Monthly Journal of Tax Controversy Contents WHISTLEBLOWER ... · 2015, and a whopping 18.5% of the...

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Monthly Journal of Tax Controversy June 2016

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Whistleblower Rewards for Financial Crimes································· 1 Eighteen Years of CDP ······················ 21 Monthly Taxpayers Assistance Corporation Tip ································39 Tax Court Calendar ···························40 Upcoming Seminars and Events ··········41

Contents

Tax Evidence, Part I July 5 RSVP: goo.gl/zDqDCe Hackensack, NJ Tax Evidence, Part II August 2 RSVP: goo.gl/X1TnOP Hackensack, NJ Tax Court Rules of Practice & Procedure- Part I September 6 RSVP: goo.gl/LfwZOX Hackensack, NJ Tax Court Rules of Practice & Procedure- Part II October 4 RSVP: goo.gl/CU51h5 Hackensack, NJ The Ethics of Tax Practice November 1 RSVP: goo.gl/ktR6qH Hackensack, NJ

Upcoming Free Events

Few words in the English language spark as much pecuniary excitement as “reward.” A reward, after all, is basically free money one receives for doing the right thing. In the case of financial crimes, the right thing is exposing individuals and institutions who are gaming our tax and banking systems. Even without a monetary reward, exposing these wrongdo-ers benefits all taxpayers in the long run—and it just feels darn good. It’s a satisfaction like sitting in traffic and watching the jerk who just sped by you on the shoulder get pulled over by the State Police. If you think about it, the government should not have to offer re-wards; honest taxpayers should be incentiv-ized to ferret out financial crimes because those criminals are costing us all in the form of higher taxes. According to a 2013 TIME magazine article, studies have placed the “tax gap” (the difference between what is le-gally owed to the federal government versus what is collected) at $600 billion.1 That is al-most double the $343.8 billion collected for all corporate income taxes in fiscal year 2015, and a whopping 18.5% of the federal government’s fiscal year 2015 total revenue.2

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WHISTLEBLOWER REWARDS FOR FINANCIAL CRIMES: INTERNAL REVENUE CODE VS. BANK SECRECY ACT By Frank Agostino, Esq. Jeremy Klausner, Esq.*

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Put another way, if the government could collect that $600 billion tax gap, we could all pay a lot less in tax. That should be reward enough.

A. A Brief History of Whistleblower Rewards for Financial Crimes.

Notwithstanding the existing economic incentive to get everyone to pay their fair share, rewards for whistleblowers have been around a long time. Beginning in 1867, the Secretary of the Treas-ury was given authorization to pay rewards to tax whistleblowers “for detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws.” 3 The potential rewards created by this legislation are voluntary, not mandatory, and few, if any, were ever paid out. Be-tween 1867 and 1996, this reward regime continued without any substantive changes. In 1996, Congress added a provision allowing whistleblower rewards specifically for individuals who helped the government detect underpayments of tax, not just violations of the internal revenue law.4 The 1996 amendments also directed the IRS to pay rewards from the proceeds collected as a result of the whistleblowing, rather than from appropriated funds. While these changes in-creased the efficacy of what the IRS refers to as the Informants’ Rewards Program, the program still lacked publicity and suffered from inconsistent implementation, and rewards were capped at 15% of the collected tax and penalties with a maximum reward of $10 million. Whistleblowers had no right to appeal the IRS determinations.

In a June 2006 audit report titled, The Informants’ Rewards Program Needs More Centralized Management Oversight,5 the Treasury Inspector General for Tax Administration (“TIGTA”) summed up the reward program this way:

The IRS uses its Informants’ Rewards Program [“Program”] to administer the authority provided by Internal Revenue Code Section 7623 (2004) to make pay-ments to private citizens for assistance in “(1) detecting underpayments of tax, and (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws.” Rewards are paid as a percentage of the taxes, fines, and penalties collected based on the relationship of the informant’s infor-mation to the recovery. Rewards can also be paid on amounts collected prior to receipt of the information if the information leads to the denial of a claim for re-fund that otherwise would have been paid. This Program has been an effective method of identifying and collecting unpaid taxes. From Fiscal Years (FY) 2001 through 2005, over $340 million in taxes, fines, penalties, and interest were re-covered based on information obtained through the Informants’ Rewards Pro-gram, with rewards of over $27 million paid to informants. The Informants’ Re-wards Program has significantly contributed to the IRS’ efforts to enforce tax

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laws, but additional management focus could enhance the effectiveness of the Program as an enforcement tool and make the process more accommodating to informants. Our analysis of IRS data indicated that examinations initiated based on informant information were often more effective and efficient than returns ini-tiated using the IRS’ primary method for selecting returns for examination.

What TIGTA also determined was that a lack of standardized procedures and limited managerial oversight weakened the program. Of note, in 32% of the reward cases reviewed, TIGTA was “unable to determine the justification for the reward percentage awarded to the informant.”6 In 76% of rejected reward claims, TIGTA was “unable to determine the rationale for the reviewer’s decision to reject the claim.”7 Even worse news for potential whistleblowers was that an average of over 7.5 years lapsed between the filing of the initial reward claim and payment of the reward. That is a long time to wait. Given the effectiveness of the program in spite of its weaknesses, TIGTA was in favor making it “more attractive to future informants wishing to report violations of tax laws.”8

In 2006, Congress passed the Tax Relief and Health Care Act.9 In an effort to respond to TIGTA’s recommendations, Congress expanded and attempted to standardize the Informants’ Reward Program by adding section 7623(b) of the Internal Revenue Code (“IRC” or the “Code”). Section 7623(b) essentially created a second reward program that includes mandatory payments, stan-dardized reward percentages, and increased maximums. The 2006 revisions also provide unsat-isfied award recipients with appeal rights to the United States Tax Court and created the IRS Whistleblower Office. Section 7623(b) rewards are only applicable in certain cases, however. Pur-suant to IRC § 7623(b)(5), mandatory rewards are payable only if the “tax, penalties, interest, ad-ditions to tax, and additional amounts in dispute exceed $2,000,000.” In addition, if the informant provides information about an individual taxpayer, that individual’s gross income must exceed $200,000 for the period(s) at issue. Where these criteria are not met, informants can still apply for rewards under the original, voluntary system previously established in IRC § 7623(a).

In 1970, Congress also passed the Currency and Foreign Transactions Reporting Act, the legisla-tive framework of which is now commonly referred to as the Bank Secrecy Act (“BSA”). Additional anti-money laundering legislation has been enacted since 1970, including provisions in Title III of the USA PATRIOT Act of 2001. BSA is now comprised by 12 separate pieces of legislation.10 The BSA and related regulations provide for criminal penalties, civil penalties, and the forfeiture of as-sets for a number of offenses related to currency reporting, money laundering and tax evasion. Among these penalties are penalties for failure to file the Report of Foreign Bank and Financial Accounts (FBAR).11



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Congress delegated final authority to assess civil penalties for BSA violations to the United States Department of Treasury Financial Crimes Enforcement Network (FinCEN).12

The BSA also has a whistleblower reward program of its own. Under 31 U.S.C. § 5323(a), the Secretary of the Treasury “may pay a reward to an individual who provides original information which leads to a recovery of a criminal fine, civil penalty, or forfeiture, which exceeds $50,000, for a violation of” the BSA. Like the original tax reward program in IRC § 7623(a), whistleblower re-wards for BSA violations are voluntary, and their amounts are determined at the discretion of the government. BSA rewards also have the significant drawback of being capped. The government may not award more than 25% of the net amount of the fine, penalty, or forfeiture collected or $150,000, whichever is less. Finally, no award is available unless the amount collected exceeds $50,000. Penalties and fines under the BSA can be quite high, especially for failure to file FBARs, so the $150,000 cap is a significant drawback for potential informants.

B. The Interplay of Whistleblower Rewards Under the Internal Revenue Code and the Bank Secrecy Act.

Until recently, there was some question as to the interplay of the reward programs under the IRC and the BSA. A whistleblower case decided by the United States Tax Court now provides some guidance. In Whistleblower 22716-13W v. Commissioner,13 an anonymous whistleblower (“Petitioner”) filed an IRS reward application (Form 211) with respect to information provided about an individual taxpayer's failure to file FBARs. The government subsequently collected a multi-million dollar civil penalty from the taxpayer as well as a small amount of tax. Petitioner claimed entitlement to the mandatory informant’s reward under IRC § 7623(b) based upon the aggregate amount collected by the government. Assuming the amount collected was $2 million, the minimum reward Petitioner would have been entitled to was $300,000 (15% of $2 million). The government took the position that Petitioner was not entitled to any mandatory reward be-cause the civil penalty arose under the BSA, not the IRC, and thus did not constitute “tax, penal-ties, interest, additions to tax, and additional amounts in dispute” as required by IRC § 7623(b)(5)(B). Stated another way, the question facing the Tax Court was whether an FBAR civil penalty (and by extension any civil penalty arising under the BSA) constitutes an “additional amount” for purposes of ascertaining whether the $2 million threshold of IRC § 7623(b)(5)(B) has been met. The Tax Court held: (i) the term “additional amounts” as used in IRC § 7623(b)(5)(B) means the civil penalties set forth in Chapter 68, Subchapter A, of the Internal Revenue Code captioned, “Additions to the Tax and Additional Amounts,” and (ii) FBAR civil penalties are not such “additional amounts” within the meaning of IRC § 7623(b)(5)(B), because they are not assessed, collected, or paid in the same manner as taxes. In short, FBAR payments must be excluded in determining whether the $2 million “amount in dispute” requirement for the mandatory § 7623(b)



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reward has been satisfied. This result is in keeping with final regulations promulgated by the IRS with respect to reward applications:

Like section 7623, the internal revenue laws are contained in Title 26 and imple-menting guidance is issued under that title. Although the IRS may collect penal-ties for violations of Title 31, Money and Finance, and seize property under Title 18, Crimes and Criminal Procedure, those penalties and seizures do not relate to “underpayments of tax,” may be imposed independently of whether a tax under-payment occurs, and are not related to violations of the internal revenue laws un-der Title 26. Moreover, administrative actions under Title 26 and Title 31 entail separate administrative proceedings, and administrative distinctions persist even when the actions proceed at the same time. In some cases, the IRS may collect penalties for failure to file Form 114, “Report of Foreign Bank and Financial Ac-counts” (FBAR), which is an information reporting requirement under Title 31 the violation of which does not necessarily result in an underpayment of tax. As a re-sult, FBAR penalties do not constitute collected proceeds. Moreover, sections 5323(a) and 9703(a) of Title 31 provide independent authority, separate and apart from section 7623, for the payment of rewards for information relating to certain violations of Title 31 or Title 18. Finally, the terms “additions to tax” and “additional amounts” have long been used to encompass the penalties under Subchapter A of Chapter 68 of Subtitle F of the Code and they are routinely used in forms issued by the IRS pursuant to Title 26 to refer to those penalties. They do not provide any support for treating non-Title 26 amounts as collected pro-ceeds. The comments received did not change the view of Treasury and the IRS that section 7623 only authorizes awards for amounts collected under the internal revenue laws, which are contained in Title 26, the Internal Revenue Code. Treas-ury and the IRS recognize the commenters’ concern that the statute may reduce the incentive to provide information to the IRS regarding non-Title 26 violations. The language of the statute does not, however, support a broader, more-inclusive definition of collected proceeds. Treasury and the IRS instead empha-size that when the IRS collects amounts based on information related to non-Title 26 violations and also collects related proceeds under Title 26, the Title 26 col-lected proceeds may form the basis for an award under section 7623. Moreover, depending on the facts and circumstances, the non-Title 26 proceeds may form the basis for an award under a whistleblower award program other than the one authorized by section 7623.14



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Despite the IRS position that “non-Title 26 proceeds may form the basis for an award under a whistleblower award program other than the one authorized by section 7623,” the Tax Court noted that prior to 2009, the IRS Whistleblower Office did pay discretionary awards under section 7623(a) based on FBAR recoveries. The Tax Court went on to state that “nothing in this Opinion would prevent the Secretary from doing so in the future.” Thus, it appears that, at least with re-spect to FBAR penalties, whistleblowers can (and should) make a claim for reward under both the IRC and the BSA.

C. How to File Whistleblower Claims Under the IRC and BSA.

The IRS website now provides comprehensive information regarding the Informants’ Reward Pro-gram. Claims for discretionary and non-discretionary whistleblower rewards under IRC § 7623(a) and (b) must be made on IRS Form 211 and under penalty of perjury. Forms 211 should be mailed to the IRS Whistleblower Office at 1973 N. Rulon White Blvd., M/S 4110, Ogden, UT 84404. For more information on IRS whistleblower claim and how to file them, everything you need to know can be found at https://www.irs.gov/uac/whistleblower-informant-award. A copy of IRS Form 211 is attached as Appendix A.

One might think that information on how to file a whistleblower reward claim under the BSA would be as readily available as the information on the IRS website. After all TIGTA found the IRS Infor-mants’ Reward Program generally successful. According to an October 2015 report by the Gov-ernment Accountability Office (“GAO”), the IRS Program has been incredibly successful, with close to $2 billion collected from whistleblower claims from 2011-2015:15

Unfortunately FinCEN’s website is completely devoid of any information regarding reward applica-tions. In fact, no readily available public information currently exists with respect to filing a whistle-blower claim with FinCEN. Even the Code of Federal Regulations (“CFR”) section concerning BSA awards adds nothing, as it is identical to the statute itself.16 A request to FinCEN for guid-ance resulted in the following message:



7623(a) Claims 7623(b) Claims Total Total Awards 483 17 500 Total Collected Proceeds $843M $1.039B $1.882B

Total Award Amount $54M $261M $315M

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Good day Mr. Klausner,

I will forward your questions to our IRS liaison here at FinCEN to see if he or she has some additional input on this matter. That being said, while IRS has Form 211 for submitting an “Application for Award for Original Information” under sec-tion 7623 of the Internal Revenue Code, FinCEN does not have a comparable standard FinCEN form for submitting an application for awards under 31 USC § 5323. Please be on the lookout for a call or email response from our IRS liai-son, who may be able to provide further information on informants’ rewards pro-grams under 31 USC § 5323 and its processes.

Regards, FinCEN’s Resource Center

What is unclear is why the “IRS liaison” would be able to provide guidance on informants’ awards under the BSA when the IRS position and the existing case law provide for a distinct separation of reward programs. The IRS is only responsible for rewards available under IRC § 7623. What is clear, as we previously stated, is that final authority to assess civil penalties for BSA violations is delegated to FinCEN.17 C.F.R.The authority to enforce the FBAR reporting and recordkeeping re-quirements was re-delegated from FinCEN to the Commissioner of Internal Revenue by a Memo-randum of Agreement between FinCEN and the IRS. Although the IRS conducts FBAR examina-tions and assesses penalties, it would seem that all BSA whistleblower rewards, including those for FBARs, are within the purview of FinCEN. This conclusion is buttressed by the fact that the Internal Revenue Manual (“IRM”) at one time had a section referring to whistleblower awards for BSA violations, IRM 4.26.7.8.18 That section has been removed. As noted above, until 2009, the IRS did pay IRC § 7623(a) voluntary rewards for information leading to the collection of FBAR penalties. Although that practice ended, as Judge Lauber stated, there is nothing in the statute or case law preventing the IRS from paying such rewards going forward.

Some guidance can be found in proposed legislation currently under review by the House Judici-ary Committee. The proposed Holding Individuals Accountable and Deterring Money Laundering Act, H.R. 4242, seeks to add a new section to the BSA regarding whistleblower rewards, 31 U.S.C. § 5323A. Under that proposed section, which mirrors the non-discretionary reward scheme of IRC § 7623(b), FinCEN would prescribe regulations governing the application for, and determi-nation and payment of such awards. The legislation does away with the $150,000 maximum award and proposes that awards range from 10% to 30% of the penalties collected, with a mini-mum collection of $1 million triggering the non-discretionary reward. The proposed legislation also



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provides whistleblowers appeal rights for these non-discretionary rewards directly to the United States Courts of Appeals. The proposed section 5323A is reproduced in full at Appendix B. There is an interesting twist in the proposed legislation relevant to rewards for collection of FBAR penal-ties. The statute provides for rewards where penalties are recovered in any judicial or administra-tive action brought by FinCEN under the Bank Secrecy Act. Technically, this would exclude FBAR penalties because the IRS, not FinCEN, conducts FBAR examinations and assesses penalties.

However, the statute also provides rewards will be paid for penalties recovered in “related ac-tions,” which are defined to include “any judicial or administrative action based upon original infor-mation provided by a whistleblower that led to the successful enforcement of the action.” Given the language and intent of the statute, FBAR exam penalty assessments should be considered “related actions” for BSA reward purposes.

D. Practical Considerations for BSA Reward Claims.

Without any guidance or rules, how is a potential BSA whistleblower to file a reward application? The two most logical approaches are (i) submit an application to the Director of FinCEN contain-ing essentially the same information that is requested on the IRS Form 211 (Appendix A); and (ii) submit a request to the Director of FinCEN for an administrative ruling pursuant to 31 C.F.R.



Legislation Type of Reward

Minimum Government

Recovery

Amount of Award

How to Apply Appeals?

IRC § 7623(a) Discretionary None 15% of recov-ery, capped at $10M

IRS Form 211 None

IRC § 7623(b) Mandatory $2,000,000 15% to 30% of recovery, no limit

IRS Form 211 Directly to U.S. Tax Court

31 U.S.C. § 5323

Discretionary $50,000 25% of recovery or $150,000 whichever is less

Unclear Unclear but doubtful

31 U.S.C. § 5323A (Proposed)

Mandatory $1,000,000 10% to 30% Regulations to be promulgated by FinCEN

Directly to U.S. Court of Appeals

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1010.710 et seq. Although this article does focus on FBAR penalties as a basis for BSA reward applications, BSA rewards are not limited to the BSA’s FBAR requirements. Any violation of the BSA can be the basis of a reward application, including structuring and failure to file other finan-cial reporting forms, such as FinCEN Form 8300 (reports of cash over $10,000 received in trade or business), and CMIRs (reports of international transportation of currency or monetary instru-ments; FinCEN Form 105).

The BSA reward statute mirrors the discretionary rewards created by IRC § 7623(a). Both are dis-cretionary; both are capped; and both have a low (or no) minimum threshold. Thus, a practical approach to applying for a BSA reward is to send the same information to the director of FinCEN that is required on the IRS Form 211. The application itself could take any form, as long as it con-tains the necessary information and is signed under the penalty or perjury.

Alternatively, a potential whistleblower could request an administrative ruling interpreting the ap-plication of 31 U.S.C. § 5323. The C.F.R. provides “the Director, FinCEN, or his designee, either unilaterally or upon request, may issue administrative rulings interpreting the application of this chapter.”19 C.F.R.Requests for administrative rulings may be hypothetical, but rulings issued un-der this section bind FinCEN when the request describes a specifically identified actual situa-tion.20 C.F.R.Since a reward application would be a specifically identified actual situation, asking FinCEN to interpret whether an award is appropriate under the given circumstances should be a sufficient means by which to essentially create a reward application. Requests for rulings must be submitted in a specific manner:

31 C.F.R. § 1010.711 Submitting requests.

(a) Each request for an administrative ruling must be in writing and contain the following informa-tion:

(1) A complete description of the situation for which the ruling is requested, (2) A complete statement of all material facts related to the subject transaction, (3) A concise and unambiguous question to be answered, (4) A statement certifying, to the best of the requestor's knowledge and belief, that the ques-tion to be answered is not applicable to any ongoing state or Federal investigation, litigation, grand jury proceeding, or proceeding before any other governmental body involving either the requestor, any other party to the subject transaction, or any other party with whom the re-questor has an agency relationship, (5) A statement identifying any information in the request that the requestor considers to be exempt from disclosure under the Freedom of Information Act, 5 U.S.C. § 552, and the reason therefor,



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(6) If the subject situation is hypothetical, a statement justifying why the particular situation de-scribed warrants the issuance of a ruling, (7) The signature of the person making the request, or (8) If an agent makes the request, the signature of the agent and a statement certifying the authority under which the request is made.

(b) A request filed by a corporation shall be signed by a corporate officer and a request filed by a partnership shall be signed by a partner.

(c) A request may advocate a particular proposed interpretation and may set forth the legal and factual basis for that interpretation.

(d) Requests shall be addressed to: Director, Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183.

(e) The requester shall advise the Director, FinCEN, immediately in writing of any subsequent change in any material fact or statement submitted with a ruling request in conformity with para-graph (a) of this section.

FinCEN is required to advise any requester if his or her ruling request “does not conform to the requirements of §1010.711.”21 Notice of non-conformity must be in writing and describe the re-quirements that have not been met. The requester has 30 days from the date of notice to conform his or her request; otherwise, the request is treated as withdrawn.22

A related consideration is what appeal rights a whistleblower has if his or her reward application, whatever form it may take, is denied. While the proposed 31 U.S.C. § 5323A provide for appeals directly to the United States Courts of Appeals, there is no right to appeal in the current BSA whis-tleblower regime. Again, this is very similar to IRC § 7623(a). Prior to the 2006 amendments to IRC § 7623, there was no mandatory reward and no right to appeal an IRS reward determination. The 2006 amendments, which created the non-discretionary IRC § 7623(b) reward, also created a right to appeal section 7623(b) rewards to the United States Tax Court. There is still no right to appeal the discretionary rewards under section 7623(a) unless there is a viable contractual claim.23 The obvious reason for this lack of appeal rights is because the IRS is under no duty to confer a reward. The statute is completely voluntary. Since the IRS does not have to confer a re-ward at all, it cannot be an abuse of discretion not to do so (or to award less than the whistle-blower thinks is due). This same reasoning should apply to the current 31 U.S.C. § 5323. Be-cause awards under this statute are similarly voluntary, there can be no abuse of discretion, and therefore no reason for a right to appeal.



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The suggestion has been made that reward decisions made by FinCEN may be subject to review under the Administrative Procedures Act (“APA”). This is based on the strong presumption that the actions of an administrative agency are subject to judicial review where there is no other ade-quate remedy.24 Courts reviewing agency action pursuant to the APA must either (i) compel agency action that was either “unlawfully withheld or unreasonably delayed,” or (ii) find unlawful and “set aside agency action, findings, and conclusions” that are, among other things, arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.25

There are two fatal flaws to the suggestion that FinCEN reward determinations are subject to re-view under the APA. First and foremost, the APA’s waiver of sovereign immunity does not extend to claims for money damages.26 The goal of a whistleblower seeking judicial review of a voluntary reward “is to seize or attach money in the hands of the Government as compensation....”27 While the whistleblower may not be seeking the specific relief of payment, an action seeking to force FinCEN to pay an award is the same type of “substitute...relief” that the Supreme Court deter-mined falls outside of the Administrative Procedure Act’s waiver of sovereign immunity.28

Even if review of a reward determination were not a claim for money damages, there is a narrow exception to the APA for actions that are committed to agency discretion. This exception is appli-cable in instances where “‘statues are drawn in such broad terms that in a given case there is no law to apply.’”29 Indeed, the courts have enumerated various factors to be weighed in determining whether an action is committed to agency discretion by law. These factors include the existence of such broad discretionary power that it is not appropriate for judicial review.30 The BSA reward statute gives FinCEN the broadest possible discretion, i.e., not to pay a reward at all. This is but-tressed by the fact that neither 31 U.S.C. § 5323 nor the regulations (31 C.F.R. § 1010.930) have any ascertainable standards upon which to base a review, meaning there is “no law to apply.” There are no such standards, because Congress intended these rewards to be completely volun-tary and committed to the discretion of FinCEN. Thus, there is no basis for a court to compel Fin-CEN to make a reward payment, or find failure to pay a reward arbitrary or capricious. Non-reviewability can be inferred from this overall statutory scheme. As the statute now stands, Fin-CEN has the absolute and unreviewable discretion not to pay a reward at all.



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E. Considerations for Attorneys and Accountants Handling Overseas Voluntary Disclosures.

If I notice that several voluntary disclosure clients are using the same bank or return preparer, how should I proceed?

First, consider your ethical obligations to your various clients. Such obligations may include the attorney-client privilege. For example, you may only be aware that several clients are using the same bank or return preparer through confidential attorney client communications. If so, it would be unethical for you to inform one client that you have other clients using the same preparer or bank. If it is your intent to file a collective reward application for all clients using the same preparer or bank, then the careful practitioner should obtain consent from each individual client to pool in-formation for reward application purposes. Sharing this information among clients should not break attorney-client or attorney work product privileges. “The common interest privilege is an ex-ception to the general rule that disclosure of documents protected by the work product doctrine or attorney client privilege constitutes a waiver of the protection. Parties who share ‘strong common interests’ may also share privileged or protected material without waiving the privilege or protec-tion.”31 There are two obvious options. The first option is to do nothing. While perhaps not the “right thing,” it may be the practical thing from your client’s perspective. Any reward will be volun-tary, capped, and not appealable. The presumption drawn from the current climate and available information is that the IRS is not going to pay a voluntary reward based on a whistleblower’s FBAR information. It is also unlikely that FinCEN is interested in paying awards at this time. There is no standardized procedure for reward applications to FinCEN; there is no case law; and there is no readily available information on whether FinCEN has paid any rewards, and if so, how much. The most likely reason is that FinCEN receives few, if any reward applications.

The second option is to suggest your client or clients file reward applications. As discussed above, reward applications pertaining to FBAR violations should be filed with both the IRS and FinCEN. You and your client should discuss the costs involved, the potential time it will take, any exposure the client may face, and any ancillary considerations the client may have with respect to the individuals or entities about whom he or she will be informing (e.g., retaliation). This must be balanced against the low potential for recovery of an award and the maximum award the client can hope to obtain. In connection with this option, you must consider whether each client should file a separate reward application. The answer has to be no. One reward application should be filed on behalf of all clients that are providing the same information (e.g., the identity of the com-mon bank or return preparer). If multiple reward applications are filed containing the same infor-mation, each individual application cannot logically be providing original information (information the government does not have). Once the government has the information from one application,



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all subsequent reward applications add nothing new. If all applications are filed at the same time, the most logical outcome is that FinCEN will pay no reward to any applicant. If you are thinking that your clients are going to be entitled to $150,000 for each individual FBAR penalty connected with the bank or return preparer that your clients’ information leads, that result is highly unlikely.

The statute is fairly clear that the maximum payment is $150,000 for the information provided, no matter how much the government collects in penalties.

Can I avoid my FBAR penalty by turning in my return preparer or bank?

Based on the current statutes and case law, the IRS is responsible for assessing FBAR penalties, but FinCEN is responsible for reward applications under the BSA. Because the IRS does not pay FBAR rewards, it is highly unlikely that it will forego assessment of penalties in exchange for whis-tleblower information. Additionally, clients entering the Offshore Voluntary Disclosure Program (“OVDP”) are required to provide certain information to the IRS. Trying to negotiate avoidance of the FBAR penalty in exchange for providing information that is already required under the OVDP is not going to be successful. If your client is lucky enough to get a reward, he or she could cer-tainly use it to pay or defray his or her own FBAR penalty. That being said, where the IRS seeks to impose multiple penalties on the same account, turning in a return preparer or bank may con-vince the government to assess only one penalty. Although the IRS has an informal policy of one penalty per account, there is no statute that provides such protection. Penalties are conduct based, not tax loss based, and multiple penalties for failure to report the same account do not vio-late due process.

Can and should I file a reward application at the same time I go into the OVDP?

Your client can file a reward application at the same time he or she goes into the OVDP. There is no harm to the OVDP application because (i) the IRS is asking for cooperation from OVDP filers, and (ii) the completion of the reward application may assist counsel in deciding which offshore disclosure program is right for the client. From a reward standpoint, consider the fact that the in-formation your client is providing via the reward application is also required in the OVDP.32 If the information is provided in the OVDP, the government already has it, and therefore there is no original information on which to base a reward. If your client is planning on filing a reward applica-tion and taking advantage of the OVDP, he or she may want to file the reward application first.

If you are interested in the OVDP or filing a reward application under for violations of the Internal Revenue Code or the Bank Secrecy Act, Agostino & Associates has expertise in these areas. Please contact Jeremy Klausner or Frank Agostino to discuss your unique situation.



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Footnotes:

* Frank Agostino, Esq. is the principal of, and Jeremy Klausner, Esq. is an associate with, Agostino & Associates, P.C. in Hackensack, NJ.

1. Christopher Matthews, The $600 Billion the IRS Can’t Collect, TIME, Mar. 27, 2013, http://business.time.com/2013/ 03/27/the-600-billion-the-i-r-s-cant-collect/.

2. Drew Desilver, High-income Americans pay most income taxes, but enough to be ‘fair’?, PEW RES. CENTER, Apr. 16, 2016, http://www.pewresearch.org/fact-tank/2016/04/13/high-income-americans-pay-most-income-taxes-but-enough-to-be-fair/.

3. See IRC § 7623(a)(2). 4. See IRC § 7623(a)(1). 5. TREASURY INSPECTOR GEN. FOR TAX ADMIN., NO. 2006-30-092, THE INFORMANTS’ REWARDS PROGRAM NEEDS MORE

CENTRALIZED MANAGEMENT OVERSIGHT (June 2006), available at https://www.treasury.gov/tigta/auditreports/2006reports/200630092fr.pdf.

6. Id. 7. Id. 8. Id. 9. Pub. L. 109-432. 10. See, e.g. 31 U.S.C. §§ 5311-5330 and 31 C.F.R. Chapter X (formerly 31 C.F.R. Part 103). For a detailed history of

the BSA, see ABA RECOMMENDATIONS FOR BANK SECRECY ACT/ANTI-MONEY LAUNDERING REFORM, app. C, available at http://www.aba.com/Compliance/Documents/BSA-AppendixC.pdf.

11. 31 C.F.R. § 1010.350; 31 U.S.C. § 5321(a). 12. 31 C.F.R. § 1010.810. 13. 146 T.C. No. 6 (2016). 14. Awards for Information Relating to Detecting Underpayments of Tax or Violations of the Internal Revenue Laws, 79

Fed. Reg. 47245-75 (Aug. 12, 2014), https://www.federalregister.gov/articles/2014/08/12/2014-18858/awards-for-information-relating-to-detecting-underpayments-of-tax-or-violations-of-the-internal.

15. U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-16-20, IRS WHISTLEBLOWER PROGRAM: BILLIONS COLLECTED, BUT TIMELI-NESS AND COMMUNICATION CONCERNS MAY DISCOURAGE WHISTLEBLOWERS (Oct. 2015), available at http://www.gao.gov/assets/680/673440.pdf. There is currently a proposal requiring the GAO to provide a similar report on whether, and to what extent, the Treasury Department has paid whistleblower rewards for information relating to FBAR violations under the BSA. JOINT COMM. ON TAXATION, JCX-30-16, DESCRIPTION OF THE CHAIRMAN’S MARK OF THE “TAXPAYER PROTECTION ACT OF 2016,” at 9 (Apr. 18, 2016), available at https://www.jct.gov/publications.html?func=startdown&id=4896.

16. See 31 C.F.R. § 1010.930. 17. 31 C.F.R. § 1010.810. 18. Former IRM, pt. 4.26.7.8 (Jan. 1, 2003) provided:

Rewards for Informants 1. An individual who provides original information that leads to recovery of a criminal fine, civil penalty, or forfeiture

that exceeds $50,000 for a violation of the Bank Secrecy Act is eligible for a reward, 31 U.S.C. 5323 and 31 C.F.R. 103.62.

2. The reward may not exceed the lesser of $150,000 or 25% of the net amount collected. Generally officers and employees of the United States, state or local governments are not eligible to collect the reward.

19. 31 C.F.R. § 1010.710. 20. 31 C.F.R. § 1010.715. 21. 31 C.F.R. § 1010.712. 22. Id.



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23. See Dacosta v. United States, 82 Fed. Cl. 549 (Ct. Cl. 2008). Section 7623(a) has been interpreted to provide for a contractual claim for a reward only when the informant and the government negotiate and fix a specific amount as the reward; the statute itself is not money-mandating for jurisdictional purposes. Id. at 556.

24. Dunlop v. Bachowski, 421 U.S. 560, 567 (1975); 5 U.S.C. § 704. 25. 5 U.S.C. § 706. 26. Dep’t. of Army v. Blue Fox, Inc., 525 U.S. 255, 262 (1999). 27. Id. at 255. 28. Id. at 261-63. 29. Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 410 (1971), quoting . S. Rep. No. 752, 79th Cong.,

1st Sess., 26 (1945). 30. Estate of Gardner v. Commissioner, 82 T.C. 989, 996 (1984). 31. Jones v. Tauber & Balser, PC, 503 B.R. 510, 517 (N.D. Ga. 2013). 32. An argument that the Fifth Amendment protects your client from disclosure of certain information is unavailing.

Every Court that has opined on this issue has found that the production of foreign bank account statements and financial records does not violate the Fifth Amendment privilege against self-incrimination based on the required records exception. In addition, 18 U.S.C. § 4 (Misprison of Felony) requires, “whoever, having knowledge of the actual commission of a felony cognizable by a court of the United States, conceals and does not as soon as possi-ble make known the same to some judge or other person in civil or military authority under the United States, shall be fined under this title or imprisoned not more than three years, or both.”


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Appendix A

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Appendix B

Chapter 53 of title 31, United States Code, is amended—

(1) by inserting after section 5323 the following:

“Sec. 5323A. Whistleblower incentives “(a) Definitions.—For purposes of this section:

“(1) Bank secrecy act.—The term ‘Bank Secrecy Act’ means this subchapter, section 21 of the Federal Deposit Insurance Act (12 U.S.C. 1829b), and section 123 of Public Law 91-508.

“(2) Covered judicial or administrative action.—The term ‘covered judicial or administra-tive action’ means any judicial or administrative action brought by FinCEN under the Bank Secrecy Act that results in monetary sanctions exceeding $1,000,000.

“(3) FinCEN. —The term ‘FinCEN’ means the Financial Crimes Enforcement Network. “(4) Monetary sanctions.—The term ‘monetary sanctions’, when used with respect to any

judicial or administrative action, means— “(A) any monies, including penalties, disgorgement, and interest, ordered to be

paid; and “(B) any monies deposited into a disgorgement fund as a result of such action or

any settlement of such action. “(5) Original information.—The term ‘original information’ means information that—

“(A) is derived from the independent knowledge or analysis of a whistleblower; “(B) is not known to FinCEN from any other source, unless the whistleblower is

the original source of the information; and “(C) is not exclusively derived from an allegation made in a judicial or administra-

tive hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information. “(6) Related action.— The term ‘related action’, when used with respect to any judicial or

administrative action brought by FinCEN, means any judicial or administrative action that is based upon original information provided by a whistleblower that led to the successful en-forcement of the action.

“(7) Whistleblower.—The term ‘whistleblower’ means any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of laws en-forced by FinCEN, in a manner established, by rule or regulation, by FinCEN.


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“(b) Awards.— “(1) In general.— In any covered judicial or administrative action, or related action, Fin-

CEN, under regulations it prescribes and subject to subsection (c), shall pay an award or awards to 1 or more whistleblowers who voluntarily provided original information to FinCEN that led to the successful enforcement of the covered judicial or administrative action, or re-lated action, in an aggregate amount equal to—

“(A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and

“(B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.

“(2) Source of awards. —For the purposes of paying any award under paragraph (1) there are authorized to be appropriated such sums as may be necessary, and the Secretary may also use funds from the Department of the Treasury Forfeiture Fund and the Depart-ment of Justice Assets Forfeiture Fund. “(c) Determination of Amount of Award; Denial of Award.—

“(1) Determination of amount of award.— “(A) Discretion.—The determination of the amount of an award made under subsec-

tion (b) shall be in the discretion of FinCEN. “(B) Criteria.— In responding to a disclosure and determining the amount of an award

made, FinCEN shall meet with the whistleblower to discuss evidence disclosed and rebuttals to the disclosure, and—

“(i) shall take into consideration— “(I) the significance of the information provided by the whistleblower to the success of the covered judicial or administrative action; “(II) the degree of assistance provided by the whistleblower and any legal rep-resentative of the whistleblower in a covered judicial or administrative action; “(III) the mission of FinCEN in deterring violations of the law by making awards to whistleblowers who provide information that lead to the successful enforce-ment of such laws; and “(IV) such additional relevant factors as FinCEN may establish by rule or regu-lation; and

“(ii) shall not take into consideration the balance of any fund described under sec-tion 5323(d).

“(2) Denial of award. —No award under subsection (b) shall be made—



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“(A) to any whistleblower who is, or was at the time the whistleblower acquired the origi-nal information submitted to FinCEN, a member, officer, or employee of—

“(i) an appropriate regulatory agency; “(ii) the Department of Justice; “(iii) a self-regulatory organization; or “(iv) a law enforcement organization;

“(B) to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under this section;

“(C) to any whistleblower who gains the information through the performance of an audit of financial statements required under the Bank Secrecy Act and for whom such submission would be contrary to its requirements; or

“(D) to any whistleblower who fails to submit information to FinCEN in such form as Fin-CEN may, by rule, require. “(3) Statement of reasons.— For any decision granting or denying an award, FinCEN shall

provide to the whistleblower a statement of reasons that includes findings of fact and conclu-sions of law for all material issues.

“(d) Representation.— “(1) Permitted representation.—Any whistleblower who makes a claim for an award under

subsection (b) may be represented by counsel. “(2) Required representation.—

“(A) In general.—Any whistleblower who anonymously makes a claim for an award under subsection (b) shall be represented by counsel if the whistleblower anonymously submits the information upon which the claim is based.

“(B) Disclosure of identity.—Prior to the payment of an award, a whistleblower shall dis-close their identity and provide such other information as FinCEN may require, directly or through counsel for the whistleblower. “(e) Appeals.—Any determination made under this section, including whether, to whom, or in

what amount to make awards, shall be in the discretion of FinCEN. Any such determination, ex-cept the determination of the amount of an award if the award was made in accordance with sub-section (b), may be appealed to the appropriate court of appeals of the United States not more than 30 days after the determination is issued by FinCEN. The court shall review the determina-tion made by FinCEN in accordance with section 706 of title 5.”; and

(2) in the table of contents for such chapter, by inserting after the item relating to section 5323 the following new item:

“5323A. Whistleblower incentives.”


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EIGHTEEN YEARS OF CDP: PROTECTING TAXPAYERS’ RIGHTS IN COLLECTION DUE PROCESS HEARINGS & SEIZURE ACTIONS

The Internal Revenue Service Restructuring and Reform Act of 1998 (“RRA 98”)1 will celebrate its 18th anniversary this July. This seminal piece of legislation is significant for many reasons, per-haps the most notable of which is its grant to taxpayers of administrative and judicial collection due process (“CDP”) rights in connection with enforced collection action by the Internal Revenue Service (“IRS”).2 Since, as Chief Justice John Marshall famously observed, “the power to tax in-volves the power to destroy,”3 these procedural due process safeguards were an important addi-tion to the Internal Revenue Code (“I.R.C.” or the “Code”).

In its relatively short 18-year history, CDP has had (and continues to have) a lasting impact on tax litigation. The National Taxpayer Advocate cited CDP cases as among the top five most litigated issues in federal courts from 2010 through 2015. But the frequency with which CDP cases are litigated may be even more far-reaching — anecdotal evidence suggests that CDP cases account for more than one-third of all of the nation’s tax litigation.4 The prevalence of CDP cases in litiga-tion is partially attributable to the United States’ efforts to close the $458 billion tax gap, which can be defined as the difference between the amount of taxes owed and the amount of taxes that is not paid voluntarily and on time.5 But, as this article explains, the prevalence of CDP litigation is also attributable to fundamental misunderstandings about how CDP hearings work.

This article explores common misconceptions about administrative and judicial CDP rights, and it provides strategies to more effectively represent clients in these cases. This article first provides an overview of the IRS’s authority to collect taxes and the taxpayers’ rights in response to those collection actions. Second, this article explains how officers in the IRS Office of Appeals (“Appeals”) are failing to property balance the IRS’s proposed collection action against taxpayers’ legitimate concerns that the collection action be no more intrusive than necessary. Third, this arti-cle discusses strategies practitioners can use to have CDP cases remanded from the Tax Court to Appeals to avoid the costs associated with litigation. Then, this article discusses how seizures and sales of taxpayers’ assets can sometimes inadvertently deny taxpayers their rights under CDP procedures. In this regard, this article also discusses strategies taxpayers can use to chal-lenge the propriety of such seizures and sales.

I. Overview of the IRS’s Available Collection Devices and Taxpayers’ CDP Rights

A. Overview of Collection Devices Available Under the Code

I.R.C. § 6301 authorizes the IRS to collect taxes imposed by the internal revenue laws. To further that objective, Congress provided that the IRS may effect the collection of taxes by liens, levies,


By Frank Agostino, Esq. Patrick Binakis, Esq.*

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and seizures, in addition to other methods. As to liens, I.R.C. § 6321 creates a lien in favor of the United States on all property and property rights of a taxpayer liable for federal tax who neglects or refuses to pay the tax after the IRS’s notice and demand for payment. The lien arises at the time an assessment is made and generally continues until the assessed amount is satisfied or unenforceable by lapse of time.6 As to levies, I.R.C. § 6331(a) authorizes the IRS to levy upon all property or rights to property of any taxpayer liable for any tax who neglects or refuses to pay that liability within ten days after notice and demand for payment was made. As to seizures, in any case in which the IRS may levy upon property or rights to property, I.R.C. § 6331(b) authorizes the IRS to seize and sell such property or rights to property (whether real, personal, tangible, or intangible). As detailed immediately below, there are numerous limitations to the IRS’s power to collect taxes by lien or levy, many of which were added by the CDP provisions of the RRA 98. The IRS’s ability to seize property is also limited by a number of Code and Internal Revenue Man-ual (“I.R.M.”) provisions, but is generally outside CDP, because the IRS has not proposed a spe-cific collection action. In view of this bifurcated approach, we discuss the IRS’s limitations when it comes to seizures more fully infra Section IV.

B. Overview of Taxpayers’ CDP Rights

Before the IRS can pursue collection by lien or levy, the IRS must first notify the affected taxpayer in writing of his or her right to a hearing under I.R.C. § 6330 with an impartial settlement officer in Appeals.7 As applied to liens and levies, these notices have historically taken the form of a Notice of Federal Tax Lien and Your Right to a Hearing Under I.R.C. 6320, or a Notice of Intent to Levy and Notice of Your Right to a Hearing.8 However, the Service has more recently begun to issue automated final notices (i.e., a Notice LT11, Notice of Intent to Levy) which, according to its terms, confer upon taxpayers CDP rights under I.R.C. § 6330.9 Taxpayers who receive Notice LT11 should file Form 12153 in response to the notice so as to preserve their CDP rights.

As to the procedure, a taxpayer requests a CDP hearing under I.R.C. § 6330 by filing with the as-signed revenue officer (or if no revenue officer is assigned to the Internal Revenue Service Center issuing the final notice) a Form 12153, Request for a Collection Due Process or Equivalent Hear-ing. The filing of the Form 12153 is the mechanism by which a CDP case can be transferred from the IRS Collection Division to Appeals, and in turn, the only means by which a taxpayer can ob-tain judicial review of Appeals’ determination. Where a hearing is requested in response to the filing of a final CDP notice, the revenue officer or Service Center will forward the Form 12153 and all supporting documents to Appeals, which will then assign the CDP hearing request to an settle-ment officer. Importantly, a taxpayer is allowed only one hearing under I.R.C. § 6330 with respect to the taxable period to which the unpaid tax specified in the final notice relates, so it is important



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that all defenses and arguments are raised in the Form 12153 or a properly filed supplement thereto.10

After a CDP hearing request is assigned to Appeals, the Appeals officer determines whether the proposed collection action may proceed. The Appeals officer’s determination in this regard is gov-erned by the standards set forth in I.R.C. § 6330.11 These standards require the assigned Appeals officer to consider appropriate spousal defenses, challenges to the appropriateness of the collec-tion action, and potential collection alternatives, such as the posting of a bond, the substitution of other assets, an installment agreement, and offer in compromise, among others.12 Following the hearing, Appeals issues a notice of determination setting forth the Appeals officer’s findings and decisions whether the proposed collection action may proceed.13 Importantly, this determination must (A) verify that the requirements of applicable law and administrative procedure have been met, (B) consider relevant issues raised by the taxpayer concerning the collection actions, and (C) consider whether the proposed collection action balances the need for efficient collection of tax with the taxpayer’s legitimate concern that the collection action be no more intrusive than neces-sary.14 The taxpayer, in turn, may petition the Tax Court for judicial review of the notice of deter-mination.15

Importantly, pursuant to I.R.C. § 6330(d)(2), Appeals retains jurisdiction over CDP cases even though a petition was filed with the Tax Court. This concurrent jurisdiction is the means by which the Tax Court, upon the taxpayer’s motion or sua sponte (on the Court’s own motion), may re-mand a case to Appeals to conduct a supplemental or new hearing under I.R.C. § 6330.

C. Common Misapplications of Collection Rules and Trend Toward Seizures

As seemingly straightforward as these rules might be, as noted, CDP litigation continues to ac-count for more than one-third of all federal tax litigation. The prevalence of CDP litigation is attrib-utable, at least in part, to misapplication of the above-noted rules by Appeals officers. The most pervasive errors we see in practice, which has also drawn the ire of the National Taxpayer Advo-cate, is a failure to properly consider whether the proposed collection action balances the need for efficient collection of tax with the taxpayer’s legitimate concern that the collection action be no more intrusive than necessary (colloquially referred to as “the balancing test”). Also in practice, we have seen revenue officers increasingly pursue seizures of taxpayers’ assets ostensibly to deny CDP rights to the taxpayers whose property is being seized. We discuss in turn how to re-solve each of these issues, in Parts II and IV of this article.



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II. “The Balancing Test”

A. Overview

Appeals’ erroneous application of the balancing test under I.R.C. § 6330(c)(3)(C) results in unnec-essary litigation and has been criticized by the National Taxpayer Advocate in recent years.16 As noted above, I.R.C. § 6330(c)(3)(C) requires the Appeals officer to consider whether the proposed collection action balances the need for the efficient collection of taxes with the taxpayer’s legiti-mate concern that any collection action be no more intrusive than necessary.17 The National Tax-payer Advocate eloquently describes the balancing test:

This balancing test is central to a CDP hearing because it instills a genuine notion of fairness into the process from the perspective of the taxpayer. The balancing test also validates the taxpayer’s right to privacy by taking into account the inva-siveness of enforcement actions and the due process rights of the taxpayer.18

In practice, however, settlement officers routinely fail to perform the balancing test, and instead recite in the notice of determination that they considered the test and concluded that the proposed collection action outweighs the taxpayers’ concerns about intrusiveness.

B. Criticisms of How the Balancing Test Is Being Administered

By way of background, the Code requires the National Taxpayer Advocate to prepare an annual report to Congress that contains a summary of at least 20 of the most serious problems encoun-tered by taxpayers.19 One of the most serious problems the National Taxpayer Advocate identifies in her 2014 Annual Report to Congress is entitled, “The IRS Needs Specific Procedures for Per-forming the Collection Due Process Balancing Test to Enhance Taxpayer Protections.”20 The Na-tional Taxpayer Advocate reported that a review by the Taxpayer Advocate Service (“TAS”) of CDP procedures and case law reveals that “the IRS Office of Appeals is not giving proper atten-tion to the balancing test, especially to legitimate concerns of taxpayers regarding the intrusive-ness of the proposed collection action.”21 Specifically, TAS found that Appeals often uses pro forma or boilerplate statements that the balancing test has been performed, yet does not cite any specific factors balanced.22 The National Taxpayer Advocate reported that “[t]hese issues contrib-ute to the appearance that Appeals is simply ‘rubber stamping’ prior determinations by the Collec-tion function.”23 Hence, the National Taxpayer Advocate concludes that “the IRS is missing oppor-tunities to improve compliance, enhance taxpayer trust and confidence, [and] relieve undue bur-den on taxpayers,” by not consistently applying the test as intended by Congress in the RRA 98.24



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These remarks are fully consistent with the authors’ experiences in CDP hearings, the effect of which is to cause taxpayers to seek judicial review by the Tax Court.

C. National Taxpayer Advocate Recommendations

The National Taxpayer Advocate proposed the following solution to Congress in order to address errors with the balancing test:

To provide the protections that Congress intended, the National Taxpayer Advo-cate recommends that the Office of Appeals, in collaboration with TAS, formulate a policy statement on the CDP balancing test that reflects congressional intent; de-velop specific factors for the application of the CDP balancing test based on an analysis of case law and legislative history for use by both Appeals and Collection; revise the I.R.M. to specifically prohibit pro forma statements that the balancing test has been performed and instead require a description of which factors were considered and how they apply in the particular taxpayer’s case; integrate any newly developed factors for the application of the CDP balancing test into the Ap-peals I.R.M. and train all Appeals Officers, Settlement Officers, and Appeals Ac-count Resolution Specialists on applying the balancing test consistently; incorpo-rate the balancing test analysis into the Collection I.R.M.; and provide necessary training to Collection employees (because if the balancing test were applied at the point of first contact, there would be less rework for TAS and Appeals).25

D. IRS Response to Recommendations and Criticisms

The Commissioner of the IRS took no corrective action to address any problem identified by TAS other than to “update ‘new hire’ training for Field Collection and Campus Collection to ensure it reflects the latest Collection I.R.M. guidance on the balancing test analysis.”26 Instead, the IRS cited numerous statistics which the IRS claims supports the conclusion that the IRS is meeting its requirements to balance collection alternatives. In response to the IRS, predictably, TAS was not thrilled, and stated that the “IRS’s refusal to adopt a policy statement underlying congressional intent and reiterating the focus of the balancing test on whether the collection action is more intru-sive than necessary demonstrates a lack of commitment to taxpayer rights.”27

E. Case Law

Recent case law confirms that Appeals is often not properly applying the balancing test under I.R.C. § 6330(c)(3)(C).28 For example, in Budish v. Commissioner,29 a sculptor had self-reported his income, but did not pay the tax. He received a notice of intent to levy and ultimately negotiated



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an installment agreement with the settlement officer during his CDP hearing. The Appeals officer insisted on filing a Notice of Federal Tax Lien as a condition to the installment agreement.30 The taxpayer explained that filing the Notice of Federal Tax Lien would destroy his business because suppliers would then insist on payment upfront rather than extending credit to him (as selling sup-plies to him on credit was typical in his business).31 The taxpayer could not agree to the filing of a Notice of Federal Tax Lien, so the settlement officer denied the installment agreement and sus-tained the proposed levy.32 The Tax Court remanded the case to Appeals, finding that the settle-ment officer had failed to properly perform the balancing test, and her assertion that she had per-formed the balancing test was “surplusage or boilerplate, included merely for the sake of com-pleteness.”33

Similarly, in Lofgren Trucking Serv., Inc. v. United States,34 the Appeals erroneously determined that 2006 first quarter employment taxes were “new” tax debts incurred while an installment agreement request was pending. In fact, the taxpayer had submitted its payment plan during the second quarter of 2006 and had paid its 2006 second quarter employment taxes. Moreover, the settlement officer in Lofgren summarily denied the taxpayer’s requested installment agreement solely based on his mistaken belief that accepting the plan was impossible under the Code and the regulations because of the debt incurred for the first quarter of 2006.35 The federal district Court for the District of Minnesota noted that the settlement officer did not cite any balancing fac-tors and did not provide the basis for the summary rejection of the installment agreement that had been proposed.36 As a result, the Court held that the taxpayer had been deprived of its right to a fair hearing under I.R.C. § 6330(b) and remanded the case to the Office of Appeals.37

The above cases demonstrate that courts are willing to remand cases to Appeals, especially when there is no analysis provided by the settlement officer as to the balancing test, though it does not happen often. Certainly, these cases support the observations of the National Taxpayer Advocate and call into doubt the IRS’s claims that the IRS is meeting its obligations under I.R.C. § 6330(c)(3)(C).

III. Remand of CDP Cases to Appeals and Post-CDP Hearing Review

Another issue with which the IRS and the courts appear to struggle is when a CDP case can (or should be) remanded to Appeals. Tax Court jurisdiction in CDP cases is generally limited to a re-view of a CDP “determinations” as memorialized in a notice of determination that is based upon the administrative CDP hearing.38 The Tax Court has observed that, “[a]bsent limiting statutes, courts generally have the authority to issue such orders as they deem necessary and prudent to achieve the orderly and expeditious disposition of cases.”39 The Tax Court has also recognized its authority to remand a case to Appeals when doing so is “necessary or productive.”40 Most typi-



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cally, changed circumstances warranting a remand to Appeals constitute a change in financial circumstances that affects the outcome of the pending litigation. For example, in Tucker v. Com-missioner,41 when the unemployed taxpayer’s accounts were put into currently not collectible (“CNC”) status as a result of a CDP determination, and the taxpayer later obtained a job, the Tax Court concluded that this change in circumstances warranted a remand of the case to Appeals. The Tax Court concluded that the taxpayer’s receipt of wages or salary as a collection source would be a change in the taxpayer’s circumstances that could trigger Appeals’ retained jurisdic-tion under I.R.C. § 6330(d)(2).42

The Tax Court has also remanded CDP cases to Appeals when the record is incomplete or there has been some other failing in the process that essentially amounts to a determination that Ap-peals abused its discretion. For example, in Dickes v. Commissioner,43 the Tax Court remanded the case to Appeals when the settlement officer left the taxpayer with the impression that he would have an opportunity to submit an offer in compromise if his request for penalty abatement was denied during the hearing. The settlement officer in Dickes subsequently never responded to the taxpayer’s penalty abatement request, and the Court held that remand was appropriate to al-low the taxpayer to submit the requested offer in compromise.44

It is sometimes advisable to file a petition with the Tax Court in response to a determination that is favorable to the taxpayer so as to invoke the Tax Court’s jurisdiction. Pursuant to I.R.C. § 6330(e) and Rule 55 of the Tax Court’s Rules of Practice and Procedure, the Tax Court retains jurisdiction over a timely filed CDP petition. Thus, if Appeals determines that it is not appropriate to pursue collection at the current time (e.g., by reporting the taxpayer’s account as CNC), that determina-tion may change over time if, for example, Collections subsequently determines that the tax-payer’s account is collectible. If the taxpayer does not challenge the original determination of CNC, then he or she may be precluded from doing so in the future because, as noted above, the taxpayer only receives one hearing with respect to a particular tax for a particular year.

If the taxpayer wants to ensure his or her right to judicial review of subsequent collection action with respect to that period, then he or she may want to file a petition with the Tax Court to invoke the Tax Court’s jurisdiction. Then, the Tax Court retains jurisdiction over that period and the tax-payer preserves his or her right to judicial review. Otherwise, upon completion of a retained juris-diction hearing, Appeals’ subsequent determination as to the period is not subject to judicial re-view by the Tax Court.45



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IV. Approvals Needed to Take Seizure Actions

A. Overview

Despite the broad protections guaranteed to taxpayers by the CDP procedures, the final notice sent by the revenue officer to the taxpayer does not disclose the actual collection action to be taken if the lien or levy action subject to the hearing under section 6320 or 6330 is sustained. Ab-sent an explanation of which of the many options available to the IRS to collect, Appeals or any settlement officer within Appeals cannot genuinely employ any balancing test.

To further elaborate: as previously mentioned, the IRS must notify a taxpayer in writing of his or her right to a hearing before a levy is made. Unfortunately, the Notice LT11, labeled “Intent to seize your property or rights to property,” does not refer to the collection action that the IRS in-tends to take. Instead, it says, “We haven’t received any payment from you for your overdue taxes. This letter is to advise you of our intent to seize your property or rights to property. You must contact us immediately.” The IRS explanation of this notice in its “Answers to Common Questions” is just as cryptic:

What happens if I don't respond to this letter or don't pay?

We can attach a levy to your wages or bank accounts up to the amount owed to the Service. We may also take enforced collection action to collect the amount including the filing of a Notice of Federal Tax Lien. A lien is a public notice to your creditors that the government has a right to your interests in your current assets and any assets you acquire after we file the lien. It can affect your ability to get credit.46

In practice, revenue officers do not determine which collection actions they will take until after Ap-peals or the Tax Court makes its determination. Without further information given at a CDP hear-ing as to how a potential collection action would adversely affect the taxpayer, a settlement officer cannot “balance the need for efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.”47 As a practice point, conse-quently, the tax professional preparing for a CDP hearing must evaluate all of the potential collec-tion actions and specifically address the hardships that could occur if they were taken, and then explain “balancing” in the context of a collection alternative, to ensure the settlement officer can conduct the proper tests. Such explanations would guard against a seizure or sale of property, the effect of which is to deny taxpayers CDP rights because, as noted above, CDP rights do not apply to such seizures and sales.48



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Some background on seizures is appropriate. As previously mentioned, pursuant to I.R.C. § 6331(b), in any case in which the IRS may levy upon property or rights to property, the IRS may also seize and sell such property or rights to property (whether real, personal, tangible, or intangible).49

I.R.C. § 6334(a) sets forth the types of property that is generally exempt from levy, including sei-zures of principal residences and tangible personal property or real property used in a trade or business of an individual taxpayer. But, pursuant to I.R.C. § 6334(e), the IRS may levy or seize a principal residence and the above-described business assets if a judge or magistrate of a federal district court approves in writing the levy or seizure or such asset.50 For purposes of seizures, a “principal residence” broadly includes any real property used by the taxpayer, the taxpayer’s spouse or former spouse, and taxpayer’s minor children as a principal residence.51

Not surprisingly, if a revenue officer determines that the IRS should take the extraordinary step of seizing a taxpayer’s principal residence or business assets, the IRS has a detailed set of approv-als that must be satisfied before the case will be referred to Tax Division of the Department of Justice (“Tax Division”) to introduce the suit. These approvals vary by the type of asset to be seized, and this article summarizes below the steps that are taken before a seizure of a tax-payer’s principal residence, certain business assets, or perishable goods may occur. In general, however, once a revenue officer secures the necessary approvals, he or she must have the IRS Area Counsel prepares a letter to the Assistant Attorney General for the Tax Division authorizing and requesting the institution of suit.52

When the Tax Division receives the authorization from the IRS Area Counsel, then the case be-comes the responsibility of the Tax Division, which makes the final decision of whether or not to institute the suit.53

B. Judicial Approval for Principal Residence Seizure

If the revenue officer determines that it is appropriate to have a taxpayer’s personal residence seized and sold, then the first step to have the case referred to the Tax Division is for the revenue officer to complete the required narrative report and application for seizure and sale.54 The narra-tive report details the result of the investigation and contains the recommendation to seize the principal residence.55 In addition to the narrative report, the revenue officer will also prepare and submit to his or her manager a suit package that contains the following items:

• Form 4477, Civil Suit Recommendation; • The narrative report • Form 2434–B, Notice of Encumbrances Against or Interests in Property Offered for

Sale;



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• Form 2433, Notice of Seizure; • Estimated minimum net sale proceeds calculation, including supporting worksheets,

memorandums, or excerpts from the IRS’s Integrated Collection System (ICS) history; • Copies of Notices of Federal Tax Lien; • Form 13719, Pre-Seizure Checklist and Approval Request; • A copy of deed to the property to be seized; • A commercial title report with an explanation of the title search results; and • Any other relevant documents, such as appraisals, L–1058 (Final Notice of Intent to

Levy), L–3174 (New Warning of Enforcement), Form 14071 (Request for Information from Lien Holder), or Form 668-A (Notice of Levy), among others.56

The completed suit package is then forward to the revenue officer’s group manager, through the IRS Advisory Division and through appropriate levels of management, including the Area Direc-tor.57 After approval of the suit recommendation, then the IRS Advisory Division will submit the case to Area Counsel for referral to the Tax Division.58 If the Tax Division agrees to institute the case, then the assigned attorney initiates the proceeding for judicial approval of the seizure on the principal residence by filing with the appropriate federal district court a petition demonstrating that the underlying tax liability has not been satisfied, that no reasonable alternative for collection of the taxpayer’s debt exists, and that the requirements of any applicable law or administrative pro-cedure relevant to the seizure and sale have been met.59 The taxpayer will receive a hearing to rebut the government’s prima facie case if the taxpayer files an objection within the time period required by the court. The objection must raise a genuine issue of material fact demonstrating that the underlying tax liability has been satisfied, that the taxpayer has other assets from which the liability can be satisfied, or that the IRS did not follow the applicable laws or procedures pertaining to the levy.60 The taxpayer is not permitted to challenge the merits underlying the tax liability in the proceeding.61

C. Seizures Requiring Area Director Approval

Area Director approval is required for certain seizures unless the collection of the tax is in jeop-ardy.62 One of these types of seizures include personal residences, a term which encompasses property owned by the taxpayer and used by others as a principal residence.63 It is important to distinguish this type of seizure from situations involving the seizure of a property used as a princi-pal residence by the taxpayer, taxpayer’s spouse or former spouse, or taxpayer’s minor children, which requires the judicial approval described.64



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D. Judicial Approval for the Sale of Tangible Personal Property or Real Property

Used in the Trade or Business of an Individual Taxpayer

Area Director approval is also required for the seizure of tangible personal property or real prop-erty used in the trade or business of an individual taxpayer unless the collection of the tax is in jeopardy.65 The decision of whether or not to approve the seizure of this type of asset is based on the use of the asset, not the type of liability for which the seizure is being conducted.66 The I.R.M. provides examples of tangible personal property that may be subject to seizure and sale, includ-ing the contents of register, a liquor license, and a vehicle used as transportation by a self-employed real estate agent.67

E. Perishable Goods

If the IRS determines that any property seized is liable to perish or become greatly reduced in value, or if the property cannot be kept without great expense, then the IRS shall appraise the value of the property and return it to the owner. In exchange, the owner will pay the IRS an amount equal the appraised value, or give bond according to specifications that the IRS deems appropriate.68 If the owner of the property does not pay such amount or furnish such bond, then the IRS may make public sale of the property in accordance with applicable regulations.69 Upon identification of a potential perishable goods sale, the revenue officer’s group manager will sched-ule a pre-seizure, four-way conference with the revenue officer, Property and Liquidation Special-ist (“PALS”), and PALS group manager to begin development of a perishable goods sale plan.70

The I.R.M. states:

Responsibility for all perishable goods sale plans, final criteria determination, and sale responsibilities rests with the PALS function. The PALS will prepare and se-cure PALS group manager concurrence for a Perishable Goods Criteria and Sale Plan memorandum for every perishable goods case. ... The memorandum will in-clude:

• Identification of the appropriate criteria and an analysis that demonstrates the need to conduct the sale under IRC section 6336

• Asset valuation to include appraisal and inventory list • Analysis of estimated expenses for both moving the assets to another location

and storing on site for an IRC section 6335 sale • Analysis of estimated expenses and proceeds under an IRC section 6336 sale • A marketing plan including of both pre- and post- seizure marketing • Information regarding the need for a Consent or Writ of Entry • An estimate of the time frame from the point of seizure to sale



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• Resources required to conduct the sale (e.g., personnel, supplies, security) • Group manager concurrence signature line.71

The below chart is a Seizure Approval Reference Table from the I.R.M. which provides a good summary of the type of asset and the approval authority needed for its seizure:72



Asset Type Approval Authority: JA-Judicial

AD-Area Director TM-Territory Mgr.

JA AD TM

REAL PROPERTY: Principal Residence – Primary dwelling of the taxpayer, the taxpayer’s spouse, former spouse and/or the tax-payer’s minor children. I.R.M., pt. 5.10.2.3 & I.R.C. § 6334(e)(1)

X X

Personal Residence – A principal residence of someone other than the taxpayer, the taxpayer’s spouse, former spouse and/or minor children. I.R.M., pt. 5.10.2.4 & I.R.M., pt. 5.17.3.4.5(3)

X

Real property used in the trade or business of an individ-ual taxpayer. I.R.M., pt. 5.10.2.5 & I.R.C. § 6334(e)(2) X

Real Property belonging to a religious organization. If the property is being used as a residence, use the appropriate guidance listed above. Area Counsel approval must be obtained before seeking other appropriate approvals when seizing property belonging to a religious organiza-tion. I.R.M., pt. 5.10.1.12.3.

X

Mobile Home determined to be real property: I.R.M., pt. 5.10.1.12.1, Mobile Home

If used as principal residence, see principal residence approval level. If

used as personal residence, see per-sonal residence approval level. If

used as a business asset, see real property used in the trade or busi-

ness for approval level. If not in any of the categories mentioned, follow real property not listed in the excep-

tions above.

Real Property not listed in the exceptions above X

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JA AD TM

PERSONAL PROPERTY:

Contents of a residence. A residence is the principal resi-dence of the taxpayer or other person. X

Tangible personal property used in the trade of business of an individual taxpayer. I.R.M., pt. 5.10.2.5 & I.R.C. § 6334(e)(2)

X

Perishable goods – Seizure and expedited sale of prop-erty under I.R.C. § 6336. I.R.M., pt. 5.10.1.7 X

Personal Property belonging to a religious organization. Area Counsel approval must be obtained before seeking other appropriate approvals when seizing property be-longing to a religious organization. I.R.M., pt. 5.10.1.12.3

X

Firearms of substantial value may be seized if they are included as a business asset (sports equipment outlet, hardware store, gun shop, etc). Prior to the seizure the revenue officer must contact PALS who will contact Area Counsel and ATF. I.R.M., pt. 5.10.1.12.4

X

Controlled substances or drug paraphernalia. I.R.M., pt. 5.10.1.12.5 X

Material considered obscene or pornographic – Area Counsel must be contacted before such material is seized. I.R.M., pt. 5.10.1.12.6

X

Criminal Enterprises (assets of narcotics related taxpay-ers in connection with jeopardy/termination assessments). I.R.M., pt. 5.10.1.12.7

X

Property with environmental considerations. I.R.M., pt. 5.10.1.12.8 X

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V. Conclusion

The procedural due process protections guaranteed by CDP and the RRA 98 are alive and well, but the courts, the IRS, and Appeals must do more. The IRS should update relevant I.R.M. provi-sions to provide guidance to settlement officers and revenue officers as to the appropriate factors to consider under the balancing test of I.R.C. § 6330(c)(3)(C). The courts, to the extent the IRS is unwilling to do so on its own, should develop factors to consider in determining whether a settle-ment officer abused his or her discretion in allowing a proposed collection action to proceed. Practitioners must vigilantly protect their clients’ interests administratively, judicially, and espe-cially when the seizure and sale of a taxpayer’s assets would create hardship that can be amelio-rated by proper application of the balancing test, by addressing the effects of potential collection actions at the earliest possible opportunity to do so.





JA AD TM

Cleared Contractor Facility. I.R.M., pt. 5.10.1.12.9 X

Mobile Home determined to be personal property: I.R.M., pt. 5.10.1.12.1, Personal Property

If used as principal residence, see principal residence approval level. If

used as personal residence, see personal residence approval level. If used as a business asset, see real property used in the trade or busi-

ness for approval level. If not in any of the categories mentioned, follow personal property not listed in the

exceptions above.

Vehicles: I.R.M., pt. 5.10.2.5 & I.R.C. § 6334(e)(2)

Territory manager unless the vehicle is used in the trade of business of an individual taxpayer, see tangible per-

sonal property used in the trade of business of an individual taxpayer.

Personal Property not listed in the exceptions above X

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Footnotes:

* Frank Agostino, Esq. is the principal of, and Patrick Binakis, Esq. is an associate with, Agostino & Asso-ciates, P.C. in Hackensack, NJ.

1. Pub. L. No. 105-206, § 3401, 112 Stat. 685, 746 (1998). 2. The National Taxpayer Advocate aptly summarizes the importance of these protections in her 2016

Objectives Report to Congress: “Collection Due Process (CDP) hearings are one of the most significant taxpayer protections in the Internal Revenue Code because they provide the taxpayer with an opportu-nity to obtain administrative appellate and judicial review of the first IRS lien filing or first proposed levy action with respect to any tax.” 2 NAT’L TAXPAYER ADVOCATE, 2016 OBJECTIVES REPORT TO CONGRESS 6 (2016).

3. McCulloch v. Maryland, 17 U.S. 316, 431 (1819). 4. See Carlton Smith, Unpublished CDP Orders Dwarf Post-trial Bench Opinions in Uncounted Tax Court

Rulings, PROCEDURALLY TAXING (Jan. 29, 2015), http://www.procedurallytaxing.com/unpublished-cdp-orders-dwarf-post-trial-bench-opinions-in-uncounted-tax-court-rulings/. Mr. Smith performed a search of the Orders the United States Tax Court issued between January 1 and December 31, 2014, in which the words “summary judgment” and “remand” or section “6320” or “6330” appeared. His search pro-duced approximately 300 Orders during that one-year period, which suggests that CDP is litigated far more frequently than the National Taxpayer Advocate’s Annual Report to Congress suggests. To be sure, with 300 cases being resolved through a dispositive motion, plus the 76 reported decisions ac-counted for in the Annual Report, this means that the Tax Court disposed of CDP cases in an appeal-able decision in 376 cases, which is nearly 2.5 times the reportedly most litigated issue, accuracy-related penalties, which accounted for 153 of the 731 cases decided during 2015. See 1 NAT’L TAX-PAYER ADVOCATE, 2014 ANNUAL REPORT TO CONGRESS 477 (2014). As to the one-third statistic cited in the article, adding the 300 CDP cases identified by Mr. Smith to the 731 opinions decided by the courts brings the total number of cases decided to 1,031, and 376 CDP cases divided by the 1,031 total cases decided is approximately 36.47%.

5. The $458 billion tax gap cited is the annual average for the 2008 through 2010 tax years. See IRS, Tax Gap Estimates for Tax Years 2008-2010 (Apr. 2016), available at https://www.irs.gov/PUP/newsroom/tax%20gap%20estimates%20for%202008%20through%202010.pdf.

6. I.R.C. § 6322. 7. See I.R.C. §§ 6320(a) and (b) (relating to liens); 6330(a) and (b) (relating to levies). Note there is a sub-

tle distinction between “Appeals officers” and lower-ranking “settlement officers” within Appeals. Settle-ment officers generally handle CDP conferences and issues relating to collections, whereas Appeals officers handle determinations of tax liability as specifically authorized by statute, see, e.g., I.R.C. § 6330(c)(3). The IRS practice of using non-statutorily authorized settlement officers to sometimes han-dle matters that the Code might have designated to an Appeals officer is permitted per Tucker v. Com-missioner, 676 F.3d 1129 (D.C. Cir. 2012) cert denied 133 S.Ct. 646 (2012), which does not consider Appeals employees to be possess the same authority and discretion of “inferior officers” as governed by the Appointments clause of the Constitution.

8. The IRS historically has sent three notices advising the taxpayer of a balance due and demanding pay-ment – a first notice, a second notice, and a final notice. However, in more recent years, the IRS has begun to issue only two notices – a first notice and a final notice. The taxpayer may request a hearing



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in response to any of the notices, though the type of hearing offered will depend upon the underlying notice. In response to a final notice, the taxpayer is offered a CDP hearing at which all judicial appeals rights under I.R.C. § 6330 are available. In response to a notice other than a final notice, the IRS may offer the taxpayer a hearing under the Collection Appeals Program (known as a “CAP hearing”). See I.R.M., pt. 8.24.1.1 (Dec. 17, 2013). Pursuant to I.R.M., pt. 8.24.1.1.1 (Dec. 2, 2014), “[t]axpayers who file a CAP request may also be entitled to, and file for, a Collection Due Process, Equivalent, or Re-tained Jurisdiction hearing, if a CDP notice [(i.e., a final notice)] was issued.” This rule is consistent with I.R.C. § 6330(b)(2), which provides that taxpayers shall be entitled to only one hearing under I.R.C. § 6330 with respect to the taxable period to which the unpaid tax for which the notice of demand re-lates.

9. Page 2 of the Notice LT11, Notice of Intent to Levy, informs the taxpayer of his or her right to a CDP hearing. The National Taxpayer Advocate and private practitioners have been critical of the Notice LT11, questioning whether the Notice LT11 provides taxpayers with adequate notice of their right to a hearing under I.R.C. § 6330. Accord Nina Olson, National Taxpayer Advocate, Remarks at the Meeting of the Section of Taxation of the American Bar Association, Most Litigated Issues in Tax Court Cases (May 6, 2016).

10. I.R.C. § 6330(b)(2). 11. See I.R.C. § 6330(c) (as applies to levies, and is also made applicable to liens vis-à-vis I.R.C. § 6320(b)

(4)). 12. See id. Importantly, a taxpayer is precluded from challenging the existence or amount of the underlying

tax liability unless he or she did not receive a notice of deficiency for the tax liability or was not other-wise provided an opportunity to dispute the tax liability. See I.R.C. § 6330(c)(2)(B). The Tax Court and the IRS take the position that the “did not otherwise have an opportunity” language in I.R.C. § 6330(c)(2)(B) refers to a prior administrative opportunity to dispute the liability that the IRS seeks to collect. See Lewis v. Commissioner, 128 T.C. 48, 55-61 (2007); see also Treas. Reg. § 301.6320-1(e)(3), Q&A-E2. This issue is now on appeal to the U.S. Court of Appeals for the Seventh Circuit, see Our Country Home Enters. v. Commissioner, No. 7688-14L (T.C. June 6, 2015) (order and decision entered granting IRS’s motion for summary judgment), appeal docketed, No. 16-279 (7th Cir. Feb. 8, 2016).

13. Treas. Reg. §§ 301.6320-1(e)(3), Q&A-E8, 301.6330-1(e)(3), Q&A-E8. 14. I.R.C. § 6330(c)(3). 15. I.R.C. § 6330(d)(1). 16. See, e.g., 2 NAT’L TAXPAYER ADVOCATE, 2016 OBJECTIVES REPORT TO CONGRESS 5, 66-68 (2016)

(noting that “Courts, practitioners, and taxpayers have all complained that Appeals Settlement Officers apply the balancing test as boilerplate language.”); see also 1 NAT’L TAXPAYER ADVOCATE, 2014 ANNUAL REPORT TO CONGRESS 185-96 (2014).

17. I.R.C. § 6330 (c)(3)(C). 18. 2 NAT’L TAXPAYER ADVOCATE, 2016 OBJECTIVES REPORT TO CONGRESS 66 (2016). 19. I.R.C. § 7803(c)(2)(B)(ii)(III), (VIII) 20. 1 NAT’L TAXPAYER ADVOCATE, 2014 ANNUAL REPORT TO CONGRESS 185-96 (2014). 21. 2 NAT’L TAXPAYER ADVOCATE, 2016 OBJECTIVES REPORT TO CONGRESS 66 (2016). 22. Id. 23. Id. 24. Id. 25. Id. at 6. 26. Id. at 68. 27. Id.



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28. As the National Taxpayer Advocate notes, “the vast majority of balancing test related cases ruled in

favor of the IRS,” and there has been “little scrutiny or in-depth review, if any, of how an A[ppeals] O[fficer] balanced the taxpayer’s concerns with the government’s interest to collect.” Id. at 68. In the ab-sence of any guidance in the I.R.M. as to what constitutes a reasonable balance of the equities, it is not surprising that these cases have been decided disproportionately in favor of the IRS. But, as Part II.E discusses, the Tax Court has recently begun to remand cases to Appeals where the Court decides that a proper balancing of the equities should not allow the collection action to proceed.

29. T.C. Memo. 2014-239. 30. Id. 31. Id. 32. Id. 33. Id. 34. 508 F. Supp. 2d 734, 739 (D. Minn. 2007). 35. Id. at 738. 36. Id. 37. Id. 38. I.R.C. § 6330(d)(1). 39. Williams v. Commissioner, 92 T.C. 920, 932 (1989) (quoting Link v. Wabash R.R. Co., 370 U.S. 626,

630-31 (1962) (internal quotations omitted) 40. Lunsford v. Commissioner, 117 T.C. 183 (2001). 41. 135 T.C. 114, 143 (2010), aff’d, (D.C. Cir. 2012). 42. Id. 43. T.C. Memo. 2013-210. 44. Id. 45. Treas. Reg. §§ 301.6320-1(h)(2) Q&A-H2, 301.6330-1(h)(2) Q&A-H2. 46. Understanding your LT11 Notice, IRS.GOV, https://www.irs.gov/individuals/understanding-your-lt11-

notice (last reviewed or updated Feb. 19, 2016). 47. I.R.C. § 6330(c). 48. See supra note 9. 49. I.R.C. § 6331(b). 50. See also I.R.C. § 6334(a)(13)(B). 51. I.R.M., pt. 5.10.2.3(1) (May 24, 2016). 52. I.R.M., pt. 5.17.4.2.1(3) (Aug. 1, 2010). Although Area Counsel is “always available for the purpose of

rendering legal advice in ascertaining the most desirable course of action,” see I.R.M., pt. 5.17.4.2.1(2) (Aug. 1, 2010), the ultimate decision of whether the referral to the Tax Division should be made rests with the revenue officer and the individuals in his or her chain or approval.

53. I.R.M., pt. 5.17.4.2.1(4) (Aug. 1, 2010). 54. I.R.M., pt. 5.10.2.3(3) (May 24, 2016). 55. I.R.M., pt. 5.10.2.3(4) (May 24, 2016). Additionally, the report must contain three sections: (1) an intro-

duction, which includes a request for judicial approval of a principal residence seizure, the amount of money expected as the net sale proceeds, the type(s) of tax and the current outstanding balance(s), the earliest collection statute expiration date (CSED), and a summary of administrative actions taken and the need for urgent action if required; (2) a body that contains a chronological presentation of the facts supported by exhibits; and (3) the conclusion and recommendation, which is the closing for the report and includes a brief summary of the recommendation for a principal residence seizure and a restate-ment of the request for institution of civil action. See I.R.M., pt. 5.10.2.3(5)-(7)



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56. I.R.M., pt. 5.10.2.3(9) (May 24, 2016). 57. I.R.M., pt. 5.10.2.3(10) (May 24, 2016). 58. I.R.M., pt. 5.10.2.3(11) (May 24, 2016). 59. Treas. Reg. § 301.6334–1(d)(1). 60. Treas. Reg. § 301.6334–1(d)(2). 61. Id. 62. I.R.M., pt. 5.10.2.4(1) (May 24, 2016). 63. Id. 64. I.R.M., pt. 5.10.2.3 (3) (May 24, 2016). 65. I.R.M., pt. 5.10.2.5 (1) (Apr. 11, 2013). 66. I.R.M., pt. 5.10.2.5 (3) (Apr. 11, 2013). 67. I.R.M., pt. 5.10.2.5 (1), (4), (5) (Apr. 11, 2013). 68. I.R.C. § 6336(1). 69. I.R.C. § 6336(2). 70. I.R.M., pt. 5.10.1.7(1) (May 20, 2016). 71. I.R.M., pt. 5.10.1.7(4) (May 20, 2016). 72. I.R.M., Exhibit 5.10.2-1, Reference 5.10.2.1, (Apr. 11, 2013).


Do you know of, or are you, a taxpayer that had money seized under the government’s civil forfei-ture process? These taxpayers may now have the opportunity to get back the money taken by the government. Last week, the Internal Revenue Service sent letters to an estimated 700 indi-

viduals who had money seized by and forfeited to the United States based on a violation of struc-turing laws. Structuring is the act of making cash deposits or withdrawals of less than $10,000 in

order to avoid the filing of a cash transaction report (a “CTR”). Often, the money involved in struc-turing is “legal source” and tax has been paid, meaning it was not the proceeds of tax evasion or other criminal activity. The government's letter states, “the IRS has revised its policy on the sei-

zure and forfeiture of property associated with violations of the structuring laws. Under this policy, IRS Criminal Investigation (IRS-CI) will no longer pursue the seizure and forfeiture of property

associated solely with “legal source” structuring. Because of this change, you may request a re-turn of your property through the remission or mitigation of forfeiture process....” The time to act is limited to 60 days from receipt of the letter. If you know anyone who may qualify for this program,

Agostino & Associates can help, having already filed petitions for remission for several clients. Please contact Jeremy Klausner (x130) or Frank Agostino (x107) for more information.

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Generally, relief from penalties falls into four separate categories: reasonable cause, statutory ex-ceptions, administrative waivers and correction of IRS error.1 A taxpayer may qualify for relief from certain penalties under the First Time Abate Policy (FTA).2

FTA is an administrative waiver, and requirements for abatement include: (1) no penalties for the three tax years prior to the tax year in which the penalty was received, or filing previously was not required; (2) all currently required returns are filed, or a valid extension has been filed; and (3) any tax due has been paid, or there is an arrangement to pay.3 Certain penalties will continue to ac-crue until the tax is paid in full, so it may be advantageous to wait until tax is fully paid prior to re-questing penalty relief under this policy.4

FTA only applies to a single tax period for a given account. For example, if a request for penalty relief is being considered for two or more tax periods on the same account, and the earliest tax period meets FTA criteria, penalty relief based on FTA only applies to the earliest tax period, not all tax periods being considered.5 Denial of relief under the FTA program is not a bar to again re-questing abatement under statutory reasonable cause criteria. Since there are several exceptions listed in Internal Revenue Manual advising of instances where FTA may or may not be available, careful review of guidelines are recommended.

- Desa Lazar, Esq.

1. I.R.M., pt. 20.1.1.3.1 (Nov. 25, 2011)(Criteria for Relief From Penalties). 2. I.R.M., pt. 20.1.1.3.6.1(1) (Aug. 5, 2014)(First Time Abate (FTA)). 3. Id. 4. I.R.M., pt. 20.1.1.3.6.1(3) (Aug. 5, 2014)(First Time Abate (FTA)). 5. I.R.M., pt. 20.1.1.3.6.1(4) (Aug. 5, 2014)(First Time Abate (FTA)).

MONTHLY TAXPAYERS ASSISTANCE CORPORATION TIP: PENALTY RELIEF VIA FIRST TIME ABATE

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Frank Agostino, Esq. Ext. 107 [email protected] Patrick Binakis, Esq. Ext. 125 [email protected] Jairo Cano, Esq. Ext. 144 [email protected] Robert Dennerlein, Esq. Ext. 131 [email protected] Jeffrey Dirmann, Esq. Ext. 119 [email protected] Eugene Kirman, Esq. Ext. 142 [email protected] Jeremy Klausner, Esq. Ext. 130 [email protected] Dolores Knuckles, Esq. Ext. 109 [email protected] Tara Krieger, Esq. Ext. 118 [email protected] Lawrence Sannicandro, Esq. Ext. 128 [email protected] Michael Wallace, EA Ext. 143 [email protected] Caren Zahn, EA Ext. 103 [email protected]

AGOSTINO & ASSOCIATES, P.C. CONTACT INFORMATION

UPCOMING UNITED STATES TAX COURT CALENDAR CALLS

All Calendar Calls Are Held at: Jacob K. Javits Federal Building

26 Federal Plaza Rooms 206, 208

New York, NY 10278

September 12, 2016

September 26, 2016

October 31, 2016

November 14, 2016

November 28, 2016

December 12, 2016

The United States Tax Court has announced its non-attorney admissions exam (“USTCE”) will be held at 12:15 p.m. on Tuesday, No-vember 15, 2016 at the Ronald Regan Build-ing and international Trade Center in the Atrium Hall, 1300 Pennsylvania Avenue, NW, Washington, DC 20004. Enrolled agents, CPAs, or other non-attorneys who are inter-ested in being admitted to practice before the US Tax Court should download the applica-tion via www.ustaxcourt.gov. Click on the “Forms” tab and select the document labeled “Admissions Information for Nonattorneys.” Applications for the USTCE must be submit-ted in hard copy to Admissions Clerk, United States Tax Court, 400 Second Street, NW, Room 121, Washington, DC 20217 and must be received by the US Tax Court by October 11, 2016. For further information on the USTCE, see http://www.ustaxcourt.gov/press/050616.pdf.

TAXPAYERS ASSISTANCE CORPORATION- OF COUNSEL

Desa Lazar, Esq. [email protected]

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