The IRS only has to mail a notice of deficiency to a taxpayer’s last known address in order to assess or record a tax liability for the taxpayer. This “last known address” rule is often the subject of disputes. The Sadek v. Commissioner, T.C. Memo. 2018-174, case provides an example where information available to the IRS would have shown that the addresses on record were not valid.
Facts & Procedural History
The taxpayer filed a Federal income tax return for 2005 in 2009 that reflected a California residence. Five months later, the taxpayer filed bankruptcy, a Federal proceeding, listing a Nevada address.
The IRS conducted an audit and proposed to adjust the taxpayer’s 2005 and 2006 tax returns, which the taxpayer appealed. The taxpayer’s tax attorney worked with the IRS Office of Appeals and explained that the taxpayer was then living outside of the country. While living outside of the country, the taxpayer was the subject of an active FBI investigation.
The appeals officer was not able to obtain a current address for the taxpayer, so she closed the case and the IRS issued a notice of deficiency by mailing it to the taxpayer’s address in California and Nevada.
The Last Known Address Rule
The law requires the IRS to send the notice of deficiency to the taxpayer’s “last known address.” The regulations explain that a taxpayer’s last known address is the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the IRS is given clear and concise notification of a different address. The courts have expanded on this to require the IRS to exercise “reasonable diligence in ascertaining the taxpayer’s correct address.”
Evidence of the Taxpayer’s Last Known Address
The taxpayer argued that the Federal government knew he was living abroad, not in California or Nevada, at the time the statutory notice was issued.
The taxpayer pointed to the bankruptcy proceeding, in which the court lifted the automatic stay to allow the foreclosure of both the California and Nevada properties. This would suggest that the taxpayer no longer resided at the properties.
The taxpayer also pointed to the FBI investigation and that the FBI knew that the taxpayer was living abroad at the time. The FBI admitted this fact.
What Does the IRS Really Know?
The court cited the rule in the regulations that a “change of address information that a taxpayer provides to a third party is not clear and concise notification of a different address.”
Is the bankruptcy court, which is a Federal court, or the FBI, a Federal law enforcement agency, a third party vis-a-vis the IRS, a department of the executive branch of the Federal government? Should one part of the Federal government, namely, the IRS, be charged with knowledge possessed by other parts of the Federal government?
As the court noted, the regulations also address this, saying that a “change of address information that a taxpayer provides to … another government agency, is not clear and concise notification of a different address.” Thus, the IRS is not charged with knowledge of any other agency. But again, this leaves one wondering if the bankruptcy court is a “government agency.”
It also leaves one wondering if the IRS Appeals Office exercised reasonable diligence in ascertaining the taxpayer’s last known address. It appears that the IRS Appeals Office did try to locate the taxpayer, but even though it knew the taxpayer was living abroad, it did not know the taxpayer’s exact address. This is why it is important to keep the IRS apprised of one’s address.
One way to do this, given an exception in the regulations, is to file an address change notice with the U.S. Postal Service. The outcome of this case would have been different had the taxpayer done this and the notice of deficiency was mailed to a different address.