Longtime IRS attorney Carolyn Schenck has been selected to advise the agency’s new fraud enforcement program.

In her new role as national fraud counsel, Schenck will advise the program on the design and development of its anti-fraud efforts as it supports activities across the IRS to detect and deter tax fraud, the agency said in a May 26 release.

Schenck’s appointment is the latest in a string of staff shuffles that reflect a renewed emphasis by the IRS on preventing tax fraud. Those efforts began with Eric Hylton’s promotion from deputy chief of the Criminal Investigation division to commissioner of the Small Business/Self-Employed Division in September 2019, followed by the February selection of Brendan O’Dell to temporarily serve as promoter investigations coordinator and the appointment of Damon Rowe to head up the new Fraud Enforcement Office in March.

According to the IRS, Schenck will collaborate closely with Rowe and O’Dell on their anti-fraud efforts.

Frank Agostino of Agostino & Associates PC said the IRS’s new enforcement group will serve an essential function in promoting voluntary compliance. There’s a perception among tax cheats that the IRS can’t or won’t find them, and this means the tax system needs this sort of coordination on fraud, he said. “I want to see the good in everyone, but there is tax fraud in the world,” he said.

Schenck is serving as assistant division counsel (international) in SB/SE, where for the past decade she has advised the IRS’s Offshore Compliance Initiative. Throughout her career at the IRS, which began in 2006, Schenck has litigated cases before the Tax Court, advised IRS agents on fraud cases, and assisted the Justice Department with criminal tax prosecutions.

Good Call

IRS Commissioner Charles Rettig described Schenck as “extremely well-regarded” by the tax community, and practitioners who spoke with Tax Notes agreed.

Agostino praised the selection of Schenck to fill the role, saying she is an exceptional lawyer who is well versed in the law of tax fraud. “She’s knowledgeable about where the line and the law is, and what taxpayers went over the line knowing where the line was,” he said.

Steven Toscher of Hochman Salkin Toscher Perez PC said Schenck’s appointment suggests a “continued and sustained commitment by the IRS to detect and deter tax fraud,” and that the appointment of Schenck, along with Rowe and O’Dell, will yield more efficient tax enforcement and fraud detection across all the IRS’s operating divisions.

A Time Such as This

IRS Chief Counsel Michael Desmond said in the release that bringing Schenck into her new role is especially timely, given the opportunities for tax fraud amid the coronavirus pandemic.

“Someone with her talent and experience should send a strong signal that those who seek to take advantage of the situation will face dire consequences,” Desmond said.

Toscher echoed that sentiment, observing that Schenck appears to have a “broad mandate” that will involve not only advising Rowe and boosting fraud referrals by the operating divisions of the IRS to CI, but also the training of IRS agents and developing the “appropriate use of civil fraud penalties.”

Toscher also suggested that by specifying that Schenck will work closely with O’Dell, the IRS is signaling that its focus on promoters and enablers of tax fraud schemes is a major part of its antifraud strategy.

We are pleased to announce that three of our principals Steven Toscher, Michel Stein and Jonathan Kalinski will be speaking at the upcoming Strafford webinar on Taxation of Cannabis: Overcoming Tax Challenges in Marijuana Business Operations, Key Planning Techniques, Thursday, June 18, 2020, 1:00 pm-2:30 pm EST, 10:00 am-11:30 am PST.

This CLE/CPE webinar will provide tax counsel and advisers guidance on tax and related issues for businesses engaged in the cannabis industry. The panel will discuss critical federal and select state tax rules impacting cannabis businesses, recent tax court decisions, Section 280E, forfeiture, and banking.

The sale and distribution of cannabis for recreational or medical use have become a powerful economic engine generating billions in annual revenue with 33 states and the District of Columbia having some form of legalization of the substance. Despite state relaxation of marijuana prohibition laws, without careful planning, the taxation of regulated cannabis businesses can result in hefty tax assessments and penalties.

Cannabis businesses are accounting for and reporting the results of their operations with gross receipts, cost of goods sold (COGS), and other deductions just like other for-profit businesses. However, as long as marijuana remains a Schedule 1 controlled substance under federal law, these businesses must navigate the pitfalls of complex federal and state tax rules.

Under Section 61, all gross income must be reported from whatever source it is derived. However, under Section 280E, cannabis businesses cannot deduct rent, wages, and other expenses unless it is for COGS, resulting in a substantially higher tax rate than other companies on their income. This dilemma has been the subject of recent tax court cases and appeals.

Listen as our panel discusses federal and select tax rules impacting the cannabis industry, recent tax court cases, Section 280E, forfeiture, banking, and other related issues.

For full programming details Click Here.

Most federal criminal cases end in a written plea agreement, and tax cases are no exception. In plea negotiations, prosecutors wield enormous power and can effectively dictate the terms to most defendants. The plea agreements are largely district-specific, boilerplate documents that even individual prosecutors can’t modify outside of the factual basis, minor adjustments to appellate waivers, and options for sentencing recommendations.

Courts recognize the unequal bargaining power in deciding whether a prosecutor has breached a plea agreement. As with any one-sided contract, ambiguities are construed against the drafter (i.e., the government). Beyond charging decisions — which charges and how many counts, both of which affect the statutory maximum sentence and the recommended guideline sentencing range — the primary negotiated benefit in a plea agreement is the government’s promise regarding its sentencing position. Such promises can range from agreeing to recommend a particular sentence, to an agreement that the government can recommend any sentence it wants up to the statutory maximum. Although judges make their own sentencing decisions, the government’s recommendation carries substantial weight in most cases.

Given the importance of the government’s sentencing recommendation, whenever a prosecutor strays from the agreed-to recommendation in the plea agreement, there’s a good chance it will be considered a breach of the plea agreement. Upon a breach, there are two almost inevitable outcomes: a do-over on sentencing and an internal Department of Justice ethics investigation of the prosecutor. Most breaches aren’t fixable unless they are a “slip of the tongue or typographical error.” The 9th U.S. Circuit Court of Appeals appropriately has held that the district court can’t fix the problem by claiming it would disregard the breach. Once the “breach” bell has been rung, the sentencing must proceed before a different judge. This isn’t a comment on the judge’s abilities to disregard the government’s improper argument, but more likely a comment that any sentence imposed by the judge tainted by the government’s breach would carry the appearance of unfairness.

On May 12, the 9th Circuit reversed the sentence imposed by an Idaho district judge and remanded to a new judge for either resentencing or to consider the defendant’s request to withdraw from the guilty plea to a 26 U.S.C. Section 7206(2) charge (aiding and abetting the filing of a false tax return). United States v. David Brannum, 19-30126 (unpublished). Although the plea agreement set the tax loss at just over $100,000, the prosecutor argued in a sentencing brief that the actual loss was $3.3 million and the sentence should reflect the seriousness of criminal conduct associated with the higher number. The government tried to justify this apparent breach of the plea agreement by claiming it wasn’t asking that the guideline sentencing range be based on the $3.3 million figure, but instead the general sentencing factors contained in 18 U.S.C. Section 3553(a) (which actually includes the guidelines as a factor) should take into account the higher figure. The district court found that this argument was not a breach, but likely recognized the 9th Circuit could disagree and tried to appeal-proof the sentencing by stating on the record that it was disregarding the government’s argument and was sentencing the defendant based on the $100,000 loss amount. The sentence was below the guideline range, but well above the straight-probationary sentence recommended in the presentence report drafted by U.S. Probation. The district court’s attempt to save the sentencing on appeal was in vain, as the damage had been done and could not be cured by claiming to ignore the government’s injection of a loss amount 33 times higher than agreed to in the plea agreement. The 9th Circuit found it was a breach, sent it back for resentencing, and now the case will be another judge’s concern.

The case isn’t over for the prosecutor, who (fortunately for his or her sake) wasn’t named in the appellate decision. A judicial finding that a breach occurred means the prosecutor almost certainly will be investigated by the DOJ’s Office of Professional Responsibility. Although the district court found there was no breach, t 9th Circuit’s description of the prosecutor’s course of conduct in the short opinion suggests that the breach was, at a minimum, reckless. Instead of instantly apologizing for taking an inconsistent (and very aggressive) position in the sentencing papers, the prosecutor tried to justify the position in the sentencing hearing by asserting that using a $3.3 million tax loss figure for Section 3553(a) arguments, and $100,000 tax loss for guideline calculations, was consistent with the plea agreement. Although the district court found no breach, the 9th Circuit summarily found that both the sentencing position and arguments during the sentencing hearing constituted breaches of the plea agreement. The 9th Circuit noted that the sentencing position brief alone was sufficient to establish the breach, but the prosecutor’s doubling down on the breach in the sentencing hearing couldn’t have helped the government’s argument on appeal.

Much of the plea-negotiation dance, including convincing the client that he or she will be treated fairly at sentencing, is based on trusting that the prosecutors will stick to the letter and spirit of the plea agreement. This incident presumably will have repercussions for both the prosecutor and the Idaho U.S. Attorney’s Office, at least when dealing with the defense bar and perhaps the Court.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman Salkin Toscher Perez PC.  He spent 11 years as an AUSA in the Office of the U.S. Attorney (C.D. Cal), spending three years in the Tax Division of the where he handed civil and criminal tax cases and 11 years in the Major Frauds Section of the Criminal Division where he handled white-collar, tax, and other fraud cases through jury trial and appeal.  As an AUSA, he served as the Bankruptcy Fraud coordinator, Financial Institution Fraud coordinator, and Securities Fraud coordinator.  Among other awards as a prosecutor, the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.  Before becoming an AUSA, Mr. Davis was a civil trial attorney in the Department of Justice’s Tax Division in Washington, D.C. for nearly 8 years, the last three of which he was recognized with Outstanding Attorney awards. 

Mr. Davis represents individuals and closely held entities in criminal tax (including foreign-account and cryptocurrency) investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white-collar criminal investigations including campaign finance, FARA, money laundering, and health care fraud. 

Applicants who clearly lied in their applications for the Paycheck Protection Program’s (PPP) tax-free forgivable loans will make better targets for criminal investigation than those who don’t fit lawmakers’ ideas of the program’s intended beneficiaries.

“I’m sure there are some blatantly false [statements on PPP loan applications], and I think that is where it’s going to go. I don’t think they’re going to get in the business of going in and second-guessing the uncertainty,” Steven Toscher of Hochman Salkin Toscher Perez PC said.

To read more Click Here.


We are pleased to announce that Dennis Perez, Michel Stein, Robert Horwitz and Sandra Brown will be speaking at the CalCPA Webinar at 9 am on May 19th entitled “What Professionals Need to Know About PPP Loans and Employee Retention.”

The PPP loan has and continues to be one of the most critical fiscal stimulus tools to combat the Covid 19 induced recession. Join our experienced team of tax litigators for guidance on obtaining and keeping this valuable source of capital for business survival and avoiding the potential pitfalls of an SBA audit and investigation.

For full programming details Click Here.



We are pleased to announce that three of our principals Steven Toscher, Michel Stein and Cory Stigile will be speaking at the upcoming Strafford webinar on IRS Audits: Responding to IDRs, Independent Office of Appeals, Extending the Statute, and Current IRS Initiatives, Tuesday, May 26, 2020, 1:00 pm-2:50 pm EST, 10:00 am-11:50 am PST.

All tax practitioners need to be up-to-date on the latest IRS tax initiatives and current IRS audit procedures. Before the audit takes place, advisers need to understand the different types of examinations, the current IRS audit process, and when returns are no longer subject to audit. The type of audit: correspondence, office, field or compliance affects the effort and ease of resolving the issue(s) raised.

Since most audits take place just before the statute runs, deciding whether to grant the IRS an extension of time is often a critical initial consideration. Throughout the process, there is a fine line between cooperating with the IRS and its voluminous information document requests (IDRs) and providing information that could be damaging.

For full programming details Click Here.

We are pleased to announce that three of our principals Steven Toscher, Michel Stein and Sandra Brown will be speaking at the upcoming CPAacademy webinar on Developments in Cryptocurrency – Reporting and Enforcement, Wednesday, June 3, 2020, 3:00 pm PDT; 2:00 PST.

The Internal Revenue Service (IRS) launched a “soft letter” campaign advising taxpayers believed to have engaged in cryptocurrency transactions of their obligations to report those transactions and the ability to file amended tax returns to correct prior reporting and compliance issues.

The program will provide tax advisers and compliance professionals with a practical look at IRS guidance to calculating and reporting income and gain on cryptocurrency (e.g., Bitcoin) transactions.  We will also discuss the IRS’ position on cryptocurrency as property rather than cash, analyze IRS monitoring to increase compliance and define proper reporting and tax treatment for hard forks, “mining” and exchanging cryptocurrency.  Further, we will address recently released IRS Revenue Ruling 2019-24 and the updated FAQs regarding the taxation of cryptocurrency, with a particular focus on the recent IRS enforcement initiatives to identify and tax virtual currency activity and how this soft letter campaign fits into the IRS voluntary disclosure practice.

For full programming details Click Here.

Most tax professionals are familiar with the Supreme Court’s Flora decision: a taxpayer has to pay in full a tax assessment plus penalties and interest before you can bring a refund suit.  California has had a similar rule, which has been part of the California Constitution since 1913.  Article XIII, sec. 32 of the California Constitution states:

No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax.  After payment of a tax claimed to be illegal, any action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature.

Jeremy Daniel was an officer of a defunct California corporation that owed sales tax, penalties and interest.  The Board of Equalization assessed him for the unpaid sales tax, penalties and interest under its policy for assessing responsible persons and Reg. sec. 1702 (18 CCR sec. 1702).  Daniel filed a suit challenging the assessment against him without paying or filing a refund claim.  The case was dismissed.

Daniel subsequently filed an amended complaint after failing a portion of the assessment and filing a refund claim. The amended complaint against  the California Department of Tax and Fee Administration (CDTFA), successor to the Board of Equalization.  The amended complaint did not directly challenge the assessment.  Instead, it alleged that policy and regulation for assessing persons for unpaid sales tax was illegal and unconstitutional.  It prayed for a declaration that the policy and regulation were illegal and unconstitutional and any assessment based on the policy and regulation was not a tax under the California constitution.  The CDTFA filed a demurrer on the ground that the complaint was barred by sec. 32.  The superior court denied the demurrer, holding that the action was to determine the validity of a regulation, not to determine the validity of an assessment against an individual taxpayer or for a refund of tax.  Thus, according to the superior court the pay first, litigate later rule did not apply.  The CDTFA petitioned the Court of Appeal for a writ of mandate.  The Court granted the writ in California Department of Tax and Fee Administration v. Superior Court (May 7, 2020) Docket No. B294400

Finding that the writ petition presented a “significant issue” of “great public interest” the Court of Appeal denied a motion to dismiss the writ.  It then addressed the two questions raised by the petition: a) whether sec. 32 (which the Court termed the “pay first, litigate later” or “pay up or shut up” rule) bars the suit and b) whether Government Code sec. 11350, which authorizes declaratory judgment actions to determine the validity or governmental regulations carves out an exception to sec. 32.  The Court answered the first question “yes” and the second question “no.”

With respect to the first, the Court stated that sec. 32 bars a taxpayer from maintaining any action the net effect of which would be to resolve his liability for a disputed tax unless he pays the entire amount owed with penalties.  Because Daniel had not paid the tax in full and followed the procedures established for bringing a refund suit, sec. 32 barred his action for declaratory relief.   It rejected his argument that he could proceed as a member of the general public or as an officer of a new corporation to whom the regulation may apply in the future since allowing a taxpayer to proceed on that basis would make sec. 32 “a dead letter.”

The Court then turned to the second question.  Gov. Code sec. 11350 allows “any interested person” to obtain a declaration as to the validity of any regulation.  The Court held that this declaration does not exempt the action from sec. 32’s reach.  It gave three reasons for its conclusion:

First, under the rules of statutory construction, sec. 11350 does not on its face exempt claims from the reach of sec. 32’s pay first requirement.  Sec. 32 controls tax actions so that an action for declaratory relief that would result in invalidating an assessment cannot be maintained.

Second, the purpose of sec. 11350 is to provide an avenue for relief where none previously existed.  Taxpayers have always had an avenue for relief from a tax assessment: they can pay the tax and then pursue a claim for refund.

Third, the California Supreme Court has “strongly suggested” that sec. 11350 is not meant to be an exception to sec. 32.

The Court rejected two final claims of Daniel: a) that he is not seeking to determine the amount of tax he owes, but to determine whether the assessment is unconstitutional since by its very terms sec. 32 applies where a taxpayer claims a tax is “illegal;” b) that he is not seeking to enjoin collection, since that would be the effect of granting the relief requested.

The Court remanded to case to the superior court with instructions to dismiss the amended complaint without leave to amend.

Tax litigation in California reminds me of an old Chicago saying about politics:  if you wanna play you gotta pay.

Contact Robert S. Horwitz at horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions.

For decades, the Internal Revenue Service (“IRS”) has maintained a voluntary disclosure policy which provides an opportunity for taxpayers to come forward and disclose their noncompliance with the tax laws with the primary incentive being that, in almost all cases, the taxpayer will avoid criminal prosecution. The IRS made some significant announcements recently that could benefit those who wish to consider a voluntary disclosure to come into compliance with the tax laws.

IRS Announcement for Non-Filers

On March 25, 2020, the IRS announced the new IRS People First Initiative to provide immediate relief to help people facing uncertainty over taxes.[1] A highlight of the key actions in the IRS People First Initiative focused on Non-Filers with the IRS reminding people who have not filed their returns for tax years before 2019 that they should file their delinquent returns and consider taking the opportunity to resolve any outstanding liabilities with the IRS to obtain a “Fresh Start.”

IRS Memorandum Limiting New LB&I Examinations

On April 14, 2020, a Memorandum was issued to all IRS Employees assigned to the Large Business and International Division (“LB&I”) regarding compliance priorities during COVID-19 Pandemic.[2] The Memorandum directed that through July 15, 2020, with some limited exceptions[3], LB&I will not open new examinations unless it falls within a continuing activity as defined therein.

IRS’s Voluntary Disclosure Program

 The IRS’s Voluntary Disclosure Program is designed to give taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report legal source income and/or foreign assets an opportunity, with potential protection from criminal liability, to pay all tax due associated with respect to unreported income and foreign assets.  The current procedures, applicable for voluntary disclosures made after September 28, 2018, apply to both domestic and offshore voluntary disclosures. That said, the current policy bears many of the earmarks found under the prior offshore voluntary disclosure programs.

Current IRS Voluntary Disclosure Program

 On November 20, 2018, the IRS announced its newest voluntary disclosure procedures as set forth in a five-page guidance memorandum.[4] The guidance makes several points very clear: (1) taxpayers who did not commit any tax or tax related crimes and do not need the voluntary disclosure practice to seek protection from potential criminal prosecution can continue to correct past mistakes using the Streamlined Filing Compliance Procedures or by filing an amended or past due tax return; (2) for those taxpayers who do need protection, the filing of corrected tax returns for the most recent six-year period will be required, with IRS agents having the discretion to expand the disclosure period to cover additional years and cooperative taxpayers also being allowed to expand the disclosure period; (3) for taxpayers participating in a voluntary disclosure, cooperation with the IRS means more than just making full disclosure of unreported income and offshore assets, extending the time to assess, and arranging for payment: the IRS expects taxpayers to assent to all adjustments that result from the audit; and, (4) while the current voluntary program, unlike the preceding offshore voluntary programs, does permit the right to seek review by IRS Appeals, the IRS expects that taxpayers will not to exercise their legal rights to contest audit adjustments and seek review by IRS Appeals in return for the IRS’s agreement, in general, not to assess more stringent penalties.

Voluntary Disclosure Preclearance by IRS-Criminal Investigation

IRS-Criminal Investigation (“CI”) will continue to screen all voluntary disclosure requests to determine if a taxpayer is eligible to make a voluntary disclosure. For all cases where CI grants preclearance, taxpayers must then promptly submit all required voluntary disclosure documents using Form 14457.

Form 14457 requires information related to taxpayer noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties, and equally important, identification of any professional advisors involved in the taxpayer’s noncompliance.

After CI has preliminarily accepted the taxpayer’s voluntary disclosure, it will notify the taxpayer of preliminary acceptance by letter and simultaneously forward the voluntary disclosure letter and attachments to the LB&I unit in Austin, Texas. This LB&I unit will select the most recent tax year covered by the voluntary disclosure for examination and forward cases to the appropriate Business Operating Division and Exam function for civil audit. All voluntary disclosures will follow standard audit procedures.

Voluntary Disclosure Penalty Framework

 The nature and extent of penalties assessed under the voluntary disclosure program will, in large part, be a function of the taxpayer’s cooperation during the process.  A taxpayer who provides prompt and full cooperation during the examination of a voluntary disclosure is entitled to civil penalty mitigation, whereas a taxpayer whose case is not resolved by agreement can expect to face maximum civil penalties under the law.

A summary of the penalties applied to taxpayers who fully cooperate with the IRS during the process are as follows:

Civil Fraud Penalty
The civil penalty under IRC § 6663 for fraud or the civil penalty under IRC §6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. In limited circumstances, the IRS may apply the civil fraud penalty to more than one year  – up to all six years – based on the facts and circumstances of the case. Typically, the IRS’s assertion of the civil fraud penalty beyond six years will only occur if the taxpayer fails to cooperate and resolve the examination by agreement. Note, while the taxpayer may request imposition of accuracy-related penalties under IRC §6662 instead of civil fraud penalties, the IRS expects that such requests will involve  exceptional circumstances.

 FBAR Penalty
If the voluntary disclosure also involves a non-disclosed foreign bank account, then willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines contained in the Internal Revenue Manual, which include mitigation guidelines that permit the IRS to reduce FBAR penalties if certain criteria are met.  A taxpayer must present convincing evidence to justify why such penalty should not be imposed.  Additionally, while a taxpayer may request that the IRS impose non-willful FBAR penalties, the granting of such request is again expected to only happen in exceptional circumstances.

Information Return Penalties
The penalties for failure to file information returns will not be automatically imposed. This is a positive development for taxpayers, as the penalties for not filing information returns such as Forms 5471 (requiring disclosure of ownership of foreign corporations), Forms 8938 (requiring disclosure of foreign financial assets), and Forms 3520 (requiring disclosure of information regarding foreign trusts), can be significant, especially if the taxpayer’s noncompliance spans multiple years. The procedures provide that agents will exercise discretion as to these types of penalties and will take into account the application of other penalties (such as the civil fraud penalty and the willful FBAR penalty) and the extent of the taxpayer’s cooperation.

Other Penalties
Other penalties, such as those relating to excise taxes, employment taxes, and estate and gift taxes, will be based upon the facts and circumstances of each case and taxpayers should anticipate that when such facts exist, the examining agent may seek assistance from the appropriate subject matter experts within the IRS.

 Options for Taxpayers with Unfiled Returns or Unreported Income Who Do Not Need Protection from Potential Criminal Prosecution

There are other programs for taxpayers with unfiled returns or unreported income who may not have exposure to criminal liability or substantial civil penalties due to willful noncompliance.  As noted above, those options include the Streamlined Filing Compliance Procedures, the delinquent FBAR submission procedures, or the delinquent international information return submission procedures.  Most taxpayers would prefer to settle things through these later programs, as the options call for significantly smaller penalties, if not penalty-free, resolutions with the IRS. So, while the adage no “one size fits all” may always be applicable when it comes to noncompliant taxpayers coming in from the cold, with the IRS currently standing down on the opening of new examination cases, the adage that “timing is everything” in the context of getting to the IRS before the IRS gets to you, is especially true right now.


Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C.  Prior to joining the firm, Ms. Brown served as the Acting United States Attorney, the First Assistant United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal).  Ms. Brown  specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court. 

[1] IR-2020-59, March 25, 2020.

[2] Revision to Internal Revenue Manual 4.46.3; LB&I-04-0420-009.

[3] Id.(e.g., LB&I managers have discretion with respect to examinations of prior, subsequent, and related returns associated with an existing examination.)

[4] https://www.irs.gov/pub/foia/ig/spder/lbi-09-1118-014.pdf

The Internal Revenue Service (“IRS”) has recently provided notice that it will, in large part, not follow the adverse decision issued by the Fifth Circuit Court of Appeals in Rothkamm v. United States[i] which found that seeking help from the Taxpayer Advocate Service (“TAS”) tolled the time limits under IRC § 6343(b) for the filing of an administrative claim to challenge a wrongful levy.[ii]

Rothkamm v. United States

Kathryn Rothkamm and her husband filed separate tax returns. Mr. Rothkamm incurred a tax liability. The IRS levied on funds in Mrs. Rothkamm’s bank account to help pay for Mr. Rothkamm’s tax debts despite Mrs. Rothkamm’s assertion that the funds were her separate property and thus, not subject to her husband’s tax debts.  The bank honored the levy and turned over the funds to the IRS.

Mrs. Rothmann sought assistance from the TAS by filing a taxpayer assistance order (“TAO”) application. Five months later the TAS case was closed and nine months thereafter, i.e., fourteen months after the date of the levy, Mrs. Rothmann filed her administrative claim directly with the IRS asserting that the levy was wrongful and the funds should be returned to her. The IRS denied her claim asserting that it was untimely under IRC § 6343(b) as the applicable statute of limitations for the filing of an administrative claim to challenge a wrongful levy is not tolled for the time in which her request was pending with TAS.

Mrs. Rothmann filed suit in District Court to challenge the IRS’s denial of her wrongful levy claim.  After the District Court dismissed her suit, finding that the statute of limitations had not been tolled by her pending TAO, Mrs. Rothmann filed an appeal with the Circuit Court. Thereafter, the Fifth Circuit overturned the decision of the lower court and found that Mrs. Rothmann’s TAO did toll the applicable statute of limitations and thus, her claim was timely.  The Fifth Circuit’s decision in Rothkamm is now final.

IRS’s Nonacquiescense in Rothkamm

On March 27, 2020, the IRS published its notice regarding its nonacquiescence in the court’s decision in Rothkamm. [iii]  Specifically, the IRS has stated that, for cases that would be filed in courts not within the Fifth Circuit, it will not follow the holding that filing a TAO with TAS automatically tolls the statute of limitations under IRC § 6343(b) to extend the time period for the filing of a wrongful levy lawsuit.

Reiterating its’ legal position on tolling, as advanced in the Rothkamm litigation, the IRS will continue to assert that “a plain reading of section 7811(d) shows that the time periods tolled [for pending TAOs] relate to actions available to the IRS, not actions available to taxpayers.”[iv] In simple terms, the IRS’s legal position, for matters outside of the jurisdiction of the Fifth Circuit, is that it is solely within the discretion of the IRS to determine whether or not a TAO applicant’s claim is tolled.

So, before summarizing “how” the IRS is legally able to “nonacquiesce” with an adverse decision, it is worth noting “what” the IRS’s Acquiescence Policy is and “why” it exists.

IRS’s Acquiescence Policy

What is the IRS’s Acquiescence Policy?

If the IRS wants taxpayers to know that it will follow an adverse decision in future cases involving similar facts and issues, it will announce its “acquiescence” in the decision. Conversely, if it wants taxpayers to know that it will not follow the decision in such future cases, it will announce its “nonacquiescence.” In cases involving multiple issues, the IRS may acquiesce in some issues but not others.[v] In decisions supported by extensive reasoning, it may acquiesce in the result but not the rationale.  This policy is known as the IRS acquiescence policy.

The IRS does not announce its acquiescence or nonacquiescence in every decision it loses. Furthermore, it may retroactively revoke an acquiescence or nonacquiescence.

When it does announce its acquiescence or nonacquiescense, the IRS publishes its notice  as “Actions on Decision” first in the Internal Revenue Bulletin (“IRB”), then in the Cumulative Bulletin (“CB”). The footnotes to the relevant announcement in the IRB and CB indicate the nature and extent of IRS acquiescences and nonacquiescences.

Why does the IRS have a Acquiescence Policy?

These acquiescences and nonacquiescences have important implications for taxpayers. If a taxpayer bases his or her position on a decision in which the IRS has nonacquiesced, he or she can expect an IRS challenge in the event of an audit. In such circumstances, the taxpayer’s only recourse may be litigation. On the other hand, if the taxpayer bases his or her position on a decision in which the IRS has acquiesced, he or she can expect little or no challenge. In either case, it is important to be aware that the IRS examining agent will be bound by the IRS position in the Actions on Decision published in the IRB and CB

Judicial Precedence

How is the IRS able to legally nonacquiesce in an adverse decision?

A quick summary of a legal concept known as “judicial precedence” explains why the IRS is not always bound by an adverse decision when it faces future litigation on similar facts and issues.

Judicial precedence means lower courts have to follow decisions of higher courts in deciding cases where the facts are sufficiently similar.  Absent an “Act of Congress” to change in the law, rulings of the U.S. Supreme Court are binding on all courts; whereas, rulings by a particular Court of Appeals, albeit given a level of deference by the other appellate courts, are only legally binding on the specific lower courts within that appellate court’s jurisdiction.[vi]

That means, for a litigant like the IRS, which can find itself litigating the same issues with multiple taxpayers who are located in different parts of the country, the IRS is not necessarily bound by an adverse decision – as long as the IRS’s loss was in a different appellate court’s jurisdiction than the appellate court in which it is litigating.

To be clear, judicial precedence is not limited to the IRS. For example, if the Fifth Circuit had ruled against Mrs. Rothkmann, another taxpayer could proceed to litigate similar facts and issues against the IRS in any court within the jurisdiction of the other twelve federal courts of appeals.[vii]

Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C.  Prior to joining the firm, Ms. Brown served as the Acting United States Attorney, the First Assistant United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal)  Ms. Brown  specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court. 

[i] Rothkamm v. USA, 802 F.3d 699 (5th Cir. 2015); https://taxpayeradvocate.irs.gov/Media/Default/Documents/NTAblog/Rothkamm%20-%20Fifth%20Circuit%20Opinion%20(9-21-2015).pdf

[ii] In 2012, when the IRS issued it’s the levy in this case, the applicable period for filing an administrative claim to challenge an IRS levy was only nine-months under IRC § 6532(c).  That period was extended to two years with respect to levies issued after December 22, 2017, or for which the nine-month statute had not already expired. See, Public Law 115-97.

[iii] https://www.irs.gov/pub/irs-aod/aod-2020-03.pdf

[iv] Rothkamm at page 20.

[v] An example of the IRS agreeing in part is present in the Rothkamm case, where: (1) the IRS raised a second legal argument, i.e., that Mrs. Rothkamm lacked standing as a “taxpayer” to obtain tolling under a TAO; (2) lost both that argument and the tolling argument; and (3) decided to provide notice that it will acquiesce in one issue, i.e., the “taxpayer”, but not the tolling issue.

[vi] Jurisdiction of the U.S. Circuit Courts can be determined by region of the country or specific subject matter of the litigation.

[vii] https://www.uscourts.gov/about-federal-courts/court-role-and-structure

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