Chapter 11 Policy changes Impact on and through the Tax Court

Litigation

The IRS is a repeat player present in all federal tax litigation.¹ It has a large group of in-house attorneys (lawyers) at the local and national level who handle its litigation and who write its regulations. The local attorneys perform the trial work, but they act on the direction of the attorneys located in the National Office who approach each issue strategically. Because of its position as a repeat player, the IRS can pick and choose the cases it litigates in order to promote the best outcomes. At the National Office, its attorneys become subject matter experts in narrow areas of the tax law. The IRS National Office groups them into subject matter areas generally headed by an attorney with many years of experience who can see the broader implications of individual cases. These attorneys advise the local attorneys as to which cases to push forward and which cases to concede. In this way, the IRS has significant influence over the cases offered to judges for decisions, as well as a significant ability to shape the course of the law through litigation.

In the United States, the legal system operates as a precedent-based system, with new decisions being influenced by the outcomes of earlier cases having similar fact patterns.² If precedent exists from Case A and later the same or similar facts come before the same or a lower court in Case B, the outcome of Case B will be controlled by the precedent set in Case A. It’s possible that if Case B had gone first, the judges might have reached a different outcome, perhaps because Case B has much more sympathetic facts and would have offered the judges a different lens through which to view the matter. Similarly, the possibility exists that the taxpayer in Case B received representation from a much more accomplished lawyer who considered matters not argued in Case A. By controlling, or at least influencing, which cases move forward in litigation first, a repeat player can seek to have the case(s) with the facts most favourable to the outcome it seeks go first and establish precedent and can otherwise choose which cases will move forward to decision. In this way, one could describe precedent as path dependent, since the order of presentation to the courts can impact the setting of precedent.

By incrementally obtaining decisions on issues of importance, the IRS can shape legal precedent and set the stage for future success. It does this not only at the trial level but also in the decisions it makes on which cases to appeal.³ When parties bring litigation in an appellate court that the IRS does not like or that has a case with issues that are especially favourable to taxpayers, the IRS will seek ways to concede or otherwise dispose of those cases, waiting for subsequent cases in a more favourable jurisdiction or with more favourable facts.⁴ Because it is a repeat player, it has the ability to shape litigation in an effort to better control precedent. That does not mean that the IRS can totally control which cases move forward in litigation but does give it much more control over the system than individual litigants have.

Regulations and other rules

Of course, the IRS also influences the law through actions other than litigation. Perhaps through regulation it plays an even more important role, given the power of regulations to shape and control the law.⁵ When Congress passes legislation, it relies on agencies to explain the law.⁶ In explaining the law, the IRS seeks to write regulations which, of course, follow the legislative mandate of Congress, but which also interpret that mandate in a manner most favourable to the government. Once the IRS has properly promulgated a regulation, courts in the United States are generally bound by the interpretation of the IRS, so long as it has reasonably interpreted the law.⁷

The same lawyers in the IRS National Office who look for cases in litigation that present the best facts also write the regulations. As mentioned, the lawyer assigned to write a regulation will be a subject matter expert on the topic on which the regulation is written and the work will be reviewed by senior lawyers and executives with many years of experience in the area. Through regulations, the IRS shapes the interpretation of changes to the law made by Congress.⁸

Litigation: impact of clinics on individual cases

Prior to the existence of low-income taxpayer clinics, low-income taxpayers essentially had no voice in shaping the law, either through litigation or through regulations. Low-income taxpayers brought litigation which could impact the law, but almost without exception, each individual taxpayer who sought to litigate an issue in their own case gave little or no thought as to how their case might influence the body of law governing low-income taxpayers as a whole.

Occasionally, a low-income taxpayer with compelling facts, the ability to persevere and good fortune would win an important case. Some important examples in the US tax system are: Vera v. Commissioner, in which the Tax Court determined that the petitioner could bring an innocent spouse case into the Tax Court for a tax period for which she had previously received a notice of determination because the IRS included the year in a second notice of determination;⁹ Loveland v. Commissioner, in which the Tax Court clarified that meeting with a revenue officer does not qualify as a prior administrative hearing which has preclusive effect on collection issues that a taxpayer may want to raise in a collection due process (CDP) hearing;¹⁰ and Porter v. Commissioner, in which the Tax Court held that the taxpayer was entitled to equitable relief under §6015(f) even though she had reason to know of the taxable distribution because of other mitigating factors.¹¹

Most cases in the United States involving low-income taxpayers result in a loss for the taxpayer.¹² That common outcome does not mean the taxpayer should have won and lost only because of the lack of representation. It does, however, reflect the fact that pro se litigants have a more difficult path to success.¹³ In many cases, the taxpayer takes a case to litigation because the pro se taxpayer lacks the skills to properly evaluate the case. In some notable cases, the low-income taxpayer lost a case that established precedent, which in turn damaged the chances of future taxpayers who may have had more compelling facts and law.¹⁴

The IRS benefits when it litigates against most pro se taxpayers since the IRS always has a well-trained lawyer who can outmatch the pro se taxpayer in arguing the law and the facts. It is not the goal of the IRS or the Tax Court to reach the wrong conclusion because the taxpayer is unrepresented, but in an adversarial system, the pro se taxpayer is almost never equipped to match the skill in arguing the case that the government brings. This imbalance puts extra pressure on the court to try to cause full development of the factual aspect of the case and to perform additional legal research on its own. The court will almost always struggle to provide the taxpayer with the protection that a well-trained lawyer could bring to the contest.

Low-income taxpayer clinics bring several benefits to the Tax Court cases in which they engage. They assist the taxpayer in properly evaluating the case and thereby facilitate settlement of some cases that otherwise would have gone to trial because of the inexperience of the taxpayer. They assist in case development which often results in settlement of the case, often favourable to the taxpayer, because the proper development of the case allows the IRS to see why the taxpayer should prevail in whole or in part. They assist at trial to make sure that proper evidence goes into the record, making it more likely that the taxpayer can succeed, and they assist in writing briefs. So, on the individual case level, low-income taxpayer clinics provide significant assistance to the taxpayers they represent, which makes it more likely that the taxpayer will prevail or will settle and less likely that the taxpayer’s case will result in an unfavourable precedential opinion.

Clinics have some constraints that the IRS does not have in trying to use litigation to shape future law. While the IRS can make strategic decisions to concede certain cases, clinics represent individuals and have a duty to those individuals to zealously represent them. Sometimes an individual may not have the best case for progressing an area of the law but has a viable case, nonetheless. Unless the client decides to be strategic in continuing to press a case, a clinic may be bound to represent the individual litigant, despite knowing that the client’s case may not be the best one with which to try to shape the law. Clinics have more leeway if they are coming in at the appellate level and offering to appeal a case that might not otherwise be appealed.

Litigation: impact of clinics on the community of low-income taxpayers

While individual case representation by the clinics provides a significant benefit to the individual taxpayers and to the system, clinics or some clinics with better resources, have the ability to use litigation to shape the law. Each individual clinic does not see as many cases as the IRS sees; however, on some issues clinics will see enough cases to pick and choose the best ones for litigation. Clinics also have the ability to see outcomes and to approach unrepresented taxpayers to offer the service of taking their case on appeal or making a request for reconsideration.¹⁵

The first example of clinics in the United States working together in a coordinated litigation strategy in an effort to change the law occurred in an attack on the regulations then promulgated under IRC 6015(f). This code provision came into existence in 1998. The regulation written by IRS attorneys explaining the law took the position that taxpayers only had two years after the IRS began collection activity within which to make an innocent spouse request for relief under IRC 6015(f).¹⁶

The 1998 legislation created three paths to innocent spouse relief – IRC 6015(b), (c) and (f). In subparagraphs (b) and (c) the statute provided the two-year limitation within which the claimant had to act after the IRS initiated collection action on the liability; however, (f) contained no such time limitation. Despite the absence of a statutory provision setting a time limit for requesting relief, the IRS wrote such a limit into its regulations. When the regulations were written, the IRS requested comments on the proposed regulation; however, it received no comments on this provision.¹⁷

Two clinics joined together to attack the regulation provision, and they succeeded in convincing the Tax Court that the regulation invalidly limited the time within which the taxpayer could request (f) relief.¹⁸ The IRS appealed the decision in Lantz and clinics quickly used the decision to flood the Tax Court with many cases. Three circuits upheld the validity of the regulation¹⁹, including the 7th Circuit in the Lantz case, but the litigation highlighted the problem. Congress put pressure on the IRS to withdraw the regulation and it did.²⁰ In 2013, the IRS issued a revised 6015(f) Revenue Procedure.²¹ This time clinics, acting through the American Bar Association Tax Section, submitted comments to the proposed regulations.²² To date, the IRS has not finalised the regulations. The process of contesting the 6015(f) regulation united many in the clinic community, showing the power of the clinics to accomplish a goal through litigation.

The Tax Clinic at the Legal Services Center of Harvard Law School (hereinafter the Tax Clinic) seeks to build on the success of the litigation in the Lantz case. By identifying issues of significant interest to the low-income taxpayer community and pushing to find cases involving those issues and to litigate those issues, the Tax Clinic seeks to push for changes to the law through litigation. It primarily does this by seeking out cases it determines present the issues it identifies as important as well as by finding the cases with the most favourable facts.

The first issue it identified concerned the jurisdiction of the Tax Court in situations in which the taxpayer files a petition beyond the time period listed in the statute. The Tax Court has a longstanding view that if a taxpayer misses the time period listed in the statute, the court cannot exercise jurisdiction over the case. The Tax Court’s position that the time period for filing a petition is jurisdictional disproportionately hurts low-income taxpayers because they are more likely to be pro se and to miss a time frame. The United States Supreme Court has issued rulings over the past seventeen years that most time periods for filing suit are not jurisdictional but are claims processing rules.²³ The Tax Clinic sought to apply the Supreme Court precedent to the various time frames for filing a petition in Tax Court. The first case in which the Tax Clinic pushed this issue was the case of Guralnik v. Commissioner.²⁴

In Guralnik, the petitioner’s attorney gave the petition in a CDP case on Friday 13 February to Federal Express and purchased its most expensive next-day delivery service. The last date to file the petition was Sunday 15 February, but because of IRC 7203 and because the last date fell on a Sunday, a timely petition could have been filed on Monday. Monday 16 February was a federal holiday, which meant that the last day to file the petition fell on Tuesday 17 February. On Tuesday 17 February, it snowed in Washington, DC, causing the Tax Court to close. The petition was delivered on Wednesday 18 February. The IRS moved to dismiss the petition as late. The Tax Clinic filed an amicus brief arguing that the time period was not jurisdictional and that the Tax Court could equitably toll the time period because of the circumstances of this case. The Tax Court ruled against the position argued by the Tax Clinic in a 16–0 en banc opinion but did accept an argument that because the clerk’s office was closed on 17 February, the petition could be timely filed the following day.

The Tax Clinic has argued this issue in additional cases in the past five years. Most of the time it has lost;²⁵ however, the DC Circuit has ruled that the language in one of the Tax Court’s jurisdictional grants is not jurisdictional.²⁶ Because of the success in the DC Circuit, a circuit split existed which caused the Supreme Court to accept a case presenting the issue of jurisdiction in the Tax Court. In Boechler v. Commissioner, the Supreme Court ruled 9–0 that the time period for filing a petition in Tax Court is not jurisdictional, which means that a taxpayer with a good excuse for filing late can have their case moved forward to a merits determination.²⁷ The issue in Boechler concerned an issue present in only 3 per cent of Tax Court cases. The primary issue in Tax Court cases involves the determination of the additional liability the IRS has determined that a taxpayer owes. This issue is present in 95 per cent of the cases. After Boechler, the Tax Court ruled again that in cases involving additional liability the taxpayer must file their petition in a timely manner. The Clinic worked with a taxpayer to appeal that decision and prevailed in the Third Circuit.²⁸ The issue may now go back to the Supreme Court for a ruling on this aspect of Tax Court jurisdiction or be resolved through acceptance by the Tax Court of the Third Circuit’s decision or by Congressional action.

While the Tax Clinic has put a lot of energy and effort into pursuing the jurisdiction issue, it has also filed amicus briefs in a variety of cases it felt had an impact on low-income taxpayers, directly represented taxpayers with impact issues in other areas of the law, and in some of its amicus briefs it has partnered with another clinic.

The Tax Clinic identified the innocent spouse area as one in which the IRS and the Tax Court were placing too much emphasis on the knowledge factor. Therefore, it chose to represent two individuals in their appeals of their losses of innocent spouse cases at the Tax Court.²⁹ In each case, the taxpayer had several positive factors in the test established by the IRS and only one negative factor, knowledge. Yet, the court found the individuals did not qualify for innocent spouse status. In both cases the Tax Clinic lost the appeal, due in part to the high burden to overturn a factual decision of a lower court. As with the jurisdictional issue, it hopes that the losses bring attention to the issue, which may bring Congressional attention to the factors necessary to obtain innocent spouse relief.

The Tax Clinic appealed a case involving last known address. Low-income taxpayers move more often than taxpayers with higher incomes. The failure to receive notice of IRS action can present significant issues to low-income taxpayers. In the appeal brought by the Tax Clinic, the taxpayers had provided notice of their change of address to the IRS in several ways but not in the way the IRS desired the notice to occur.³⁰ The appellate court overturned the decision of the Tax Court, finding that the various ways in which the taxpayers provided their new address adequately put the IRS on notice.

The Tax Clinic has filed amicus briefs in cases involving the full payment rule which keeps many low-income taxpayers from obtaining refunds overpaid to the IRS.³¹ The Tax Clinic has filed amicus briefs regarding the jurisdiction of district courts to hear innocent spouse cases.³² The Tax Clinic has filed amicus briefs in an innocent spouse case involving tacit consent to file the return.³³ The Tax Clinic has an amicus brief in the Tax Court in an innocent spouse case concerning the ability to obtain innocent spouse relief from the payment of an erroneous refund.³⁴ The Tax Clinic filed an amicus brief in the district court concerning the scope of the Regulatory Flexibility Act which requires the IRS to address the concerns of small businesses as it write regulations.³⁵ The definition of small businesses includes the gig economy jobs that many low-income taxpayers work. The Tax Clinic also filed an amicus brief in the district court in support of the right of prisoners to receive the stimulus check sent out by the IRS during the global pandemic.³⁶

The Tax Clinic has also filed an amicus brief with the United States Supreme Court in two cases.³⁷ In CIC Services, it filed an amicus brief in support of the position that the Anti-Injunction Act does not prohibit taxpayers from bringing a suit attacking a regulation where the suit does not impair the collection of tax. This issue can affect low-income taxpayers because of all of the benefit programmes Congress runs through the IRS. The Supreme Court adopted the position argued in the amicus brief, allowing the taxpayer to challenge the regulation.³⁸

Commenting on proposed legislation, regulations, forms and rules

While impact litigation provides an important avenue for representing the interests of low-income taxpayers, an even greater impact can occur by influencing the legislation, regulations, forms or rules that will govern low-income taxpayers. Prior to the establishment of low-income taxpayer clinics and the realisation by these clinics that they could make an important difference in this area, low-income taxpayers essentially had no voice in the process the IRS used to create rules, regulations and forms. Now, low-income taxpayer clinics look for announcements by the IRS of proposed rulemaking and seek to provide input whenever possible.³⁹

On 26 March 2018, the House of Representatives Committee on Ways and Means Subcommittee on Oversight published a discussion draft entitled ‘The Taxpayer First Act’. Unlike the recent tax reform legislation, the Act was jointly released in a bipartisan effort to reform tax procedure. The publication of the draft came with an invitation to submit comments and a statement that ‘Comments would be most helpful if received by April 6, 2018’. Despite the short time frame for comment, the Tax Clinic produced a forty-nine-page comment to Congress on the proposed legislation.⁴⁰ Because it is unusual for Congress to issue a formal request for comments, this is the only comment project the Tax Clinic has engaged in at the legislative phase.

Clinics generally comment on regulations in one of two ways. Many clinicians belong to the American Bar Association Tax Section. The ABA Tax Section has a formalised process for commenting on regulations and the IRS holds its comments in high regard.⁴¹ Clinicians started paying attention to regulations and regularly commenting on them about 12–15 years ago. Since that time, the committee that addresses the issues concerning low-income taxpayers has become one of the most prolific commenters on IRS regulations. Appendix A contains a list of the comment projects of the ABA Tax Section in the past decade with the projects on which the Pro Bono and Tax Clinics Committee has participated marked in bold. During this period, clinician members of the ABA Tax Section have become the most prolific of all committees of the section. In addition to the comments made by the section, individual clinics make comments from time to time as well.⁴²

As well as commenting on regulations, clinicians occasionally comment on subregulatory guidance when the IRS offers the opportunity to comment on such guidance. Clinicians comment on forms as the IRS adopts new forms or makes changes to forms. In 2020, the IRS published a notice seeking comments on the form individuals use for seeking innocent spouse relief.⁴³ Because the Tax Clinic represents numerous low-income individuals seeking relief from the joint liability caused when they have signed a joint return with their spouse, it commented on the proposed new form.⁴⁴ The comments submitted by the Tax Clinic led to a meeting between two members of the clinic and several members of the team at the IRS working on the form. A year later when the IRS published the revised form, the Tax Clinic’s comments made a difference in some parts of the revision.⁴⁵ This form has critical importance for low-income taxpayers seeking innocent spouse relief.

Most of the people submitting this form are unrepresented. In the majority of their cases, clinicians or other representatives do not get involved with their case until the IRS has denied their innocent spouse status. If the clinician begins representing the taxpayer at the stage of the Tax Court, the clinician’s ability to assist can be significantly hindered because in the Tax Court case the taxpayer may only present information presented to the IRS during the administrative consideration of the request for relief. Making sure that this form led the unrepresented taxpayer to submit as much relevant information as possible was a critical objective of the comments submitted by the Tax Clinic.

In October 2021, the Tax Clinic submitted comments on IRS Form 911 used by taxpayers to request assistance from the Taxpayer Advocate’s Office. These comments were submitted in response to a formal request from the IRS.⁴⁶

At the annual meeting of low-income taxpayer clinics in 2019, the office at the IRS in charge of the meeting arranged a meeting between several clinicians and members of an IRS team designing a revision to the form used for CDP. In anticipation of the meeting, the Tax Clinic representative to the group prepared written comments which he shared with the IRS. The meeting lasted more than two hours and gave the clinicians the opportunity for significant impact on the design of the form. Like the form for innocent spouse relief, this form is foundational to the process leading to Tax Court. Most of the taxpayers submitting this form are unrepresented at the time of its submission. If they omit arguments and information, the rules at play in Tax Court may limit the additional information they can present.

The Tax Clinic also comments on changes to the rules of the Tax Court. Each time the Tax Court makes changes to the rules that govern practice before the court, the court offers the public the opportunity to comment on the rule changes. The Tax Clinic seeks to comment each time the court offers this opportunity because some of the rules have a direct impact on taxpayers appearing before the Tax Court.⁴⁷ Over 70 per cent of the petitioners in Tax Court appear unrepresented. Because so many petitioners proceed pro se, ensuring that the rules adequately allow the unrepresented to navigate the requirements of the court becomes extremely important if these individuals have a chance of success.

Commenting on systemic problems at the IRS

One of the duties of the National Taxpayer Advocate (NTA) involves looking for parts of the tax system that do not function properly.⁴⁸ To fulfil this role, the NTA set up a system by which taxpayers and representatives could report to the Taxpayer Advocate Service problems that exist in working with the IRS. The system goes by the name Systemic Advocacy Management System (SAMS).⁴⁹ The NTA encourages clinicians to submit comments to SAMS by making it an item on which clinicians report in their grant reports. Even without the encouragement of ticking off a box on a grant report, using the SAMS system serves an important function for clinicians in their effort to interface with the system and ensure that the IRS understands problems that can impact low-income taxpayers. For many clinicians who may not participate in impact litigation or formal comment projects, the regular submission of comments to SAMS serves as their primary means of systemic advocacy. The system is well known to clinicians and heavily used. Low-income taxpayers would have little knowledge of the system and would lack the overall vision of the system to enable them to make good use of this tool.