TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

A Court of Appeals recently decided that an innocent spouse who relied on the IRS’s bad advice and filed suit in Tax Court too late, couldn’t get “equitable tolling” of the filing deadline.

Tax law allows spouses and former spouses to escape liability for joint tax debts in certain situations, including when it would be “inequitable to hold the individual liable for any . . . deficiency.” If the IRS denies so-called “innocent spouse” relief, then the taxpayer can petition the United States Tax Court to get a judge to rule on the requested relief.    Taxpayers don’t have to pay the tax first and sue for a refund in Tax Court, as they would in U.S. District Court, so missing out on Tax Court could mean the end of the case, particularly for taxpayers who don’t have the money to pay the tax and sue for a refund.  Like most lawsuits, there’s a deadline to file suit in Tax Court; in this case, it’s 90 days after the IRS denies a claim for relief.

In the unfortunate case of Nancy Rubel, the IRS failed to accurately count to 90 days. In denying her claims for innocent spouse relief, the IRS helpfully told Ms. Rubel that she had a right to appeal to Tax Court.  Instead of telling her that she had 90 days to file the petition – which presumably would have led her to pull out a calendar and accurately figure out the filing deadline – the IRS unhelpfully told her an exact deadline for filing in Tax Court.  The 90-day period according to the IRS’s calendar actually was 105 days on the calendar that everyone else, including the Tax Court, uses.  Ms. Rubel filed after 90 days had expired but before the incorrect deadline told to her by the IRS.  When she got to Tax Court, the IRS moved to dismiss her appeal as untimely.  She appealed, arguing that the IRS was “equitably estopped” from arguing she was late, because all she did was rely on the IRS’s incorrect calculation of the filing deadline.  It was unfair, she argued, for the IRS to tell her she had 105 days to file and then move to dismiss because she didn’t’ file within 90 days.

The Third Circuit Court of Appeals upheld the Tax Court in Rubel v. Commissioner, finding that the statute setting the 90-day deadline was “jurisdictional.”  That means, if the taxpayer doesn’t file within 90 days, the Tax Court isn’t authorized by Congress to hear the case.  That also means, the deadline can’t be ignored through arguments such as equitable tolling that otherwise might allow a court to overlook a late filing.  Interestingly, the Third Circuit didn’t comment on the harsh result from Ms. Rubel’s decision to trust the IRS.  The court also didn’t comment on the perverse incentives resulting from its decision – that the IRS has no incentive to tell taxpayers the right filing deadline and in fact will greatly improve its position by “miscalculating” the appeal period and slipping out of Tax Court jurisdiction if the taxpayer relies on the IRS.  Hopefully the IRS will start telling taxpayers that the deadline is 90 days instead of trying to calculate 90 days for the taxpayer, as they’ve shown that they can’t even read a calendar and taxpayers suffer the consequences.

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, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division.

Mr. Davis represents individuals and closely held entities in criminal tax 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. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).