With CDP, taxpayers have a limited avenue to make the IRS face consequences for errors it makes in the assessment and collection process. In RRA 98 Congress amended Section 6502(a) and limited the circumstances when taxpayers can extend the 10-year statute of limitations (SOL) on collections. Grauer v Commissioner illustrates how taxpayers can walk away from an agreed and assessed liability when the IRS is sloppy and fails to demonstrate that a taxpayer has validly extended the statute of limitations on collections in light of Section 6502(a).
The mistakes led in Grauer to the taxpayer escaping from a 2000 assessment of over $57,000 in taxes, penalties and interest. Because this case is so fact-specific, below I repeat many of the opinion’s findings, with some paraphrasing and omitted references to the record.
Facts
- On April 6, 2000, petitioner Grauer filed his 1998 Federal income tax return. He reported $103,495 of taxable income, a $40,637 tax liability, and a $38,577 balance due.
- IRS, on May 8, 2000, assessed a $57,698 tax liability against petitioner.
- IRS’s account transcript relating to 1998 indicates that on July 13, 2001, it received a signed return receipt relating to a notice of intent to levy.
- On October 2, 2001, the parties executed Form 900, Tax Collection Waiver, on which the 10-year period of limitation for collection was extended until “May 8, 20015” (emphasis added).
- IRS’s account transcript relating to 1998 further indicates that on October 3, 2001, petitioner Grauer entered into an installment agreement;
- On February 20, 2006, the installment agreement was terminated;
- From 2006 to 2012 respondent issued petitioner balance due notices; and
- IRS, on February 11, 2013, issued petitioner a notice of intent to levy relating to 1998.
The Key Mistakes in the Case
IRS transcript shows an earlier CDP notice from a notice of intent to levy though IRS says transcript is wrong
The opinion notes that in 2001 the transcript indicated Grauer received a notice of intent to levy. Why is that important? The right to a CDP hearing only attaches to the first notice of intent to levy. IRS told the court that its transcript on that point was wrong. The court agreed, or at least in the absence of direct evidence to the contrary, felt that the issue was unclear enough to allow the case to proceed (that is a jurisdictional issue that the IRS could not waive):
[N]o direct evidence of such a notice was produced by either party…we agree with respondent that his account transcript is inaccurate and that we have jurisdiction
Grauer claimed he did not enter into an installment agreement; this time IRS said transcript was right
Grauer said he did not enter into an installment agreement. The IRS said that he did, this time using the transcript to back its assertion. This was a key point, as in amending 6502(a) Congress limited situations to when taxpayers can extend the SOL on collection only in cases of installment agreements or levy releases after the 10-year period expires. The court here concluded that in making his affirmative defense Grauer made a prima facie case that the 2013 notice of intent to levy was issued beyond the 10-year period from assessment. At that point the IRS had the burden of producing an exception to the 10-year period, and that is where the IRS came up short because it failed to produce the installment agreement itself:
Respondent produced a waiver relating to 1998, on which the parties extended the 10-year period of limitation for collection. He did not, however, produce an installment agreement that was entered into in connection with the waiver. See sec. 6502(a)(2)(A). In fact, respondent’s only evidence that such an agreement exists is an account transcript that he concedes is inaccurate and an indecipherable and unconvincingly explained collection of numerical codes. Accordingly, we find that an installment agreement was not agreed to in connection with the waiver, and the 10-year period of limitation for collection has expired. (emphasis added).
Parting Thoughts
While the IRS was able to serve up an extension (albeit sloppily drafted with an end date in 20015), the absence of the installment agreement itself in conjunction with IRS both disavowing and relying on transcripts was what gave the taxpayer the win. While some of the IRS abuses of the late 20th century that led to RRA 98 were more theater than substance, there were many problems surrounding the IRS practice of squeezing extensions out of taxpayers entering into installment agreements. Moreover, since then, there appears to be less than careful practice when it comes to documenting entering or terminating those agreements. To that end, Keith has a good discussion of installment agreements, including the history that led to 6502(a) and often times informality at IRS when it comes to them in a post discussing the Antioco case a couple of years ago. If Grauer is representative of IRS practice, practitioners who work with taxpayers beyond the normal 10-year period on collection should be careful to put the IRS to the test to establish that it has dotted its I’s and crossed its T’s, especially when it comes to extensions surrounding installment agreements.
What about the importance of the court not allowing the IRS to rely on the transcripts? Normally, the IRS transcript serves as a business record. That is critical because the event here occurred almost two decades ago and the IRS will have great difficulty keeping paper documents of the transaction for that long.
Because the other aspects of this business record contained errors, the transcript here did not receive the deference that the Tax Court and other courts normally give to the IRS transcript as a business record. From the IRS’s perspective, it is problematic if it cannot rely on transcripts in court. Maybe this is an isolated incident but the IRS should treat this as a wake up call. The IRS must maintain high quality in its transcripts or it will start losing cases like this in a wholesale manner.