Reversing Tax Court, Third Circuit Holds That IRS Did Not Send Notice to Taxpayer's Last Known Address

(Parker Tax Publishing January 2021)

The Third Circuit vacated a ruling by the Tax Court which found that the IRS had properly sent a notice of deficiency to a couple's last known address by sending the notice to their former address, which the taxpayers' CPA had incorrectly listed on their 2014 tax return, even though the taxpayers had subsequently listed their new address on IRS forms, although not on an official IRS change of address form. The Third Circuit found that Form 8822, Change of Address, has not been consistently required to notify the IRS of an address change, and further found that the IRS had actual notice that the taxpayers had moved because, before the notice of deficiency was issued, the taxpayers' CPA told an IRS agent conducting an audit that the taxpayers had moved. Gregory v. Comm'r, 2020 PTC 393 (3d Cir. 2020).

Background

When Damian and Shayla Gregory moved in June 2015, they neglected to submit an official change of address form to the IRS or to the Postal Service. Compounding the error, their CPA, Michael Chaffee, listed their old address when he filed their 2014 tax return in October 2015. By November 2015, the IRS was auditing the Gregorys' 2013 return.

Chaffee sent a Form 2848, Power of Attorney and Declaration of Representative, to the IRS agent conducting the audit, designating himself as power of attorney for the Gregorys. The Form 2848 listed the Gregorys' new address. Form 2848 states that its only purpose is for "representation before the IRS." The instructions for Form 2848 state that the address listed on the form will not change the taxpayer's last known address and directs the taxpayer to file Form 8822, Change of Address, to change their address with the IRS.

In April 2016, Chaffee filed Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to extend the Gregorys' time to file their 2015 tax return. Form 4868 also listed the Gregorys' new address, but, like Form 2848, its instructions told the taxpayer to use Form 8822 to change their address with the IRS. Three days after Chaffee filed the extension, the IRS agent conducting the 2013 audit, Agent Buzzelli, mailed a letter to the Gregorys' old address, informing them that their 2014 taxes were also being audited. Sometime in the summer of 2016, Chaffee told Agent Buzzelli during a telephone call that the Gregorys had moved.

In October 2016, the IRS mailed to the Gregorys, at their old address, a notice of deficiency for their 2013 and 2014 taxes. The notice gave the Gregorys 90 days to petition for review in the Tax Court. After the 90-day period had ended, Chaffee called the IRS to learn whether the IRS had issued the Gregorys a notice of deficiency, and the IRS confirmed that it had. Chaffee and the Gregorys then mailed a petition to the Tax Court.

In the Tax Court, the IRS moved to dismiss the petition for lack of jurisdiction as untimely. The Gregorys cross-moved to dismiss the notice of deficiency for lack of jurisdiction because it was not sent to their last known address. The Tax Court granted the IRS's motion and held that the Gregorys' petition to the Tax Court was late and the Gregorys' last known address was their old address.

The Gregorys appealed to the Third Circuit. They argued that their power of attorney forms and extension request constituted clear and concise notice of a new address and that the IRS's interpretation to the contrary was unreasonable and not entitled to deference. They also pointed out that their CPA was in direct contact with IRS agent Buzzelli and he informed her of the change of address. The IRS responded that it has given taxpayers clear guidance on how to change their address and that the Gregorys failed to follow that guidance.

The Tax Court has deficiency jurisdiction only if the IRS mails a valid notice of deficiency to the taxpayer and the taxpayer timely files a petition disputing the deficiency. If the notice is not validly sent or the petition is not timely filed, the Tax Court does not have jurisdiction to redetermine the deficiency. Under Code Sec. 6212, the IRS must send a notice of deficiency to a taxpayer's last known address, regardless of whether the taxpayer actually receives the notice. Reg. Sec. 301.6212-2(a) provides that a taxpayer's last known address is the address that appears on the taxpayer's most recently filed tax return, unless the IRS is given clear and concise notification of a different address. Rev. Proc. 2010-16 provides a list of IRS forms that are and are not returns, specifically for establishing whether a document is a return for purposes of updating a taxpayer's last known address. Rev. Proc. 2010-16 explicitly states that Form 1040 is a return but that Forms 2848 and 4868 are not.

Third Circuit's Analysis

The Third Circuit vacated the Tax Court's judgment and remanded the case. The Third Circuit found that courts have required the IRS to use reasonable diligence to determine a taxpayer's last known address. The court noted that the reasonable diligence requirement is rooted in equity and is measured by what the IRS knew or should have known at the time it sent the notice of deficiency, including information it should know through the use of its computer system.

The Third Circuit found that Form 8822 has not been consistently required to notify the IRS of an address change. For example, the court found that Rev. Proc. 2001-18, the procedure in place before Rev. Proc. 2010-16, included many of the same requirements for written notice as Rev. Proc. 2010-16. Although it did not mention Form 2848, it stated that Form 4868 was not a "return" and would "not be used . . . to update the taxpayer's address of record." The court observed that while this prior procedure was in effect, updated addresses on Form 2848 were found sufficient notice of an address change at least twice: in Hunter v. Comm'r, T.C. Memo. 2004-81, and in Downing v. Comm'r, T.C. Memo. 2007-291.

Furthermore, the court found that the IRS had actual notice that the Gregorys had moved. Besides the power of attorney forms and extension request, Chaffee pointed out that in the summer of 2016before the IRS issued the notices of deficiencyhe told the IRS agent conducting the audit that the Gregorys had moved. According to the Third Circuit, in determining whether the IRS had clear and concise notice of an address change, the proper inquiry is what the IRS knew or should have known. Therefore, the court concluded that actual notice to the IRS agent combined with an updated address on two forms was sufficient notice that the IRS knew or should have known that the Gregorys had changed addresses.

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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