Assisting taxpayers on a pro bono basis is often a team effort, not an individual one. The members of the taxpayer’s team may include low-income taxpayer clinicians, student volunteers, and private practitioners. In addition, while some may view the IRS as the opposing team, IRS employees can be instrumental in ensuring that the correct result is reached. Finally, in litigation Tax Court judges fill the role of umpire/referee and likewise are instrumental in the process. This column explores a recent team effort that resulted in a “win” for the taxpayer.
After graduating from college, Melody (not her real name) got married, had three children, and settled down with her family in the Midwest. She started blogging and became very active in her local church. Life was good.
Melody’s husband Robert (not his real name) had a stable job, and Melody was able to act as the primary caregiver for their children. Robert maintained tight control over the family finances, however, limiting Melody’s access to financial accounts and bills. Robert gave Melody a debit card that could be used to purchase minor household items as needed. Because the bills were usually paid and there were no lavish purchases, Melody believed that everything was financially stable.
Over time, Robert became abusive to Melody and began living a secret life. Unbeknownst to Melody, Robert began to engage in fraudulent and criminal activity related to the use of client investment funds. For example, he made investments contrary to the terms of investment contracts with his clients and used client funds for personal use. To cover his illegal actions, Robert misrepresented the performance of the investments and satisfied client redemption requests by misappropriating funds from the accounts of other clients. Robert’s Ponzi scheme ultimately unraveled, and he was indicated on several criminal charges. He ultimately pled guilty to wire fraud and money laundering and was sentenced to several years in prison. During this time, in addition to caring for her three children, Melody was also caring for a relative in advanced stages of cancer.
Melody first learned of Robert’s indictment and criminal activities through local news coverage. All at once, her life came crashing down as she now faced having to raise her three children alone without any financial support. Things got worse when she discovered that Robert had also failed to meet the family’s tax obligations. Robert had always controlled the preparation and filing of a joint federal income tax return for the couple. He was the sole breadwinner at the time and assured Melody that his accountant was accurately and completely preparing their joint returns.
The IRS audited two years covering the period involving the majority of Robert’s criminal activity. Robert did not disclose the audit to Melody and concealed all IRS communications from her. Before Robert was indicted and ultimately sent to prison, the IRS issued a notice of deficiency for the two years, asserting a number of adjustments and the 75% civil fraud penalty. Robert did not file a petition with the Tax Court, resulting in a multi-million dollar assessment against Robert and Melody.
In a strange twist, Robert submitted Form 8857, Request for Innocent Spouse Relief, seeking relief for Melody for the tax obligations without informing her he was doing this. Because they were still married and not living apart at that time, the requested relief was limited to section 6015(b) and (f). Around the time Robert was headed to prison and Melody first learned of the tax problems, the IRS denied the request for relief. Melody learned of the denial and asked the IRS to reconsider. She was told that relief could not be granted at that time but that she could reapply for relief under section 6015(c) once her divorce from Robert was finalized.
The Team Starts to Form
Approximately a year after being denied relief, Melody’s divorce from Robert was finalized. Among the post-divorce items that she needed to address was the outstanding federal tax liability. She understood that she needed the help of a tax professional. Unfortunately, her financial situation at the time was dire, and she could not afford an attorney. Enter Dana Goldstein, a tax attorney at Community Legal Aid Services, Inc. (CLAS) in Akron, Ohio. Dana sprang into action, filing a Freedom of Information Act (FOIA) request and preparing a new Form 8857 focused on requesting relief under section 6015(c). The new request for relief highlighted much of the background discussed above and set forth the reasons why relief should be granted.
In late 2017, the IRS issued a preliminary determination denying the request for relief. To support the denial, the letter stated that Melody intended to file a joint return, she allowed Robert to handle the finances and file the joint returns, and there was a history of filing joint returns.
Based on the FOIA documents, the preliminary determination, and her experiences assisting taxpayers, Dana became concerned that the matter would not be resolved administratively, making litigation necessary to gain relief for Melody. She contacted Susan Morgenstern at the Taxpayer Advocate Service in Cleveland, Ohio, to see if Susan knew of someone who might be able to assist in the matter and, if necessary, litigate the case in Tax Court. (Shout out to Susan for receiving the 2021 Janet Spragens Pro Bono Award!)
The Team Expands
I have known Susan for several years, going back to when she, Keith Fogg, and George Willis approached me about becoming involved with the Pro Bono & Tax Clinics Committee. At the time we met, Susan was an attorney with the Legal Aid Society of Cleveland assisting low-income taxpayers. Susan knew I was active in the pro bono community and had handled several section 6015 cases in the Tax Court. She gave Dana my name as someone to contact to either help out on the matter or provide a referral.
In early 2018, Dana and I connected about the matter, and I was interested in helping out. The first step was to ensure that my firm would agree to assist in the matter. Enter Elizabeth Lewis, pro bono counsel at my firm. Elizabeth agreed that the matter was a worthy candidate for our pro bono services and agreed that we could undertake the representation.
The next step was to find appropriate staffing to assist on the matter. Enter Mike Louis, who was then a senior tax associate in my firm’s Dallas office. Mike quickly agreed to assist, and we helped Dana prepare a protest contesting the preliminary denial of relief. Mike went above and beyond, reviewing every document received in response to the FOIA request and researching publicly available sources for information corroborating the information being submitted to the IRS.
After the protest was submitted, Mike engaged in negotiations with the IRS Appeals Officer assigned to the case. From the start, the Appeals Officer indicated that the fraud penalty would not be considered as part of the request for relief. The officer ultimately upheld the preliminary denial without addressing our arguments. The final determination letter was brief: it stated that the tax returns were filed with fraudulent intent and that Melody knew, or had reason to know, of the income or deductions that caused the additional tax.
The final determination was extremely disappointing to the team, as we believed it was both factually and legally incorrect. We were never provided with any facts or legal analysis supporting the determination, despite several requests. Dana’s earlier intuition was correct that we were going to have to go to Tax Court.
So we continued on. Mike, who had now been promoted to partner, began preparing a petition to the Tax Court. Later, however, Mike transitioned from law firm life to in-house life, accepting a position as tax counsel for Fluor Corporation. Melody was extremely appreciative of Mike’s work and sent him a wonderful email thanking him for his assistance and wishing him luck on his new job.
Now we were down a key player; but when one teammate goes down, another one must step up. Enter Evan Walters, a tax associate at my firm who had expressed an interest in tax controversy matters. Evan assisted in finalizing and filing the petition to the Tax Court in 2019. He then engaged in additional legal research to bolster Melody’s position. During all this, Evan kept Melody apprised of the status of the case.
The Team Gets a “W”
Once the IRS filed its answer to our petition, we reached out to IRS counsel to set up a conference call to introduce ourselves and discuss the case. As is common in litigation, there were some delays on both sides, and then we learned that a new IRS counsel had been assigned to the case. We quickly turned back to Dana to see if she had worked with new counsel at all. Fortunately, she had. The news was promising, as Dana indicated that the new counsel was very reasonable and fair.
In 2020, we were finally able to set up a conference call with IRS counsel. We explained Melody’s situation and why she should be granted full relief. IRS counsel listened to our explanation, asked thoughtful and insightful questions, and promised to get back to us within 6 weeks after reviewing the file in more detail. After what seemed like an eternity (but was actually less than 6 weeks), we got the good news that the IRS was conceding the case in full and granting the requested relief.
One of the favorite parts of my job is providing goods news to clients. In my normal billable work, this may be that the IRS has dropped an audit issue, a favorable settlement has been reached, or we have prevailed in litigation. This is usually done over the phone due to geographic limitations and/or the desire to relay the information as quickly as possible. Clients are always appreciative of the time and effort spent, but that appreciation manifests itself in different ways when one is dealing with an individual taxpayer with limited means.
Evan and I set up a Zoom call with Melody to break the good news. It is difficult to express in words how wonderful it was to see Melody’s reaction to the news: we could see the weight being lifted off her shoulders and the release of years of stress and uncertainty. These are the moments when one can see the results of giving back to others in less fortunate situations. A further enjoyment was being able to tell Mike Louis about this result, given the time he had put into the matter and his substantial contribution. Needless to say, he was very happy, asked me to pass along his best to Melody, and commented on how this experience had been a very fulfilling one for him while he was in private practice.
As discussed above, Melody has been through a lot. But she has persevered through it all. During the ugly days of Robert’s indictment and sentencing to prison, she managed to go back to school and earn a master’s degree in clinical counseling. As a licensed professional counsel, she now primarily helps teens and women who have been in abusive situations and provides spiritual support to others. She is also happily remarried and enjoying life with her family.
After we finished her case, Melody sent me the following quote:
When I was a boy
and I would see scary
things in the news,
my mother would say to me,
“Look for the helpers.
You will always find people
who are helping.”
Here, we had a team of tax helpers to assist Melody with her scary tax situation. Perhaps more importantly, Melody has moved on from her unfortunate experience and is helping many others to deal with abusive situations. ■