IRS Collections Activity Barred by Statute of Limitations Because Taxpayer Lived in U.S.
(Parker Tax Publishing November 5, 2014)

Even though the taxpayer signed a document saying she lived in the Bahamas, the evidence showed that she was never outside of the United States for more than six months and thus the statute of limitations was not tolled and the IRS could not enforce its liens for the recovery of trust fund taxes. Reinhart v. Comm'r, T.C. Memo. 2014-218 (2014).

In the early 1990s, Kim Reinhart had a secretarial and bookkeeping services company in Daytona, Florida. This business lasted until 1996. In 1993, the IRS assessed a 1992 trust fund recovery penalty against Kim for approximately $59,000. The penalty was associated with one of Kim's clients who added her as a signatory to its bank account. Later that year, the IRS filed a notice of federal tax lien against Kim in Volusia County, Florida.

In February 1991, Kim and her husband bought a home in Ponce Inlet, Florida, where they lived until the home was sold in May 1994. From May of 1994 to May of 2011, Kim and her husband bought and sold numerous residences in Florida. In addition, in 2002, Kim's husband rented an apartment in the Bahamas.

Kim and her husband filed a joint federal income tax return for 2001 in February 2004. That 2001 return was mailed from the Bahamas in August 2003 and listed a Bahamian mailing address for Kim and her husband. Kim and her husband's 2002, 2003, and 2004 joint tax returns listed the same Bahamian mailing address. Kim's 2004 joint tax return included a Schedule C-EZ, Net Profit From Business, which listed a Bahamian mailing address for her consulting business.

On August 7, 2006, Kim signed a declaration submitted to the U.S. District Court for the Southern District of Florida stating that she and her husband lived in Nassau, Bahamas, and that a Vero Beach, Florida, home in which they sometimes lived never was intended to be their residence.

On February 8, 2011, the IRS mailed to Kim a Notice of Federal Tax Lien (NTFL) Filing and Your Right to a Hearing under IRC 6320, informing her that it had filed an NFTL with respect to the 1992 trust fund recovery penalty. On March 15, 2011, the IRS mailed Kim a second notice, informing her that it had filed an NFTL (this time, in the county of Kim's last known address) with respect to the 1992 trust fund recovery penalty. This notice was mailed to the mailbox at Pack Mart in Sebastian, Florida, as this was Kim's last known address.

In September 2011, Kim and an IRS settlement officer held a telephone CDP hearing. The settlement officer told Kim that he had reviewed documents she previously gave him and none of the documents proved that she lived in the United States. This was important because, under Code Sec. 6503(c), the running of the statute of limitations is suspended for the period during which the taxpayer is outside the United States if the period of absence is for a continuous period of at least six months.

Kim contended that the IRS was time barred from collecting the 1992 trust fund recovery penalty because the 10-year limitations period had expired. Code Sec. 6502(a)(1) provides generally that if the assessment of any tax imposed by the Code is made within the relevant statute of limitations, then the tax may be collected by levy as long as the levy is made within 10 years after the assessment. The IRS cited Reg. Sec. 301.6503(c)-1(b), which provides that the running of the statute of limitations on collection is suspended for the period during which the taxpayer is absent from the United States if that period is a continuous period of absence from the United States extending for six months or more.

The March 15, 2011, NFTL was filed well beyond 10 years after the June 15, 1993, date on which Kim's 1992 trust fund recovery penalty liability was assessed. Kim established a prima facie case that the statute of limitations precluded the IRS from collecting the 1992 trust fund recovery penalty. The IRS contended that Kim lived in the Bahamas and any traveling she did to the United States during the six-month periods consisted of casual and temporary visits, such that the period of limitations was suspended.

During a 2006 deposition before the Department of Justice, Kim testified that her address was in the Bahamas. She testified that the deposition pertained to her husband's tax case, and explained that she believed it to be a general question about where she lived with her husband. She also explained that when she answered "five years" in reference to how long she lived in the Bahamas, she meant they had the apartment for five years. Kim testified that she was not asked whether she lived continuously in the Bahamas or whether she had other residences.

The Tax Court held that when the IRS filed the NFTL, the 10-year period of limitations had expired with respect to the 1992 trust fund recovery penalty. The Tax Court said that credible evidence failed to establish that Kim was outside the United States for any continuous period of at least six months from 2002 through June 15, 2003, including casual and temporary visits. Kim, the court noted, convincingly testified that she lived and worked in the United States and was never generally and substantially outside the United States from 2002 through 2012.

For a discussion of the statute of limitations on the collection of tax after assessment, see Parker Tax ¶260,130. (Staff Editor Parker Tax Publishing)

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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