Anyone that has ever represented a taxpayer in an IRS exam eventually has seen the IRS Form 4549 which is used by the IRS agent to indicate the proposed assessment in cases where the parties are expected to agree to the amounts. The second page of the form contains a signature block for the taxpayer to sign to agree not to contest the amounts on the form.
In the case of Hinkle, et al v. United States, US DC NM, Case No. 1:16-cv-01048 KG/SCY the taxpayer protested that they signed the Form 4549 after receiving what they believed were assurances from the IRS agent that no penalties would be assessed for the years in question. Despite that, just after they had signed the forms they were notified the IRS was considering assessing penalties under IRC §6707A.
As the Court outlines the steps leading up to the signing of the Form 4549s in this case:
In April and May 2009, Plaintiffs were notified by Internal Revenue Agent (“IRA”) Russell Gadway, on behalf of the IRS, that their 2007 tax return had been selected for examination.4 (Doc. 34-1) at 1-2, 23-24, and 44-45. On June 14, 2010, each set of Plaintiffs received a letter from IRA Gadway referencing tax years 2007 and 2008, stating, in pertinent part: “[t]his correspondence is to see if I can convince you to agree to the enclosed examination change report. This report is different from previous ones in that the penalties have been waved (sic) if you agree at my level when you relied on your preparer for taking the deduction.” Id. at 3, 25, and 46. Each letter was accompanied with a Form 4549 document titled “Income Tax Examination Changes,” and this form assessed an accuracy-related penalty under 26 U.S.C. § 6662. Id. at 4-5, 26-27, and 47-48. On July 7, 2010, William D. Hinkle signed a Form 4549 document which assessed neither a § 6662 penalty nor any other penalty. Id. at 49-50. On July 11, 2010, Gene E. and Betty L. Hinkle also signed a Form 4549 document which assessed neither a § 6662 penalty nor any other penalty; and, R. Bryan Hinkle and Matilda Garcia signed their Form 4549 document which assessed neither a § 6662 penalty nor any other penalty on July 12, 2010, and July 13, 2010, respectively. Id. at 6-7, and 28-29.
Thus, the taxpayers were unpleasantly surprised just a few days later. As the opinion continues:
On July 19, 2010, the IRS notified R. Bryan Hinkle and Matilda Garcia, and William D. Hinkle, that it was considering assessing penalties under 26 U.S.C. § 6707A for failure to disclose a listed transaction under 26 C.F.R. § 301.6011-4(b)(2) and 26 U.S.C. § 6111 and § 6112. (Doc. 34-1) at 31, 51.
Things didn’t get less confusing when yet more correspondence arrived in September:
On September 4, 2010, Gene E. and Betty L. Hinkle received a letter from Deborah M. Daub on behalf of William P. Marshall, North Atlantic Area Director of the IRS, stating “[w]e’ve reviewed and accepted the examination report that we previously gave to you regarding the examination of your tax return for [2007 and 2008]. We do not plan to make any additional changes to your return(s) unless we change a partnership, S-Corporation, trust, or estate tax return in which you have an interest.”5 Id. at 8.
The matter remained in this state until the following year when the IRS decided to propose the penalties under IRC §6707A:
In late March 2011, each Plaintiff received a Form 4549-A titled “Income Tax Discrepancy Adjustments” assessing a civil penalty under § 6707A.6 (Doc. 34-1) at 9-10, 32-33, and 52-54. On April 10, 2011, Robert E. Bivins, the Plaintiffs’ accountant, sent a letter to IRA Gadway protesting the § 6707A penalty in the March 2011 Form 4549-A documents. Id. at 11-12, 34-35, and 55-56. Mr. Bivins notes “[t]he taxpayer was further assured no penalties would be assessed through acceptance and payment of taxes alleged to be due, which assurance has apparently been broken.” Id. at 12, 35, and 56.
The IRS took a while to make its next move, but when it did so it wasn’t one the taxpayers liked:
Over a year later, on September 3, 2012, the Plaintiffs received “Notice of Penalty Charge” from the IRS for tax years 2007 and 2008. Id. at 13-16, 36-39, and 57-60. A week later, Mr. Bivins responded with a letter protesting the assessment of § 6707A penalties against Plaintiffs in the Notice of Penalty Charges. Id. at 17, 40, and 61. On September 19, 2013, Mr. Bivins completed and submitted Form 843 documents for the Plaintiffs for tax years 2007 and 2008, requesting an abatement of the § 6707A penalty. Id. at 19-20, 42-43, and 63-64.
The IRS issued a response in December of 2013 to the taxpayers:
On December 26, 2013, Gene E. and Betty L. Hinkle received a letter from Jeffrey E. Barrett, Operations Manager, AM Operations 1, on behalf of the IRS, referencing correspondence on September 19, 2013.7 Id. at 21. This letter states, in pertinent part: “Dear Taxpayer: Thank you for your correspondence dated 09/09/13. In reviewing your account, our records show that all penalties have been waived for the tax years listed above, as agreed by Internal Revenue Agent Mr. Russell Gadway.” Id.
Despite the statement that “all penalties have been waived as agreed” by the IRS agent, no refund of the §6707A penalty payments were forthcoming. Thus, the matter ended up before the court.
One fact readers may have noticed is that the IRS was looking at two different penalties—one was the 20% accuracy related penalty under §6662 which had initially been proposed in the examination and which was later removed and, separately, the penalty under IRC §6707A for the failure to disclose a listed transaction. And, in their various correspondence, never actually dealt with both penalties, resulting in the rather confusing correspondence.
However, by the time this is in Court it’s clear which penalties are in dispute—the IRS’s ability to go after the §6707A penalties after having obtained the taxpayer’s consent to the other examination changes on a Form 4549 along assurances that penalties would be removed.
The Court first looked at whether the Form 4549 and additional correspondence had created an enforceable contract with the taxpayer that barred the later imposition of the IRC §6707A penalties. The Court concluded that IRC §§7121 and 7122 contained the exclusive means by which the IRS could be bound contractually to settle tax matters.
The opinion notes:
Under § 7121(a), “[t]he Secretary is authorized to enter into an agreement in writing with any person relating to the liability of such person (or of the person or estate for whom he acts) in respect of any internal revenue tax for any taxable period.” Further, “[a]ll closing agreements shall be executed on forms prescribed by the Internal Revenue Service.” 26 C.F.R. § 301.7121-1(d)(1). The appropriate forms are Form 866 or Form 906. Rev. Proc. 68-16, Sec. 6.
The Form 4549 is not one of the designated forms that provides for such a binding agreement on the IRS.
But the taxpayers argue that the IRS had offered to remove any penalties if they would agree to the proposed assessments, and that offer is documented in the December 2013 letter that showed “all penalties had been waived” in accordance with their agreement with the IRS Agent.
But the Court did not accept this view. The opinion holds:
The Court disagrees for at least two reasons. First, the December 26, 2013, letter does not amount to an offer as there is no promise by the IRS to take or forego some action. At most, this letter implies an agreement to waive penalties, as defined by IRA Gadway’s June 14, 2010, letter accompanying the Form 4549 documents. The June 14, 2010, letter refers to previous Form 4549 documents, and the only previous Form 4549 documents show an accuracy-related penalty under § 6662 and not a § 6707A penalty. In other words, Plaintiffs have failed to provide evidence of a Form 4549 document assessing a § 6707A penalty prior to IRA Gadway’s June 14, 2010, letter.
Second, neither the Form 4549 documents nor the December 26, 2013, letter are in a form required to create a binding closing agreement under 26 C.F.R. § 301.7121-1(d)(1). Plaintiffs cite Haiduk v. Commissioner of Internal Revenue, and other similar United States Tax Court memorandum opinions, as authority to navigate around this closing agreement standard. See Haiduk, 60 T.C.M. (CCH) 864 (1990) (“Formal stipulations of settlement or decision documents are not absolute prerequisites to a binding agreement to settle pending litigation if the intent of the parties to settle and the terms of the settlement are otherwise ascertainable.”). However, cases like Haiduk only apply to agreements in docketed cases. See also Mueth v. United States, 2008 WL 2625909, at *8 (S.D. Ill.) (“In other words, the § 7121 statutory framework (providing for closing agreements) is the exclusive method to administratively settle a tax liability until a suit is docketed in Tax Court or District Court. Once suit is filed, settlement need not be accomplished via § 7121 closing agreement and can be effected by other means.”). The cases cited by Plaintiff are inapplicable because the supposed agreement occurred before this case was filed in September 2017. Therefore, the Court concludes there is no genuine issue of material fact as to whether there was an enforceable contract precluding the IRS from assessing the § 6707A penalty.
In the absence of a contractual agreement, the Court could still find the IRS was barred from assessing the penalty based on the concept of equitable estoppel. The opinion, citing United States v. Browning, 630 F.2d 694, 702 (10th Cir. 1980), provides that the taxpayers need to prove four assertions to be able to obtain equitable estoppel relief against the IRS:
- The party to be estopped (the IRS in this case) must know the facts;
- The IRS must intend that its conduct will be acted upon or must so act that the party asserting the estoppel has the right to believe that it was so intended;
- The taxpayer must be ignorant of the true facts; and
- The taxpayer must rely on the IRS’s conduct to his injury.
The opinion goes to note that if there “affirmative misconduct” that can create estoppel against the government.
The Court does not find that there was any evidence of an affirmative misrepresentation by the IRS. The opinion notes:
The evidence establishes that IRA Gadway waived the § 6662 accuracy-related penalty. IRA Gadway’s June 14, 2010, letter states that previous penalties would be waived for signing the accompanying Form 4549 documents. (Doc. 34-1) at 3-5, 25-27, and 46-48. The accompanying 4549 documents assess the § 6662 penalty.
Plaintiffs argue the § 6707A penalty also was waived and they offer the deposition testimony from Mr. Bivins, who testified that IRA Gadway represented to him that IRA Gadway had settlement authority on behalf of the IRS. (Doc. 37-1) at 7 (depo. at 72). Mr. Bivins also testified that he discussed the § 6707A penalty with IRA Gadway and that there were previous examination change reports, presumably Form 4549 documents, assessing a § 6707A penalty. Id. at 2 (depo. at 27); id. at 3-5 (depo. at 29-31). While this Court considers the evidence, including the documents, in the light most favorable to Plaintiffs, it concludes Mr. Bivins’ reliance was not reasonable, specifically that the § 6707A penalty was included in a Form 4549 document prior to IRA Gadway’s June 14, 2010, letter. Thus, based on the evidence before the Court, a reasonable jury could only find that IRA Gadway’s June 14, 2010, letter waived the § 6662 penalty, and not the § 6707A penalty.
The Court also did not find that the December 2013 letter provides any evidence of affirmative misconduct regarding the §6707A penalties:
The December 26, 2013, letter does not specifically mention the § 6707A penalty but does reference correspondence dated September 19, 2013, the date the Form 843 documents were filed. (Doc. 34-1) at 21-22. This letter references a waiver of “all penalties” as agreed by IRA Gadway. Id. at 21. Construed in the light most favorable to Plaintiffs, this letter raises a question whether Manager Barrett, on behalf of the IRS, included the § 6707A penalty in the December 26, 2013, letter. Even so, this letter does not demonstrate affirmative misrepresentation or concealment necessary for a reasonable jury to find the IRS engaged in affirmative misconduct. Thus, Plaintiffs have not established a genuine issue of material fact requiring their claim of equitable estoppel to proceed to trial.
The key problem here was not getting an explicit explanation of what the IRS agent meant by removing the penalties. The taxpayers appear to have assumed that all penalties the IRS planned to assert would be on the examination report. While that assumption appears reasonable on its face, the §6707A penalty is in a somewhat different category.
As well, the agent had agreed to remove the penalties on the report—and only §6662 penalties showed on the report.
Finally, as the Court notes, absent a formal closing agreement the IRS is not barred from asserting additional tax for the year in question. While it is not the norm for the IRS to go back to the same year to go after penalties under a new issue, it clearly is something the IRS can do.