRC 6020(a) or (b), and the actual filing of a return after the assessment of a liability from a SFR. IRC 6020 authorizes the IRS to prepare returns and assess tax from documentation available, with and without the consent of the taxpayer. Obviously, if a return has not been filed, a notice of deficiency matters not. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added language at the end of 11 USC 523(a) and immediately prior to 11 USC 523(b). The term return, for 11 USC 523, includes a SFR prepared under 6020(a) but does not include returns made pursuant to 6020(b). Returns prepared pursuant to 6020(a) are prepared by statute with the assistance of the taxpayer whose return was prepared. Returns prepared under 6020(b) are prepared without the taxpayer's participation, after a request has been made. The latter can never be discharged. The remaining open question is whether a taxpayer s filing a real return after an SFR under 6020(b) has been filed. In the Sixth Circuit, substantial doubts exist as to whether anything can be filed after a 6020(b) assessment. In re Hindenlang, 164 F.3d 1029 (6 th Cir. 1999). In the Ninth Circuit, the taxpayer s filing of a return in good faith will be deemed to start the time running. In re Nunez, 232 B.R. 778 (B.A.P. 9 th Cir. 1999). Trouble in Paradise: United States v. Hernandez, (United States Bankruptcy Court, W.D. Tex, January 2012). Any return filed late cannot, under the hanging paragraph, be a return. 3. The Fraudulent Return. All taxes with respect to which the debtor made a fraudulent return. 11 USC 523(a)(1)(C). The United States has the burden of proof to show that a return was fraudulent. The burden of proof in a bankruptcy proceeding to establish the exception to discharge is a preponderance of evidence, not the normal standard for fraud, clear and convincing evidence. 8 This exception will normally not apply unless the fraud penalty under IRC 6672 has been assessed. A fraud penalty in a notice of deficiency that was not disputed before the United States Tax Court does not create res judicata or collateral estoppel. Presumably the IRS will have some evidence of fraud, if included in a notice of deficiency. More importantly, care needs to be taken in viewing any type of criminal conviction to assure that the conviction requires fraud. The making of a false statement or the failure to file does not create a fraudulent return. 4. Attempted to Evade or Defeat. All taxes which the debtor willfully attempted in any manner to "evade or defeat." Willfully attempting to defeat in any manner to 8 Collier Bankruptcy Manual 523.03 (3d ed. Rev. 2009). 48

evade or defeat the tax was a hot bed of litigation for a number of years. That issue was resolved by the Eleventh Circuit Court of Appeals' decision in In re Griffith, 206 F.3d 1389 (11 th Cir. 2000), cert. denied. 531 U.S. 826 (2000). The Eleventh Circuit in United States v. Jacobs, 490 F.3d 913 (11 th Cir. 2007) reviewed, the willfulness requirement in 11 USC 523(a)(1)(C), after the United States District Court had reversed the Bankruptcy Court's finding that willfulness did not exist in the attempt to evade or defeat. The Eleventh Circuit sustained the District Court's reversal. For those of us assisting taxpayers in reviewing their financial affairs, the Eleventh Circuit's review of Mr. Jacobs's conduct merits special attention: The record overwhelmingly shows that Mr. Jacobs willfully attempted to evade or defeat his taxes within the meaning of 523(a)(1)(C).... Mr. Jacobs admits that he and his wife purchased a home in 1995, after he [had] been accumulating tax debt for several years, and titled it solely in his wife's name while he remained on the mortgage, because the mortgage company wanted to avoid the attachment of tax liens. Mrs. Jacobs had essentially no income or assets, and Mr. Jacobs made all the mortgage payments on the home himself.... Also highly relevant to the conduct requirement is the undisputed evidence that Mr. Jacobs caused his law firms to characterize his earnings as officer compensation not subject to tax withholding, and then failed to pay estimated tax on those earnings. He admits that his law firms failed to withhold taxes from the compensation they awarded him in the years in question, that he could have caused them to withhold tax from his earnings but did not do so, and that the law firms purchased numerous luxury vehicles that he and his wife used in part for personal purposes. Title to at least one of those vehicles, the 2003 G.M.C. Yukon, was in Mrs. Jacobs's name, and Mr. Jacobs testified that the 2001 Suburban 'was financed in [Mrs. Jacobs's] name,' but all the payments for the purchase of those vehicles were made by Mr. Jacobs's firms.... In 2000 and 2001, Mr. Jacobs donated approximately $12,152 to the Place of Encouragement, and in 1997 he paid $12,000 to the Amelia Island Chapel. He made thousands of dollars' worth of gifts to his children. It is also undisputed that Mr. Jacobs made large payments for luxury items, such as approximately $20,000 for plastic surgery for his wife in 2000, over $1,000 per month for a golf club membership and entertaining expenses, and between $600 and [$]700 per month for a leased Mercedes-Benz for his 49

wife, even though the Jacobses apparently also drive other luxury vehicles. [490 F.3d at 925-926] Most importantly, the Court's opinion contains every type of conduct that should be considered impermissible prior to the filing of a bankruptcy petition, with any expectation of moving through that process unscathed. D. Objections to Dischargeability of Tax Claims. The "dischargeability" of the specific matters defined in 11 USC 523, including taxes, do not require the filing of a complaint, as contrasted with the general discharge. The discharge of those obligations, as a matter of law, requires no action. That leads to two (2) procedural options which a debtor (and the IRS) must consider. 1. Passive. The "do-nothing" option arises when a taxpayer, having completed their due diligence, determines that their taxes are dischargeable. The IRS was given notice of the bankruptcy. The IRS does nothing and the debtor does nothing. Doing nothing also includes not sending a letter to the IRS. The IRS is listed as a creditor and notice was given through the normal process. a. After the bankruptcy, the IRS may not take any further action confirming the due diligence. If a notice of federal tax lien was filed before the bankruptcy, during the bankruptcy proceeding some thought should be given to determining the value of the secured claim, 11 USC 506, Fed. R. Bankr. P. 3012, even if the tax is discharged. b. Your client receives a letter from the IRS requesting payment of the taxes that you believed were discharged. The bankruptcy lawyer prepares a letter to the IRS submitting a copy of the notice of the discharge, requesting confirmation that the liability has been discharged, and entry of the appropriate transaction code. You send that letter certified. (1) The IRS disagrees. In response to your certified letter that the tax has been discharged, the IRS tells you that the tax was not discharged and that you are obligated to make the payment. That letter should explain their basis for making a determination that the tax was not discharged. At that stage, the matter should have been transferred to IRS lawyers. (2) Solution. Immediately upon receipt of that letter, the bankruptcy attorney should request a show cause hearing in the United States Bankruptcy Court with a motion to find the United States in contempt for violation of the discharge injunction. The Bankruptcy Court has the authority to hear the show cause hearing without reopening the case. The bankruptcy case should be reopened, initiated by a separate motion, to file a complaint for dischargeability if the IRS pursues its collection efforts. 50

c. Chapter 11. A Different Process. In a Chapter 11 proceeding, the disclosure statement and the plan of reorganization should include express provisions describing the treatment of all the tax liabilities. The disclosure statement should clearly define the amount of the Priority Taxes and the non-priority dischargeable taxes. The Chapter 11 plan will provide for treatment of Priority Taxes to satisfy the statutory requirement for payment over a period of sixty (60) months after the order for relief. The non-priority taxes will be unsecured claims and will receive the same treatment as any other unsecured non-priority claim. If the IRS does not object to the disclosure statement or the plan, attempting to collect, after confirmation of the plan, would be both unwise and unseemly. No cases have been found deciding whether collateral estoppel or res judicata applies, which is not surprising. The United States and the IRS are certainly parties in the Chapter 11 proceeding. Their failure to object to the treatment of their claims followed by entry of an order approving the disclosure statement and confirming the plan of reorganization clearly satisfies the basic elements for res judicata. 2. Active. The "active" option requires the filing, in a Chapter 7 or a Chapter 11, of a complaint to "determine" dischargeability of any tax claim. There are no time limits within which to file that complaint. Fed. R. Bankr. P. 4007. See also 11 USC 523(c)(1). The IRS will always take the passive option, waiting until after the bankruptcy discharge has been entered. The debtor/taxpayer should file that complaint. With appropriate due diligence, the filing of a complaint to determine dischargeability eliminates any uncertainty as to the IRS's acting after a bankruptcy is closed. After determining that the basic requirements for discharge of a tax liability have been satisfied, a candid discussion with the client as to the exact matters that should be covered in a complaint might disclose some behavior of which you might not have been aware and which could impact a Court's view as to whether this particular taxpayer willfully attempted to evade or defeat the tax. The filing of a complaint determining dischargeability of taxes is followed by a letter to the District Counsel and a request for a meeting to discuss what issues the IRS may have. The defense of these cases in a bankruptcy proceeding will be referred to the Tax Division, Department of Justice. The Department of Justice will file a response to the complaint to determine dischargeability. The normal discovery will take place unless the IRS can tell the Department of Justice that there is no factual basis upon which to dispute the claim for discharge. See No Standing Nonjusticiable: Motion to Dismiss Hinton v. United States, 107 AFTR2d 2011-2324 (U.S.D.C., N.D. Ill., 2011): no claim filed plus no objection to discharge; court had nothing to decide. 51

After reviewing the complaint with your client, you must explain the "passive" option and the value of the complaint option. A letter to your client, signed by them, acknowledging counseling as to the choice between the two (2) options and your client's decision to accept one or the other is the best practice, particularly when the client decides to follow the "passive" option. E. Review of Bankruptcy Discharge. Santini Stone, LLC v. Commissioner, TC Memo 2009 64 (March 25, 2009) found Judge Wells reviewing a determination by a Settlement Officer that IRC 6721 civil penalty had not been discharged in a prior bankruptcy of the petitioner. The case arose after the IRS issued a notice of levy following a taxpayer's default under a confirmed Chapter 11 plan. 1. Only One Review of the Tax. The taxpayer requested review of the underlying tax. The Court found that the claim in the bankruptcy case permitted the taxpayer an opportunity to contest the IRS claims. That opportunity precluded, under IRC 6330(c)(2)(B), the second challenge as to the validity of the tax in the CDP hearing. On the other hand, the Court was willing to review the Settlement Officer's consideration of the discharge of the penalty as an abuse of discretion. 2. Review of Bankruptcy Treatment. The plan provided for a specific treatment of the penalty. The Settlement Officer concluded that the penalty maintained its character as a tax. The Tax Court disagreed and found that the Settlement Officer "abused her discretion in characterizing the penalty as not having been discharged." Santini Stone, LLC, supra page 9 and 10. F. Non-Dischargeable Taxes: What Happens? If the non-dischargeable taxes are entitled to a priority, and most non-dischargeable taxes are, any proceeds realized from the disposition of assets not subject to the claims of secured creditors will be applied to the Priority Taxes after the payment of administrative expenses. That is a planning factor. Entities can define when they file their Chapter 11 proceeding and create Priority Tax claims that they want to be paid from the proceeds realized from the sale of their assets. A better planning opportunity exists for individuals, in either Chapter 7 or Chapter 11. IRC 1398(d)(2) permits the election of a short taxable year ending on the day prior to the date of the filing of the petition. Any bankruptcy liability reported on the return for that short taxable year will be a Priority Tax. If the tax is not discharged in Chapter 7 for a Human Being, the Human Being remains liable for the tax if not paid in the bankruptcy. All of the IRS options remain available to that 52

individual. The statute of limitations for collection has been extended by the period of time that the bankruptcy was in existence. IRC 6502(h). In Chapter 11, the plan of reorganization must address Priority Taxes and non-priority taxes as an unsecured claim. No plan of reorganization can be confirmed unless the plan contains a provision for payment of Priority Taxes in regular installments over not more than five (5) years 9 after the date of the order 10 for relief, normally the date of filing. Total value requires a rate of interest, 11 to preserve value of the tax claim, a time-value of money exercise. The rate of interest preserves the amount of tax over the payout period. Remember remove the penalties. Please understand that the non-priority unsecured claim is the last class to be paid. For entities, it is prior to equity owners. Non-priority unsecured tax claims can be paid out over an extended period of time (more than five (5) years) at a rate of interest that maintains the value of the interest of each class of claims in the property of the estate on the date of confirmation. 11 USC 1129(a)(7)(A) and (b)(2)(b). Please recall this description when you consider an OIC or an installment agreement. Practice Note: The Trust Fund Recovery Penalty a/k/a "100% Penalty," IRC 6672, will always be (regardless of age) a non-dischargeable Priority Tax. Payment of the Trust Fund Recovery Penalty over five (5) years under a Chapter 11 plan will be the best deal that most taxpayers will be able to obtain. 11 USC 1129(a)(9)(C). G. A Dischargeable Tax Secured by a Notice of Federal Tax Lien. If a notice of federal tax lien was filed prior to the bankruptcy petition, the IRS, like any other secured creditor, has a claim against the asset in which the security interest was perfected. If the underlying tax is dischargeable, the lien survives the bankruptcy; the tax does not. The amount collectible should be limited to the value of the secured claim on the date that the bankruptcy petition was filed. If the asset is not liquidated in the bankruptcy, does the security interest reach any appreciation in the value of the asset? 11 USC 506 and Fed. R. Bankr. P. 3012 addresses determination of the value of a secured claim. Exempt assets. Exempt assets are not part of the bankruptcy estate. Exemptions from federal tax liens are determined by federal statutes and not by state statutes. To the extent a federal tax lien attached to an asset that was exempt under state law, the federal tax lien remains in place regardless of whether the tax was discharged or not. 11 USC 505 only determines the value of property of the estate. An unaddressed question best frames the discussion of the status of an exempt asset: 9 10 11 11 USC 1129(a)(9)(C) 11 USC 301 Henderson &. Goldring, Tax Planning for Troubled Corporations (CCH 2009) at 1016.1. 53

1. No federal tax lien was filed prior to the bankruptcy. What if assets were excluded from a bankruptcy estate? To be exempted, assets must be in estate. See Wadleigh v. Comm., 134 T.C. 280 (2010). 2. Certain interests in the debtor's real estate were exempt. Can the IRS file a notice of tax lien, when all of the tax liability has been discharged in the bankruptcy, to reach the exempt asset? Filing the notice of federal tax lien after the bankruptcy would violate the injunction of the automatic stay as to any debt that is discharged. The discharge of the debt without the perfection of the security interest prior to filing bankruptcy stays further action by the IRS. VI. PRIORITY TAXES. A. Priority Claims Generally. Priority claims are defined in 11 USC 507. Priority Taxes are defined in 11 USC 507(a)(8)(A) through and including (G) and the flush language at the end of (G) and before 507(a)(9). Administrative expenses are paid first. If any money is left, priority claims are paid. In Chapter 11, the same priority exists and those provisions must be satisfied before a Chapter 11 plan can be confirmed. 1. Excise Taxes and Customs Duties listed in subparagraphs (E) and (F) of 11 USC 507(a)(8) do not arise with any degree of frequency. 2. Any tax required to be "collected" or withheld for which a debtor might be liable, in any capacity, has priority regardless of the age of the claim. 11 USC 507(a)(8)(C). For business entities, sales tax and withholding tax (income and employee share of FICA) will always be a Priority Tax and can never be discharged. The Trust Fund Recovery Penalty, also known as the One Hundred Per Cent (100%) Penalty under IRC 6672, is a priority obligation. 3. Property tax incurred prior to the commencement of the bankruptcy and payable without penalty within one year before filing the petition is a Priority Tax and not an administrative expense. B. The Aging of a Tax Claim. Any tax measured by "income or gross receipts" within certain time frames have priority. That means federal or state income taxes. Taxes falling outside those time frames are not priority claims and are dischargeable. 54

1. The Three (3) Year Rule. 11 USC 507(a)(8)(A)(i) grants priority to tax liabilities arising from returns due within three (3) years prior to the filing of a bankruptcy priority. The due date includes the date as extended. No return has to be filed. For example, the IRS makes a forced assessment under IRC 6020(b), and the taxpayer has a liability. No return has been filed. If that liability was due on a return that should have been filed within three (3) years prior to the filing of the bankruptcy petition, that claim has priority. 2. The Two Hundred Forty (240) Day Rule. The second time frame, 11 USC. 507(a)(8)(A)(ii), begins with the assessment of the tax. Congress, correctly, wanted to provide the IRS with some time within which to collect additional tax after an assessment, before the tax could be discharged in bankruptcy. That time is two hundred forty (240) days. 12 The two hundred forty (240) day period, which was not changed by the 2005 Bankruptcy Act, is extended for the period of time, after the assessment, during which an offer in compromise was in effect, plus thirty (30) days. 3. "Tolling" the Three (3) Years and the Two Hundred Forty (240) Days. The 2005 Bankruptcy Act added language extending both the three (3) year period and the two hundred forty (240) day period for the time during which a governmental entity was prohibited from collecting the tax as a result of a request by the debtor for a hearing and appeal of any collection action, plus ninety (90) days. That language tracks identically the language in IRC 6330(a)(3)(B) and (b), known as a "CDP Hearing." Additionally, the three (3) year period and the two hundred forty (240) day period are both extended for any time period during which the collection of that liability was stayed in a prior bankruptcy proceeding. 4. IRS Plain Language Transcripts of Account. As must be obvious at this point, only the tax professional can make an accurate computation to determine the time periods for Priority Tax or a non-priority tax. More importantly, the tax professional cannot complete that task without obtaining transcripts of account from the IRS. The tax professional that has enrolled in the IRS Professional Priority System can obtain those transcripts relatively easily. If you are not enrolled, you can call the IRS tax practitioner hotline, fax your power of attorney to them and the plain language transcripts will be faxed to you within a very short period of time. Note: To the uninitiated, have some additional work to do while you are holding on the phone for someone to answer your request for plain language transcripts. C. Compensatory Penalties: Not Federal Tax Penalties! 11 USC 507(a)(8)(G) makes tax penalties a priority. The statutory definition has two (2) conditions. The penalty must be related to a claim itself that has the priority defined in 507(a)(8). Penalties on a non-priority tax claim have no priority. 12 How anyone decided the 240 days was a reasonable time within which to collect an additional assessment has never been discussed. 55

The second part is that the penalty be...in compensation for actual pecuniary loss.... Under the Internal Revenue Code, the fraud penalty, the late filing penalty, the failure to file penalty, and the accuracy related penalties, have absolutely no connection to compensation for any loss much less an actual pecuniary loss. This creates a real potential anomaly: The tax claim can be a Priority Tax (not dischargeable), but the penalty, absent the element of being actually compensatory, fails the test of 11 USC 507(a)(8)(G), and can be discharged. In an individual Chapter 7 or 11, any business removing the penalty and interest on penalties can significantly reduce the amount of the priority obligation and should be reviewed very carefully. The Trust Fund Recovery Penalty is not a "penalty" Criminal Case Restitution: Non-dischargeable Fraud Penalty Dischargeable FBAR Penalty Non-dischargeable, Title 31, Not 26 Not a tax penalty 11 USC 523(a) defines exceptions to discharge. The specific provision excepting penalties from discharge reads: (7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty (A) (B) relating to a tax of a kind not specified in paragraph (1) of this subsection; or imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition; The "or" after (A) lets (B) discharge penalties even if the tax is not dischargeable provided the penalty is based on events taking place three (3) years before the bankruptcy petition is filed. McKay v. U.S., 957 F.2d 689 (9th Cir. 1991) 56

VIII. APPLICATION OF PAYMENTS. A. Rev. Proc. 2002-26 13 1. Voluntary Payments. a. No Instructions. If a taxpayer does not provide "specific written directions," the IRS applies the payments in a manner that will serve the IRS's best interests. [.02] b. Designated Payments. The taxpayer makes a voluntary payment, with specific written directions for application and the IRS accepts the payment, the IRS will apply the payment as directed. [.01] (1) The Check. The front and back of the check should contain a specific tax period to which the payment should be designated and citation of the revenue procedure: "Apply to Form 941, 0396, Rev. Proc. 2002-26,.01," and incorporate your letter by a reference on the check. (2) The Letter and the Mailing. You cannot rely upon the IRS to understand a complicated letter and take appropriate action. Keep your instructions simple but direct and use a separate letter and a separate check for every taxable period. 2. OIC and Installment Agreement Payments. If either agreement contains terms directing the application of the payments, then the IRS will follow those directions. Otherwise, the amounts will be applied in the manner that the IRS determines to be in its best interests. [.03] 3. Payments under a Chapter 11 Plan: Designation for Non-Trust Fund Taxes. United States v. Energy Resources Co., Inc., 495 U.S. 545 (1990). The Court side-stepped the question of whether the payments under a bankruptcy plan designated for application to the trust fund penalty, before being applied to the non-trust fund portion, were voluntary or involuntary within the meaning of the IRS's internal guides. The U. S. Supreme Court held that each case must be reviewed on its own facts as to whether the designation of the payments is necessary to the success of the plan of reorganization. The Bankruptcy Court has sufficient equitable powers to require application of payments as long as that application is predicated on a finding that such an application was necessary for the plan of reorganization to succeed. Subsequent to that decision, one treatise suggests that more often than not, the taxpayer's allocation of the payments has been rejected. 14 In every case, the taxpayer will have to make a presentation in his confirmation hearing as to the reason supporting the application, focusing on the success of the plan of reorganization and all the variables that might involve. 13 14 2002-15 CB 746 Henderson & Goldring, supra. note 14, 1016.2 57

5

SURVEY OF 2013 CDP CASES Updated January 1, 2014 (112 cases reviewed)-- FRANCES D. SHEEHY, ESQ. Law Office of Frances D. Sheehy 5481 Wiles Road, Suite 502 Coconut Creek, FL 33073 Telephone: 954-449-9880 Facsimile: 954-449-9758 Email: fsheehy@att.net I. CHALLENGING THE UNDERLYING LIABILITY IN CDP A. - Cannot Challenge Liability: 1. Campbell v. Commissioner, TC Memo 2013-57 Prior statutory notice issued. IRS met burden of proof with USPS Form 3877 and testimony of Post Office employees re: 90 day letter being refused by TP. TP did not testify that he did not receive the post office notice. Cannot challenge liability in CDP, and TP provided no collection alternatives or documentation.(pro se). Also see, Janshen v. Commr., TC Summ.Op. 2013-73; Chambers v. Commr., TC Memo 2013-252; Mfum v. Commr., 112 AFTR 2d 5025 (3d Cir. 2013); 2. Kalil v. Commissioner, TC Summ.Op. 2013-29 A CDP request challenged the liability based on the statute of limitations, that the tax was paid and that it had been settled. Appeals did not consider the underlying liability because there was 90 day letter, the assessment was thus timely, and a TP letter about a settlement and the IRS cashing the check is not a settlement. (Pro se). 3. Boyd v. Commissioner, TC Memo 2013-100 TP husband was not on the L1058 and was dismissed for lack of jurisdiction. TP wife could not dispute the liability she failed to timely petition Tax Court after 90 day letter. The TP was not entitled to a face to face hearing, and even thought the Appeals Officer refused to continue the case, it was not abuse of discretion because the TP requested it too late. (Pro se). -1-

4. Thompson v. Commissioner, TC Memo 2013-61 Can t dispute liability if 90 day letter. The IRS suggested audit reconsideration, and the court urged the IRS to do an audit reconsideration. (Sympathetic TP????)(Pro se). 5. Arroyo v.commr., TC Memo 2013-112 The 90 day letter was sent to the last known address but the TP did not receive it. The Court considered the liability issue even thought the TP had no proof of changing his address with the post office. The Court did not sustain the failure to pay penalty because the IRS had the burden of proof and did not meet it. (Pro se). 6. Giaquinto v. Commr., TC Memo 2013-150 TP cannot dispute TF liability if he did not make any effort to claim the 60 day letter. 7. Gentile v. Commr., TC Memo 2013-175 TP disputed liability for SFR returns but provided no corrected tax liability and therefore did not properly raise the liability issue with Appeals. TP did not select a hearing date, did not propose collection alternatives. Tax Court would not remand because it was not necessary or productive. (Pro se). See also, Sstevenson v. Commr., TC Memo 2013-284. th 8. Trivedi v. Commr., 111 AFTR 2d 2110 (9 Cir. 2013) TP could not dispute liability because prior CDP notice for which no hearing was requested and there is no Tax Court jurisdiction for a CAP. (Pro se). See also, Cohen v. Commr., TC Memo 2013-86 (TP can t raise same issue in 2 CDP s even if first was equivalent hearing.). 9. US v. Latos, 111 AFTR2d 2333 CDP s determining liability are collateral estoppel in suit to reduce lien to judgment and sell house. (Pro se). 10. Hall v. Commr., TC Memo 2013-93 TP can t dispute liability in CDP if agreed to liability as part of criminal plea. Duress is not imposed when there are legal actions that limit choices. (Pro se). -2-

11. Precision Prosthetic v. Commr., TC Memo 2013-110 The TP loses if the refund period is not within the CDP jurisdiction of the Court and there was no timely claim for refund. 12. Burt v. Commr., TC Memo 2013-140 The TP had a criminal conviction with no overpayment for the criminal years and prior frivolous penalties. SJ for IRS because appeals determined the tax to be currently uncollectible. (Pro se). 13. Solucorp v. Commr., TC Memo 2013-118 The IRS can pursue TF collection against the parent corporation even if the sub is in Tax Court. See also, Hellman v. Commr., TC Memo 2013-190; Trainor v. Commr., TC Memo 2013-14 (Seized assets by IRS does not stop collection.) B. YES- Dispute Liability in CDP 14. Nerlinger v. Commissioner, 2013 US App. LEXIS 23995 (DC Cir. 2013) TP who wins in tax court cannot appeal to get an order that states there was an abuse of discretion. (Pro se) 15. Thompson v. Commissioner, TC Memo 0213-260 TP can t get second CDP when lien release was revoked, but can challenge the FTP penalty even if it is an early request before the L1058. 16. Adams v. Commissioner, TC Memo 2013-92 The TP can dispute the underlying tax because his Tax Court petition was dismissed as untimely. (Pro se). (The IRS still won because the TP has no records to support deductions.) 17. Cutler v. Commissioner, TC Memo 2013-119 The Court granted innocent spouse relief but would not require the monies levied from her children to be returned. 18. Santa v. Commissioner, TC Memo 2013-178 The TP gets a second chance at innocent spouse relief because he was not eligible for 6015(c) at his first trial. The court granted him relief and determined that the IRS could not rely on hearsay evidence of the wife in the administrative -3-

record, and that the IRS waived knowledge of unreported wages by not arguing it on brief. 19. Karogozian v. Commissioner, T.C. Memo 2013-164 TP was reclassified as an employee, but could not credit overpayment of tax in prior year to current liability. Equitable recoupment did not apply. (Pro se) 20. Meyer v. Commr., TC Memo 2013-268 The appeals officer relied on two forms for proof of mailing that were dubious and the law changed. The case was remanded for the appeals officer to clarify whether there was a valid 90 day letter. (Pro se). 21. Dixon v. Commr., TC Memo 2013-207 and Dixon v. Commr., 141 T.C. No. 3 (2013) TP s were criminally prosecuted for failure to file 941's and IRS took all records. TP s and IRS agreed on withheld amounts from wages and bonuses. On advise of counsel the TP s paid monies to corporation, who then designated payments to the IRS as withholding of TP. The records were lost. The court used the best evidence rule, the checks, and the amounts agreed upon and found that the corporation can designate employment tax payments for specific employees and the TP got credit for the withheld taxes. (TP s get amounts credited as of April th 15 of year following tax year, not when paid by the corporation.) The court commented on the good reputation of TP counsel. 22, AOD 2013-12 th The IRS position on Zapara v. Comm v. Commr., 652 F3d 1042 (9 Cir. 2011) IRS agrees that a TP can raise issued re: levied assets at a CDP hearing. It does not agree that the Tax Court can order a credit to the TP account for the value th of the assets, but will follow this case in the 9 Circuit. II. GOOD, BAD AND WORSE A. CDP and Statute of Limitations: 23. City Wide Transit Inc. v. Commr., 709 F. 3d 102 (2 Cir. 2013) nd The accountant for the TP embezzled money and filed false 941's. The IRS prosecuted the accountant. The fraud of the accountant (even though he did it for -4-

his own benefit) kept the statute of limitations open. The Second Circuit reversed the Tax Court. B. CDP and Offers in Compromise 24. Szekely v.commr., TC Memo 2013-227 Remand of rejected OIC because it was neither fair nor rational for Appeals to close a case 1 day after a deadline was not met, when TP had been cooperative, and IRS had delayed 6 months and 1 day. TP was ordered to revise OIC and 433. (Pro se). 25. Anderson v. Commissioner, TC Memo 2013-261 Remand of rejected OIC of 74 year old TP with prostate cancer and heart problems. The Court remanded because the AO ignored the medical evidence and must analyze an ETA OIC, and must clarify findings re: dissipation of assets and voidable transfer of assets. 26. Pomeroy v. Commr., TC Memo 2013-26 The taxpayers had a history of non-compliance, and wife had civil penalty for frivolous returns. The Court remanded the case to reconsider the rejected OIC s because the record was insufficient as to the consideration of the TP husband s stroke. 27. Lane v. Commr., TC Memo 2013-12 The court remanded the case for Appeals to reconsider a rejected OIC of a sole proprietor because the AP disregarded the mechanics, lien, personal income and expenses, mortgage payments, economic hardship and should have used 3 month average of income. 28. Fatehi v. Commr., TC Memo 2013-101 After remand for reconsideration of an OIC, the TP rejected an offer for $125/mo for 24 months, then failed to provide new financials to a third appeals officer. The court sustained rejection of the TP $625 OIC for failure to provide financials and found that the TP is not entitled to lien withdrawal just because he can t afford to pay. (Pro se.) -5-

29. Matick v. Commr., TC Summ. Op. 2013-72 OK to reject OIC when TP has equity in property. AO determined that the TP could full pay, and if the TP can earn money they are not sick enough for an ETA OIC. (Practitioner in this case did not want appeals to consider the OIC and continually requested it be sent back to OIC specialist even though in CDP.) (Pro se.) See also, Stotts v. Commr., TC Summ. Op. 2013-46 (Court won t review settlement negotiations.) 30. Ramdas v. Commr., TC Memo 2013-104 OIC rejected because the TP had rental properties, life ins., did not propose IA, and did not argue ETA hardship at trial. 31. Reed v. Commr., 141 TC 7 (2013) TP filed two prior OIC s that were rejected for dissipation of assets and noncompliance. TP wanted OIC s reopened, accepted and all payments made subsequently would full pay the OIC s. Appeals analyzed prior rejections, determined them to be proper. Court found for IRS because can t evaluate prior OIC s using old financials. 32. Johnson v. Commissioner, 111 AFTR2d 1998 (DC Cir. 2013) OIC rejected because TP dissipated $200,000 assets. See also, Taggart v. Commr., TC Memo 2013-113 (OK to file lien while OIC pending and dissipation). (pro se); Glossop v. Commr., TC Memo 2013-208 (dissipation, non-compliant and low ball OIC). (Query: do these cases apply new OIC rules on dissipation in IRM?) 33. Fincourt B. Shelton PC v. Commissioner, TC Memo 2013-273 TP attorney OIC rejected, then TP paid $120,000 to RO. The Court would not apply equitable estoppel because OIC is the only way to compromise tax. The TP continued to operate the PC after he said it was closed. (Pro se). 34. Isley v. Commr., 141 TC 11 (2013) OIC accepted by appeals was rejected by counsel. The Court detemrined that an OIC must be approved by DOJ if it includes criminal tax years. The case was remanded for a new OIC or IA with DOJ approval. denied because unfiled returns and no 433B. -6-

C. CDP and Installment Agreements: 35. Antioco v. Commr., TC Memo 2013-35 Tax Court remands for THIRD time: IA rejected for 71 yr old TP with 90 yr old mother. Court found AO incredible testimony, wrong on fraud, no insolvency analysis, erroneous statements by AO, mistake of law, erroneous and inconsistent findings, arbitrary. Court cited Chenery doctrine and remanded again. 36. McCarthy v. Commr., TC Memo 2013-214 OK to reject IA if TP has assets (motorcycle, truck, boat, cars, etc.) and won t try to borrow or sell. (Pro se). See also, Holland v. Commr., TC Memo 2013-205 (AO required sale of house and car); J & S Auto Painting Inc. v. Commr., TC Memo 2013-232 (OK to reject IA if lower than bank statements show and noncompliance.); Grant v. Commr., TC Summ. Op. 2013-83 (OK to reject low ball IA); Lengua v. Commr., TC Memo 2013-197 (TP not try to get loan even though no income.). 37. Moore v. Commr., TC Memo 2013-78 Court considered that TP conceded IA issue because it was not in the stipulation or the evidence even though it was argued in pretrial memo. 38. Bibby v. Commr., TC Memo 2013-281 Jeopardy levy was OK because the TP spent an erroneous refund and transferred assets and failed to cooperate with AO. 39. Friedman v. Commr., TC Memo 2013-44 OK for AO to reject collection alternatives because the TP had large income, history of non-compliance, was non-compliant, even though TP has medical issues. Would not delay collection until bonus. (Pro se). 40. Link v. Commr. TC Memo 2013-53 Elderly taxpayer cared for by grandson was no allowed expense for second old car. IRS used national standards and determined no hardship. (Pro se). See also, Thompson v. Commr., 140 TC No. 4 (2013) (partial pay IA not allow tithe to church). -7-

41. Zumo v. Commr., TC Summ. Op. 2013-66 TP rejected appeals offer of 72 month IA. OK not to deviate from national standards without support. IRS discretion re: lien withdrawal. (Pro se). 42. Barrett v. Commr., TC Memo 2013-256 The TP had been granted currently not collectible for TF and relied on res judicata for income tax CDP, and rejected streamlined IA of $340 per month. The Court found that it was neither res judicata nor collateral estoppel because it was a different tax and had not been litigated, but was settled. D. CDP - Other 43. Walker v. Commissioner, 111 AFTR2d 939 (M.D. N.C. 2013) TP suit against social security levy instead of filing CDP. Case dismissed. 44. Creditron Financial Corp. v. Commr., TC Memo 2013-17 TP filed untimely CDP s, an untimely Tax Court petition and a CAP. All were dismissed for lack of jurisdiction. (Pro se corp. officer). See also, Gray v. th Commr., 112 AFTR2d 5328 (7 Cir. 2013) (Tax court petition filed 32 days - dismissed no jurisdiction.) 45. Michael Leathers v. Ronald Leathers, 111 AFTR2d 1890 (D.KS. 2013) Malpractice????? CDP was not processed because it was signed by the attorney who did not have a 2848 on file. 46. Kehoev. Commr., TC Memo 2013-63 Court would not remand where the issue was IRS refusal to withdraw tax lien because it is discretionary, even though the TP was compliant with a good history. (Pro se). See also, Blackman v. Commr., TC Memo 2013-194. 47. Moreland v. IRS, 2013-2 USTC 50,515 (D. KS. 2013) TP cannot get declaratory relief re: liens because of the Anti-Injunction Act, could have a CDP hearing. 48. Law Office of Rossi,PLLC v.us, 111 AFTR2d 1859 (E.D. Mich. 2013) IRS levied after CDP because the RO thought it was a Disqualified Employment Tax Levy. The Court determined that the IRS mistake was not -8-

reckless or intentional even though it may have been negligent. Checking the IA box on a CDP request is not an offer of an IA. IRS returned the levied funds. III. Bankruptcy Issues. 49. O Donnell v. Commissioner, TC Memo 2013-247 Doctor filed CDP, offer lowball IA. The attorney provided appeals backup documentation, including his invoice that said: delay IRS to file bankruptcy. The TP filed bankruptcy during the Tax Court case. The AO determined that the CDP was for delay and asset transfers and sustained the levy. (Query??? Malpractice, disclosure of attorney client privilege?) 50. Myers v. US, 2013-2 USTC 50,552 (D. KS 2013) TP s ex-husband filed separate return and IRS gave him credit for all joint estimated tax payments. TP filed bankruptcy, IRS filed claim. Case was dismissed because it was not a collection matter, and did not exhaust administrataive remedies. Court did not give pro se attorney same leeway as other pro se. 51. Son Gee Wine & Liquors Inc. v. Commissioner, T.C. Memo 2013-62 If the IRS files an estimated claim in the bankruptcy and it is not disputed, the liability cannot be subsequently disputed in a CDP. 52. Beeler v. Commissioner, TC Memo 2013-130 CDP was remanded by the Second Circuit to reduce the trust fund by $80,860 because the IRS did not meet its burden of proof to show the application of payments made in bankruptcy. The Court noted the IRS conduct including general failure to maintain records, and erroneous entries in TP records. IV. Delay in CDP (No face to face CDP s if unfiled returns, no financials, or frivolous arguments) nd 53. Williams v. Commissioner, 111 AFTR2d 2025 (2 Cir. 2013) TP is not entitled to face to face hearing if frivolous arguments, unfiled returns, and no financials. 54. Laforge v. Commr., TC Memo 2013-183 OK to deny face to face if AO deadline missed. 55. Osband v. Commr., TC Memo 2013-188 -9-

CDP can review frivolous return penalty, which was upheld. OK to deny IA without 433. th 56. Matton v. Commr., 111 AFTR2d 839 (9 Cir. 2013) th 9 Circuit upheld sanctions by the Tax court because the TP failed to attend a face to face hearing, failed to provide financials, and did not tell the court why the tax was invalid. See also, Harper v. Commr., TC Memo 2013-79 (next time penalty.) 57. Golub v. Commr., TC Memo 2013-196 The court granted SJ to the IRS and fined the TP $15,000 penalty for trying to litigate an issue that had been lost multiple times. (Pro se). 58. Zook v. Commr., TC Memo 2013-128 Frivolous arguments resulted in $2000 penalty for delay. (Same argument in TP husband s case netted similar penalty. ) (pro se) 59. Satkiewicz v. Commr., TC Memo 2013-73 Tax protestor lost job and appeals determined him currently not collectible. Tax court warned of future penalties. (Pro se), see also, Pohl v. Commr., TC Memo 2013-291. -10-

6

Law Office of Frances D. Sheehy 5481 Wiles Road, Suite 502 Coconut Creek, Florida 33073 954-449-9880 Fax: 954-449-9758 Email: fsheehy@att.net SURVEY OF DISCHARGEABILITY - RECENT CASES - 2013 (176 cases reviewed) I. Returns in bankruptcy A. Returns or not. 1. Pendergast v. Mass. Dept. Of Revenue, 494 B.R. 8 (Bankr. D. Mass. 2013) The Debtor late-filed 6 years returns in 2009. Mass. had already assessed 3 of the years. Based th on the McCoy case, 666 F. 3d 924 (5 Cir. 2012), the Court held that late returns are not returns for purposes of dischargeability, even if there was no prior assessment. See also, Fahey v. Mass. Dept of Revenue, 2013 Bankr. LEXIS 2375 (Bankr D. Mass. 2013); and Segnetz v. Mass. Dept. Of Revenue, 2013 Bankr. LEXIS 2376 (Bankr. D. Mass. 2013). 2. Wendt v. US, 2013-2 USTC 50,607 (Bankr. S.D. FL 2013) On debtor s motion for sanctions for violation of the discharge injunction, because the IRS tried to collect $400 post discharge, the Court determined the tax to be non-dischargeabe. The debtor claimed the return was late because the hurricanes of 2005 destroyed tax papers, she had an ill friend and health problems. She did not explain why she did not contact the IRS. The Court applied the McCoy analyses (even though this was an after-filed return), refused to apply the Beard test and found that a late return is not a return for purposes of discharge, notwithstanding the valid reasons for lateness. (Pro se). 3. Perry v. US, 500 B.R. 796 (M.D. Ala. 2013) The Court analyzed the McCoy approach, the IRS ( debt not return) approach, and the Beard criteria. Under each method, the debtor lost. The court found that returns filed late, after an IRS assessment, are not an honest attempt to file a return and are non-dischargeable under Hindenlang. The I didn t think I owed tax defense did not work. 4. Mallo v. US, 498 B.R. 268 (D. Colo. 2013) The court affirmed the bankruptcy court, finding that the late returns filed after the IRS has made an assessment were not returns for purposes of dischargeability, relying on Beard and the fact that there were no special circumstances. The Court did not adopt McCoy, nor did it buy the IRS debt argument because the statute does not differentiate between late returns and late returns filed after the IRS assessment. See also, Martin v. US, 500 B.R. 1 (D. Colo. 2013). -1-

5. Moffitt v. US, 2013 Bankr. LEXIS 2628 (Bankr. W.D. Ky. 2013) The court granted the IRS motion for Summary Judgment, finding returns filed late in the same amount as the IRS assessment, were not a reasonable attempt to satisfy the tax obligation, based on Hindenlang. 6. Moffitt v. Mass. Dept of Revenue, 2013 Bankr. LEXIS 4046 (Bankr. W.D. Ky. 2013) Mr. Moffitt lost again for the same reasons for failing to file state tax returns, and failing to file an amended state tax return after an IRS audit. The court declined to follow McCoy, but found under Hinderlang that the late returns were not a reasonable attempt to satisfy the tax obligation. 7. In re Moore, 112 AFTR2d 5629 (Bankr. M.D. Ga. 2013) Tax returns filed within 2 years of the bankruptcy are not discharged by the Plan because they are not priority taxes. B. Duty to file returns/ keep records and discharge none in 2013 II. Taxes Are Not Discharged. (A) Tax Court none in 2013 (B) Circuit Court 8. US v. Monahan, 497 B.R. 642 (BAP First Cir. 2013) The First Circuit BAP reversed the Bankruptcy Court and found that the post bankruptcy interest was not discharged because the Chapter 13 plan did not specify that the tax was discharged. (Practice Point). ( C ) District Court 9. US v. Dr. Stanley, 2013 US Dist. LEXIS 121016 (S.D. Miss. 2013) In a suit to reduce a tax lien to judgement, the taxpayer claimed the taxes had been discharged in bankruptcy. The court found the 1998 through 2004 taxes to be non-dischargeable because the debtor filed late returns, didn t pay, put assets in others names, had expensive toys - jaguar, motorcycle, vacations. The bipolar defense did not work because he could function as a doctor. Post bankruptcy taxes were not discharged, and taxes due within 3 years of the bankruptcy were not discharged. Judgement was entered for the IRS. 10. US v. Dr. Stanley, 2013 USTC 50,612 (S.D. Miss. 2013) (round two) The IRS won in a suit to reduce a tax lien to judgment, for thirteen years of tax liabilities, ten of which were non-dischargeable in a Chapter 7 for evasion. The debtor requested that the judgement be stayed and the bond waived. Without any evidence provided by the debtor to satisfy the factors with respect to the bond and the stay, the request was denied. 11. Vaughn v. US, 111 AFTR2d 1482 (D. Colo. 2013) -2-

The District Court affirmed the bankruptcy court s determination that the taxpayer s use of KPMG tax shelter Blips, and transfer of assets prior to assessment was sufficient to conclude the taxes were non-dischargeable for evasion to pay. (D) Bankruptcy Court 12. In re Whitson, 112 AFTR2d 6838 (Bankr. E.D. TN. 2013) Tax assessed within 240 days of bankruptcy for disallowed EIC, child care credit are priority taxes and not discharged. See also, Baylor v. US, 112 AFTR2d 5257 (Bankr. N.D. TX 2013). 13. In re Ryan, 2013 Bankr. LEXIS 5412 (Bankr. D. Mass. 2013) After the bankruptcy, the IRS claimed the debtor had not filed returns for 2 years, which they had not listed on their proof of claim as no return. There had been discussions with the IRS attorney during the bankruptcy which did not include the claim of unfiled returns. The debtor claimed the returns were filed with multiple years. The IRS records were conflicting, the Plan did not say the tax is discharged. The IRS did not provide the court with requested documents and the debtor did not file any affidavits with respect to the filing of the returns. The court found the tax to be excepted from discharge, but noted that had the debtor provided more evidence/affidavits, the IRS would not have met its burden of proof. (Two practice points.) 14. In re Clemente, 111 AFTR2d 598 (Bankr. D. NJ 2013) The debtor objected to the IRS proof of claim because he made payments to the Revenue Officer under the impression they would be applied against tax and not penalties. The debtor did not subpoena the Revenue Officer or produce the IRS letter which might have supported his claim. The tax due was found to be priority. 15. Meyer v. US, 111 AFTR2d 1162 (Bankr. E.D. NY 2013) The debtor was an attorney who had not filed returns for the years 1992 through 2001, and had filed late returns for 2002 through 2007. He put assets in family members name, had no personal bank account, boat, 2 mercedes, horse, etc. The court found the tax to be excepted from discharge because of willful evasion to pay. 16. ETRG Investments LLC v. Hardee, 2013 Bankr. LEXIS 949 (Bankr. E.D. TX 2013) The debtor is the managing memeber of the LLC, who embezzled monies and failed to pay payroll taxes. The court found that the debt owed to the LLC is non-dischargeable because the debt owed by the LLC to the IRS is nondischargeable, but the debt to the other members is discharged. There is no fiduciary duty to the other members. 17.In re Newton, 490 B.R. 126 (Bankr. D.C. 2013) The debtor moved to vacate his Chapter 7 discharge because a tax relief company had interacted with the IRS by filing documents that extened the time periods in Sections 523 and 507, thus making the 2004 and 2005 taxes nondischargeable. The court granted the motion to reopen the case and denied the request to vacate the discharge because the debtor has no standing to make that request and any such request has to be made prior to the discharge. (Malpractice???). -3-

18. Pitts v. US, 2013 Bankr. LEXIS 3315 (Bankr. C.D. CA 2013) The debtor is a general partner and is liable for the employment taxes of the partnership even though there is no separate assessment. III. Taxes Are Discharged 19. In re Mazzarella, 2013 Bankr. LEXIS 4855 (Bankr. N.D. Oh. 2013) An installment agreement to pay city income tax does not toll any of the bankruptcy periods because collection was not prohibited as the result of a hearing request. Fines are also discharged. th 20. Winters v. Commr., 2013 Bankr. LEXIS 5197 (BAP 6 Cir. 2013) The bankruptcy court decision that the taxes were not dischargeable is reverse and remanded for the bankruptcy court to determine if the 3 year statute of limitations for assessment of 2004 has expired. 21. In re Weiss, 2013 Bankr. LEXIS 5320 (Bankr. D. Kx. 2013) The Trust Fund taxes were discharged through the Chapter 13 Plan, even though they were not paid because the IRS filed an untimely claim, which was disallowed and the Plan provided that the Priority tax would be discharged. 22. In re Molina/Gomez, 487 B.R. 73 (Bankr. D. P.R. 2013) Puerto Rico taxing authority claimed that the taxes were priority because the taxpayer had a payment plan which they deemed to be an offer in compromise. The court did not determine whether a payment plan is an OIC, but rather decided that since the payment plan ended more than 240 days before the bankruptcy, the tax was discharged. (What about the extra 30 days?) 23.Buchanan v. Buchanan, 2013 Bankr. LEXIS 2586 (Bankr. S.D. Ind. 2013) The ex-wife wanted the court to determine that her ½ of the tax refund that had not been paid was support and non-dischargeable. It was determined to be discharged because it was not in the support section of the divorce order. 24. In re Berry, 2013 Bankr. LEXIS 3248 (Bankr. N.D. Ind. 2013) The county was unsuccessful at having $273 court fee determined to be excise tax. Therefore it was discharged. 25. US v. Steinman, 111 AFTR2d 1313 (E.D. Wisc. 2013) The IRS filed suit, unsuccessfully, to have the debtors discharge denied and tax deemed non dischargeable because of evasion to pay. The debtor was credible and convinced the court that he tried to force the sale of marital property to pay the tax. 26. Erikson v. US, 2013 Bankr. LEXIS 2049 (Bankr. E.D. Mich. 2013) The debtors adversary to determine dischargeability was dismissed on motion of the IRS because they intended to abate the tax. The court found there was no case or controversy. -4-

IV. Procedural Issues: A. Summary Judgment 27. Brown/Gonzales v. Mass. Dept. Of Revenue, 489 B.R. 1 (D. Mass. 2013) Massachusetts motion for summary judgment was denied for dischargeability of a late filed return. The court found that Beard only applies if Massachusetts assesses the tax before the return is filed by the taxpayer. 28. US v. Fletcher, 489 BR 224 (Bankr. N.D. Ok. 2013) The court denied the IRS motion for summary judgment for a determination under either Section 727 or 523 because willfulness and intent on summary judgment. B. Bankruptcy Stay 29. In re Killmer, 501 B.R. 208 (Bankr. S.D. NY 2013) The mortgage company filed a motion to reopen a bankruptcy case because a tax sale of the debtor s property occurred before the case was closed. The sale was in violation of the injunction, and was void. 30. Sanchez/Gonzales v. Treas. Puerto Rico, 2013-1 USTC 50,149 (Bankr. D. P.R. 2013) The notices requesting payment sent to taxpayers do not violate the automatic stay unless they threaten seizure. 31. In re Hollis, 2013 Bankr. LEXIS 3052 (Bankr. E.D. Wisc. 2013) The Dept. Of Agriculture was not listed as a creditor. It was not a willful violation of the stay when the IRS setoff the tax refund in favor of the DOA. The court granted stay relief. See also, Newberry v. US, 111 AFTR2d 924 (Bankr. S.D. Il. 2013). C. Certain tax claims and their treatment 32. In re Cook, 112 AFTR2d 6569 (Bankr. N>D. Ala. 2013) The Chapter 13 debtor has to include a tax refund for EIC in disposable income even though it is exempt. See also, In re Jackson, 2013 Bankr. LEXIS 2509 (Bankr. S.D. IN. 2013) (EIC tax credit is exempt but ACTC credit is not. ) 33. Adams v. IRS, 2013 Bankr. LEXIS 5286 (Bankr. N.D. GA. 2013) The IRS late claim was allowed in a Chapter 13 because they were not noticed of the bankruptcy. 34. Prisco v. IRS, 112 AFTR2d 6918 (N.D. NY 2013) The debtor had to pay the post bankruptcy interest and penalties ($370), even thought the tax was full paid in the Chapter 13 before it was converted. (Pro se). (Query? Is this cost effective for the IRS?) 35. In re Fergusen, 2013 Bankr. LEXIS 6 (Bankr. C.D. Ill. 2013) The Chapter 12 debtor can t sell estate assets to pay post bankruptcy tax. -5-

36. In re Cantelli, 111 AFTR2d 483 (Bankr. N.D. Oh. 2013) The court dismissed the Chapter 7 because it was not filed in good faith. The debtor failed to fully disclose assets, sales and loans, the bankruptcy was aimed at only the IRS, the taxpayer was a serial business owner to avoid tax and lived a luxurious lifestyle. He paid the trust fund tax, but not the income tax. 37. In re Turner, 2013 Bankr. LEXIS 313 (Bankr. E.D. Ky 2013) The debtor could not reopen his Chapter 7 to add a tax assessed after bankruptcy 38. In re Hemann, 2013 Bankr. LEXIS 1385 (Bankr. N.D. Ia. 2013) The Chapter 12 debtor dissolved the family farm partnership prior to bankruptcy and transferred the assets. He never stopped farming, just changed the operation and the entity. The income resulting from the transfer was excluded from taxable income because it was the sale of farm assets used in farming under Section 1222(a)(2)(A). 39. In re Walls, 112 AFTR2d 5063 (Bankr. N.D. Miss. 2013) The Bankruptcy court held that the Debtor had to file an adversary pleading in the Chapter 13 (not reopen the 7) to determine if the taxes had been discharged in the prior Chapter 7 because he was over the debt limit otherwise. 40. US v. Wanland, 2013 U.S. Dist. LEXIS 64598 (E.D. Ca. 2013) The court held that there is no claim preclusion because a criminal case is not within the bankruptcy court s jurisdiction. The debtors defense that the tax was discharged in bankruptcy did not work to get rid of the 35 criminal counts of tax evasion. D. Jurisdiction, etc. None in 2013 or included elsewhere E. Liens after Bankruptcy 41. US v. Kolb, 112 AFTR2d 6436 (W.D. Ark. 2013) In a suit to reduce the tax lien to judgment and foreclose, the court granted summary judgment to the IRS in the total amount for the foreclosure because the tax liens survive bankruptcy. The judgment only included the non discharged trust fund tax. 42. Brinsen v. US, 485 B.R. 890 (Bankr. N.D. Ill. 2013) The court allowed the Chapter 13 debtor to value the tax lien, which would remain until the Chapter 13 discharge. 43. Williams v. IRS, 488 B.R. 492 (Bankr. M.D. Ga. 2013) The Chapter 7 debtor cannot strip a tax lien if any part of it is secured. 44. US v. Short, 2013 U.S. Dist. LEXIS 68340 (N.D. Oh. 2013) The IRS wanted to reopen and amend a lawsuit to collect a personal judgment that had been -6-

closed for 8 years because a bankruptcy was filed. The court denied the request because the IRS could have gotten stay relief. 45. US v. Latos, 111 AFTR2d 2333 (D.RI 2013) Summary judgment was granted to the IRS to enforce liens on property for discharged tax. The court did not allow the taxpayer to dispute the tax and the debtor failed to argue statute of limitations. (Pro se). 46. US v. Burrell, 2013 U.S. D. LEXIS 124741 (E.D. CA. 2013) In a suit to reduce the tax lien to judgment, the IRS was granted summary judgment. The court found that a stipulation in the bankruptcy was not res judicata because it was not a judgment on the merits. The 10 year statute of limitations on collection was suspended during the Chapter 11 converted to a Chapter 7 plus 6 months from the discharge date. F. Fees and Follies 47. In re Lin, 499 B.R. 430 (Bankr. S.D. NY 2013) The bankruptcy was dismissed for bad faith on motion of the IRS. The debtor paid all creditors but the IRS, caused unreasonable delay, and the court did not believe that she was the victim of extortion and gave $1.7 mil cash to two women in a cab, but never reported it to the police 48. Jou v. Adalian, 500 B.R. 402 (Bankr. M.D. PA 2013) Discharge was denied at the request of a creditor because the debtor failed to file tax returns for ten years, had no records, and could not explain loss of assets. 49. Lopez v. Dept. of Treas. Puerto Rico, 492 B.R. 595 (Bankr. D. P.R. 2013) The notice sent by the taxing authority threatening to seize property was a willful violation of the the stay because the Dept. had notice of the bankruptcy. The debtor would be granted actual damages, but not punitive. 50. Murphy v. US, 2013 Bankr. LEXIS 5340 (Bankr. D. Maine 2013) The court found that the IRS had willfully violated the bankruptcy injunction. Upon reopening the bankruptcy, the court ordered the debtor to prove that a discharge was entered, and the IRS to prove that the taxes were excepted from discharge. The IRS refused to identify why the taxes were not discharged. The court granted summary judgment to the debtor. The IRS claimed that the debtor is required to file and adversary to determine dischargeability. The court found that to be wrongheaded. The court found the IRS claim of investigating and finding willful evasion as definitive to be a unilateral decision not encompassed in the bankruptcy code. The court determined that the IRS gets no such special status. A trial was scheduled for damages. (Contrast this with the cases where the IRS claims no case or controversy and dismisses the debtor s adversary!!!) 51. McDonald v. US, 112 AFTR2d 6306 (D. Nev. 2013) The court ordered the IRS to return $998 that was seized by the IRS In violation of the -7-

injunction. The debtor had to then exhaust his administrative remedies for fees before damages would be considered. 52. Steinke v. US, 112 AFTR2d 5360 (Bankr. Colo 2013) The IRS levied post bankruptcy on a 401K. The court enjoined the levy but did not consider damages because the debtor had not exhausted the administrative remedies. See also, In re Parham, 112 AFTR2d 5585 (Bankr. E.D. Tn. 2013). 53. US v. Equipment Acquisition Resources, Inc. v. US, 485 B.R. 586 (N.D. Ill. 2013) The company could not recover transfers from the IRS for payments of shareholder taxes because there was no waiver of sovereign immunity. The Court affirmed the bankruptcy court s dismissal. 54. In re Reed, 492 B.R. 261 (Bankr. E.D. TN 2013) The Bank s claim in the bankruptcy was reduced by the amount of the 1099C that was issued to the debtor. The court found that amount to be discharged when the 1099C was issued. The bank could claim any attorneys fees up to the time of the 1099C. 55. Neely v. Trippon, 2013 US Dist. LEXIS 87254 (S.D. TX. 2013) Attorney who filed malpractice suit against the accountant who miscalculated the dischargeability of the tax was sanctioned because the suit was beyond the statute of limitations, was an asset of the bankruptcy estate, and he had a reputation for vexatious behavior. 56. Winters v. IRS, 485 B.R. 375 (Bankr. M.D. Tn. 2013) The court found that the tax at issue in the pending Tax Court cases was assessable an dnot dischargeable. The erroneous refund issued to the debtor by the IRS did not belong to the debtor and therefore, does not belong to the bankruptcy estate. (Malpractice?) -8-