In an unpublished order on November 17, 2014, the Tax Court brought to an end the Collection Due Process (CDP) case of Jurata Antioco. The order grants attorney’s fees of slightly over $40,000 and decides that the IRS “may not proceed with the collection . . . as described in the Notice of Determination . . . .”
The order entered on November 17 came as a response to the third visit of this case before the Tax Court. The first time this case came to the Tax Court Ms. Antioco represented herself. She argued that the Settlement Officer in Appeals never asked her to submit a revised Form 433-A (Collection Information Statement) and that she would experience great economic hardship if she could not obtain an installment agreement. Before the case went to trial, the IRS asked that the Court remand the case because the SO’s failure to request the updated Collection Information Statement created an abuse of discretion. The Court granted the motion and remanded the case to Appeals.
On February 4, 2013, Judge Holmes issued a memorandum opinion on the case when it came back to him after the remand. Because Appeals had not followed his instructions in remanding the case, Judge Holmes was not kind in his evaluation of the work of the SO who handled the remand. In the order issued on November 17, 2014, Judge Holmes returns to his criticism of the handling of the case: “The Court has already detailed the poor conduct of the Commissioner and his agent . . . . Suffice it to say that [the SO] behaved very badly.”
This post will focus on what happened after the remand and prior to the final order with particular emphasis on the issues raised by the installment agreement (IA) Ms. Antioco appears to have received following the remand.
If you want precedent that details how not to handle a CDP case, read the February 4, 2013 memorandum opinion. Les has written before about CDP remands. Rather than harp too much on the lessons the opinion offers to those handling a remand, I want to use this post to follow the case down a side alley, or two side alleys, it visited between the time of the remand hearing and the final order closing the CDP case. Both the IRS and Ms. Antioco visited the district court with unsuccessful results. I will focus on the IRS visit because it displays the unusual and little discussed power of the IA.
Suit for Damages for Wrongful Collection
Following the Tax Court’s decision on the remand, Ms. Antioco filed suit against the IRS for wrongful collection action under IRC 7433. Picking up on the determinations made in Judge Holmes strongly worded opinion, she sought damages for the actions of the SO in reviewing her case on remand. As we have blogged before, IRC 7433 cases present significant challenges to taxpayers seeking recovery. The district court dismissed the suit largely on the ground that the SO’s actions did not constitute collection action. It viewed the review provided by the SO in the CDP process as a review of collection action rather than collection action itself. Because the SO stepped out of the ordinary mold of an Appeals employee and sought to initiate the filing of the notice of federal tax lien, I might have argued that doing so crossed over to collection action even though the IRS does not view filing the notice of federal tax lien as collection action for purposes of the innocent spouse provisions. See What is Collection Action (Oct. 2, 2013). Ms. Antioco focused on his abusive nature in the hearing and his failure to consider her arguments. These types activities seem to fall outside collection action and into review. The court made rather short work of her complaint.
Suit to Reduce Assessment to Judgment
Simultaneously, the IRS sued Ms. Antioco to reduce her liability to judgment. Suing to reduce an assessment to judgment gives the IRS the ability to collect from her long past the 10 year statute of limitations on collection and takes pressure off the need to deal with her property in the near future.
At the end of the opinion issued in the remanded case, Judge Holmes stated “We will therefore again remand the case to Appeals to consider Ms. Antioco’s proposed installment agreement, her financial information and whether special circumstances or economic hardship exists.” Ms. Antioco and the IRS entered into an installment agreement on June 13, 2013. The terms of the installment agreement state, in relevant part:
An installment agreement was established with the taxpayer, the installment agreement will be reviewed in 3 years, but no later than June 20, 2016 at which time the taxpayer will attempt to borrow the funds to full pay her outstanding income taxes. If the taxpayer is unsuccessful in securing financing to pay her tax liability, a financial analysis will be conducted to determine a new payment amount and the installment agreement will continue.
As is generally required, Ms. Antioco will be expected to make full payment of the liability within the remaining statute of limitations or the statute plus five years.
Because the existence of an IA means Ms. Antioco would pay the tax without further collection effort by the IRS, the suit seems unnecessary – more about that later – unless you consider the high percentage of defaults on IAs. See The Online Payment Agreement Program Benefits Taxpayers and the Internal Revenue Service, but More Could Be Done to Expand Its Use, TIGTA (Sept. 27, 2013) (providing that the default rate for streamlined individual installment agreements during the 2007-2012 tax years was an average of 18%). For whatever reason (and Ms. Antioco offers a reason), the IRS appears unsatisfied with an IA as the appropriate or only collection resolution to the case.
History of Installment Agreement Provision
IAs have existed for a long time but until 1988 had no statutory basis. They simply existed as an administrative remedy created by the IRS to fill a need similar to the status of audit reconsideration today. In 1988 Congress wanted to show that it could reign in the IRS and it passed legislation entitled the Taxpayer Bill of Rights (later known as TBOR I when Congress decided to franchise this moniker). In TBOR I Congress codified IAs in IRC 6159. Much of TBOR I consisted of codifying administrative practices because the IRS threw up these practices as fodder for legislation figuring that this type of legislation would have a minimal impact on tax administration.
With respect to IAs, the IRS only partially met its goal. Yes, the codification of IAs simply moved a practice from one solely covered by the Internal Revenue Manual to one now governed by the Internal Revenue Code, but codification brought new language and meant that the IRS could not change IAs to get some payment from the taxpayer even if the taxpayer could not full pay. Prior to Section 6159 revenue officers would get taxpayers to pay $25 a month on a $50,000 liability if that was all the taxpayer could pay because getting something beat getting nothing and, as college development officers would tell you, getting a small amount over time can lead to a big pay day in the end.
So, with Section 6159 an IA should occur only when it leads to full payment. Creative revenue officers got taxpayers to extend the collection statute of limitations for 20, 30, or 50 years to give taxpayers time to full pay. See Collection Statute Expiration Dates: The IRS Lacks a Plan to Resolve Taxpayer Accounts with Extensions Exceeding its Current Policy Limits, TAS (2013). This abuse led Congress to change the ability of the IRS to obtain extensions on the statute of limitations on collection. RRA 98, Pub. L. No. 105-206, § 3461(c)(2), 112 Stat. 685, 764 (1998). This led to the passage of the partial pay installment agreement – another form of offer in compromise. American Jobs Creation Act of 2004 (AJCA), Pub. L. No. 108-357, § 843(a) and (b), 118 Stat. 1600 (Oct. 22, 2004). In short, codification of IAs has had, and continues to have, consequences on the IRS collection practices it did not foresee in 1988. Queue the suit against Ms. Antioco to reduce the assessment to judgment.
Result of Suit
On July 14, 2014, the IRS filed suit against Ms. Antioco in the San Francisco Division of the Northern District of California. Suits to reduce to judgment are probably the simplest of all tax suits. The three-page complaint basically says she has an outstanding assessment and under IRC 7401 and 7402 and the IRS seeks to reduce the assessment to judgment. On July 30, 2014, Ms. Antioco filed a motion to dismiss the suit and a memorandum in support of her motion. She argues that the suit must be dismissed because she has an IA in effect and “once an IA is in effect, the government is barred from taking any collection action, and this includes commencing a proceeding in court.” The memorandum further alleges that the reason for the suit is to offset the attorney’s fees she expects to receive in the Tax Court case. This allegation provides her explanation for the filing of the suit.
Section 6331(k)(2)(C) bars the IRS from issuing a levy “during the period that such an IA for payment of such unpaid tax is in effect.” Section 6331 (k)(3)(A) provides that the IRS is barred from bringing a proceeding in court for collection while an IA is in effect. The regulation at 26 C.F.R. 301.6331-4(b)(2) provides that “the IRS will not refer a case to the Department of Justice for commencement of a proceeding in court, against a person named in an IA or proposed IA, if levy to collect the liability is prohibited.”
The memorandum also cites a few cases in support of its position. The most significant of the cases cited is United States v. Hanks, 2014 U.S. App. Lexis 11649 (11th Cir. 2014), where the issue turned on the proper termination by the IRS of an IA. The taxpayer had failed to comply with the terms of the IA but argued that the IRS did not properly terminate the IA before initiating the suit. The court found the IRS did properly terminate the IA prior to bringing suit; however, the negative implication of the holding leads to the conclusion that, had the IRS not properly terminated the IA, the court would have dismissed the suit.
The IRS and Ms. Antioco filed a joint stipulation to dismiss the suit. The judge ordered the case dismissed on September 19, 2014. Of course, neither the stipulation nor the order states that the IRS agreed that the suit violated the restrictions on referrals to the Department of Justice while a pending IA existed. It certainly appears that the IA impacted the outcome.
The case points to the silent power of an IA. The IRS enters into many IAs in a very informal manner. Frequently, they come into existence with no written document based on a phone call with someone at the Automated Collection Site (ACS). As mentioned above, taxpayers frequently fail to fulfill their obligations under the IA but it takes some time before the IRS formally terminates the IA. Because of the prohibitions on administrative and judicial collection, taxpayer’s may receive protection from collection for an extended period. Among other benefits, this period of prohibition of collection activity can benefit a taxpayer seeking to pass the time frames for bankruptcy priority periods in order to obtain a discharge of the debt.
Conclusion
Going back to the case of Ms. Antioco, she sought an IA and the IRS fought it because of the amount of equity in her property. The IRS wants taxpayers with significant equity to sell or borrow against the property with equity rather than to enter an IA. The IRS resisted IA before the CDP, after the CDP request, and after the remand of the CDP case. The IRS only entered in the IA after the opinion in the second remand. The Tax Court’s willingness to override the IRS on these facts suggests it may serve as a more favorable forum for those with equity seeking an IA or it may just demonstrate that poor case work in Appeals leads to unexpected results. Having obtained the IA she sought throughout the CDP process, Ms. Antioco not only benefited from the ability to pay her liability over a long period of time – essentially a loan from the IRS when she could not get one from banks – but she got the protection an IA brings from most collection action with the filing of the notice of federal tax lien being the notable exception.