On March 1, 2022, the Tax Court issued a Memorandum Opinion in the case of Kazmi v. Commissioner (T.C. Memo. 2022-13). The primary issues presented in Kazmi v. Commissioner were (1) whether the petitioner is entitled to challenge the underlying liabilities, and if so, whether he is a responsible person who willfully failed to pay over employment taxes under IRC § 6672, and (2) whether the Appeals abused its discretion in sustaining the collection action.
The Parties Arguments in a Nutshell
The petitioner’s Position
The petitioner argued that he may challenge his underlying liabilities because a Letter 1153, Proposed Trust Fund Recovery Penalty, does not constitute a prior opportunity under IRC § 6330(c)(2)(B) since the IRS’s denial of a Letter 1153 appeal does not result in an opportunity for the taxpayer to seek judicial review before the Tax Court. The petitioner further argued that he is not a responsible person liable for TFRPs under IRC § 6672, or, essentially, that the IRS has the wrong person.
The IRS’s Position
The IRS argued that the petitioner was prohibited from now challenging his underlying liabilities because he failed to appeal the earlier Letter 1153, which constituted an opportunity to dispute them under IRC § 6330(c)(2)(B). The IRS further argued that the Tax Court should therefore apply an abuse of discretion standard and hold that the IRS did not abuse its discretion.
The Tax Court’s Opinion
The Tax Court held for the IRS, citing the fact that the Tax Court has consistently held that a properly served and received Letter 1153 constitutes a prior opportunity to challenge the underlying liability and therefore a failure to appeal it prohibits the same challenge at a collection due process hearing (CDP hearing). In addition, the Court will hold the Commissioner did not abuse his discretion in sustaining the NFTL filing with respect to the periods at issue.
Background to Kazmi v. Commissioner
Urgent Care is an Illinois corporation taxed under federal law as an S corporation. Urgent Care did not pay the employment taxes reported on its Forms 941, Employer’s Quarterly Federal Tax Return, for the second and third quarters of 2014, resulting in outstanding liabilities of $6,184.23 and $4,190.77, respectively. Twenty-three pages of an opinion for a little over $10,000. That is anathema to judicial economy, but here we are.
The petitioner was employed by Urgent Care as a part-time hourly bookkeeper during the periods at issue. He had no ownership interest in Urgent Care. He was not an officer of Urgent Care. His name was not on any of Urgent Care’s bank accounts. He did not have check signing authority for Urgent Care nor any authority to make payments on behalf of Urgent Care. At all times, he worked under the authority and direction of the sole owner of the practice, Dr. Aref Senno.
Nonetheless, in the TFRP interview, the petitioner identified himself as the bookkeeper and his job as “to take care of payroll.” He also indicated that he was authorized to transmit payroll tax returns and make federal tax deposits and that he was aware that withheld taxes had not been remitted.
Not unsurprisingly, after it was unable to collect the $10,400 from the medical practice, the IRS determined that the petitioner was a jointly and severally liable “responsible person” and proposed assessing TFRPs against him in a Letter 1153 dated December 16, 2015. The petitioner does not dispute receiving the Letter 1153 or signing the accompanying PS Form 3811, Domestic Return Receipt. Critically, a taxpayer has 60 days to challenge a Letter 1153 by submitting a written appeal, but the petitioner made no appeal. The IRS then timely assessed TFRPs against the petitioner on March 22, 2016.
The CDP Charade
On July 19, 2016, the IRS issued the petitioner a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC § 6320. This got the petitioner’s attention, and he submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing. The Form 12153 challenged the underlying liabilities but neither requested collection alternatives nor made other challenges to the appropriateness of the collection action. Attached to the Form 12153 was a note from Dr. Senno, which attempted to absolve the petitioner of any “responsibility.”
It did not.
The CDP appeal was assigned to a settlement officer, who set a date for the conference and requested that he provide certain information including a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employment Individuals.
Before the CDP hearing, the settlement officer verified that the requirements of applicable laws and administrative procedure had been met, including the proper issuance of the Letter 1153, notice and demand, the NFTL filing, and the notice of a right to a CDP hearing. The settlement officer further determined that the petitioner was prohibited from challenging the underlying liabilities in a CDP hearing because the Letter 1153 provided him with a prior opportunity to contest his underlying liabilities of which he failed to take advantage.
When the SO called at the appointed time, the petitioner was not inclined to answer. He phoned the SO two weeks later, and they discussed the appeal—including underlying liabilities. He reiterated that he did not want to pursue collection alternatives because he was innocent, dammit. Also, he failed to ever provide a Form 433‑A. The SO sustained the NFTL in the notice of determination, and the petitioner timely petitioned the Tax Court for redetermination.
The Trust Fund Recovery Penalty
Employers have a duty to withhold or collect from an employee’s wages the employee’s share of Federal employment taxes, which the employers then must pay over to the Federal Government. Such withheld amounts are known as “trust fund taxes,” because they are “held to be a special fund in trust for the United States.”
When net wages are paid to an employee and the employer does not pay over the withheld funds, the Commissioner has no recourse against the employee. For this reason, IRC § 6672 provides a collection tool allowing the Commissioner to impose a TFRP on certain persons who fail to withhold and pay over trust fund taxes. The TFRP under this section is equal to the total amount of the tax not paid over.
The TFRP must be paid upon notice and demand by the Commissioner and shall be assessed and collected in the same manner as taxes. The TFRP is known as an “assessable penalty” because the Commissioner can assess the TFRP against a taxpayer without first having to issue the taxpayer a notice of deficiency. The assessable penalty was approved by the group manager on Form 4183 on December 16, 2015—the same day the notice was issued.
IRC § 6672(a) imposes the TFRP on
- “[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title” who
- “willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof.”
The term “person” includes an officer or employee of a corporation who is under a duty to collect, account for, and pay over the tax. Such persons are referred to as “responsible,” and the term may be applied broadly. Whether someone is a responsible person is “a matter of status, duty and authority, not knowledge.”
The Seventh Circuit considers the following to be indicia of “responsible person” status:
- holding corporate office;
- owning stock in the company;
- serving on the board of directors;
- having authority to sign checks; and
- having control over corporate financial affairs.
A responsible person will be held liable for a TFRP only where the failure to pay the withholding tax was willful. “Willful” for this purpose does not mean the responsible person must have a “criminal or other bad motive.” Instead, it means “simply a voluntary, conscious and intentional failure to collect, truthfully account for, and pay over the taxes withheld from the employees.”
To establish willfulness, there is no requirement that the responsible person intended to deprive the Federal Government of the withholding tax. Willfulness can exist where the “responsible person acts with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the [Federal] Government.” Willfulness is typically proven by evidence that a responsible person paid other creditors when withholding taxes were due to the Federal Government.
The petitioner contended that he was not liable for a TFRP because he was not a responsible person who “willfully” failed to pay over the withheld taxes for any of the periods at issue. Because the underlying tax liability of a TFRP is the penalty itself, the Tax Court had to first decide whether the petitioner was entitled to challenge his underlying liabilities before reaching the merits of his contention.
Obligatory Notice under IRC § 6320
Before imposing a TFRP under IRC § 6672, the IRS must properly notify the responsible person and properly assess the penalty against that person. In order to properly assess, the Commissioner must generally notify the taxpayer in writing by mail to the taxpayer’s last known address advising that the person will be subject to an assessment of the TFRP. Letter 1153 satisfies this preliminary notice requirement.
The IRS may not assess a TFRP for at least 90 days after providing the notice (in this case, a Letter 1153). Within those 90 days, the taxpayer may challenge the notice by requesting an administrative hearing before Appeals.
If the responsible person fails to pay the TFRP after notice and demand, the amount becomes a lien in favor of the United States upon that person’s property and rights to property. The IRS may then file an NFTL to protect the priority of the lien against certain third parties. Once the IRS files an NFTL, it must notify the person of the filing and of the person’s right to a CDP hearing to appeal the NFTL filing.
Standard of Review
In general, a taxpayer must raise an issue at a CDP hearing to preserve it for the Tax Court’s review. In reviewing a determination under IRC § 6330(c)(2), the Court considers only issues that the taxpayer properly raised during the CDP hearing. Therefore, “[a] taxpayer is precluded from disputing the underlying liability [in this Court] if it was not properly raised in the CDP hearing.”
A taxpayer during a CDP hearing does not properly raise an issue, including an issue concerning his underlying tax liability, if he “fails to present to Appeals any evidence with respect to that issue after being given a reasonable opportunity to present such evidence.” A taxpayer cannot challenge an underlying liability in a CDP hearing, and this Court cannot review that liability, if the taxpayer had an earlier opportunity to dispute the assessment of that liability.
Before TFRPs can be assessed, the IRS must generally notify the taxpayer in writing by mail to the taxpayer’s last known address advising that TFRPs will be assessed. Letter 1153 satisfies this preliminary notice requirement. The IRS issued the petitioner a Letter 1153, and the petitioner does not dispute receiving Letter 1153 or signing the accompanying PS Form 3811.
The Letter 1153 in the present case satisfied the notice requirement of IRC § 6672. The assessment of the TFRPs against the petitioner was thus valid. The Tax Court may therefore consider the merits of that assessment—i.e., the underlying liabilities—provided that Mr. Kazmi was not statutorily precluded from raising them during his CDP hearing. The trouble for Mr. Kazmi—he was so precluded…
A Letter 1153 also provides a taxpayer with an administrative means for protesting a proposed assessment of TFRPs. In the specific context of CDP cases involving TFRPs, this Court has held that, for purposes of IRC § 6330(c)(2)(B), a taxpayer has an “opportunity” to dispute his underlying tax liability for a TFRP when he receives Letter 1153. Thus, if the taxpayer receives Letter 1153 but fails to challenge the underlying tax liability at the Appeals conference, then the taxpayer is precluded by IRC § 6330(c)(2)(B) from challenging the underlying tax liability in a subsequent CDP hearing. This is the circumstance in which Mr. Kazmi now finds himself.
The petitioner does not dispute that he failed to challenge the Letter 1153. Instead, he asks the Tax Court to overturn its previous holdings that Letter 1153 constitutes a prior opportunity. His argument is that Letter 1153 does not provide a prior opportunity under IRC § 6330(c)(2)(B) because the IRS’s denial of a Letter 1153 appeal does not result in an opportunity for the taxpayer to seek judicial review before the Tax Court.
The petitioner is correct to the extent that, if a taxpayer appeals Letter 1153 and the IRS denies the appeal, the taxpayer cannot at that stage challenge the denial of the appeal in the Tax Court. This is so because the Tax Court is a Court of limited jurisdiction. It has only the jurisdiction which is conferred on it by statute. But the Tax Court’s lack of jurisdiction does not necessarily mean that a taxpayer lacks any opportunity for judicial review.
This Court addressed an argument similar to Mr. Kazmi’s in Bishay v. Commissioner. In that case, the Court noted that
The lack of opportunity for judicial review after the Letter 1153 proceeding does not severely prejudice the taxpayer because, as we have previously noted, “the IRC § 6672 penalty is divisible, so that a taxpayer may litigate the penalty after having paid an amount corresponding to the tax withheld from a single employee.” Thus, the taxpayer whose liability is upheld in the Letter 1153 proceeding can make a small “token” payment towards the IRC § 6672 penalty, file a refund claim with the IRS, and, if the refund claim is denied, file a refund suit in the Federal District Court or the Court of Federal Claims.
This Isn’t ‘Nam, Mr. Kazmi. There are Rules.
The petitioner’s failure to challenge the Letter 1153 thus precluded him from challenging his underlying liabilities in the CDP hearing or in the Tax Court proceeding. In so holding, the Tax Court ever so cordially lets the petitioner down slowly:
At this time, the Court declines to overturn its previous holdings that a properly mailed and received Letter 1153 constitutes a prior opportunity.
- Dixon v. Commissioner, T.C. Memo. 2019-79, at *16 (citing Jarrett v. Commissioner, T.C. Memo. 2018-73, at *31). ↑
- Jarrett, T.C. Memo. 2018-73, at *31 (citing Pollock v. Commissioner, 132 T.C. 21, 25 n.10 (2009)). ↑
- IRC § 7501(a). ↑
- Cashaw v. Commissioner, T.C. Memo. 2021-123, at *9 (citing Mazo v. United States, 591 F.2d 1151, 1154 (5th Cir. 1979)). ↑
- See Newsome v. United States, 431 F.2d 742, 745 (5th Cir. 1970). ↑
- Mazo, 591 F.2d at 1154. ↑
- IRC § 6671(a). ↑
- See generally Smith v. Commissioner, 133 T.C. 424, 428-30 (2009) (providing an overview of assessable penalties); Williams v. Commissioner, 131 T.C. 54, 58 n.4 (2008) (noting that assessable penalties fall outside of the deficiency notice regime of IRC § 6212 to IRC § 6214 and thus fall outside this Court’s deficiency jurisdiction). ↑
- See Blackburn v. Commissioner, 150 T.C. 218, 223 (2018). ↑
- IRC § 6671(b). ↑
- Mason v. Commissioner, 132 T.C. 301, 321 (2009) (citing Logal v. United States, 195 F.3d 229, 232 (5th Cir. 1999), and Barnett v. IRS, 988 F.2d 1449, 1454 (5th Cir. 1993)). ↑
- Mazo, 591 F.2d at 1156. ↑
- United States v. Kim, 111 F.3d 1351, 1362-63 (7th Cir. 1997). ↑
- IRC § 6672. ↑
- Newsome, 431 F.2d at 745. ↑
- Id. ↑
- Id. at 747. ↑
- Mazo, 591 F.2d at 1155. ↑
- Gustin v. United States, 876 F.2d 485, 492 (5th Cir. 1989). ↑
- IRC § 6672(b)(1); IRC § 6212(b); Mason, 132 T.C. at 322. ↑
- See Mason, 132 T.C. at 317-18, 322. ↑
- IRC § 6672(b)(3). ↑
- IRC § 6672(b)(3)(A). ↑
- IRC § 6321. ↑
- IRC § 6323. ↑
- IRC § 6320(a) and (b). ↑
- Perkins v. Commissioner, 129 T.C. 58, 63 (2007); Magana v. Commissioner, 118 T.C. 488, 493 (2002); Treas. Reg. § 301.6330-1(f)(2), Q&A-F3. ↑
- Treas. Reg. §§ 301.6320-1(f)(2), Q&A-F3, 301.6330-1(f)(2), Q&A-F3; see Giamelli v. Commissioner, 129 T.C. 107, 115 (2007). ↑
- Thompson, 140 T.C. at 178. ↑
- Treas. Reg. § 301.6320-1(f)(2), Q&A-F3; see Pough v. Commissioner, 135 T.C. 344, 349 (2010). The taxpayer must also raise the issue in his petition to this Court. Rule 331(b)(4) (“Any issue not raised in the assignments of error shall be deemed to be conceded.”). ↑
- IRC § 6330(c)(2)(B); Mason, 132 T.C. at 317. ↑
- IRC § 6672(b)(1); Mason, 132 T.C. at 322. ↑
- Id. ↑
- See id. ↑
- See Mason, 132 T.C. at 317-18. ↑
- See § 7442; Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392, 396 (1971). ↑
- Burns, et al., 57 T.C. at 396; see also IRC § 7442. ↑
- T.C. Memo. 2015-105, aff’d without published opinion, 2017 WL 11453028 (1st Cir. 2017). ↑
- See Weber v. Commissioner, 138 T.C. 348, 363 n.12 (2012) (citing Davis v. United States, 961 F.2d 867, 870 n.2 (9th Cir. 1992), and Bland v. Commissioner, T.C. Memo. 2012-84). ↑
- Bishay, T.C. Memo. 2015-105, at *17 n.9. ↑