Ubiquitous in filing instructions given to tax clients are the words "send by certified mail." In a recent case, the Tax Court turned this around and examined mailing instructions that apply to IRS employees. Having access to those instructions from the IRS's "playbook" helped a former pro football player win his case.
Though electronic tax filings become more common every year, taxpayers still submit hard-copy filings for a variety of reasons. Sec. 7502 points to the postmark as proof of timely filing. However, if the postmark is illegible, or if it bears a timely date but the IRS receives the mailing later than it ordinarily would, the taxpayer bears the burden of proof of timely filing. Under Regs. Sec. 301.7502-1(c)(2), one way this burden can be satisfied is by the postmark date on a U.S. Postal Service (USPS) (or IRS-approved private delivery service) receipt for certified mail.
The IRS follows a similar practice for its own mailings. Sec. 6330(a)(2) requires that, prior to filing a levy on a taxpayer's property or right to property, the Service must notify the taxpayer of the right to a Collection Due Process (CDP) hearing. The notice must be given to the taxpayer in person; left at the dwelling or usual place of business of the taxpayer; or sent by certified or registered mail, return receipt requested, to the taxpayer's last known address. The IRS lists such mailings in its internal database, the Integrated Data Retrieval System (IDRS), which can be accessed by employees. But according to the IRS's administrative instructions in Internal Revenue Manual (IRM) Section 22.214.171.124.2.1.1(6), if the taxpayer alleges "an irregularity," the proof of mailing is USPS Form 3877, Firm Mailing Book for Accountable Mail, or equivalent IRS-certified mail list, that bears the initials of a USPS employee or a USPS date stamp for the article mailed. This mailing record figured in the outcome of Kearse, T.C. Memo. 2019-53.
The taxpayer, Jevon Kearse, is a former NFL football player. After a successful career at the University of Florida, he was selected in the first round of the 1999 NFL draft, and during 1999 to 2010 he played for the Tennessee Titans and Philadelphia Eagles.
In his 2010 Form 1040, U.S. Individual Income Tax Return, Kearse claimed a deduction that the IRS disallowed. On May 11, 2012, the IRS mailed him a notice of deficiency. Having received no response to the notice, on Dec. 4, 2012, the IRS filed a Notice of Federal Tax Lien (NFTL) for unpaid tax and sent Kearse a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320.
Kearse filed a request for a CDP or equivalent hearing, together with an offer in compromise (doubt as to liability) of $1. The offer in compromise claimed a lack of proper mailing and nonreceipt of the May 11, 2012, notice of deficiency.
In response to the alleged lack of proper mailing, the Appeals officer verified mailing of the notice of deficiency in the IDRS but could not find the Form 3877. Following the CDP hearing with the taxpayer's representative, the Appeals officer sent a notice of determination, which stated that legal and procedural requirements with respect to the NFTL had been met and sustained the lien. In response, Kearse submitted a petition in Tax Court challenging the notice of determination on the grounds the IRS erred in asserting that the May 11, 2012, notice of deficiency was properly mailed to him, that he did not receive it, and that the IRS erred in its determination of his underlying tax liability.
The Tax Court ordered the IRS to address whether the Appeals officer properly verified that the notice of deficiency was mailed to Kearse. The IRS responded that the mailing of the notice of deficiency was verified in the IDRS but stipulated that the Form 3877 could not be found. The IRS argued that the IRM allows Appeals officers to rely on the IDRS alone to verify mailing. The court, however, noted that the IRM further states that where a taxpayer has, as here, "alleged an irregularity," Appeals officers must also review a copy of the notice of deficiency and properly executed Form 3877 (or equivalent IRS-certified mail list). Therefore, the court held, the IRS failed to prove that the Appeals officer properly verified the mailing, an abuse of discretion.
After trial, the IRS provided a copy of the Form 3877, which had been found. Because the IRS had not asked to be relieved from its prior stipulation that it could not find the form, and noting that stipulations cannot be changed except in extraordinary circumstances, the court refused to relieve the IRS from the binding effect of the stipulation.
In acting against the taxpayer before locating the document that was required by its own administrative procedures, the IRS was caught offside by the Tax Court. The case offers several takeaways for practitioners.
Verify that the IRS has followed proper mailing procedures
Practitioners may want to advise clients to retain transmittal envelopes from notices of deficiency so that practitioners can verify proper mailing. As was the case for Kearse, the lack of a proper method of transmittal could give rise to a cause of action.
Clients should advise the IRS of address changes
Practitioners should advise clients to file IRS Form 8822, Change of Address, if they move, to receive notices and refund checks on a timely basis. The IRS updates the last known address of taxpayers when certain returns are filed and processed, and Rev. Proc. 2010-16 defines which filings are considered returns for this purpose. But if the interval is long between the move and the next applicable return filing and the IRS is not given notice, taxpayers might not receive IRS mailings for which they are held responsible.
Get the playbook
The IRM is available on the IRS website (irs.gov/irm).Practitioners may find it a helpful guide to understanding the administrative procedures that the IRS should follow in its interactions with taxpayers and practitioners. Knowing what plays your opponent must make can help you plan your own.
Linda Franks, CPA, is controller at B&Z Manufacturing Co. Inc. in San José, Calif. To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com.