A CPA’s inability to prove that he had timely mailed an appeal to the IRS regarding the issue of whether this taxpayer was truly liable for a trust fund recovery penalty proved a major problem for the taxpayer in the case of Smith v. Commissioner, TC Memo 2015-60.
In late October of 2010 the IRS sent Letter 1153, Trust Funds Recovery Penalty Letter, to Mr. Smith proposing to assess the penalty against him for unpaid employment taxes of a partnership in which he had been a partner. Mr. Smith faxed the letter to his CPA who was with a firm with 5 partners and over 40 staff members.
The CPA stated he prepared a letter to the individual with the IRS that the letter indicated any appeal should be sent in early November of 2010 requesting a conference on the issue. The letter stated that Mr. Smith had withdrawn as a partner of the partnership as of the beginning of the year before the year to which the unpaid taxes related and thus Mr. Smith should not be held liable for the taxes. He stated he gave this letter to a member of the staff of the firm to mail to the IRS.
Nothing else appears to happen until April of 2012 when the IRS assessed the penalty against Mr. Dickey. In May the CPA sent the IRS a letter responding to the CP504 notices indicating he had called the IRS on May 9, 2012 and was told to call a Ms. Redfield who had not returned his calls.
The saga continues to get more serious for Mr. Smith in June, as the IRS now sends a notice that the IRS intended to levy to collect the trust-fund-recovery penalties for the first, second and third quarters of 2009, a full year after Mr. Smith claimed to have withdrawn from the partnership. The CPA now sent the IRS Office of Appeals a request for a collection-review hearing, again stating Mr. Smith was not a partner and thus should not be liable for the penalties.
In the telephone conference, the IRS settlement officer informed the CPA that since Mr. Smith had failed to challenge the original 2010 letter, the taxpayer could not raise the issue of the validity of the underlying liabilities as part of the collection-review hearing. The CPA continued to insist that his client was not liable for the penalties, and he did not suggest any form of a collection alternative at the hearing.
The CPA sent along a faxed copy of his November 2010 letter, but with a note on the cover page that his office could not locate the certified mail receipt.
Under IRC §6330(c)(2)(B) a taxpayer may challenge the validity of the underlying tax liability if he did not have an opportunity to dispute the liability. The taxpayer’s position was that since the IRS had ignored the November 2010, the taxpayer had been denied any opportunity to challenge the liability, thus it should be an issue in this case.
The IRS settlement officer disagreed and on December 4, 2012 sent the taxpayer the notice of determination upholding the proposed levy.
The Tax Court notes that if a taxpayer receives a Letter 1153 (which the taxpayer admits he did in this case) offering an appeal and who fails to take advantage of the appeal option timely had an opportunity to dispute the underlying liability. The taxpayer had 60 days from the day the letter was issued to administratively appeal—the question here is whether such an appeal was requested in a timely fashion, which turns on whether, in fact, the letter in question had been mailed to the IRS in October of 2010 as the CPA asserted.
The Tax Court found that the taxpayer was unable to produce evidence that the document had actually been mailed at that time.
The Court noted that all the CPA had testified was that he had given it to staff to mail, not that he had actually mailed the document. The Court notes:
We did not hear firsthand testimony, for example, from the staff member who would have handled and effected the mailing of the November 11, 2010 letter. We therefore are not inclined to presume, on the basis of petitioner’s suggestion of the reliability of Dickey’s firm’s system for processing outgoing mail, that the November 11, 2010 letter in question was actually deposited into the U.S. mail for delivery to the addressee.
While the Court there was no evidence presented that the item was mailed (no one testified to actually mailing the document), there was other evidence suggesting it had not been actually mailed.
The Court noted:
Dickey testified that no certified or registered mail receipt for the letter was found in his files at his firm. Had the November 11, 2010 letter been sent to the IRS as Dickey mentioned, most likely it would have been sent by certified or registered mail. We infer this from the importance of the letter and from the fact that Dickey and his firm searched for a copy of a certified or registered mail receipt.4 We further believe that had any certified or registered mail receipt existed, Dickey would have instructed, and his firm's staff would have understood, that this receipt should be retained in Dickey's files. Therefore, the lack of such a receipt in Dickey's files is an indication that the letter was not mailed.
The Court therefore concluded:
The evidence on whether the November 11, 2010 letter was sent by Dickey's firm to respondent in late 2010 is less than satisfactory. Although we cannot be certain the letter was not sent, we conclude, on the basis of the evidence presented, that it is more likely than not that the letter was not sent. Therefore, we find that the letter was not sent. This finding is appropriate because (1) the preponderance-of-evidence standard is the relevant standard for determining whether Dickey's firm sent the letter, see Sego v. Commissioner, 114 T.C. 604, 611 (2000) (holding that the determination of whether a taxpayer has received a notice of deficiency, so as to preclude a challenge to the underlying tax liability, is made on a preponderance of the evidence), and (2) the preponderance-of-evidence standard is met if the fact is more likely than not to be true (see United States v. Barksdale-Contreras, 972 F.2d 111, 115 (5th Cir. 1992)).
Unfortunately this case presents a series of problems and a result that, presuming the assertion of the taxpayer that he had withdrawn from the partnership a year earlier, is clearly contrary to the result that should have been obtained.
For a practitioner this case reminds us how important it is to make sure a) that we obtain clear documentation, via certified mail receipts, of actual mailing of documents to the IRS when we mail them and b) that we actually follow up on such mundane tasks as assuring that mail made it to the post office.
As well, it’s important to consider “fall back” positions when dealing with a situation like the collection hearing when things go wrong. In this case, the failure to pursue alternatives also meant the taxpayer had “burned” his opportunity in general at the collection hearing, having decided to go “all in” with the “I don’t owe the tax” defense despite being made aware the IRS had taken the position that this defense could no longer be raised.