The complexities tax practitioners face when practicing before the Internal Revenue Service and in Tax Court can be illustrated by following a case as it progresses from a return to a settlement. The case of actor Charlie Sheen highlights many of the issues that confront practitioners as they navigate the path from Appeals to Tax Court to settlement. Steven Jager, a CPA and partner at Fineman West and Co. LLP, who is also admitted to practice in Tax Court, faced a number of hurdles when he was handed the case, which had proceeded to the Independent Office of Appeals.
When Charlie Sheen filed his 2015 tax return, he owed money but couldn't pay it, Jager said. "There was no audit — it was a self-assessed return filed without the ability to pay the balance due. When a taxpayer files and doesn't pay, they ask for the amount owed. If the taxpayer doesn't pay within 30 days, they ask for it, nicely. Eventually they stop asking nicely, and assign the case to a revenue officer, a field collections person, and their job is simply to collect money and information. In this case, they assigned it to a very aggressive revenue officer."
"One of the tools they use is to issue a notice saying that if you don't pay within 30 days, they might levy upon your property. They are required to give that warning under Code Section 6330," he continued.
Then, during that 30-day period of time, there are several possibilities, according to Jager. "One is that the taxpayer or his representative can file for a [Collection Due Process] hearing. This is exactly what happened. Charlie's business manager filed the appropriate document and requested a CDP hearing. Having filed the request, the business manager was able to delay further collection activity."
In the normal course of events, the case would then be transferred from the revenue officer to the Independent Office of Appeals. This case was transferred to a settlement officer in the East Harford, Connecticut, Independent Office of Appeals. There's no requirement for the IRS to have the case go anywhere other than where they want or have the capacity available, Jager explained. The conferences can be held by telephone, entirely by correspondence, or a combination of both, or fact to face.
"The purpose of the CDP hearing is to act as the constitutional protection against having a U.S. citizen having their stuff taken from them without due process, under the Fourth Amendment of the constitution," he continued. "The first step is that the appeals officer asks for a Collection Information Statement, a financial roadmap that the taxpayer lists all of assets with great specificity — names and addresses of banks, who owes them money, where properties are located., etc. The Appeals Officer wanted everything back by 14 days, together with all documentation. That means if I have 10 bank accounts, I have to list all 10 and get statements for those accounts for the last six months. That would be almost impossible to do in 14 days, especially for someone with as complicated financial affairs as Charlie. So the business manager contacted the appeals officer and asked for more time, and the appeals officer denied the request."
The business manager contacted Robert Schriebman, a veteran tax controversy attorney. Schriebman, who is winding down his practice, reluctantly agreed to take the case on a short-term basis. He called the appeals officer and asked for more time, and was told to get a power of attorney, which he sent to the appeals officer.
The appeals officer refused to grant the request for any additional time and closed out the case.
"If the appeals officer closes the case too quickly without giving us a fair shake, then the remedy is to petition the Tax Court and the judge can decide if the IRS moved too quickly, which would be an abuse of discretion," Jager explained. "So Mr. Schriebman prepared the petition, after which he handed the case to me. The IRS strategy was eventually to file a motion for summary judgment. If they won that, the court would find, as a matter of law, that it was reasonable for the IRS to close the case because Mr. Sheen failed to provide what was requested of him."
Jager took over the case in early 2020, and decided to file an offer in compromise to deal with all of Sheen's tax liabilities, including 2017 and 2018 as well as 2015. The IRS motion for summary judgment was not filed by the agency until later in 2021.
"I was surprised it took so long for them to file the motion," said Jager, "The reason was that they believed, as did I, that the OIC would be accepted and that the cases for all three years — 2015, 2017, and 2018 — would be settled simultaneously. "
At that point, the case was being worked on by an Appeals officer in Los Angeles and Jager. "We had an agreement hammered out, and it was signed off by the Appeals officer and IRS counsel. When it got to the area director for Appeals, he rejected it unceremoniously. Now I had 30 days to petition the Tax Court for the years 2017 and 2018."
What brought the IRS back to the negotiating table, Jager believes, was his allegation of error in the petition that the IRS never addressed his offer to include a future income collateral agreement. This gives the IRS the right to additional payments from Sheen if his income increases by a certain amount over a five-year period.
"Where a taxpayer suggests a collection 'sweetener,' the government has to at least acknowledge and address it. If they fail to, that's an abuse of discretion," Jager observed.
Now Jager had two active cases pending in the Tax Court. Very soon after that, IRS counsel asked Jager to make a joint motion for remand. The case was remanded to a different IRS Appeals office outside of Los Angeles, where an OIC was agreed upon, including a future income collateral agreement.
"Just before closing the 2015 case, I wrote a status report to the court that I had previously asked the IRS to seal the record due to the publicity it was attracting," Jager recalled. "The National Office declined, citing the case of Willie Nelson Music Co., which concluded that the public interest in access to public court information generally outweighs an individual taxpayer's fear of embarrassment or harm to reputation."
"The case is really rich with lessons in the nuances of federal collections procedures," he said.
