Sending Notices with Bad Dates

On June 22, 2020 National Taxpayer Advocate Erin Collins issued a blog post advising readers to keep an eye out for notices with expired action dates.  The post notes that “during the shutdown, the IRS generated more than 20 million notices; however, these notices were not mailed.  As a result, the notices bear dates that now have passed, some by several months and some of the notices require taxpayers to respond by deadlines that have also passed.” I will repeat myself once or twice in this post but if I am reading it correctly the IRS is knowingly and intentionally creating a false entry on thousands, perhaps tens of thousands, of taxpayers’ official records of account.

The NTA describes as a silver lining the fact that the IRS is granting additional time to respond before interest or penalties apply and that the IRS is putting inserts with the letters to explain something about the mismatch in the date of mailing and the dates on the letters.  I will talk more about some of the letters the NTA mentions in her blog post.  I found myself wondering about several things that were not explained in the NTA’s blog post.  Why did the IRS print these notices?  Why doesn’t the IRS shred the notices and recycle the paper in order to issue new notices with the proper dates on the notices?  Why hasn’t the IRS issued a news release or Tax Tip about the notices to alert taxpayers and practitioners?  Prior to the NTA blog post, the IRS only released this information though its National Public Liaison (NPL), which, while helpful, does not reach a wide audience. And while many people read the NTA blog posts, I don’t think it has a readership on a par with broadly released statements from the IRS.

The IRS might think it has communicated to practitioners. It pushed this news out through the NPL on June 9. The stakeholder liaison is an inadequate way to disseminate important news. On the day of the stakeholder liaison email, IRS quietly updated the page on IRS operational status to include the information. It also posted this news as a “Statement on Balance Due Notices” here.  I do not want to detract from the important discussion of the decision itself, but it is also worth mentioning that the information the IRS has made public on this situation and the method and medium of making it public, fails to signal the importance of this action.

Yesterday the NTA released her 2021 Objectives Report to Congress, which confirms the information in her blog post. Kudos to the NTA for including the problem of outdated notices in the news release accompanying the report. This will help get the word out to practitioners.

In a letter to Commissioner Rettig, Representatives Neal and Lewis expressed their concern over the outdated notices and suggested that the IRS take steps to “ensure no taxpayers are penalized” for the IRS’s inability to timely process correspondence. For the reasons explained below, this will not be easy to do if the IRS moves forward with its plan to mail the outdated notices.


The NTA states that several dozen kinds of IRS notices will be mailed in the next month or two.  Maybe there is still time for the IRS to reconsider its decision to send out-of-date notices.  I hope so.  Here, I will discuss a few of the notices she mentioned.  Before starting the specific discussion, I note that many of these notices are required by statute.  I draw a distinction between statutorily required notices and other types of IRS notices.  While the best practice would be to send out notices on the date listed on the notice for all notices, the purposeful mailing of misdated statutorily required notices creates a more serious problem.

No matter what an insert says, the taxpayer will receive a statutorily mandated notice triggering statutorily prescribed duties and response times with the wrong date on the notice and the wrong date(s) for responding.  In the last two sentences of her blog post the NTA mentions that the IRS computer system will show as the business record of the IRS the wrong date.  She says “[c]ompounding confusion surrounding notice dates, IRS transcripts for taxpayers’ accounts will also reflect incorrect dates for some of the notices.” 

This could have grave consequences for both taxpayers and the IRS if the dates on the letters compromise the IRS business records.  First, taxpayers who do not keep the envelope and the letter may have trouble proving that the dates on the letter did not reflect the actual mailing date when making a future challenge.  Second, if the IRS builds a business record which it knows contains inaccurate information it makes all of its records suspect.  Courts regularly rely on certified transcripts from the IRS for the accuracy of the date an action took place.  If the IRS knowingly puts the wrong dates into its system of records, that calls the entire system into question.  This could have consequences for the IRS far beyond the consequences of recycling these letters and making sure that its records accurately reflect actions taken.

Here you have the NTA saying that the IRS business record is inaccurate.  That could be powerful evidence in court to strike at many IRS actions taken that stem from 2020.  It also has the potential to support grounds for damages if certain collection actions occur after a wrongful assessment or wrongful filing of a notice of federal tax lien.  It may present the possibility that in a CDP case a taxpayer may wish to lean on a rights-based failure to inform argument as a grounds to invalidate the proposed collection action.

Notice and Demand

IRC 6303 requires that the IRS send out a notice and demand letter within 60 days of the making of an assessment.  Case law going back at least three decades holds that the failure to send the notice and demand letter within the 60-day period does not invalidate the assessment but there is some possibly contrary case law.  The failure impacts the timing of the creation of the federal tax lien.  IRC 6321 and 6322 provide that the federal tax lien arises upon assessment, notice and demand and failure to pay within the demand period.  Ordinarily, failure to pay within the demand period causes the federal tax lien to relate back to the date of assessment.  If the IRS sends out the notice and demand beyond the 60-day period, the FTL will only arise upon non-payment and will not relate back to assessment.

You might say “so what,” because who cares about the FTL.  Only after the IRS filed the notice of federal tax lien (NFTL) does the IRS create a perfected lien.  The unperfected FTL still, however, has meaning.  For example, it attaches to property transferred for less than full value.  If a fight arises regarding the attachment of the FTL, the actual date of the mailing of the notice and demand letter matters.  Because of the pandemic, the IRS could not avoid sending out many notice and demand letters after the 60-day period.  Sending them out beyond the time frame must occur due to no fault of the IRS but sending a significantly backdated letter will undoubtedly confuse many recipients and may cause some to even challenge the validity of a notice which on its face asks the taxpayer to do something impossible.  If the notice and demand letter is invalid, the IRS has real problems because it would not have created the FTL, which has many consequences, including but certainly not limited to violating disclosure of a taxpayer’s liability if the IRS records a notice of federal tax lien when no underlying lien exists.

There is also the problem of the address.  The IRS must mail the notice and demand letter to the taxpayer’s last known address.  The IRS must use the taxpayer’s address as shown on the taxpayers most recently filed and properly processed return, unless clear and concise notification of a different address is provided. See, e.g., Duplicki v. Comm’r, T.C. Summary Opinion 2012-117.If these notices have been sitting in the bowels of a service center for months during the filing season, it is quite possible that many taxpayers have filed returns between the time of the creation of the notice and demand letter and the mailing of that letter.  The NTA does not mention if the insert changes the address on the letter.  I imagine it does not.  While many paper returns filed in the past few months remain in the parking lots of the service centers to which they were sent, the vast majority of taxpayers filed electronically.  Many of those returns will have gone through processing, and the IRS will know the taxpayer’s new address before these musty notices get mailed.  Mailing the notice and demand letters to something other than the taxpayer’s last known address will create an invalid notice and demand letter creating the same problems described above.  Maybe these are all notice and demand letters based on returns filed with insufficient remittance and processed early in the filing season, so the notice on the letter is the address on the most recent return.  If these notices do not come from that source, the likelihood that a fair percentage will bear an address other than the last known address is reasonably high.  This means taxpayers should be prepared to challenge the notices on this basis, which is not often done.

Math Error Notices

As most readers know the name math error notice is a misnomer.  Subsection 6213(g)(2) provides the definition of math error notice.  Sixteen different actions trigger the sending of a math error notice only one of which is 1+1=3.  Earlier this year, Les updated Chapter 10 of the treatise “IRS Practice and Procedure” and adopted the practice of the Taxpayer Advocate Service of calling this notice the summary assessment authority notice.  For this post I will stick with the misleading language of the statute, but errors in math play a small role in these notices.

The math error notice provides an exception to the need for the IRS to send a notice of deficiency in order to make an assessment.  Instead of a 90-day letter offering the chance to go to Tax Court, the taxpayer receiving a math error notice has 60 days to write back to the IRS expressing disagreement or the IRS will make the assessment.  We have not written enough about math error notices but some of our prior posts on this topic exists here, here, here and here.  Nina Olson wrote often about these notices as the NTA.  Find some of her writings here, here, here and here

This notice cuts off rights.  Most taxpayers fail to respond giving the IRS a shorter, easier path to assessment than the notice of deficiency.  Math error notices confuse taxpayers in the best of times as discussed in some of the NTA annual reports.  If you couple the ordinary confusion of these notices with dates that make no sense, the likelihood of a failure to response undoubtedly goes up.

Note that the math error notice must be mailed to the taxpayer’s last known address and the discussion above concerning notices with something other than the last known address applies here.  If the math error notice goes to the wrong address but the IRS makes an assessment following a failure of the taxpayer to respond, then the IRS has a bad assessment and all of the things that flow from a bad assessment.  These “things” can take a lot of time and effort to unwind.  They can also cause the IRS to lose the right to assess if the unwinding occurs after the statute of limitations on assessment has passed.

On a smaller scale the government faced a similar problem in the government shutdowns of 2013 and 2018-2019.  The system seems to generate notices automatically at certain points in time.  The system does not understand when the government ceases to operate.  In the prior shutdowns it sent out notices of deficiency and collection due process notices while the government was closed, but those letters didn’t have the wrong date and the taxpayer could still file a Tax Court petition or CDP request in the right time frame.

Collection Due Process Notices  

I wrote a blog post in 2018 about a CDP case in which the Revenue Officer went to the taxpayer’s house to deliver the CDP notice but the taxpayer’s dog deterred the RO from making delivery.  He went back to his office and mailed the CDP notice to the taxpayer to avoid bodily injury; however, he mailed the notice two days later.  When he mailed the notice, it still bore the date of his canine-thwarted personal delivery effort.  The Tax Court concluded that the time to make a CDP request runs from the date of mailing (or delivery) and not the date on the CDP notice.

Now the IRS will throw into the system potentially thousands of wrongly dated CDP notices, causing the recipients confusion and filing dates that may or may not fall within 30 days of the actual date of mailing.  How many taxpayers will keep the letter and the envelope?  Will the IRS have the correct date of mailing in its database or the original date of mailing?  Remember that these mailings result not from a single RO working a case but from a mass-produced effort at the service centers.

Are CDP notices sent by the IRS with knowingly wrong dates valid CDP notices?  If invalid, it makes all downstream levy actions wrongful.  Will the CDP notices be sent to the taxpayer’s last known address or to some other address?  If sent to something other than the taxpayer’s last known address, the CDP notices are not good.


The IRS should throw away these letters.  (Recycle them please with appropriate taxpayer identification precautions.)  Send new letters in which the dates on the letters match the dates of mailing.  Yes, this will be expensive in cost of production of the letters and the time it takes to create the new letters.  But it may prove less expensive than the alternative.  It certainly will create less confusion among the taxpayers receiving the letters, the representatives trying to assist the letters, and the courts interpreting the IRS actions.

Summary Opinions for 9/21/15 to 10/2/15

Running a little behind on the Summary Opinions.  Should hopefully be caught up through most of October by the end of this week.  Some very good FOIA, whistleblower, and private collections content in this post.  Plus fantasy football tax cheats, business on boats, and lots of banks getting sued.  Here are the items from the end of September that we didn’t otherwise write about:


  • Let’s start with some FOIA litigation. The District Court for the District of Columbia issued two opinions relating to Cause of Action, which holds itself out as an advocate for government accountability.  On August 28th, the Court ruled regarding a FOIA request by Cause for various documents relating to Section 6103(g) requests, which would include all request by the executive office of the Prez for return information, plus all such requests by that office that were not related to Section 6103(g), and all requests for disclosure by an agency of return information pursuant to Sections 6103(i)(1), (2), & (3)(A).   The IRS failed to release any information pursuant to the last two requests, taking the position that records discussing return information would be “return information” themselves, and therefore should be withheld under FOIA exemption 3.  There are various holdings in this case, but the one I found most interesting was the determination that the request by the Executive Branch and the IRS responses may not be “return information” per se, which would require a review by the IRS of the applicable documents.  Although the petition was drafted in broad terms, this Washington Times article indicates the plaintiff was seeking records regarding the Executive Branch looking into them specifically, presumably as some type of retaliation.

In a second opinion issued on September 16th, in Cause of Action v. TIGTA, Judge Jackson granted TIGTA’s motion for summary judgement because after litigation and in camera review, the Court determined none of the found documents were responsive.  This holding was related to the same case as above, but the IRS had shifted a portion of the FOIA request to TIGTA.  Initially, TIGTA issued a Glomar response, indicating it could not confirm or deny the existence (I assume for privacy reasons, not national defense).  The Court found that was inapplicable, and TIGTA was forced to do a review and found 2,500 records, which it still withheld.  Cause of Action tried to force disclosure, but the Court did an in camera review and found the responsive records were not actually applicable.

  • That was complicated.  Now for something completely different.  This HR Block infographic is trying to get you all investigated for tax fraud.  In summary, 75 million of the 319 million people in America play fantasy football, and roughly none are paying taxes on their winnings.  If you click on the infographic, we know you are guilty.  Thankfully, my teams this year are abysmal, so I won’t be committing tax fraud…my wife on the other hand has a juggernaut in our shared league…To all of our IRS readers, please ignore this post.
  • Now a couple whistleblower cases.  In Whistleblower One 10683W v. Comm’r, the Tax Court held that the whistleblower was entitled to review relevant information relating to the denial of the award based on information provided by the whistleblower.  The whistleblower had requested information relating to the investigation of the target, the disclosed sham transaction, and the amounts collected, but the IRS took the position that certain items requested were not in the Whistleblower Office’s file, and were, therefore, beyond the scope of discovery (denied, but we don’t have to explain ourselves).  The Court disagreed and found the information was relevant and subject to review by the whistleblower.  Further, the IRS was not unilaterally allowed to decide what was part of the administrative record.  Another case that perhaps casts a negative light on how the IRS is handling the whistleblower program.
  • On September 21st, the District Court for the Middle District of Florida declined a pro se’s request for reconsideration of a petition for injunctive relief against the IRS to force it to investigate his whistleblower claim in Meidinger v. Comm’r (sorry couldn’t find a free link to this order).  Mr. Meidinger likely knew the court lacked jurisdiction, and this was the purview of the tax court —  Here is a write up by fellow blogger, Lew Taishoff, on Mr. Meidinger’s failed tax court case.  Lew’s point back in 2013 on the case still rings true:  “But the administrative agency here has its own check and balances, provided by the Legislative branch.  There’s TIGTA, whose mission is ‘(T)o provide integrated audit, investigative, and inspection and evaluation services that promote economy, efficiency, and integrity in the administration of the internal revenue laws.’ Might could be y’all should take a look at how the Whistleblower Office is doing.”  The tax court really can’t force an investigation, but TIGTA could put some pressure on the WO to do so.  After taking a shot at the IRS, I should note I know nothing of the facts in this case, and Mr. Meidinger may have no right to an award, and TIGTA has flagged various issues in the program.  It just doesn’t feel like significant progress is being made.
  • I found Strugala v. Flagstar Bank  pretty interesting, which dealt with a taxpayer trying to bring a private action under Section 6050H.  Plaintiff Lisa Strugala filed a class action suit against Flagstar Bank for its practice of reporting, and then in future years ceasing to report, capitalized interest on the borrower’s Form 1098s.  Flagstar Bank apparently had a loan that allowed borrowers to pay less than all the interest due each month, resulting in interest being added to the principal amount due.  At year end, the bank would issue a 1098 showing the interest paid and the interest deferred.  In 2011, the bank ceased putting the deferred interest on the form.  Plaintiff claims that the bank’s practice violated Section 6050H, which only requires interest paid to be included.  The over-reporting of interest, she claims, causes tens of thousands of tax returns to be filed incorrectly.  Further, upon the sale of her home, Strugala believed that the bank received accrued interest income that it didn’t report to her.  A portion of the case was dismissed, but the remainder was transferred to the IRS under the primary jurisdiction doctrine.  The Court found the IRS had not stated how the borrower should report interest in this particular situation, and that it should determine whether or not this was a violation.  In addition, Section 6050H didn’t have a private right under the statute.  I was surprised that this was not a case of first impression.  The Court references another action from a few years ago with identical facts.  However, perhaps I shouldn’t not have been, as this is somewhat similar to the BoA case Les wrote about last year, where taxpayers sued Bank of America alleging fraudulent 1098s had been issued relating to restructuring of mortgage loans.
  • The Tax Court has held in Estate of John DiMarco v. Comm’r, that an estate was not entitled to a charitable deduction where individual beneficiaries were challenging the disposition of assets.  Under the statute, the funds have to be set aside solely for charity, and the chance of it benefiting an individual have to be  “so remote as to be negligible.”  Here, the litigation made it impossible to make that claim.
  • My firm has a fairly large maritime practice, which makes sense given our sizable port in West Chester, PA (there is not actually a port, but we do a ton of maritime work).  That made me excited about this crossover tax procedure and maritime  Chief Counsel Advice dealing with Section 1359(a).  Most of our readers probably do not run across Section 1359 too frequently.  Section 1359 provides non-recognition treatment for the sale of a qualifying vessel, similar to what Section 1031 does for like kind real estate transactions.  This applies for entities that have elected the tonnage tax regime under Section 1352, as opposed to the normal income tax regime.  In general, the replacement vessel can be purchased one year before the disposition or three years afterwards.  But, (b)(2) states, “or subject to such terms and conditions as may be specified by the Secretary, on such later date as the Secretary may designate on application by the taxpayer.  Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe.”  Those regulations do not exist.  The CCA determined that even though the regulations do not exist, the IRS must consider a request for an extension of time to purchase a replacement vessel, as the Regs are clearly supposed to deal with extensions by request.
  • From The Hill, another article against the IRS use of private collection agencies.




A Recent TIGTA Report on Collection Notices and a Recent GAO Report on the Automated Collection System Provide an In-Depth Look at How the IRS Collection Function Operates

Perhaps the citing of one of the taxpayer rights listed in the Taxpayer Bill of Rights (TBOR) should not receive extraordinary attention.  Still, I was impressed when I found that on the first page of its report about new collection notices, TIGTA cited to the taxpayer’s right to be informed as influencing the new collection notices.  Before I get into the details of these two reports I wanted to make special note of the TBOR sighting which suggests it has some importance in the development of administrative processes within the IRS.  The citation to TBOR also helps me as I prepare to speak on taxpayer rights and collection at the upcoming International Conference on Taxpayer Rights.  Les is also a speaker at the conference.

The TIGTA report discusses the taxpayer right immediately after discussing the statutory requirements.  Getting cited in a report prepared by an arm of the Treasury Department does not carry the same importance as a citation by a Court or independent body as the basis for action but it does signal that the rights are having an impact.  I understand that some states and localities have begun adopting taxpayer rights statements following the lead of the IRS.  Success in advocating based on these rights may yet occur.


While the citation to the first right listed in TBOR, deserves passing mention, the TIGTA report itself demands attention from those doing collection work not only because it describes the new notices in the collection stream but also because of all of the statistics about the notices that it provides.  The IRS carefully monitors the effectiveness of the letters it sends in the collection notice stream.  Even a 1% change in taxpayer behavior based on these letters can have a significant impact on the number of cases in the IRS collection inventory.  Because of the impact of the language of the notices in effectively collecting revenue, the IRS measures the impact of these notices and tests the results of the chosen language.

When you combine the TIGTA report with the GAO report concerning the automated collection system issued shortly thereafter, it is possible to obtain a very detailed picture of the inner workings of the IRS collection process.  In this post we generally focus on statutory rights taxpayers have in dealing with the collection system but the administrative process provides a far more important topic for most taxpayers because the way the IRS administers the collection of taxes, while guided by the statutes, has a much more practical impact.  Understanding how the IRS guides cases through this process can assist in making decisions about what to do when your client has a problem with the collection system.  As I will discuss further below, understanding the significant problems the IRS now faces in administering the system, may also influence advice to clients on next steps.

If you want to take the time to read the reports, and I recommend reading them if you want to understand how the collection process at the IRS works, read the TIGTA report first because it covers the first part of the life of a case in collection.  This report focuses on the notices that the IRS sends to taxpayers.  It is easy to think of these notices by letter number or to not think of these notices at all but the notices generate a lot of money for the IRS.  The wording of the notices, the timing and everything about them requires careful choreography in order to maximize successful revenue impact.  The TIGTA report provides very granular detail concerning each of the notices and how successfully the notice produces payment.  Because the IRS recently went through a notice revision process, you can see in the report the impact of the changes in the language in the notices on taxpayer behavior.  I cannot say that the new improved notices provide the best way to gently guide taxpayers to compliance but knowing that the IRS pays careful attention to this, while considering taxpayer rights, gives me positive feelings about the tax collection process.

The GAO report essentially picks up where the TIGTA report leaves off.  It describes the three phases of IRS collection as notice, telephone (essentially Automated Call Sites or ACS) and in-person (Revenue Officers.)  Page 9 of the report has one of many helpful charts in the report and lays out this three step process.  Of course, not every collection case will go through this process and, as the report details, the IRS ability to handle the telephone phase is decreasing rapidly.  Its ability to handle the in-person phase, which I sometimes call its collection concierge service, has degraded significantly over the past two decades.  This report focuses on the second phase and does not analyze the in-person phase where I believe the loss of resources would equal or exceed the telephone phase.

While the TIGTA report had some positive numbers for the IRS concerning its success with notices, the GAO report starts off with some stark and troubling numbers for the IRS with respect to the telephone segment of its collection process.  “ACS has experienced significant declines in staffing, with full-time equivalents decreasing by 20 percent (from 3,672 to 2,932) from fiscal years 2012 through 2014.  Over the same period, the number of unresolved collection cases at the end of each year increased by 21 percent (from 4.2 million to 5.1 million).”  As staffing and inventory move in opposite directions at a rapid pace, this creates an interesting quandary for those giving advice to taxpayers who owe federal taxes.  The IRS sends fewer levies because sending levies generates phone calls.  It must monitor the number of levies it sends because of its limited ability to answer the phones in response to the levies.

The GAO report details how the IRS prioritizes the cases in collection.  While the report focuses on the perceived failure of the IRS to have adequate detail in its plan for prioritization and selection of cases, it is clear that the IRS does have a detailed process even if it has not linked that process to its mission.  It is also clear as you read the report who is likely to receive attention.  Nothing in the report is overly surprising, except perhaps the rapid rate in the past three years of the decline in the IRS ACS capabilities but, as with the TIGTA report, the amount of detail and the number of charts provides a significant level of granularity concerning this function of the IRS.  Table 3 on page 43 of the report gives the numbers of the dropping enforcement actions taken by ACS between 2012 and 2014:  Notices of Federal Tax Liens Filed down 11.29%; levies issued down 36.6%; letters sent by ACS down 30.9% and outgoing calls down 40.4%.  In addition to the loss of employees in ACS, some sites were shut down for over a year between 2013-2014 to work identity theft cases.

While I am focusing on the gloomy numbers, the GAO provides much detail on many of the sub-parts of the IRS ACS function.  Taken together these two reports can really instruct anyone interested in knowing about the systems at the IRS for collection as opposed to the statutes that apply.  Understanding the systems and the numbers can help you explain to clients what is happening in their case and why.


Application of the Failure to Send Notice and Demand Letter in IRC 6330 Case

In the first post I discussed the role that the notice and demand plays in the collection process. In this post, I will consider how the Tax Court and other courts have approached situations when the IRS has failed to comply with its statutory and regulatory requirements for issuing a notice and demand.


All of this sets the scene for the 9th Circuit’s decision in the Nakano case in which the IRS failed to send the traditional notice and demand letter prior to seeking to take levy action.  The issue arose in the context of a collection due process (CDP) case.  CDP did not exist in the 1980s when the primary wave of challenges to the timely issuance of notice and demand occurred.  It came into existence in the Revenue Reform Act of 1998.  Because CDP did not exist at that time and the Tax Court was then almost exclusively a pre-assessment forum, the Tax Court did not face the issue of the impact of failing to send out the notice and demand letter timely when the cases cited above were decided.  Perhaps for that reason, the Tax Court treated its opinion on this issue as a full Tax Court opinion indicating that it thought its decision was novel or precedent setting.  The insight of the Tax Court will bring a new perspective to this issue.  I think the Court reached the right result here although it did so on the basis of a factual argument rather than directly addressing the legal issue of the effect of the failure to timely issue the notice and demand letter on the underlying assessment.

The IRS determined that Mr. Nakano failed to pay over taxes collected by the company, National Airlines, Inc., where he served as the Chief Financial Officer.  It therefore assessed against him the trust fund recovery penalty in an amount equal to the unpaid trust fund taxes.  A couple of items about his trust fund recovery liability deserve note.  First, his liability does not stem, or at least not primarily, from unpaid employment taxes, the traditional route to this penalty, but rather for unpaid airline excise taxes.  The trust fund recovery penalty applies in any situation in which a responsible officer does not pay over federal taxes collected on behalf of the IRS by an entity.  Excise taxes can cause this liability as well as employment taxes but do so much less frequently.  Second, the liabilities at issue were for quarters in 2000 and 2001 yet the trust fund recovery penalty assessment did not occur until March 28, 2006, over five years later.  Interest did not run on Mr. Nakano’s trust fund recovery penalty until assessment.  This is a consequence of placing the trust fund recovery penalty statute in the assessable penalties section of the Internal Revenue Code, which, I believe, is a mistake Congress should correct.  I commented on this in an article for Hastings Business Law Journal.

When the IRS assessed the trust fund recovery penalty against Mr. Nakano on March 28, 2006, it apparently failed to send him a notice and demand letter until June 6, 2006, 70 days after assessment.  Because of the size of his liabilities, almost $9 million, his case did not take the normal route through the collection process.  In most cases the IRS will follow the notice and demand letter with one or two other letters sent six to eight weeks after each other.  These letters are not required by statute but are designed by the IRS to convince the taxpayer to pay without triggering the more serious steps of filing the notice of federal tax lien or issuing a levy.  Here, the size of the liability caused the IRS to collapse its normal process and move very quickly to levy, or at least the threat of levy.  Here, the IRS issued the Notice of Intent to Levy letter, required by IRC 6330 and 6331, on May 22, 2006, within the 60 day period after assessment.  The  Circuit, sustaining the Tax Court, determined that the notice of intent to levy served the purpose of the notice and demand letter.

The Tax Court looked at IRC 6303 to determine what information should go into a notice and demand.  It determined that the statute required that a notice and demand state the amount of the unpaid tax and demand payment. The Notice of Intent to Levy contained that information and was issued within 60 days of assessment.  Since the Notice of Intent to Levy contained all of the information required by IRC 6303 and since it was sent within 60 days of the date of assessment, the statute was satisfied and the taxpayer’s challenge to the collection process, something contemplated by the CDP hearing process, failed.

Mr. Nakano attacked the assessment against him on three bases:  1) it was untimely; 2) the Certificate of Assessment incorrectly characterized it as a jeopardy assessment and 3) the notice and demand was untimely.  The Tax Court found that the assessment occurred within the statutory time frame and that the incorrect characterization of the type of assessment did not cause the assessment to fail.  When it turned to his third argument, the Tax Court stated simply that “the Court has already rejected Nakano’s argument that he did not receive timely notice and demand for payment.”  Does the Tax Court’s failure to reject Mr. Nakano’s argument on a legal basis and its reliance on its factual determination in this case suggest that it believes the legal argument that failure to timely send notice and demand has some validity as a basis for striking down an assessment?

The 9th Circuit sustained the Tax Court determination in an unpublished opinion.  It did not specifically address the issue of the validity of the assessment because taxpayer abandoned that argument, but it did determine that the notice of intent to levy satisfied the requirements of notice and demand.  This leaves open the question of how the Tax Court would have ruled on the validity of the assessment had the notice and demand not occurred within 60 days.

While the “quick” issuance of the notice of intent to levy seems to have saved the IRS here, the timing of the notice of intent to levy here is very unusual.  In a normal case it would not occur until two or three months later – outside the 60 day period after assessment.  In addition, some levies do not require the notice of intent to levy, e.g., jeopardy levy and state refund offsets.  In those situations the IRS can take property without going through the notice of intent to levy process and any notice may occur on the back end.  The decision here allows the levy to move forward, unlike the lien decision in Conroy because of the language of the notice of intent to levy which serves the dual purpose of meeting the notice and demand.  If this case involved a taking without the requirement of first sending the notice of intent to levy, the IRS would be back in the same situation as Conroy.  It would have taken collection action prior to a notice and demand.

The Tax Court left open here the issue of the impact of the failure of the IRS to send notice and demand on the validity of the underlying assessment.  The IRS will make this mistake again given the volume of assessments it makes.  The next time it makes this mistake and must defend the validity of the assessment it is unlikely to have corrected the problem by making a notice of intent to levy within 60 days.  It will be interesting to see if the Tax Court will then make the legal ruling it failed to make here or if it thinks that the failure to send notice and demand does impact the validity of the assessment.  For the reasons I set forth here, I do not believe that a failure to send notice and demand should impact the validity of the assessment but the Nakano case certainly provides encouragement to the next person where the IRS fails to send a timely notice and demand to the taxpayer’s last know address.

Does the Failure to Timely Issue Notice and Demand Impact the Underlying Assessment Rather than the Just Liens or Levies

Notice and demand, like assessment, generally provides a mundane step in the collection process that few pay any attention. Last week the Supreme Court denied cert on the Ninth Circuit’s decision in Nakano v. Commissioner of Internal Revenue. This brings back into focus the Tax Court decision which through its silence suggested that some life may still exist in arguments that an IRS foot fault at this stage has meaningful consequences with respect to the assessment made against a taxpayer instead of just the collection actions taken thereafter. On appeal the taxpayer abandoned the argument that failure to send notice and demand rendered the assessment invalid and focused instead on arguments of ex parte and the inability of the Collection Due Process notice required by IRC 6330 to serve as the notice and demand required by IRC 6303.  The taxpayer failed but the issues in the case deserve some discussion.

Because an assessment must occur within a specific time frame, knocking out the assessment due to a default in the process of making or completing the notice and demand could eliminate the liability altogether.  The problem frequently comes to light after the time for making assessment for that tax period has expired.  So, the IRS has a strong interest in making sure that post assessment problems, such as the timely issuance of notice and demand, do not invalidate the assessment itself but only impact post assessment options available to the IRS.  Even if a delay in sending out notice and demand does not knock out the assessment, it could significantly impact the collection options available to the IRS – or not.  In this two-part post, I will discuss the role that notice and demand plays in the collection process, including its role in creating the federal tax lien and its acting as predicate to levy. In part  two, I will analyze Nakano and discuss how the cases decided in the past few decades may provide insight to some in this dusty corner of tax procedure. A look at this case and the cases decided in the past few decades may provide insight to some in this dusty corner of tax procedure.


Background of Notice and Demand Provisions

When the IRS makes an assessment, IRC 6303(a) provides that it “shall, as soon as practicable, and within 60 days after the making of an assessment of a tax pursuant to section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof.  Such notice shall be left at the dwelling or usual place of business of such person, or shall be sent my mail to such person’s last known address.”  Subsection (b) of this section permits delay in sending the notice where the assessment occurs prior to the last date prescribed for payment, e.g., where a balance due return for individual income taxes is filed in February.  Notice and demand usually takes the form of a letter informing the taxpayer that an unpaid assessment exists and requesting that the taxpayer please pay it within 10 days.  Most taxpayers and practitioners think of it, assuming they think of it at all, as the first notice in the series of collection notices that the IRS sends before it takes serious collection action such as filing a notice of federal tax lien or initiating a levy.

While the language of IRC 6303 contains the directive “shall”, the regulations implementing the statute adopt a much more forgiving approach.  The implementing regulation generally tracks the precise language of the statute but contains an additional sentence – “However, the failure to give notice within 60 days does not invalidate the notice.”  Case law, as discussed below, has adopted the approach of the regulation and found the failure to send the notice and demand within 60 days as something that the IRS can generally cure by sending out the notice and demand after the 60-day period.  Consequences do exist for failure to send out the notice and demand letter within 60 days; however, those consequences are generally not thought to extend to invalidating the underlying assessment.  Most courts have separated notice and demand from the assessment process and made it a part of the lien process.  The Nakano case does not find the assessment invalid; however, it reaches that conclusion by finding an untraditional notice and demand letter rather than simply saying that the failure to send notice and demand does not impact assessment.

The Assessment Process

To set the scene for the discussion of the consequences of an IRS failure to send notice and demand, it helps to think about the legal and practical issues surrounding assessment.  Assessment of federal taxes serves several purposes.  It primarily serves as the mechanism for the IRS to record a liability on its books and records.  Until an assessment occurs, the IRS generally cannot take any collection action and it has no mechanism for recording the existence of a liability.  For most people, assessment of tax serves the important purpose of allowing them to obtain a refund because it is the assessment of tax coupled with the credits sitting on the account that creates the overpayment of tax generating a refund.  From 1978 to 1994, the IRS made the institutional decision to violate the automatic stay of the bankruptcy code in BC 362(a)(6) barring assessment in order to allow taxpayers in bankruptcy to obtain their refunds. Not one taxpayer ever complained about this stay violation and in 1994, Congress finally realized that by barring the IRS from making assessments in bankruptcy cases, it was keeping the IRS from recording liabilities in the only statutory method it had.

In well over 90%, probably closer to 99% of cases, the IRS makes an assessment because the taxpayer files a tax return and consents to assessment.  In the other cases, assessment results from the taxpayer signing a consent to assessment during audit, the math error process, a default of a notice of deficiency or a partial or complete loss in Tax Court.  No matter how it occurs, the IRS will search the specific account period and tax type for which the assessment occurs to determine if credits (payments) exist on that account.  If credits exist, the IRS will satisfy the assessment with the credits and refund to the taxpayer any excess of credits (assuming the offset provisions are not triggered by an outstanding federal tax or other qualifying debt.)  If credits do not exist, the IRS will (should) send out a notice and demand letter within 60 days of the assessment for the difference between the amount of the credits on the account and the amount of the assessment.  Most taxpayers have withholding credits or estimated tax payments on their account or they remit the known balance with their return, and they never see a notice and demand letter.

In the small minority of cases in which the credits on the account do not equal the amount of the assessment, the IRS issues the notice and demand letter.  The IRS knows of the need for this letter before it makes the assessment based on the process it has developed.  It almost always makes assessment on Mondays and it almost always sends out the notice and demand letter on the Saturday before the Monday (postdating the letter to Monday) in order for the taxpayer to have as much notice as possible in order to pay the balance within 10 days after notice and demand and avoid the federal tax lien.  See relevant portions of the Internal Revenue Manual here.  As with all systems, sometimes it fails and notice and demand does not go out within 60 days of the assessment or, and this is not the issue in Nakano, the notice and demand letter does not go to the taxpayer’s last known address.

Consequences of Failing to Send Notice and Demand Letter

The Supreme Court, 11th Circuit, and 6th Circuit previously addressed what happens when the IRS fails to send out notice and demand.  The cases generally hold that the failure to send the notice and demand does not invalidate the underlying assessment but rather prevents the federal tax lien from coming into existence and prevents the IRS from taking administrative collection action.  More specifically, the 5th Circuit held that the government’s failure to notify under § 6303(a) cuts off government’s administrative [lien and levy] and non-judicial remedies. Additionally, a Maryland District Court, and the 10th Circuit have held that the Commissioners must comply with the notice and demand requirements before exercising non-judicial collection powers.

Courts have agreed with the regulation and allowed the IRS to issue the notice and demand letter late and begin administrative collection action/notice of tax lien filing thereafter.  The consequence to the IRS of not sending the notice and demand letter is not to destroy its right to tax administrative collection action but merely to postpone it.  Courts have also found that different types of IRS correspondence other than the narrowly tailored notice and demand letter of IRC 6303 can meet the statutory requirement.

The focus on the federal tax lien rather than assessment exists because the assessment provisions of IRC sections 6201, 6202 and 6203 do not mention notice and demand.  Section 6201 provides the general authority for assessment, by asserting “The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes… imposed by this title ….”.  In sections 6202 and 6203 Congress granted broad authority to the IRS to establish the mode and time of assessment and the method of assessment, respectively.  Like the statutory provisions, the regulations under these sections do not mention notice and demand.  I believe they do not because notice and demand is a post-assessment process not linked to the validity of the assessment itself.  The regulations under IRC 6203 were written in 1954 and last amended over 30 years ago.  They set up a procedure for assessment officers in service centers who sign summary records as the method of making assessments.

The Role of Notice and Demand in Creating the Federal Tax Lien

In contrast to the assessment process, which does not mention notice and demand, the federal tax lien provisions in IRC 6321 and 6322 peg their existence to the failure of the taxpayer to pay the tax after the IRS makes its demand.  I.R.C. 6321 states “If any person liable to pay any tax neglects or refuses to pay the same after demand… the amount shall be a lien….”  Once neglect or refusal to pay occurs after the making of notice and demand, the federal tax arises and, pursuant to IRC 6322 arises (or relates back to) the date of assessment.  Without notice and demand, the federal tax lien cannot arise.  If the federal tax lien does not arise, the IRS has an assessment but no means for securing the assessment, protecting the priority of its position in the assets of the taxpayer or moving forward with administrative collection.

Notice and Demand as a Predicate to Levy

Similarly, the notice and demand provisions play a pivotal role in the other main collection tool of the IRS – the levy.  IRC 6331(a) makes notice and demand a predicate to levy – “If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax by levy….”  IRC 6330 places an additional requirement restricting levy “unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made.”




Summary Opinions for 05/30/14

Before getting to the summary of tax procedure items from last week, we have to thank Professor Scott Schumacher for his wonderful guest post on the Roberts case.  We hope Scott will grace our pages with his presence again sometime in the near future.

To the tax procedure:


  • The District Court for the District of Columbia in Z Street v Koskinen considered the applicability of the Anti-Injunction Act and the Declaratory Judgment Act in allowing a lawsuit challenging the IRS’s “Israel Special Policy” that IRS employed when reviewing the organization’s application for Section 501(c)(3) status. The underlying suit considers whether the IRS policy  violated the organization’s First Amendment rights. The district court, relying in large part on the DC Court of Appeals analysis in the Cohen telephone excise refund cases, allowed the case to proceed, finding that the suit did not seek to restrain the assessment or collection of taxes and thus was not barred by either the AIA or DJA. We have written before on the cracks appearing in the AIA and DJA and will likely speak to this issue again soon.   For more on this case, check out the coverage by NonProfit Law Blog here.
  • Here is one we missed from Mid-May (we won’t let it happen again), the Tax Court in The Markell Co., Inc. v. Comm’r, held that the Treasury Regulation 1.752-6, which applied retroactively to transactions beginning in 1999, was valid.  The Court noted that courts have split on the retroactivity issue referring to the 7th Cir. in Cemco v. US in favor of retroactivity, and Court of Federal Claims and ED of Texas against.  For those readers unfamiliar with these regulations, they were promulgated in response to Son-of-BOSS transactions, and provide that if a partnership in a Section 721 transaction assumes a liability of a partner, the partner’s basis may be reduced by the amount of the liability determine on the date of the exchange.  As you can imagine, since this is part of subchapter K, what I have just stated is substantially less complex than the actual provision.
  • The Tax Court had a fairly important holding last week in Julia R. Swords Trust v. Comm’r, declining to apply the federal substance over form doctrine to recast a transaction being reviewed under Section 6901 for transferee liability.  The Court noted that it had never specifically held that federal law did not apply, but that the First (Frank Sawyer Trust), Second (Diebold Foundation), and Fourth (Starnes) had all rejected the Service position that the last requirement of the Section 6901 test was in fact a two prong test.   Section 6901 requires 1) one party to owe the tax, 2) another party to be a transferee under Section 6901, and then 3) an independent state law/equity principal holding the other party liable for the tax.  The Service has argued (unsuccessfully) that the third requirement necessitates first a federal “substance over form” determination-or other federal analysis-, followed by the application of the state’s fraudulent transfer analysis.  Often, the state law on substance over form will not be as robust, allowing the pesky form to thwart the liability review under state law.
  • $#!!, don’t mess with Whistleblower 11332-13W, he/she won’t back down.  The Tax Court has agreed to allow this case to move forward anonymously.  Although my voyeuristic tendencies make me wish I knew what company was evading taxes (and possibly connected to terrorists), the facts do seem to lean towards keeping this one buttoned up.  Apparently, Mr. or Mrs. Whistleblower had already been threatened with death, and armed guards had broken into his or her office.  S/He was also able to show specific recognizable events would allow the employer and other targets to identify the Whistleblower, and there could be considerable social and professional stigma if his or her identity were to be disclosed.  Perhaps I am too anxious, but working somewhere that was involved in tax evasion and terroristic organizations would really add a level of stress to my life that I could do without.
  • From Jack Townsend’s Federal Tax Crimes Blog, a good discussion on the Zwerner verdict upholding a 150% FBAR penalty, which links to another great discussion on the Tax Controversy Report.  I have no objection, overall, to the US going after folks who stash money overseas and fail to report it to the Service, but this does seem fairly harsh—I should add the caveat that I do not know the underlying facts, and perhaps those would sway me to believe Mr. Zwerner received his just deserts.
  • SCOTUS will not review Nakano v. United States, which we covered previously in SumOp here, where the 9th Cir. held that a levy notice constituted notice and demand for Section 6303 purposes.  Keith should have another post on Nakano in the near future.