I’m talking about the Tax Court’s decision in Treece Financial Services Group v. Commissioner, 158 T.C. No. 6 (2022). There, the IRS audited the taxpayer and reclassified a worker as an employee, resulting in employment taxes and penalties. The taxpayer did not contest the reclassification; rather, the taxpayer argued that his liability should be determined under the Voluntary Classification Settlement Program (VCSP). Briefly, the VCSP is an IRS settlement program whereby, in exchange for the taxpayer’s prospective reclassification of workers as employees, the IRS offers audit immunity and reduced liability exposure that, quite literally, is pennies on the dollar. The taxpayer had applied for the VCSP, but was turned down by the IRS. In Tax Court, the taxpayer argued that the IRS improperly denied his VCSP application and sought to have his employment tax liability determined consistent with the VCSP’s reduced liability terms. The IRS argued that the Tax Court lacked jurisdiction to review the IRS’ determination made in connection with an administrative settlement program – in other words, “Respect my Authoritah!”
The Tax Court’s response: “No, You Respect MY Authoritah!”
The Tax Court ruled that its jurisdiction over tax deficiencies included reviewing administration determinations that are necessary to determine the merits of the proposed deficiency, and that there was a strong legal presumption that an act of administrative discretion is subject to judicial review. Because the IRS’ denial of the VCSP directly affected the taxpayer’s liability, the Tax Court held that it had jurisdiction to review the IRS’ determination of the taxpayer’s eligibility for the program. The Tax Court rendered its decision in the form of a full Tax Court opinion, which is binding legal precedent that is subject to review by all of the Tax Court judges prior to decision. Apparently the Tax Court wanted to deliver a clear message to the IRS.
That message, though, was not received by the IRS. Following the decision, the IRS filed a rare Motion to Reconsider with the Court. The IRS claimed that the Tax Court erred in its holding of jurisdiction, arguing that the IRS’ determination on the taxpayer’s VCSP was made as part of a voluntary compliance settlement initiative that is not considered an audit or examination, and further, that a taxpayer’s liability existed by operation of statute, distinct from the IRS’ discretionary efforts. This was an extremely bold move by the IRS, which as a matter of practice, only files motions to reconsider “in cases of substantial error.”
The Tax Court’s reply: “RESPECT MY AUTHORITAH!”
The Tax Court denied the IRS’ motion, noting that “reconsideration is not a means by which to relitigate previously rejected legal arguments or to present new legal theories.” The IRS is expected to appeal, once a final judgment is rendered.
The impact of this decision cannot be overstated. The IRS may no longer serve as judge, jury and executioner in its settlement programs, whether it be a voluntary disclosure, a streamlined submission, a microcaptive settlement resolution, conservation easement settlement initiative, the VCSP or other program. The IRS’ determinations are arguably subject to judicial review, as they should be.
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