The Unspotted Issue in an Audit; Ethics and Crimes (7/24/20; 7/28/20)

In an ABA Tax Section Court Procedure Virtual meeting on Wednesday, there was a one-hour discussion of ethical issues in handling a matter in the Tax Court.  The participants in the discussion were:

• Judge L. Paige Marvel, United States Tax Court, Washington, D.C.
• Elizabeth G. Chirich, Chief, Branch 1, Procedure & Administration, IRS Office of Chief Counsel, Washington, D.C.
• Guinevere Moore, Moore Tax Law Group, LLC, Chicago, IL
• Kandyce Korotky, Covington & Burling, Washington, D.C. (Moderator)
• Mitchell I. Horowitz, Buchanan Ingersoll & Rooney P.C., Tampa, FL

The discussion was excellent.  I highly recommend those who can access the recording of the event on the ABA web site to do so.  (I would provide a link but have not yet located the link, perhaps because the recording has not yet been put up.)
During the discussion I posted two questions which, apparently because of time, the participants did not respond to.  I offer the questions and some comment here.  The questions were:

1.        Question : What if the IRS sets up only one issue in the notice of deficiency and the IRS never spotted a big issue involving omitted income. There is no real gray area in the unspotted issue; the taxpayer clearly would owe tax if the unspotted issue were fully litigated (indeed taxpayer’s counsel did not think she could even make a nonfrivolous argument that the omitted income should not have been included). After filing the petition, IRS Counsel offers to concede that one issue (the spotted issue in the NOD) and sends a stipulated decision document saying that the deficiency is $0. Because the taxpayers’ counsel knows that stipulation that there is no deficiency is not true, can the taxpayers’ counsel sign the stipulated decision?
2.        Question: This may be a philosophical question rather than one you can answer here:  What good are ethical rules when they don’t provide answers — i.e., when different ethical lawyers acting ethically can reach different conclusions — does that simply reward the aggressive attorney (who may even be a lawyer who charges for the benefit offered to the taxpayer by being aggressive within the ambiguities — even creative ambiguities — in the ethical rules) and the taxpayer engaging this ethically aggressive attorney?  And would about the more conservative ethical attorney and his client?  Is the ethically conservative attorney providing less than ethically aggressive representation then not zealously representing the client?  There is more but I’ll stop there?

The second question is more philosophical, so I will focus on the first question.  Here is the key background:

1.      As I note in my Federal Tax Procedure Book, § 6211(a) defines a deficiency in part here relevant as:  “the taxpayer’s correct tax liability less the amount the IRS has previously assessed.”  

2.     Decision documents in a deficiency case state either that “there is a deficiency in income tax due from petitioner” in a stated amount for a taxable year(s) or “there is no deficiency in income tax due from petitioner” for the taxable year.

The first question above asks the practitioner’s response when the practitioner knows that the decision document recitation that there is no deficiency is not correct.  The same issue would arise if the decision document stated a deficiency amount for a year(s) without considering the unspotted issue.
I have only had one case that I recall presented this issue in a draft decision document.  I discussed the issue with my client and the real decision maker for the client (a lawyer, one of the smartest lawyers I ever met, in business with the client).  That lawyer and, at his recommendation, the client stepped up and authorized me to discuss the issue with IRS counsel.  That was the end of the client discussion (very short, no back and forth about what to do); I raised the issue with IRS counsel; and the decision document was revised to state the correct deficiency (a substantial amount).  Fortunately, I had a good client who had good counsel and I did not have to chase down my ethical responsibilities that would have been required had the client instructed me not to discuss the issue with IRS counsel and to sign the decision document as proffered.
I do not discuss this specific issue in my Federal Tax Procedure Book in Chapter 18 on Ethics.  I will likely revise the book to include the example in my 2020 editions that will be posted to SSRN in August 2020.  But I do discuss a similar dilemma involving a claim for refund timed to avoid the assessment statute of limitations on new assessments, thus, in the refund claim and resulting suit if necessary, to avoid the unspotted issue.

            Let me illustrate in an example.  Let’s say that the taxpayer is audited and the IRS sets up a single issue that results in a notice of deficiency for $100,000.  You counsel the taxpayer that, in your best judgment as a seasoned tax litigator, you can win that issue in whichever court the taxpayer chooses to litigate it.  However, since you handled that audit, you also know that the auditing agent did not spot an even larger issue that, in your judgment, the taxpayer would lose in any court that the taxpayer chooses to litigate it.  That issue would create a tax liability larger than the dollars that would be saved on the issue that you believe the taxpayer could win.  One of the traditional gambits is to preserve the refund statute of limitations, let the assessment statute expire, and the file the claim for refund.  For example, assume that the Year 01 return was filed on April 15 of Year 02, the audit deficiency was proposed on September 1 of Year 04, your client signs a Form 870 waiver of the restrictions on assessment for Year 01 on September 5 of Year 04, the IRS assesses the tax on February 1 of Year 5, the taxpayer pays on February 10 of Year 05, and the statute of limitations on further assessment expires on April 15 of Year 5.  You will recall that, although the statute of limitations on further assessment has expired, the taxpayer still has 2 years from the date of the February 10 payment to claim a refund. So, on June 1 of Year 05, the taxpayer files a claim for refund alleging that the IRS erred on the one audit issue (the only issue the IRS knows about).  In that claim for refund, the taxpayer does not mention the issue the IRS did not audit and is not otherwise aware of, despite the fact that, in his attorney’s judgment, he would lose that issue and his taxes for the year are therefore not overpaid.  Can the taxpayer lawfully sign the amended return (the claim for refund) with the jurat?  Can the attorney counsel or otherwise assist the taxpayer in filing the return?

I don’t know what other practitioners would or should do.  I can state what I would do.  I would not participate in the filing of the claim for refund and advise the taxpayer / client not to do so either.  The reasons I would marshal for the client are:  First, Section 6672 provides a 20% penalty for filing a claim for refund in an excessive amount without reasonable cause.  Second, there could be criminal penalties – perhaps tax evasion (§ 7201), perhaps tax perjury/false statement (§ 7206(1)), perhaps false, fictitious or fraudulent claim (18 USC 287).  Third, it is wrong.  (I don’t think stating this reason is inconsistent with the duty of zealous advocacy for the client.)  And those are just the risks for the client.  For the professional participating — dare I say enabling — the conduct there are professional ethics as well as potential criminal liability.
Now the play in the joints come if the unspotted issue is not certain to be resolved against the taxpayer if the IRS were to discover the issue and fully litigate it.  What level of confidence as to the issue is required for the taxpayer and the professional to avoid the problem?  Certainly, the taxpayer could likely avoid the criminal penalties with some level of assurance, such as perhaps reasonable basis or substantial authority or maybe just nonfrivolous position that the taxpayer could prevail if litigated.  But, what about the professional, particularly one who knows the vagaries and uncertainties in the statements of position (what really is reasonable basis of reasonable cause or nonfrivolous)?  And what if the professional is willing to permit assisting the client do something wrong to cloud his judgment as to whether the client has a defensible position on the unspotted issue?
I would appreciate anyone wanting to engage on the issues presented by these fact patterns either by comment on the blog or by email to me at
This blog is cross-posted on my Federal Tax Procedure Blog, here.

Added 7/28/20 9:30pm:

I am getting feedback/pushback from some colleagues who agree or disagree or in between with some of the comments above.  I will try to address some of the comments, and this discussion may come in several segments as I consider and try to make a meaningful comment to some of the comments I received.  So, those wanting more might check back from time to time or check the Updates for Prior Blog Postings (5/7/20; 7/17/20) in the right column, here.  I will add new comments sequentially in numerical order.

1.  One person seemed to treat the claim for refund example above as an adversary-type proceeding, suggesting that filing a claim for refund might be appropriate.  I am not convinced because, in the example, the attorney knows that the taxpayer is not entitled to a refund.  I have nothing new to offer on that.  But I posited this question to the person:  What if the attorney knows that the refund statute of limitations bars the refund — i.e., it is an arguably meritorious claim on the merits but the statute of limitations unquestionably bars the IRS from granting the claim?  Can the taxpayer with the attorney’s assistance file the claim in the hopes that the IRS will just miss the statute of limitations issue?  The person responded that yes, filing the claim for refund was appropriate.  I am not convinced.  Isn’t this just another example of the audit lottery?

2.  In example #1, is it relevant that the time period to file a claim for refund is jurisdictional, so that timeliness inheres in the claim for refund in question?  I haven’t dug into that issue, but it seems to me that, if timeliness is jurisdictional and inherent in the claim, then an untimely claim is inherently invalid and signing the required jurat may be improper for that reason.

3.  I turned example #1 around and asked whether the person felt the it was legal or ethical for the IRS to make an assessment (or send a predicate notice of deficiency) or take collection action when the IRS personnel knew that the assessment or collection statute of limitations had expired.  The person answered yes.  While I never worked for the IRS, but did for DOJ Tax; my gut reaction (uninformed by specific research) is that the answer is no.  There may be some remedies for a taxpayer for such improper conduct, but the question here is whether the IRS, knowing its conduct was illegal because of the statute of limitations, may legally or ethically undertake the conduct.  Note in this regard that, as I understand the statute of limitations for tax assessments, at least, it is as if the liability never existed (some statutes of limitations by contrast merely foreclose a remedy but do not wipe out the underlying liability).