IV. Challenging the Orthodoxy of Agency Expertise
By amending section 6015 and limiting Tax Court review (at least at first blush) to the administrative record established at the time of the Service’s final determination, Congress appears to have perpetuated traditional notions of administrative law in innocent spouse cases. Limiting review to the administrative record ignores the numerous and well-documented problems the Service has in administering the innocent spouse program and continues the myth of agency expertise. The conceit of nearly all of administrative law is that a group of subject-matter experts are making decisions, and courts (whose members are generally not experts) should defer to those decisions. In addition, the presumption is that administrators have the best opportunity to develop a record and make on-the-ground determinations impacting citizens. This may be true in many, if not most, instances, but that presumption should not be blindly followed, especially when it is clear that it is not the case. Before turning to the problems with the administration of innocent spouse cases, this Article will briefly outline the scholarly debate regarding the application of administrative law in tax cases and whether deference to the administrative agency, generally, should continue.
A. The Debate
1. Tax, Administrative Law, and “Tax Exceptionalism”
Tax and administrative law have long had an uneasy relationship. Professor (now Dean) Paul Caron was among the first scholars to recognize what he referred to as “tax myopia,” and what has later been termed “tax exceptionalism.” In his article, Tax Myopia, or Mamas Don’t Let your Babies Grow Up to Be Tax Lawyers, Caron identified two myths: first, that tax lawyers are somehow different than other lawyers; and second, that tax law is fundamentally different than other areas of the law. In Caron’s view, this has created a mistaken view that tax law is a self-contained body of law that has shielded itself from important developments in other areas of the law. Among other things, it created confusion over the appropriate level of deference that should be afforded Treasury Regulations and whether so-called “Chevron deference” applied to these tax regulations.
Professor Kristin Hickman picked up the scholarly baton from Caron in her article, The Need for Mead: Rejecting Tax Exceptionalism in Judicial Deference. She echoed Caron’s thesis that it is problematic for courts and scholars to treat tax differently than other areas of the law. Using the term “tax exceptionalism,” Hickman asserted that the view that tax is different or exceptional creates “a cloistering effect that too often leads practitioners, scholars, and courts considering tax issues to misconstrue or disregard otherwise interesting and relevant developments in non-tax areas, even when the questions involved are not particularly unique to tax.” She lists the debate on judicial deference to tax regulations as “an especially frustrating example of this tax exceptionalism at work.” Hickman then compares tax and non-tax cases and argues that tax is not in fact exceptional and, as a result, should not have its own unique rules on deference to administrative regulations.
Since Hickman’s article, many scholars have weighed in on the application of the APA in tax cases. Several of these scholars have addressed the application of the APA to the Tax Court’s review of the Service’s collection activity, known as Collection Due Process appeals. In their article, The Death of Tax Court Exceptionalism, Stephanie Hoffer and Christopher J. Walker examine the application of the APA to the Tax Court generally and the court’s review of Service determinations. Not surprisingly, given the title of their article, Hoffer and Walker assert that the APA should apply to all decisions by the Tax Court and that the court should “abandon tax exceptionalism and return to first principles of administrative law.”
Professor Leandra Lederman issued what she referred to as a “reply” to Hoffer and Walker’s article in her article, Restructuring the U.S. Tax Court: A Reply to Stephanie Hoffer and Christopher Walker’s The Death of Tax Court Exceptionalism. Lederman agrees with Hoffer and Walker that there are sound policy reasons to reject tax exceptionalism, or what she refers to as “tax insularity,” but notes there is conflicting evidence regarding Congress’s intent to apply the APA to Tax Court proceedings. Nevertheless, she avers that “it makes little sense for the Tax Court to apply different standards in its review of IRS actions than other courts do, without justification.”
The chorus against tax exceptionalism and advocating for the application of the APA to Tax Court proceedings has not been unanimous. For instance, Professor Lawrence Zelenak, in his delightful article, Maybe Just a Little Special, After All?, defends (with, as Zelenak admits, numerous hedges and qualifications) tax exceptionalism. First, Zelenak notes that the people who think tax is exceptional, i.e., different and apart, are actually non-tax people. Thus, it is not the tax lawyers who think they are “exceptional.” Second, to the extent that tax lawyers believe that tax is exceptional, they are no different than antitrust lawyers who believe that antitrust law is exceptional or bankruptcy lawyers who believe that bankruptcy law is exceptional. Finally, Zelenak asserts that tax actually is more special than the average specialty. This is so because not only does tax finance the operation of government, but it also impacts the lives of the vast majority of people. Thus, having special rules for tax may be appropriate.
Professor James Puckett offers a more spirited defense of tax exceptionalism in his article, Structural Tax Exceptionalism. Puckett points to the many instances in which the APA does not apply to the tax laws and notes that because the tax laws supplant the APA, “the death knells for tax exceptionalism should be quite muffled.” One of his defenses of having rules different than the APA for tax is that the United States tax system depends on voluntary compliance with the laws by taxpayers. As a result, the tax system must be constructed in a way that taxpayers feel they are being treated fairly and equitably. Puckett notes that studies have demonstrated a “strong preference for a traditional adversarial trial rather than an inquisitorial process in which the same party investigates and decides.” Thus, he argues that given the mistrust of the Service, adjudication of tax matters should be left to the courts rather than with the Service, which has the benefit of taxpayers perceiving it as a fairer and more equitable system.
A review of the scholarly literature on the application of the APA to tax matters shows a strong, but not universal, majority opinion that the APA should apply. A different line of scholarship running parallel to this discussion is whether the APA and administrative law should continue to be applied at all. The next section takes up that discussion.
2. Questioning Foundations
The debate about the Tax Court’s review of Service determinations is part of a larger scholarly discussion about the wisdom and viability of basic assumptions of the administrative state. For example, the law is generally settled that judicial review of agency decisions should be based on the record before the administrative body, and review should be for abuse of discretion. Nevertheless, scholars have long challenged these basic assumptions as both unworkable and inequitable. For example, Professors Currie and Goodman questioned the record rule, asserting that limiting review to the administrative record should not be taken at face value. They note that in many cases litigants offering new evidence may have had no opportunity to present that evidence at the administrative level. They assert that denying these litigants the opportunity to present the evidence in court might well be a violation of due process. But even if it is not a violation of due process, it would, Currie and Goodman assert, “often reduce judicial review to a rubber stamp, especially where the proffered evidence tended to expose the administrative record as a product of superficial and inadequate investigation. To uphold the administrator’s action merely because it is supported by such a record would be to reward him for wearing blinders.”
More recently, scholars have begun to challenge the most fundamental tenets of administrative law. In his book, Is Administrative Law Unlawful, Philip Hamburger argues that administrative power runs “outside the law” and is unconstitutional. The constitutional structure of government limits the powers of the three branches by reserving certain powers to each branch. The lawmaking power lies with the legislature, the interpretation of the law lies with judicial branch, and the enforcement of the law lies with the executive branch. Thus, except for the certain constitutionally-enumerated powers, the executive branch should exercise neither legislative nor judicial powers. And yet, that is precisely what the modern administrative state does. It passes laws, interprets those laws, ascertains the rights of the parties under that law, and enforces that law.
Hence, rather than operate through normal legislative and judicial procedures, it runs parallel to them using similar processes and procedures. “In this sense, it is an extralegal mode of constraint, and it thereby evades not only the Constitution’s legislative and judicial powers but also its legislative and judicial institutions and processes and even many of its rights.” In doing so, administrative adjudications deny due process of law. Administrative agencies need not provide the same protections, the same processes, as courts, because they are not courts. And yet, in so acting, they are exercising judicial powers not granted to them under the Constitution. This is justified because due process does not apply to these adjudications—constitutional due process only applies to proceedings in court. But as Hamburger points out, due process should apply to all adjudications, which is why it is called due process of law.
Hamburger also asserts that the rise of administrative power in this way depends on judicial deference (which it has received), making administrative decisions “supralegal” and “above the law.” As a result, our system of administrative law has allowed the executive branch to consolidate in one branch of government the powers that the Constitution distributes to the other branches. “Administrative law thus is more deeply unlawful than has hitherto been understood: Not only does it violate the law, but also it departs from the ideal of government through and under the law.”
Hamburger’s book has had many detractors. For example, Julian Davis Mortenson and Nicholas Bagley, in their article Delegation at the Founding, assert that Hamburger “relies almost entirely on medieval and early-modern English material,” and “he only so much as glances at the evidence of what the Founding generation actually said about the original public meaning of the Constitution.” In his review of Hamburger’s book, Adrian Vermeule asserts: “If Hamburger were an originalist in the conventional American sense, he would spend far more time on the ordinary meaning of the text as of 1789 and on the ratification debates, and far less time on subterranean connections between the Stuart monarchs and German legal theory.” By citing Hamburger, I am not endorsing his research or his views. Rather, I reference Hamburger to show that the fundamental principles of administrative law are being questioned. And not just by scholars—the courts are also engaged in the conversation.
Jeffrey Pojanowski takes a less dystopian view of administrative law than Hamburger in his recent article, Neoclassical Administrative Law. Rejecting what he terms “administrative skepticism” and “administrative pragmatism,” Pojanowski sets forth a new framework for analyzing administrative law questions. Neoclassical administrative law “combines the skeptic’s understanding of the judicial role on questions of law with the supremacist’s approach to questions of discretion and policymaking.” His theory of administrative law ensures that courts have the final say on questions of legal interpretation, but upholds what he calls “legislative supremacy” by giving greater deference to the policy choices of administrative agencies. Pojanowski asserts that “neoclassical administrative law finds a place for both legislative supremacy and the rule of law within the administrative state, without subordinating either of those central values to the other.”
These scholars have questioned the very foundations of administrative law and, in so doing, have rejected the APA and its notions of deference. However, as discussed below, one need not resort to these wholesale changes to ascertain that the Service’s determinations in innocent spouse cases are not entitled to deference by the courts.
B. The Service’s Determinations Are Not Entitled to Deference
Contrary to presumptions of administrative law, the Service is not uniquely qualified to decide the issues involved in innocent spouse cases. Service personnel are well-qualified to interpret the tax laws in drafting regulations. They are also experts at processing returns and evaluating collection matters. But when it comes to the issues involved in innocent spouse cases, they are no more qualified, and indeed decidedly less qualified, than judges. Moreover, the system and structure of innocent spouse administration makes it virtually impossible for Service personnel, even if they were so qualified, to render proper decisions.
Both the Tax Court and the Ninth Circuit have recognized the inherent problems with the Service’s administration of innocent spouse cases. The Ninth Circuit bemoaned the fact that there are no formal procedures for any type of adversarial process, and at “no time during the process is the taxpayer afforded the right to conduct discovery, present live testimony under oath, subpoena witnesses for trial, or conduct cross-examination.” The court noted further that without a record developed at trial, the Tax Court would not have “a sufficient record to comply with its duty” under section 6105(e) to determine the appropriate relief available to the taxpayer.
For Tax Court review of a Service determination to mean anything, there must be—at a minimum—some amount factfinding and reasoning. But, under the current structure, that is not happening in the vast majority of cases, nor will it, absent substantial changes. Innocent spouse personnel are located at CCISO in Covington, Kentucky. Obviously, unless the taxpayer lives within the greater Cincinnati area, they will have no opportunity to meet directly with CCISO personnel. In fact, even if one lived in Covington, Kentucky, the agency’s service centers are not open to non-Service personnel. This means that Service agents are required to make their decisions without ever meeting the parties involved. And, as noted, most determinations are made via correspondence, and no actual hearing, even telephonically, is held. This often means that taxpayers are not permitted to fully present their case to the Service. Indeed, there is generally no back-and-forth discussion between the requesting spouse and the Service, and the requesting spouse will have little opportunity to amass a complete record. This is particularly the case if the Service agent has contact with the non-requesting spouse. The taxpayer/requesting spouse will not learn of what her ex-spouse has told the Service. Thus, in such cases, the agent will be making determinations without a complete record.
As will be discussed immediately below, Service agents are required by the revenue procedure to determine, inter alia, issues of credibility, whether fraud has occurred, whether the requesting spouse has suffered abuse, and whether equity favors granting relief. These are some of the most complex factual and legal issues finders of fact are required to make. The following sections will discuss why making these decisions under the present structure is severely problematic.
1. Determining Credibility
CCISO personnel are essentially the trier of fact in innocent spouse cases. They are charged with determining whether the requesting spouse knew or had reason to know of the item giving rise to the deficiency or that the tax would not be paid; whether she suffered abuse; and whether she suffers from a disability. These issues, and many others, necessarily implicate the requesting spouses’ credibility, i.e., whether she has credibly made her case. Likewise, if the non-requesting spouse contests the case, the agent must determine whether he is more credible than his former spouse. As such, the procedures should ensure that the trier of fact is in a position to evaluate that credibility.
Witnesses’ demeanor has long been regarded as a primary “method of ascertaining the truth and accuracy of their narratives.” This requires the ability to observe the person’s attitude, appearance, and conduct. A person’s demeanor includes his or her tone of voice, how hesitant he or she is in answering, his or her look, his or her glances, and the pitch of his or her voice. “It is possible that the witness’s demeanor is the determinative factor in appraising trustworthiness and, therefore, can never be ignored.” Assessing credibility can only be done by viewing the individual under scrutiny in person. This is why trials are conducted and why the Confrontation Clause of the Fifth Amendment exists.
Thus, in every case, Service agents must determine whether the requesting spouse has credibly made her case for relief. And yet, there is simply no mechanism for these agents to judge credibility. Service agents never interact face-to-face with taxpayers, and they never have an opportunity to view their demeanor and assess the credibility. We should no longer pretend that they do and defer to their determinations.
Indeed, the Internal Revenue Manual essentially acknowledges this when it provides: “In cases where RS and NRS give conflicting testimony and there is no corroborating evidence to support either’s statements, consider denial, which leaves the liability joint and gives both taxpayers opportunity to go to appeals.” Thus, the IRM instructs its CCISO employees not to do further investigation or make a credibility determination, but to leave such further inquiry to IRS Appeals.
2. Fraud
CCISO personnel are also required by Rev. Proc. 2013-34, in every section 6015(f) case, to determine whether the requesting spouse has committed fraud. Fraud is an exceptionally complicated issue, and there is no one agreed upon definition. Indeed, many courts have essentially abandoned any attempt to define it, and instead have made pronouncements like, “[t]he law does not define fraud; it needs no definition; it is as old as falsehood and as versable as human ingenuity.” Fraud is generally inferred from various types of circumstantial evidence, so-called “badges of fraud.” Like credibility and demeanor questions, Service agents are charged with inferring fraudulent intent and judging badges of fraud (by one or both of the parties) never having met or, likely, spoken to them.
Outside of the innocent spouse arena, if the Service is to determine whether fraud has been committed, there is an extensive process with multiple levels of review. The Internal Revenue Manual provides that when “indicators (badges) of fraud are uncovered, the compliance employee must clearly document the potential fraud indicators and initiate a discussion with the compliance employee’s group manager.” If the group manager agrees that there are indicators of fraud warranting fraud development, the employee is required to contact the fraud enforcement advisor. All of these matters must be documented and submitted through the appropriate chain of command. By contrast, innocent spouse agents make the fraud determination with apparently no input, no consultation, and no advice. Moreover, if the Service wants to assert fraud in a deficiency case, it must prove fraud by a preponderance of the evidence. Again, let us not pretend that taxpayers requesting innocent spouse relief are afforded any kind of hearing, review, or due process.
3. Abuse
Perhaps the most troubling area that CCISO employees must evaluate is whether the requesting spouse has been the victim of domestic violence or other abuse. The presence of abuse is a significant factor under Rev. Proc. 2013-34: If the requesting spouse has been subjected to abuse, she may be relieved of the tax liability even though it was her income that caused the deficiency and even though she had knowledge of the items giving rise to the liability. Thus, the determination of abuse can often be determinative of the outcome.
Rev. Proc. 2013-34 has a fairly broad and enlightened definition of abuse:
Abuse comes in many forms and can include physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate the requesting spouse, or to undermine the requesting spouse’s ability to reason independently and be able to do what is required under the tax laws. All the facts and circumstances are considered in determining whether a requesting spouse was abused.
Unfortunately, the way in which abuse claims are administered by CCISO is not so enlightened. Form 8857 has several questions dealing with abuse, which would provide CCISO personnel the ability to grant relief. However, in practice, the Service will not grant relief unless the abuse claim is corroborated by independent evidence such as police reports.
But, as Jacqueline Clarke noted, many victims of abuse cannot produce corroborating evidence because of the very nature of the abuse. Domestic violence is a very under-reported crime, with estimates that only 14.5% of serious assaults are reported to the police. Additionally, many abuse victims do not want to make claims of abuse public because of privacy concerns, fear of further abuse, and fear of the removal of children. Thus, many who seek innocent spouse relief will not have the paper trail of police reports, protection orders, or other documentation that the Service expects and requires. In addition, the definition of abuse under the Revenue Procedure includes “efforts to control, isolate, humiliate, and intimidate the requesting spouse, or to undermine the requesting spouse’s ability to reason independently and be able to do what is required under the tax laws.” This type of conduct is generally not criminal, and as a result, there would never be documentary evidence to substantiate this conduct in a submission to the Service. If the Service requires abuse claims to be substantiated by independent evidence, the vast majority of claimants will have their requests denied. This is not a workable system.
Of course, not every allegation of abuse should automatically be believed. But if we know that claimants will not have documentation, there must be an alternative means for providing additional proof. That proof would normally only come from testimony from the requesting spouse, and perhaps others. This means that claims must be evaluated by engaging in personal contact and interviews with requesting spouses and other witnesses. Credibility is a key factor in these determinations, which again can only be done in person. Under existing procedures, the Service never engages in face-to-face meetings with taxpayers, and thus, current procedures will not permit an effective resolution of this important and sensitive issue. Providing a hearing and in-person presentation of evidence will not necessarily mean success in convincing the Service of abuse claims. Indeed, as Professor Clarke explained, the innocent spouse claimants have prevailed in less than half of their cases even when they have alleged that they were abused.
C. Systemic Failure
As noted, the fundamental premise of administrative law is the expertise of agency officials who have made informed decisions based on a full (or at least adequate) record. As noted by William W. Buzbee and Robert A. Schapiro, “[a]dministrative record review furthers two key pillars of the administrative state, legislative supremacy and agency expertise. The record requirement ensures that agencies follow the congressional mandate and base their decisions on a rational application of their expertise to a recognized body of data.” Likewise, Hoffer and Walker assert that “confining judicial review to the administrative record encourages the agency to develop and exercise its expertise by evaluating all relevant evidence in its administrative proceeding and providing a reasoned explanation for its decision.” While this may be the ideal, at least with regard to innocent spouse cases, it is demonstrably not the case.
Absent fundamental change, innocent spouse decisions from CCISO are not, and will not be, based upon a full record or reliable data. Service agents do not, and without systemic changes will not, base their decisions on all relevant evidence. In the end, the debate over section 6015(e)(7), the record rule, and whether the review should be de novo or abuse of discretion is sort of secondary. The procedures established by the Service amount to a systemic failure, where in the mainline of cases, the mechanisms set up can only by happenstance reach the correct result. The vast majority of innocent spouse cases never reach the courts, and relying on judicial review will not protect the rights of most taxpayers. Thus, the Service must dramatically alter its procedures.
Regardless of whether one agrees with Professor Hamburger that the administrative state is despotic and tyrannical, we should no longer blindly follow the assumptions that administrative agents are the best experts and that their judgments are well reasoned, well founded, and deserving of deference. Service agents are not in a better position than judges to make credibility determinations when they never meet and rarely speak with the parties. They cannot make accurate determinations on issues of abuse without a full and fair hearing. Therefore, unless we want to turn a blind eye to the obvious flaws in the system and procedures, fundamental changes must be made. This is especially the case given that the vast majority of taxpayers in innocent spouse case are pro se and do not have the benefit of counsel.
V. Needed Reforms
Any forthcoming reformation to the innocent spouse procedures must ensure that cases are fully developed at the administrative level to the extent feasible and that an opportunity is provided for meaningful and substantive review of agency actions. This will require legislative, judicial, and administrative reforms. It will also require the acknowledgement that traditional notions of administrative law and administrative efficiency should not control the debate or the reforms.
For example, Hoffer and Walker’s article, The Death of Tax Court Exceptionalism, approaches the problems raised by Service failures from a macro view, analyzing the issues under traditional ideas of administrative law. The authors acknowledge that the Tax Court reverses the Service’s determinations in innocent spouse cases at a consistently high rate, and that this is likely a necessary check on improper agency decision-making. However, they dismiss the courts’ important role by asserting that “although the Tax Court’s current position may improve accuracy in litigated cases, correcting agency errors is not the sole or predominant policy objective in the modern administrative state.” They also suggest that “confining judicial review of the administrative record encourages the agency to develop and exercise its expertise by evaluating all relevant evidence in its administrative proceeding and providing a reasoned explanation for its decision.” As I hope I have made abundantly clear, this is not happening in innocent spouse cases, nor will it occur absent significant change.
Moreover, as someone who has represented low-income taxpayers for more than 20 years, I simply cannot share Hoffer and Walker’s appeals to efficiency and “equity.” These are real people, with real lives, and real pain. If reform is to be meaningful, these cases must be viewed not from a macro level but from a micro level. As John Kidwell stated in a different context, “we don’t care just about social order. We care also about individual justice.” Regardless, innocent spouse cases do not call for only judicial reform. Rather, they point to the need for systemic change at the agency level. I make several suggestions.
A. Amend Section 6015
The recent amendment to section 6015 perpetuates an already dysfunctional system. In amending section 6015(e) to add clause (7), Congress (I hope) assumed that the Service was creating, in most—if not all—cases, a record from which the Tax Court could reasonably exercise its statutorily mandated review. And yet, as discussed above, it is clear that this is not the case, nor will it be absent significant reform. Thus, unless and until the Service makes substantial changes that provide a meaningful opportunity for putative innocent spouses to make their case and allow a full record to be developed, the record should be left open until the Tax Court has had a chance to complete it. This will give taxpayers the opportunity to testify before a tribunal and adequately present their case. It will permit them to provide testimony regarding any abuse that occurred and for which there is no independent documentary evidence. It will allow them to provide rebuttal to evidence from the non-requesting spouse. Decisions will be based on the credibility of the witnesses and all of the evidence, not just the evidence provided with the Form 8857.
B. The Tax Court Should Require Some Showing by the Service that Its Decision is Entitled to Deference
Given CCISO failures, CCISO’s decisions should not be given the presumption of correctness. The default position—that agency personnel are the experts, that the agents have compiled a complete record, and that courts should defer to the agents’ judgments—should be abandoned. At a minimum, the courts should examine whether a reasoned judgment has actually been made. This is not substituting the court’s judgment for the agency’s, but rather ensuring that the premise upon which administrative law is based has actually occurred. It should be incumbent upon the agency seeking to have its judgment affirmed to show that a modicum of process occurred and that the agency’s decision was actually based on evidence and a developed record.
The Tax Court appears to be fully aware of the deficiencies in the Service’s systems and procedures in hearing innocent spouse cases. If Congress does not amend section 6015(e)(7), the court should follow Judge Holmes’s lead in Fatty and interpret the phrase “newly available evidence” to include all testimony and other evidence that the taxpayer was not able to present before CCISO. This will help ensure that cases are fully heard and that taxpayers are afforded some measure of due process.
C. The Service Must Amend Its Procedures to Ensure Taxpayers Have the Ability to Present Their Case
1. Move Agents Out of the Service Center
Of course, it is not ideal or even advisable for the Tax Court to remain the arbiter of innocent spouse cases. Indeed, only a small percentage of innocent spouse cases ever reach the Tax Court. Thus, if the rights of these taxpayers—some of the most vulnerable taxpayers—are to be preserved, the Service must change its procedures for processing and evaluating innocent spouse cases. While the Service could make small changes around the margins, in order to remedy the real challenges, it must change how and where the cases are heard. The biggest problem is that cases are processed and decided in Covington, Kentucky, with no direct, person-to-person contact. Until that is changed, the issues in case development and due process will remain an insurmountable problem.
The National Taxpayer Advocate (NTA) addressed a similar problem when she discussed the problems arising from “campus centralization” of IRS Appeals. Prior to 2003, most Appeals cases were handled by field offices spread across the country. The Service then decided to consolidate many of the Appeals cases into the campuses. The Service’s justification for this switch was to increase efficiency and decide cases earlier in the process, increase Appeals’ cost effectiveness, achieve greater efficiency through specialization, “get the right work to the right employees,” and to work cases generated by campuses in those campuses. From a macro-level efficiency perspective, this move made sense. IRS Appeals was able to increase the number of cases handled and decrease overall wait times.
But this efficiency came at a cost. As the NTA noted, “[w]hile shortening Appeals’ case cycle time is a worthy objective, an Appeals-wide campus centralization policy that is driven by the goal of improving cycle time numbers may ultimately have a negative impact on taxpayer burden and taxpayer rights.” The negative impact included: depriving taxpayers of the ability to present their case and all of the facts, a diminished working relationship between Service personnel and taxpayers and their representatives, and the systemic limitations of operations in a Service campus.
The NTA’s report also stated that the same problems noted by the increase in IRS Appeals handled in campuses were found in other campus centralized efforts, including innocent spouse and Offers in Compromise. These problems included lack of personal contact with taxpayers; basing decisions on “standards” rather than a consideration the individual taxpayer’s facts and circumstances; emphasizing rapid case processing; and a lack of independent decision-making and failing to exercise discretion.
Thus, the most significant reform that must occur is to reverse the practice of having innocent spouse cases handled in a centralized campus lacking a meaningful opportunity for face-to-face contact (in person or via videoconference) with the requesting spouse. While handling cases in one campus likely provides some efficiencies, those efficiencies should be outweighed by providing a full (or at least full-ish) and fair hearing.
Allowing requesting spouses an in-person (or at least a videoconference) hearing would allow them to present testimony and documentary evidence that may not have been previously provided or to give further explanations for submitted documents. It would allow the Service agent to assess the credibility of the taxpayer, as well as the non-requesting spouse. Perhaps most significantly, it would require the agent to make a determination after having met and interacted with the taxpayer as an actual person, rather than just a faceless Form 8857.
This change would require moving staff from Covington, Kentucky, to the field (if videoconference access were not a feasible alternative). This would entail some initial expense and perhaps a loss of efficiencies, at least at the beginning. But fully and fairly resolving cases at the initial stage would reduce the number of cases handled by IRS Appeals, as well as the number of cases litigated in the Tax Court. Thus, ultimately, the innocent spouse system would be more effective (and, indeed, perhaps even more efficient) if agents were brought out into the field and closer to taxpayers.
Nina Olson noted, in arguing for more due process in cases before the Service, that for powerful agencies like the Service, accuracy and consistency very quickly become equated with what she refers to as the “Three E’s”: efficiency, economy, and expediency. Olson argues that the Service should add two other “E’s”: effectiveness and efficacy. She argued, convincingly, that practical due process analysis should not only weigh the agency’s desire for efficiency, economy, and expediency. Rather, “for the sovereign to accurately and consistently administer the laws, it must provide a meaningful opportunity to be heard. Accuracy also requires that the government agent hearing the individual’s concerns be unbiased—that is, the government must listen—not pretend to listen, but actually listen.”
Moreover, allowing taxpayers to participate more fully in the process allows them to feel that they have been heard in a meaningful way. This, in turn, makes them more likely to accept the outcome, regardless of whether they win or lose, which would further increase efficiency.
2. Modify Procedures to Ensure a Complete Record
Of course, moving Service agents from Covington to field offices will yield little benefit unless agents provide a more extensive hearing. One may not reasonably expect the Service to engage in a full trial-type proceeding in every case. However, some kind of hearing should be expected and required. In his article, “Some Kind of Hearing,” Judge Henry J. Friendly dealt with the issue of what should be required, given the vast increase in the number and types of hearings that government holds, if the hearing is less than a full trial, but rather are clearly adjudicative hearings. In doing so, the goal is to devise procedures that are both fair and feasible. He set out 11 requirements of a fair hearing: an unbiased tribunal; notice of the proposed action and the grounds asserted for it; an opportunity to present reasons why the action should not be taken; the right to call witness, to know the evidence against you, and to have the decision based solely on the evidence presented; the right to counsel; the making of a record and a statement of reasons; public attendance; and judicial review. While certainly not every hearing by the Service must include all of these requirements, certain requirements of a fair hearing must be included. Judge Friendly noted that the requirements that the decision be made on the record and include a statement of reasons are nearly essential if there is to be judicial review. To these, I would add the right to present evidence and to call witnesses.
Moreover, the IRM should be amended to require agents to make personal contact with requesting spouses and offer an in-person interview. In-person interviews are routine in tax examinations. Indeed, the IRM provides: “An interview is a meeting between two or more individuals (e.g., in person, by phone, by video conference, etc.) for the purpose of gathering information to investigate and/or resolve issues. Initial interviews should be conducted face-to-face.” The Manual further provides that “[i]nterviews are used to develop information and establish evidence. The testimony of witnesses and statements made by taxpayers or their representatives are major factors in resolving tax cases.” Thus, the Service clearly recognizes the benefits of in-person interviews and personal contact. It is particularly frustrating when these benefits are recognized in enforcement matters but not in cases where the taxpayer would gain from in-person contact.
It is also essential that the work of line agents be closely monitored and reviewed by managers. Too often, determinations are made by agents with little to no recitation of facts or analysis. Preventing incomplete or sloppy determinations from being issued in the first instance would add efficiencies to the process.
3. Additional Training
I am not unmindful of the difficulty in resolving innocent spouse cases. Indeed, my criticisms of the current procedures show how challenging these cases can be. The Service and its systems are well-suited for evaluating whether a tax return was properly prepared, including whether all income was included and whether deductions were properly substantiated. The Service is adept at evaluating collection matters like Offers in Compromise, which require mechanical calculations of income, expenses, and documentation. Innocent spouse cases are of a different kind altogether. As discussed above, they require agents to assess credibility and determine whether the requesting spouse has been the subject of abuse. They require agents to decide whether spouses have transferred assets as part of a fraudulent scheme. They must determine whether it would be inequitable to hold the requesting spouse liable for the tax liability. These are extremely difficult questions for which agents are not fully trained.
It is beyond the scope of this Article to suggest how agents can be better trained. But it is clear that more and better training is necessary. Agents should be better trained in how to conduct interviews and gather evidence. They should be given more and better training on spousal abuse and all of the issues related to these occurrences. Finally, agents should be given more training on how to effectively draft a determination that marshals all of the evidence obtained and sets forth detailed legal analysis and findings.
VI. Conclusion
Individuals filing for innocent spouse relief are among the most vulnerable taxpayers. They are usually low income, mostly women, and often have suffered from abuse by their ex-husbands. They are generally not represented by a lawyer or Certified Public Accountant, and they have to navigate the maze of Service bureaucracy on their own. It is essential that the system be established and maintained to protect their rights. The system, as it currently exists, does not.
It is past time when courts should defer to decisions where the agency has set up a system that does not provide even rudimentary procedures that will ensure that taxpayers are given a decent shot at a fair hearing. “Law evolved as a protection against the whim of a sovereign. Law at least theoretically imposes some order on human affairs and assures persons that the sovereign will act with some regularity and consistency.” In innocent spouse cases, the sovereign—the Service—does not act with regularity and consistency. The Tax Court should not defer to its determinations. More importantly, the system by which innocent spouse cases are reviewed and decided must be substantially revised so that, at least in the majority of cases, the correct decision is made by the agency.
Requiring more process from the Service in administering the innocent spouse provisions will create more efficiencies. If the Service were actually to hold something approaching a real hearing, gathering evidence and allowing the taxpayer to present her evidence, there would be fewer cases to appeal within the Service and fewer cases appealed to the Tax Court. Thus, with an investment in innocent spouse processing, the Service might in the end save money. That said, I am not naïve. I appreciate the budget constraints that the Service has been operating under for the past many years. I also recognize that improving innocent spouse administration might not be the Service’s highest priority. The need for change nevertheless exists.
Ultimately, in order for the changes to be truly meaningful, the Service must change the tenor of how it evaluates innocent spouse cases from an enforcement model to a service model. Too often, CCISO personnel look for a reason not to grant relief. The Service should, in areas like innocent spouse, adopt a more service-focused posture. Agents should assist taxpayers in building their record and providing assistance in the types of documentation that are helpful. While this is certainly not the norm for Service personnel, the Taxpayer Advocate Service has shown that it can be done. Ensuring the rights of all taxpayers, particularly the most vulnerable, should be the mission of every Service employee.
