Posted by: Taxlitigator | March 10, 2016

In Collection Due Process Cases, It’s Receipt of the Notice that Matters by ROBERT S HORWITZ

A notice of deficiency sent to a taxpayer’s last known address is a ticket to the Tax Court that allows a taxpayer to dispute a proposed deficiency of income, estate or gift tax before assessment. If a taxpayer fails to file a petition with the Tax Court within 90 days of mailing of the notice (150 days if the taxpayer is out of the country), the IRS can assess the tax and begin collection activity.  Normally, the only recourse a taxpayer has to dispute the liability in court is to pay the entire amount owed and seek a refund.

Sec. 7436 of the Internal Revenue Code contains provisions allowing an employer to dispute a proposed employment tax assessment before assessment if there is a dispute about whether workers are employees or independent contractors. The IRS is required to send a Notice of Determination of Worker Classification (“NDWC”) to the taxpayer’s last known address.  The taxpayer can then petition the Tax Court to dispute the proposed employment tax liability.  If the taxpayer doesn’t file a Tax Court petition on time, the IRS can assess the tax and begin collection.

What happens if the taxpayer doesn’t receive the notice of deficiency or NDWC? Is there a way to challenge the liability in court without having to pay and seek a refund?  The answer, as we learn in Hampton Software Development, LLC v. Commissioner, TC Memo 2016-38 (March 3, 2016), is maybe.

In Hampton Software Development, the taxpayer protested to IRS Appeals an audit finding that a worker was an employee and not an independent contractor.   After a conference, IRS mailed a NDWC to the taxpayer’s last known address.  The letter was returned stamped “unclaimed.”  The IRS then assessed the tax and issued a Final Notice/Notice of Intent to Levy under IRC sec. 6330.  This gave the taxpayer the right to protest the proposed collection action to appeals.  The taxpayer protested and raised only one issue: that it was not liable for the tax.  IRS Appeals denied relief on the ground that the taxpayer could not challenge the underlying liability in a collection due process case. The taxpayer petitioned Tax Court.  The IRS moved for summary judgment on the ground that under sec. 6330, the taxpayer could not challenge the underlying liability.  The Tax Court denied the motion.

Secs. 6320 and 6330 allow a taxpayer to protest to IRS Appeals a final notice/notice of intent to levy or notice of tax lien filing. While the matter is pending before Appeals, and in Tax Court if the taxpayer challenges Appeals’ determination, collection activity is stayed.   Sec. 6330 allows a taxpayer to challenge the underlying liability in a collection due process proceeding “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 liability.”  IRS regulations provide that if a tax is subject to deficiency procedures, a taxpayer did not have an opportunity to contest the liability if he did not receive a notice of deficiency.  If a tax is not subject to deficiency procedures, an opportunity to dispute the liability includes an opportunity to challenge the tax in Appeals pre or post assessment.

The IRS claimed that the procedures under sec. 7436 for issuing a NDWC are not deficiency procedures; thus, the taxpayer had an opportunity to dispute the liability in appeals pre-assessment. According to the IRS, he could not dispute it post-assessment in a collection due process case.

The Tax Court first looked at the provisions of sec. 7436 to determine whether a NDWC is subject to deficiency procedures. Under sec. 7436(d)(1), the principals of several sections of the Internal Revenue Code that apply to deficiencies are applicable to NDWC.  Thus the Court held that sec. 7436 is a tax to which deficiency procedures apply.  As a result, that the taxpayer had a pre-assessment appeals conference was irrelevant to the question of whether it could challenge the underlying liability in a deficiency procedure.  The real question was whether the taxpayer actually received the notice.  A taxpayer cannot deliberately refuse to accept a notice of deficiency or a NDWC and then challenge the underlying liability in a collection due process proceeding.  In the case before it, the returned envelope established that the taxpayer did not receive the NDWC.  There was no evidence as to whether the taxpayer deliberately refused to accept the NDWC.  Since this was a factual question, the motion of the IRS for summary judgment was denied.

A taxpayer did not receive a notice of deficiency or a NDWC before an assessment is made. Similarly, a taxpayer may not receive the sec. 6672(b) notice and thus did not have an chance to appeal the proposed trust fund penalty before it is assessed.  In these circumstances, a taxpayer has not had an opportunity to contest the liability prior to assessment.   Unless a taxpayer deliberately refused to accept the notice, she can thus challenge the tax liability without paying by a timely collection due process protest.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com 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


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