Assessment Statute Extension under 6501(c)(8); Changes of Address; and Lessons for Counsel – Designated Orders: December 9 – 13, 2019

My apologies for this delayed post; I had my head so buried in the Designated Orders statistics from our panel at the ABA Tax Section’s Midyear Meeting that I neglected the substantive orders from December. Worry no longer: here are the orders from December 9 – 13. Not discussed in depth is an order from Judge Guy granting Respondent’s motion for summary judgment in a routine CDP case, along with an order from Judge Gustafson sorting out various discovery disputes in Lamprecht, Docket No. 14410-15, which has appeared in designated orders now for the seventh time. Bill and Caleb covered earlier orders here and here.

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As I mentioned during the panel, Designated Orders often resolve difficult, substantive issues on the merits. These orders are no exception. There were two cases that dealt with the deductibility of conservation easements. (Really, there were four dockets resulting in an order disposing of petitioner’s motion for summary judgment from Judge Buch, and one case resulting in a bench opinion from Judge Gustafson.) I’m not going to get into the substance of conservation easements, as clients in a low income taxpayer clinic seldom run afoul of these rules. Interestingly, this is also the first time we’ve seen a bench opinion in a TEFRA case—at least one that was also a designated order.

I must wonder, however, whether the Court strikes the appropriate balance in resolving substantively complex cases, on the merits, in either manner. While neither Judge Buch’s order nor Judge Gustafson’s bench opinion could have been entered as a Tax Court division opinion—as far as I can tell, they do not break any new ground—they could both easily qualify as memorandum opinions. As a practitioner, I find value in the ability to research cases that appear in reporters—precedential or otherwise. Relegating these cases to the relatively unsophisticated search functions found on the Tax Court’s website often makes it quite difficult to efficiently conduct case research.

Perhaps the Court’s new electronic system in July will remedy some of these issues. Nevertheless, any solution that doesn’t integrate with the systems that practitioners utilize to conduct case research—namely, reporters and the third-party services that catalogue and analyze the cases issued in those reporters—strikes me as inferior.

I fully understand and appreciate the value that the Court and individual judges place on efficiently resolving cases; that is no minor concern. I’ve been informed that issuing a memorandum opinion, as opposed to resolving a case through an order or bench opinion, can tack on months to the case.

But individual judges and the Court as an institution ought to carefully consider (1) whether the Court suffers from systemic problems in efficiently issuing memorandum opinions (and whether anything can be done to remedy these problems) and (2) whether the efficiency concern outweighs practitioners’ and the public’s interest in effective access to the Court’s opinions. 

More to come on this point in future posts. But for now, let’s turn to this week’s orders.

Docket No. 13400-18, Fairbank v. C.I.R. (Order Here)

First, a foray into the world of foreign account reporting responsibilities, which Megan Brackney ably covered in this three part series in January. Here, the focus lies not on the penalties themselves, but on another consequence of failing to comply with foreign account reporting requirements: the extension to the assessment statute of limitations under section 6501(c)(8).

Petitioner filed a motion for summary judgment in this deficiency case, on the grounds that the statute of limitations on assessment had long since passed. Petitioners timely filed returns for all of the tax years at issue, but the Service issued a Notice of Deficiency for tax years 2003 to 2011 on April 12, 2018—long after the usual 3 year statute of limitations under section 6501(a).

But this case involves allegations that the Petitioners hid their income in unreported foreign bank accounts. And section 6501(c)(8) provides an exception to the general assessment statute where a taxpayer must report information to the IRS under a litany of sections relating to foreign assets, income, or transfers. If applicable, the assessment statute will not expire until 3 years after the taxpayer properly reports such information to the IRS.

The statute applies to “any tax imposed by this title with respect to any tax return, event, or period to which such information relates . . . .” This appears to be the same sort of broad authority in the 6 year statute of limitations (“the tax may be assessed . . . .”) that the Tax Court found to allow the Service to assess additional tax for the year in question, even if it didn’t relate to the underlying item that caused the statute extension. See Colestock v. Commissioner, 102 T.C. 380 (1994). While the Tax Court hasn’t explicitly ruled on this question, it is likely that it would reach a similar conclusion for this statute.  

Respondent claimed that Ms. Fairbank was a beneficial owner of a foreign trust, Xavana Establishment, from 2003 to 2009, and thus had a reporting requirement under section 6048—one of the operative sections to which 6501(c)(8) applies. Further, for 2009 and 2011, Respondent claimed that Ms. Fairbank was a shareholder of a foreign corporation, Xong Services, Inc.—again triggering a reporting requirement under section 6038 and a potential statute extension under 6501(c)(8). Respondent finally claimed that Ms. Fairbank didn’t satisfy these reporting requirements for Xong Services until June 18, 2015—thus the April 12, 2018 notice would have been timely. Moreover, Respondent claimed, Ms. Fairbank hadn’t satisfied the reporting requirements for Xavana Establishment at all.

It’s important to pause here to note that the reporting requirements under sections 6048 and 6038 are separate from the FBAR reports required under Title 31. While the Petitioners filed an FBAR report for Xong Services, they seem to argue that this filing alone satisfies their general reporting requirements for this interest. That’s just not true; foreign trusts and foreign corporations have independent reporting requirements under the Code, under sections 6048 and 6038, respectively. Specifically, Petitioners needed to file Form 3520 or 3520-A for their foreign trust; they needed to file Form 5471 for their interest in a foreign corporation. And it is failure to comply with these reporting requirements that triggers the assessment statute extension under section 6501(c)(8)—not the failure to file an FBAR (which, of course, would have its own consequences). 

Petitioners claimed that they had, in fact, satisfied all reporting requirements for Xavana Establishment at a meeting with a Revenue Agent on July 18, 2012. But it seems that the Petitioner’s didn’t submit any documentation, such as a submitted Form 3520, to substantiate this. As noted above, they further claim the FBAR filed for Xong Services in 2014 satisfied their reporting requirements. Respondent disagreed, but did allow that the reporting requirements were satisfied later in 2015 when Petitioners filed the Form 5471. 

Because Petitioner couldn’t show that they had complied with the 6038 and 6048 reporting requirements quickly enough to cause the assessment statute to expire, they likewise couldn’t show on summary judgment that the undisputed material facts entitled them to judgment as a matter of law. Indeed, many of the operative facts here remain disputed. Thus, Judge Buch denies summary judgment for the Fairbanks, and the case will proceed towards trial.

Docket No. 9469-16L, Marineau v. C.I.R. (Order Here)

This case is a blast from the past, hailing from the early days of our Designated Orders project in 2017. Both Bill Schmidt and I covered this case previously (here and here). Presently, this CDP case was submitted to Judge Buch on cross motions for summary judgment. Ultimately, Judge Buch rules for Respondent and allows the Service to proceed with collection of this 2012 income tax liability. 

They say that 80% of life is simply showing up. Petitioner had many chances to show up, but failed to take advantage of them here. Petitioner didn’t file a return for 2012; the Service sent him a notice of deficiency. While Petitioner stated in Tax Court that he didn’t receive the notice, he didn’t raise this issue (or any issue) at his first CDP hearing.

Nonetheless, the Tax Court remanded the case so he could raise underlying liability, on the theory that he didn’t receive the notice of deficiency and could therefore raise the underlying liability under IRC § 6330(c)(2)(B)—but Petitioner didn’t participate in that supplemental hearing either!

Back at the Tax Court again, Petitioner argued that not only did he not receive the notice of deficiency, but that it was not sent to his last known address. This would invalidate the notice and Respondent’s assessment. The validity of the notice also isn’t an issue relating to the underlying liability; rather, this is a verification requirement under IRC § 6330(c)(1). So, if the Settlement Officer failed to verify this fact, the Tax Court can step in and fix this mistake under its abuse of discretion standard of review.

Petitioner changed his address via a Form 8822 in 2014 to his address in Pensacola. On June 8, 2015, he submitted a letter to the IRS national office in Washington, D.C., which purported to change his address to Fraser, Michigan. The letter contained his old address, new address, his name, and his signature—but did not include his middle name or taxpayer identification number. The IRS received that letter on June 15.

The Tax Court recently issued Judge Buch’s opinion in Gregory v. Commissioner, which held that neither an IRS power of attorney (Form 2848) nor an automatic extension of time to file (Form 4868) were effective to change a taxpayer’s last known address. We covered Gregory here. (Keith notes that the Harvard clinic has taken the Gregory case on appeal.  The briefing is now done and the case will be argued in the 3rd Circuit the week of April 14 by one of the Harvard clinic’s students.) Similarly, Judge Buch deals in this order with what constitutes “clear and concise” notification to the Service of a taxpayer’s change of address.

Judge Buch held that Petitioner didn’t effectively change his address. Under Revenue Procedure 2010-16, a taxpayer must list their full name, old address, new address, and taxpayer identification number on a signed request to change address. Taxpayers do not have to use Form 8822 in order to change their address, but this form contains all the required information to do so under the Rev. Proc. Because Petitioner failed to include his middle name and taxpayer identification number, the letter was ineffective.

Judge Buch ultimately holds that the letter was ineffective because the IRS received the letter on June 15—three days before the NOD was issued. The Rev. Proc. provides that a taxpayer’s address only changes 45 days after the proper IRS offices receives a proper change of address request. The national office is not the proper office; even if it was, the IRS only had three days to process the request prior to sending out the NOD. The lesson here is that if you know a NOD is coming, you can’t quickly trick the IRS into sending it to the wrong

If that wasn’t enough, Petitioner argued that because the USPS rerouted the NOD to a forwarding address in Roseville, Michigan, the NOD should be invalidated. However, the NOD was valid because Respondent send it, in the first instance, to Petitioner’s last known address prior to any subsequent rerouting.

There being no issue with the NOD’s validity—and because Petitioner didn’t participate in the supplemental hearing—Judge Buch granted Respondent’s motion and allowed the Service to proceed with collections.

Docket Nos. 12357-16, 16168-17, Provitola v. C.I.R. (Orders Here & Here)

The Court seems a little frustrated with Respondent’s counsel in this case. These orders highlight a few foot-faults that counsel—whether for Respondent or Petitioner—ought to be careful not to make.

This case is also a repeat player in designated orders; previous order include Petitioners’ motion for summary judgment from Judge Leyden here and Petitioners’ motion for a protective order here, which I made passing mention of in a prior designated order post.

Regarding the present orders, the first order addresses Respondent’s motion in limine, which asked that the Court “exclude all facts, evidence, and testimony not related to the circular flow of funds between petitioners, their Schedule C entity, and petitioner Anthony I. Provitola’s law practice.” Judge Buch characterizes this as a motion to preclude evidence inconsistent with Respondent’s theory of the case—i.e., that the Schedule C entity constituted a legitimate, for profit business. That doesn’t fly for Judge Buch, and he accordingly denies the motion.

He then takes Respondent to task for suggesting that “The Court ordinarily declines to consider and rely on self-serving testimony.” I’m just going to quote Judge Buch in full, as his response speaks for itself:

The canard that Courts disregard self-serving testimony is simply false. We disregard self-serving testimony when there is some demonstrable flaw or when the witness does not appear credible. If we were to disregard testimony merely because it is self-serving, we would disregard the testimony of every petitioner who testifies in furtherance of their own case and of all the revenue agents or collections officers who testify that they do their jobs properly, because that testimony would also be self-serving.

Ouch. In general though, I appreciate Judge Buch’s statement.  I recall being mildly annoyed reading court opinions that disregard a witness’s testimony because it was “self-serving.” For all the reasons Judge Buch notes, quite a lot of testimony will be self-serving. That’s not, without more, a reason to diminish the value of the testimony. It’s certainly not a reason to prohibit the testimony through a motion in limine. 

The second motion was entitled Respondent’s “unopposed motion to use electronic equipment in the courtroom.” (emphasis added). Apparently, the courthouse in Jacksonville has some systemic issues in allowing courts and counsel access to electronic equipment. Of what kind, the order does not make clear, though many district courts or courts of appeals where the Tax Court sits limit electronic equipment such as cell phones, tape recorders, and other devices that litigants may wish to bring as evidence to court. IRS counsel is likely the best source of knowledge on such restrictions; here, Judge Buch notes that the Court’s already taken care of these matters on a systemic basis for the upcoming trial session.

But Respondent’s counsel again makes a foot-fault here that draws an avoidable rebuke from Judge Buch. Respondent noted in his motion that he “called petitioners to determine their views on this motion, and left a voicemail message. Petitioners did not return this call as of the date of the motion, and as a result, petitioners’ views on this motion are unknown.” 

That’s not an unopposed motion! In Judge Buch’s words again, “The title of the motion (characterizing [it] as “unopposed”) is either misleading or false. . . . Consistent with Rule 50(a), we will treat the motion as opposed.”

Of course, because the Court had already resolved the issue with electronic equipment, Judge Buch denies the motion as moot.

Trial was held on 12/16 and 12/17. Judge Buch issued a bench opinion that held for Respondent, and designated the order transmitting the bench opinion on January 27. That’s Caleb’s week, so I’ll leave it to him to cover the underlying opinion.

Review of 2019 (Part 4)

In the last two weeks of 2019 we are running material which we have primarily covered during the year but which discusses the important developments during this year.  As we reflect on what has transpired during the year, let’s also think about how we can improve the tax procedure process going forward.

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Qualified offers

In BASR Partnership et al. v. United States, a tax matters partners submitted a nominal $1 qualified offer to the IRS, prevailed at summary judgment, and then successfully moved for award of litigation costs under IRC 7430. Upon appeal to the Federal Circuit, the government argued against the award, asserting, among other things, that the award was abuse of discretion because the nominal offer was not a good faith attempt at settlement. Despite the partnership context, the case has implications for low-income taxpayers, who often utilize nominal qualified offers in frozen refund litigation. If the court accepted the government’s argument, it might cost doubt on the validity of nominal qualified offers and lead to further government arguments in the low-income taxpayer context. However, the court ruled for the taxpayer, holding that the nominal qualified offer was reasonable and the award was not an abuse of discretion.  The tax clinics at Georgia State and at the Legal Services Center of Harvard Law School filed an amicus brief in this case on behalf of BASR.

See Ted Afield, Nominal Qualified Offers and TEFRA, Procedurally Taxing (Feb. 25, 2019), https://procedurallytaxing.com/nominal-qualified-offers-and-tefra/

TBOR

Another important issue is the use of the Taxpayer Bill of Rights in litigation. In Moya v. Commissioner, the Tax Court rejected the taxpayer’s TBOR-based argument in a deficiency case, looking to the history of the TBOR to find that it “accords taxpayers no rights they did not already possess”. The Tax Court may soon face such arguments outside the deficiency context and could rule differently. While thus far, the TBOR has not proven a strong support for taxpayers’ arguments, it will hopefully spur new, more taxpayer-protective changes to regulations and subregulatory guidance.

Keith Fogg, NEO – A Series of Reflections, Procedurally Taxing (July 8, 2019), https://procedurallytaxing.com/neo-a-series-of-reflections/

Keith Fogg, TBOR Provides no Relief in Tax Court Deficiency Proceeding, Procedurally Taxing (May 13, 2019), https://procedurallytaxing.com/tbor-provides-no-relief-in-tax-court-deficiency-proceeding/

Miscellaneous

Litigation of merits in bankruptcy

In Bush v. United States, the 7th Circuit addressed whether a bankruptcy court has jurisdiction to determine a debtors’ tax liability. The 7th Circuit found in the affirmative, determining that the bankruptcy court did have jurisdiction, but found that the court had no reason do so over the Tax Court, where the appellants had originally litigated the separate question of the tax liability. The 7th Circuit’s decision favors taxpayers who may have already lost (or never had in the first place) their statutory right to go to Tax Court, by providing another legal avenue for a redetermination of tax liability.

See Keith Fogg, New Circuit Precedent on Issue of Litigating Tax Merits in Bankruptcy, Procedurally Taxing (Oct. 18, 2019), https://procedurallytaxing.com/new-circuit-precedent-on-issue-of-litigating-tax-merits-in-bankruptcy/

Late e-filed returns and reliance

Generally, taxpayers cannot avoid assessment of a late-filing penalty due to reliance upon a third-party preparer, per the 1985 case United States v. Boyle. Courts have recently begun to address whether this applies to e-filing of tax returns. In Intress v. United States, the taxpayers made the argument that a late filing penalty was inappropriate, because the late filing was due to their tax preparer failing to hit ‘send’ when filing through e-file software. However, the district court was unconvinced, applying Boyle to the e-filing context and rejecting taxpayers’ attempt to avoid the penalty. Nevertheless, as e-filing becomes the dominant form of tax return filing, this issue may increasingly be litigated.

See Keith Fogg, Reliance on Preparer Does Not Excuse Late E-Filing of Return, Procedurally Taxing (Sep. 4, 2019), https://procedurallytaxing.com/reliance-on-preparer-does-not-excuse-late-e-filing-of-return/

Leslie Book, Update on Haynes v US: Fifth Circuit Remands and Punts on Whether Boyle Applies in E-Filing Cases, Procedurally Taxing (Feb. 12, 2019), https://procedurallytaxing.com/update-on-haynes-v-us-fifth-circuit-remands-and-punts-on-whether-boyle-applies-in-e-filing-cases/

Passport revocation

Passport revocation is expected to be an increasingly utilized and contested IRS enforcement technique. In July 2019, the IRS released a revision to the Internal Revenue Manual (5.1.12) that provides guidance on the passport decertification process. Currently, taxpayers with tax debts in excess of $50,000 (and satisfy other criteria listed in the IRM) are considered to have “seriously delinquent tax debts”, which can result in certification of the debt to the State Department. Taxpayers with such debts will eventually receive notices, which carry a right of appeal to the Tax Court or U.S. District Court. The IRM revision details these processes, as well as the process of reversing a passport certification to the State Department.

See Nancy Rossner, IRM Changes to Passport Decertification and Revocation Procedures, Procedurally Taxing (Aug. 27, 2019), https://procedurallytaxing.com/irm-changes-to-passport-decertification-and-revocation-procedures/

Fraud by return preparer

Another potential issue for future litigation is the question of whether tax return preparer fraud triggers the fraud exception to the three-year statute of limitations for assessment. In the most recent instance, Finnegan v. Commissioner, the 11th Circuit briefly addressed the issue but ended up ruling that the taxpayers had failed to preserve the issue for appeal. In 2015, the Federal Circuit addressed the question in a similar case, BASR Partnership v. United States, and found that the fraud exception is not triggered by third party fraud and only applies when the actual taxpayer acts with “intent to evade tax”. The Tax Court, meanwhile, has held to its ruling in Allen v. Commissioner, which held that a fraudulent return triggers the fraud exception, regardless if the taxpayer had the requisite intent or not.

See Keith Fogg, 11th Circuit Affirms Tax Court Decision Regarding Fraud by Preparer, Procedurally Taxing (July 22, 2019), https://procedurallytaxing.com/11th-circuit-affirms-tax-court-decision-regarding-fraud-by-preparer/

Last known address

Another recently litigated question is whether filing a Form 2848 with a new taxpayer address is sufficient to put the IRS on notice of the taxpayer’s last known address. In Gregory v. Commissioner, the taxpayers submitted a new 2848 and a 4868 extension request with their new address, but the IRS did not adjust its records and issued a subsequent notice of deficiency to the taxpayer’s old address. The Tax Court looked to the applicable regulation, 301.6212-2, which defines “last known address” as “the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return”. The Tax Court then found that neither the 2848 nor 4868 constituted a “return” under the regulatory definition and thus did not give notice. The court then proceeded to analyze whether the forms gave “clear and concise notice” of the address change, finding that they did not, in part because both included disclaimers that their filing will not change last known address. The taxpayers have appealed to the 3rd Circuit and are now represented by the tax clinic at the Legal Services Center of Harvard Law School.  The opening brief for the Appellant was filed on November 20.

See Keith Fogg, Tax Court Holds Power of Attorney Form Inadequate to Change a Taxpayer’s Address, Procedurally Taxing (Apr. 2, 2019), https://procedurallytaxing.com/tax-court-holds-power-of-attorney-form-inadequate-to-change-a-taxpayers-address/

Proving Clear and Concise Notification of New Address

Because of the importance of the last known address in so many documents that the IRS mails, the rules surrounding the determination of the last known address have outsized significance.  The mundane act of notifying the IRS of a new address takes on overriding importance when it becomes the difference between owing and not owing a large tax liability.  Today’s post was brought to my attention and largely framed by Carl Smith.

In an unpublished opinion, the Fifth Circuit, in Williams v. Commissioner, dodged the issue of whether the applicable Revenue Procedure created to enhance the guidance in the regulation under IRC 6212 gives an automatic 45 days after a change of address notice is given to the IRS to reset the last known address.  Williams brought a Collection Due Process (CDP) case arguing that he did not receive the Statutory Notice of Deficiency (SNOD) because he had moved.  He argued that prior to the move he had properly (or at least sufficiently) advised the IRS of the move such that it should have used his new address rather than his old one in mailing him the SNOD.  The failure to receive the SNOD could qualify him to litigate the merits of the underlying liability in the CDP case or, even better, it could cause the SNOD to be invalid which would cause the assessment against him to go away and, depending on the status of the statute of limitations, might cause him to completely win the case if the statute has now expired. 

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Mr. Williams produced a letter addressed to the National Office in which he informed the IRS of a change of address sent prior to the mailing of the SNOD.  However, he has two problems: (1) he could show no proof that the letter was mailed, and (2) the National Office is not the proper place to send such a letter.  Below is the entire opinion of the Fifth Circuit on the last known address decision (sans footnotes):

Whether a notice of deficiency is sent to a taxpayer’s last known address is a question of fact we review for clear error. If the IRS fails to properly mail a deficiency notice, any subsequent assessment or collection of the deficiency is invalid. Conversely, if the notice is properly mailed, 26 U.S.C. § 6212 does not require receipt of the notice for it to be valid. Code § 6212(b) provides that a notice of deficiency, “if mailed to the taxpayer at his last known address, shall be sufficient.” The phrase “last known address” is a term of art defined by Treasury Regulations as “the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the [IRS] is given clear and concise notification of a different address.” The regulations in turn reference Revenue Procedure 90-18 or any subsequent procedures promulgated by the IRS as describing the proper procedure to inform it of a change of address. The IRS must also exercise reasonable diligence to determine the taxpayer’s last known address in light of all relevant circumstances. The proper inquiry for reasonable diligence examines the facts the IRS knew or should have known at the time it sent the notice.
 
The question before this court is whether Williams had delivered a “clear and concise” notification to the IRS prior to the November 12, 2014 Notice of Deficiency, indicating that he wished his last known address to be the Bedford P.O. Box. The Revenue Procedure in effect at the time provided that taxpayers could update their address (1) electronically through the IRS website, using Form 8822, Change of Address; (2) by written communication to the service center serving the old address; (3) by written communication in response to communications by an IRS agent; or (4) orally by informing an employee who has access to the Service Master File.
 
Officer West refused to consider the October 1, 2014 notification because it did not include proof of mailing. The Tax Court acknowledged that Williams must have sent some notification of change of address because the IRS mailed subsequent notices to the Bedford P.O. Box in 2015. However, the letter was not addressed to any of the departments of the IRS identified in the Revenue Procedure. Assuming Williams mailed the letter on October 1, that was only 43 days before the Notice of Deficiency, not the 45 days described by the Revenue Procedure.
 
In Ward v. Commissioner, we previously held that the IRS did not exercise reasonable diligence in determining the taxpayer’s last known address when it did not comply with the change-of-address notification mailed 15 days prior to the notice of deficiency. In that case, the IRS acknowledged receipt of the change-of-address notification and there was no doubt as to when it was received by the IRS. We agreed that the IRS is entitled to a reasonable time to process notifications of change of address from taxpayers but also held that the IRS did not exercise reasonable diligence in that case. That decision predated the regulations and Revenue Procedure on which the Commissioner relies, but we have subsequently applied the “reasonable diligence” requirement. Regardless, Ward is distinguishable because in this case, it is not clear when the IRS received Williams’s letter.


We need not decide whether the Commissioner is automatically entitled to 45 days to process a change-of-address notification based on its Revenue Procedure or whether the regulations and Revenue Procedure entitle the IRS to more time to process notifications. There is doubt as to when Williams mailed his clear and concise notice of change of address. Officer West did not act arbitrarily or capriciously when she found Williams’s evidence insufficient. Accordingly, the Tax Court did not err in affirming the IRS Office of Appeals’ decision and there is not sufficient evidence to overturn the Tax Court’s finding that Williams’s last known address had not changed by November 12, 2014.

In a twist on the normal situation in which a taxpayer seeks to put in evidence not contained in the administrative record, Williams also argued the Tax Court should not have taken evidence beyond the administrative record.  This is the Robinette issue (although the court doesn’t cite Robinette).  The Fifth Circuit declines to issue a ruling on that question because the administrative record alone contained enough, in its view, for the Tax Court to have ruled against the taxpayer.

The case presents an interesting issue regarding notice to the IRS and deference to the Revenue Procedure, but the decision ultimately rests on the absence of information regarding the timing of the mailing of the change of address to the IRS and whether it was ever mailed.  Although it did not turn on the place of mailing the address change to the IRS, that too would make a difference.  The Fifth Circuit seems willing to consider facts that would support a conclusion the IRS had enough information at the time it sent the SNOD to require it to update Williams address; however, the court cannot get past the lack of information in the record regarding when the IRS found out.  The Tax Court made a statement in Gregory v. Commissioner, 152 T.C. No. 7 (2019) that it will follow the regulation and the subsequent published subregulatory guidance on the last known address, as discussed in a post here.  The Fifth Circuit does not signal that it will follow the subregulatory guidance; however, it does signal that the IRS needs fair notice, and the taxpayer has the burden to prove that the IRS received fair notice of the change in address.

Sanctions, Converted Items Confusion and More, Designated Orders: October 14, 2019 – October 25, 2019

Only one order was designated during Patrick Thomas’s week, the week of October 14, 2019, and two during mine, the week of October 21, 2019. As a result, this is a joint post from Patrick and me covering both weeks. It begins with Patrick’s coverage of the one order designated during his week.

Docket  No. 12646-19, Brown v. C.I.R. (Order Here)

This short order displays the power of the Tax Court to sanction taxpayers who raise frivolous arguments or institute proceedings in the Court merely for purposes of delay. The Tax Court has a busy docket, handling approximately 25,000 new cases each year. Frivolous claims and proceedings instituted merely for purposes of delay clog that docket, at the expense of taxpayers who have legitimate disputes with the Service.

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This case deals with Petitioner’s 2008 federal income taxes—with a petition filed on July 9, 2019. Given that timing, Respondent unsurprisingly filed a motion to dismiss for lack of jurisdiction, presumably arguing that Petitioner failed to file the petition within 90 days of the notice of deficiency.

The Petitioner in Brown had previously filed three cases in the Tax Court. In Docket 7375-18, he failed to pay the Court’s filing fee, and the case was accordingly dismissed. In Docket 4754-19, he raised a constitutional challenge to paying the filing fee, which the Court swiftly disposed of; constitutional challenges to the payment of filing fees are rarely successful. And after all, if Petitioner had a financial inability to pay the fee, the Tax Court provides a remedy through the fee waiver application. 

Finally, in a case entitled “Estate of Ernest Richard Brown v. Commissioner”, at Docket 12335-11, the Court likewise dismissed the case due to failure to pay the fee and to properly prosecute the case.

Judge Carluzzo, in the present order in Docket 12646-19, notes that “a copy of the notice of deficiency [for 2008] is attached to the petition filed May 24, 2011,” but that in the present case, Petitioner denied ever receiving the notice. Accordingly, he regards that allegation as “patently false”.

Accordingly, Judge Carluzzo not only grants Respondent’s motion to dismiss, but also imposes a $500 penalty for the “frivolous pleading” in this case. I’m not sure if this low amount will dissuade Petitioner from continuing to challenge the liability. But as we’ve seen before, further frivolous proceedings will only lead to escalating penalties. And while the 6673 penalty is limited to $25,000, the penalty is imposed on any “proceedings” instituted before the Court—suggesting that the penalty could exceed $25,000 if Petitioner continues to file frivolous pleadings.

Docket Nos. 1143-05, 1144-05,1145-05, 1334-06,1335-06, 1504-06, 20673-09, 20674-09, 20675-09, 20676-09, 20677-09, 20678-09, 20679-09, 20680-09, 20681-09, David B. Greenburg, et. al. v. C.I.R. (Order Here)

This order involves a long-running consolidated, in-part TEFRA-related and in-part-deficiency-related case. It previously had orders designated during my week in September, which I didn’t specifically address, but now feel is unavoidable.

I must admit its significance is a bit lost on me – likely because it lives (somewhat) in the world of partnerships and TEFRA. 

The case was already heard, decided (the opinion is here) and is in the computation stage, but the petitioners moved the Court to dismiss the case for lack of jurisdiction in August and the Court addressed- and denied – the motion. This most recent order was filed in October and asks the Court to reconsider that denial. 

The October motion reiterates the arguments in the August motion, which seem to also be arguments that were addressed in the opinion (but with more focus on an issue with the partnership’s TEFRA election).

So what is it that petitioners keep arguing about? The IRS had sent notice to the petitioners about converting certain specified items into non-partnership items as result of a criminal investigation. This is permitted by section 6231(c)(1)(B). Once the items are converted, they are subject to deficiency proceedings rather than TEFRA proceedings because they are no longer considered to be partnership items.

Petitioners argue the Court does not have jurisdiction because the IRS asserted that certain items were converted items, when they were actually non-partnership items. This confuses the Court, because converted items are considered non-partnership items.

In other words, the crux of the petitioners argument is that a distinction should be made between “partnership items originally, but converted under TEFRA into nonpartnership items” and “items that aren’t converted into nonpartnership items by a converted items notice of deficiency because they are already nonpartnership items” and the Court doesn’t have proper jurisdiction over the latter.

The Court said it cannot make this jurisdictional distinction without some legal authority for doing so. It finds that it has jurisdiction over all of the items, even though the way in which the items became subject to the Court’s jurisdiction differed.

The Court acknowledges that the parties have preserved this issue for appeal (which is likely petitioners’ goal) and denies petitioners’ motion to dismiss yet again. 

Docket No. 17286-18, Michael Sestak v. CIR (Order Here)

In this order, Judge Buch holds the IRS to a high standard (ironically, its own) when applying the last known address rule.

Petitioner notified the IRS of his change of address when he began serving a five-year sentence in a federal prison – the only part that he did not communicate was his prison registration number, which is the number used to identify individual inmates. The IRS received this correspondence because petitioner also requested an abatement of failure to file penalties due to the reasonable cause of his imprisonment, which the IRS granted.

In addition to petitioner’s correspondence, a relative of petitioner sent a letter to the IRS that discussed petitioner’s prison sentence and included petitioner’s new address, this time with his prisoner registration number. The IRS retained this letter in its records.

Then the IRS sent petitioner a notice of deficiency to the address petitioner provided without the prisoner registration number. The petitioner never received the notice of deficiency and only became aware of it after he started receiving collection notices. A year and a half after the notice of deficiency was sent, petitioner petitioned the Tax Court.

IRS moves to dismiss the case for lack of jurisdiction because the petition was not timely filed, arguing that it reasonably relied on petitioner’s letter (which, again, did not list the prisoner registration number) when it sent the notice to petitioner’s last known address.

If the IRS does not exercise reasonable diligence and sends a notice of deficiency to an incorrect address, the notice of deficiency is deemed invalid. The Court addressed this issue more generally in Keeton v. Commissioner, holding that the IRS did not use the last known address when it knew the taxpayer was incarcerated and didn’t send the notice to the prison.

This order takes that decision one step further. The IRS was aware of the incarceration and sent the letter to the prison, but the Court still finds that that wasn’t enough.

Referencing the IRM (while acknowledging its non-precedential value), the Court states,

The Commissioner’s own manual gives instructions for mailing notices of deficiency to incarcerated taxpayers. The Internal Revenue Manual (IRM) states that the address on the notice of deficiency “should reference the prisoner locator number, if available.” The IRM provides a link to the Bureau of Prisons website where Service personnel may find prison locator numbers and addresses. The IRM thus states that a complete address for a prisoner contains the prisoner registration number and then provides a link to find that number. Therefore, the Commissioner knew he had an incomplete address for [petitioner] because the IRM stated that a prisoner address should contain the prisoner’s registration number.

The IRS asserts that it acted reasonably because the notice was sent by the Automated Underreporter System to the address on file. The Court finds that requirements under the last known address rule of section 6212(b) do not depend on which system the IRS uses to mail the notice and due diligence is required when the IRS is aware an address is incorrect or incomplete. The Court dismisses the case for lack of jurisdiction but not on the IRS’s proposed basis, but rather on the basis that the notice of deficiency was invalid since it was not sent to the taxpayer’s last known address.

Tax Court Holds Power of Attorney Form Inadequate to Change a Taxpayer’s Address

In a precedential opinion in the case of Gregory v. Commissioner, 152 T.C. No. 7 (2019), the Tax Court has held that sending a power of attorney (POA) form to the IRS with a new address for the taxpayer does not put the IRS on notice with respect to the change of address such that it must use that address in corresponding with the taxpayer in a notice required to be sent to the taxpayer’s last known address. Bryan Camp has a nice write up of the case on the Tax Prof blog if you want an expanded take on the case and you have an interest in knowing how Bryan met his wife.

Before going into an explanation of the basis for the Court’s opinion and why it issued a precedential opinion on this issue, I found it worth noting what was not discussed in this case. Since it was not discussed, I do not know why and would welcome comments from any reader who might know. Because the issue in the case is whether the POA form can change a taxpayer’s address, I would guess that a valid POA existed at the time the notice of deficiency at issue in this case was mailed. If a valid POA existed at the time of the issuance of the notice, why didn’t the POA receive the notice in time to file the Tax Court petition?

The IRS position is that its failure to send a copy of the notice of deficiency to the POA does not invalidate the notice and does not save the taxpayer who files late. See IRM 4.8.9.11.4 (providing that notice may be invalid if not mailed to last known address of taxpayer or if not mailed by certified or registered mail) and IRM 4.8.9.11.2 (providing that copies of the notice are sent to the POA via regular mail). Here, it is not clear if there was a valid POA at the time of the notice, if the POA was timely notified or if the IRS failed to send a copy to the POA. If a POA existed and the IRS timely sent a copy to the POA, maybe this was really a case seeking to protect the POA from exposure. If a POA existed and the IRS did not send a timely notice to the POA, I am surprised that the taxpayer did not at least make an argument regarding that failure. If the notice were a notice of determination in a CDP case, IRC 6304 might come into play if the IRS failed to timely notice the POA. See IRC 6304(a)(2); but cf. Bletsas v. Commissioner, T.C. Memo 2018-128 (2018) (rejecting taxpayer’s argument that IRC 6304 required the IRS to mail a notice of lien to her POA).

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The Gregorys filed their return for 2014 after they moved from Jersey City, New Jersey to Rutherford, New Jersey in 2015; however, on the 2014 return they put their Jersey City address. The opinion did not provide an explanation for why they did this but right off the bat they have created a problem for themselves. During the course of the examination, the Gregorys submitted two POAs to the IRS and each POA listed their new address in Rutherford. During the examination, they also filed a request for extension of time to file their 2015 return and that request also listed their Rutherford address. When the IRS issued the notice of deficiency on October 13, 2016, it had not yet received their 2015 return and it had not received a formal change of address notification from the Gregorys.

The IRS sent the SNOD to Jersey City. The Gregorys did not receive it until after 90 days had run. They filed their Tax Court petition immediately upon receipt of the SNOD. The IRS moved to dismiss the petition as untimely. Both parties agreed it was untimely and that the Tax Court case became one that would decide whether the notice was sent to their last known address and not one which would determine the merits.

The Court here relies on the statute, the regulations under the statute and the Rev. Proc. promulgated in furtherance of the regulations. Bryan Camp’s post does an excellent job walking through those provisions and I will not duplicate it here. The result of the application of the statute, the reg and the Rev. Proc., as well as the language on the POA form and the application for extension form, is that these forms are not returns. Putting a new address on these forms does not provide the type of notice requiring the IRS to adjust its records. Because the POA form and the application for extension form do not require the IRS to adjust its record of a taxpayer’s address, the sending of the SNOD to the Jersey City address met the statutory requirement of sending the notice to the taxpayer’s last known address. Since it met that requirement, the SNOD provided a valid basis for the IRS to assess the liability shown thereon. The taxpayers can still litigate about the underlying liability. They must fully pay first and file a refund claim in order to litigate the issue through the refund process. Alternatively, since they did not receive the SNOD, they can litigate the merits in a Collection Due Process case once the IRS sends notice of intent to levy or files a notice of federal tax lien. Depending on whether a copy of the SNOD was timely sent to a representative, they may find their representative anxious to assist them in obtaining an opportunity to litigate the merits.

The decision here suggests to practitioners that they should take the opportunity of sending in a POA to review the client’s last known address and the practitioner should consider including with the POA a formal notice of the change of address where appropriate.

The case does not address the situation of conversations with the IRS. When I speak with someone at the IRS and I am confirming my ability to represent the taxpayer, I frequently get quizzed about the POA. One part of the quiz is the taxpayer information. If the POA does not contain the taxpayer’s phone number, I get quizzed about their phone number and sometimes about their address. If a representative talks to a human at the IRS about the taxpayer’s address on a POA, I wonder if that might change the outcome here. The issue of last known address has many permutations. In the book Effectively Representing Your Client before the IRS an entire chapter is devoted to this topic. No one wants to be relying on a last known address argument but this issue comes up with frequency.

 

Filing a Tax Court Petition Late for Purposes of Determining if the Notice of Deficiency Was Mailed to the Last Known Address

In Sadek v. Commissioner, T.C. Memo 2018-174 the Court decided the issue of a taxpayer’s last known address at the time of the mailing of the notice of deficiency. These cases occur regularly. We have not written about one recently and this one is interesting because no one seemed to know the taxpayer’s last known or current address including his lawyer. The taxpayer did not file the Tax Court petition until more than four years had passed from the issuance of the notice of deficiency. The only reason that the taxpayer filed the petition in Tax Court was to obtain from the court a ruling regarding last known address. From the outset of the case the Tax Court lacked jurisdiction to hear the merits of the underlying liability but could in dismissing the case determine whether the assessment based on the default in filing a timely Tax Court petition could stand. For another take on this case with greater detail see the post by Bryan Camp in his lessons from the Tax Court series.

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The amounts at issue are eye popping. The IRS assessed Mr. Sadek over $30 million in income tax and penalties for 2005 and 2006. Prior to making the assessments, the IRS sent a notice of deficiency to him at an address in California and one in Nevada. The IRS mailed the notice of deficiency on August 25, 2011. At the time it mailed the notice, the last correspondence it had from Mr. Sadek appeared on his 2005 individual income tax return which he filed on May 21, 2009. It showed a California address and the IRS sent one copy of the notice to that address. In October of 2009 Mr. Sadek filed bankruptcy in Nevada. The IRS sent a second copy of the notice to the address in Nevada that Mr. Sadek used in filing the bankruptcy petition. At the time the IRS mailed the notice Mr. Sadek actually resided in Beirut, Lebanon; however, the IRS did not send a notice to him in Beirut.

Prior to the issuance of the notice, Mr. Sadek had appealed the proposed audit adjustments. The Appeals Officer asked Mr. Sadek’s representative where Mr. Sadek resided. The court found that :

During the pendency of petitioner’s appeal, AO Zhou and Mr. McGinnis communicated about petitioner’s location. Mr. McGinnis informed AO Zhou that petitioner was out of the country, but AO Zhou was unable to get a new address from Mr. McGinnis despite repeated attempts. AO Zhou never spoke directly with petitioner, and Mr. McGinnis represented to AO Zhou that petitioner had cut off contact with him as well.

Anyone who has represented a client before the IRS and had the client go missing knows the uncomfortable feeling that Mr. McGinnis must have felt over not knowing the location of his client. Representing low income taxpayers, I do regularly lose touch with clients. Although the clinic does not have fee issues creating concerns about lost clients, we have plenty of other issues and try hard to reestablish contact if possible. Of course, the Appeals Officer would also have been uncomfortable. She knew the importance of sending the notice of deficiency to the correct address. She seems to have diligently pursued the address and defaulted to the best information in the IRS system when the taxpayer’s current address was not forthcoming. I hope that the IRS also sent a copy of the notice of deficiency to Mr. McGinnis. Maybe that did not help here since Mr. McGinnis had lost touch with his client but the copy of the notice sent to the representative will often keep the client from defaulting on a notice sent to the “last known address” which is not the actual address.

Mr. Sadek resided in Beriut from September 2010 through May 2014. While the IRS did not know where he resided, the FBI investigator assigned to his case did have conversations with him and knew that Mr. Sadek was out of the country even though he did not have a specific address for Mr. Sadek.

Mr. Sadek argues in this case that the IRS had ample notification that he did not reside in California or Nevada at the time it sent the notice. First, he argued that the file in the bankruptcy case showed that the bankruptcy court lifted the automatic stay to allow creditors to foreclose upon his California and Nevada homes. The IRS argued that the bankruptcy files did not show that the foreclosure actually took place and also did not show where he actually lived. The controlling regulation also makes clear that information a taxpayer provides to a third party “is not clear and concise notification of a different address.”

Next, Mr. Sadek argued that “[v]irtually the entire federal government knew where” he was. The Court rejected this argument as well because the evidence showed the FBI knew he had left the US and spent some of his time in Lebanon but did not have a specific address. Further, even if the FBI had known precisely where he lived, it could not have shared that information with the civil arm of the IRS. Similarly, Mr. Sadek’s argument regarding the State Department failed. He argued that he provided his specific address in Lebanon to the State Department in connection with a request for a renewed passport. He did not, however, put evidence into the record of the hearing on this matter of the address provided to the State Department. Had he put on evidence that he provided a specific address to the State Department, providing the updated address to the State Department would not cause his address to change with the IRS. The regulation provides that “change of address information that a taxpayer provides to … another government agency, is not clear and concise notification of a different address.”

Last, Mr. Sadek argues that the IRS knew the two addresses to which it sent the notices were wrong and so the notice could not be valid. The Tax Court holds that the burden falls on the taxpayer to keep the IRS informed of his address and not on the IRS to find exactly where someone lives. The IRS tried to find his correct address and even Mr. Sadek’s own representative could not tell the IRS where to send the notice. The case shows that the IRS must make an effort when it knows that the address it has is wrong but that effort need only be reasonable. The taxpayer bears the burden to keep the IRS informed. When your own representative does not know how to find you, you will have an uphill battle convincing a court that the IRS should have known your address. Most cases do not have the personal involvement of an Appeals Officer prior to the issuance of the notice of deficiency and an Appeals Officer who directly questions the representative regarding the proper address. In the face of that type of questioning, taxpayer’s failure to provide the IRS with the proper address causes the outcome here.

Mr. Sadek owes a lot of money. That kind of money makes it worthwhile trying to set aside the assessment for an improperly filed notice. Since his case was dismissed for lack of jurisdiction because of an untimely petition and not because of a wrongly addressed notice of deficiency, the IRS assessment stands. If he wants to contest the underlying liability now, he must find the money to pay for at least one of the two years in order to meet the requirements of Flora.

 

Returned to Sender: Should the IRS Be Required to Search for A Taxpayer’s New Address Beyond its Own Databases When a Notice is Returned as Undeliverable?

We welcome guest blogger Lisa Perkins who is an Assistant Clinical Professor of Law and Director of the Tax Clinic at University of Connecticut School of Law. Professor Perkins worked for five years in the Criminal Division of Department of Justice Tax Section and over a decade as an AUSA in the Unites States Attorney’s office in Hartford. She joins Sonya Miller of UNLV and Christina Thompson of Michigan State as a writer of posts on tax articles featuring procedure issues. She writes to us today about an article that looks at ways to improve getting notice to taxpayers and a realistic opportunity to contest their tax issue in court. The 7th Edition of “Effectively Representing Your Client before the IRS” is coming out this month. It has an entire chapter on this topic if you are interested in more information on last known address issues. Keith

The IRS is required to send via certified mail to the “last known address” of a taxpayer several notices that contain substantive legal rights, including statutory notices of deficiency, final notices of intent to levy, and notices of filing of federal tax liens. The Code requires a taxpayer to exercise the right to appeal the actions proposed in these notices within very strict time limits. The time limit for claiming the substantive right provided in the notice (e.g., filing a Tax Court petition within 90 days), begins to run on the date of mailing, regardless of whether or when the taxpayer actually receives the notice. The IRS need only exercise reasonable diligence in ascertaining the “last known address” of the taxpayer for purposes of mailing the notice. The Code does not require “actual” receipt.

An expansion of the reasonable diligence standard applicable to determining the “last known address” was proposed by the National Taxpayer Advocate in her 2012 annual report and is the subject of The Last Known Address: A Joint Effort Between the IRS and the U.S. Postal Service, Larry Jones and Rachel Multer Michalewicz. Though the article was published in the April-May 2014 issue of the Journal of Tax Practice & Procedure, the question remains relevant today. Courts beyond the Fifth Circuit Court of Appeals have remained reluctant to require the government, upon return of a notice, to search for a new address for a taxpayer in databases outside of the IRS, such as motor vehicle and real property records, despite the government’s access to and routine use of these databases for other purposes (e.g., to locate assets upon which to levy).

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In The Last Known Address: A Joint Effort Between the IRS and the U.S. Postal Service, Jones and Michalewicz discuss what constitutes “clear and concise notification of a change of address” for purposes of the IRS’s burden to send certain notices, including statutory notices of deficiency (SNOD), to a taxpayer’s last known address. In particular, the authors look more closely at the change of address process to IRS records effected by a database maintained by the U.S. Postal Service and claim that errors in the process may prejudice a taxpayer.

As the authors explain, Treas. Reg. 301.6212-2(a) “defines ‘last known address’ as ‘the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address.’” The IRM applicable to Notices of Deficiency warns “[i]n no event should databases or information outside of the IRS be consulted for addresses. Alternative addresses, to the extent that they are used, must have been provided to the IRS by the taxpayer or his representative (or other agent).” IRM 4.8.9.8.2.5 (07-09-2013).

While the IRS generally will not accept change of address information from a third party, an exception is provided in the regulation for regular address updates obtained from the U.S Postal Service (USPS). See Treas. Reg. Sec. 301.6212-2(b)(1) & (2). The USPS maintains a National Change of Address (NCOA) database which is forwarded to the IRS weekly. See IRM 4.8.9.8.2.1 (08-11-2016) (SNOD Last Known Address guidance). The article explains how the IRS goes about updating an address from the NCOA database and notes the IRS allows the update to carry through despite the fact that the names may not match exactly.

For instance, as the authors explain, “if the NCOA database shows a Bob Smith who changed from one specific address to another, and the IRS records show a Robert Smith with that same prior address, the IRS can consider that a match and update the records.” The new address from NCOA will be considered the last known address until the taxpayer files a tax return with a different address or gives the IRS “clear and concise notification of a different address.” Contrast this with IRS rules that narrowly restrict attempted changes of address by a taxpayer himself.

For instance, per the Internal Revenue Manual relating to Notices of Deficiency, only the following notices from taxpayers are considered “clear and concise notification” of an address change:

  1. A statement signed by the taxpayer requesting the address change and containing full name, old address and SSN and/or EIN,

IRM 4.8.9.8.2.2 (07-09-2013)

On the other hand, standing alone, the following are not considered “clear and concise” notification of a new address:

  1. Letterhead of taxpayer correspondence;

Id. A phone call from the taxpayer requesting an address change is insufficient unless it is made in connection with a conversation about an open account or adjustment and authentication of the caller’s identity is verified using the criteria in IRM 21.1.3.2.3 and 21.1.3.2.4. IRM 4.8.9.8.2.4 (07-09-2013). See also Rev. Proc. 2010-16, 2010-19 IRB 664.

I can certainly see why many of these restrictions seem appropriate safeguards to preventing theft of taxpayer information. Yet, as the authors point out, allowing the USPS NCOA to effect an automatic update to a taxpayer address without an exact name match is prejudicial to taxpayers and seems inconsistent with these safeguards. Couldn’t a third party file a change of address form for a taxpayer with the local post office resulting in the same identity theft issue (though obviously the IRS would not be responsible)? In my former career as a federal prosecutor, I once handled an identity theft case involving a taxi driver who was doing just that: redirecting other people’s mail to post office boxes he set up for the purpose of collecting their financial information, including credit card cash advance offers that he then used to the detriment of these individuals.

As the authors explain, a taxpayer residing in the Fifth Circuit (Louisiana, Mississippi and Texas), may have the added benefit of the Fifth Circuit Court of Appeal’s more expansive requirement of reasonable diligence in determining the “last known address.” In Mulder v. Commissioner, 855 F.2d 208, 210 (5th Cir. 1988), the Fifth Circuit invalidated a notice of deficiency and held the IRS had a duty to further investigate when the postal service had returned letters to it prior to the mailing of the notice of deficiency. Likewise, in Terrell v. Commissioner, 625 F.3d 254, 257 (5th Cir. 2010), the court held the IRS has a duty to further investigate by, e.g., searching DMV or other records, where the “IRS knows or should know at the time of mailing that taxpayer’s address on file may no longer be valid [due to] previously returned letters, . . . .” Nonetheless, as Jones and Michalewicz explain, even in the Fifth Circuit, taxpayers benefit from this more generous standard only at the time of the original mailing of a notice, not if that notice is then returned to the IRS.

Ultimately, the authors conclude that it would not be unreasonable to require the IRS to investigate further to determine a correct address for a taxpayer upon receipt of an undelivered notice (or other credible information questioning the accuracy of the address information on the IRS’s original notice). As the article points out, the National Taxpayer Advocate has urged Congress to amend the Code to require that the IRS look beyond its own databases to locate potential new addresses for sending taxpayers important notices, such as notices of deficiency.

Conclusion

If the IRS were required to search beyond its own databases to locate a new address for a taxpayer, presumably to send a new notice, how far should it be required to go?  Which databases should the IRS consult?  To be clear, the examples the authors suggested (and the National Taxpayer Advocate has suggested) include motor vehicle records and real property records; they do not suggest the IRS could or should rely on a “Google” search for this information.  Motor vehicle records and real property records typically contain information from the individual to which they pertain.  In the context of low-income taxpayers, who tend to move frequently, and may not file or may not be required to file a tax return each and every year, this would seemingly improve the chances of actual receipt of a notice of deficiency.  But, as the authors note, broader search requirements will also raise more questions, such as whether a second notice to a newly located address re-starts the 90 day window for filing a Tax Court petition, and whether the courts should validate the IRS’s extra search effort, even when the IRS picks the wrong Bob Smith.

 

Designated Orders: 10/2/17 to 10/6/2017

LITC Director for Kansas Legal Services William Schmidt reviews interesting procedural issues in this week’s edition of designated orders. Two of the cases he discusses involve bench opinions which we have written about previously here and here. We got a little bit behind in publishing our weekly review of designated orders making this the second post of the week on such orders.  We hope to go back to our “normal” pattern of posting each Friday.  Keith

Out of 8 designated orders last week, I am focusing on two cases that relate to the last known address of the Petitioner (reinforcing the necessity of communicating address changes to the IRS) and one case where Petitioner needed to provide more evidence to support his claims.

The first two cases cited are bench opinions, authorized under IRC section 7459(b). Tax Court practice is to read a bench opinion into the record, wait to receive the printed transcript weeks later, then issue an order serving the written copies of the transcripts to the parties (who may or may not have paid the court reporter for those transcripts). Bench opinions are just as subject to appeal as other cases, so long as the case involved has not been designated a small tax case under 7463.  The written version of the bench opinion is useful for the appellate court.

Last Known Address Case 1

Docket # 22293-16, Nathanael L. Kenan v. C.I.R. (Order Here).

Mr. Kenan filed his 2011 tax return from his address on Ivanhoe Lane in Southfield, Michigan. Mr. Kenan alleges that he moved to a new address, Franklin Hills Drive, in Southfield prior to February 2013 and notified the U.S. Postal Service regarding his change of address. The IRS mailed a statutory notice of deficiency (“SNOD”) to the original address on February 19, 2013.   Mr. Kenan filed his 2012 tax return from the second address. Once Petitioner verified the SNOD, he filed a petition with the Tax Court with the argument that no SNOD was ever mailed out.

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I previously reported on this case in this blog posting regarding The Court’s denial of Respondent’s motion to dismiss for lack of jurisdiction. Within that post, I noted that the IRS is required to update their addresses based on U.S. Postal Service (“USPS”) Change of Address notifications and those notifications are influential to determine jurisdiction for Tax Court.

The Court held an evidentiary hearing in Detroit, Michigan, on September 18, 2017. Petitioner bore the burden of proof regarding his change of address with the USPS. Petitioner gave oral testimony that he submitted his change of address notification to the USPS after he moved in June 2012 and before the IRS issued the SNOD in February 2013. Petitioner was to give specific details of when he gave notice and what he stated on the form. He did not provide any further specifics or provide documents in support of his statements.

The Court did not have evidence of what Petitioner submitted to the USPS so could not compare the USPS or IRS data (for example, if a name or address submitted to the USPS was misspelled). Based on that lack of evidence, the conclusion was that the IRS acted on the last known address they had for the Petitioner. The Court dismissed Petitioner’s petition for lack of jurisdiction as being untimely filed.

Last Known Address Case 2

Docket # 9469-16 L, Mark Marineau v. C.I.R. (Order Here).

Patrick Thomas previously reported on this case in this blog posting. At last report, the question was why the IRS sent a SNOD to the Petitioner in Michigan if Petitioner lives in Florida.

Here is the procedural background – Following Petitioner’s Tax Court petition, Respondent filed a motion for summary judgment, supported by a declaration from the settlement officer. The Court directed by order on July 5, 2016, for Petitioner to file a response, but he filed his own motion for summary judgment instead where he objected to Respondent’s motion (filed October 19). Respondent filed a response January 23, 2017, objecting to Petitioner’s motion. Petitioner filed a reply to Respondent’s response on March 24, 2017. The Court ordered Respondent to explain the disparity between the address listed on the Form 3877, the notice of deficiency address and the address where the notice of deficiency was sent. On July 28, Respondent filed a First Supplement to Motion for Summary Judgment, supported by a declaration supported by Respondent’s counsel. Petitioner was ordered to file a response on or before September 14 but did not.

This began when the IRS prepared a substitute return for Petitioner for 2012 because Petitioner failed to file his tax return. On June 8, 2015, Petitioner mailed a letter to IRS headquarters that told of his change of address to a post office box in Fraser, Michigan, stating that it was an official notification and requesting that they update their records. On June 18, 2015, the IRS mailed the notice of deficiency to Petitioner at a Pensacola, Florida, address. Even though the notice was mailed to Florida, the USPS attempted delivery to a Roseville, Michigan, address. The IRS has not explained why it was sent to that Roseville address even though it was addressed to the Pensacola address. The notice went unclaimed and the USPS returned it back to the IRS on July 21, 2015.

Petitioner did not file a petition for redetermination of the notice of deficiency for 2012. The IRS sent demand for payment regarding the full 2012 tax liabilities that Petitioner did not pay.

Following this, the IRS and Petitioner corresponded based off his Pensacola address. First, the IRS mailed a notice of intent to levy and Petitioner filed a Form 12153, Request for Collection Due Process or Equivalent Hearing. Petitioner said he would like to have a face-to-face hearing. He did not check any box to propose a collection alternative but wrote in his statement that he would like to discuss collection options if it is proven he owes the tax. The settlement officer’s response was that in order to have a face-to-face hearing, Petitioner needs to complete Form 433-A and submit a tax return for 2012, plus returns for 2013 and 2014 (or explain why he was not required to file a return for that year/years). Petitioner again requested the meeting but did not supply any of the requested documents so the settlement officer followed up with a reminder letter and second copy of the original letter. Petitioner did not call for the March 1, 2016, hearing date and did not supply the documents. The Appeals Office sent a notice of determination March 17, 2016, to his Pensacola address. Petitioner again responded to request a face-to-face hearing without providing any documents. Petitioner timely filed a petition with the Tax Court and listed his Pensacola address as his mailing address.

The Court concluded there is still an issue of material fact regarding whether the June 8, 2015 notice of deficiency was mailed to Petitioner’s last known address. One issue is while Petitioner’s method of notification to the IRS was unorthodox, Petitioner argues it was a “clear and concise notification” of his change of address. The Court denied both the Petitioner’s motion for summary judgment and the Respondent’s motion for summary judgment.

Evidence Presented at Trial

Docket # 23891-15, Abdul M. Muhammad v. C.I.R. (Order Here).

This case concerns a SNOD sent to Petitioner regarding tax years 2012 and 2013. At issue were $15 in taxable interest unreported in 2013, one dependent exemption in 2012 and two exemptions in 2013, head of household status for both years, American Opportunity Credit or other education credits for both years, a deduction for $7,743 for charitable contributions in 2013, ability to deduct Schedule C business expenses in 2013, penalty for failure to timely file a tax return in 2012, and accuracy related penalty under IRC section 6662(a) in both years.

At trial September 18, 2017, in Detroit, Michigan, Petitioner represented himself and had the burden of proof requirement regarding these noted issues below.

  • Interest Income: Petitioner presented no evidence to dispute that the $15 was taxable interest income.
  • Qualifying Children: Petitioner presented no records (school, medical or otherwise) to show that the children lived with him for more than half the year.
  • Education: Petitioner was enrolled in online courses at the University of Phoenix and had expenses of $4,178 in 2012 and $3,977 in 2013.
  • Charitable Contributions: Petitioner did not have documentary evidence to show charitable contributions he made to his mosque.
  • Business Expenses: Petitioner did not offer documentary evidence to support his claim of $10,299 in expenses as a roofer in 2013.
  • Accuracy Related Penalty: No reasonable cause was provided to dispute the burden in 6662(a) or (b)(1) for a taxpayer’s negligence or disregard of rules and regulations.

As a result, the IRS adjustments were sustained regarding the interest income, dependency exemptions, head of household filing status, business expenses and accuracy related penalties.

However, the IRS did not provide convincing proof regarding Petitioner’s late filing of his 2012 tax return (their documents provided contradictory dates so did not meet the burden of proof). Also, Petitioner claimed $4,377 in charitable contributions but the deficiency stated $7,743 (a difference of $3,366) so the deficiency needed to be recomputed. He was also entitled to the education credits for both years.

Takeaway: Providing evidence at Tax Court, especially documentary evidence, is necessary to win on issues at trial. When the Petitioner only provides oral evidence restating a position on the issue, it is unlikely that will be a successful tactic.