Last week my son got a job at Auto Zone, a company that sells auto parts to the entire U.S. The IRS administers a wickedly complex set of tax laws to same population. Guess which one employs more people? Auto Zone. It has over 87,000 workers to sell you windshield wipers. The IRS does its job using about 74,000 workers. Oh, and while both organizations employ computer support, can you guess whose computers are the mother of all outdated legacy systems? I am sure you can.
Overworked IRS employees and outdated computer systems commit errors. Last week, two Tax Court cases teach us when taxpayers might benefit from IRS errors. In Askar Moukhitdinov and Sana Abeuova v. Commissioner, T.C. Memo. 2020-86 (June 16, 2020) (Judge Colvin), a computer error did not invalidate a Notice of Deficiency (NOD) and the taxpayer thus could not get preassessment review. But in Carl William Cosio v. Commissioner, T.C. Memo. 2020-90 (June 18, 2020) (Judge Vasquez), a human error gave the taxpayer another chance for prepayment review of a disputed IRS assessment. Details below the fold.
Today’s cases involve rules for both NODs and CDP. So here’s a brief word on each to give you context. Those who know this stuff may either want to skip this part or else see if they can catch me in error. It does happen.
Law: Last Known Address Rules for Ticket to the Tax Court
When the IRS determines a taxpayer has reported less than the correct tax, the IRS may not assess that deficiency until after it sends the taxpayer a Notice of Deficiency (NOD) and the taxpayer either timely petitions the Tax Court for review or forgoes that opportunity. §§6212, 6213. The NOD is the taxpayer’s “ticket to the Tax Court.” There are other types of “tickets” that the IRS sends as well, notably Notices of Determinations in CDP cases. The Tax Court tries to apply a uniform set of rules to all of these tickets to determine when the relevant petition period starts. See Bongam v. Commissioner, 146 T.C. 52 (2016).
Two important sub-rules here are (1) the IRS will always meet the sending requirement if it sends the NOD to the taxpayer’s last known address and (2) the taxpayer has a 90 day window (or 150 days if the NOD is sent to a foreign address) to file a Tax Court petition.
As to the first, sending to the last known address is a safe harbor procedure for the IRS. Any NOD properly mailed to the last known address is a valid NOD, even if the taxpayer never receives it. See e.g. King v. Commissioner, 857 F.2d 676, 679 (9th Cir.1988)(“if a notice of deficiency is mailed to the taxpayer at the taxpayer's last known address, actual receipt of the notice is immaterial to its validity.”). However, an NOD may still be valid even if not sent to the last known address if it is actually received by the taxpayer in time to file a timely petition in this Court. See e.g. McKay v. Commissioner, 89 T.C. 1063, 1068 (1987). Thus, sometimes the Tax Court has used the date of receipt as the date that triggers the relevant period within which to petition the Tax Court. See Bongam, supra (collecting cases).
As to the second, §6213 says that taxpayers have 90 days “after the notice of deficiency...is mailed” to petition the Tax Court. That language does not say exactly when the 90 day period starts, only that it starts at some point “after” the NOD “is mailed.”
The Tax Court has used the §6213 ambiguity to create a series of taxpayer-favorable rules. I detail them in Bryan T. Camp, Equitable Principles and Jurisdictional Time Periods, Part 2, 159 Tax Notes 1589 (June 11, 2018). Basically, the Tax Court will choose the date that it thinks most fair. Usually that is either the date appearing on the NOD or the date of actual mailing as reflected by the postmark on the envelope or the IRS certified mail receipt. Compare Loyd v. Commissioner, T.C. Memo. 1984-172 (when postmark date was three days earlier than date appearing on the notice of deficiency, petition was timely when filed within 90 days of date appearing on the notice even) with Lundy v. Commissioner, T.C. Memo. 1997-14 (taxpayer who received NOD on March 30, 1996 not permitted to rely on the NOD that was obviously misdated March 29, 1997, instead of March 29, 1996). And, of course, the Tax Court sometimes even starts the petition period from the date the taxpayer actually receives the relevant “ticket.” Bongam, supra.
The important point here is that the Tax Court takes a “a broad, practical construction rather than a narrow, technical one” of the notification requirements (Bongam at 55). The Tax Court tries to interpret the NOD notice requirements to be as fair to the taxpayer as the statute and regulations allow.
When a taxpayer raises the question of whether the IRS properly sent the NOD, the government has the burden of producing evidence that (1) an NOD actually existed and (2) the NOD was mailed to the taxpayer’s last known address. Coleman v. Commissioner, 94 T.C. 82 (1990). Once the IRS comes forward with sufficient evidence as to both elements, the NOD gets a strong presumption of validity. See Cropper v. Commissioner, 826 F.3d 1280 (10th Cir. 2016)(taxpayer unable to overcome presumption that he received NOD).
Law: Collection Due Process (CDP)
After assessment, the IRS can start enforced collection. T he Collection Due Process rules allow a taxpayer to put IRS collection activity on pause to give the taxpayer space to work out an alternative to immediate, forced, full payment of the unpaid tax liability. For folks looking for punishment, you can find fuller explanations of CDP in prior lessons here, here, here and here.
Here's what you need to know for today’s lesson:
(1) Contesting merits. Section 6330(c)(2)(B) permits a taxpayer to ask for a review of the underlying tax liability if the taxpayer "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.” In order to preserve a merits dispute, a taxpayer must not only raise the issue in Appeals, but must also give Appeals sufficient information for it to make a decision. Only then will the taxpayer be able to get Tax Court review of the merits determination. See. Treas. Reg. 301.6330-1(f)(2).
(2) Limits on number of CDP hearings. Taxpayers can get up to two CDP hearings for each tax liability the IRS seeks to collect, once under §6320 when the IRS files a notice of federal tax lien and once under §6330 when the IRS seeks to first exercise its levy powers. But taxpayers get only one §6320 CDP hearing and one §6330 CDP hearing for any given tax liability. See Q&A B4 in both Treas. Reg. 301.6330-1(b) and Treas. Reg. 301.6320-1(b). The regulations deal with what happens when a taxpayer receives more than one §6320 CDP notice, or more than one §6330 CDP notice. If that happens, the regulations say that only the first CDP notice triggers rights to a CDP hearing. If the taxpayer fails to timely ask for a CDP hearing within 30 days of the first CDP Notice, but then asks for a hearing after receiving a later CDP notice, the taxpayer gets only an equivalent hearing.
Moukhitdinov: IRS Error Did Not Invalidate NOD
The IRS sent an NOD to Mr. Moukhitdinov and Ms. Abeuova. Their last known address had a five-digit zip code: 10017 (Midtown Manhattan for those who must know). Their zip+4 code was 10017-3522.
The IRS computers did not use either the five-digit or the zip+4 code on the NOD. Instead the IRS computers threw an additional three digits to create a bizarre zip+7 code: 10017-3522946.
The NOD was dated November 7, 2016 and advised the taxpayers that they had until February 6, 2017 to file a Tax Court petition. After no Tax Court petition was filed, the IRS assessed the taxes and started collection. It sent an unspecified “collection notice” on May 22, 2017 (probably one of the CP 50x series). The collection notice used the same bizarre zip+7 code.
The taxpayers responded promptly to the collection notice. They speedy-quick contacted their accountant who drafted a letter for Mr. Moukhitdinov to sign and send in. He did, dating the letter dated June 1, 2017. Attached to the June 1, 2017 letter was a copy of the first page of the NOD.
Months passed. Many, many months. The opinion is silent on what, if anything happened. But eventually, on October 15, 2018, the taxpayers filed a Tax Court petition for review of the NOD.
Both the IRS and the taxpayers asked the Tax Court to dismiss the case for lack of jurisdiction. I assume the IRS said that even if the NOD had not been properly mailed to the last known address, the taxpayer had actually received it by June 1, 2017 letter as evidenced by the attachment. That would mean that even if the IRS lost its last known address safe harbor, the taxpayer actually received it before June 1, 2017, triggering the 90 day period. October 15, 2018 was still way beyond even that.
But the Tax Court did not go there. Judge Colvin instead found that the zip code error was immaterial and that the NOD had been properly mailed to the taxpayer’s last known address.
Typically, the IRS shows a proper mailing through either a properly completed Post Office Form 3877 or a defectively completed Form 3877 bolstered by additional evidence (such as testimony from a postal worker). See e.g. Lee v. Commissioner, T.C. Memo. 2011-129 (post office testimony that it had corrected the erroneous zip code on an NOD otherwise properly addressed).
Here, the IRS submitted a defective Form 3877 as proof of proper mailing. The Form was dated November 1, 2016. It contained a tracking number so that was good. The defect was that the IRS left blank the box on the Form showing how many items the Post Office had received.
Key for Judge Colvin was that the same tracking number as was on the Form 2877 appeared on the copy of the first page of the NOD that was attached to the taxpayer’s June 1, 2017 letter. From that, Judge Colvin concluded that the zip code error did not matter. The NOD had been properly mailed to the last known address. Safe harbor achieved!
Cosio: Office of Appeals Error Precludes Summary Judgment in Tax Court
Mr. Cosio had problems filing his tax returns and paying his taxes. He filed his 2015 return in December 2016, but was unable to pay the liability he reported and the IRS assessed.
So the 2015 year went into collection...where it joined tax years 2006-2011. On April 7, 2017, the IRS sent Mr. Cosio a CDP notice for all those years at the same time. It also apparently sent him a separate CDP notice for 2012. He timely requested a CDP hearing for all his years, using a single Form 12153. On the form he asked for various collection alternatives. He also wrote that he was contesting his liability for 2015.
In response to his Form 12153 Appeals sent Mr. Cosio three letters. The first told him he was too late to get either a CDP hearing or an equivalent hearing for the 2006-2011 years. I thus infer that the April 7th CDP notice was not the first CDP notice Mr. Cosio received for the years 2006-2011. The second letter said he was too late for a CDP hearing for the 2012 year, but he could still get an equivalent hearing. And, in fact, Appeals opened an equivalent hearing for him for 2012. The third letter said Appeals was opening a CDP hearing for him for the 2015 year.
Appeals assigned both the 2012 equivalent hearing and the 2015 CDP hearing to the same Settlement Officer (SO). Here is where the error came in. She repeatedly and mistakenly sent Mr. Cosio scheduling letters referencing only the 2012 hearing. There was some back and forth between Mr. Cosio, the SO, and Mr. Cosio’s representative at that time, with the last interaction being a July 24, 2017 phone call where Mr. Cosio said he had an in-person hearing set for September and wanted to pursue that. From the SO’s administrative file, it appears that she believed she was proceeding simultaneously with the 2012 and the 2015 years, but in her letters and other written communications she refers only to the 2012 equivalent hearing. In August 2017 Hurricanes Harvey and Irma hit Florida, and in response the SO sent a “last chance” letter on September 13, 2017, giving Mr. Cosi an additional 14 days to provide additional information before she closed the 2012 and 2015 cases. That was the first letter that mentioned the 2015 year. When Mr. Cosi did not respond, the SO closed both cases and issued a CDP Notice of Determination (CDP NOD) for the 2015 year and then a Decision letter for the 2012 year.
Mr. Cosi timely petitioned Tax Court and the IRS moved for summary judgment. It’s position was that the SO had scheduled an August 2017 conference call, had told Mr. Cosi about that telephone hearing, had given Mr. Cosi plenty of time to gather evidence and present his arguments, but that Mr. Cosi had failed to appear and present evidence either then or even after being given another 14 days in consideration of Hurricane Harvey. To support its position, the IRS introduced the SO’s administrative notes, showing she had treated both 2012 and 2015 as a simultaneous hearing.
Mr. Cosi, however, pointed out that he had asked for a face-to-face and had told the SO he was going to have one in September and that all the letters and other communication he had received from the SO referenced only the 2012 year, thus making it seem that the 2015 was put off until a different time.
Judge Vasquez ruled that the record in the case was too ambiguous to show that Mr. Cosi had received a sufficient opportunity to contest the merits of his 2015 tax liability. The SO’s repeated failure to mention the 2015 tax year in her letters to Mr. Cosi meant that “there is a material dispute of fact as to whether petitioner received a reasonable opportunity to present his evidence pertaining to his tax liability for 2015.” (Op. at 15).
When you catch the IRS in error, the key lesson from these cases is to look at how did the error prejudice the taxpayer from obtaining relief that Congress provides in the Tax Code? In our first case, the NOD error did not work to the detriment of the taxpayers’ ability to contest the merits of their liability. In our second case, the SO’s error did.
Coda 1: Judge Colvin’s decision in Moukhitdinov may actually help the taxpayers. He says that the NOD was properly mailed to their last known address and thus it triggered their Tax Court petition period on November 7, 2016, the date on the NOD. This ruling may work out to the taxpayer’s benefit in a later CDP case. That is because if they want to contest the merits of the liability, they have to show they did not actually receive the NOD timely even if it was mailed timely. They may be able to do that, depending on the evidence. In contrast, Judge Colvin could have based his decision on their having actually received the NOD no later than June 1, 2017, as evidenced by a copy of it having been attached to their letter to the IRS. If that had been the basis for finding their Tax Court petition was untimely, then they would not be able to argue in a later CDP case that they had not actually received an opportunity to contest the liability.
Coda 2: Judge Vasquez’s ruling in Cosio just denies an attempted Summary Judgment motion by the IRS. However, it is also a strong signal that, absent better evidence from the IRS, the SO likely abused her discretion by not giving Mr. Cosio an opportunity to be heard on the merits of the 2015 liability. As far as collection goes, Mr. Cosio is on the collection hook for a whole bunch of tax years other than 2015, but this is a question of a merits dispute that he is entitled to under the CDP rules. As to that the IRS may decide to ask for a remand to Appeals to give him that chance.
The taxpayer’s attorney in Moukhitdinov also raised a frivolous argument. The attorney argued that the IRS somehow committed fraud because the date on the NOD was later than mailing date on the Form 3877. The NOD was dated November 7, 2016 and the Form 3877 showed a mailing on November 1, 2016.
Judge Colvin rightly rejected the argument, although he refrained from calling it frivolous. He just said “it takes more than this anomaly to establish petitioners’ allegation of fraud.”
The reason why this is a frivolous argument is that the later NOD date only helps the taxpayer, under the Tax Court’s approach for counting the 90 petition period. It may be that the IRS puts a later date so the taxpayer does not lose the 2 or 3 days it may take the Post Office to deliver the document. I would welcome comments on this from readers. I could not find any help in the IRM, but a more proficient reader might know. However, it may also be that the IRS function that generates the NOD does not know exactly when the NOD will be mailed. It’s not like some human licks the envelope and walks the NOD to the Post Office. There are internal routing processes. Putting a later date on the NOD is, again, a taxpayer-friendly move because the NOD instructions key off of the date on the NOD.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He commits lots of errors and hopes most of them are harmless.