The taxpayers in the case of Chapman v. Commissioner, TC Memo 2019-110 argued that the IRS had failed to send the notice of deficiency to their last known address. They stated they had failed to receive the document and, as such, were not aware of the deadline by which they had to file a Tax Court petition.
The case involved Duane Chapman and his recently deceased wife, Alice Smith. The couple had been featured on a pair of TV series, eight seasons of Dog the Bounty Hunter on A&E and three seasons of Dog and Beth: On the Hunt on CMT. The series chronicled their experiences as a bounty hunter in both Hawaii and Colorado.
The confusion arose because although the couple resided in Honolulu and their business was located there in 2012, their 2010 and 2011 tax returns each bore a different Los Angeles address. The first address, used on their 2010 return, was the address of a CPA firm in Los Angeles. That CPA was the preparer of their 2010 return which was filed and processed in mid-2011. He held a power of attorney for the taxpayers, but on March 22, 2012, he notified the appeals officer handling the taxpayer’s examination of their 2006 and 2007 returns that the firm was no longer representing the taxpayers or any of their entities, and was withdrawing his power of attorney.
Their 2011 return, which was filed in October 2012, now showed an address of a second CPA in Los Angeles. The information related to that return was input into and available on the IRS computer system on November 19, 2012.
The IRS had recorded a change to the second CPA’s address on November 1, 2011. This change was made based on a phone call the IRS received. The IRS had verified the caller had the authority to make the change. In August of 2012, while the taxpayer’s protest was still pending, the new CPA had his assistant send a fax to the IRS appeals officer, indicating the new CPA would filing a power of attorney with the agency sometime after August 28, 2012. However, the appeals officer did not receive this POA by the time he closed the case as unagreed on November 13, 2012.
The IRS had been preparing for the mailing of a notice of deficiency beginning in August of 2012. The appeals officer asked another IRS employee to search for additional addresses to send notice of deficiency to, noting that the taxpayer had listed his prior POA’s address as his mailing address and asking that the notice also be sent to the taxpayer’s business address. The second IRS employee emailed the appeals officer regarding the draft notice of deficiency, indicating his review of IRS records had come across two primary addresses (which turned out to be each CPA’s office in Los Angeles) and two other addresses in Denver and Honolulu that do not appear to be current.
The packages were eventually sent to the two Los Angeles addresses. USPS records show both notices were delivered in early December 2012, although both the taxpayers nor the second CPA claim not to have received the document.
The taxpayers asserted that the appeal officer knew they had a business office in Hawaii and that the addresses on their 2010 and 2011 (which is where the notices were mailed) were not their own addresses, but that of their return preparers. Thus, they state, the last known address for them would have been an address in Hawaii (although they were inconsistent in arguing if that was their home or business address in Hawaii).
The Court noted that “last known address,” which is where the IRS can send the notice of deficiency and be deemed to have delivered it to the taxpayers, is a singular and not a plural term—there can only be one last known address. The opinion noted that even the taxpayers kept swapping addresses during the time the matter was before the court, apparently arguing for both addresses—and the Court found that wasn’t what the law allowed.
The opinion then turns to the IRS regulations on this point, found at Reg. §301.6212-2(a) which provides:
(a)General rule. Except as provided in paragraph (b)(2) of this section, a taxpayer’s last known address is the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address.
The regulation goes on to provide that the IRS can provide for procedures to notify the agency of the address. The most recent applicable notification Revenue Procedure is Revenue Procedure 2010-16. That procedure provides that “a return will be considered properly processed after a 45-day processing period which begins the day after the date of receipt of the return by the Internal Revenue Submission Processing Campus.” The procedure provides for a similar 45-day period for the IRS to process a clear and concise oral notification of a change of address.
On November 29, 2012, the date the deficiency notices were filed, the last return they had filed was the 2011 return showing the office address of their new CPA. That information had been processed and was available on the IRS computer system no later than November 19, 2012. That was 10 days before the notice as received. The opinion noted that while the return had been processed, per Revenue Procedure 2010-16, it would not have been properly processed until after the notices had been mailed.
So that left the 2010 return as the last one to be properly processed by the date the notice was issued—but the agency had received clear and proper oral notification of the address of the new CPA as the mailing address in November 2011. The taxpayers had not shown they had sent any sort of notice to the IRS of a different address that was meant to be their last known address during that time—so the address of the new CPA was their last known address, and the IRS sent the notice of deficiency to that address.
The Court rejected the taxpayer’s argument that the appeals officer knew of their Honolulu address, which actually appears to have been the case based on his instructions to the second IRS employee. But the Court found that the IRS is not under an obligation to send a notice to any address any IRS employee might know about when the taxpayer has not taken steps to clearly notify the IRS of their preferred mailing address. As the Court noted, in the face of multiple addresses that the taxpayers argue the IRS should have sent the notices to (at least two in Hawaii), what meaning would word “last” have in this context?
The use of the tax preparer’s address as the mailing address for the tax returns likely was a useful convenience for the couple, but in this case, the envelope did not appear to make its way to the taxpayer. The prior CPA likely believed he did not have a responsibility to forward on the notice of deficiency since he had resigned his power of attorney.
And, clearly, the new CPA may face a claim if the taxpayer decides that, since the USPS shows the envelope was delivered, that the failure to get their day in Tax Court is that CPA’s fault. And it wouldn’t be surprising to see them upset at the prior CPA for not forwarding the document, assuming it was not forwarded.
Clearly there are likely other relevant facts—the fact that no POA was ever submitted by the new CPA may indicate that he was having issues with the client. As well, if that wasn’t the case, then we have to wonder why it took over 500 days for a petition to be filed—presumably, the IRS would have been sending out other notices to collect the tax once the 90-day period passed. It’s not likely the IRS waited over a year to start issuing notices of some sort. Presumably those notices were being mailed to some address during that time period.
CPAs need to understand the risks involved when the client uses the CPA’s firm as the mailing address for a tax return—their office becomes the “last known address” for the taxpayer. Unfortunately, since the CPA may be getting other mail for the taxpayer, it’s not inconceivable that the IRS letters might get lost in the shuffle.
Or, in a case like this, if the letter is misdelivered by the USPS, the burden will fall on the CPA to try and prove he/she didn’t actually get the document if the client decides to pursue damages—and proving something didn’t get delivered is extraordinarily difficult. Like it or not, claiming it was “lost in the mail” sounds self-serving, and if multiple documents are now claimed to have been misdelivered related to this taxpayer the story sounds even more questionable to the finder of fact at a trial.