The IRS puts taxpayers on notice by mailing letters and notices. It is common for these letters and notices to not be delivered or to be delivered late.
This can present a serious problem for taxpayers, particularly when the letter or notice is one that proposes to increase the about of tax that is due. When this happens, the question is whether the taxpayer really had an opportunity to contest the liability set out in the notice or letter.
The court addressed this in Cox v. Commissioner, T.C. Summary Opinion 2016-53.
Facts & Procedural History
The IRS issued a Letter 1153, Trust Funds Recovery Penalty Letter, to assess Trust Fund Recovery Penalties against the taxpayer under Section 6672. The assessment was based on unpaid payroll taxes for a company the taxpayer had previously owned and subsequently sold.
As noted in the Letter 1153, the taxpayer had 60 days to appeal the assessment before it became final. The 60 day period happened to end on a weekend, which extended the date until the Monday following the 60 day period.
The taxpayer filed his appeal by hand delivering it and mailing it to the IRS on the Tuesday following the 60 day period. The IRS assessed the penalties and the IRS attempted to collect the penalties from the taxpayer.
The taxpayer submitted a form to the IRS timely to ask for a Collection Due Process Hearing. He intended to contest the liability at the hearing.
The IRS refused to consider the question of liability, concluding that the taxpayer previously had an opportunity to contest the liability.
The taxpayer petitioned the U.S. Tax Court to review the IRS’s determination.
Opportunity to Contest a Tax Liability
The question for the court was whether the IRS abused its discretion in not considering whether the taxpayer was liable for the penalties. The court noted that the case was unusual in that the taxpayer apparently had direct proof that he was not liable for the penalties, saying:
Petitioner testified during the trial that he had sold [the company] before the last quarter of 2010 and that the new owner, not petitioner, would have been the responsible person. In addition, petitioner indicated that he had paid the employment tax liabilities for all quarters that ended before he sold the company. Petitioner adduced written evidence at the trial showing when he had sold the company, and he further indicated that the buyer’s testimony would support his position. So we are faced with (1) an anomalous circumstance where petitioner might have been able to successfully contest the underlying liabilities and (2) the resulting question of whether it was an abuse of respondent’s discretion not to permit him to attempt to do so.
The court cited its prior precedent, which says that “Section 6330 does not authorize the Commissioner to waive the time restrictions imposed therein.” Based on this, the court concluded that the IRS did not abuse its discretion. So the taxpayer lost–or so it would seem.
The IRS’s Powers are No So Limited
While the court’s precedent is correct that Section 6330 does not authorize the IRS to waive the time restrictions, it does not go on to say that Section 6330 does not go on to say that the IRS cannot waive the time restrictions. The court also did not address the regulations, which provide the IRS Office of Appeals broad discretion to settle tax cases for the IRS.
The court case also does not address other remedies, such as collection alternatives. The Offer in Compromise based on Doubt as to Liability and the Officer in Compromise based on Effective Tax Administration are two such alternatives. As its name implies, the Offer in Compromise based on Doubt as to Liability is a request for the IRS to settle or compromise a tax liability for a tax that is not owed. The Offer in Compromise based on Effective Tax Administration is a request for the IRS to settle or compromise a tax liability based on equity or public policy.
It does not appear that the taxpayer asked the IRS to consider collection alternatives during the Collection Due Process Hearing, but it would have been interesting to see how the court decided the case if the taxpayer had proposed these collection alternatives.
Luckily for the taxpayer, these options may still be open to him even though he litigated and lost his case in court. Taxpayers are not precluded from pursuing Offers in Compromise after their court cases have been decided. So the taxpayer may actually have another opportunity to contest the liability if he chooses to pursue it. Opportunity knocks.
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