TP Argues Collection Statute of Limitations for Assessment

[The Observer]

Our passionate TP tries to argue that the government's ten-year limitation to collect on tax assessments somehow bars the government's ability to assess the tax in the first place. He gets to this silly conclusion relying on either erroneous or doctored transcripts, while conveniently ignoring the fact that if you don't file returns, the government has unlimited time to file returns for you.

By the way, this TP is in our archives where you can read about his succesful effort to lose his real property to the government.

UNITED STATES OF AMERICA,
Plaintiff,
v.
MARVIN D. MILLER,
Defendant.

Release Date: FEBRUARY 23, 2015

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
SOUTH BEND DIVISION

OPINION and ORDER

This matter is before the court on a motion to dismiss filed by defendant Marvin D. Miller. Plaintiff United States of America seeks unpaid income tax liabilities and unpaid civil penalty liabilities from Mr. Miller. Pursuant to Federal Rule of Civil Procedure 12(b)(6), Mr. Miller moves to dismiss the complaint for failure to state a claim upon which relief may be granted. He argues the assessment of income tax was barred by the statute of limitations and the civil penalties were arbitrary and capricious. The United States opposes the motion.

I. BACKGROUND

Mr. Miller didn't file income tax returns for the years 1991 - 1995. On July 5, 2004, the Internal Revenue Service made assessments of federal income tax, civil penalties, and interest against Mr. Miller for the tax years 1991 - 1995. The IRS also made separate civil penalty assessments for frivolous filings against Mr. Miller on various dates in 2004 - 2009, 2011, and 2013 for the tax years 2002 - 2010. The United States claims that despite notices and demands for payments, Mr. Miller has refused to pay the assessed amounts. Mr. Miller doesn't dispute this claim. As of March 30, 2014, the assessments for tax years 1991 - 1995 totaled $ 435,655.38 and the assessments for tax years 2002 - 2010 totaled $ 44,172.57.

II. STANDARD OF REVIEW

Federal Rule of Civil Procedure 12(b)(6) allows dismissal when the movant fails "to state a claim upon which relief can be granted." When considering a Rule 12(b)(6) motion to dismiss, the court construes the complaint in the light most favorable to the nonmoving party, accepts all well-pleaded facts to be true, and draws all inferences in the nonmoving party's favor. Reynolds v. CB Sports Bar, Inc., 623 F.3d 1143, 1146 (7th Cir. 2010). To survive a motion to dismiss, a "complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

Mindful of Mr. Miller's pro se status, the court reads his filings liberally. Donald v. Cook County Sheriff's Dept., 95 F.3d 548, 555 (7th Cir. 1996). Thecourt will "give a pro se [party] a break when, although he stumbles on a technicality, his [filing] is otherwise understandable." Hudson v. McHugh, 148 F.3d 859, 864 (7th Cir. 1998). Nevertheless, the court is under "no obligation to act as counsel or paralegal to pro se litigants." Myles v. United States, 416 F.3d 551, 552 (7th Cir. 2005).

III. DISCUSSION

Mr. Miller claims the IRS had until May 19, 2004 to assess the tax for the years 1991 - 1995. He points to the "Account Transcript" that he claims to have received from the IRS for each of the years and that he attached to his motion. In the "Transactions" section of the transcripts, a line item states, "IRS can assess tax until 5-19-2004." The IRS assessed the tax on July 5, 2004, so Mr. Miller thinks the assessment was untimely.

The United States first disputes the authenticity of the Account Transcripts and argues the court's use of the transcripts to decide a motion to dismiss would be inappropriate. The court agrees. The court may consult matters outside the pleadings without converting a motion to dismiss to one for summary judgment under limited circumstances. See Santana v. Cook Cnty. Bd. of Review, 679 F.3d 614, 619 (7th Cir. 2012) (documents that were referred to in the complaint, authentic, and central to the plaintiff's claim weren't matters outside the pleadings for the purposes of Federal Rule of Civil Procedure 12(d)). The transcripts weren't mentioned in the complaint or authenticated and so don't fall within the limited circumstances that would allow the court to consult them to support the motion to dismiss.

The United States contends no statute limits the time period within which the IRS may assess liabilities against individuals who don't file a tax return. Under 26 U.S.C. section 6020(b)(1), if a taxpayer doesn't file a tax return, the IRS must make a return for the taxpayer. Section 6020 doesn't specify a time frame within which the IRS must make this return. Mr. Miller didn't file returns for tax years 1991 - 1995, and as a result, the United States says the IRS made his returns as it was required to do by section 6020(b)(1). In general, taxes must be assessed within three years after a return is filed. 26 U.S.C. section 6501(a). If, however, the tax return is executed by the IRS under section 6020, like Mr. Miller's tax returns for the years 1991 - 1995 were, the making of the return doesn't start the clock on the three-year statute of limitations on assessment and collection. 26 U.S.C. section 6501(b)(3). In sum, no statute limited the time frame within which the IRS could make the returns for Mr. Miller or within which the IRS could enter assessments against him based on those returns.

Mr. Miller contends 26 U.S.C. section 6502(a) is the relevant statute of limitations. Under section 6502(a)(1), an assessment may be collected by a court proceeding within ten years after the assessment of the tax. Mr. Miller claims he was told the IRS had until May 19, 2004 to make the assessments. The United States, however, claims the assessments were made on July 5, 2004, and the court must accept all well-pleaded facts in the complaint, such as this date, to be true for the purpose of the motion to dismiss. Reynolds v. CB Sports Bar, Inc., 623 F.3d 1143, 1146 (7th Cir. 2010). The complaint was filed on July2, 2014 -- within ten years of July 5, 2004 -- and as a result states a claim upon which relief plausibly may be granted. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

Mr. Miller's argument that the civil penalty assessments for the tax years 2002 - 2010 were arbitrary and capricious is based on his claim that the assessments for tax years 1991 - 1995 were erroneous. The court denies his motion to dismiss those assessments as untimely, so this contingent argument also collapses.

Finally, Mr. Miller generically argues the United States didn't plead sufficient facts to state a cause of action and points to the IRS's burden of proof under 26 U.S.C. section 6703(a). Mr. Miller doesn't tell the court how the United States' allegation that he hasn't paid civil penalty assessments the IRS made against him for the tax years 2002 - 2010 is insufficient. The complaint must only state a claim to relief that is plausible on its face, Ashcroft, 556 U.S. at 678, and the United States offers enough information to do so.

IV. CONCLUSION

For the foregoing reasons, the court DENIES the defendant's motion to dismiss (Doc. No. 6).

SO ORDERED.

ENTERED: February 23, 2015

Robert L. Miller, Jr.
Judge
United States District Court

[Famspear]

The taxpayer did attach copies of the IRS transcripts to his Motion To Dismiss Complaint. Although the copies do appear to be copies of genuine, undoctored transcripts, they are -- like IRS transcripts generally -- somewhat difficult to decipher.

The transcripts cover tax years 1991 through 1995.

One thing that I hate about the IRS computer system is that the entries are not always shown in the actual chronological order in which the entries are made. Also, the dates on the entries often are not the actual date of entry, but rather some sort of "effective date" (which may or may not be the "effective date" from a legal standpoint). If there were one thing that the IRS could do to improve its documentation on this, it would be to re-write its programs to provide that all entries must be posted in the strict chronological order in which they are made (regardless of "effective date") and that both the "effective date" and the actual entry date be shown.

Here are the first seven entries in the transcript for 1991:

[first entry]
code 15
Substitute tax return prepared by IRS [document number redacted]
11-20-1995
$0.00

[second entry]
code 595
Tax return referred for review
05-20-1992
$0.00

[third entry]
code 595
Tax return referred for review
10-25-1993
$0.00

[fourth entry]
code 595
Tax return referred for review
10-25-1993
$0.00

[fifth entry]
code 570
Additional account action pending
11-20-1995
$0.00

[sixth entry]
code 420
Examination of tax return
11-09-1995
$0.00

[seventh entry]
code 560
IRS can assess tax until
05-19-2004
$0.00

As you can see, there is some apparent duplication. And, even with a copy of the 636-page IRS handbook containing the descriptions of the codes, it can be difficult to make sense of IRS transcripts.

Assuming that all the references to "tax return" are indeed references to the SFR, and assuming (as the Court noted) that no valid federal income tax return for this year was ever filed by the taxpayer, the seventh entry (which implied that the IRS was required to assess the tax by May 19, 2004) appears to have been completely erroneous. As the Court noted, there simply is no deadline for assessing this tax where the taxpayer has not filed a valid return.

In my experience (and I have studied hundreds of these over the years), many IRS account transcripts contain errors. One type of error I find is an entry indicating that a bankruptcy case for an individual has been closed where that case is most definitely still open. We're not sure; perhaps the IRS personnel are confusing the taxpayer's discharge (which often happens fairly early in the case) with the closing of the case (which often does not happen until years later).

[Famspear]

.....He [the taxpayer] gets to this silly conclusion relying on either erroneous or doctored transcripts, while conveniently ignoring the fact that if you don't file returns, the government has unlimited time to file returns for you.

Not only that, but under section 6020(b)(1), the government is not even required to file returns for you in order to assert and collect the tax (even though the statute contains the phrase "the Secretary shall make such return....").

Curiously, had the IRS not even assessed the taxes in Miller's case back in 2004, the government actually could have filed and maintained the collection lawsuit -- per section 6501(c)(3) -- without any filing deadline at all (again, assuming that Miller has never filed valid returns for the years in question). Under section 6151(a), the taxpayer's legal obligation to pay arises "without assessment".

And, if a taxpayer files valid returns, the government can still file and maintain the same kind of lawsuit without assessing the taxes -- as long as the lawsuit is filed within three years of the date on which the valid returns are filed. (Note: That rule applies even if the valid returns are filed late.) However, the government only rarely files a lawsuit without first making the assessments.

[operabuff]

One thing that I hate about the IRS computer system is that the entries are not always shown in the actual chronological order in which the entries are made. Also, the dates on the entries often are not the actual date of entry, but rather some sort of "effective date" (which may or may not be the "effective date" from a legal standpoint). If there were one thing that the IRS could do to improve its documentation on this, it would be to re-write its programs to provide that all entries must be posted in the strict chronological order in which they are made (regardless of "effective date") and that both the "effective date" and the actual entry date be shown. . . .


As you can see, there is some apparent duplication. And, even with a copy of the 636-page IRS handbook containing the descriptions of the codes, it can be difficult to make sense of IRS transcripts.

Assuming that all the references to "tax return" are indeed references to the SFR, and assuming (as the Court noted) that no valid federal income tax return for this year was ever filed by the taxpayer, the seventh entry (which implied that the IRS was required to assess the tax by May 19, 2004) appears to have been completely erroneous. As the Court noted, there simply is no deadline for assessing this tax where the taxpayer has not filed a valid return.

In my experience (and I have studied hundreds of these over the years), many IRS account transcripts contain errors. One type of error I find is an entry indicating that a bankruptcy case for an individual has been closed where that case is most definitely still open. We're not sure; perhaps the IRS personnel are confusing the taxpayer's discharge (which often happens fairly early in the case) with the closing of the case (which often does not happen until years later).

One of the handicaps that the IRS has labored under for many years is outdated computer systems. Over the last twenty years ago or more the IRS has been working to modernize, but the process has gone slowly. Commissioner Rossotti (a computer guy rather than a tax guy) was appointed by President Clinton in large part in the hope that he would be able to jump start the process. He had some success but the IRS is still working at it. Doubtless the added programming to accommodate its responsibilities under the Affordable Care Act has not helped the overall system improvements along and of course the budget cuts don't help either.

[operabuff]

Curiously, had the IRS not even assessed the taxes in Miller's case back in 2004, the government actually could have filed and maintained the collection lawsuit -- per section 6501(c)(3) -- without any filing deadline at all (again, assuming that Miller has never filed valid returns for the years in question). Under section 6151(a), the taxpayer's legal obligation to pay arises "without assessment".

And, if a taxpayer files valid returns, the government can still file and maintain the same kind of lawsuit without assessing the taxes -- as long as the lawsuit is filed within three years of the date on which the valid returns are filed. (Note: That rule applies even if the valid returns are filed late.) However, the government only rarely files a lawsuit without first making the assessments.

All true, but most of the IRS's administrative collection tools require an assessment and notice and demand before being used. The IRS does take the position that it can offset overpayments against unassessed liabilities - see for example Rev. Rul. 2007-51: http://www.irs.gov/pub/irs-drop/rr-07-51.pdf

But as a practical matter, what usually would happen would be that the IRS would freeze the refund until an assessment of the liability could be made.

Also, as a practical matter, it's pretty rare for the IRS component issuing refunds to even be aware that there's an unassessed liability out there for which an offset is possible.

[The Observer]

One thing that I hate about the IRS computer system is that the entries are not always shown in the actual chronological order in which the entries are made. Also, the dates on the entries often are not the actual date of entry, but rather some sort of "effective date" (which may or may not be the "effective date" from a legal standpoint). If there were one thing that the IRS could do to improve its documentation on this, it would be to re-write its programs to provide that all entries must be posted in the strict chronological order in which they are made (regardless of "effective date") and that both the "effective date" and the actual entry date be shown.

The complete transcripts would show a cycle date to the right of the transaction codes (TC) which is the "effective date" I think you are referring to when the transaction was finalized by the system. The cycle date is effectively the week when the transaction uploaded to the transcript. This is not the same date as when the transaction was input by the person authorized to input it. The reason is that the system, due to its antiquity, is not real-time and a great deal of the processing is done over the weekend when there are more resources. Some of the transaction codes can upload over night or within the same week of the request. Some transactions may take two to three weeks to upload and/or impact the taxpayer's account. And we won't even discuss about employees having to switch the data tape reels that are still supporting some programs - I am not sure that Rosotti got those phased out.

And none of the above begins to address what happens when there are conflicting TCs that take precedence or current freeze codes that stop certain processing from going forward.

As you can see, there is some apparent duplication.

In this particular event, it is only the TC 595 code, which is the input to denote that an IRS employee had requested an exam referral so that the delinquent return status for 1991 that was open could be closed. Why the input was requested several times during 1992-1993 is not clear from the limited information. It may be possible that the Examination Division closed out the earlier referrals by deciding not to create an assessment, and then got new referrals to consider again; perhaps the referring employee had to provide more information or verification of the taxpayer's income before they would proceed with the 6020(b) process.

But as a practical matter, what usually would happen would be that the IRS would freeze the refund until an assessment of the liability could be made.

Which is the reason for the TC 570 posting above - it freezes the taxpayer's account so that any credits or refunds are blocked from being sent back to the taxpayer.

The TC 420 is the actual code to indicate that the audit process has started.

In my experience (and I have studied hundreds of these over the years), many IRS account transcripts contain errors.

It's hard to say from just looking at your "light version" of this transcript. It would appear that the TC 560 is an error (there would be no need to request an extension of the assessment statutory period in this particular case since no original return was filed to start the 3 year period running and in any event, any sane taxpayer would not agree to extend the IRS time to create a 6020(b) assessment.) My guess is that someone input the statute extension on the wrong case and from what I can see, there is no existing code to reverse this erroneous request.

One type of error I find is an entry indicating that a bankruptcy case for an individual has been closed where that case is most definitely still open. We're not sure; perhaps the IRS personnel are confusing the taxpayer's discharge (which often happens fairly early in the case) with the closing of the case (which often does not happen until years later).

I am not sure what types of bankruptcies you are referring to, but I know the IRS routinely treats Chapter 7 "no asset" cases as basically not collectible and will input the litigation transaction code to show that the discharge was issued on this case so they can proceed with the abatement of the taxes that qualify for discharge on the taxpayer's account. I am not sure if these types of Chapter 7 cases remain open after the discharge is issued by the court (which at least in my area looks to happen around 4-5 months after the taxpayer has filed). But if they do, I would think there is no impact on the taxpayer and that waiting for the BK to officially close before abating the taxes is not in the best interest of the petitioner. I am not sure what happens to those particular cases where the IRS determines to pursue an Isom investigation against exempt assets claimed by the taxpayer and whether they wait for closure of the BK case or proceed after the discharge to collect from those assets.

And, even with a copy of the 636-page IRS handbook containing the descriptions of the codes, it can be difficult to make sense of IRS transcripts.

Ah yes, the dreaded tome known as Document 6209. Badly organized, dense and vague language and descriptors, and seems to get bigger every year - not unlike a unpleasant in-law that has moved in with you. New revenue officers have been known to run shrieking out of the building with bleeding eyeballs when they are first shown this publication.