Last week, I discussed the case of Mr. Kearse, whose three lawyers secured him a CDP win some five years after filing a Tax Court petition. They got the win because of an IRS screw-up. They did not get the underlying assessment invalidated. They did not get a merits determination of the underlying liability. They did not kill future collection. They got delay. I questioned what value that whole process added for either Mr. Kearse or taxpayers in general.
This week I discuss the case of Linda J. Romano-Murphy v. Commissioner, 152 T.C. No. 16 (May 21, 2019) (Judge Morrison). Ms. Romano-Murphy, representing herself, secured a CDP win some 10 years after she first filed her Tax Court petition. She got the win because of an IRS screw up. Unlike Mr. Kearse's team she got the underlying assessment invalidated. Once again, however, I question whether this win created value for either this taxpayer or taxpayers generally.
The case took 10 years because Ms. Romano-Murphy initially lost her Tax Court case on the merits of her liability. She appealed to the 11th Circuit in 2013 on a procedural issue. Three years later that court rendered its opinion that the IRS had screwed up by not following a new rule that the 11th Circuit discovered buried in an implication in the statutory language of §6672, a rule no one else had spotted during the 20 years the statute had been in operation.
The new rule is a procedural one: when the IRS proposes to assess a Trust Fund Recovery Penalty (TFRP) under Section 6672 and the taxpayer timely asks for a hearing with the Office of Appeals, then the IRS may not assess the liability until after Appeals performs its review and issues a document that reflects its final determination.
The 11th Circuit sent the case back to the Tax Court to decide whether the IRS screw-up was harmless error. In a 87-page opinion, the Tax Court said the IRS error was not harmless and held that the assessment was void. It reversed the Appeals CDP determination since the IRS cannot collect a void assessment.
You may think this is great result for Ms. Romano-Murphy. She got the assessment invalidated! I wish I shared that happy outlook. Alas! I think the result is really just a win of delayed assessment and later collection. And I cannot see how the 10-year delay benefits either the taxpayer or tax administration. Details below the fold.
Here's what you need to know about the interplay of §6672 and CDP to understand this case.
Law: Section 6672 Procedure
The tax code imposes on several groups of persons the responsibility to collect, account for and pay over to the government various taxes imposed on other persons. These are known as trust fund taxes because §7501(a) says that the money so collected is held in trust for the United States until it is paid over. Two of the most important trust fund taxes are employee income and social security taxes. Employers are supposed to withhold those taxes from employee paychecks and pay the withheld money to the Treasury.
The TFRP is a penalty designed and administered to help ensure payment of trust fund taxes. It provides that the IRS may impose a penalty on any person who, under a duty to collect a trust fund tax, "willfully fails to collect such tax, or truthfully account for and pay over such tax." We call such persons responsible persons. The penalty amount is 100% of the tax owed. That is why some old-timers still call the TFRP the "100% penalty." But the IRS has a policy to use the penalty simply as a back-up collection device, so if multiple responsible persons are on the hook, the IRS will stop collection once the full amount of the employer's unpaid liability is recovered. Hence the newer name: TFRP.
Section 6672 provides that when the IRS decides to assess a TFRP against a responsible person, it must give that person notice of the proposed assessment. The IRS does so using Letter 1153. The person then has 60 days to ask for a conference with the IRS Office of Appeals. If the taxpayer timely protests and asks for an appeal, the RO and the RO’s group manager must review the protest first before sending it to Appeals. If what the taxpayer submits changes their mind, they don’t assess. But if it does not change their mind, they send a Trust Fund Package, containing the administrative file and the protest materials, to the Office of Appeals.
When Appeals gets the Trust Fund Package it is supposed to conduct a hearing, following the rules in IRM 8.25.2. Appeals can come to any number of dispositions. If the disposition is to reject the taxpayer's protest in part or in full, it is supposed to send the taxpayer either Letter 1363 or 1364. IRM 188.8.131.52.
Taxpayers have no right to pre-assessment judicial review of the IRS administrative decision. That has never been thought to be a hardship because the §6672 penalty is divisible. To trigger the refund process, the taxpayer need only pay a portion of the assessed penalty---generally the amount of trust fund taxes for one employee for one pay period. The taxpayer can then request a refund of that amount and, when denied, file a refund suit. For a lovely explanation of all of this see Chapter 16 of “Effectively Representing Your Client Before the IRS” (7th Ed. 2018).
Central to today's case is the §6672 adjustment to the assessment statute of limitations. Subsection (b)(3) provides that “the period...for the assessment of such penalty shall not expire before the later of— (A) the date 90 days after the date on which such notice [the Letter1153] was mailed or delivered in person, or (B) if there is a timely protest of the proposed assessment, the date 30 days after the Secretary makes a final administrative determination with respect to such protest.”
Law: CDP Procedure
Last week’s post gives a basic overview of CDP procedure. Here I just want to emphasize one feature: the ability of taxpayers to get what I call a second chance at a first bite of the apple. That is the effect of §6330(c)(2)(B) which allows the taxpayer to use the CDP hearing to challenge “the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”
Relevant here is that the “prior opportunity” includes administrative opportunities to contest a proposed assessment. Lewis v. Commissioner, 128 T.C. 48, 50-61 (2007). Specifically, the Letter 1153 is a “prior opportunity” for taxpayers facing a TFRP assessment. McClure v. Commissioner, T.C. Memo. 2008-136. See also Mason v. Commissioner, 132 T.C. 301 (2009) (generally discussing “prior opportunity” as applied to TFRP assessments).
Like taxpayers who use CDP to attack a deficiency of income or estate tax, taxpayers who seek to attack a TFRP assessment generally do not get to contest the merits of the assessment, unless they show that they never received the Letter 1153 and thus never had the opportunity to contest the merits pre-assessment. Ms. Romano-Murphy's situation was properly treated as an exception to that general rule.
Ms. Romano-Murphy ran a nurse staffing company in California. It ran into financial difficulties in the mid-2000’s. As part of its audit of the company’s 941’s, the IRS opened a TFRP investigation. In July 2006 the RO sent Ms. Romano-Murphy the Letter 1153 proposing to assess a §6672 penalty against her of about $350,000. She received it and sent in a protest, but her protest apparently was either not forwarded to Appeals or not processed by Appeals. Either way, she never got the pre-assessment hearing in Appeals as contemplated by §6672.
In October 2007, the IRS assessed a the TFRP against Ms. Romano-Murphy and started collection. In August 2008 it sent her a CDP notice for its intent to levy and in September 2008 it filed an NFTL and sent her a CDP notice for the NFTL. Ms. Romano-Murphy asked for and received a CDP hearing. Even though she had received the Letter 1153, Appeals decided that it’s prior failure to give her the hearing she requested meant that she had not had an opportunity to contest the TFRP. So CDP Appeals officer found and reviewed the Trust Fund Package she had sent in. The Appeals officer then sustained the TFRP on the merits and put that decision in the Notice of Determination, dated November 20, 2009.
In 2009, Ms. Romano-Murphy timely filed a pro-se petition in Tax Court. The Tax Court reviewed the TFRP merits determination de novo.
In November 2012, Judge Morrison issued a 107 page memorandum opinion carefully evaluating Ms. Romano-Murphy’s various arguments on the merits---that she was not a responsible person, that she was not willful, that the IRS had totally screwed up the allocation of quarterly payments, that the liabilities had been discharged in bankruptcy, etc., etc., etc. After meticulous consideration of allegations and arguments, Judge Morrison found that Ms. Romano-Murphy was a responsible person who was liable for the TFRP. He then sustained the Appeals determination to allow administrative collection. See Romano-Murphy v. Commissioner, T.C. Memo 2012-330 (Romano-Murphy I).
The intrepid Ms. Romano-Murphy then moved to vacate the 107 page liability decision on the grounds that the TFRP assessment was invalid and the assessment limitations period had now run. Her argument was that §6672 gave her a right to a pre-assessment hearing before Appeals. She had not received a pre-assessment hearing. Ergo, the resulting assessment was invalid. In this short Order dated April 22, 2013, Judge Morrison summarily rejected that argument and she appealed to the 11th Cir.
In 2016, the 11th Cir. agreed with Ms. Romano-Murphy that §6672 gives taxpayers a right to a pre-assessment hearing. It found that right implied by how §6672(b) alters the assessment limitation period: “In our view, §6672(b)(3)(B) contemplates that there will be a pre-assessment determination of liability and notice thereof to the taxpayer if a timely protest has been filed.”
Therefore, the IRS had screwed up by not giving her the pre-assessment hearing she had properly requested. It had never issued a final determination.
But the 11th Cir. declined to decide on the effect of the screw-up. Instead, it remanded the case to the Tax Court with instructions to “address whether the IRS’ error, under the circumstances, is harmless or requires setting aside the 2007 assessment (or some lesser form of corrective action).”
In its May 21, 2019 opinion the Tax Court concluded that the IRS screw up was not harmless and it declared the 2007 assessment invalid.
Lesson: CDP Wins Taxpayer a 10-Year Delay
After reading and re-reading this opinion I am embarrassed to say that I cannot figure out how the IRS screw-up harmed Ms. Romano-Murphy. Judge Morrison’s 87 page opinion is very thorough, well structured and yet remains utterly opaque to me. The meat of the opinion comes in pages 39-76. This is where Judge Morrison explains why the IRS screw-up requires invalidation of the assessment. He has two basic reasons. Each one is difficult for me to understand. I hope the IRS appeals the decision to get some clarification from the 11th Circuit.
But my confusion is not relevant to the lesson today. Suffice to say that the Tax Court decided that the IRS screw up meant the assessment was invalid. Let’s look at what that does for Ms. Romano-Murphy. I think it does squat.
It is true that Ms. Romano-Murphy “won” a new procedural rule for §6672 assessments. That new rule does not help her on the merits here because all it means is that the IRS gets a re-do. The very same reason that led the 11th Circuit to discover the new rule and led the Tax Court to invalidate the assessment also operates to toll the assessment limitations period: the IRS failed to give Ms. Romano-Murphy the pre-assessment final administrative determination the 11th Circuit said she was entitled to. Thus, the IRS has time to re-assess the tax because §6672(b)(3) says that the assessment limitations period “shall not expire before the later of...the date 30 days after the Secretary makes a final administrative determination with respect to such protest.” Since there has not yet been a final administrative determination, the assessment period is still tolled, even as you read this blog.
Alert readers might wonder whether the CDP evaluation of Ms. Romano-Murphy’s Trust Fund Package would be “a final administrative determination” within the meaning of §6672(b)(3). Nope. The entire point of the 11th Circuit opinion was that Ms. Romano-Murphy failed to received the “final administrative determination” contemplated by §6672 because that term means a pre-assessment final determination. Similarly, Judge Morrison takes pains to tell us that “a pre-assessment determination is fundamentally different from a post-assessment determination.” (Slip Op. at 59, emphasis supplied). That difference is part of why he finds the IRS screw-up was not harmless error: the eventual decisions on the merits of Ms. Romano-Murphy’s liability---including, by the way, Judge Morrison’s own herculean 107 dissection on the merits of her liability---were no substitute for a merits decision made pre-assessment. That's a real head-scratcher for me but, as I said, it is beyond the scope of this post.
The point is that the logic of both the 11th Circuit and the Tax Court means there has been no “final administrative determination” of Ms. Romano-Murphy’s TFRP liability within the meaning of the statute. Thus, the assessment limitation period has not expired. The IRS actually raised this point in the case. Judge Morrison dismisses that point in footnote 17 on page 59 where he says that the IRS argument may be true, but is not relevant to the decision on harmless error.
Nor do I see that this §6672 procedural win helps other taxpayers. The 11th Circuit’s new rule seems to be a rule that the IRS can implement through a change in the IRM. Thus, the only beneficiaries are future taxpayers who are lucky enough to have the IRS screw-up the new procedural rule.
So if Ms. Romano-Murphy’s win does not help her on the merits, what did she win?
Delay. Just like Mr. Kearse last week. True, delay might be good for her. It might result in a windfall if the IRS decides not to re-do the assessment. Even if the IRS re-assesses, Ms. Romano-Murphy gets a lot more time to protect assets from collection. But I sure have a hard time seeing how kicking the collection can down the road for 10 years brings much benefit to either her or the tax system. Readers are welcome to give their thoughts in the comments.
Ironic Coda: Ms. Romano-Murphy argued that the IRS screw-up prejudiced her because, in part, "a pre-assessment hearing would have occurred earlier than her collection-review hearing...and she therefore would have had better evidence at a pre-assessment hearing." (Opinion at 20). In other words, she said that the delay in the merits determination harmed her. So now she wins...a 10 year delay to get another merits determination. Yeah.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law