Outstanding tax balance denied preparer's participation in IRS e-filing program.

• Author: Laffie, Lesli S.

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 explained 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...