Last week, the Court decided Carlos Alamo v. Commissioner, T.C. Memo. 2017-215 (Oct. 31, 2017). This is a case worth remembering for at least two reasons. First, it teaches a lesson about how sticking to your guns can get very expensive because of the accumulation of penalties and interest. No matter how hard to work to contest a tax, penalties and interest work harder.
In this case Mr. Alamo worked very hard to contest his 2009 taxes. But his refusal to ever file a 2009 return resulted in some astonishing additions to his basic liability of $86,651 in unpaid taxes for that year. The Service's levy CDP notice, issued on November 1, 2012, reflected accumulated penalties and interest of $46,474. That equals 54% of his unpaid taxes. And who knows what the total looks like now, some five years later.
The lesson, then, can borrow from the great American roots musician Ry Cooder’s classic “The Taxes on The Farmer Feed Us All.” It might go like this:
We worked through Spring and Winter, through Summer and through Fall
But those penalties and interest worked the hardest of us all
They worked on nights and Sundays, they worked each holiday
They settled down among us and they never went away
The second lesson is about how the Service proves compliance with § 6212 notice requirements. It appears that Mr. Alamo is a hobbyist, albeit more clever than most. He tried to play the proof game. He lost. Still, his stubborn refusal to concede that the Service had properly sent him a Notice of Deficiency (NOD) is a great lesson in how to attack the adequacy of notice but also a warning that an obdurate refusal to cooperate during the CDP hearing can destroy the last chance to get the correct tax liability. By insisting on his perceived “right” to make the Service prove compliance with procedure, Mr. Alamo lost this chance to get his tax liability corrected. For more details on this second lesson, see below the fold:
Briefly, Mr. Alamo did not file a 2009 return. Following its Substitute for Return (SFR) process the Service sent Mr. Alamo a Notice of Deficiency (NOD) in September 2011. Well, at least a Post Office Form 3877 shows that the IRS sent Mr. Alamo a document on October 1, 2017 and the Service’s records show the NOD was returned by the post office on November 4th as unclaimed or refused.
Mr. Alamo did not file a Tax Court petition in response to the NOD and so in February 2012 the IRS assessed a total of $121,180. On November 13, 2012, the Service sent Mr. Alamo a Letter 3172, (“Notice of Federal Tax Lien Filed and your Right to a Hearing”). This notice gave Mr. Alamo until December 21, 2012 to ask for a Collection Due Process hearing. The Service had previously sent Mr. Alamo a CDP notice regarding its intent to collect taxes by levy but he had not responded to that notice.
This time, however, Mr. Alamo responded timely and requested a CDP hearing. In doing so he raised the question of whether the IRS followed proper procedures in assessing his 2009 liability. He also wanted to contest the liability on the merits.
The term “hearing” is something of a misnomer with respect to the Collection Due Process rules. There is no requirement for a traditional one-time, sit-down “hearing” before the decision-maker, the Office of Appeals Settlement Officer (SO). Treas. Reg. § 301.6330-1(d). Instead, hearings are informal and may be conducted using regular mail or email or phone calls: no face-to-face meetings are necessary and there is no requirement that the proceedings be transcribed or recorded. Id. See also Living Care Alternatives of Utica, Inc. v. United States, 411 F.3d 621, 624 (6th Cir.2005).
In this case the CDP hearing consisted of letters and phone calls between Mr. Alamo and the Settlement Officer (SO). It started in January 2013 and ended seven months later in July 2013. During that time Mr. Alamo steadfastly asserted he had not received the NOD, asked to see the IRS proof that it had properly sent him the NOD. He also asked to contest the liability of the 2009 tax year. Eventually, the SO issued a Notice of Determination on August 30, 2013, concluding that the NTFL was correctly sent. Mr. Alamo timely petitioned for Tax Court review in September 2013. In August 2015, the Service asked for a remand to allow the SO to verify again that the NOD was properly mailed to Mr. Alamo’s last known address. The SO also took this opportunity to again try and convince Mr. Alamo to file his 2009 returns but with no greater success. The SO issued a supplemental Notice of Determination in February, 2016. The case then proceeded to trial and the Tax Court issued its opinion in November 2017.
During the eight month CDP hearing and again during the five month remand period and, again, during the Tax Court review period Mr. Alamo refused to file a return for 2009 and kept insisting it was the IRS burden to prove that it properly mailed him the NOD. At the same time he insisted on a face-to-face hearing to allow him to contest the very tax liability that he denied was properly proposed. These two positions are what brings out the lesson about what the Service must prove.
As to the NOD, § 6212 does not require that the taxpayer actually receive it before the Service may use it to asses. The statute instead contains two requirements. First, it requires that the Service “shall send notice of such deficiency to the taxpayer by certified mail or registered mail.” Second, it provides that the NOD is valid “if mailed to the taxpayer at his las known address.” The IRS has the burden to prove both a proper “sending” and a proper “last known address.”
Generally, when taxpayers contest the validity of an NOD, they do not contest the sending but instead argue that the Service failed the last known address requirement. Here, Mr. Alamo was contesting the sending requirement and so this opinion is an interesting lesson in what kind of proof the IRS must offer to show it complied with §6212.
What is interesting is that in almost all SFR cases the NOD is computer-generated. I keep emphasizing to my classes that the IRS does not keep a “copy” of any SFR NOD. The best it can do is print off a duplicate. But it can never provide a copy of the “original” mailed because not only do computers generate the NOD, they also generate the envelope, postage, and even affix the green “Return Receipt” card. The computers spit these NODs out like machine-gun bullets, a much faster clip than humans could do. So when the Service needs to show a court the substance of what it send a taxpayer, it must reprint the document from the computers.
So under such circumstances the Service generally relies on a Post Office form, Form 3877, to show both when the NOD was mailed and where it was mailed. See generally IRM 184.108.40.206.3 (08-11-2016)
In this case, however, Mr. Alamo pointed out that: (1) the 3877 was incomplete because it lacked a required signature and because the tracking number for the reprinted NOD did not match the tracking number on the Form 3877; (2) the Services records and the Form 3877 show only that some document was mailed to him on the day the Service said it mailed the NOD. The records do not show that the document mailed was actually an NOD. Mr. Alamo pointed out that any number of documents could have been mailed then.
Despite these arguments, however, the Tax Court held that the Service had proved proper mailing. It decided that even a flawed Form 3877 is worth something to the Court when the Service presents other evidence consistent with the Form. Also, the Court found persuasive that a refused or undeliverable NOD was received back from the Post Office shortly after the date the Service records showed the NOD being mailed. And the Service records show no other documents being mailed to Mr. Alamo at that time.
In contrast to the §6212 requirements that the Service must only “send” an NOD to the taxpayer’s “last known address,” §6330 allows taxpayers to contest the underlying tax liability of an assessed liability when the taxpayer “did not receive any statutory notice of deficiency for such tax liability.”
While it was true that Mr. Alamo’s non-receipt of the NOD opened the door to contesting the liability, the Tax Court held that his “intransigence” in refusing to even submit a 2009 return meant that he had not properly raised the issue with the SO. “A taxpayer may not claim to challenge the underlying tax liability in a CDP hearing and then refuse to cooperate with the Office of Appeals in attempting to establish that liability.”