Tax Court in Brief | Chavis v. Commissioner | Collection Due Process and Trust Fund Recovery Penalty

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Tax Litigation:  The Week of June 13th, 2022, through June 17th, 2022

Chavis v. Comm’r, 158 T.C. No. 8 | June 15, 2022 | Lauber, J. | Dkt. No. 11835-20L

Short Summary: During the relevant tax periods, Angela Chavis (“Petitioner”) and her then husband were associated with a C corporation—Oasys Information Systems, Inc. (“Oasys”). Oasys withheld payroll taxes from its employees’ wages; however, those taxes were not paid to the government. Accordingly, the IRS determined trust fund recovery penalties (“TFRPs”) against Petitioner and her then husband, pursuant to Section 6672. On July 13, 2015, the IRS issued to Petitioner a Notice of Trust Fund Recovery Penalty (Letter 1153) and attached Proposed Assessment of Trust Fund Recovery Penalty (Form 2751). Petitioner did not appeal the proposed assessment, and the IRS assessed the TFRPs against Petitioner on November 16, 2015. Petitioner and her husband divorced in 2016.

On May 16, 2019, the IRS issued to Petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing (Letter 3172). Petitioner timely requested a CDP hearing on May 29, 2019, and specifically requested currently not collectible status, innocent spouse relief, and/or lien withdrawal. Petitioner separately submitted a Request for Innocent Spouse Relief (Form 8857) in July 2019; however, the IRS denied the Petitioner’s request for failing to meet the eligibility requirements for innocent spouse relief under Section 6015.

On November 19, 2019, Petitioner participated in the CDP hearing with the assigned IRS settlement officer. The settlement officer stated that Section 6015 relief was not available for TFRP liabilities, Petitioner could not challenge her TFRP liabilities because she had a previous opportunity to challenge them, and Petitioner would need to provide a completed Form 433-A to determine if she was eligible for CNC status. Upon furnishing the Form 433-A, the settlement officer determined that she was not eligible and closed the case. Petitioner timely filed a petition with the Tax Court. The IRS subsequently filed a motion for summary judgment.

Key Issues:

  • (1) Whether Petitioner was entitled to challenge her underlying tax liability at the CDP hearing or in Tax Court?
  • (2) Whether Petitioner was eligible for innocent spouse relief under Section 6015?
  • (3) Whether the IRS abused its discretion in sustaining the collection action?

Primary Holdings:

  • (1) Petitioner was not entitled to challenge her underlying tax liability at the CDP hearing or in Tax Court because she had a prior opportunity to challenge the liability.
  • (2) Petitioner was not eligible for innocent spouse relief under Section 6015 because the tax liability did not arise from any liability shown on a joint federal income tax return.
  • (3) The IRS did not abuse its discretion in sustaining the collection action.

Key Points of Law:

  • A taxpayer may challenge the existence or amount of her underlying tax liability in a CDP case only if she “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute” it. I.R.C. § 6330(c)(2)(B).
  • A taxpayer has the opportunity to dispute her liability for a TFRP by filing an appeal with the IRS when she receives a Letter 1153. See Mason v. Comm’r, 132 T.C. 301, 317–18 (2009); Lewis v. Comm’r, 128 T.C. 48, 61 (2007).
  • In determining whether the settlement officer abused his/her discretion, the Tax Court considers whether he/she: (1) verified that the requirements of any applicable law or administrative procedure have been met; (2) considered any relevant issues petitioners raised; and (3) determined whether “any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of [petitioner] that any collection action be no more intrusive than necessary.” See R.C. §§ 6330(c)(3); 6320(c).
  • An individual who has made a joint return may elect to seek relief under Section 6015(b), and an individual who is eligible to elect the application of Section 6015(c) may elect to limit such individual’s liability for any deficiency with respect to such joint return. SeeR.C. § 6015(a)(1)-(2).
  • Section 6015(f) applies only to unpaid taxes or deficiencies arising from joint income tax returns. See Reg. § 1.6015-1(a)(1)(iii).
  • To be entitled to CNC status, a taxpayer must demonstrate that, on the basis of his/her assets, equity, income, and expenses, he/she has no apparent ability to make payments on an outstanding tax liability. See Foley v. Comm’r, T.C. Memo. 2007-242.
  • A settlement officer does not abuse his/her discretion when he/she employs local and national standards to calculate a taxpayer’s expenses and ability to pay. See Friedman v. Comm’r, T.C. Memo. 2013-44.
  • Withdrawal of a Notice of Federal Tax Lien is appropriate where: (1) the filing of such notice was premature or otherwise not in accordance with administrative procedures, (2) the taxpayer has entered into an installment agreement that renders the NFTL unnecessary, (3) withdrawal of the NFTL will facilitate the collection of the tax liability, or (4) withdrawal of the NFTL would be in the best interests of the taxpayer (as determined by the National Taxpayer Advocate) and the United States. See R.C. § 6323(j)(1).

Insight: Chavis serves as a warning to taxpayers facing potential TFRP assessments. Taxpayers should not ignore a Letter 1153 (and attached Form 2751) in the hopes of addressing the TFRP assessments later in a CDP hearing or in Tax Court. As the Petitioner here learned the hard way, taxpayers who are given the opportunity to dispute a tax liability (and don’t pursue it) cannot later challenge the tax liability in a CDP hearing. Moreover, taxpayers cannot simply make arguments in a CDP hearing or in Tax Court without providing documentation that supports their position. In particular, when evaluating collection alternatives, documentation is key. Finally, TFRP assessments are not subject to innocent spouse relief—even when they are related to a business a taxpayer operated with his/her (former) spouse.

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