Tuesday, December 29, 2009

More on Civil Penalties - the CDP Gambit

I recently blogged on the subject of "Civil Penalties in the Mix - the Qualified Amended Return Gambit." I discussed the use of the qualified amended return to pre-empt the IRS's ability to assert a penalty in a Son-of-Boss case where the taxpayer did not accept the Son-of-Boss settlement initiative. Today I write about another gambit to contest the IRS's penalty assertion in a Son-of-Boss case where the taxpayers did not enter the settlement initiative. Neither of these topics are technically federal tax crimes issues. Federal tax crimes practitioners do, however, often involve themselves with the civil procedure aftermaths or adjuncts of criminal investigations, and the Son-of-Boss transactions had criminal allegations swirling around them.

In Olesen v. Commissioner, T.C. Memo. 2009-307, the Olesens did not join the settlement initiative, so the IRS issued a notice of deficiency asserting the tax and the full bore § 6662(h) penalty. (It could have been worse had the IRS asserted the civil fraud penalty, although there is no reason to believe -- other than perhaps the Government's expansive imagination -- that any taxpayers, Olesen included, were actually guilty of fraud.) The Olesens did not pursue the qualified amended return gambit and did not file a petition in the Tax Court in response to the notice of deficiency. (There is some question as to whether they received the notice, but all the law requires for a valid notice of deficiency is that the notice be sent, not that it be received; hold that thought, though.) So, as happens when a notice of deficiency is not petitioned to the Tax Court, the IRS assessed the tax, penalty and interest, and in due course, after the taxpayers failed to pay, sent them a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, often referred to as a determination notice. This gave the Olesens a right to seek Collection Due Process ("CDP") review first in IRS Appeals and thereafter, if not satisfied, in the Tax Court. The Olesens pursued CDP review. Upon the CDP review, the Appeals Officer determined that the Olesens had received the notice of deficiency and therefore could not contest the underlying the underlying merits of the tax, penalty and interest in the CDP proceeding. § 6330(c)(2)(B) (Note here that, for CDP review of the merits, the taxpayer's receipt of the notice is required to foreclose CDP review of the merits, whereas the notice itself is valid when sent).

The immediate issue in the Tax Court was whether the Olesens could introduce evidence of the settlement initiative, going to the merits of the penalty. This raised the predicate issue of whether the Olesens were entitled to contest the merits of the penalty, an issue they had lost in the IRS Appeals CDP review.

The Tax Court held (i) that it had jurisdiction to "to verify the Appeals officer's determination that petitioners received the deficiency notice and are therefore precluded from challenging the underlying liability" and (ii) that notice of deficiency was (a) sent to the taxpayers and (b) received by them (despite their suggestions to the contrary). The Court's reasoning is crytic, so I quote (case citations omitted):

We agree with the Appeals officer that the record establishes that petitioners received a deficiency notice for 2001. Respondent issued the deficiency notice to petitioners' last known address as provided on their returns for 2004 and 2005. Furthermore, respondent's production of a certified mail list recording the mailing of the deficiency notice creates a strong presumption that the notice was mailed and was delivered or offered for delivery at the address to which it was sent. Receipt of the deficiency notice is presumed in the absence of clear evidence to the contrary. Petitioners failed to produce evidence to rebut the presumption that they received the deficiency notice. In fact, petitioners' counsel's concessions during the CDP hearing further support the Appeals officer's determination that petitioners received the deficiency notice. Accordingly, we find that petitioners received a deficiency notice for 2001 and are therefore precluded from introducing evidence of the Son of BOSS settlement initiative to challenge the underpayment penalty.
The take-away lessons from this and the earlier blog are: (i) don't ignore the notice of deficiency without a plan where the risks / costs are acceptable, (ii) if the Olesens thought the CDP review and Tax Court CDP case would be their "hail-Mary" equivalent of the qualified amended return, they were wrong, (iii) if, however, they knew the risks of the "hail-Mary" CDP gambit and the risks were tolerable, then perhaps it was not a bad try, although it befuddles me how they thought they were going to win the issue with the minimal showing made, and (iv) in all events, the taxpayers have a fall back way to contest the liability in the traditional refund suit, if needed using a variation of the partial payment gambit to avoid the strictures of the Flora prepayment rule, or perhaps even in a collection suit.

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