Tax Court Invalidates Notice of Deficiency Due to IRS Address Change Irregularities

(Parker Tax Publishing May 2024)

The Tax Court held that a notice of deficiency was invalid because it was not sent to the taxpayer's last known address and therefore dismissed the case for lack of jurisdiction. The court found that the IRS failed show that it complied with Reg. Sec. 301.6212-2(a) in updating the taxpayer's last known address after the taxpayer introduced evidence that he was incarcerated, did not file a change of address form, and that his son with the same name may have been living at the address where the notice was sent. Phillips v. Comm'r, T.C. Memo. 2024-44.

Background

Keith Phillips last filed a federal tax return in March 2004 for tax year 2003. On this return, which he filed jointly with his now ex-wife, Phillips listed his address as 75 Hazeltine Avenue in Youngstown, Ohio.

In January 2010, Phillips began serving a prison sentence which continued through January 2017. During this time, Phillips was injured and suffered a permanent loss of nearly all vision in his right eye. He filed a civil lawsuit against the prison, and in 2014 he received a $201,011 personal injury settlement. Phillips did not file an income tax return for tax year 2014.

In 2018, the IRS prepared a substitute for return, reporting Phillips' personal injury settlement as income. The IRS determined an income tax deficiency and penalties for failure to timely file a return and pay tax. The IRS sent a notice of deficiency to Phillips at 157 Roslyn Drive in Youngstown, Ohio (the Roslyn Address).

Phillips did not protest the notice of deficiency within 90 days, and the IRS assessed the deficiency along with additions to tax. After receiving no payment, the IRS filed a federal tax lien and issued a notice of filing a federal tax lien to Phillips at the Roslyn Address. Phillips did not request a collection due process hearing and failed to pay the liability. The IRS certified Phillips as an individual owing seriously delinquent tax debt to the State Department and in May of 2021, it issued Phillips a CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the State Department. This notice was sent to Phillips at 120 North Richview Avenue in Youngstown, Ohio.

In response, Phillips filed a petition with the Tax Court. Phillips contended that the IRS incorrectly determined that the personal injury settlement he received in 2014 was taxable income. The IRS filed a motion to dismiss for lack of jurisdiction on the ground that Phillips failed to timely petition the Tax Court. The IRS attached a copy of the notice of deficiency and USPS Form 3877, Firm Mailing Book For Accountable Mail. Phillips responded that he never lived at the Roslyn Address. The IRS asserted in response that third-party reporting related to Phillips' ex-wife supported changing Phillips' last known address to the Roslyn Address. Phillips again argued that he never lived at the Roslyn Address but his son, who shares the same name, could have been living with Phillips' ex-wife at that address. The IRS asserted that Phillips' address was updated in accordance with a notification from the U.S. Postal Service's National Change of Address (NCOA) database (NCOA Notification). To support this assertion, the IRS attached Integrated Data Retrieval System (IDRS) transcripts of Phillips' account. The IRS explained the general process it follows upon receipt of an NCOA change-of-address notification but did not provide any additional information related specifically to Phillips' NCOA Notification.

In every deficiency case the IRS must have issued the taxpayer a notice of deficiency under Code Sec. 6213(a). In this case, the parties did not dispute that Phillips did not receive the notice of deficiency until several years after it was mailed to the Roslyn Address. Rather, the IRS asserted that the notice was sent to Phillips' "last known address," which started the clock on Phillips' 90-day window to file a petition with the Tax Court.

It is not mandatory that the IRS mail a notice of deficiency to a taxpayer's last known address; rather, the taxpayer's last known address is "a 'safe harbor' address. If the IRS takes advantage of this safe harbor, then Code Sec. 6212(b)(1) provides that a notice of deficiency "shall be sufficient," and whether the taxpayer actually receives the notice is immaterial. However, if the IRS mails a notice to an incorrect address but the taxpayer receives actual notice in sufficient time to file a petition with the Tax Court, the notice is valid even though improperly addressed. In this case, the IRS did not alleged that Phillips had actual notice of the notice of deficiency in time to petition the Tax Court. Therefore, the dispositive issue was whether the notice of deficiency was mailed to Phillips' last known address within the meaning of Code Sec. 6212.

The term "last known address" is not defined in the Code. Under Reg. Sec. 301.6212-2, a taxpayer's "last known address" is presumptively the address appearing on the taxpayer's most recently filed and properly processed federal tax return. The IRS will update a taxpayer's last known address if the taxpayer provides clear and concise notification of a different address. Generally, providing a third party, such as a payor or another government agency, change-of-address information is not clear and concise notification of a different address for purposes of determining the taxpayer's last known address. However, the regulation provides that the IRS will update a taxpayer's last known address to that accumulated and maintained in the NCOA database. A taxpayer's last known address will be updated if the taxpayer's name and last known address in the IRS records match the taxpayer's name and old mailing address contained in the NCOA database. The regulation does not provide additional information as to the NCOA database nor the matching process.

To update his address with the USPS, a taxpayer may call the USPS or submit a USPS Form 3575, Official Mail Forwarding Change of Address Order, in person or online. The USPS maintains change-of-address information in the NCOA database. The IRS, as a licensee of the NCOA database, receives a weekly file from the USPS, containing change-of-address information. If the taxpayer's name and old address in the IDRS matches that in the NCOA database, the taxpayer's last known address is updated in the IDRS to the address in the NCOA database.

Under Reg. Sec. 301.6212-2(b)(2), a taxpayer's last known address is the address obtained by the matching process. Therefore, if the IRS complies with the procedure set forth in the regulation - specifically matching a taxpayer's name and old address to the NCOA database - the address in the NCOA database is the taxpayer's last known address, even if the USPS improperly processed the change-of-address form.

Observation: In a typical case involving a taxpayer's last known address, the IRS sends the notice of deficiency to the address listed on the taxpayer's most recently processed tax return. A taxpayer will then argue that he provided adequate notice of a new address to the IRS, and thus the notice of deficiency was not sent to his last known address. In this case, the parties' arguments were the opposite of what is typical for this issue. The IRS argued that Phillips provided clear and concise notification of a change of address by sending a change-of-address form to the USPS, whereas Phillips countered that he neither lived at the Roslyn Address nor submitted the USPS change-of-address form.

Analysis

The Tax Court held that the notice of deficiency was invalid because it was not sent to Phillips' last known address. Therefore, the court denied the IRS's motion to dismiss, but nevertheless dismissed the case because the notice of deficiency was invalid.

The court noted that the IRS may carry its initial burden to show that it properly mailed the notice of deficiency with the presumption of official regularity. However, the court found that Phillips successfully rebutted the presumption of regularity in the IRS's process of updating his address. In addition to Phillips' sworn testimony that he did not file a change-of-address form in 2010, Phillips suggested that his son, with the same name, may have been residing at the Roslyn Address with his mother. Phillips also provided documentation showing that he was incarcerated when the IRS processed the USPS change-of-address form. In the court's view, this evidence lent credibility to Phillips' argument that he did not submit the USPS change-of-address form. The court determined that there was an irregularity in the matching process: either the IRS did not receive the NCOA Notification or the information contained in the NCOA Notification matched Phillips' son's account rather than his account.

The court found that the IRS failed to overcome Phillips' evidence of irregularity. The court noted that the IDRS transcripts contained no information relating to the process of matching Phillips' information to the NCOA Notification in 2010, only the result of such process. In addition, the court found that the IRS's inconsistent explanations for the change of address further diminished the credibility of the transcripts. The IRS initially argued that third-party reporting regarding Phillips' ex-wife supported the decision to update Phillips' last known address. However, the court pointed out that reliance on third-party reporting, excluding the USPS, to update Phillips' last known address would violate Reg. Sec. 301.6212-2(b)(1). The IRS later asserted the new theory that the change of address was the result of an NCOA Notification, but failed to explain this change in position. After finding that the IRS provided no additional evidence related to its compliance with the regulation to update Phillips' last known address, the court concluded that the IRS failed to carry its burden to show compliance with regulation.

For a discussion the Tax Court's jurisdiction over a notice of deficiency, see Parker Tax ¶263,510.

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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