Duty of Consistency in Suit to Collect Unpaid Taxes
Many tax cases are won or lost based on tax procedure issues. The U.S. v. Holmes, Civil Action No. 4:15-cv-00626 (S.D. Texas 2016), case serves as a reminder of this. The case involved a lawsuit filed by the government in the eleventh hour and the duty of consistency doctrine.
The Holmes case involved an estate tax return filed for the 1997 tax year. The IRS assessed the tax in July of 2004. The IRS did not make any effort to collect the tax liability until 2013–nine years after the tax was assessed by the IRS.
Facts & Procedural History
The taxpayer submitted a Form 12153 to the IRS on October 5, 2013, to request a Collection Due Process (“CDP”) hearing. The IRS lost the CDP hearing request due to the federal government shutdown from October 1, 2013 to October 16, 2013. The taxpayer then sent a letter to the IRS on June 2, 2014, to withdraw its request for a CDP hearing. The government then brought suit to collect the tax on March 10, 2015–more than ten years after the tax was assessed by the IRS.
The dispute in the case was whether the IRS’s lawsuit was timely filed. The IRS generally has ten years from the date a tax is assessed to bring suit to try to collect the tax. This time period is extended when the IRS receives the taxpayer’s request for a CDP hearing. This extended time period ends when the IRS receives the taxpayer’s written request to withdraw the CDP hearing request or the IRS issues a Notice of Determination in the CDP hearing.
Since the IRS lost the October 5, 2013 CDP hearing request, the taxpayer argued that the request was not received by the IRS until the taxpayer re-submitted the prior request to the IRS on May 2, 2014. So the taxpayer was arguing that the CDP hearing request only extended the ten year time to file suit by one month–from May to June of 2014. This would mean that the government’s time for filing suit expired in 2014 and the lawsuit was not timely filed.
The court did not agree. It applied the consistency doctrine, which it described as follows:
The elements of the duty of consistency are: (1) a representation or report by the taxpayer; (2) on which the Commission has relied; and (3) an attempt by the taxpayer after the statute of limitations has run to change the previous representation or to recharacterize the situation in such a way as to harm the Commissioner.” Herrington v. C.I.R., 854 F.2d 755, 758 (5th Cir. 1988). “If this test is met, the Commissioner may act as if the previous representation, on which he relied, continued to be true, even if it is not. The taxpayer is estopped to assert the contrary.” Id.
The Duty Of Consistency
The court dismissed the taxpayer’s argument that the duty of consistency only applies to situations where a taxpayer adopts a factual representation for one tax year and adopts a different factual representation for a different tax year. The court said that the duty of consistency doctrine applies in cases where a taxpayer has taken one position, garnering a tax benefit over many years, and attempts to change its position to garner another benefit.
The court said that the taxpayer had “garnered the benefit of avoiding the tax deficiency for many years, and now change their factual representation in an attempt to garner a judicial shield of protection from liability.”
The CDP Request – Valid?
The court noted that the taxpayer had “aggressively demanded a CDP hearing” with the IRS by writing a letter to the IRS that noted that its original CDP hearing request had in fact been received by the IRS timely. According to the court, the IRS relied on this letter and treated the hearing as a CDP hearing. Thus, the court concluded that the taxpayers were precluded from arguing that the CDP hearing request was not received by the IRS timely. This lead the court to the conclusion that the time the government had to file suit was extended by the CDP hearing request and this extension was sufficient to make the lawsuit filing timely.
This case serves as a reminder that taxpayers should be wary of filing CDP hearing requests when the ten collection statute is about to expire. When they do submit these requests, if they are not going to litigate the CDP hearing if it is not successful, taxpayers should be ready to submit a written request to the IRS to withdraw the CDP hearing as soon as they have a sufficient basis to believe that the outcome will not be favorable. This will help minimize the time that the collection statute is extended.
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