Outstanding Tax Balance Denied Preparer's Participation in IRS E-Filing Program

In 1995, the IRS assessed tax preparer penalties against M for recklessly or intentionally disregarding rules or regulations regarding 35 returns under Sec. 6694(b). The Service assessed a penalty of $1,000 per return against him. It made an $8,750 alternative assessment against M for understatements of tax liability under Sec. 6694(a).

M paid a portion of the assessment and filed suit against the IRS, seeking a refund of that portion and an abatement of the remaining amounts. The case was settled at the final pre-trial conference, with M agreeing to pay $1,000 per return for nine returns, and $250 per return for the remaining returns, plus interest.

On Aug. 12, 1997, an order of dismissal was entered. The order stated that "either party may reopen the matter within sixty (60) days of the date of this order to enforce the settlement agreement." M did not pay the settlement amount, and the Service did not reopen the matter within the 60-day period.

In November 1998, M applied to participate in the IRS's e-filing program. He stated on the application that no preparer penalties had been assessed against him. In February 1999, the Service rejected the application. The rejection letter ex-plained that the IRS's records showed that M had "balances due on [his] 1989, 1990 and 1991 individual income tax returns," attributable to the preparer penalties. M pursued administrative appeals, arguing that he owed the government no money, because the Service did not move to enforce the settlement agreement. M's administrative appeals were denied; he then filed suit.

The district court rejected M's contention that the settlement amounts were no longer outstanding simply because the government had not acted to enforce them and held for the IRS. In a per curiam opinion, the Court of Appeals affirms.

The rules on admission to the e-filing program are rationally grounded: preventing known abusers of the Code from participating in filing, which presents an increased risk of loss, is certainly not arbitrary. The application of the rules in M's case was also rational. M asserts that the Service's determination was arbitrary because the settlement converted his tax liability into a general debt. He reasons that this money is no longer a tax liability but merely a debt owed the IRS, as if he had been found liable to the Service on a tort claim.

M's argument fails as a matter of logic and law. On his reasoning, the IRS should never settle tax-assessment cases. As soon as it does, he argues, the Service loses the ability to exclude known frauds from participating in its programs. We are not as sanguine as M about taking this step; forcing the IRS to litigate, rather than negotiate, tax cases serves no purpose.

Further, Rev. Proc. 98-50 set the eligibility requirements for the e-filing program. This procedure noted that an applicant may be denied for failure to file timely and accurate tax returns, failure to pay any tax liabilities or assessment of any tax penalties or misrepresentation on an application. The Service stated that the first ground (failure to file timely and accurate tax returns) was the basis for its decision. Its reasoning seems to be (although it is admittedly unclear on this point) that M's returns for several years did not reflect the amounts that M actually owed, because M did not pay the assessment penalties. For those inaccuracies, the IRS took M to task and denied M access to the program.

M was assessed penalties, failed to pay the amounts arising from those assessments and lied about the assessments on his application to the e-filing program. These facts are not contested. M explains away the assessments by noting that, rather than go to trial, he settled by agreeing to pay a $9,000 "reckless disregard penalty" and a $6,500 "negligence penalty." He argues that the IRS dropped its case when it settled with him, and therefore cannot hold the assessments or the settlement amounts that he still owes against him. We do not find this convincing. While a settlement does not carry a mandatory inference of guilt, neither does it erase the fact that the assessments exist or that the balances remain unpaid. The Service is not required to procure a favorable jury verdict before it can rationally deny M's application, nor should the IRS's willingness to enter into settlement agreements threaten its ability to judge the qualifications of tax preparers for sensitive positions. The fact of the assessment is a sufficient basis to uphold the Service's determination.

M incorrectly argues that he owes the IRS nothing because the Service did not reopen the case for enforcement within 60 days, as listed in the court order. Even if the failure to reopen the case rendered the debt completely unenforceable (e.g., if there were a statute-of-limitations (SOL) defense), the debt would still exist, and would form a reasonable basis for the application of the IRS rule. However, the 60-day limit was not an SOL by any means. It was a time limit imposed for the enforcement of the settlement by the very district court that heard the case.

The Service has valid and sensible rules regarding who may participate in its e-filing program. The rules were properly applied in M's case. The IRS stated its reasons clearly and informed M of his right to administrative appeal, which M exercised. The Service did not act arbitrarily or capriciously when it denied M permission to participate in its e-filing program.

Anthony G. Michael, 6th Cir., 6/3/02, aff'g DC