Correcting an Erroneous Judgment for Unpaid Taxes

If the IRS gets a court judgment for unpaid taxes, can you challenge the judgment after it is entered? What if you can show that no tax is due? Can you fix the erroneous judgment after the fact? Can you just prepare corrected returns and file them? The court addresses this in United States v. Bigg, No. 3:15-cv-217 (E.D. Va. 2019).

Facts & Procedural History

The taxpayer stopped filing tax returns in 2002. He had several significant life events. He purchased a radiology business that was struggling. The office manager concealed the financial problems.

The IRS filed substitute returns for the taxpayer. This recorded significant tax debts for the taxpayer on the IRS’s books.

From 2012 to 2014, the IRS took various actions to collect the unpaid taxes. It filed suit in 2015 against the taxpayer and his business to reduce the tax debt to a judgement. The taxpayer did not respond to the default judgment motion. The motion was granted in December of 2015.

The IRS levied on the business’ insurance payments from 2016 to 2019 to pay the taxes. The taxpayer hired a tax resolution firm that did nothing to resolve the tax debts. The taxpayer tried to file belated tax returns for 2002 through 2008, which were not processed by the IRS.

Substitute Tax Returns

The IRS is authorized to file substitute tax returns when taxpayers fail to file. The IRS does so by including all items of income it is aware of. This usually entails including the income reported to the IRS by third parties, such as income from Forms 1099, etc.

It is no secret that these substitute for returns grossly overstate the tax due. It does this as the IRS prepares the returns without full knowledge of deductions, credits, etc. the taxpayer may be entitled to.

The IRS provides taxpayers with a copy of the proposed return in advance. This gives the taxpayer an opportunity to challenge the numbers.

Judgments for Unpaid Tax Debts

If the taxpayer does not respond and the IRS isn’t able to collect, it may attempt to reduce the tax debt to a judgment. This type of tax litigation can extend the time for the IRS to collect the unpaid taxes. This typically extends the normal 10 year collection period by an additional 10 years.

The debt is then collected by the Department of Justice, Financial Litigation Unit. The case may be assigned back to the IRS collection function. Revenue officers may be assigned at that point.

But can the taxpayer go back and file corrected returns after a judgment is entered and the case has been assigned to an IRS revenue officer to collect, to correct the assessments? What if the taxpayer prepares tax returns showing that no tax is due?

Federal Rule of Civil Procedure 60(b)

Federal Rule of Civil Procedure 60(b) allows the courts to reverse a prior judgment. It is intended to allow the court to reverse an injustice.

Section 60(b) can apply when there is:

(1) mistake, inadvertence, surprise, or excusable neglect;

(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);

(3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;

(4) the judgment is void;

(5) the judgment has been satisfied, released, or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or

(6) any other reason that justifies relief.

Item six is a catch-all. The courts have said it only applies in limited and extraordinary circumstances. This includes situations where the taxpayer was prevented from prosecuting his case.

Extraordinary Circumstances

The taxpayer in the present case put on evidence that he was unable to prosecute his case. This included some very serious life events. It also included tax returns showing that no tax was due. If true, there is certainly an injustice in collecting over $1 million from the taxpayer that was not owed.

The court concluded that the life events did not prevent him from participating in the litigation. After being notified of it, he let two years pass without filing the current litigation. Thus, the court concluded that these were not “extraordinary circumstances” that merit relief under Rule 60(b)(6).

The taxpayer in this case should have hired a tax attorney, rather than a tax resolution firm. Even the court suggests that the taxpayer’s defense may have been successful if the defense was raised timely. The tax attorney could have challenged the judgment sooner.