Tax Court Nixes Assessment of Trust Fund Recovery Penalty (TFRP)

(Parker Tax Publishing June 2019)

On remand from the Eleventh Circuit, the Tax Court held that the assessment of a trust fund recovery penalty (TFRP) was invalid and the IRS Office of Appeals abused its discretion in upholding a proposed levy and the filing of a notice of lien to collect the assessment because the IRS failed to make a final administrative determination regarding the taxpayer's protest of the TFRP before assessing the penalty as required under Code Sec. 6672(b)(3)(B). The Tax Court found that a pre-assessment final administrative determination is one of the "requirements of any applicable law" under Code Sec. 6330(c)(1) that must be verified by the Office of Appeals as part of a collection due process hearing. Romano-Murphy v. Comm'r, 152 T.C. No. 16 (2019).

Background

Linda Romano-Murphy was the chief operating officer and corporate secretary of Nurses PRN, LLC (NPRN), a nurse-staffing company. In July of 2005, NPRN filed a Form 941, Employer's Quarterly Federal Tax Return, for the second quarter of 2005. NPRN reported that $403,019 was the amount of its liability to the IRS for Federal Insurance Contributions Act (FICA) and income taxes (trust fund taxes) that it was required to withhold from its employees' wages.

In July of 2006, the IRS mailed Romano-Murphy a Letter 1153, Trust Fund Recovery Penalty Letter, stating that NPRN had failed to pay approximately $346,732 of trust fund taxes for the second quarter of 2005. The IRS proposed to assess that amount against Romano-Murphy as a trust fund recovery penalty (TFRP) under Code Sec. 6672. The letter said she could appeal the proposed assessment by mailing a written protest to the IRS within 60 days along with a request for a conference with the Office of Appeals (Appeals). In September of 2006, Romano-Murphy wrote the IRS a timely letter appealing the proposed assessment of the penalty and requesting a conference with Appeals. The IRS did not take any action in response to the letter.

The IRS assessed the $346,732 TFRP against Romano-Murphy for NPRN's unpaid trust fund taxes in October of 2007 by sending a notice of assessment with a demand for payment within 60 days. In August of 2008, the IRS served Romano-Murphy a notice that it proposed to levy to collect from her the TFRP for NPRN's trust fund taxes for the second quarter of 2005. In September of 2008, the IRS served Romano-Murphy with a notice that it had filed a notice of lien to facilitate the collection from her of the TFRP. Romano-Murphy mailed the IRS a timely request for a collection due process (CDP) hearing.

In February of 2009, Appeals held a face-to-face conference with Romano-Murphy. Following the hearing, Appeals sent Romano-Murphy a Form 12257, Summary Notice of Determination. The Form 12257 stated that Appeals had determined that the assessment of a TFRP was valid, that Appeals had verified that all requirements of applicable law and administrative procedure had been met, that collection should proceed, that the proposed collection action balanced the need for the efficient collection of taxes and the legitimate concern of Romano-Murphy that any collection action be no more intrusive than necessary, and that the notice of proposed levy and the filing of the notice of lien were sustained.

On November 17, 2009, Romano-Murphy filed a petition with the Tax Court attaching the Form 12257. Three days later, Appeals mailed a final notice of determination to Romano-Murphy stating that the notice of proposed levy and the filing of the notice of lien were sustained. In Romano-Murphy v. Comm'r, T.C. Memo. 2012-330, the Tax Court held that Romano-Murphy was liable for the TFRP and sustained Appeals' determination. Romano-Murphy appealed to the Eleventh Circuit.

Code Section 6672 Assessment Period

In general, the IRS has three years during which it is entitled to assess a TFRP. Code Sec. 6672(b) alters the three-year period in two ways. First, under Code Sec. 6672(b)(3)(A), the three-year period is held open for 90 days after the mailing of a preliminary penalty notice. Second, under Code Sec. 6672(b)(3)(B), if the person makes a timely protest of the proposed assessment in response to the preliminary penalty notice, the three-year period is held open until the date that is 30 days after the IRS makes a final administrative determination with respect to the protest.

Eleventh Circuit's Analysis

Romano-Murphy argued on appeal that the IRS's assessment was invalid because the IRS did not hold a hearing or make a final determination before the assessment. The government countered that Code Sec. 6672(b)(3) does not confer a right to a pre-assessment hearing or a pre-assessment final administrative determination. Instead, the government argued, the function of Code Sec. 6672(b)(3) is to extend the period for the IRS to assess the penalty.

In Romano-Murphy v. Comm'r, 2016 PTC 94 (11th Cir. 2016), the Eleventh Circuit held that the IRS erred in not making a pre-assessment determination of Romano-Murphy's liability. The Eleventh Circuit recognized that Code Sec. 6672 does not contain a subsection concerning a pre-assessment hearing or determination of liability. However, in the view of the Eleventh Circuit, Code Sec. 6672(b)(3)(B) contemplates that there will be a pre-assessment determination of liability and notice thereof to the taxpayer if a timely protest has been filed. The Eleventh Circuit concluded that Romano-Murphy was entitled to a pre-assessment determination of her Code Sec. 6672 liability and remanded the case to the Tax Court to determine whether the IRS's error was harmless or required setting aside the assessment (or some lesser form of corrective action).

Tax Court's Analysis on Remand

On remand, the Tax Court held that the IRS's obligation to make a final administrative determination regarding Romano-Murphy's protest before assessing the penalty, as identified by the Eleventh Circuit, was a "requirement of any applicable law" under Code Sec. 6330(c)(1). The Tax Court found that the IRS's failure to meet this requirement meant that the assessment was invalid and that Appeals erred in upholding actions to collect the assessment. The Tax Court reasoned that, in light of the Eleventh Circuit's opinion, the requirement to make a final administrative determination before assessing a TFRP is a statutory command found in Code Sec. 6672(b)(3).

Addressing the significance of the IRS's failure to make a pre-assessment final determination with respect to Romano-Murphy's protest of the TFRP, the Tax Court determined that the appropriate disposition of the case was to (1) hold that the assessment was invalid and (2) not sustain Appeals' determination to uphold the proposed levy and the filing of a notice of lien. In the court's view, there was no reason to remand to Appeals because it was apparent that the requirement of making a pre-assessment determination was not met. The court concluded that, given the Eleventh Circuit's ruling that a final determination in response to a timely protest was a precondition for an assessment, an assessment without the required determination is invalid, and it was an abuse of discretion for Appeals to uphold the proposed levy and filing of notice of lien to collect from Romano-Murphy the assessed TFRP.

For a discussion of the TFRP, see Parker Tax ¶210,108. For a discussion of CDP hearings, see Parker Tax ¶260,540.

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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