No CDP Hearing for Couple Who Had Prior Opportunity to Dispute Tax Liability

(Parker Tax Publishing April 2020)

The Tax Court held that a couple against whom the IRS filed a notice of federal tax lien and who never received a notice of deficiency but met twice with the IRS Office of Appeals, and whose tax liability was subsequently abated as a result of those meetings, had a prior opportunity to dispute their underlying tax liability for purposes of Code Sec. 6330(c)(2)(B) and therefore were properly denied an opportunity to challenge their underlying liability in a collections due process hearing. The Tax Court found that during the audit reconsideration process, the taxpayers were fully engaged with the IRS Appeals Officer (AO), that the AO reviewed the evidence and arguments they presented and that, in the end, the taxpayers enjoyed a full and fair opportunity to challenge their underlying tax liability before the Appeals Office. Lander v. Comm'r, 154 T.C. No. 7 (2020).

Background

Joseph and Kimberly Lander filed a late joint tax return for 2005 in April of 2009. The IRS opened an examination of the couple's 2005 return and sent a 30-day letter in July of 2011 proposing adjustments resulting from the disallowance of a passthrough loss and an unreported capital gain. The Landers replied with a protest letter, but the IRS determined that the letter was not a proper protest letter under the Internal Revenue Manual.

The IRS then prepared a notice of deficiency. Joseph Lander was incarcerated in 2011, so the IRS sent duplicate notices to the Landers at their separate addresses. Neither Joseph nor Kimberly ever received a notice of deficiency. The IRS's records showed that the notices were sent by certified mail but were returned unclaimed. In July of 2012, the IRS assessed the taxes, penalties, and interest determined in the Landers' notice of deficiency. Later that month, the IRS sent a notice of intent to levy. The Landers sent the IRS a letter explaining that they never received a notice of deficiency nor a response to their protest to the 30-day letter.

The IRS Examination Division reexamined the Landers' 2005 return and invited the Landers to send a proper formal protest letter. The Landers responded with another letter outlining their arguments and requesting review by the IRS Appeals Office. The Landers' case was assigned to Appeals Officer Thomas Bohne. After two meetings between Bohne and the Landers, the IRS abated a portion of the couple's tax liability. The IRS then issued a notice of federal tax lien for the unpaid amount.

The Landers requested a collection due process (CDP) hearing with the Appeals Office. They asserted that the underlying assessment was invalid because a notice of deficiency was not mailed to them. The Appeals Office determined that the Landers were not entitled to challenge their underlying liability because they had previously settled the matter and agreed to a reduction in the balance of tax due. The Appeals Office issued a notice of determination sustaining the decision to file the lien.

The Landers took their case to the Tax Court. They again argued that the IRS failed to mail a notice of deficiency before entering the assessments against them. They also contended that they were not given a full and fair opportunity to challenge their underlying tax liability during the audit reconsideration process. They claimed that Bohne did not give full consideration to the matter and that, in any event, they were entitled to an opportunity for prepayment judicial review.

Under Code Sec. 6330(c)(2)(B), a taxpayer may challenge the existence or amount of an underlying tax liability in a CDP hearing only if the taxpayer (1) did not receive a notice of deficiency or (2) did not otherwise have a prior opportunity to dispute the liability. Reg. Sec. 301.6330-1(e)(1), Q&A E-2, states that an opportunity to dispute an underlying liability includes a prior opportunity for a conference with the Appeals Office that was offered either before or after the assessment of the liability. In Lewis v. Comm'r, 128 T.C. 48 (2007), the Tax Court upheld the validity of Reg. Sec. 301.6330-1(e)(1), Q&A E-2, and held that a taxpayer's conference with Appeals after the assessment of a tax that was not subject to deficiency procedures was a prior opportunity for purposes of Code Sec. 6330(c)(2)(B) and the regulation. However, the Tax Court did not rule in the Lewis decision on the applicability of the prior opportunity rule in cases requiring a notice of deficiency.

Tax Court's Analysis

The Tax Court held that the assessments against the Landers were valid based on ample and persuasive evidence that the IRS mailed a notice of deficiency by certified mail to the Landers at their last known address. The court also held that the Appeals Office correctly determined that the Landers had a prior opportunity to dispute their tax liability within the meaning of Code Sec. 6330(c)(2)(B).

The court explained that although the Lewis case involved a tax for which no notice of deficiency was required before assessment, the reasoning and analysis of that decision applied equally to this case. The court cited language from Lewis stating that while Code Sec. 6330(c)(2)(B) could be read to mean that every taxpayer is entitled to one opportunity for a pre-collection judicial review of an underlying liability, it seemed unlikely that this was Congress's intent. The Tax Court said in Lewis that if Congress had intended to preclude only those taxpayers who previously had an opportunity for judicial review of the underlying liability from raising it again in a CDP hearing, the statute would have been drafted to say so.

Thus, the court said that, under Code Sec. 6330(c)(2)(B), it was required to consider whether the Landers (1) did not receive a notice of deficiency or (2) did not otherwise have an opportunity to dispute the tax liability. According to the court, there was no question the Landers did not receive a notice of deficiency, but the court found that their meetings with Bohne constituted an opportunity to dispute their tax liability. The court noted that after the Examination Division reviewed and reaffirmed the adjustments in the notice of deficiency, the Landers were granted an independent review in the Appeals Office. The court found that Bohne engaged with the Landers, took a fresh look at the record, conceded certain issues, and abated a significant portion of the tax. Only then, the court observed, did the IRS file the lien that led to the additional collection review proceedings in the Appeals Office and the instant action. The court also noted that after Bohne made the adjustments, he invited the Landers to contact him with any additional questions, but they did not do so. The court concluded that the Landers were fully engaged with Bohne, that he reviewed the evidence and arguments they presented, and that in the end the Landers enjoyed a full and fair opportunity to challenge their underlying tax liability before the Appeals Office during the course of the audit reconsideration process.

Observation: The court noted that the Landers were not left without an opportunity for judicial review. The court pointed out that the couple could pay the tax, file a claim for a refund, and if that claim was denied, file a refund suit in a district court or the Court of Federal Claims.

For a discussion of appealing a levy in a CDP hearing, see Parker Tax ¶260,540.

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