Colorado Tax Attorney Contests IRS Bypass Letter
People's Source International LLC v. United States is yet another interesting Colorado tax case. People's Source involved an Aurora, Colorado tax attorney and the issuance of a bypass letter.
A bypass letter is a letter that the IRS sends to a taxpayer when the IRS believes that the taxpayer's tax attorney has failed to respond to IRS requests. As outlined in the People Source court opinion, the IRS apparently believed that the Aurora, Colorado tax attorney had failed to respond to the IRS request for information and meetings.
Upon receipt of the bypass letter, the taxpayers sent notice to the IRS that they would bring suit against the IRS if the IRS failed to retract the bypass letter. The next day the taxpayers filed suit against the IRS in the United States District Court for the District of Colorado, seeking a temporary restraining order and a permanent injunction to prevent the IRS from contacting them directly. The taxpayers amended their complaint to ask for injunctive relief and up to $1 million in damages caused by the bypass letter. Two months later the IRS informed the taxpayer that it had determined it to be in the best interests of the agency to withdraw the bypass letter.
The taxpayers then agreed to withdraw the complaint for damages and the motion for injunctive relief, leaving only their claim for attorney fees. The District Court denied the request for attorneys fees. On appeal, the Tenth Circuit Court of Appeals essentially held that the taxpayers would have been entitled to attorneys fees had the taxpayers merely exhausted their administrative remedies prior bringing suit. In this case, the administrative remedies would have been exhausted if the taxpayers had attended one conference with the IRS Appeals Office.
Here are some of my thoughts about this case, as it is set out in the court opinion. First, the IRS often does not respond in a timely fashion (if ever) to the tax attorney's requests for information or meetings, yet the tax attorney cannot issue a bypass letter to the IRS. For example, I as a tax attorney cannot simply send a letter to the IRS Commissioner to tell them that I will be interacting directly with the IRS Commissioner because the IRS revenue agent has failed to respond to my request for information or meetings. Instead, I, and my clients, have to wait months (and in some cases, years) for the IRS to respond. I often wonder why taxpayers have to wait years for the IRS to respond, yet they are penalized when they fail to respond to the IRS in a timely fashion? Also, I wonder why the IRS has the ability to send a bypass letter, when taxpayers do not have that right?
Second, the IRS has a practice of contacting tax attorneys and taxpayers at odd hours (e.g., Friday at 6:00 pm). These types of calls often come months if not years after the tax attorney or taxpayer initiated contact with the IRS. When the IRS agent does not get through to the tax attorney or taxpayer on this one occasion, they often make a record that the tax attorney or taxpayer has not been cooperative.
The IRS will then generate a letter to the tax attorney or taxpayer, which requests that the tax attorney or taxpayer get in contact with the IRS within a certain number of days. The problem is that the date written on the top of the letter has often passed or is about to pass by the time that the IRS letter arrives.
Some IRS offices use a postal meter, which allows you to see that their letter was sent on day one, it was put in the US postal system on day twenty, you know that it did not arrive in your mail box until day twenty three, and the IRS letter asks you to respond by day twenty five. This problem is even worse for the IRS offices that do not use a postal meter, as tax attorneys and taxpayers are left in the dark as to when the IRS letter was sent. Again, when the tax attorney or taxpayer fails to respond by this date the IRS employee will make a note in their records specifying that the tax attorney or taxpayer have not been cooperative.
Taxpayers then lose some of their rights because of their not being cooperative. For example, the IRS will argue in court that the burden of proof does not shift to the IRS because the taxpayer has failed to cooperate.
Third, the bypass letter presents the IRS with the ability to bully and harass taxpayers. In many cases taxpayers attempt to represent themselves before the IRS or with the assistance of a CPA. In these cases the taxpayer usually will only hire a tax attorney when the IRS fails to apply the law in an appropriate manner, the IRS fails to respond in a timely manner, or the IRS employee otherwise acts unreasonably. Should the IRS be rewarded in any of these cases by being able to bypass the taxpayer's legal counsel - as the IRS was the party that misapplied the law, that failed to respond timely, or acted unreasonably?
Even though the taxpayer was not entitled to attorneys fees, this Aurora, Colorado tax attorney probably did the right thing. He put the IRS on notice that issuing a bypass letter is not appropriate and has consequences.
A bypass letter is a letter that the IRS sends to a taxpayer when the IRS believes that the taxpayer's tax attorney has failed to respond to IRS requests. As outlined in the People Source court opinion, the IRS apparently believed that the Aurora, Colorado tax attorney had failed to respond to the IRS request for information and meetings.
Upon receipt of the bypass letter, the taxpayers sent notice to the IRS that they would bring suit against the IRS if the IRS failed to retract the bypass letter. The next day the taxpayers filed suit against the IRS in the United States District Court for the District of Colorado, seeking a temporary restraining order and a permanent injunction to prevent the IRS from contacting them directly. The taxpayers amended their complaint to ask for injunctive relief and up to $1 million in damages caused by the bypass letter. Two months later the IRS informed the taxpayer that it had determined it to be in the best interests of the agency to withdraw the bypass letter.
The taxpayers then agreed to withdraw the complaint for damages and the motion for injunctive relief, leaving only their claim for attorney fees. The District Court denied the request for attorneys fees. On appeal, the Tenth Circuit Court of Appeals essentially held that the taxpayers would have been entitled to attorneys fees had the taxpayers merely exhausted their administrative remedies prior bringing suit. In this case, the administrative remedies would have been exhausted if the taxpayers had attended one conference with the IRS Appeals Office.
Here are some of my thoughts about this case, as it is set out in the court opinion. First, the IRS often does not respond in a timely fashion (if ever) to the tax attorney's requests for information or meetings, yet the tax attorney cannot issue a bypass letter to the IRS. For example, I as a tax attorney cannot simply send a letter to the IRS Commissioner to tell them that I will be interacting directly with the IRS Commissioner because the IRS revenue agent has failed to respond to my request for information or meetings. Instead, I, and my clients, have to wait months (and in some cases, years) for the IRS to respond. I often wonder why taxpayers have to wait years for the IRS to respond, yet they are penalized when they fail to respond to the IRS in a timely fashion? Also, I wonder why the IRS has the ability to send a bypass letter, when taxpayers do not have that right?
Second, the IRS has a practice of contacting tax attorneys and taxpayers at odd hours (e.g., Friday at 6:00 pm). These types of calls often come months if not years after the tax attorney or taxpayer initiated contact with the IRS. When the IRS agent does not get through to the tax attorney or taxpayer on this one occasion, they often make a record that the tax attorney or taxpayer has not been cooperative.
The IRS will then generate a letter to the tax attorney or taxpayer, which requests that the tax attorney or taxpayer get in contact with the IRS within a certain number of days. The problem is that the date written on the top of the letter has often passed or is about to pass by the time that the IRS letter arrives.
Some IRS offices use a postal meter, which allows you to see that their letter was sent on day one, it was put in the US postal system on day twenty, you know that it did not arrive in your mail box until day twenty three, and the IRS letter asks you to respond by day twenty five. This problem is even worse for the IRS offices that do not use a postal meter, as tax attorneys and taxpayers are left in the dark as to when the IRS letter was sent. Again, when the tax attorney or taxpayer fails to respond by this date the IRS employee will make a note in their records specifying that the tax attorney or taxpayer have not been cooperative.
Taxpayers then lose some of their rights because of their not being cooperative. For example, the IRS will argue in court that the burden of proof does not shift to the IRS because the taxpayer has failed to cooperate.
Third, the bypass letter presents the IRS with the ability to bully and harass taxpayers. In many cases taxpayers attempt to represent themselves before the IRS or with the assistance of a CPA. In these cases the taxpayer usually will only hire a tax attorney when the IRS fails to apply the law in an appropriate manner, the IRS fails to respond in a timely manner, or the IRS employee otherwise acts unreasonably. Should the IRS be rewarded in any of these cases by being able to bypass the taxpayer's legal counsel - as the IRS was the party that misapplied the law, that failed to respond timely, or acted unreasonably?
Even though the taxpayer was not entitled to attorneys fees, this Aurora, Colorado tax attorney probably did the right thing. He put the IRS on notice that issuing a bypass letter is not appropriate and has consequences.
 
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