When it comes to celebrity gossip, Charley Sheen, who I mostly remember as the star of Two And A Half Men, is in a class of her own. For example, you can look up the Charlie Sheen effect, if you’re interested in that sort of thing. In any case, considering all his other problems, it is not shocking that he has tax problems. The IRS has been trying to collect from him for the years 2015, 2017 and 2018. He recently got some good news from the tax court and there may be lessons to be learned from his case.
From public records, we don’t know how much the IRS is trying to get from Charlie Sheen. It is reasonable to infer that this is considerably more than the $3.1 million offer in compromise that the CPA and United States Tax Court practitioner Steven Jager negotiated for Ms. Sheen. We also don’t know if what the IRS is looking for is the result of an audit or if it’s entirely the result of Mr. Sheen filing without paying.
What happens when you don’t pay
If you can’t pay the balance owing, when it’s time to file and you want to be as compliant as possible, it’s best to file in a timely manner. There are separate penalties for late filing and late payment. It is 4.5% per month for late filings and 0.5% for late payments. The overdue file peaks at 22.5% after five months. Late payments peak at 25% after a few years. You can do the math, if you care.
If you’ve spent your life complying, in the back of your mind you might think that if you fail to send in the balance due when you return, that within days a team of IRS ninja agents will be in your garden and will start auctioning. all your belongings. That’s not how it works.
What can happen is that nothing will happen and that after ten years you will be olly olly oxen free thanks to the limitation period for the samples. Anecdotal reports backed by IRS statistics indicate that it is becoming more and more common. You may receive an increasing series of threatening letters. And your account may go to a collection agency who will call you. If you have thick skin, none of this should bother you.
At some point, however, you may receive a notice that they are going to tie or tie you up. It’s serious. The notice must inform you of your right to a hearing which you can invoke by filing Form 12153 – Request for Collection Due Process or Equivalent Hearing. This will stop the levy or lien action in its tracks until the IRS Independent Appeals Office makes its final decision. Generally, when you are at this stage, there is no controversy as to the exact amount of tax. And then there is Reilly’s Tenth Tax Planning Law – Once the tax exceeds what you can pay, no matter how much more.
Reasonable recoverability potential
The route Charley Sheen took was to make an Offer in Compromise (OCI). This requires full disclosure of resources and liabilities. the Application to Tax Court signed by Steven Jager, his representative, shows the tortured administrative history of the application.
The original OCI submitted on January 6, 2020 was $1,240,115. An OS specialist in Monroe LA got involved, then moved on to another OS in Birmingham AL. From what Mr. Jager told me, these specialists were completely unfamiliar with Los Angeles or the problems a media personality like Mr. Sheen might face. A different SO, this one in Los Angeles, has scheduled a conference for Nov. 18, 2020. Mr. Jager has prepared a six-page memo detailing the issues with the latest report. At the conference, they worked on it with the SO by referencing each concession to the Internal Revenue manual.
Finally, on February 24, 2021, there was a new offer based on the appeals officer’s calculations in the amount of $3,130,420. The Office of Chief Legal Counsel determined that the offer was legally sufficient and Mr. Sheen remitted over $600,000 on March 10, 2021 to bring the total paid to 20% of the offer.
The regional director vetoed the settlement. No further appeals were allowed within the IRS. The Regional Director did not provide any explanation for the reversal of the settlement officer’s judgment. Hence the motion of the Tax Court.
Mr. Jager filed the petition with the Tax Court on November 5, 2021. On January 24, 2022, Judge Foley issued an order returning the case to IRS appeals, which really is as good as you can get to tax court in a collection case. This particular pushback was based on an agreement with the IRS lawyer
I confirmed my impression with Lew Taishoff, who follows the Tax Court with incredible intensity. He blogged his answer:
Mr Reilly’s comment was that this seemed like a quick turnaround for a petition filed last November. I checked some details and concluded that Mr. Sheen’s attorney, a CPA, had been around the block a few times (as they say on that remote minor island in the United States, and hello, Judge Holmes), and knew from where . Said lawyer is a USTCP, not a lawyer.
As I discovered many years ago, it is not necessarily that some animals are more equal than others, as George Orwell said. Sometimes knowing what to say to your opponent and how to say it is more important. Getting a teletubbying IRS attorney to file one of the cascading files that confronts him with appeals is more up to the petitioner’s attorney than the petitioner’s IMDb listing.
CPAs and Enrolled Agents (EAs) can represent taxpayers before the IRS until appeal. The Tax Court, however, is, you know, a court, so if you’re not representing yourself, a low percentage bet in general, you’ll probably hire a lawyer. Non-lawyers can represent taxpayers in Tax Court, but must pass a rigorous exam that takes place every two years. Very few people take the exam and very few of them pass. In 2018, of the 143 people who took the exam, 22 passed.
Mr. Jager told me that the key to getting the Tax Court to dismiss a CDP case is the administrative record. In order to show that the IRS “abused its discretion” by, for example, ignoring something the taxpayer provided, there must be evidence that the taxpayer provided it. He pointed me to an article he had written on the subject – Retention of the administrative record of the CDP hearing.
Since the Tax Court recognizes that the accuracy (and completeness) of the administrative record may be challenged, it is incumbent on us, the lawyers, CPAs and EAs representing these taxpayers, to proactively ensure that the administrative file includes all the questions that are validly raised by us.
It must be the kind of thing you learn while studying for the USTCP exam. I doubt it’s on the CPA exam.
Here is Mr. Jager’s comment.
I am very grateful to the IRS attorney for suggesting that I file a joint motion to have our case referred to appeals, and to the Tax Court for allowing our motion. I really couldn’t have asked for more than that, because this order means that I will have the chance to continue to defend this Offer in Compromise, which I believe is wholeheartedly and absolutely in the best interest of the IRS and my client; a real “win-win”. By enacting Code Section 7122, Congress clearly intended that all citizens have the right to ask for an offer, offering to pay as much as they can afford. The intent of Congress is clear that such regulations are a legitimate alternative to otherwise time-consuming and costly collection tools that are inconvenient for everyone involved. When the IRS accepts an Offer in Compromise made in good faith, the IRS gets paid regardless of the taxpayer’s “reasonable recoverable potential”, and the taxpayer gets a “fresh start”. What could be better than that for both parties?
Lawyer Steven A Leahy also heard from Mr Jager and gives an interesting analysis if you have twenty minutes of life to spare.
I picked up the story from a brief mention in Eide Bailly Tax News & Views.
Kirsten Parillo has Charlie Sheen ‘Winner’ in Tax Court Litigation to Tax Notes.