The Facts

A thumbnail and streamlined sketch of the facts is as follows. The taxpayer, Gyorgy, had failed to file tax returns for years including 2002 and 2003, the years at issue on appeal.  The IRS made substitute returns for 2002 and 2003, and mailed notices of deficiencies to the address in its records, even though the IRS knew the address was incorrect since it had received returned undelivered mail as well as third-party information returns with one or more different addresses for the taxpayer.  After no petitions were filed in the Tax Court in response to the undelivered notices of deficiency, the IRS assessed.

Two years later, the IRS commenced collection proceedings, and mailed lien notices to the taxpayer—at his correct address. In response, the taxpayer filed timely requests for due process hearings before the IRS.  In its request, Gyorgy challenged the underlying deficiency and whether the IRS had followed its necessary procedures.  During the CDP process, Gyorgy provided no material information to the CDP officer, and the Appeals Office issued an adverse determination.  Gyorgy timely petitioned the Tax Court, where the Tax Court conducted a de novo review.  Gyorgy appears to have provided very little relevant evidence, and the Tax Court sustained the lien notices for tax years 2002 and 2003.  Gyorgy appealed to the 7^th Circuit.

 The Issues

First, is judicial review in a CDP case limited to the administrative record? Prior to Gyorgy, several circuits had decided the issue but the 7^th Circuit had not.  Consequently, the Tax Court, under its rule of Golsen, had applied its own rule in the absence of controlling precedent from the court to which the case was appealable.  On appeal, the 7^th Circuit in Gyorgy had the opportunity to clarify the record rule for taxpayers in its geographic jurisdiction.  But the court punted instead, as it was not required to reach the issue on the record in Gyorgy’s particular case (it appears the taxpayer was afforded a full opportunity but failed to provide additional evidence or credible testimony to supplement the administrative record.  Whether review was limited to the administrative record or not should be academic).  Nevertheless, in its discretion, the 7^th Circuit could have clarified the application of the record rule, which may have assisted the IRS and taxpayers confused about the extent of judicial review, and, thus, the level of due process to which they are entitled in a CDP appeal.

The lack of clarity that remains surfaces at least two policy questions for the record rule. One: whether there should be a uniform application of the record rule across circuits.  Without uniformity of application, different taxpayers will have different opportunities to challenge adverse IRS determinations and thus different levels of due process, depending upon where they reside.  Uniformity, however, may require legislative action unless the Supreme Court steps in.  Two: if a uniform law is adopted, should it limit or not limit review to the administrative record.  The main downside of limiting review to the administrative record is that it may lead to a more litigation-oriented and less resolution-oriented process because it would encourage taxpayers to load up the administrative record with all potentially relevant evidence in the event the matter is submitted for judicial review.  In practice, the resolution-mindedness of the process and parties involved has been a key quality to its success.

Second, on the last known address issues, what is a court’s standard of review in a CDP case in the context of a challenge to the assessment of the underlying liability on the grounds that the IRS failed to mail a notice of deficiency to the taxpayer’s last known address? The general rule is that when the underlying tax liability is properly at issue in a CDP hearing, the Tax Court reviews the underlying liability issue de novo, but reviews the Appeals Office’s other determinations for abuse of discretion.  Should the last known address issue, when raised as invalidating the underlying liability assessment, be viewed as part of the underlying liability determination, and accordingly subject to the de novo standard of review?  Not according to the 7^th Circuit in Gyorgy.  In its opinion, the 7^th Circuit cited two cases to support applying an abuse of discretion standard: Goza, a 2000 Tax Court decision, and Jones, a 2003 5^th Circuit decision.  In Jones, the taxpayer failed to pay the tax shown due on its return, so a notice of deficiency was not a prerequisite to assessment.  In Goza, the taxpayer received notices of deficiency so could not contest the underlying liability or associated assessment in the CDP proceeding before the court.

At a minimum, there is a legitimate policy debate to be had on the proper standard of review. The rationale for de novo review of the underlying liability is that taxpayers that had not received a prior opportunity to petition the Tax Court should receive the same rights of review to which taxpayer’s would be entitled outside of the CDP context (but that the review should be conducted within the CDP process so that adjudication of the underlying liability does not materially delay the IRS’s collection action).  In a sense, the CDP process is a conceptually bifurcated but consolidated proceeding in which the taxpayer may challenge, in the first place, the assessment of the underlying liability.  Secondarily, the taxpayer may also challenge the proposed actions to collect the assessed liability if they are determined to be owed.  De novo review of all issues associated with adjudicating all matters related to the underlying assessment would afford the CDP petitioner the same rights as they would receive through other avenues of review—whether in Tax Court or in District Court where the taxpayer may challenge an assessment on last-known-address grounds and the District Court would review the issue without deference.  De novo review would also permit the taxpayer to obtain (and introduce as evidence) information from the IRS that is relevant to a last-known-address determination.

Third, how extensive is the IRS’s due diligence obligation to locate a taxpayer’s correct address when it knows or has reason to know that the taxpayer is not receiving mail at the address in its records? Under the law, taxpayers have a duty to clearly notify the IRS when their address changes, and the IRS has an obligation of “reasonable due diligence” to identify the taxpayer’s correct address when they know the address in their records is wrong.  In many last-known address cases, the taxpayer could have done a much better job at clearly notifying the IRS of their address change, and the IRS could have done more to locate the taxpayer’s correct address when it was obvious the address in their files was invalid.  In determining whether a notice was mailed to the taxpayer’s “last known address,” courts at times tend (as a practical matter) to balance the respective obligations that both taxpayers and the IRS have; however, different courts place more or less of the onus on one side of the balance or the other.

The 7^th Circuit in Gyorgy determined that the IRS had met its “reasonable due diligence” obligation and thus the mailing address it used constituted the taxpayer’s last known address.  It may be important that Gyorgy’s facts, as portrayed in the 7^th Circuit’s opinion, are unsympathetic.  He had failed to file returns for the tax years at issue and at least four subsequent years, had kept the IRS utterly in the dark about his whereabouts, and on the witness stand he even admitted that he moved around so much that his correct address was hard to keep track of.  The IRS’s records suggested that the postal service also did not have a more recent address than the address appearing on his last filed tax return—for tax year 2000.  The IRS had received returned mail from the address in its records as well as W-2 and 1099 forms for 2002 and 2003 that showed different addresses, but the IRS received no responses to R-U-There letters sent to at least one of those different addresses.  Based on these facts, the 7^th Circuit did not require the IRS to expand its search for the taxpayer’s address beyond the IRS’s own records.

The 7^th Circuit acknowledges in its opinion that it may have required less of the IRS to meet its due diligence obligation than other courts had in other cases.  It discussed a leading case out of the 5^th Circuit, Terrell v. Commissioner, in which the 5^th Circuit required the IRS to expand its investigation to at least certain accessible sources, which may include DMV records, or contacting the taxpayer’s employer or return preparer. These are among the sources the IRS routinely consults when attempting to collect taxes, so why shouldn’t it take these steps when notifying taxpayers of important rights?  The facts of Terrell, however, are distinguishable for many reasons including that the taxpayer had filed tax returns and taken reasonable although imperfect steps to allow the IRS to know her correct address.  The 7^th Circuit expressly declined to decide whether it should categorically reject Terrell or should follow Terrell if presented with a similarly sympathetic set of facts.

A question readers may wish to consider is whether the juxtaposition of Gyorgy and Terrell represents a developing circuit split on whether the definition of “reasonable due diligence” requires investigation into records not currently in the IRS’s possession when the IRS knows the mailing address in its records is wrong; or whether the differences in the cases reflect that the “reasonable due diligence” standard calls for a pragmatic, fact-driven approach that may be influenced at least partly on the reasonableness of the taxpayer’s efforts; or whether it suggests something else entirely.

Conclusion

In summary, the posture of the Gyorgy case placed three procedural issues in the 7^th Circuit’s hands.  Although the court punted on the record rule, it raised relevant and worthwhile points on all three issues, which readers may wish to weigh in on.

Editor Update

Jack Townsend’s Federal Tax Procedure Blog also has a nice write up of the case, where he raises a practical question as to why a nonfiler would want to raise the last known address issue: “ In the case, Gyorgy filed no tax returns, so, even if he prevailed on the issue of last known address, the IRS still has the ability to assess.  (I presume that he did not do the § 6020(a), here, substitute for return which he signed, thus making it a return.)”