IRS Failure to Verify Mailing of Notice of Deficiency Was Abuse of Discretion

(Parker Tax Publishing June 2019)

The Tax Court held that, in a collections due process hearing, the IRS Office of Appeals abused its discretion when it failed to properly verify, as required under Code Sec. 6330(c), that the assessment of the taxpayer's unpaid income tax liability was preceded by a duly mailed notice of deficiency. The court found that the notice of determination issued after the hearing did not indicate what documents were relied on to verify that the notice of deficiency was properly mailed, and the record did not contain a United States Postal Service (USPS) Form 3877 or equivalent IRS certified mailing list bearing a USPS date stamp or the initials of a postal employee. Kearse v. Comm'r, T.C. Memo. 2019-53.

Background

Jevon Kearse is a retired professional athlete who played in the National Football League from 1999 to 2010. His unpaid federal income tax liability for 2010 stemmed from the IRS's determination that a $1,359,000 deduction for a business bad debt expense should be disallowed. A notice of deficiency dated May 11, 2012, that was addressed to Kearse at his last known address, reflected that determination.

In November of 2012, the IRS assessed the unpaid balance of Kearse's 2010 tax liability, which at that time totaled $432,015. In December of 2012, the IRS filed a notice of federal tax lien (NFTL) and sent Kearse a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320, advising him that an NFTL had been filed and of his right to request a hearing to appeal the collection action and to discuss payment options. Kearse responded by submitting a Form 12153, Request for a Collection Due Process or Equivalent Hearing (CDP hearing request), along with a Form 656-L, Offer in Compromise (Doubt as to Liability). Kearse offered to pay $1 and, in a document attached to the form, explained the circumstances of his offer, including asserting the lack of proper mailing and receipt of the notice of deficiency.

In May of 2014, an IRS Office of Appeals (Appeals) officer conducted a CDP hearing. Appeals then sent Kearse a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 sustaining the NFTL. Attached was a summary which detailed the matters considered by Appeals and concluded that Appeals had verified the mailing of the notice of deficiency using IRS computer records.

Kearse petitioned the Tax Court, arguing that Appeals failed to verify that the IRS properly mailed the notice of deficiency to him before assessing the tax liability as required under Code Sec. 6330(c)(1). Kearse and the IRS stipulated that the IRS could not produce a United States Postal Service (USPS) Form 3877 to show proof of mailing of the notice of deficiency or otherwise establish that it was delivered to Kearse.

The IRS contended that the Internal Revenue Manual (IRM) instructs Appeals officers to examine the IRS's Integrated Data Retrieval System (IDRS) to verify the validity of an assessment from a notice of deficiency. In a response filed after the Tax Court trial, the IRS included a declaration from the Appeals officer stating that although she was unable to secure the USPS Form 3877 to show proof of mailing, she examined the IDRS in order to verify that the notice of deficiency was mailed to Kearse. The IRS later produced a USPS Form 3877 dated May 11, 2012, intended to prove the mailing of the notice of deficiency to Kearse via certified mail. The IRS stated that during the pendency of the case, the IRS had updated its systems for locating certified mailing lists (CMLs), allowing them to be easily located.

Analysis

The Tax Court held that the Appeals officer abused her discretion by failing to properly verify that the assessment of Kearse's unpaid 2010 income tax liability was preceded by a duly mailed notice of deficiency. Consequently, the Tax Court concluded that Appeals abused its discretion in sustaining the NFTL.

The Tax Court found that this case was "strikingly similar" to Hoyle v. Comm'r, 131 T.C. 197 (2008), a case in which Appeals determined that a notice of deficiency was properly sent but did not indicate what documents were relied on to verify that the notice was properly mailed. The administrative record in Hoyle lacked, for example, a USPS Form 3877, which the Tax Court and other courts have held raises a presumption of official regularity in the IRS's favor and generally establishes that a notice of deficiency has been properly mailed. In Hoyle, the Tax Court held that when a taxpayer alleges no notice of deficiency was mailed, the taxpayer has alleged an irregularity, thereby requiring the Appeals officer to review (1) a copy of the notice of deficiency, and (2) the USPS Form 3877 or equivalent IRS CML bearing a USPS date stamp or the initials of the postal employee.

The Tax Court found that, as in Hoyle, the notice of determination in this case did not indicate what documents were relied upon to verify that the notice of deficiency was properly mailed. Additionally, the record did not contain a USPS Form 3877 or equivalent CML bearing a USPS date stamp or the initials of a postal employee. Indeed, the parties stipulated that the IRS could not produce that form (or list), the court noted.

The court rejected the IRS's contention that the Appeals officer could rely on the IDRS to verify the mailing of the notice of deficiency. In the court's view, the IRS had correctly stated the general rule as provided in the IRM. However, the court found that under Hoyle, where a taxpayer alleges that the notice of deficiency was not properly mailed to him, he has "alleged an irregularity," thereby requiring Appeals officers to do more than rely solely on the IDRS. The court found that in such a case the Appeals officer must review (1) a copy of the notice of deficiency, and (2) the USPS Form 3877 or equivalent IRS CML.

The Tax Court also rejected the IRS's proffering of a USPS Form 3877 in its post-trial response. The court found that the IRS had already stipulated that it could not produce the form and explained that the court treats a stipulation as a conclusive admission that cannot be changed except in extraordinary circumstances.

For a discussion of the rules regarding the filing of federal tax liens and IRS collection procedures, see Parker Tax ¶260,530 and ¶260,540, respectively.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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