Preserving Judicial Review for Trust Fund Recovery Penalties
Taxpayers who are assessed trust fund recovery penalties need to take note of the U.S. Tax Court’s recent decision in Anderson v. Commissioner, T.C. Memo. 2016-219. The decision highlights a potential foot fault they may make when trying to resolve their trust fund recovery penalties at the IRS administrative level.
Facts and Procedural History
The facts and procedural history for the case are as follows:
- The taxpayer was a partner in a law firm.
- The IRS assessed trust fund recovery penalties against him when the law firm’s employment taxes were not paid over to the IRS.
- The IRS issued the taxpayer the equivalent of a 30-day letter for several of the tax periods (the trust fund recovery penalty is proposed in a 60-day letter, a Letter 1153).
- In response, the taxpayer filed a protest to contest his liability for the penalties.
- Appeals closed the case and the IRS issued a levy notice to collect the unpaid penalties.
- The taxpayer requested a CDP hearing.
- The CDP hearing was suspended pending a criminal investigation.
- During this time, the taxpayer submitted an offer in compromise, doubt as to liability, contending that he was not a responsible person for the penalties.
- Appeals eventually closed the CDP hearing case and rejected the offer in compromise, without having a hearing.
- The taxpayer filed a petition with the court to have the case re-opened in Appeals.
The question before the court was whether the taxpayer could contest the liability in a CDP hearing and, by extension, in court.
An Opportunity to Contest the Liability
Section 6330 permits a taxpayer to challenge the existence or amount of his underlying liability in a CDP proceeding only if the taxpayer did not receive a notice of deficiency or otherwise have a prior opportunity to contest the liability. This begs the question as to what qualifies as an opportunity to contest the liability when it comes to the trust fund recovery penalty? The U.S. Tax Court addressed this in Anderson by considering several prior cases.
Challenging the Liability for the Penalty
In Siquieros v. United States, 94 A.F.T.R.2d (RIA) 2004-5518 (W.D. Tex. 2004), the taxpayer was assessed trust fund recovery penalties. The taxpayer submitted an offer-in-compromise, doubt as to liability. The taxpayer then submitted a CDP hearing request and asked the court to review the case when the hearing was not successful. In Siquieros, the court concluded that the taxpayer did not have a prior opportunity to contest her liability, so the taxpayer in that case was allowed to raise the issue in the CDP hearing and, as a result, in court. This decision was handed down by a U.S. District Court in Texas and affirmed by the Fifth Circuit Court of Appeals.
Challenging the Amount of the Tax
The U.S. Tax Court has weighted in on this issue as well. It did so in Baltic v. Commissioner, 129 T.C. 178 (2007), in which the taxpayer received a notice of deficiency for an income tax and he filed an offer in compromise, doubt as to liability, as part of a CDP hearing. In Baltic, the U.S. Tax Court concluded that the taxpayers were challenging the amount of the tax during the CDP hearing and by submitting an offer, not their liability for the tax vs. the liability of other persons. So the court concluded that the taxpayer could not raise the issue in the CDP hearing or, as a result, in court.
In Anderson, without explanation, the U.S. Tax Court cited two of its prior opinions for the proposition that a challenge to the liability for the trust fund recovery penalty is a challenge to the amount of the penalty. It then cites its Baltic opinion to conclude that the taxpayer in Anderson was able to contest his liability for the penalty and he did so prior to the CDP hearing.
So according to the U.S. Tax Court, a taxpayer cannot challenge his responsibility for trust fund recovery penalties and not contest the amount of the penalty, and thereby preserve his right to a CDP hearing for the liability and for the U.S. Tax Court to have jurisdiction over the IRS’s decisions for the penalty. The law is not settled on this issue, however. This is particularly true for taxpayers who are in the Fifth Circuit.
Taxpayers who are assessed trust fund recovery penalties should take note of the Anderson case. They should be very clear in their protests and in any offer in compromises that they submit, that they are only contesting the liability for the penalties as a responsible person, and not the amount of the penalties themselves. This may help preserve their CDP hearing rights and, ultimately, the right to have the U.S. Tax Court review the liability.