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.
read more...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.
Would the taxpayer in this case have standing to challenge the underlying assessment in tax court under CDP hearing? He did not have a prior opportunity since he did not receive to NOD. Is proper mailing of the NOD sufficient to foreclose his right to contest the underlying liability under CDP?
William
I think Mr. Sadek would have the ability to contest the liability in a CDP case. The ability to contest the merits of a liability in the CDP case allows taxpayers to contest the merits in situations in which a valid assessment exists because the IRS mailed the notice of deficiency to the last known address but the taxpayer proves that they never received the notice. It appears that Mr. Sadek did not receive the notice. If the Tax Court agrees that he did not, he should be able to contest the liability in Tax Court through the CDP process.
Keith
“The ability to contest the merits of a liability in the CDP case allows taxpayers to contest the merits in situations in which a valid assessment exists because the IRS mailed the notice of deficiency to the last known address but the taxpayer proves that they never received the notice.”
I wonder how a taxpayer could prove that they never received the notice. Even if a tracking number is provided and USPS’s web site doesn’t show delivery, the notice might have been delivered. Conversely if USPS’s web site does show delivery, the notice might not have been delivered. IRS return addresses frequently end in the abbreviation “PA” and a number not “US” and a number, so if Lebabon’s post office tried to return an undeliverable letter they would send it to Panama’s post office.
On the other hand, what happens if the IRS says one time that they mailed a Notice of Deficiency but later the IRS says they didn’t? Since the taxpayer didn’t receive any Notice of Deficiency, the taxpayer should be able to contest the underlying liability in a CDP hearing.
Meanwhile, the IRS ignores Form 8822 change of address notices and Tax Court ignores briefs which point out that an intervenor wrote her address correctly in a declaration. (The fillable PDF for Notice of Intervention truncates addresses.)