IRS SCHOOLS TAXPAYERS ON DUTY OF CONSISTENCY

Shirley died in October 1997. The estate filed an estate tax return and paid the tax indicated. The IRS subsequently audited Shirley’s estate and issued a notice of deficiency. After Tax Court proceedings, the court issued a stipulated decision increasing estate taxes by $215,264. This tax was never paid.

The IRS issued liens on real property in the name of the estate and a beneficiary. It also issued a Notice of Intent to Levy. On October 5, 2013, the estate submitted to the IRS via certified mail a Form 12153 Request for a Collection Due Process or Equivalent Hearing. This submission occurred about the same time as a federal government shutdown, and the IRS claimed it did not receive the submission. One of the beneficiaries then wrote a letter to the IRS and enclosed a copy of a certified mail receipt showing that the received the submission in October 2013. Based on the certified mail receipt, the IRS accepted that it received the request on October 5, 2013.

On March 10, 2015, the IRS commenced a case in federal district court against two beneficiaries and the estate to foreclose outstanding liens and obtain a money judgment for unpaid taxes, penalties and fees. A principal argument of the taxpayers was that the IRS’ suit to collect taxes was commenced 10 years and 237 days after the assessment date (the date of the Tax Court stipulated decision). Since the IRS only has ten years to collect taxes under Code §6502, the taxpayers claimed the statute of limitation on collection had expired.

The IRS claimed that it was within the 10-year statute because the limitation period was suspended for 241 days during the pendency of the collections due process hearing, as directed by Code §6330(e)(1). It asserted the tolling commenced on October 5, 2013, the date the IRS treated the request as being received.

The taxpayers responded by claiming that the request for the collections due process hearing was not initiated until May 2014, after one of them sent a letter to the IRS to prove that the IRS received the request in October 2013.

The District Court ruled against the taxpayer on a motion for summary judgment. The 5^th Circuit affirmed the ruling, based on the taxpayers’ duty of consistency. The 5^th Circuit noted: “The district court found it unfair for the taxpayers to have waved about the certified mail receipt showing that the hearing request was sent and received in October, only to reverse course and insist during this litigation that it was not so. It held the taxpayers to the duty of consistency, an estoppel doctrine developed in tax cases.”

The duty of consistency is an equitable doctrine grounded in fairness. In Herrington v. CIR, 854 F.2d 755 (5^th Cir. 1988), the appeals court held that the duty of consistency applies if three elements are met: (1) a representation or report by the taxpayer; (2) on which the Commissioner has relied; and (3) an attempt by the taxpayer after the statute of limitations has run to change the previous representation or to recharacterize the situation in such a way as to harm the Commissioner."

The court found that (1) and (2) were met when the taxpayers asserted that they filed for the due process hearing in October 2013. Item (3) was met based on the taxpayers’ arguments regarding the summary judgment motion.

The taxpayers argued that the duty of consistency applies only when a taxpayer takes inconsistent positions from one year to the next. The appeals court rejected this, noting the application of the duty in cases that only involved one tax year.

The taxpayers also argued that the duty does not apply when the inconsistency concerns a pure question of law and both the taxpayer and the IRS have equal access to the facts. The appeals court rejected this, noting both that the issue involved a question of fact (the date the hearing was requested), and that the IRS did not have equal access to the facts since the taxpayers had the certified mail receipt and so knew what they had sent and when it was received.

The case is interesting on several levels. First, it provides an illustration of a court applying the duty of consistency, which is not a regular occurrence. Second, it is interesting on a visceral level, as we witness a taxpayer, to use a cliché, being hoisted on their own petard.

United States v. Barbara L. Holmes et al, unpublished (5^th Cir. No. 16-20790); Herrington v. CIR, 854 F.2d 755 (5^th Cir. 1988);

Applicable Federal Rates - July 2017

IRS Reminds U.S. Taxpayers Living Abroad of Misc. Filing Due Dates and Filings

In News Release 2017-105, the IRS reminded U.S. taxpayers living abroad:

• The extended due date, if the taxpayer had his or her tax home and abode abroad on the original due date, is June 15. But interest on taxes runs from the original April 18 due date. The extension also applies to military personnel  abroad. When filing the return, the taxpayer must file a statement indicating which of these exceptions to the normal due date apply.
• A taxpayer must still file even if the Foreign Earned Income exclusion or the Foreign Tax credit substantially reduces or eliminates U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.
• Taxpayers abroad who can't meet the June 15 deadline can still get more time to file, but they need to ask for it. Their extension request must be filed by June 15. Automatic extensions give people until Oct. 16, 2017, to file; however, this does not extend the time to pay tax.
• One way to get an extension on Form 4868 is through the Free File link on IRS.gov. To get the extension, taxpayers must estimate their tax liability on this form and pay any amount due.
• Another option for taxpayers is to pay electronically and get an extension of time to file. IRS will automatically process an extension when taxpayers select Form 4868 and they are making a full or partial federal tax payment using Direct Pay, the Electronic Federal Tax Payment System (EFTPS) or a debit or credit card. There is no need to file a separate Form 4868 when making an electronic payment and indicating it is for an extension.
• The annual Report of Foreign Bank and Financial Accounts (FBAR) is now the same as for a federal income tax return. This means that the 2016 FBAR, Form 114, was normally required to be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 18, 2017. But FinCEN is granting filers missing the original deadline an automatic extension until Oct. 16, 2017 to file the FBAR. Specific extension requests are not required. In the past, the FBAR deadline was June 30 and no extensions were available.

News Release 2017-105

Treasury Has No Authority to Collect PTIN Fees

Since 2010, federal tax return preparers have been required to obtain a Preparer Tax Identification Number (PTIN), which they include when signing a federal tax return. A fee has been charged, both to obtain an initial PTIN and to renew each year. A portion of the fee was slated to go towards funding the mandatory Registered Tax Return Preparer regulation regime. While this regime was killed by the courts, the annual fees remain.

An opinion today was issued in the U.S. District Court for the District of Columbia that has struck down Treasury's ability to collect these fees, and to rebate the fees it has collected. It is likely that Treasury will appeal this, but barring success to Treasury, tax preparers can look forward to receiving their own special refund check from the IRS in the future.

Adam Steele v. U.S. (USDC for DC Circuit - Case No. 14-cv-1523-RCL

FAQs Are Not Legal Authority

The IRS's Small Business/Self Employed Division (SB/SE) has indicated that the IRS will add a provision to the Internal Revenue Manual at IRM 4.10.7 describing the lack of precedential value the IRS will grant to IRS FAQs.

The IRS often publishes guides and instructions for taxpayers on the IRS.gov website to assist taxpayers in compliance. These can include FAQs (Frequently Asked Questions, with related answers).

The IRM provision will provide that FAQs appearing on IRS.gov that Treasury does not publish in the Internal Revenue Bulletin are not legal authority and should not be used to sustain tax positions unless the FAQs themselves, or the IRS via press release, notice or announcement, indicate otherwise.

So in other words, the IRS is saying “here is our interpretation, but even if you follow it, we can disagree with you later.” Presumably, this is a two-edged sword for the IRS. With pronouncements like this, the IRS should likewise not be able to use a taxpayer’s failure to follow a FAQ against the taxpayer (but somehow I don’t think that is going to happen).

IRS Small Business/Self Employed Division Memo “Interim Guidance on use of Frequently Asked Questions (FAQs) and other items posted to IRS.gov” (May 18, 2017)