Back-to-back opinions released by the United States Tax Court on May 20 and May 21 of 2019 serve as compelling reminders that what we learned in kindergarten is true: the same rules really do apply to everyone. When the IRS does not follow required procedures, the Tax Court will not hesitate to invalidate an assessment and find for the petitioner.
In Jevon Kearse v. Commissioner, a retired professional football player claimed a deduction of almost $1.4 million due to a business bad debt expense.1 The IRS examined his return and disallowed the deduction.2 What happened next is unclear. The IRS claims to have sent the taxpayer a notice of deficiency dated May 11, 2012, to his last known address.3 Mr. Kearse, on the other hand, says he did not receive the notice of deficiency.4 On November 5, 2012, the IRS assessed the additional amount due that was proposed in the Notice of Deficiency, and just 29 days later, on December 5, 2012, filed a Notice of Federal Tax Lien and apprised Mr. Kearse of his rights to contest the NFTL in a Collections Due Process (CDP) Appeal.5 From the very first communication between the taxpayer and the IRS hereafter, the taxpayer claimed he did not receive the notice of deficiency and argued that the assessment was invalid.6 The CDP Appeals officer claimed to have obtained verification that all requirements were followed with regard to the proposed enforced collection.7 But how could this be? In the Tax Court litigation, the Commissioner stipulated that Mr. Kearse never received the Notice of Deficiency8 and stipulated that the Commissioner was unable to produce a USPS Form 3877, Firm Mailing Book for Accountable Mail, or equivalent IRS certified mailing list bearing a USPS date stamp.9 Put another way, the IRS stipulated that the taxpayer did not receive the notice of deficiency and that the IRS had no actual proof that it was mailed. And this stipulation is important. Once parties stipulate to facts in Tax Court, it is almost impossible to “take it back.”10
Without proof of mailing of the Notice of Deficiency, and in light of Mr. Kearse’s timely and repeated assertion that he never received it, the Tax Court took issue with the Appeals officer’s cursory determination that the statutory requirements for an assessment were met, as well as reliance on computer records in light of the taxpayer’s repeated assertion that he did not receive the notice.11 Indeed, the only reason Mr. Kearse was able to challenge the liability at issue in the CDP Tax Court case is because both parties stipulated that he never actually received the notice of deficiency.12 Because the Court found that the Appeals officer did not actually verify timely and properly mailed notice of deficiency—despite cursory claims to the contrary, the Court held that the failure constituted an abuse of discretion.13 One might read this case and think the result was unfair to the Commissioner, because the Commissioner later did produce what it claimed to be proof of mailing.14 Proof of mailing later, however, could not reverse the stipulation to the contrary, and could not change the fact that the Appeals officer did not verify mailing back when it was required: during the CDP hearing.
Romano-Murphy v. Commissioner15 is another case resulting from a CDP hearing. In Romano-Murphy, the taxpayer was COO of a nurse staffing company from 2002-05.16 For the second quarter of 2005, the company failed to pay employment taxes.17 The IRS sought the trust fund recovery penalty from the taxpayer, sending her Letter 1153 in July 2006.18 Letter 1153 stated that the IRS intended to assess the penalty against her and explained what she needed to do to protest the penalty at IRS Appeals.19 She followed the instructions in the letter and submitted a protest within the time permitted.20
The IRS then assessed the trust fund penalty against her in October 2007 without ever holding the Appeals conference that the taxpayer requested.21 Because there was no Appeals conference, the IRS never made a final administrative determination.22 The IRS’s assessment set off IRS collection actions, including a notice of intent to levy and notice of lien on the taxpayer’s property.23 In September 2008, the taxpayer received notice that the IRS had filed a notice of lien to facilitate collection of the assessed amount, and she again timely requested a hearing.24 Appeals did give her a conference this time and upheld the penalty assessment.25 The taxpayer then received a notice of determination and timely petitioned the Tax Court.26
The Tax Court upheld the determination at Appeals, holding that taxpayers have no right to a pre-assessment hearing at Appeals, even if timely requested, and that the IRS was not required to make a final administrative determination before assessment.27 The taxpayer appealed to the Eleventh Circuit, which vacated and remanded.28 The Eleventh Circuit held that a pre-assessment hearing, if requested, must occur before assessment, and that the IRS was required under section 6672(b)(3) to make a final administrative determination before assessing a trust fund recovery penalty.29 It remanded to the Tax Court to determine whether the IRS’s failure to hold the pre-assessment hearing was harmless error.30
On remand, the Tax Court held that the IRS was required under section 6672 to make a final administrative determination before assessing the trust fund recovery penalty, and that an assessment made in the absence of such a final administrative determination is invalid.31 In a CDP hearing, Appeals must ensure under section 6330(c) that the IRS made the final administrative determination before assessing the trust fund recovery penalty, and there is no such thing as harmless error in case of a failure.32 The IRS must comply with procedural requirements contained in the statute as well as its own procedural rules.33
These cases serve as welcome reminders that the IRS must follow the rules, just as taxpayers must. They are also equally poignant reminders that the IRS can and sometimes does get it wrong. Practitioners should always request and carefully review the IRS administrative file with a critical eye. And here’s an idea that will be met with skepticism, but nonetheless is worth mentioning. The IRS should consider conceding cases where, as in Kearse and Romano-Murphy, the validity of the assessment is in doubt.
The Commissioner is authorized by section 6404(a) of the Internal Revenue Code to abate assessments of tax, interest, and penalties that are (1) excessive in amount, (2) assessed after the expiration of the statute of limitations, or (3) erroneously or illegally assessed. Section 6404(a) is a long-standing provision in the Code. Since at least 1939, the Commissioner has had the authority to abate taxes and penalties erroneously or illegally assessed:
Except as otherwise provided by law in the case of income, estate, and gift taxes, the Commissioner, subject to regulations prescribed by the Secretary, is authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties collected without authority, and all taxes that appear to be unjustly assessed or excessive in amount, or in any manner wrongfully collected.34
The longevity of this provision suggests that it is core to the Code and should be well known to all IRS employees.
In 2010, the IRS Office of Chief Counsel issued Notice CC-2010-012, setting forth the litigation position of the Commissioner in cases involving section 6404(a).35 The Commissioner’s unsurprising position is that arguments that the Commissioner has authority to abate assessments that are legally permitted, but deemed excessive because they are “unfair,” misread the statute.36 Instead, the Chief Counsel notice clarifies that the Commissioner’s position is that “authority under section 6404(a) to abate assessments that are excessive in amount extends, therefore, only to amounts that exceed the amount determined by correct application of the tax law.”37
An abatement of the assessments in Kearse and Romano-Murphy would have saved both the taxpayers and the IRS the time, expense, and aggravation that necessarily follows litigation. Reading these cases and thinking about how section 6404(a) could have applied brought to mind a Field Service Advice memo38 authored by Deborah Butler that I have had hanging on my bulletin board in my office since my first year of practicing law. In this memo, one of the main issues addressed was whether the IRS Office of Chief Counsel had an ethical obligation to advise taxpayers that an assessment made in connection with a partnership was invalid and that the taxpayer should file a refund claim before the statute of limitations expired.39 Because the IRS Office of Chief Counsel’s client is the IRS, and not the taxpayer or the public, the memo concluded that the Office of Chief Counsel should not inform the taxpayer of the mistake. But the analysis did not end there. Instead, it concluded:
Our legal practice and conduct should always be characterized by adherence to the highest standards of professionalism, honesty, and fair play. The Internal Revenue Service, in conjunction with its own policy statements must determine whether it will contact the taxpayers and advise them that improper assessment procedures were utilized; however, as counsel to the Internal Revenue Service, we should recommend that the agency notify the taxpayers of the technical defect in the assessments.40
This memo has been in my office as a reminder that professionalism, honesty, and fair play guide all of us tax professionals in our practice. In cases like Kearse, Romano-Murphy, and any others in which the validity of the assessment at issue is suspect, these principles, together with section 6404(a), provide a path to resolution that does not have to involve litigation. ■