Week of 9/22/97
In United States.v . Tenzer, ___ F.3d ___ (2d Cir. 9/19/97), unofficially reported in Tax Notes Today of 9/22/97, the Second Circuit reversed the district court's holding dismissing an information (indictment equivalent) for failure to file because the IRS had violated its own voluntary disclosure policy. The taxpayer was a tax attorney who failed to file for several years. After repeated attempts by the IRS to get him to file the delinquent returns, the taxpayer engaged counsel to represent him and, finally, filed the returns, showing a large balance due. The taxpayer then, also after some foot dragging, tried through his counsel to settle the liability (then about $1.3MM) for a cash payment of $250,000. However, the revenue officer on the case determined that that offer was about half of what its policies then required for a settlement. For example, the financial statement submitted with the offer showed that the taxpayer's equity in assets was about $345,000. During the period that his counsel was negotiating with the IRS on this matter, the taxpayer failed to stay current on his ongoing taxes, paying no estimated taxes and, although filing his return, failing to pay the amount indicated on the return. The IRS then instituted its criminal investigation which resulted in this prosecution.
On these facts, the district court concluded that the taxpayer fell under the IRS's voluntary disclosure policy and dismissed the information. In reversing the district court, the Court of Appeals had some disturbing things to say about the voluntary disclosure policy, but did attempt to mitigate the scope of its holding to some extent. The key points of the holding are:
- The Court reviewed summarily the checkered history of the voluntary disclosure policy. Basically, it was on and off over various periods and had differing nuances during some of the periods.
- The Court concluded that all versions of voluntary disclosure policy required that, "in order to be eligible for the benefits of the policy, the taxpayer must either pay or make bona fide arrangements to pay the applicable taxes and penalties."
- Tenzer did not comply with this requirement because he had not make a good faith compliance with this requirement that he pay or make bona fide arrangements to pay.
- The Court acknowledged that, for a taxpayer would cannot pay, making a bona fide arrangement to pay depends upon the cooperation of the IRS in reaching an agreement. What happens if the IRS unreasonably refuses to reach an agreement with the taxpayer negotiating in good faith to reach an agreement. The Court reasoned:
While the burden of making a bona fide arrangement rests principally on the taxpayer, we note that the government is obligated to negotiate in good faith with the taxpayer toward the end of achieving an arrangement to pay. An arrangement can only be made if the IRS agrees to it, but the IRS may not withhold its assent capriciously or in bad faith. The IRS must afford a taxpayer who has acted in reliance upon the voluntary disclosure policy a reasonable opportunity to satisfy all of the conditions of that policy, including a payment plan. If the parties cannot agree within a reasonable time on a suitable arrangement for payment, then the IRS is justified in refusing to treat that taxpayer as a voluntary disclosure.
Comments: Many practitioners in the past have thought that they could avoid a failure to file charge by simply filing the delinquent returns before CID got on the matter (or depending upon the iteration of the voluntary disclosure policy, before the IRS contacted the taxpayer). The next step of resolving the tax liability reported on the delinquent returns was viewed as simply a collection matter and not a matter thought to implicate prosecution for the original failure to file. However, where Tenzer is applicable (the Second Circuit) or followed (other circuits agreeing with its rationale in the future), we now find that an essential part of the process will be for the taxpayer to move promptly (if he or she is well advised) to reach an agreement with the IRS as to payment. And, the taxpayer may be well advised not to attempt to negotiate too hard with the IRS. For example, the taxpayer may be well advised to make his or her first offer one that is consistent with the IRS's then current guidelines for accepting offers, or otherwise face the risk that he or she will be prosecuted for failure to file. Of course, the taxpayer in Tenzer was particularly egregious by delaying and obfuscating throughout the process, but the holding of the Court does not limit itself to such bad facts.