In the case of Barnhill v. Commissioner, 155 T.C. 1 (2020) the Tax Court determined that the taxpayer never received the letter from the IRS scheduling the conference to dispute the Trust Fund Recovery Penalty (TFRP). Because the taxpayer did not receive that letter, the taxpayer did not have a prior opportunity to dispute the merits of the TFRP. Because the Settlement Officer in the Collection Due Process case refused to hear the merits of the TFRP based on the position that the taxpayer had a prior opportunity to dispute the TFRP in Appeals, the Tax Court remanded the case to Appeals to give the taxpayer an opportunity to contest the merits. Bryan Camp wrote an excellent post on this case which you may want to read instead of this one, but I will try to cover slightly different ground.
read more...The Barnhill case arose in Richmond, Virginia. I had lunch with Mr. Barnhill’s attorney not long after the opinion was issued. He indicated that after the opinion, the parties reached a basis for settlement and described the settlement to me. The Tax Court docket sheet does not yet reflect a settlement but sometimes the settlement of a case can move slowly and particularly now. The settlement shows the benefit of CDP in a way that we do not talk about often and the prior opportunity aspect of this case stands in contrast to another TFRP case involving prior opportunity now pending before the 4th Circuit.
Mr. Barnhill requested a hearing with Appeals to talk about the imposition of the TFRP against him. He felt and his ultimate settlement suggests that the TFRP proposed against him was too high. For reasons unknown he did not receive the invitation to the hearing offered by Appeals. Because he did not respond to the offer of the hearing, Appeals quite rightly recommended the assessment move forward, which led to the filing of the notice of federal tax lien which led to his request for a CDP hearing.
Because this is a TFRP case with a divisible tax at issue, Mr. Barnhill had a way to get into court to contest the liability without having to full pay the liability. He did not face the same mountain of full payment faced by Lavar Taylor’s clients who tried without success to use CDP to resolve the merits of their tax liability as we discussed here, here and here. Even without the full payment barrier, however, litigation in district court costs much more than litigation in Tax Court in almost every case and certainly more than an administrative hearing. CDP offered him the chance to have his administrative hearing that he missed. Once he missed the pre-assessment administrative hearing with Appeals, CDP provided, by far, the cheapest way for him to resolve his dispute over the liability. It also provided the cheapest way for the IRS to resolve the dispute.
Not every taxpayer has a meritorious argument that the assessed amount overstates the correct liability. I understand the desire to limit the use of Appeals resources and Counsel resources if a high percentage of cases seeking a merits review lack any merit. I have no empirical evidence but do not believe that the majority of cases seeking a merits adjustment lack a basis for such an adjustment. The IRS does taxpayers, and in many cases itself, a disservice by imposing regulations that limit the opportunity to come into Appeals in the CDP context and limit the opportunity to litigate in Tax Court. Viewed through the lens of taxpayer rights, it has regulations that do not provide taxpayers with their full rights. This is particularly true in cases with high dollar assessable, non-divisible penalties, but also applies in situations where a simple administrative visit could resolve a matter that otherwise requires expensive district court litigation.
Assuming the information provided to me that the Barnhill case has settled for an amount substantially lower than the assessed amount is correct, the case stands as an example of the benefit of CDP merits opportunities. Instead of working hard to limit those opportunities, the IRS should reexamine its regulations, perhaps armed with empirical evidence I do not have, and create a better system than exists today.
This leads to the contrast between what has happened in Barnhill and what happened in a CDP case stemming from an Automated Underreporter assessessment, the Zhang case. Zhang was decided by designated order rather than precedential opinion and was blogged by Caleb Smith here. Like Mr. Barnhill, Mr. Zhang did not have a pre-assessment hearing with Appeals and sought to raise the merits of his assessment in a CDP case. The facts in the Zhang case, however, differed slightly and that difference caused the Tax Court to deny him the opportunity to go back to Appeals to work out the issue. As a result, he decided to take his case into the 4th Circuit (docket no. 20-01453) rather than to start over through the refund route (a route still theoretically open to him should he lose on appeal.)
Among other things, the Zhang case reinforces the importance of the Tax Court’s orders. While the Barnhill case ends up as a precedential opinion, the Zhang case flies under the radar as an order, albeit a designated one. In Mr. Zhang’s case he alleges that he did not receive the statutory notice of deficiency. In most cases, but see the discussion on Landers here, that would afford Mr. Zhang the opportunity to have a hearing with Appeals regarding the merits of the assessment. Mr. Zhang made a timely CDP request after receiving a notice of intent to levy and asked to discuss the merits of the assessment; however, the individual in Appeals handling his case for some reason did not consider the merits. The Tax Court seemed to acknowledge that the Appeals mishandled this CDP hearing; however, Mr. Zhang did not petition the Tax Court after receiving the determination letter in this case.
He later received a notice of federal tax lien which caused him to file another CDP request. He again sought to raise the merits of the assessment. Here, he gets caught in a Catch-22 situation. Appeals says maybe we should have listened to you last time, but that time serves as a prior opportunity and it’s too late to raise the merits now. The Tax Court agreed with Appeals on this point. The 4th Circuit will have an opportunity to rule on the outcome.
IRS – is this what you want? Your mistake led the pro se Mr. Zhang to the wrong place and now you are arguing that because the pro se Mr. Zhang did not appeal your mistake he is out of luck on having a prepayment forum to fix his liability. Yes, he could try audit reconsideration but why make him do that? His case is an AUR case. It should be relatively easy to determine if you agree. Here is the maddening part of prior opportunity, and the game the IRS wants to play with it. Let’s figure out a way to resolve these cases at the administrative level and not force people into court unnecessarily, particularly when the mistake started with the agency and not the individual.
Mr. Barnhill’s result shows the redeeming feature of CDP. Mr. Zhang’s case shows the maddening aspect of how it is administered in some cases. We can make it better.
Section 6330(c)(2)(B) strikes again. As you suggest, Treasury should amend the regulations to expand what can be challenged through a CDP hearing. As currently drafted, it is nearly impossible for a pro se taxpayer to understand what can and cannot be raised in a CDP hearing. One of the most glaring issues I see is in penalty abatement requests which are submitted before the right to a CDP hearing. As stated in IRM Section 8.22.8.10.6 (10-01-2012), if you appeal a penalty abatement denial prior to raising the penalty issue in a CDP, you forclose your ability to challenge the penalty during the CDP hearing. Such a position is illogical in that it pushes educated taxpayers to wait to challenge a penalty liability. In waiting, the taxpayer preserves the right to raise the penalty in a CDP, and in turn the taxpayer ensures the right to Tax Court review if needed. However, by waiting the taxpayer also risks the filing of a federal tax lien. Uneducated/unrepresented taxpayers will take a different approach and rush to file a penalty abatement letter right away, which may cut off the ability to challenge the liability through a CDP assuming appeal rights are offered. This is nonsensical, and is unfair to uneducated/unrepresented taxpayers. Further, the system should be structured in a way that pushes taxpayers to resolve matters as quickly as possible, as oppossed to delaying a challenge which ultimately results in the Service expending additional resources (i.e. sending out collection notices, the filing of liens, etc.).
I strongly agree that the IRS needs to review its prior opportunity policies. Congress put that language into the statute primarily to stop frivolous claimants from having “more bites at the apple,” but far too often I see taxpayers with legitimate claims regarding the underlying liability foreclosed from challenging a “wrong” assessment – especially in the trust fund recovery penalty cases. I have one client in district court and one client in Appeals on remand from Tax Court, and I feel strongly that both cases should have been resolved at the administrative level.