IRS Properly Referred Case to DOJ Before Rejecting Proposed Installment Agreement

(Parker Tax Publishing September 2023)

In a case of first impression, the Second Circuit held that the IRS properly referred a taxpayers' unpaid assessment to the Department of Justice for the commencement of a civil action before formally rejecting their proposed installment agreement, even though Reg. Sec. 301.6331-4(b)(2) prohibits referrals so long as a taxpayer-proposed installment agreement remains pending. The Second Circuit found that Code Sec. 6331 is silent on when the IRS may refer an action to the DOJ, and a regulation that limits the IRS's referral power cannot read into the statute something that is not there. U.S. v. Schiller, 2023 PTC 236 (2d Cir. 2023).

Background

Denise and Walter Schiller, a married couple, failed to pay $91,945 in taxes as reported on their 2007 joint tax return. On November 3, 2008, the IRS jointly and severally assessed defendants $112,324 in taxes, penalties, and interest. The Schillers conceded that these calculations were correct.

On December 7, 2017, the Schillers proposed an installment agreement to the IRS, offering to pay $361 per month toward their tax liabilities. An IRS agent visited the Schillers on August 7, 2018, to discuss the tax debt. IRS internal records indicated that, by September 19, 2018, the IRS had determined that the proposed installment agreement should be rejected.

On October 30, 2018, the Schillers received a letter from the IRS formally rejecting their proposal on the grounds that they had "sufficient cash or equity in assets to fully or partially pay the balance owed." The letter explained that "if [the Schillers] previously received a notice accepting [their] installment agreement proposal, such acceptance was not authorized and any acceptance is withdrawn" and that, to the extent accepted, the agreement was terminated. Finally, the letter outlined the procedure to follow if the Schillers did not agree with the decision to deny or terminate the installment agreement, which included filing a request for an administrative appeal within 30 days. Unbeknownst to the Schillers, by the time they received this letter, the IRS had already referred the matter to the Department of Justice (DOJ) to initiate collection proceedings in court. The Schillers, who were not aware of the timing of the referral to the DOJ, did not take any of the steps outlined in the letter or seek an appeal of the decision by the November 29, 2018, deadline.

Under Code Sec. 6331(k)(2), the IRS is prohibited from levying a taxpayer's property with respect to an unpaid tax during (1) the period that an offer for an installment agreement for payment of such unpaid tax is pending with the IRS; (2) the 30 days following either a rejection or termination of an installment agreement; (3) the period that an installment agreement is in effect; and (4) if an appeal from the rejection or termination of an installment agreement is filed, the period that such an appeal is pending. Reg. Sec. 301.6331-4(a)(2) provides that a proposed settlement agreement becomes pending when it is accepted for processing and remains pending until the IRS accepts the proposal, the IRS notifies the taxpayer that the proposal has been rejected, or the proposal is withdrawn by the taxpayer. In addition, Code Sec. 6331(i)(4)(A) and (k)(3)(A) combine to bar the government from instituting collection proceedings in court when an installment agreement is in the picture. The combined effect of these interrelated provisions is that no proceeding in court of the collection of any unpaid tax can be begun while a proposed installment agreement remains pending. However, Reg. Sec. 301.6331-4(b)(2) goes a step further, delaying not just the commencement of collection proceedings but also referrals to the DOJ so long as a taxpayer's offer for installment payments remains on the table.

On November 30, 2018, following the expiration of the 30-day period for administrative appeals from the IRS's formal rejection of the installment agreement, the DOJ commenced an action in a district court seeking to reduce the Schillers' 2007 unpaid federal income taxes to a civil judgment. The parties filed cross motions for summary judgment. In their motion, the Schillers argued that the IRS had violated Code Sec. 6331 and Reg. Sec. 301.6331-4(b)(2) by referring this case to the DOJ before formally rejecting their proposed installment agreement. Although conceding that the referral was premature under Reg, Sec. 301.6331-4(a)(2), the government contended that it was entitled to judgment as a matter of law because it complied with the statutory requirement by commencing the action 31 days after the formal rejection of the Schillers' proposed installment agreement. The district court granted the government's motion for summary judgment and denied the Schillers' cross-motion.

The Schillers appealed to the Second Circuit. They argued that, because Code Sec. 6331(i)(4)(A) refers to a discrete act by the Treasury Secretary, the "proceeding" contemplated by the statute begins immediately upon the Secretary's referral of the assessment to the DOJ. They also claimed that the IRS's violation of Reg. Sec. 301.6331-4(b)(2) should result in the invalidation of the referral and bar the government's collection action.

Analysis

The Second Circuit affirmed the judgment of the district court. The Second Circuit noted that this dispute presented a question of first impression for the court.

The court rejected the Schillers' argument that an IRS referral - that is, a request that the DOJ begin litigation - should be considered tantamount to beginning a collection proceeding in court. The court noted that the language of the regulation on which the Schillers relied recognizes the distinction between referring and beginning a case. In addition, the court noted that the plain terms of the suspension provisions of Code Sec. 6331(i) and (k) prohibit the commencement of a collection action in court during specified periods, not the IRS's antecedent request that the DOJ file such an action. The court said that, in short, the Code is silent on when the IRS may refer an action to the DOJ, and a regulation that limits the IRS's referral power cannot read into the statute something that is not there.

The court also declined to invalidate the referral of the Schillers' case to the DOJ based on the IRS's violation of Reg. Sec. 301.63331-4(b)(2). The court observed that an agency's failure to follow its own regulations or procedures can require its action to be invalidated. However, the court noted that Second Circuit precedent requires a showing of prejudice to the rights protected where the regulation does not affect fundamental rights derived from the Constitution or federal statute. The court found that the Schillers did not claim a violation of the constitutional rights and noted that the regulatory limits on IRS referrals of collection actions are not statutorily derived. As a result, the Schillers had to demonstrate prejudice for the government's violation to invalidate the collection action.

In the court's view, the Schillers neither advanced any particular theory of prejudice nor established that they suffered harm from the IRS's premature referral of the collection action. There was no evidence, in the court's view, suggesting that the premature referral improperly curtailed the IRS's consideration of their proposed installment agreement, which had been pending before the IRS for nearly a year by the time it was formally rejected. The court noted that the Schillers did not assert they were even aware of the referral at the time they learned the IRS had rejected their proposed installment agreement. The court said that to the contrary, the IRS subjected their proposed installment agreement to multiple levels of internal review, furnished notice of the rejection, provided an explanation for why the proposal was rejected, and afforded the Schillers an opportunity to appeal, which they declined to pursue. In conclusion, the Second Circuit agreed with the district court's assessment that the government's breach of Reg. Sec. 301.6331-4(b)(2) constituted nothing more than "a technical, non-prejudicial error on the part of the government."

For a discussion of installment agreements, see Parker Tax ¶250,515.

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.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com