Daily Tax Report ®

Timing Matters: Tax Court Challenge Can’t Be Too Early, Too Late

July 2, 2020, 8:45 AM

With Tax Day looming and unemployment still high, there has been much discussion about whether taxpayers will pay what they owe on time. The difference between total taxes owed and taxes paid on time is sometimes referred to as the “tax gap.”

Three components make up the gross tax gap: non-filing, underreporting, and underpayment. Last year, the Internal Revenue Service released the tax gap estimates for the years 2011-2013. The report indicated that, by far, the most significant compliance issue is underreporting by individual taxpayers; underpayment by individual taxpayers makes up just 11% of the total.

Even so, Congress loves to view the tax gap as a possible revenue source, and in 2015 they enacted the Fixing America’s Surface Transportation (FAST) Act. As a result, in tax code Section 7345, the IRS is now required to certify to the State Department when a taxpayer owes a “seriously delinquent tax debt.” That generally refers to a taxpayer who owes the IRS more than $50,000 (adjusted for inflation) in back taxes, penalties, and interest. Following the certification, the State Department can revoke or choose to not renew the taxpayer’s passport.

If a taxpayer believes that the certification was made in error, the taxpayer may petition the U.S. Tax Court. If the court finds that there was an error, then the court can notify the State Department to correct it. That’s precisely that fact pattern that landed a new matter before the Tax Court.

On Feb. 12, 2018, the IRS assessed Vivian Ruesch $160,000 in penalties under Section 6038 for failing to file information returns for the tax years 2005-2010.

On April 16, 2018, the IRS issued Ruesch a Notice CP504, Notice of Intent to Seize (Levy) Your Property or Rights to Property. In response, the taxpayer submitted an appeal under the IRS Collection Appeals Program.

Unfortunately, because of a coding error, the IRS misclassified the CAP appeal as a request for a Collection Due Process (CDP) hearing. A CDP hearing allows the taxpayer to discuss the outstanding amounts with the IRS Independent Office of Appeals before a levy action is taken.

In September 2018, the IRS also filed a notice of federal tax lien and sent Ruesch a lien notice. In response, the taxpayer timely requested a CDP hearing. Unfortunately, owing to a computer error—possibly related to the first coding mistake—the IRS didn’t correctly record the request, or immediately offer the taxpayer a CDP hearing.

Three months later, the IRS certified Ruesch’s liability to the Secretary of State as a “seriously delinquent tax debt” under Section 7345(b). The IRS also sent her a Notice CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the State Department. Ruesch then filed a Tax Court petition challenging the certification as well as the underlying liability for the penalties.

Meanwhile, relying on the incorrect coding of Ruesch’s CAP appeal and initially believing it to be a CDP hearing, the IRS reversed its certification to the Secretary of State. When the IRS discovered the error several days later, it again certified the debt and issued a new notice to the taxpayer.

The IRS subsequently filed a motion to dismiss the case in Tax Court for lack of jurisdiction concerning the redetermination of the penalties. The IRS noted in its response that the Ruesch petition mentioned that she had requested a CDP hearing for the lien notice. The agency stated that it was investigating whether it had received the request.

The IRS subsequently discovered that the taxpayer had timely requested a CDP hearing. That request suspended collection of her tax debt so that it was no longer “seriously delinquent.” As a result, the IRS again reversed the certification.

Because the certification that the taxpayer challenged has been reversed, the IRS filed a separate motion to dismiss the case as moot.

The Tax Court is a court of limited jurisdiction to the extent authorized by Congress. The court’s jurisdiction over passport cases is defined by Section 7345(e), which makes clear that it has the authority to review a challenge to IRS certification of a taxpayer’s liabilities as “seriously delinquent.”

But there is nothing in Section 7345 that allows the Tax Court to do more, including redetermining the taxpayer’s underlying liability for the assessed penalties. And the taxpayer didn’t offer any arguments that would support broadening the court’s authority.

As a result, the only relief that the Tax Court is authorized to grant is to order the IRS “to notify the Secretary of State that such certification was erroneous.” That wasn’t necessary in this case since the IRS had already reversed the certification, no matter how circuitously, and Ruesch already received the relief that she sought. And while the court agreed that the IRS had some technology issues to work out, it didn’t find any reason to believe that the agency wouldn’t continue to act appropriately.

Of course, the Tax Court does have the authority to redetermine the accuracy of the penalties after a CDP hearing. However, a CDP hearing is currently pending for Ruesch—it’s hardly complete. That means that the court may not hear those arguments at this time.

Timing, the court seemed to stress, is everything. A case has to be “ripe” to be heard—neither too soon (in the case of the penalties) nor too late (in the case of the certification).

It’s worth noting that this is a Tax Court opinion, and not a Tax Court memo. Generally, a Tax Court memo is issued in a case that doesn’t involve a novel legal issue. In contrast, a Tax Court opinion is issued when the Tax Court believes it involves a sufficiently important legal issue or principle.

The case is Ruesch v. Comm’r, T.C., No. 6188-19P, 6/25/20.

This is a weekly column from Kelly Phillips Erb, the TaxGirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

To contact the reporter on this story: Kelly Phillips Erb at kelly.erb@taxgirl.com

To contact the editors responsible for this story: Rachael Daigle at rdaigle@bloombergindustry.com; Colleen Murphy at cmurphy@bloombergtax.com

To read more articles log in. To learn more about a subscription click here.