What happens if the IRS violates the law? Specifically, what if the IRS assesses a penalty and attempts to collect it without first issuing the proper notice to the taxpayer? The court addresses this in Romano-Murphy v. Commissioner, 152 T.C. 62, in the context of a trust fund recovery penalty.

Facts & Procedural History

The taxpayer was the CEO of a nurse staffing company. The IRS sent the taxpayer a letter indicating that it would assess a trust fund recovery penalty against her for the staffing company’s unpaid employment taxes.

The taxpayer submitted a protest to ask the IRS Office of Appeals to review the proposed penalty. The IRS did not respond to the protest. Instead, the IRS assessed the penalty and attempted to collect the tax.

The taxpayer filed a collection due process hearing request to challenge the collection actions. The IRS upheld the collection actions. Litigation ensued.

The U.S. Tax Court sustained the collection actions. On appeal, the 11th Circuit Court of Appeals reversed. It concluded that the IRS had to decide the underlying issue by having the original appeals hearing and issuing a final determination on the penalty. It remanded the case to the U.S. Tax Court to determine what to do with the case.

The Two Options: Remand or Dismiss?

The U.S. Tax Court was confronted with two options. The first is to remand the case to the IRS Office of Appeals to consider whether the taxpayer is liable for the penalty. The second is to conclude that the assessment is invalid.

The taxpayer would probably prefer the later option, as the IRS has a limited period of time for assessing a penalty. This time may have already passed. If the original assessment is invalidated, the IRS may not be able to assess the penalty again.

The U.S. Tax Court concluded that it had to dismiss the original assessment. The reason was that the original assessment was not valid as a matter of law. Thus, the original assessment was invalid from the outset. There was nothing to send back to the IRS Office of Appeals.

Invalidating Trust Fund Penalties

The IRS has not consistently followed a process of sending final notices in trust fund recovery penalty cases. Thus, these pre-notice assessments are somewhat common. Taxpayers who have had trust fund recovery penalties assessed before the IRS Office of Appeals considered their case, should take notice of the court’s holding in this case.

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