Reversing the decision of the Tax Court in a Collection Due Process (CDP) hearing challenging the appropriateness of the assessment, the Eleventh Circuit in Romano-Murphy v. Commissioner determines that the changes to IRC 6672 in 1996 require the IRS to actually hold an appeals hearing before assessing the trust fund recovery penalty (TRFP) and not simply offer the hearing. The IRS position in the case, supported by the absence of a statutory requirement explicitly requiring a hearing before assessment, was that the statutory change required it to send the proposed responsible officer a certified letter notifying the person of the proposed TFRP assessment and offering a hearing with Appeals but did not require that Appeals actually hold a hearing prior to the making of the assessment. This is a case of first impression in the Circuit courts even though the law has been in existence for two decades. Unless the IRS acquiesces to the decision, look for it to contest the issue in other circuits. Because the IRS failure to offer the hearing in this case was a mistake, it may be many more years before the issue comes up again.read more...
In 1996 Congress added IRC 6672(b), which requires the IRS to notify the person it has identified as a responsible officer of the proposed assessment under that statute and offer the person a hearing with Appeals. Before the change in the statute, the IRS could simply assess the 6672 liability at any time before the expiration of the statute of limitations. Some persons found out about the assessment upon receiving notice and demand. The lack of a formal administrative method for appealing the decision of the revenue officer to assess this liability concerned many practitioners and led to the change. The change has an impact on the statute of limitations because the IRS must wait for 60 days after sending the notice before it can assess. The statute is suspended during that 60 day period assuming that the IRS properly sent the notice.
Ms. Romano-Murphy operated a healthcare staffing business from 2002-2005 and served as CEO of that business. For the second quarter of 2005 the business filed a Form 941 with a liability of over $600K and no remittance. After unsuccessfully seeking payment from the company, the IRS turned its attention to her. After its investigation, it sent her letter 1153 in July 2006 stating that it intended to make a 6672 assessment against her and informing her that she had the right to go to Appeals to protest the decision of the Collection Division. The letter explained what she needed to do to request the Appeals conference. On September 6, 2006, she responded to the letter requesting a conference. Her protest letter raised two issues neither of which directly challenged the TFRP assessment. First, she stated the IRS erred in determining the amount of the trust fund taxes owed and second, the IRS erred in calculating the penalty.
For unknown reasons, the IRS did not forward the protest to Appeals and, instead, assessed the TFRP against her on October 15, 2007, in the amount proposed in the letter. She wrote several letters to the IRS protesting the assessment prior to her opportunity to discuss the matter with Appeals; however, those letters went unanswered.
In September, 2008, she received a Collection Due Process (CDP) notice and timely requested a hearing. This time she received a hearing at Appeals and she contested the liability. The Appeals employee noted that she had not received a hearing before the assessment even though she timely requested one. He allowed her to challenge the correctness of the TFRP assessment in the CDP hearing. After reviewing the case, the Appeals employee determined that the TFRP assessment was correct both in substance and in amount. She received a notice of determination sustaining the proposed levy, and she timely petitioned the Tax Court.
The Tax Court sustained the determination of Appeals. In its decision the Tax Court noted that Appeals did give her a chance to contest the underlying liability in the CDP context even though it had failed to give her the requested hearing prior to making the assessment. She filed a motion to vacate the order arguing that the failure to give her a hearing before assessment invalidated the assessment. The Tax Court denied her motion finding that taxpayers have no right to a pre-assessment hearing.
In her appeal of this decision, she targeted the correctness of the assessment made without the opportunity for the Appeals conference. The IRS acknowledged that it must send the notice but argued that 6672 only requires it send the notice and not that it hold an Appeals conference. The statute states that “[n]o penalty shall be imposed [the TFRP penalty] unless the Secretary notifies the taxpayer in writing … or in person that [the proposed responsible officer] shall be subject to an assessment of such penalty.” Later, the statute makes it clear that the notice must precede the assessment but says nothing about the hearing. In the alternative, the IRS argued that even if the hearing is a prerequisite to making the assessment, the failure here was harmless error because she received the same type of conference in the CDP context. The 11th Circuit looked at the statute, the regulations, the IRM and other relevant authorities in deciding that the pre-assessment hearing must occur, if requested, prior to the assessment. It remanded the case to the Tax Court, however, because it could not make a decision on the record before it whether the making of the assessment was harmless.
The 11th Circuit found that even though 6672(b) does not have a subsection that addresses the requirement of a pre-assessment hearing before the making of the assessment, subsection (b)(3) “does presuppose that there will be a pre-assessment determination at some point if a taxpayer files a timely protest.” That subsection addresses the impact of the notice on the statute of limitations. It provides that “if there is a timely protest of the proposed assessment” the statute of limitations on assessment “shall not expire before … the date 30 days after the Secretary makes a final administrative determination with respect to such protest.” The Court notes that the IRS position renders the terms “protest” and “final determination,” terms not defined anywhere in the Internal Revenue Code, meaningless. Because of the language in (b)(3) the 11th Circuit concludes that “there will be a pre-assessment determination of liability and notice thereof to the taxpayer if a timely protest has been filed…. Statutory silence on the details as to how these procedures are to occur does not require us to shrug our collective shoulders and let the IRS act in an arbitrary fashion.”
Having decided that the IRS must offer the requested Appeals conference before assessment based on the language of the statute, the Court then looks for further support of its conclusion. It finds support for its conclusion using a technique it used in the case of Griswold v. United States, 59 F.3d 1571 (11th Cir. 1995) where it sought to determine how to remove a federal tax lien. In that case, after finding little guidance in the statute, it looked to the regulations and the IRM to determine how to release a lien and it felt looking at those sources in this case could also provide instruction.
The relevant regulation (See (d) Example 7) does not explicitly state that the pre-assessment hearing is a requirement; however, the example makes clear that the Appeals Office must make a determination prior to the assessment. The regulations under CDP also contemplate an Appeals hearing before assessment and deny a taxpayer a hearing on the merits in the CDP process if the taxpayer did not make the request for a hearing after receiving the 6672(b) notice. The third regulation to which the Court cited was the procedural regulation governing Appeals functions which describes the pre-assessment Appeals process in TFRP cases.
The Court next turned to the IRM for support of its decision. There it found a host of provisions describing the hearing in detail. So, the Court felt comfortable with its interpretation of the statute that the pre-assessment hearing, when properly requested, must occur prior to the making of the assessment. It pointed out that the Tax Court did not address the harmless error issue in its decision because it decided that the hearing was not a statutory prerequisite to assessment so it remanded the case for a determination on that point.
The IRS’s failure here will not occur often. It admitted that the failure to hold the hearing did not result from an intentional act but from an oversight. It will almost always offer the Appeals conference when a taxpayer makes a timely request. Nonetheless, the opinion provides an important procedural victory for Ms. Romano-Murphy and for all taxpayers. With respect to TFRP cases, potentially responsible officers have another tool to use in attacking the assessment. Even though it will rarely occur, for the person denied a hearing, the IRS lapse in holding the hearing provides a basis for knocking out the assessment. This will generally occur after the statute of limitations has expired. On a broader basis, the Court’s refusal to accept the IRS argument that the statute only requires notice and does not require the IRS to do the thing contemplated in the notice could have broader implications. Other statutes have notice provisions that may not clearly spell out whether the IRS must hold an administrative hearing after giving notice. The 11th Circuit’s decision provides substance to the procedural mechanism of notice and gives teeth to the intent of the statute.