For CPAs who aspire to practice in Tax Court, the ability to review a case that has been litigated by a fellow CPA is a useful educational tool.
This April, Steven Jager, CPA, a tax partner at Fineman West & Co. LLP and one of only a handful of CPAs admitted to practice before the Tax Court, closed out a case he had been handling for several years. His experience demonstrates the advantage CPAs have when they can petition the Tax Court, prepare and file motions, draft and serve interrogatories, etc.
The case — Lu v. Commissioner, Docket No. 10523-23L — started out as an assessment of penalties for late filing of Form 3520, "Report of Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts." Jager's pleas for relief and his correspondence were not getting any traction until May 2021 when an Appeals officer in Seattle was assigned to the case.
"He weighed that my reasons for abatement due to reasonable cause only merited offering an 80% reduction due to 'the hazards of litigation,'" Jager said.
That would bring the penalty down to $10,000. Jager's response was to ask to see the written approval document from the supervisor of the person who made the initial assessment. He was told there was no approval form because they didn't need one. He then pointed out that Code Section 6751(b) states: "No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the secretary may designate."
The Tax Code section doesn't distinguish between penalties assessed in the field by a revenue agent from those made in a service center, which this one was. The Appeals officer insisted, however, that the IRS followed the law because, as he claimed, the IRS only had to follow the Internal Revenue Manual.
Meanwhile, Jager's client was due a refund for the 2020 tax year, which the IRS confiscated. This gave Jager the opening to file a request for a collection due process hearing.
"I made all of my arguments and brought into the record some case law that I felt would resonate if it went to Tax Court," he explained. "One was a case in which the court said it was not quite enough to merely input into the IRS computer records to say the penalty was approved. I thought that would be super-persuasive and resolve my case, but they only dug their heels in and pursued the penalty, so I went to Tax Court. No one at the IRS imagined that I would sue the IRS over $10,000."
"In fact," he continued, "in my petition to the Tax Court, I referred to the IRS's practice of merely notating their computer records as 'a shortcut, and a rather sloppy one at that.'"
Then, after the filing of the petition, during the discovery phase, Jager served the IRS with interrogatories, asking the agency to admit or deny that it had written statutory approval. He met with the attorneys assigned to the case. The fact that two attorneys were assigned was an indication that the IRS was taking the case seriously, and more importantly, beginning to take Jager and his position seriously.
"The IRS attorneys tend to underestimate me because I am not a lawyer and did not go to law school, but they quickly learn that I have a very competent understanding of the law," he said.
The IRS Counsel attorneys agreed to meet with Jager personally, after which he was asked if he would object to having a continuance of the case, which was already calendared for trial. The attorney said the reason was to follow that motion for continuance with a motion to remand the case back to Appeals, as the government now believed that Jager never had a fair opportunity to argue the merits of the penalty and should have that chance. She said the settlement officer's conclusion that he had a prior opportunity was wrong, and was backpedaling so that when the case went back to Appeals, they would abate the penalty based on the merits.
Doing so would allow the IRS to sidestep and avoid the real issue as to whether it followed the law. With the penalty abated, the court would not issue an opinion, which the IRS became persuaded it would likely lose, and even more importantly, that court opinion would be a regular Tax Court opinion, which would be precedential, and could be relied upon by other future litigants who are in similar situations. The IRS simply did not wish to take this risk over a $10,000 remaining penalty.
"Meanwhile I learned that the National Taxpayer Advocate, Erin Collins, watched the Tax Court filings and my case got her attention," he said. "She referenced my case in her report to Congress that she delivered in January 2024. She footnoted it in a section on international information reporting penalties, as one of the 10 most serious problems in the tax system today — the unfairness and draconian application of the foreign reporting penalties. And she called me to thank me for helping her to 'move the needle.''
"Essentially, the government realized that they were going to lose the case," said Jager. "I had pushed the IRS by issuing interrogatories that were designed to lock them into their position. To their credit, they came up with a brilliant strategy to be able to concede without having to address the issue that they wanted swept under the rug."
