Tax Procedure Book Errata - Special Flora Mitigation Procedures for Certain Assessable Penalties (9/11/16)

I will revise the book to insert the following with respect to certain assessable penalties -- the return preparer penalties under § 6694 and the penalties under 6700-6703.  These penalties are assessable without predicate notice of deficiency or other such procedures permitting litigation before assessment.  Those penalties can be litigated in a traditional refund suit which will be subject to Flora's full payment rule.  The Flora full payment rule is mitigated in many contexts (included this context) by the divisible tax rule that would apply if the penalties are divisible.  There is another special Flora full payment mitigation rule applying to these penalties.  That mitigation rule is as follows:

This mitigation rule requires that (i) within 30 days of the assessment’s notice and demand, the person assessed the penalty pay 15% of the penalty and file a claim for refund and (ii) then file the refund suit in district court by the earlier of (a) 30 days from the denial of the claim or (b) 6 months and 30 days from the date the refund claim was filed.  If the taxpayer pursues this special district remedy, collection procedures on the balance will be suspended and the statute of limitations on collection will also be suspended.  [See § 6694(c) as to the preparer penalties and §§ 6703(c) as to the §§ 6700-6702 penalties.]

In addition, to the special procedure for partial payment and suit for refund, penalties subject to this special mitigation rule may be litigated in CDP procedures.

I have not yet incorporated these into the current working draft for the next version in 2017, but it will be included in that version.

I picked up the need for this revision from Taylor v. Commissioner, 2016 U.S. Dist. LEXIS 122216 (ED WA 2016), applying the rule to the § 6694 penalty.  In Taylor, the preparer timely paid the 15% and filed the claim for refund.  The denial of the claim was almost two years later.  By the time of denial of the claim, the period for filing the suit for refund for the special procedure had expired. The time for filing that suit was 6 months and thirty days after the filing of the claim for refund.

Tax Procedure Book Errata - Injured Spouse Relief for Joint Return Refunds Credited to Liability of Only One of the Spouses (9/2/16)

Keith Fogg posted a great discussion today on the Procedurally Taxing Blog: Special Statute of Limitations for Injured Spouse Relief (9/2/16), here.  I have added the paragraph below to my Federal Tax Procedure Book editions, appearing now as errata but will appear in the 2017 edition of the book editions.

Student Edition p. 151 and Practitioner edition at the end of the carryover section and immediately before 2. Constructive Overpayments, add the following paragraph (remember that the footnotes do not apply to the student edition):

Finally, as noted, the IRS may credit refunds otherwise due for tax debts and for nontax debts other federal, state agencies and even child-support payments certified by the state.  This creates a problem only one spouse owes the debt to which a refund on a joint return is credited.  In that case, the spouse who is not liable may have a separate interest in the refund on the joint return.  That spouse is called the injured spouse because that spouse’s asset is used to pay a debt of the liable spouse. n769.1  The IRS has procedures, called injured spouse relief, that permits the injured spouse to obtain the refund. n769.2  This relief to obtain the injured spouse’s share of overpayments credit to the liable spouse’s debt is sometimes confused with innocent spouse relief (discussed below beginning at p. 472 of the Student edition and p.  682 of Practitioner edition).  The IRM succinctly states the different as follows: “Innocent spouse status relieves a spouse of the responsibility for paying taxes that may then be collected from the other spouse. Injured spouse status involves obtaining a refund of a spouse's interest in an overpayment that has been offset under IRC 6402.”  n769.3  The injured spouse relief is based on general state law rights rather than being required by a particular Code section.

   n769.1 See generally IRM 25.18.5  Injured Spouse.  IRM 25.18.5.1  (03-04-2011), Background - IRC 6402 Offsets, subpar. 3 which is captioned “How Offset Issues Arise,” noting  in relevant part:
Offset issues arise where spouses file joint returns and only one spouse owes a IRC 6402 debt. In this circumstance, an allocation must be made to determine the liable spouse's interest in the overpayment, the amount that can be offset for the liable spouse's debt, and the amount to be refunded to the nonliable spouse. Rev. Rul. 80-7, 1980-1 C.B. 296, amplified by Rev. Rul. 87-52, 1987-1 C.B. 347. Due to different property rights in income tax and withholding and other credits, there is a difference in the allocation process for community property states as opposed to the other states. Rev. Rul. 85-70, 1985-1 C.B. 361.
In subsequent sections, the IRM provides the methods for allocating the amount of the refund to the injured spouse.  Having spent most of my career practicing in Houston, Texas, I was particularly interested to see a special IRM provision devoted allocations in Texas.  IRM 25.18.5.10  (03-04-2011), Injured Spouse Claims Involving Federal Tax Offsets in Texas.  Texas is just different. 

   n769.2 The relief is requested by Form 8379, titled Injured Spouse Allocation, which can be filed (i) with the return if the taxpayers know of the § 6502 creditable debt of the liable spouse and (ii) after notice of the credit in order to obtain the benefit for the injured spouse.  For more on the relief, see Keith Fogg, Special Statute of Limitations for Injured Spouse Relief (Procedurally Taxing Blog 9/2/16), discussing the TIGTA report titled Injured Spouse Cases Were Not Always Timely Resolved, Resulting in the Unnecessary Payment of Interest (Ref. No. 2016-40-042 5/19/16). One key point that Keith Fogg makes is that the statute of limitations for claiming injured spouse relief for credits to the liable spouse’s federal tax debts is three years whereas the statute of limitations for such relief for nontax debts is six years.  Keith also notes that one solution where a potential injured spouse knows of the creditable debt in advance is for the potential injured spouse to not file a joint return.  But, Keith notes, that might not be a satisfactory solution where the filing of a joint return will reduce the aggregate net tax liability.  

   n769.3 IRM 25.18.5.1  (03-04-2011), Background - IRC 6402 Offsets, subpar. 3.  The IRM also notes that some spouses entitled or potentially entitled to injured spouse relief filed mistakenly for innocent spouse relief.  Where that occurs, the IRS is instructed to notify the spouse of the difference via a specific form letter and provide a copy of Form 8379, titled Injured Spouse Allocation.

Tax Procedure Book Errata - Base to Which the Failure to File and Fraudulent Failure to File Penalty Rates Apply (9/1/16)

I did not state the penalty base for the failure to file penalty which comes in two flavors -- the fraudulent failure to file penalty and the general failure to file penalty.  See § 6651(a)(1) and (f).  (Actually, it is buried in the discussion of the fraudulent failure to file penalty, but being buried is not good enough.)  The respective failure to file penalty rates are 15% per month up to 75% for fraudulent failure to file and 5% per month up to 25% for the general nonfraudulent failure to file.  The base to which the respective rates apply is the same -- the tax due "reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return."  § 6651(b)(1).

The penalty base is important and needs to be stated explicitly.  I have made that addition as follows:

In the Student edition p. 233 and the Practitioner edition p. 331, I have added the following sentence immediately after the first sentence in the section under D. Fraudulent Failure to File Return - § 6651(f).:

The base to which the 15% per month fraudulent failure to file penalty rate applies is the same base as the general failure to file 5% per month penalty – the tax due “reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return.” fn
  fn § 6651(b)(1).

In the Student edition p. 248 and the Practitioner edition p. 352, I have added the following sentence immediately after the fourth sentence in the section under F.1. Most Returns with Tax Due:

The base to which the 5% per month penalty rate applies is the tax due “reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return.” fn
   fn § 6651(b)(1).

Remember that the indicated footnotes are not contained in the Student edition.