Adapt or perish, now as ever, that is society's inexorable alternative - H.G. Wells
The United States Tax Court Adopts Vinatieri as a Financial Hardship Exception to the IRS Compliance Rules
The United States Tax Court Decision in Vinatieri v. Commissioner of Internal Revenue, 133 T.C. 392 (2009), now seems to stand for a marked departure from prior collection standards. In Vinatieri, a pro se taxpayer filed a petition for review of the IRS settlement officer’s determination to proceed with a levy for unpaid 2002 taxes. Following long standing practice reflected in its Internal Revenue Manual (IRM), the IRS settlement officer had determined that the taxpayer was not eligible for collection alternatives because the taxpayer had not filed returns for tax years 2005 and 2007. On appeal to the Tax Court, the IRS filed a motion for summary judgment. Based upon the record, the Tax Court found that levy would create economic hardship for the taxpayer due to her financial condition and that despite the taxpayer’s failure to file all required tax returns the settlement officer’s decision to sustain the levy was wrong as a matter of law and an abuse of discretion.
In 2007, Ms. Vinatieri learned of a proposed levy by the IRS on her wages for unpaid 2002 taxes. She filed a timely request for a hearing. As the case proceeded, she explained to the IRS settlement officer that she suffered pulmonary fibrosis, was dying, and only worked part time. She submitted a Form 433A showing no funds available from her $800 monthly wages and virtually no assets for liquidation.
At first, the settlement officer recognized Ms. Vintieri’s dire financial condition and said the account might be placed in “currently not collectible” status. However, the settlement officer still sustained the proposed levy because Ms. Vinatieri had not filed her 2005 or 2007 tax returns. Since Ms. Vinatieri was not compliant, she was not eligible for a collection alternative.
Ms. Vinatieri filed an appeal of that determination to the Tax Court. The Commissioner moved for summary judgment arguing the taxpayer’s non-compliance barred relief under its IRM. Observing the taxpayer’s dire economic situation, the Tax Court ordered the taxpayer to file a response and urged her to contact legal aid and the local bar going to far as to provide contact information. The taxpayer was unable to travel to secure legal assistance and filed her response pro se. Her response restated her dire financial condition.
In denying the Commissioner’s motion for summary judgment, the Tax Court focused upon I.R.C. §6343 (a)(1) which requires the IRS to release a levy if the levy creates an economic hardship due to the financial condition of the taxpayer. Next the Court applied that hardship standard to I.R.C. §6330(a) which gives a taxpayer a right to a hearing before a levy is enforced.
Applying the abuse of discretion standard, the Tax Court determined that in this taxpayer’s circumstances the proposed levy would create an economic hardship therefore “the settlement officer should consider alternatives to the levy.” In reaching its decision, the Tax Court surveyed a number of other cases in which the Court had found the Commissioner’s policy requiring compliance to be reasonable. In those cases, those taxpayers had sufficient income to meet basic living expenses, had assets which could be liquidated to pay the liability in whole or in part, or had not submitted financial information to support the claim of financial hardship.
In conclusion, Judge Dawson held that the IRS’ blanket refusal to consider any collection alternative simply because the taxpayer had not filed all required tax returns was as a matter of law an abuse of discretion if the record showed that the levy would result in a financial hardship to the taxpayer.
Since Vinatieri, which was decided December 21, 2009, the Tax Court has cited Vinatieri in nine cases. In two cases, the Tax Court cited Vinatieri but did not apply its economic hardship rationale. In six of the remaining seven, the Tax Court distinguished Vinatieri and decided for the Commissioner. In those six, the individual taxpayers were not compliant with filing and had not provided financial information to the hearing officer to substantiate economic hardship. In five, the taxpayers made frivolous arguments which clearly detracted from their claim of economic hardship. In only one case, the Taxpayer provided proof of economic hardship and the Hearing Officer proposed an installment agreement as a collection alternative despite failure to file non-compliance. Unfortunately, the Taxpayer in that case rejected the alternative insisting upon uncollectible status and the Tax Court affirmed collection. The Tax Court affirmed. The nine cases citing Vinatieri are:
- Doose v. Commissioner, T.C. Memo. 2010-18, No. 29738-08L (February 1, 2010), Decision for Commissioner. Taxpayer argued economic hardship but her other frivolous arguments undermined that possibly meritorious issue.
- Constantine v. Commissioner, T.C. Summary Opinion 2010-24, No. 27172-07S (March 2, 2010), Summary judgment granted to Commissioner. Taxpayer failed to submit financial information, and presented frivolous arguments at first and second hearings.
- Coleman v. Commissioner, T.C. Memo. 2010-51, No. 4740-09L (March 18, 2010), Summary judgment granted to Commissioner. Taxpayer did not submit financial information despite time to do so before and after hearing.
- Pitts v. Commissioner, T.C.Memo. 2010-101, 050610 FEDTAX, No. 6463-09L (May 6, 2010), decision for Commissioner. Appeals Officer did not abuse discretion refusing to conduct a face to face hearing and denying currently uncollectible status. Taxpayer had refused to submit Form 433A with a frivolous objection under Paperwork Reduction Act.
- Dalton v. Commissioner, 135 T.C. No. 20 (U.S.T.C., 2010). In Dalton, the Tax Court held that the Hearing Officer had abused her discretion in rejecting the Taxpayer’s Offer in Compromise. The Tax Court based its decision on the erroneous determination by the Hearing Officer that the Taxpayer had a nominee interest in certain trust property. The Court cited Vinatieri but not for the basis of economic hardship.
- Heidemann v. Commissioner, T.C. Summary Opinion 2010-155, Docket No. 23684-08S (U.S.T.C., 2010). Heidemann is the one case in which the Tax Court applied Vinatieri, and concluded that the Hearing Officer should consider a collection alternative despite failure to file non-compliance when the Taxpayer provides proof of Financial Hardship. In Heidemann, the Taxpayer had a long history of failing to timely file tax returns. The IRS issued a notice of intent to levy. In response, the Taxpayer submitted a Form 12153 requesting a Collections Due Process Hearing. Initially, the Hearing Officer refused to consider any collection alternative because, even though the Taxpayer claimed financial hardship, the Taxpayer had provided no substantiation. At issue were the Taxpayer’s child support obligations. However, before the hearing officer issued a decision, the Taxpayer provided substantiation. The Hearing Officer determined that the Taxpayer had an ability to pay of $68 per month and proposed a Partial Payment Installment Agreement as a Collection Alternative. The Taxpayer disagreed and insisted on Uncollectible Status. The Tax Court specifically held, “Where the taxpayer has established that the proposed levy will cause economic hardship, then the Appeals officer must not sustain the levy and must instead consider a collection alternative notwithstanding the taxpayer's failure to file Federal income tax returns.” Citing Vinatieri. Even so, the Tax Court affirmed the hearing officer’s decision to allow collection because the Taxpayer rejected the $68 per month installment agreement as a collection alternative.
- Smith v. Commissioner, T.C. Memo. 2010-240, Docket No. 22223-07 (U.S.T.C., 2010). The Taxpayer in Smith had a long and involved history of litigation with the IRS over a number of tax years. Though cited by the Court, Vinatieri played no role in the Court’s decision, and the Taxpayer had failed to substantiate any financial hardship.
- Black v. Commissioner, T.C. Summary Opinion 2011-69, Docket No. 8608-10S (U.S.T.C., 2011). Tax Court affirmed IRS Settlement Officer’s decision to sustain a Federal Tax Lien. Pro se taxpayer had delinquent tax returns and did not submit any financial data specifically a Form 433A.
- Waring v. Commissioner, T.C. Memo. 2011-270, Docket No. 1599-10L(U.S.T.C., 2011). Tax Court decision for Commissioner. Taxpayer orally proposed Offer in Compromise but did not submit Form 656.
It is abundantly clear from these subsequent cases that a taxpayer must submit a timely Form 433A, 433B, or 433F with supporting documentation to substantiate his or her economic hardship and propose a viable collection alternative consistent with his or her economic circumstances.
Apart from whether the economic hardship exception to the IRM requirement that a taxpayer be compliant with regard to his or her subsequent tax returns, it remains to be seen whether this economic hardship exception should also apply to the failure of a taxpayer to make timely subsequent deposits. At present, the IRS will not consider collection alternatives for taxpayers who have failed to make timely estimated tax deposits or have unpaid balances at the time of filing.
The requirement of timely federal tax deposits prior to consideration of collection alternatives seems to fly in the face of the economic hardship exception of I.R.C. §6343 (a)(1) as applied in Vinatieri. If a taxpayer’s financial circumstances are such that he or she would suffer hardship if the Service levied upon his or her assets, then clearly he or she would likely be unable to make subsequent period deposits. That issue remains unanswered.
Even so, one observer, Hale E. Sheppard, writing in Journal of Tax Practice & Procedure, February, 2010, p. 37, argues the Tax Court itself underscored the significance of its decision:
"The taxpayer’s election was initially respected; however, the Tax Court, on its own accord, later issued an order converting the case from a small case to a regular one. Why the change of status? According to the Tax Court, it realized that “the issues presented in [Vinatieri] may provide precedent for the disposition of a number of other cases,” so characterization as a small case, which would preclude it from being cited by other taxpayers as binding legal precedent, would be inappropriate." at p. 41.
Clearly, the Tax Court now considers Vinatieri as precedent. Indeed, the Tax Court has cited Vinatieri in nine opinions since the original decision. But, whether Vinatieri will mark a change in IRS Collections practices remains to be seen. However, its message to the practitioner and to the pro-se taxpayer is clear. First, substantiate the taxpayer’s financial condition with the hearing officer. An accurate, current, and complete Form 433A, 433B, or 433F Statement of Financial Condition is essential. Otherwise, the Tax Court will have no basis in the record to review the case for economic hardship. Second, propose a viable collection alternative consistent with the taxpayer’s financial condition. Third, do not reject a reasonable collection alternative proposed by the IRS Hearing Officer. Fourth and finally, do not make frivolous arguments.
© 2012 Daniel L. Britt, Jr., Britt & Associates Attorneys, LLC,http://www.brittanda.com/