On March 12, 2020, the Tax Court in a precedential opinion in the case of Lander v. Commissioner, 154 T.C. No. 7 adopted without change the opinion of Special Trial Judge Guy, holding that a taxpayer who failed to receive a notice of deficiency (NOD) could not litigate the merits of his tax liability in a Collection Due Process (CDP) hearing because he requested audit reconsideration and received an Appeals hearing as a part of that process. This is the first case to determine that a taxpayer who failed to receive their NOD could also be denied the opportunity to litigate the merits of the liability. Almost certainly the Court issued the case as a precedential opinion because it breaks new ground in holding that the failure to receive a notice of deficiency does not serve as a basis for a merits hearing in the Tax Court. We have discussed the case previously here, and here. The decision continues a pattern of so limiting the ability to litigate the merits of a tax liability that the promise of doing so when the CDP statute passed in 1998 seems almost eliminated through regulations and court decisions. This cannot be what Congress intended.
read more...Many taxpayers fail to properly notify the IRS of a change in their last known address with a clear and concise notification. If the IRS mailed the NOD to the taxpayer’s last known address but the taxpayer did not receive it, Congress seemed to address that situation in IRC 6330(c)(2)(B) which provides:
The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.
In the Lander case the parties stipulated to the non-receipt of the NOD. At issue was whether action subsequent to the assessment created a prior opportunity to meet with Appeals and whether the opportunity to meet with Appeals meant that the failure to receive the NOD no longer mattered for purposes of interpreting 6330(c)(2)(B).
In 1998 Congress allegedly heard lots of stories from individuals who were totally shocked to learn that they owed a liability to the IRS. These individuals apparently never knew they were being audited or, if they knew they were being audited, they thought the IRS had resolved the issues in the audit in their favor because they never received a NOD and only learned of the additional assessment when the IRS took some collection action against them. While I may have some skepticism that multitudes of people were in this circumstance, Congress apparently felt this way, and that belief drove the passage of the right to come back into Tax Court to litigate the merits of the tax liability – even where the IRS properly sent a NOD to the taxpayer’s last known address.
If the IRS had failed to send the NOD to the taxpayer’s last known address, the taxpayer already had a remedy to attack the assessment by filing a petition in Tax Court after the 90 days had run when the taxpayer became aware of the existence of the NOD. Such a petition would cause the Tax Court to make a determination regarding the reason it lacked jurisdiction. If the Tax Court determined that it lacked jurisdiction because the IRS sent the NOD to someplace other than the taxpayer’s last known address then, pursuant to cases such as King v. Comm’r, 857 F.2d 676 (9th Cir. 1988), the Tax Court would hold the NOD invalid, the IRS would abate the assessment and either the IRS would issue another NOD to the taxpayer’s last known address or, in cases where the statute of limitations on assessment had expired, the IRS would simply lose the right to assess.
So, the remedy in 6330(c)(2)(B) did not need to cover NODs sent to someplace other than the taxpayer’s last known address because the taxpayer already had a remedy for that. Similarly, the remedy would assist no one if unavailable to taxpayers who failed to receive a properly addressed NOD who had the administrative right to seek reconsideration of the assessment through audit reconsideration. This is because the administrative right to seek audit reconsideration after assessment already existed – and existed for all taxpayers assessed after an audit who did not consent to the assessment. IRM 4.13.1 describes audit reconsideration, which allows taxpayers who failed to convince the IRS prior to assessment following an audit to come back and show the IRS new information that would allow the IRS to abate the assessment down to the correct amount of tax. IRM 4.13.1 allows taxpayers who request audit reconsideration whose request is rejected by the Examination Division of the IRS to take their case to the IRS Office of Appeals to further their chances for success. What a taxpayer loses when seeking audit reconsideration is the right to go to Tax Court after an unsuccessful request. It seemed Congress sought to remedy the situation for taxpayers who failed to receive a NOD even though the NOD was correctly sent. Yet, the Tax Court in Landers says no.
In an effort to address the assessment they felt incorrectly reflected their tax liability, the taxpayers in Landers approached their Local Taxpayer Advocate (LTA). The LTA guided them to request audit reconsideration, and they did. Their effort to reduce their liability through audit reconsideration failed, and it included a trip to Appeals. At some point thereafter they received a CDP notice, timely mailed in a CDP request, obtained a hearing with Appeals and sought to raise the merits of their liability because they had not received the properly mailed NOD. Appeals denied them the right to raise the merits saying that they had done so during the audit reconsideration.
In Landers the Tax Court, for the first time and 22 years after the passage of CDP, holds that because a taxpayer can have an Appeals hearing on audit reconsideration and because the regulations say a hearing in Appeals serves as a prior opportunity within the meaning of IRC 6330(c)(2)(B) the taxpayer cannot litigate the merits of the liability in Tax Court. Because every taxpayer who fails to receive a validly mailed NOD has the opportunity to seek audit reconsideration and in the audit reconsideration process has the right to go to Appeals, the logical extension of the decision effectively renders the ability to go to Tax Court in a CDP case following the failure to receive a NOD meaningless.
Unquestionably, the Tax Court in upholding the decision to deny the Landers the right to raise the merits of their tax liability in the CDP case holds that audit reconsideration provides a trap for the unwary taxpayer who has failed to receive a NOD but may later want to go to Tax Court. As mentioned above, the logical extension of its decision means that the language of 6330(c)(2)(B) offering the right to go to Tax Court in a CDP case is an illusory right, since every taxpayer has the right to go into audit reconsideration and then the opportunity to go to Appeals if the examination division does not grant the requested relief.
Can this really be what the statute means?
While this is not the root subject of the article, the TPs could pay the amount due then file a refund claim as a back door way to litigate the assessment.
Keith – It seems to me that your “logical extension” goes too far. As I read the opinion, it is only because the TPs actually did request and receive an audit recon and met with exam and appeals (and had a portion of the assessment abated) that the court held they had a prior hearing. I don’t think the mere fact that the audit recon procedure exists would be the basis for a denial by the court if the TP did not request and have one.
Jerry – I agree that the IRS is not pushing it as far as I suggest they can under this decision, I agree the Court did not push it that far, and I agree with the comment made by Bob Probasco that the IRS is unlikely to raise the logical extension issue under the current manual guidance; however, interpreting audit reconsideration as prior opportunity under the regulation does not put a limit on those who seek audit reconsideration and are offered an appeals hearing. If audit reconsideration is a prior opportunity, everyone has that opportunity who fails to receive a notice of deficiency. Nothing in the regulation limits prior opportunity to those who are offered an opportunity to go to appeals through audit reconsideration or who actually go to appeals or who get some relief from appeals. My hyperbole is rooted in concerns and not the facts of this case. You are right that those facts were not presented here and Bob is right that the IRS does not seem to be seeking to push to the limit yet. Keith
“Unlikely” and “yet” are the key words. Put limitations in a regulation rather than the IRM and I’d be less concerned.
Pointing out the logical extension of the regulation might help in persuading the IRS to narrow “prior opportunity” in the regulation instead. So, keep up the good fight.
Keith,
Great post.
Based on the facts before it, the court certainly didn’t define the outer boundaries of “prior opportunity” as clearly as we would like. It’s been left for another day. That is, it appears the court neither accepted nor rejected the “logical extension” you mention. Further, I’m not sure if/when the logical extension will be before the court, because the “official” IRS position does not go quite that far.
IRM 8.22.8.3 (8) specifies things that are “prior opportunities” as:
– prior CDP hearing for the same tax and period
– prior CDP Final Notice for the same tax and period
– audit reconsideration if the taxpayer is offered a conference with Appeals
– IRS filed a proof of claim in a bankruptcy proceeding
– suit to reduce to judgement or enforce a tax lien regarding the tax liability
– certain form letters offering an Appeals conference
IRM 8.22.8.3 (9) specifies some things that are not prior opportunities:
– 30-day letter in a deficiency case
– audit reconsideration if the taxpayer is not offered an Appeals conference
– a concurrent Appeals conference
– accrued interest & penalties not at issue in NOD or prior hearing
– the opportunity to file an amended return
– receipt of a math or clerical error notice
– the opportunity to pay and file a refund claim
The IRM is cold comfort compared to a regulation or a court decision. But it may mean we”re unlikely to get a court decision, because the IRS is unlikely to argue that logical extension in a Tax Court case. At least, I think it’s unlikely the IRS would argue that the opportunity to file an amended return or to pay and file a refund claim constitutes a prior opportunity; only if the taxpayer pursues those actions and is offered an Appeals conference would. By the same token, I suspect the IRS wouldn’t argue that the opportunity to request audit reconsideration constitutes a prior opportunity; only if the taxpayer actually requests an audit reconsideration and is offered an Appeals conference.
I really would like a definitive answer, by regulation or from the court, ruling out the logical extension you present. But I don’t anticipate such a case will come before the court soon, and I’m skeptical whether the IRS will put this very high on its priority list for guidance.
Even if we had a definitive answer along the lines of the IRM, I’m still not happy about “prior opportunity” encompassing categories like an audit reconsideration or amended return. In those situations, an adverse Appeals determination does not give the taxpayer the same rights she has against an adverse determination in a CDP hearing – her day in court. You’re absolutely right that it is a trap for the unwary, and it’s appalling. I trust Tax Court judges more than I trust Appeals to get it right.
Twelve days ago, in an article written for the New York Times, David Cay Johnston took issue with the fantastic claims heard from taxpayers in the 1998 Roth Senate Hearings:
https://www.nytimes.com/2020/04/10/us/michael-c-cooper-dead.html
(The Senate hearings that had inspired Mr. Cooper elicited testimony that I.R.S. auditors, collections officers and criminal agents had run roughshod over taxpayers. Subsequent investigations by The Times, Tax Notes magazine, the newspaper The Virginian-Pilot and other publications showed that virtually all of the testimony had been incomplete, misleading, unverifiable or contradicted by public records. Under federal law the I.R.S. could not respond to any of the Senate testimony.)
FYI, I am quoted in that piece and I am the person that let DCJ know that Cooper had died in prison.
One way to attempt to resolve this problem is to repeatedly ask the IRS to amend the regulation to interpret the statute differently that it did in the existing regulation, in a way that permits taxpayers to raise the merits in a CDP hearing unless they had a prior judicial opportunity to contest the merits. The Brand X line of cases permits this to be done. And, if the IRS refuses to do so (which is the likely response), take the IRS’s refusal to Congress and ask for a statutory change. Start this process now, while there will more Congressional sympathy for taxpayers.
My head still hurts after being kicked in the head by 3 Circuits in this issue. Ever the masochist, I welcome the opportunity to develop a Circuit split on this issue. But the odds of a Circuit split developing on this issue are very much against taxpayers.
In response to Steve Kessel’s discussion of the fabricated testimony about IRS abuses in the Roth Senate Hearings, I have real horror stories involving my clients from that time period that would make your hair stand on end (or would make you grow hair if you don’t have any). Without authorization from my clients, I could not (and can not) discuss the specifics of those matters publicly.
And since the enactment of CDP, I’ve had plenty of situations where the CDP process literally saved my clients from being financially dismembered by overly aggressive IRS personnel. The CDP process is far from ideal, but it is a vast improvement on the law as it existed prior to the enactment of the CDP procedures.
Some of us are even old enough to remember the collection process before IRS was required to send a 30 day notice of intent to levy under 6331(d), i.e., an RO could legally show up on your client’s doorstep for the first time and immediately take levy action, without any prior notice than the “notice and demand” required by section 6303(a).
My least favorite collection manager back then had a “trick” that he pulled if he didn’t like the taxpayer. He would ask the taxpayer to come to his office for a meeting with him and the RO. At the meeting, he would ask the taxpayer to pull out there checkbook and make a payment to the IRS. Then, after getting the check, he would levy the bank account on which the check was drawn before depositing the check payable to the IRS.