IRS agents interact with taxpayers. In doing so, they make misrepresentations as any other human does. Some are unintentional and some are intentional. But what is a taxpayer to do if the IRS agent makes a misstatement and it negatively impacts the taxpayer? The McRae v. Commissioner, T.C. Memo. 2019-163, case touches on this issue.
Facts & Procedural History
This case involved an IRS audit. The IRS did not conduct the audit within the time limit provided by Congress, which is fairly common. The IRS agent sent the taxpayer a Form 872, Consent to Extend the Time to Assess Tax, to ask the taxpayer to agree to additional time for the IRS to audit their tax return.
The taxpayers did not execute the form initially. To induce the taxpayers to sign the form, the taxpayers allege that the IRS agent told them that they would have a small tax liability. The taxpayers signed the form, but the IRS agent’s statement as to the size of the tax liability turned out not to be true.
Tax litigation ensued. The taxpayers pointed out the IRS agent’s misrepresentation as to the amount of the liability. They argued that the wavier was invalid and, as such, the IRS assessment was not timely.
Estoppel in Tax Cases
Lawyers are familiar with the concept of estoppel. It is a judicial doctrine that prevents one party from taking advantage of or benefiting by taking an inconsistent position.
The doctrines of estoppel and quasi-estoppel have been applied against the IRS. There are quite a few court cases that have considered estoppel claims for statements made by IRS employees.
For example, in Ritter v. United States, 28 F.2d 265 (3d Cir. 1928), an IRS agent told a taxpayer that a refund was not needed to recoup an overpayment from a prior year. The IRS agent’s statement was not true. The IRS did not issue the refund and the time passed for filing a refund claim. The taxpayer argued that the IRS was estopped from asserting that there was no written refund claim, as the oral misrepresentation and taxpayer response counted as a refund claim. The court did not agree.
Since these early cases, the courts have developed several elements that must be established for estoppel to apply. To establish estoppel, the taxpayer has to show that:
- There was a false representation or wrongful misleading silence by the IRS,
- The error must be in a statement of fact and not in an opinion or a statement of law,
- The taxpayer was ignorant of the true facts, and
- The taxpayer was adversely affected by the IRS’s acts or statements.
If these elements are established, the courts can presume certain facts to be true even if they are not actually true.
The IRS’s Agent’s False Representation
In this case, the IRS agent allegedly lied to the taxpayer about the magnitude of adjustments he intended to make. As a tax attorney, I find it entirely plausible that the IRS agent made this type of misrepresentation. If true, this would seem to be a false representation.
The IRS agent’s lie involved a statement of fact rather than an opinion of law, so the second element seems to have been met.
The taxpayer was probably not aware of the magnitude of the IRS auditor’s adjustment and was no doubt harmed by it as he ended up being liable for more tax, so the third and forth elements seem to have been met.
The court did not find for the taxpayer. It reasoned that:
Having heard the participants’ testimony, we do not believe that Ms. Beckett made any misrepresentation to Mr. McRae. In any event, Mr. McRae was not ignorant of the facts. He knew that the IRS was proposing to disallow (among other deductions) an NOL deduction of $79,160 for 2013; that disallowance would not have produced a “small liability” for 2013. And petitioners were not adversely affected by signing the Form 872. Had they not done so, the IRS would have issued them immediately a notice of deficiency determining the same adjustments that it ultimately determined.
This case involved a carryforward of a net operating loss (NOL) from earlier years. The IRS made adjustments to this and to other business expense deductions. It seems plausible that the taxpayers did not know of the tax impact of disallowing this NOL carryfoward on their 2013 tax liability. The NOL computation is buried on the IRS’s tax computations (on the Form 4549). The taxpayers very well may have thought that the disallowance of the NOL carryforward would have resulted in a small liability–particularly if the IRS agent told them that it would result in a small tax liability.
The outcome of this case turned on the evidence presented to the court. The missing link seems to be documentation of the IRS agent’s misrepresentation. Perhaps this could have been documented in correspondence with the IRS agent and/or the IRS agent’s manager. The taxpayers surprise could have been documented too.