ALI-ABA Course of Study How To Handle a Tax Controversy at the IRS and in Court: From Administrative Audit Through Litigation

Transcription

1 157 ALI-ABA Course of Study How To Handle a Tax Controversy at the IRS and in Court: From Administrative Audit Through Litigation Sponsored with the cooperation of the ABA Section of Taxation June 24-25, 2010 San Francisco, California The Collection Process By William E. Taggart, Jr. Taggart & Hawkins, PC Oakland, California

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3 159 THE COLLECTION PROCESS 1 I. The Collection Division of the IRS has a substantial arsenal of weapons to utilize in the collection of tax liabilities notwithstanding the addition to the Internal Revenue Code ( IRC ) of significant protections for taxpayers over the past twenty years. While the broad discretion once exercised by revenue officers in the performance of their responsibilities both to collect tax and to ameliorate a taxpayer's difficulties in dealing with the system has been modified by statutory protections with respect to the mechanisms with which taxes may be collected, and with respect to interpretation of the application of such mechanisms by the Tax Court, the ultimate result for most taxpayers with unpaid delinquent liabilities has remained the same - the IRS will collect the taxes that are owed. A. Since 1988, Congress has enacted three separate Taxpayer Bills of Rights that provide taxpayers with specific rights with respect to common collection situations. The first Taxpayer Bill of Rights ("TBoR 1") was enacted as part of the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"). The second Taxpayer Bill of Rights ("TBoR 2") was enacted in July, 1996 as separate legislation. A third series of Taxpayer Bill of Rights provisions ( TBoR 3") was enacted as part of RRA 98 in July, Notwithstanding the?rights afforded a taxpayer who must deal with the Collection Division regarding an unpaid assessment, a taxpayer is well advised to proceed honestly and constructively in his/her efforts to address an unpaid tax liability. II. THE ANTI-INJUNCTION ACT. Prior to RRA 98, the Internal Revenue Code generally prohibited any judicial restraint on collection or assessment of taxes. IRC 7421(a) ("Anti-Injunction Act"). A. Notwithstanding the absolute language of IRC 7421(a), there were some circumstances in which tax collection could be enjoined: 1. A taxpayer had a legal right to stop collection on a tax assessment only where under no circumstances could the assessment be upheld, and where the taxpayer had no adequate legal remedy. See, Cool Fuel, Inc. v. Connett, 685 F.2d 309 (9th Cir. 1982). a. An injunction may be issued to restrain collection when a required 1. This outline is a revision and update of material that Karen L. Hawkins, who is now the Director, Internal Revenue Service, Office of Professional Responsibility, Washington, D.C., prepared for this Program over a period of years while she was engaged in the private practice of law. The contributions of the current author are modest in comparison to those of the original author. -1-

4 160 deficiency notice is not properly issued. IRC 6213(a). Flynn v. United States, 786 F.2d 5861 (3d Cir. 1986). b. An injunction is also permitted in the rare case where, under the most liberal view of facts and law, the assessment could not be upheld. Enochs v. Williams Packing Co., 370 U.S. 1 (1961). See, Lovell v. United States, 795 F.2d 976 (8th Cir. 1986). 2. The Tax Court has concurrent jurisdiction with the district courts to enjoin a premature assessment, levy or court proceeding instituted to collect a tax liability prematurely assessed in violation of the prohibition set forth in IRC IRC 6213(a). a. Any order entered by the Tax Court to restrain premature assessment or collection activity under IRC 6213 is treated as a decision of the Tax Court for purposes of IRC 7428(a), and is subject to the same review by a Court of Appeals as a similar order of a district court. IRC 7482(a)(3). b. The Tax Court has jurisdiction to enjoin collection action in connection with petitions filed pursuant to the elections for relief from joint and several liability available under IRC 6015(b), (c) and (f). IRC 6015(e)(1)(B). c. The Tax Court has jurisdiction pursuant to IRC 6330(e)(1) and (2) to enjoin collection initiated with respect to tax liabilities if a petition for review of a determination in a Collection Due Process ( CDP ) hearing is timely filed. III. IRS COLLECTION AUTHORITY. The IRS principal enforced collection actions are: Liens; Levies; Seizures; and Setoffs. A. Liens. The foundation of federal tax collection procedure is the federal lien that arises on the assessment of a tax liability. The federal tax lien arises by operation of law when there has been a proper assessment, notice and demand for payment, and a failure to pay. IRC The tax liability may be self-assessed, as when a taxpayer files a return showing tax due which is not paid, or may be assessed by the IRS in connection with its administrative determination that more tax is due than was shown on a return. 2. A failure by the IRS to make notice and demand is a barrier to the use of administrative collection devices (i.e., liens and levies), but such a failure does not foreclose judicial collection proceedings. -2-

5 The federal tax lien attaches to all property and rights to property, real or personal, belonging to the taxpayer. IRC The attachment is effective with respect to property or rights currently in the hands of a taxpayer as well as with respect to property acquired after the lien arises. Property subject to the federal tax lien is also subject to tracing. State law determines whether taxpayer has property or rights to property for purposes of lien attachment. Aquilano v. United States, 363 U.S. 509 (1960). a. A tax lien is not perfected against certain third parties unless a Notice of Federal Tax Lien ( NFTL ) is recorded or filed. State law dictates where, to be effective, a federal tax lien must be filed or recorded. IRC 6323(f). (1) This rule applies to income tax liens, but not to estate tax liens. Estate tax liens need not be recorded anywhere to establish priority over third parties. See, IRC b. A lien is released by passage of time - generally 10 years and 30 days after assessment of the tax. The IRS may refile a NFTL to maintain priority over third parties, but only to establish notice and priority. Refiling has no effect on the ten year administrative collection statute. (1) The refiling may be done during the period which is one year before the NFTL expires. c. IRC 6323 delineates the priority a tax lien has over other competing interests - perfected and unperfected. Generally, if an interest in property is perfected before the NFTL is filed, even actual notice of the unperfected tax lien will not defeat the competing interest s priority. d. Effective January 6, 2008, the IRS began to partially redact taxpayer social security numbers in the format XXX-XX-NNNN on all federal tax lien documents filed in public records, including lien documents issued electronically. SSN s will also be partially redacted on documents issued to taxpayers and their representatives. e. Effective March 3, 2008, the Taxpayer Advocate Service has the perfunctory authority to release liens in cases not currently open in another IRS function if the account is full paid and upon substantiation of no other balances under the procedures contained in IRM Delegation Order No (Rev. 1). -3-