Proposals for Tax Procedure
From The Shelf Project
Proposal: National Tax Lien Filing System
Date First Posted on Shelf: May 1, 2008; Updated December 2009
Review Status: Reviewed. See review committee comments on Discussion page.
Overview
The Internal Revenue Code would be amended to (1) direct the Secretary of the Treasury to establish and maintain a federal tax lien registry, in lieu of filing tax liens in local jurisdictions, which would be accessible to and searchable by the public through the Internet at no cost; (2) establish the priority of a federal tax lien based upon the date and time of the filing of a notice of lien in the federal tax lien registry; and (3) reduce the period for releasing satisfied or unenforceable tax liens from 30 to 10 days.
Current law
The Internal Revenue Service files public notices of Federal tax liens in State, county, or city recording offices around the country, pursuant to Code section 6323. There are currently more than 4,100 of these local recording offices, many of which have developed specific rules regulating how such liens must be formatted and filed in their jurisdictions. This patchwork system developed more by default than by plan, because those local offices were where documents affecting title to real property, judgments, and other lien and security interest documents had always been filed.
Under Code section 6325, the Service has 30 days to release a lien for a satisfied or unenforceable tax liability.
On April 17, 2007, Senators Carl Levin and Norm Coleman introduced S. 1124, the Tax Lien Simplification Act, during 110th Congress 1st Session. The bill, referred to the Committee on Finance, adopted the idea of a national tax lien system as presented here. The bill did not pass by the end of the Congressoinal session. Since it did not pass by the end of the session, it was cleared from the books. The bill has not been reintroduced.
Reasons for Change
The present decentralized system for filing Federal tax liens in local property offices, which was established before the advent of modern computers, the Internet, and e-government programs, is inefficient, burdensome, and expensive for all users, including the Internal Revenue Service, taxpayers and creditors.
Current technology permits the creation of a centralized Federal tax lien filing system which can provide for enhanced public notice of and access to accurate tax lien information in a manner that is more efficient, more timely, and less burdensome than the existing tax lien filing system; which would expedite the release of liens; and which would be less expensive for all users.
Explanation of Proposal
The purpose of this Act is to simplify and modernize the process for filing notices of Federal tax liens, to improve public access to tax lien information, and to save taxpayer dollars by establishing a nationwide, Internet accessible, and fully searchable filing system for Federal tax liens which would replace the current system of local tax lien filings.
For a more in depth discussion see T. Keith Fogg, National Tax Lien Registry, TNT, Aug. 25, 2008, at 783-87.
Notes to Help Make a Revenue Estimate
[excerpted from Sen. Levin's statement when introducing the bill]
"The Internal Revenue Service estimates that moving from a paper-based, locally filed tax lien system to an Internet-based, Federal tax lien filing system would save about $570 million over 10 years. These savings would come from the elimination of State filing fees, Service personnel costs, travel costs related to local filing problems, and the cost of lost taxes whenever the Service makes an error or a tax lien filing is misplaced or delayed. Filing fees, for example, vary widely from state to state, but typically cost at least $10 per filing, and in some States cost as much as $150. If a taxpayer has real estate in multiple jurisdictions, those costs multiply. Personnel costs include the service center staff that is currently charged with filing tax liens nationwide and complying with the myriad filing rules in effect in the 4,100 recording offices across the country. Additional anticipated savings would come from reduced mailing and travel costs.
Electronic filing would not only save money, it would improve services to taxpayers and creditors."
Benefits to Taxpayers
• Taxpayers would be able to review their liens as soon as they are filed online, without having to make a physical trip to one or more local recording offices.
• Taxpayers would have an easy way to look up their liens on multiple occasions and identify any problems, which would facilitate correction of errors.
• Once the underlying tax liability was resolved, the Service would be required to release the tax lien in 10 days, instead of the 30 days allowed under current law. The longer 30-day period is necessitated by the current complexities associated with filing a paper lien in one or more local offices, complexities that would be eliminated by the establishment of a centralized, electronic registry.
Benefits to creditors
• Lenders, security holders and others, for example, would be able to use a simplified search process that could take place online and would not require physical trips to multiple locations.
• Simplifying the search process would also provide greater certainty that all tax liens were found. The ability to research Federal tax liens remotely and instantaneously should be of particular benefit to larger lenders and to creditors of taxpayers with widely distributed assets.
See Senator Carl Levin, Statement on Introduced Bill S.1124 (April 17, 2007)(available at http://www.votesmart.org/speech_detail.php?sc_id=278047&keyword=&phrase=&contain).
Proposed Statutory Language.
NATIONAL TAX LIEN FILING SYSTEM.
(a) Filing of Notice of Lien- Subsection (f) of section 6323 (relating to validity and priority against certain persons) is amended to read as follows:
'(f) Filing of Notice; Form-
`(1) FILING OF NOTICE- The notice referred to in subsection (a) shall be filed in the national Federal tax lien registry established under subsection (k). The filing of a notice of lien, or a certificate of release, discharge, subordination, or nonattachment of lien, in the national Federal tax lien registry shall be effective for purposes of determining lien priority regardless of the nature or location of the property interest to which the lien attaches.
`(2) FORM- The form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien.
`(3) OTHER NATIONAL FILING SYSTEMS- The filing of a notice of lien shall be governed by this title and shall not be subject to any other Federal law establishing a place or places for the filing of liens or encumbrances under a national filing system.'.
(b) Refiling of Notice- Paragraph (2) of section 6323(g) (relating to refiling of notice) is amended to read as follows:
`(2) REFILING- A notice of lien may be refiled in the national Federal tax lien registry established under subsection (k).'.
(c) Release of Tax Liens or Discharge of Property-
(1) IN GENERAL- Section 6325(a) (relating to release of lien) is amended by inserting `, and shall cause the certificate of release to be filed in the national Federal tax lien registry established under section 6323(k),' after `internal revenue tax'.
(2) RELEASE OF TAX LIENS EXPEDITED FROM 30 TO 10 DAYS- Section 6325(a) (relating to release of lien) is amended by striking `not later than 30 days' and inserting `not later than 10 days'.
(3) DISCHARGE OF PROPERTY FROM LIEN- Section 6325(b) (relating to discharge of property) is amended--
(A) by inserting `, and shall cause the certificate of discharge to be filed in the national Federal tax lien registry established under section 6323(k),' after `under this chapter' in paragraph (1),
(B) by inserting `, and shall cause the certificate of discharge to be filed in such national Federal tax lien registry,' after `property subject to the lien' in paragraph (2),
(C) by inserting `, and shall cause the certificate of discharge to be filed in such national Federal tax lien registry,' after `property subject to the lien' in paragraph (3), and
(D) by inserting `, and shall cause the certificate of discharge of property to be filed in such national Federal tax lien registry,' after `certificate of discharge of such property' in paragraph (4).
(4) DISCHARGE OF PROPERTY FROM ESTATE OR GIFT TAX LIEN- Section 6325(c) (relating to estate or gift tax) is amended by inserting `, and shall cause the certificate of discharge to be filed in the national Federal tax lien registry established under section 6323(k),' after `imposed by section 6324'.
(5) SUBORDINATION OF LIEN- Section 6325(d) (relating to subordination of lien) is amended by inserting `, and shall cause the certificate of subordination to be filed in the national Federal tax lien registry established under section 6323(k),' after `subject to such lien'.
(6) NONATTACHMENT OF LIEN- Section 6325(e) (relating to nonattachment of lien) is amended by inserting `, and shall cause the certificate of nonattachment to be filed in the national Federal tax lien registry established under section 6323(k),' after `property of such person'.
(7) EFFECT OF CERTIFICATE- Paragraphs (1) and (2)(B) of section 6325(f) (relating to effect of certificate) are each amended by striking `in the same office as the notice of lien to which it relates is filed (if such notice of lien has been filed)' and inserting `in the national Federal tax lien registry established under section 6323(k)'.
(8) RELEASE FOLLOWING ADMINISTRATIVE APPEAL- Section 6326(b) (relating to certificate of release) is amended--
(A) by striking `and shall include' and insert `, shall include', and
(B) by inserting `, and shall cause the certificate of release to be filed in the national Federal tax lien registry established under section 6323(k),' after `erroneous'.
(9) CONFORMING AMENDMENTS- Section 6325 is amended by striking subsection (g) and by redesignating subsection (h) as subsection (g).
(d) National Federal Tax Lien Registry-
(1) IN GENERAL- Section 6323 is amended by adding at the end the following new subsection:
`(k) National Registry- The national Federal tax lien registry referred to in subsection (f)(1) shall be established and maintained by the Secretary and shall be accessible to and searchable by the public through the Internet at no cost to access or search. The registry shall identify the taxpayer to whom the Federal tax lien applies and reflect the date and time the notice of lien was filed, and shall be made searchable by, at a minimum, taxpayer name, the State of the taxpayer's address as shown on the notice of lien, the type of tax, and the tax period, and, when the Secretary determines it is feasible, by property. The registry shall also provide for the filing of certificates of release, discharge, subordination, and nonattachment of Federal tax liens, as authorized in sections 6325 and 6326, and may provide for publishing such other documents or information with respect to Federal tax liens as the Secretary may by regulation provide.'.
(2) ADMINISTRATIVE ACTION- The Secretary of the Treasury shall issue regulations or other guidance providing for the maintenance and use of the national Federal tax lien registry established under section 6323(k) of the Internal Revenue Code of 1986. The Secretary of the Treasury shall take appropriate steps to secure and prevent tampering with the data recorded therein. Prior to implementation of such registry, the Secretary of the Treasury shall review the information currently provided in public lien filings and determine whether any such information should be excluded or protected from public viewing in such registry.
(e) Transition Rules- The Secretary of the Treasury may by regulation prescribe for the continued filing of notices of Federal tax lien in the offices of the States, counties and other governmental subdivisions after December 31, 20XX, for an appropriate period to permit an orderly transition to the national Federal tax lien registry established under section 6323(k) of the Internal Revenue Code of 1986.
(f) Effective Date- The amendments made by this section shall apply to notices of lien filed after December 31, 20XX. The national Federal tax lien registry (established under section 6323(k) of the Internal Revenue Code of 1986) shall be made operational as of January 1, 20XX, whether or not the Secretary of the Treasury has promulgated final regulations establishing such registry.
Proposal: Duty to File Amended Returns
Date added to the Shelf: May 22, 2008
Current Status: Under Review
Overview
The proposal would require taxpayers to correct mistakes found after the close of a taxable year by filing an amended return within 60 days after the mistake is discovered.
Current Law
There is no duty under current law to correct a mistake found after the close of the taxable year. For instance, in Broadhead v. Commissioner, 14 T.C.M (CCH) 1284 (1955), the taxpayers’ accountant found a large error in inventory accounts, but only after the close of the taxable year. The accountant prepared an amended return for taxpayer’s signature, but the taxpayer never signed or filed it. The IRS asserted that the taxpayer "willfully and deliberately attempted to evade and defeat his income taxes when he refused to file the amended return after being advised to do so by his accountant." The Tax Court held that taxpayer was not required to file an amended return. Treasury Reg. §§1.451-1(a), 1.461-1(a) say that the taxpayer “should” file amended returns, but the “should” is horatory language that does not create a legal obligation. Badaracco v. Commissioner, 464 U.S. 386 (1984) (saying that Treasury Reg. §§1.451-1(a), 1.461-1(a) do not require filing of amended return).
Reasons for Change
Failure to correct a representation when it is later discovered that the representation is false is deceit under American common law. W. W. Page Keeton, Fraud--Concealment and Non-Disclosure, 15 Tex. L. Rev 1, 6. (1936). Thus the Restatement of Torts states that
[o]ne who, having made a representation which when made was true or believed to be so, remains silent after he has learned that it is untrue and that the person to whom it is made is relying upon it in a transaction with him, is morally and legally in the same position as if he knew that his statement was false when made. AMERICAN LAW INSTITUTE, RESTATEMENT OF TORTS 2D, §2(c), comment h (1977).
Even when a party has no duty of candor to say anything, it is deceit if the party makes an innocent representation and then fails to correct it when the party discovers that the representation was false.
Similarly in contracts, a failure to correct an innocent mistake is itself a misrepresentation. Thus A, seeking to induce B to make a contract to buy a thoroughbred mare, tells B that the mare is in foal to a well-known stallion. Unknown to A, the mare has miscarried. A learns of the miscarriage but does not disclose it to B. B makes the contract. A's non-disclosure is equivalent to an assertion that the mare has not miscarried, and this assertion is a misrepresentation. There is a duty to correct a statement that party made in good faith when the party discovers the statement is not true. A case like Broadhead that holds that the taxpayer has no legal duty to correct his own tax return with an amended return when the taxpayer discovers the return is materially mistaken and is inconsistent with the more general legal and ethical rules Within the general legal and ethical norms of American business, a party must correct an innocent representation when it is discovered that the representation is false.
The United States is owed at least the duty owed to the public as to the tort of deceit. Failure to correct a representation on a tax return, once it is known that the representation is a mistake is deceit against the United States under general legal and ethical norms.
The administration of the tax laws depends upon requiring taxpayers to make non fraudulent statements of their income. The tax law requires taxpayers to file an accurate return and imposes penalties, some quite meaningful, on taxpayer noncompliance. A tax return is a statement of the taxpayers’ income and the return is the final disposition of income tax due in substantially all cases because less than 1% of all returns are audited and challenged. A failure to correct a known false representation is a deceit equivalent to a knowing fraud on the original return.
The failure to require amended returns to correct errors creates an asymmetrical position. Taxpayers correct material errors made originally in favor of the government, but under current law they do not correct material errors made in their own favor. If the mistake was innocent, it will generally not be penalized under current law, and because it is not penalized, then given the low audit rates, less than 1% of the innocent errors in taxpayers’ favor are ever corrected. This creates a moral hazard under which meticulous taxpayers who make few errors pay higher tax than sloppy taxpayers who make many errors. If innocent errors are profitable, sloppiness will multiply.
Taxpayers also game the system under current law because they have no duty beyond the initial return. Thus taxpayers who expect adverse news on facts or law early in the following year file tax returns at the first opportunity so that they will not be sure that their representation is in error by the time they file their initial return.
Explanation of Proposal
Section 6072 of the Code would have added to it a new subsection (c) imposing a duty to file an amended return within 60 days of the time that the taxpayer discovers that that a position reported on a prior return in an open tax year is erroneous and had lead to a substantial underpayment of tax in the original tax year. Substantial underpayment of tax is defined as $5000 for individuals and $10,000 for corporations, which is a level set to make it likely that the taxpayer would not ignore the amount and to justify the cost of preparing an amended return. An erroneous position means a position for which there is no realistic possibility of success for the position on the merits if the position were contested in court. Circular 230, §10.34(a), 1994-2 C.B. 415 (realistic possibility standard required), §10.34(d)(1)(realistic possibility defined as a one-in-three chance of success). The erroneous position would, of course, cover errors such as finding an innocently misplaced record of income, a failure to capitalize closing inventory according to the count, or finding an arithmetic mistake.
Erroneous position would also cover subsequent clarifications of the law, so that, for instance, if the Supreme Court held for the government in a lead case, taxpayers in the indistinguishable cases would be under obligation to amend a return to follow the Supreme Court doctrine. If controlling authority in the Circuit Court governing the taxpayer clears up the law in way adverse to the taxpayer’s reporting position, then the taxpayer has a duty to correct the reported tax due with an amended return. Compliance with a Supreme Court or controlling Court of Appeals decisions would be the basis for an automatic permission for change of accounting method, without necessity of requesting it. Since taxpayers file for refunds when the Supreme Court finds in favor of a taxpayer, there is a symmetrical obligation to file when the interpretation is in favor of the government.
The taxpayer would not have a duty to file an amended return with respect to years that are barred by the statute of limitations when the error is discovered. Ordinarily the statute of limitations runs 3 years after the tax was due. Cf. section 6501(a). For omissions of greater than 25% of the amount of gross income stated on the return, the statute of limitations is currently extended to six years after the tax was due. Cf. section 6501(c).
There would be no negligence penalty for negligent failure to discover the error. Currently, there is no expectation of organizing records and filing an amended return in the same way that there is an expectation of filing the annual returns or even estimate tax quarterly statements. It is only the true discovery of the error that would set up an obligation to file the amended return. Work of professionals working as agents for the taxpayer, for instance, the accountant who was setting up appropriate inventory accounts in Broadhead, would be imputed to the taxpayer.
The accuracy related penalties of sections 6662 and 6663would be to amended returns filed pursuant to this rule. Section 6651 would be amended to include penalties for failure to timely file the amended return and pay the additional tax once the discovery was made and 60 days passed. The penalties imposed would mirror the penalties currently imposed with respect to late original returns.
Where the failure to file was willful, the failure to file a return is a misdemeanor subject to as much as a $25,000 fine, under section 7203. It is understood that proving willful to a jury is hard for prosecutors, but the criminal law is necessary to stigmatize behavior and act as a back up penalty even if it only imposed in less common cases.
Since 2007, section 6694 has penalized a return preparer for an understatement of tax due to a position derived from the return preparer if the return preparer did not have a reasonable believe that the position was more likely than not to prevail on the merits if challenge. Prior to amendment, section 6694 required the return preparer to have only substantial authority for a position the preparer recommends, and allowed the recommendation, even if the preparer did not think the position was more likely than not to prevail on the merits if challenged.
Two alternatives for the obligation of a return preparer under section 6694, as to amended returns, are as follows:
(1) The obligation of the return preparer who knows of the error which requires an amended return should be the same duty as his duty was had the preparer prepared the original return. Thus if amended return is due with respect to a year in which a preparer was subject to the “more likely than not standard,” to avoid penalty, then the preparer would be under the same “more likely than not standard” for the amended return.
(2) While there is considerable merit in making the amended return carry the same duty as the initial return for the year, the original return for each year creates an obligation for which all taxpayers are alert to assemble records and hire professionals to ascertain the law. For a new obligation not yet part of the customs of America, it is reasonable to adopt the older test requiring that the return preparer have a realistic possibility being sustained on its merits (a one-third chance of success test), but not necessarily the more likely than not standard.
Proposed Statutory Language
REQUIREMENT TO FILE AMENDED RETURNS OF INCOME
The Internal Revenue Code of 1986 is amended to include a new section, 6072(c) (relating to persons required to file amended returns of income), under Chapter 61, subchapter A.
(c) GENERAL RULE – When a person who has filed a tax return under subtitle A ascertains, subsequent to the filing of tax return, a material mistake on the filed return that the person was not aware of or could not have reasonably been aware of at the time of the filing but, if known at the time that the original return was filed, would represent a substantial understatement of tax liability, as provided under section 6662(d), that person must file an amended return, correcting the material mistake.
TIME FOR FILING AMENDED TAX RETURN
Section 6072 of the Internal Revenue Code of 1986 (relating to the time for filing income tax returns) is amended with the following new subsection (f).
. (f) AMENDED RETURNS: Amended returns, filed under section 6072(c), shall be made within 60 days of the date that the taxpayer ascertains that there is a material mistake on the prior filed tax return that results in a substantial understatement of tax liability, as provided under section 6662(d).
STATUTE OF LIMITATIONS FOR AMENDED TAX RETURN
Section 6501(b) of the Internal Revenue Code of 1986 (relating to limitations on assessments) is amended with the following new paragraph (4).
(4) Amended return. – For purposes of this section, the date that an amended return is filed, pursuant to section 6072(c), shall become the date of filing, instead of the date the original return is filed, unless the amended return is filed before the last day prescribed by law or regulations for the original return, in which case, the amended return shall be considered as filed on such last day for the original return.
PENALTY FOR WILLFUL FAILURE TO FILE AN AMENDED TAX RETURN
Section 7203 of the Internal Revenue Code of 1986 (relating to willful failure to file return, supply information, or pay tax) is amended with the inclusion of the language “amend a return” and “amend such return” as underlined below.
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, amend a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, amend such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure. In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting "felony" for "misdemeanor" and "5 years" for "1 year".
PENALTY FOR FAILURE TO FILE
Section 6651 of the Internal Revenue Code of 1986 (relating to the civil penalty for failure to file a return or to pay tax) is amended with the inclusion of the words “or amended return” as underlined below
(a) ADDITION TO THE TAX – In the case of failure-
(1) to file any return or amended return required under the authority os subchapter A of chapter 61…
(2) to pay the amount shown as tax on any return or amended return specified in paragraph (1)
Proposal: Interest and Penalties for Trust Fund Recovery Penalty
Date added to the Shelf: February 20, 2009
Current Status: Not Reviewed
Overview
The Internal Revenue Code is amended to provide for the imposition of interest and penalties on individual liability for Trust Fund Recovery Penalty from the due date of the corporate tax return.
Current Law
Every employer must withhold or collect income and social security taxes from its employees’ wages under Code sections 3102(a) and 3402(a). The withheld or collected taxes constitute a trust fund for the United States under Section 7501(a), and failure to pay over to the government those trust fund taxes exposes the employer and its responsible officers to the penalties of Sections 7202 and 6672.
Section 6672 imposes derivative, personal liability on individuals who were responsible for the payment of collected taxes and willful in their failure to pay trust fund taxes to the government. Individuals who meet the standard are liable for a penalty equal to the amount tax not paid. Under Section 6601, interest accrues on any tax not paid from the last date for payment. Under Section 6151, the last date for payment relates to the due date of the tax return, not taking into account extensions of the filing date. Interest accrues for an assessable penalty under Section 6601(e)(2) from the date of the notice and demand, which occurs at the same time as or right after the assessment of the liability. Section 6672 operates as an assessable penalty, and interest accrues from the date of the assessment against the responsible person, not the due date of the corporate date return under Section 6601(e)(2).
Reasons for Change
The current operation of Section 6672 fails to achieve its purpose as a collection device by insuring payment of collected taxes, and allows responsible officers to use money held in trust for the government interest free for as long as a couple years.
IRS policy causes Section 6672 to function as a collection device, rather than as an assessable penalty. The IRS only collects the amount of collected taxes one time, despite no statutory prohibition from collecting from the entity and all responsible persons. The statute of limitations for assessment of a liability under Section 6672 is based on the underlying liability on the corporate tax return, not the separate and distinct liability of the responsible person. Other true assessable penalties have no statute of limitations, and are not tied to underlying tax another taxpayer did not pay.
Congress has also decided to treat Section 6672 liabilities differently from other assessable penalties in bankruptcy proceedings. The bankruptcy code grants Section 6672 claims an unsecured priority status, while other assessable penalties do not have priority status. By ensuring that there will be a greater chance the government will recover the collected tax debt from a taxpayer’s bankruptcy proceeding, Congress demonstrates this high importance it assigns to this type of debt.
The current operation of Section 6672 as an assessable penalty creates problems with the application of Section 6601(e) governing the accrual of interest. The application of Section 6601(e) creates different results based on the form of entity chosen by the taxpayer, resulting in unequal treatment of similarly situated taxpayers. A taxpayer who operates a business as a corporation can then enjoy the benefit of having collection against the individual taxpayer determined under Section 6672, with no interest and penalties due until after assessment. A taxpayer who instead operates as a sole proprietorship will be liable for the unpaid taxes, interest, and penalties from the due date of the return.
Section 6672 also currently operates differently than other provisions for holding third parties liable, despite another taxpayer’s primary liability for unpaid taxes. The insolvency statute, 31 U.S.C. 3713, and the transferee statute, Section 6901, impose interest on the third party found liable beginning on the due date of the tax return of the individual primarily liable. Although the amount of interest charged can be reduced, depending on the value of the assets the third party received, the credit granted to employees for withheld taxes grants the credit for the full value of taxes withheld, even if that full value is not paid over to the government.
Also, Section 3505 imposes liability on third parties who lend net payroll to an entity in a manner that the entity cannot then pay withheld income tax, FICA tax, and railroad retirement tax to the government. Third party lenders are liable for interest on the unpaid taxes, accruing from the due date of the return, because the lenders know the financial situation of the employer. Unlike Section 6672, the liability under Section 3505 is not a tax liability, the interest owed by the lender does not relate to interest on the unpaid collected taxes themselves. However, the operation of Section 3505 suggests that third parties conducting activities described by Section 3505 would be liable for interest on the unpaid collected taxes.
The current operation of Section 6672 creates problems for the IRS, including loss of revenue, unnecessary expense of resources, and opposition with state trust fund tax regimes. Charging interest from the date of the assessment allows the responsible person to benefit from money held in trust for the government without paying for it, resulting in a loss of the time value of money for the IRS. Section 6672 also creates an incentive for responsible officers to allow the case to proceed through all possible administrative procedures before agreeing to the assessment, even with the knowledge that they meet the statutory definition of a responsible officer. Significant IRS resources would then be spent on these cases, which would lessen if these individuals were not given an incentive to delay.
Further, most states that have a trust fund regime charge interest from the due date of the tax return, which removes the incentive for delaying the assessment and increases revenue. Also, the majority of states charge responsible persons with the same penalties also charged to the corporation for failure to deposit and pay over the collected taxes. Under the current operation of section 6672, responsible persons escape federal penalty assessments, such as failure to deposit penalty under section 6656(a) and the failure to pay penalty under section 6651(a)(2). Although the failure to pay penalty runs from the due date of the corporate tax return, the failure to deposit penalty runs from the time the corporation fails to make required deposits of collected taxes, which can be before the due date of the return. Allowing responsible persons to escape these penalties in the federal tax system but not the majority of state tax regimes creates inconsistencies and the incentive to pay state collected tax liabilities before federal collected tax liabilities.
The failure under the current operation of Section 6672 to charge responsible persons with the penalties the corporation would be charged with results in unfair treatment of similarly situated taxpayers. A taxpayer who starts a business and incorporates that business will be able to avoid a personal assessment of the failure to deposit and failure to pay penalties. However, if the taxpayer fails to incorporate the business and instead runs it as a sole-proprietorship, the taxpayer will be liable for both the failure to deposit and the failure to pay penalties. Congress has consistently expressed concern with the disparate treatment of similarly situated taxpayers. For example, in amending the Bankruptcy Act to make collected tax liabilities nondischargeable in bankruptcy, Congress wanted to ensure corporate officers and private individuals who essentially owed the same debt to the government would not receive unequal treatment in bankruptcy. Allowing penalty assessments under section 6672 to create inequities between a taxpayer who incorporates and a taxpayer who does not runs counter to established Congressional policy and does not promote effective tax administration.
Explanation of Proposal
Section 6672 would be amended to include a new subsection governing the accrual of interest and the imposition of penalties for liabilities of responsible persons under the Section.
Notes of Help to Make a Revenue Estimate
The U.S. Government Accountability Office recently reported that as of September 30, 2007, of the 282 billion dollars in unpaid IRS assessments, over 20 percent, or 58 billion dollars, results from the failure of businesses to pay payroll taxes over to the government.
Proposed Statutory Language
Section 6672 of the Internal Revenue Code of 1986 (relating to the imposition of a penalty for the failure to collect and pay over tax) is amending by adding the following new subsections:
‘(f) INTEREST ON LIABILITY IMPOSED BY THIS SECTION – Notwithstanding section 6601(e), interest on the liability imposed under this section shall run from the last date proscribed for payment of the tax described in section 6672(a) which was not paid over to the United States.
(g) PENALTIES – Any person found liable under section 6672(a) shall also be liable for a penalty for the failure to make deposits of taxes under section 6656(a) and the failure to pay tax under section 6651(a)(2) in an amount equal to the amount owed by the taxpayer primarily liable for the tax described in section 6672(a).’
Proposal: Suspension of the Statute of Limitations Period for Assessment While a Summons for Tax Records Involving a Foreign Jurisdiction is Pending
Date First Posted on Shelf: July 20, 2009
Review Status: Not Reviewed
Overview
The Internal Revenue Code is amended to suspend the statute of limitations period for assessment while a summons for tax records involving a foreign jurisdiction is pending.
Current Law
Citizens and residents of the United States are taxed on their worldwide income.
There is a three year statute of limitations period for the Internal Revenue Service to investigate and assess a filed tax return under section 6501(a). Under section 7602, the Secretary of the Treasury has the authority to issue summons to gather tax records to determine the tax liability of a taxpayer. Also, there are special procedures to summon third parties, so-called John Doe summonses, for relevant or material records under section 7609.
Section 6503(j) provides for the suspension of the period of limitations during the judicial enforcement period with respect to certain summonses issued by the Secretary and for 120 days thereafter.
On August 2, 2007, Senator Ken Salazar introduced the bill, S. 1973, during 110th Congress 1st Session. The bill, referred to the Committee on Finance, provides for the suspension of the period of limitations due to summons as presented here.
Reasons for Change
As U.S. taxpayers increasingly engage in offshore activity, the Internal Revenue Service’s Abusive Tax Scheme Program has uncovered numerous schemes to avoid U.S. taxes that involve foreign jurisdictions that offer financial secrecy laws to hide or disguise the true ownership of income streams and assets outside of the United States. The foreign jurisdictions, offering financial secrecy laws to attract foreign investment, are commonly referred to as “tax havens” because, in addition to the financial secrecy they provide, they require little or no taxation of income from sources outside their jurisdiction.
As tax related financial information is not readily available from these foreign jurisdictions, the Service must summon the taxpayer to provide certain tax records involving foreign jurisdictions. However, as the names of the taxpayers are not known there is a need to suspend the statute of limitations to provide for the time needed to obtain such records from summoned taxpayers.
Explanation of Proposal
Section 6503 on the suspension of the statute of limitations would be amended to include a new subsection to cover pending summons for foreign based records.
Notes of Help to Make a Revenue Estimate
The Service notes that it is difficult to quantify the amount of assets held offshore but provides an estimate of some $5 trillion in assets worldwide held in offshore tax havens. The Service presumes that transfers from the U.S. represent a large share of this wealth and cites one authority who estimates a minimum of $70 billion in annual revenue loss to the U.S. Timely assessment of tax liability from taxable income held in foreign jurisdictions will allow for the collection of these taxes and appropriate penalties.
Statutory Language
SUSPENSION OF STATUTE OF LIMITATIONS WHILE SUMMONS FOR FOREIGN BASED RECORDS IS PENDING.
Section 6503 of the Internal Revenue Code of 1986 (relating to suspension of running of period of limitation) is amended by redesignating subsection (k) as subsection (l) and by inserting after subsection (j) the following new subsection:
(l) Suspension While Summons for Records of Foreign Account, Entity, or Transaction Is Pending-
(1) IN GENERAL- If any summons is issued by the Secretary to a taxpayer (or to any other person to whom the taxpayer has transferred records) with respect to a return of tax by such taxpayer, and such summons requires the production of records relating to an account, entity, or transaction involving a foreign jurisdiction, the running of any period of limitations under section 6501 on the assessment of such tax shall be suspended during any judicial enforcement period (as defined in subsection (j)(3)) with respect to such summons and for 120 days thereafter. This subsection shall not apply to a summons for the production of records relating to a foreign entity the ownership interests in which are regularly traded on an established securities market designated by the Secretary for purposes of this subsection.
(2) SPECIFIC APPLICATION- Except as provided in the last sentence of paragraph (1), this subsection shall apply in any case where the summons referred to in paragraph (1) relates to--
(A) a financial account, or an entity (including a trust, corporation, limited liability company, partnership, or foundation), formed, located, domiciled or operating in a foreign jurisdiction, or
(B) a case in which the taxpayer directly or indirectly transferred money or other property to, or received money or property from, such an account or entity or any other person in a foreign jurisdiction.
Proposal: Extension of Statute of Limitations When a Taxpayer Fails to Notify the Secretary of Certain Foreign Transfers Relating to a Tax Return
Date First Posted on Shelf: August 26, 2009
Overview
The proposal extends the statute of limitations period for assessment by three years for any failure by a taxpayer to give notice of certain foreign transactions relating to a tax return.
Current Law
Citizens and residents of the United States are taxed on their worldwide income.
Under section 6501(a), there is a three year period of limitations for the Internal Revenue Service to assess the tax liability on a filed tax return. Under section 6501(c)(8), if a taxpayer fails to notify the Secretary of certain foreign transfers, the statute of limitations for the assessment of taxes with respect to any event or period to which such information relates is extended until three years after such information is furnished.
On August 2, 2007, Senator Ken Salazar introduced S. 1973 during 110th Congress 1st Session. The bill, referred to the Committee on Finance, provides for the exception to the statute of limitations as presented here.
Reasons for Change
As U.S. taxpayers increasingly engage in offshore activity, the Internal Revenue Service's Abusive Tax Scheme Program has uncovered numerous schemes to avoid U.S. taxes that involve foreign jurisdictions that offer financial secrecy laws to hide or disguise the true ownership of income streams and assets outside of the United States. The foreign jurisdictions, offering financial secrecy laws to attract foreign investment, are commonly referred to as "tax havens" because, in addition to the financial secrecy they provide, they require little or no taxation of income from sources outside their jurisdiction.
The current statute, section 6501(c)(8) refers to tax imposed "with respect to any event or period." The word "event" does not clarify that the trigger for the information request is a tax return. By specifying "tax return," the language will clearly indicate that the information requested and being provided is with respect to a tax return.
Explanation of Proposal
Section 6501(c)(8) on the tolling of the statute of limitations for failure to provide notice of certain foreign transfers would be amended to replace "event" with "tax return."
Notes to Help Make a Revenue Estimate
The Service notes that it is difficult to quantify the amount of assets held offshore but provides an estimate of some $5 trillion in assets worldwide held in offshore tax havens. The Service presumes that transfers from the U.S. represent a large share of this wealth and cites one authority that estimates a minimum of $70 billion in annual revenue loss to the U.S. Timely assessment of tax liability from taxable income held in foreign jurisdictions will allow for the collection of these taxes and appropriate penalties.
Statutory Language
EXTENSION OF STATUTE OF LIMITATIONS DURING FAILURE TO NOTIFY SECRETARY OF CERTAIN FOREIGN TRANSFERS
Section 6501(c)(8) of the Internal Revenue Code of 1986 (relating to failure to notify Secretary of certain foreign transfers) is amended by striking "event" and inserting "tax return" as underlined below:
(8) Failure to notify secretary of certain foreign transfers. -- In the case of any information which is required to be reported to the Secretary under section 6038, 6038A, 6038B, 6046, 6046A, or 6046B, the time for assessment of any tax imposed by this title with respect to any event tax return or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section.
Proposal: Exception to Statute of Limitations Period for Collection in the Case of an Attempt to Evade Collection
Date First Posted on Shelf: September 8, 2009
Overview
The Internal Revenue Code is amended to extend the statute of limitations period for collection of tax after assessment in the case of a willful attempt to evade or defeat payment of tax to 10 years after such attempt.
Current Law
Under Code section 6502, taxes must generally be collected within 10 years after being assessed.
A willful attempt to evade or defeat a tax is a felony under section 7201. However, the Code does not provide any extension to the statutory collections period for such attempts.
August 2, 2007, Senator Ken Salazar introduced S. 1973 during 110th Congress 1st Session. The bill, referred to the Committee on Finance, provides for the ten year extension to the statute of limitations on tax collection when the taxpayer attempts to evade collection.
Reason for Change
Where a taxpayer willfully attempts to evade collection, the statute of limitations should be extended for 10 years from that illegal act for the Internal Revenue Service to collect taxes due.
Explanation of Proposal
A new subsection to section 6502 (collection after assessment) would extend the period for collection of tax after assessment in the case of a willful attempt to evade or defeat payment of tax to 10 years after such attempt.
Statutory Language
EXCEPTION TO STATUTE OF LIMITATIONS ON COLLECTION IN CASE OF ATTEMPT TO EVADE COLLECTION.
Section 6502 of the Internal Revenue Code of 1986 (relating to collection after assessment) is amended by adding at the end the following new subsection:
(c) Exception in Case of Attempt to Evade Payment- In a case of a willful attempt in any manner to evade or defeat the payment of any tax that has been assessed under this title, the time for collection of such tax by levy or by a proceeding in court shall not expire before the date which is 10 years after such attempt.
Proposal: Six Year Statute of Limitations for Assessing Returns Involving Offshore Secrecy Jurisdictions
Date First Posted on the Shelf: October 6, 2009
Overview
The statute of limitations period for investigations of tax returns involving offshore secrecy jurisdictions (defined as foreign jurisdictions which unreasonably restrict information required by the United States to enforce U.S. tax laws and which have ineffective information exchange practices) would be extended to six years.
Current Law
Citizens and residents of the United States are taxed on their worldwide income.
Under section 6501(1)(a), the period of limitations is three years for the Service to assess the tax liability of return. Under section 6501(c)(8), when a taxpayer fails to notify the Secretary of certain foreign transfers, the statute of limitations is extended until three years after such information is furnished.
On August 2, 2007, Senator Ken Salazar introduced S. 1973 during 110th Congress 1st Session. The bill, referred to the Committee on Finance, includes the provision for extending the period of limitations for returns involving offshore secrecy jurisdictions to six years.
Reasons For Change
The current statute of limitations of three years does not provide the Internal Revenue Service sufficient time to investigate the increasingly sophisticated tax avoidance schemes involving offshore jurisdictions.
As U.S. taxpayers increasingly engage in offshore activity, the Internal Revenue Service’s Abusive Tax Scheme Program has uncovered numerous schemes to avoid U.S. taxes that involve foreign jurisdictions that offer financial secrecy laws to hide or disguise the true ownership of income streams and assets outside of the United States. The foreign jurisdictions, offering financial secrecy laws to attract foreign investment, are commonly referred to as “tax havens” because, in addition to the financial secrecy they provide, they require little or no taxation of income from sources outside their jurisdiction
At least 40 countries aggressively market themselves as tax havens. The largest concentrations of assets are attracted to the stable, secure environments of the long-established tax havens that enjoy the diplomatic protection of former colonial powers.
Abusive schemes usually create structures that make it appear a nonresident alien or foreign entity is the owner of assets and income, when in fact and substance, a U.S. taxpayer is the true owner. Abusive tax schemes involve different types of entities and schemes including:
1. Foreign trusts
2. Foreign corporations
3. Foreign (offshore) partnerships, LLCs, and LLPs
4. International Business Companies (BCs)
5. Offshore private annuities
6. Private banking (U.S. and offshore)
7. Personal investment companies
8. Captive insurance companies
9. Offshore bank accounts and credit cards
10. Related-party loans
Taxpayers may use a variety of devices to conceal transfers of money or other property to a foreign entity. They can (1) send income to an offshore account or entity, (2) send payments disguised as deductible expenses (for example, rents or purchases) that are paid to entities controlled by the taxpayer and generally located in a tax haven jurisdiction, (3) fabricate sales of property to a foreign entity they control in exchange for a note of which they do not expect repayment, (4) purchase nonexistent equipment in a tax haven corporation, (5) repurchase nonexistent equipment from a tax haven corporation controlled by a related entity, (6) improperly claim depreciation on payments really made to themselves.
Once money or title to property is moved offshore, the taxpayer can continue to manage it with ease using sophisticated means of communications and funds transfers. Some tax haven banks, trust companies, attorneys, and accountants operate virtual factories making false documents to create paper trails to confound auditors. A taxpayer or foreign representative can easily create front or dummy corporations inside or outside the United States to which checks are made payable. Foreign entities may be entirely fictitious. For example, the Bank of Credit and Commerce International (BCCI) had recorded many large transactions with its Bahamas branch that was merely a “cyber bank” with no charter or no presence in the Bahamas.
Given the increasing sophistication and popularity of these abusive schemes involving offshore secrecy jurisdictions, the extension of the statute of limitations provides the Service needed time to control more effectively such tax abuse.
Explanation of Proposal
A new subsection (11) would be added to the Code section 6501(c) exceptions to the period of limitations to establish a six year statute of limitations period for returns involving offshore secrecy jurisdictions.
Notes to Help Make A Revenue Estimate
The Service notes that it is difficult to quantify the amount of assets held offshore but provides an estimate of some $5 trillion in assets worldwide held in offshore tax havens. The Service presumes that transfers from the U.S. represent a large share of this wealth and cites one authority that estimates a minimum of $70 billion in annual revenue loss to the U.S. Timely assessment of tax liability for taxable income held in offshore secrecy jurisdictions will allow for the collection of these taxes and appropriate penalties.
Statutory Language
SIX-YEAR STATUTE OF LIMITATIONS FOR INVESTIGATIONS INVOLVING OFFSHORE SECRECY JURISDICTIONS.
(a) In General- Section 6501(c) of the Internal Revenue Code of 1986 (relating to exceptions from limitations on assessment and collection) is amended by adding at the end the following new paragraph:
(11) RETURNS INVOLVING OFFSHORE SECRECY JURISDICTIONS- If, for any taxable year, any item of a taxpayer (other than an entity the ownership interests in which are regularly traded on an established securities market) is an offshore secrecy jurisdiction item (as defined in subsection (n)), the tax imposed by this title for such taxable year may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return of such tax was filed.
(b) Terms Relating to Offshore Secrecy Jurisdiction Items- Section 6501 of the Internal Revenue Code of 1986 (relating to limitations on assessment and collection) is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:
(n) Terms Relating to Offshore Secrecy Jurisdiction Items- For purposes of subsection (c)(11)--
(1) OFFSHORE SECRECY JURISDICTION ITEM- The term `offshore secrecy jurisdiction item' means any item of a taxpayer which is directly or indirectly attributable to any account, entity, or transaction involving an offshore secrecy jurisdiction. Such term shall include any item directly or indirectly attributable to--
(A) the formation or ownership by the taxpayer of any applicable account or entity (or any interest in such account or entity),
(B) the transfer of any money or other property by the taxpayer to any applicable account or entity or the transfer by the taxpayer of any interest in such account or entity, or
(C) the receipt, or use, by the taxpayer of any money or other property from any applicable account or entity.
(2) APPLICABLE ACCOUNT OR ENTITY- The term `applicable account or entity' means any financial account, or any entity (including a trust, corporation, limited liability company, partnership, or foundation), which is formed, located, domiciled, or operating in an offshore secrecy jurisdiction. Such term shall not include an entity the ownership interests in which are regularly traded on an established securities market.
(3) OFFSHORE SECRECY JURISDICTION-
(A) IN GENERAL- The term `offshore secrecy jurisdiction' means any foreign jurisdiction which the Secretary determines for purposes of this subsection is a jurisdiction which--
(i) has corporate, business, bank, or tax secrecy rules or practices which, in the judgment of the Secretary, unreasonably restrict the ability of the United States to obtain information relevant to the enforcement of this title, and
(ii) does not have effective information exchange practices.
(B) SECRECY OR CONFIDENTIALITY RULES AND PRACTICES- For purposes of subparagraph (A)(i), corporate, business, bank, or tax secrecy or confidentiality rules and practices include both formal laws and regulations and informal government or business practices which have the effect of inhibiting access of law enforcement and tax administration authorities to information regarding beneficial ownership and other financial information.
(C) INEFFECTIVE INFORMATION EXCHANGE PRACTICES- For purposes of subparagraph (A)(ii), a jurisdiction shall be deemed to have ineffective information exchange practices unless the Secretary determines, on an annual basis, that--
(i) such jurisdiction has in effect a treaty or other information exchange agreement with the United States which provides for the prompt and obligatory exchange of such information which is relevant for carrying out the provisions of the treaty or agreement or the administration or enforcement of this title,
(ii) during the 12-month period preceding the annual determination, the exchange of information between the United States and such jurisdiction was in practice adequate to carry out the provisions of the treaty or agreement; and
(iii) during the 12-month period preceding the annual determination, such jurisdiction was not identified by an intergovernmental group or organization of which the United States is a member as uncooperative with international tax enforcement or information exchange and the United States concurs in such identification.
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Proposal: Allow Low-Income Taxpayers to Sue for Refund without Full Payment of Tax
Date first posted on Shelf: December 3, 2009
Overview
This proposal seeks to allow an individual taxpayer to maintain a refund lawsuit, even without full payment of the assessed tax, if the taxpayer is paying all or part of the remaining uncollected balance under an installment agreement or if the IRS has placed the taxpayer into currently not collectible status.
Current Law
Following the Supreme Court decision in Flora v. United States, section 1346(a)(1) requires full payment of all assessed tax before a refund lawsuit can be maintained in a district court or the Court of Federal Claims. See 362 U.S. 145 (1960).
The rule of full payment often harms low-income taxpayers in cases where the IRS has issued the taxpayer an incorrect notice of deficiency. While an incorrect notice of deficiency provides the taxpayer the opportunity to contest the proposed deficiency in the Tax Court without any prepayment, many low-income taxpayers do not file a Tax Court petition for various reasons, including the taxpayer never received the notice, the taxpayer received the notice, but is too scared to open the envelope and read the notice, the taxpayer does not understand the notice, and the taxpayer does not respond to the notice appropriately. If the taxpayer does not timely file a Tax Court petition, the IRS assesses the incorrect tax stated in the notice of deficiency.
After assessment of an incorrect deficiency, low-income taxpayers often make substantial payments toward the deficiency, either by credits taken from a later-year overpayments (for example, the EITC) or through a series of small monthly installment payments under an installment agreement. This leads to over payment, because the taxpayer does not really owe a large amount of the underlying liability.
If the low-income taxpayer could get into court, he or she could prove that the underlying liability is incorrect and that he or she has overpaid. However, section 7422(a) requires that no refund suit be maintained without the taxpayer having previously filed an administrative claim for a refund. Section 6511(a) provides that any administrative refund claim must be made within the later of three years after the filing of the original tax return or two years of payment of the tax. Frequently, the claim must be filed outside the 3-year period under (a) because full payment has not occurred within three years from the filing of the return preventing § 6511(b)(2)(A) from operating to allow a taxpayer a refund of the full amount paid. If more than three years has passed since the filing of the return then the claim will be based on § 6511(b)(2)(B) which limits the amount that can be refunded to taxes paid within the 2-year period before the claim is made. Sometimes this will cause a taxpayer to recover only a small fraction of the wrongfully assessed taxes which have been paid.
Reasons for Change
Current law results in three undesirable policy outcomes to the poor.
First, because the low-income taxpayer made only partial payment against an incorrect liability, the taxpayer is barred under Flora’s full-payment rule from filing suit for refund in district court or in the Court of Federal Claims for the amount already overpaid. This is a bad policy outcome because, unlike the wealthy, low-income taxpayers typically need this money now.
Second, even if the low-income taxpayer does at some later point reach full payment of the tax, the taxpayer has usually done so outside the 3 year look-back period under § 6511(b)(2)(A) and the intermittent nature of the payments means that some of them have been made more than two years before the claim is filed causing the taxpayer to lose the right to obtain those amounts. The amount of the claim sets an outside limit on the amount of refund that the taxpayer can recover either through the administrative granting of the claim by the IRS or by refund suit. The government would get a permanent windfall from the low-income taxpayer of the incorrect taxes paid prior to the look-back periods.
Third, prior to full payment, the government may insist that the low-income taxpayer keep making monthly payments against the incorrect liability. If this money is not actually owed, this creates a lengthy, unnecessary hardship on the taxpayer. The low-income taxpayer is forced to be more frugal than necessary over money that the taxpayer does not even owe.
Despite the undesirable policy outcomes to low-income taxpayers, Congress has permitted three exceptions to the Flora full payment rule for certain wealthy taxpayers.
First, § 6166(a)(1) allows the executor of an estate to elect to pay part or all of the estate tax in up to ten equal annual installments where the estate owns an interest in certain closely-held businesses whose value exceeds 35 percent of the adjusted gross estate. In this situation full payment is not required prior to bring suit as long as: (1) the estate is current on all installment payments at the time of filing, (2) no case involving the estate tax is pending in Tax Court, and (3) if a notice of deficiency with respect to the estate tax has been issued, the time for filing a petition with the Tax Court with respect to such notice has expired.
Second, when contesting a § 6672(a) penalty imposed on a responsible person for a business’ failure to pay over employment taxes, the responsible person need only pay the minimum amount required to commence a proceeding in court with respect to this or her liability for such a penalty. (The rule of partial payment available for responsible officers under 6672 is the same rule that applies to all divisible taxes such as employment taxes and most excise taxes.)
Third, Congress has allowed persons subject to certain other penalties (§§ 6694, 6700, 6701, and 6702, the first three of which are likely only to be an issue for wealthy business taxpayers) that are not subject to the deficiency procedures to pay 15% of those assessed penalties, file a refund claim, and commence a district court suit for refund. During the suit, the government may bring a counterclaim for the balance, but it may not levy or bring any collection suit for the balance.
As a result, Flora disproportionately harms low-income taxpayers.
Explanation of Proposal
The proposal proposes to allow an individual taxpayer to maintain a refund suit without full payment of the assessed tax, if the taxpayer is paying all or part of the remaining uncollected balance under an installment payment agreement or the IRS has placed the taxpayer into currently non-collectible status. This proposal accords with the underlying policy of Flora that “the Government has a substantial interest in protecting the public purse, an interest which would be substantially impaired if a taxpayer could sue in a District Court without paying his tax in full.” In this situation, the public purse is protected and tax revenues are already maximized where the taxpayer has paid, or is paying, all that the taxpayer currently can towards the liability at the time the taxpayer brings the refund suit.
The proposal would not allow a taxpayer to go to the district court or the Court of Federal Claims if the taxpayer was already in the Tax Court or still had the option of going there under deficiency, CDP, or § 6015 procedures.
If a taxpayer is taken out of currently non-collectible status or stops paying or otherwise defaults an installment agreement while the suit is pending, the court may freely dismiss the case with right to re-file later.
For a more in depth discussion of this proposal see Carl Smith, "Let the Poor Sue for a Refund Without Full Payment" (available at <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1354145">[n]</a>).
Notes to Help Make a Revenue Estimate
Historically fewer than 1,000 refund lawsuits are filed each year, and many of these are currently dismissed for failure to make full payment or failure to file an administrative claim before brining suit. Given the strict rules for maintaining suits under the proposal, it is hard to imagine more than a few hundred more suits being brought. Suits will likely be brought by attorneys in low-income taxpayer clinics, who report seeing this Flora issue only a few times each year. The dollar amounts involved in these suits are also likely to be in the $3,000 to $20,000 range, as low-income taxpayers rarely get into disputes involving large amounts. Thus, the revenue lost if all these taxpayers won these suits would likely be less than $10 million. And not all of these suits will be won. Most will settle somewhere less than the refund sought.
Statutory Language
Section 7422 of the Internal Revenue Code of 1986 (relating to civil actions for refunds) is amended by redesignating subsection (k) as subsection (l) and by inserting after subsection (j) the following new subsection:
(k) Special rule for actions where there is an agreement in effect with the taxpayer under section 6159 or when the taxpayer is in currently not collectible status.
(1) In general. The district courts of the United States and the United States Court of Federal Claims shall not fail to have jurisdiction over any action brought by an individual taxpayer for credit or refund solely because the full amount of such liability has not been paid if there is in effect between the taxpayer and the Secretary an agreement under section 6159 or the Secretary considers the taxpayer to be in currently not collectible status.
(2) Actions to which subsection applies. This subsection shall apply to any action if, as of the date the action is filed--
(A) all installments under any agreement under section 6159 the due dates for which are on or before the date the action is filed have been paid;
(B) if there is no agreement under section 6159 in effect, the Secretary considers the taxpayer to be in currently not collectible status;
(C) there is no case pending in the Tax Court with respect to the same tax period involved in the action;
(D) if a notice of deficiency under section 6212 with respect to such tax period has been issued, the time for filing a petition with the Tax Court with respect to such notice has expired;
(E) there is no hearing pending in the Internal Revenue Service Office of Appeals with respect to such tax period under section 6320 in which the underlying tax liability may be challenged under section 6330(c)(2)(B);
(F) if a notice under section 6320(a) or 6330(a) with respect to such tax period has been issued, the time for requesting a hearing under section 6320(a)(3)(B) or section 6330(a)(3)(B) with respect to such notice in which the underlying tax liability may be challenged under section 6330(c)(2)(B) has expired;
(G) if a notice of determination has been issued under section 6330(c)(3) in a proceeding under section 6320 or 6330 with respect to such tax period in which, at the hearing, the underlying tax liability was raised as an issue, the time within which the taxpayer may appeal such determination to the Tax Court under section 6330(d)(1) has expired; and
(H) to the extent that an issue in the action involves relief with respect to such tax period under subsection (b) or (f) of section 6015, the time within which the taxpayer may elect to petition the Tax Court under section 6015(e) has expired.
(3) Permissive dismissal. If the court is notified during the pendency of the action that the taxpayer is no longer in compliance with an installment agreement or is no longer in currently not collectible status, the court may, with or without taking any evidence or holding a hearing, dismiss the action with leave to refile when either the full amount of such liability has been paid or the conditions in paragraph (2) are met at the time of refiling. In deciding whether to dismiss the action, the court may consider the extent to which the action has proceeded, the extent to which full payment has been made, any hardship that may result to the taxpayer or the United States from such dismissal, and any other reason relating to the policy of the full payment rule. A dismissal under this paragraph shall not be reviewed by any other court.
(4) Prohibition on collection of disallowed liability. If the court determines that a credit or refund is due in a decision of such court which has become final, no part of such uncollected liability for the period may be collected by the Secretary, and amounts paid in excess of the amount determined by the court as correctly paid shall be refunded.
