Robert Horwitz recently authored a blog regarding a recent district court case, United States v. Wallis, in which the court discussed the notice required prior to assessing a trust fund recovery penalty and the effect that issuance of the notice has on the statute of limitations for assessing the penalty. In that case, the court held that notice had been timely mailed to the taxpayer’s last known address, as required by 26 U.S.C. §6672(b).
Employers are required to withhold federal income and social security taxes from the wages of their employees.[i] An employer is deemed to hold the withheld taxes “in trust” for the United States and must pay them over to the government on a quarterly basis.[ii] The withheld amounts are known as trust fund taxes.[iii] If an employer withholds the taxes from its employees but fails to remit them, the government must nevertheless credit the employees for having paid the taxes, and seek the unpaid funds from the employer.[iv] Under Code Sec. 6672(a), the IRS may assess a penalty on responsible persons who willfully fail to collect, account for, and pay over the taxes to the United States.[v]
In order for the United States to assess the penalty under Code Sec. 6672, there must be a determination that the party: (1) assessed was a “responsible person,” i.e., one required to “collect, truthfully account for and pay over the tax,” (2) that party must have “willfully” refused to pay the tax, and (3) the IRS is required to give notice to the taxpayer before it can assess the penalty.
In United States v. Appelbaum, Case No. 12-CV-0186 (WD N.C. 2/3/2016), the Government filed a lawsuit to reduce a trust fund recovery penalty to judgment. Appelbaum contested the lawsuit, asserting that he had never been sent the requisite notice of proposed assessment. The court found that the IRS had not issued notice to the taxpayer – thus the assessments were invalid and the taxpayer escaped liability.
A taxpayer has 60 days from the date of notice within which to protest the proposed assessment to the IRS Appeals Office. Issuance of the notice suspends the statute of limitations on assessment for 90 days or, if a timely protest is filed, until 30 days after the Appeals Office issues its determination. The IRS gives notice by mailing or hand delivering a Letter 1153 to the taxpayer.
Appelbaum testified that he never received the notice. Normally, a Government agency such as the IRS is presumed to have acted regularly. Based on the presumption of regularity, when an IRS certificate of assessment is in evidence, the court is to presume that the IRS took all steps required before the assessment could be made. A taxpayer has a heavy burden to overcome this presumption. In this case, the IRS’s own records undermined the presumption and led to a decision in the Appelbaum’s favor.
First – the IRS did not have a complete copy of the Letter 1153 addressed to Appelbaum in the case file.
Second – the IRS could not produce evidence that the letter was sent either certified or registered mail, even though IRS policy required that Letter’s 1153 be sent certified or registered mail.
Third – there was nothing in the case file indicating that the revenue officer had attempted to interview Appelbaum, even though this was required before a Letter 1153 could be issued.
Fourth – all but one notation in the revenue officer’s case history were made at or near the date of the event—the notation for the Letter 1153 was made 21 months after the letter was allegedly sent.
Fifth – since Appelbaum never filled a protest, under normal IRS policy, the trust fund penalty would have been assessed shortly after the 90-day suspension of the limitations period expires if the taxpayer does not protest. Here, the assessment was made almost two years after the notice was issued.
Lastly – the revenue officer who had been assigned the case was not called as a witness. Since the IRS’s records did not contain evidence that the predicate steps had been taken, the court held that the assessments were invalid.
Freedom of Information Act – This case highlights the need for a practitioner to obtain a copy of the IRS’s files, including the case history sheets and all internal documents concerning an assessment, either through discovery or a Freedom of Information Act request to determine whether there are procedural grounds for challenging an IRS determination.
ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – firstname.lastname@example.org or 310.281.3200 Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com
[i] See 26 U.S.C. Section 3102(a), 3402(a).
[ii] Code Section 7501(a).
[iii] Davis v. United States, 961 F.2d 867, 869 (9th Cir. 1992).
[v] United States v. Jones, 33 F.3d 1137, 1138 (9th Cir. 1994).