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McNamee v. Commissioner (T.C. Memo. 2020-37)

On March 18, 2020, the Tax Court issued a Memorandum Opinion in the case of McNamee v. Commissioner (T.C. Memo. 2020-37). The issue presented in McNamee was whether the petitioner was liable for 17 preparer penalties or whether the penalties had been assessed improperly for want of a final administrative determination.

Background

Petitioner is a CPA, who prepared income tax returns for individual taxpayers. The IRS opened an examination to investigate the propriety of the returns he had prepared for (among other years) the taxable year 2009. IRS sent petitioner numerous (valid) Letters 1125 (30-day letters), with enclosed examination reports, explaining that it proposed to assess penalties with respect to the returns he had prepared for 18 taxpayers for 2009. For each return the IRS proposed to assess a $1,000 penalty under IRC § 6694(a) (unreasonable positions) and an additional $4,000 penalty under IRC § 6694(b) (willful or reckless conduct).

The Letters 1125 advised the petitioner of his appeal rights, and that if he did not appeal, the IRS would assess the penalties and begin collection. Petitioner requested an extension of time to protest the penalties, which the IRS granted. However, the statute of limitations on assessment in IRC § 6207(a) was close to running out, and the IRS asked the petitioner to execute a Form 872-D (Consent to Extend Time to Assess). Petitioner did not execute the Form 872-D.

Acting quickly, the IRS assessed 36 penalties (later abating 19) for 2009. Not dissuaded, the petitioner filed a protest within the extension of time granted by the IRS. Through some back and forth, Appeals sent the file back to Exam without technically making a “final administrative determination” regarding the assessment of the preparer penalties. See Treas. Reg. § 1.6694-4(a)(2).

In February 2014, the IRS issued the petitioner a Letter 3172 (Notice of Federal Tax Lien (NFTL) Filing and Right to a Hearing). The lien notice covered petitioner’s unpaid preparer penalties for 2009. A CDP hearing was requested and held in June 2014. During the CDP hearing, the petitioner contended the 2009 preparer penalties had been improperly assessed.

Stumped as to whether this was an appropriate challenge in a CDP hearing, Appeals balked at the CDP hearing, but in July 2014, the IRS informed the petitioner that liability challenges to return preparer penalties were not permitted during a CDP hearing. This was, of course, wrong, which, to the IRS’s credit, they later admitted. Appeals closed the case and issued a notice of determination sustaining the NFTL. Petitioner filed a petition with the Tax Court, though not until four months after the filing deadline. The Tax Court dismissed this initial case without a second thought.

Subsequent to the failed petition, the IRS issued a Letter 1085 (Final Notice of Intent to Levy and Notice of Your Right to a Hearing), which Letter 1085 covered the preparer penalties for 2009. Once again, at the resulting CDP hearing, the petitioner contended that the penalties had been improperly assessed.

Subsequent to the CDP hearing, the petitioner casually mentioned that he wanted $1m in damages from the IRS. The Tax Court observed that this argument (read: threat) was frivolous and in any event was not something that Appeals had jurisdiction to consider. See Tartt v. Commissioner, T.C. Memo. 2019-112, *8-*9; Broemer v. Commissioner, T.C. Memo. 2009-72.

Notwithstanding the frivolousness, the threat did not, apparently, sit well with the settlement officer, and she closed the case and issued a notice of termination. Because of the government shutdown (December 2018 – January 2019), the second petition was returned as undeliverable. Per the Tax Court’s instructions, petitioner properly resubmitted the second petition, and the Tax Court considered it timely filed.

Underlying Tax Liabilities and Penalties

Petitioner does not contest his underlying liabilities (regarding 2001-2016 returns), but he does (rather vehemently) contest his liability for the IRC § 6694 preparer penalties, which are assessable penalties and are not subject to deficiency proceedings. See Smith v. Commissioner, 133 T.C. 424, 428 & n.3 (2009). Petitioner was entitled to challenge his liability for these penalties at the CDP hearing unless he had had a prior opportunity to dispute them. See IRC § 6330(c)(2)(B); Treas. Reg. § 301.6330-1(e)(3), Q&AE2.

A taxpayer will be deemed to have had a prior opportunity to dispute a liability if he participated in an earlier CDP hearing, received a notice of determination regarding the same liability, and was entitled to petition the Tax Court for review of that determination. Bell v. Commissioner, 126 T.C. 356, 358-359 (2006). As the Tax Court explained in Bell, the statutory preclusion is triggered by the opportunity to contest the underlying liability, even if the opportunity is not pursued. Id. at 358.

Two Wrongs Make an Underlying Liabilities Precluded

In the first CDP hearing, the petitioner properly raised his liability for penalties. However, the IRS improperly concluded that he was not permitted to do so. The Tax Court observes that his remedy was to file a petition to challenge the underlying liability to the penalties, which he did not (at least, not timely). Because he failed to take advantage of a prior opportunity to contest the penalties, the petitioner’s underlying liability for the penalties was not properly before Appeals during the second CDP hearing, and he was thus precluded from advancing that challenge in the Tax Court. See Bell, 126 T.C. at 358-59.

No Final Administrative Decision NOT Abuse of Discretion

Because Appeals never completed the review of his file, and never issued a final administrative determination (which the petitioner contends is a prerequisite for assessment of penalties), the petitioner contends that the IRS did not verify that the penalties were properly assessed. The Tax Court makes quick work of this contention, stating plainly that a final administrative determination is not “an absolute prerequisite” to assessment of return preparer penalties. The governing regulation provides that the taxpayer will have the opportunity to receive a final administrative determination before assessment, unless the period of limitations (if any) under IRC § 6696(d) may expire without adequate opportunity for assessment. See Treas. Reg. § 1.6694-4(a)(2).

The IRM (as written at the time of the litigation) instructed examining agents that appeals of return preparer penalties should not be submitted to the Appeals Office, in a pre-assessment posture, if fewer than 120 days remained in the period of limitations. IRM 8.11.3.2. If fewer than 120 days remained in the period of limitations, examiners were instructed to assess the penalties and afford the taxpayer post-assessment appeal rights. Id. The IRS has since revised its policy so that a case is not submitted to the Appeals Office unless a full year remains in the period of limitations. See IRM 8.11.3.3.

In the present case, the IRC § 6694(a) penalties at issue arose from returns for 2009, which were due to be filed (absent an agreed upon extension) on April 15, 2010. See IRC 6072(a). The 30-day letters proposing the preparer penalties were issued on March 5, 2013, and the IRS granted petitioner’s request for an extension of time, until April 19, 2013, to file his protest with the Appeals Office. It was only after the IRS granted the extension that it asked for one of its own regarding assessing the penalties.

Petitioner refused to agree to any extension of the period of limitations. In hindsight, this was a boneheaded move by the IRS, who should have asked for (read: demanded) an extension for assessment prior to giving the petitioner an extension of time to file until after the statute of limitations expired. In the end, the IRS was not penalized, because the petitioner was dilatory, too, but forshame nonetheless.

Under these circumstances, the Tax Court concluded, the examining agent reasonably concluded, with respect to the penalties proposed under IRC § 6694(a), that the period of limitations under IRC § 6696(d) would expire without adequate opportunity for assessment if the IRS did not act immediately. Treas. Reg. § 1.6694-4(a)(2).

As such, the IRS was not required to issue a final administrative determination on petitioner’s appeal before assessing those 17 penalties. Treas. Reg. § 1.6694-4(a)(2). However, when the penalties, such as those under IRC § 6694(b) (willful or reckless conduct in preparing returns), have no statute of limitations for assessment, the time crunch excuse not to go through the necessary channels of IRS review is not available. Accordingly, the IRS agreed to abate the penalties assessed under IRC § 6694(b).

Original opinion: (T.C. Memo. 2020-37) McNamee v. Commissioner

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