How Much Process Do We Really Need?

This was published on Passive Activities and Other Oxymorons on December 24, 2010.
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Susan Fay Mostafa v. Commissioner, TC Memo 2010-277 , Code Sec(s) 6330.

In my professional life, I represent taxpayers.  So my general inclination is to root for them.  Sometimes, though, I really wonder if we have too much process.  Susan Fay Mostafa did not file her 1996 return (Sometimes I have this time warp thing where I will type 1995 where I really mean 2005.  That's not the case here.  I really mean 1996).  The IRS issued a notice of deficiency which Ms. Mostafa appealed to Tax Court.

In her first round in Tax Court (TCM 2006-106) she brought up some unique arguments.  She argued that the IRS was barred from assessing her by the statute of limitations (You have to file a return to start the statute).  She had blown an IRA rollover by just 4 days but had no explanation.  She also asked for attorneys fees. The court indicated that she hadn't made the motion properly.  Regardless, you don't get attorney fees when you lose.  They didn't even mention that she was representing herself.

Having lost in tax court, she still didn't pay.  So the IRS proposed to levy her assets.  Of course she got out trusty old form 12153 and requested a collection due process hearing.  She also mailed a check to the IRS for $701 with the notation "Endorsing this check accepts 1996 tax return paid in full".  (The tax liability was $1,377 with a 25% non-filing penalty tacked on. I don't want to think about how much interest there must be.)  The check was processed.

The appeals officer did not buy her argument that processing her check compromised the liability:

The Tp wanted to bring up liability issue but I explained to her that the hearing is to setup a collection alternative, such as a OIC as that is the box she marked on form 12153. TP states she has been to tax court but disagrees with amount owed and stated she was told that if she sent in the payment $701.00 that the account would be full paid and she said she stated that on her check (if check was cashed that would be agreeing account was full paid) On November 19, 2008, the Appeals Office issued a notice of determination sustaining the proposed levy. The notice of determination stated that Mostafa had attempted to raise the issue of her underlying tax liability but that she could not do so because she had received a deficiency notice.

So Ms. Mostafa decided to go to Tax Court, again.  And, being experienced now, she represented herself, again.

The Tax Court did not buy her argument,  It noted that she did not make her offer in compromise on the approved form and the IRS did not inform her it had been accepted.

There are a couple of practical points here.

If you are anywhere near owing tax you should file a return even if you think you don't owe tax.  That will get the statute of limitations working for you in the event you are mistaken.  (If you are married and not filing a joint return, you should always file a separate return since you can be deemed to have consented to a joint return you didn't sign.)

A friend of mine who does collections indicates that when he does form 12153, he always checks all the boxes, which includes "Doubt as to Liability".  If Ms. Mostafa had done that maybe the Appeals officer would have considered her argument.  It's like if you are accused of murdering somebody you say you weren't there and if you were there you didn't do it and if you did it it was self-defense and anyway you're insane.

Finally, the paid in full trick on the check is really clever, but it does not work.

On a policy level, my question is whether somebody should really be entitled to two trips to Tax Court on the same liability which will be almost 14 years old if it finally is collected.  It appears to me that for some people, the income tax really is voluntary.