On December 30, 2021, the Tax Court issued a Memorandum Opinion in the case of Pfetzer v. Commissioner (T.C. Memo. 2021-145). The primary issue presented in Pfetzer was whether the settlement officer failed to fulfill duty to verify that valid notices of deficiency were issued and mailed to taxpayer.
Held: You betcha…but the IRS still managed to lose.
Background to Pfetzer v. Commissioner
The petitioner was not a model taxpayer. In point of fact, the petitioner failed to file Federal income tax returns for 2004 through 2012. The IRS prepared substitutes for return pursuant to IRC § 6020(b), and it assessed tax for all nine years. Unfortunately for the IRS, the record does not include any notices of deficiency for these years. Consequently, the petitioner did not petition the Tax Court to challenge notices of deficiency for any of these years…because…well…there weren’t any.
In June 2016, after failing to pay the assessed tax deficiencies, the IRS sent a Notice of Federal Tax Lien to the petitioner. The In response, the petitioner timely submitted Form 12153, Request for a Collection Due Process or Equivalent Hearing, requesting an administrative hearing. On the Form 12153, the petitioner stated that he: (1) did not owe the asserted tax liabilities for 2010 and 2011, (2) wanted verification that the IRS performed the procedures required by law, and (3) wanted a face-to-face administrative hearing at the IRS office closest to him.
The assigned settlement officer requested that the petitioner submit returns for 2010 and 2011, and the petitioner politely declined. Further, he questioned the issuance of notices of deficiency for all the years in issue and alleged that he had never received any such notices. In April 2018, the IRS issued a Notice of Determination.
The Notice of Determination stated that the petitioner could not challenge the underlying tax liability for: (1) 2004 through 2008 because he had had a prior opportunity to contest the liabilities for each year when respondent previously issued a notice of intent to levy or (2) 2009 through 2012 because the IRS had issued notices of deficiency for those years.
The petitioner called bullshit and filed a Tax Court petition assigning error to the settlement officer’s alleged failure (1) to verify that all applicable administrative procedures required by law were followed and (2) to grant petitioner a face-to-face hearing at the nearest IRS office.
The IRS moved for summary judgment and produced “substitute” U.S. Postal Service Forms 3877, which I imagine were scrawled on a yellow legal pad by Felicia before she affixed one of her 137 stamps to the document. The IRS remanded the case to appeals to verify that all requirements of applicable law and administrative procedures had been met under IRC § 6330(c)(1).
In doing so, the Tax Court directed the IRS to the case of Hoyle v. Commissioner, in which the Tax Court held that when a taxpayer alleges that the notice of deficiency was not mailed, the Appeals officer must not only consult transcripts but must also examine “underlying documents”—such as the taxpayer’s return, a copy of the notice of deficiency, and a certified mailing list—to verify the proper mailing of the notice of deficiency under IRC § 6330(c)(1).
After much back and forth, Appeals issued a supplemental notice of determination in which the settlement officer stated that she relied on transcripts to ensure that assessments were made and a notice of the assessment had been sent to petitioner for each year in issue.
If you’re keeping score at home, this is not exactly what the Tax Court ordered.
The Stipulated Case
The case did not go to trial but was instead submitted under Tax Court Rule 122.
Critically, not included as stipulated exhibits were
- the IRS’s complete administrative record;
- any of the notices of deficiency; or
- any proofs of mailing to petitioner’s last known address.
Collection Due Process Checks and Balances
As part of the administrative hearing process, the settlement officer must verify that the requirements of any applicable law or administrative procedure have been met. Relevant to the Tax Court’s analysis is the requirement in IRC § 6213(a) that, with limited exceptions not applicable here, no deficiency may be assessed until after a notice of deficiency is mailed to the taxpayer.
The IRS may summarily assess an amount of tax shown on a return filed by a taxpayer but must wait 90 days after issuing a notice of deficiency before assessing a tax deficiency. If assessment of a deficiency is not preceded by a notice of deficiency as required by IRC § 6213(a), then the assessment is invalid as is any lien based on that assessment. Accordingly, the Tax Court has held that IRC § 6330(c)(1) requires the settlement officer, as a part of her review of an action to collect Federal tax, to verify that a valid notice of deficiency was issued to the taxpayer.
IRC § 6330(c)(1) does not require that the settlement officer review a particular document to satisfy the verification requirement. Generally, the settlement officer may rely on a Form 4340, Certificate of Assessments, Payments, and Other Specified Matters, or a transcript containing similar information.
However, when a taxpayer specifically alleges that he never received a notice of deficiency, a settlement officer may not rely solely on tax transcripts to verify that a notice has been issued and mailed to the taxpayer’s last known address. In such case, the settlement officer must examine “underlying documents in addition to the tax transcripts, such as the taxpayer’s return, a copy of the notice of deficiency, and the certified mailing list.”
In cases in which a copy of the notice of deficiency and a matching Form 3877 have been produced, the Court has found that the evidence of mailing was sufficient (if no contrary evidence suggests that the notice had not been mailed).
Verification not Challenge to Underlying Liability
The petitioner asserted during the administrative hearing and before the TC that the IRS failed to verify that a notice of deficiency was issued and mailed to the petitioner’s last known address for each tax year in issue. The IRS attempts to deflect this challenge by asserting that such a challenge relates to the underlying tax liability, which it argues that the petitioner cannot challenge.
The Tax Court was not buying what the IRS was trying to sell and held that proper verification is not a challenge to the underlying liability; it is a stand-alone requirement in IRC § 6330(c)(1) and is independent of the issues that may be considered under IRC § 6330(c)(2) (such as the taxpayer’s underlying tax liability).
In the present case, the IRS did not point to any evidence whatsoever in the record showing that the settlement officer examined underlying documents but rather has argued that her examination of the lien filing notice and the computerized tax transcripts satisfied the verification requirement in IRC § 6330(c)(1).
A Note on a Stipulation of Facts
The stipulated record did not include the notices of deficiency or Forms 3877. Under similar circumstances, the Tax Court has held that it was unable to determine that the settlement officer properly verified that the notices of deficiency were mailed to the taxpayer’s last known address as required under IRC § 6330(c)(1) and (3) and Hoyle. Without the notices of deficiency or Forms 3877 in the stipulated record, the Tax Court reached the same conclusion.
The Tax Court notes in a footnote that “[w]hile notices of deficiency for four of the years in issue (2009 through 2012) and matching Forms 3877 were attached to the [IRS’s] motion for summary judgment, those documents were not included in the stipulation of facts.” This is a colossal cockup on the IRS’s part, as the Tax Court is restricted to considering the stipulated evidence before it under Tax Court Rule 122. I think it’s fair to blame Felicia on this one.
- 131 T.C. 197, 205 n.7 (2008), supplemented by 136 T.C. 463 (2011). ↑
- See also IRC § 6320(c). ↑
- IRC § 6330(c)(1). ↑
- IRC §§ 6201(a), 6212(a), 6213(a); Jordan v. Commissioner, 134 T.C. 1, 12 (2010), supplemented by T.C. Memo. 2011-243. ↑
- Hoyle, 131 T.C. at 205. ↑
- Jordan, 134 T.C. at 12. ↑
- See Roberts v. Commissioner, 118 T.C. 365, 371 n.10 (2002), aff’d, 329 F.3d 1224 (11th Cir. 2003). ↑
- See Jordan, 134 T.C. at 13. ↑
- Hoyle, 131 T.C. at 205 n.7. ↑
- Id. (quoting Chief Counsel Notice CC-2006-19 (Aug. 18, 2006)). ↑
- See, e.g., Schlegel v. Commissioner, T.C. Memo. 2016-90; Garrett v. Commissioner, T.C. Memo. 2015-228; Spivey v. Commissioner, T.C. Memo. 2001-29, aff’d, 29 F. App’x 575 (11th Cir. 2001). ↑
- Hoyle, 131 T.C. at 200-03. ↑
- See, e.g., Kearse v. Commissioner, T.C. Memo. 2019-53; Rivas v. Commissioner, T.C. Memo. 2017-56 (stating that when the Appeals officer did not examine underlying documents to ascertain proper mailing of the notice of deficiency, he failed to fulfill a verification requirement under IRC § 6330(c)(1); but sustaining the determination on the basis of the record before the Court). ↑
- See Tax Court Rules 91(e), 122. ↑
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