Eighth Circuit: Ex Parte IRS Communications Didn't Warrant New CDP Hearing

(Parker Tax Publishing July 2021)

The Eighth Circuit affirmed a Tax Court holding that a taxpayer was not entitled to a new collections due process hearing on the basis of information about a meeting with the taxpayer's lawyer that was included in the administrative file that was later made available to the settlement officer who reviewed the case. The court concluded that, while sharing such information is generally prohibited, an exception applies where the information is contemporaneously included in the file and pertinent to the case. Stewart v. Comm'r, 2021 PTC 160 (8th Cir. 2021).

Background

Jason and Kristy Stewart made over a million dollars between 2015 and 2016 without paying much in federal income taxes. The IRS assessed deficiencies and penalties, but the Stewarts still did not pay. Once the IRS placed a lien on their assets, however, the Stewarts requested a collections due process (CDP) hearing. Their position was that the lien should be discharged and withdrawn because they could not afford to pay their outstanding balance.

Assigned to the case was IRS Revenue Officer Jeffrey Wagner, who began his investigation by showing up unannounced to speak with the Stewarts' attorney at the attorney's office. After the meeting, which did not go well, Wagner placed detailed notes in the IRS's administrative file. They described the attorney as "uncooperative," in part because he refused to provide the Stewarts' financial information upon request, saying that he would only send it directly to the Office of Appeals. Following some further discussion, the attorney abruptly ended the meeting by saying "we're done" and directing Wagner to get out of his office. Wagner also drafted a letter, which he sent to the attorney and placed in the administrative file later that day. Summarizing what had happened at the meeting, the letter, just like the notes, discussed the attorney's refusal to provide any collection information and his "brusque direction" to leave his office. And it made clear that Wagner did not appreciate the "complete refusal to provide or even entertain providing" the financial information he had requested.

On the same day as the meeting, the IRS officially notified the Stewarts, in a notice of intent to levy, that it planned to seize their assets. The Stewarts eventually received their CDP hearing, in which a number of collection alternatives were discussed with Settlement Officer Gregory Wert. One was placing their account in currently noncollectible status, which would temporarily halt the proposed levy. Based on the administrative file, a financial analysis prepared by Wagner, and the hearing itself, Wert decided that the Stewarts were not eligible for noncollectible status. The Stewarts petitioned the Tax Court, asking for a new CDP hearing with a different settlement officer on the grounds that Wagner's notes and letter were improper ex parte communications that prejudiced Wert against them.

The Internal Revenue Service Restructuring and Reform Act of 1998 required the IRS to make certain reforms to ensure the independence of the appeals function within the IRS, including the prohibition of ex parte communications between appeals officers and other IRS employees. In accordance with this directive, the IRS issued procedures in Rev. Proc. 2000-43, which were later revised in Rev. Proc. 2012-18. Under Rev. Proc. 2012-18, statements regarding the demeanor or credibility of the taxpayer or the taxpayer's representative, and the level of cooperation (or lack thereof) of the taxpayer/representative during the revenue officer's consideration of the case, are generally prohibited. Rev. Proc. 2012-18 also prohibits "gratuitous" comments from being included in the administrative file if the substance of the comments would be prohibited if they were communicated to Appeals separate and apart from the administrative file. However, Rev. Proc. 2012-18 provides the administrative file may include contemporaneous statements that are pertinent to the revenue officer's consideration of the case, even if those statements would otherwise be prohibited ex parte communications.

The Tax Court ruled in favor of the IRS after finding that the exception for contemporaneous pertinent statements applied to Wagner's notes and letter. The Stewarts appealed to the Eighth Circuit, arguing that Wagner's statements were gratuitous and not pertinent to their case.

Analysis

The Eighth Circuit affirmed the judgment of the Tax Court. The Eighth Circuit agreed with the Tax Court that Wagner's comments fell under the exception for contemporaneous pertinent statements and were not gratuitous.

The court found that, under the Internal Revenue Manual, Wagner had a duty to document the case history after making initial contact with the Stewarts' attorney and finding that he was unwilling to provide all the necessary information. In the court's view, Wagner's statements were pertinent precisely because they would serve as a reminder of the information that Wagner still needed to collect and what difficulties he might face in doing it. Although the Stewarts contended that once they requested a CDP hearing, Wagner should not have shown up and demanded financial information from their attorney, the court found that a CDP hearing request does not suspend the IRS's investigation. The court reasoned that, in order to determine whether the Stewarts' debt was noncollectible, the IRS had to evaluate their financial condition, so Wagner still had a role to play in gathering information in advance of the hearing.

Further, the court explained that the Stewarts were not entitled to a new hearing before a different settlement officer just because judicial conduct rules impose stricter limitations on ex-parte communications than the IRS does. The court said that settlement officers are not judges and found that the IRS decided early on with the issuance of Rev. Proc. 2000-43 that it would not adopt the formal ex parte procedures that would apply in a judicial proceeding.

For a discussion of the rules for ex parte communications between Appeals and other IRS employees, see Parker Tax ¶260,592.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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