Tax Court lacks jurisdiction because notice of deficiency was invalid

The Tax Court denied the IRS’s motion for summary judgment for lack of jurisdiction because the taxpayer’s petition was untimely filed but dismissed the case, holding that the notice of deficiency issued to the taxpayer was invalid because it was not mailed to the taxpayer’s last known address.

Facts: Keith Phillips had last filed a Form 1040, U.S. Individual Income Tax Return, in March 2004, listing his address as 75 Hazeltine Avenue, Youngstown, Ohio 44506.

From Jan. 26, 2010, to Jan. 26, 2017, Phillips was incarcerated, during which time he was injured, suffering a “permanent loss of nearly all vision in his right eye.” Phillips filed a civil lawsuit against the prison, receiving a $201,011 personal injury settlement in 2014.  He did not, however, file a federal income tax return for 2014.

In 2018, the IRS prepared a substitute for return reporting the settlement as income. The Service determined an income tax deficiency of $51,952, along with additions to tax for failure to timely file ($11,689), failure to timely pay ($11,689), and failure to pay estimated tax ($933).  It issued a notice of deficiency to Phillips, which it mailed to him at 157 Roslyn Drive, Youngstown, Ohio 44505 (the Roslyn address).

Phillips did not protest the notice of deficiency within 90 days.  The IRS then assessed the deficiency and additions to tax in February 2019.  After receiving no payment from Phillips, the IRS filed a federal tax lien against him in January 2020, mailing it to the Roslyn address, but Phillips did not request a Collection Due Process hearing or pay his outstanding tax liability. In May 2021, the IRS certified Phillips to the State Department as an individual owing a seriously delinquent debt, issuing him a CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the State Department, at 120 N. Richview Ave., Youngstown, Ohio 44509.

In response to that notice, Phillips filed a petition with the Tax Court asking for a review of the notice of deficiency and notice of certification, claiming that the personal injury settlement should be excluded from his income.

The IRS filed a motion to dismiss, claiming that Phillips failed to timely petition the Tax Court.  In a supplement to its motion, the Service claimed that the court lacked jurisdiction to hear the case, attaching a copy of the notice of deficiency along with U.S. Postal Service (USPS) Form 3877, Firm Mailing Book for Accountable Mail.  The IRS contended that Phillips’s address had been updated in accordance with the USPS National Change of Address (NCOA) database.

Phillips responded that he had never lived at the Roslyn address, instead claiming that It was the address of his ex-wife and of his son, who shares the same name.

Issues: Generally, the Tax Court noted, whether it has jurisdiction over a case seeking a redetermination of a notice of deficiency depends on the issuance of a valid notice of deficiency and the timely filing of a petition.  A taxpayer generally may file a petition challenging the IRS’s determination in a notice of deficiency with the Tax Court 90 days after the notice is mailed to the taxpayer (Secs.  6212 and 6213(a)).  But if the notice of deficiency specifies a date to file greater than 90 days after the notice’s date, then the deadline to file the petition is extended to that later date (Nutt, 160 T.C. No.  10 (2023)).

Both parties agreed that the deadline for Phillips to file a petition with the court was Dec. 24, 2018, which Phillips did not meet.

Phillips, however, argued that he never received the notice of deficiency because it was mailed to the Roslyn address.  He further contended that he did not submit a USPS change-of-address request in or around 2010 treating the Roslyn address as his mailing address.

The court interpreted Phillips’s contention to be a challenge to the validity of the notice of deficiency.  The IRS asserted that the notice was mailed to Phillips’s last known address, which “started the clock” on his 90- day window to file a Tax Court petition.

As the Tax Court explained, it is not mandatory that the notice of deficiency be mailed to the taxpayer’s last known address, but the last known address serves as a “safe harbor address” to which the notice can be sent.  If the IRS takes advantage of this safe harbor, then the notice “shall be sufficient,” (Sec. 6212(b)(1)) and whether the taxpayer actually receives the notice is immaterial.  If the notice is mailed to the wrong address but the taxpayer receives the actual notice in time to file a petition with the Tax Court, the notice of deficiency is valid even though it is improperly addressed.

The main issue in this case, though, was whether the notice of deficiency was mailed to Phillips’s last known address within the meaning of Sec.  6212.  The Internal Revenue Code does not specifically define “last known address.” However, under Regs.  Sec.  301. 6212-2(a), a taxpayer’s last known address is presumptively the address appearing on the taxpayer’s most recently filed and properly processed federal tax return.  If the taxpayer provides “clear and concise notification” of a change of address, the IRS will update the taxpayer’s last known address.

Regs. Sec.  301.6212-2(b)(2) provides that the IRS will update a taxpayer’s last known address to that accumulated and maintained in the NCOA database.  Change-of-address information that a taxpayer provides to a Third party, such as another government agency, is not clear and concise notification of a different address for determining a taxpayer’s last known address under the regulations (Regs.  Sec.  301.6212-2(b)(1)). The courts have treated the change-of-address form from the USPS as clear and concise notification.  A taxpayer’s last known address will be updated if “the taxpayer’s name and last known address in the IRS records match the taxpayer’s name and old mailing address contained in the NCOA database” (Regs.  Sec.  301.6212-2(b)(2)(i)).

The IRS usually relies on the last-known-address safe harbor to show the validity of a notice of deficiency.  Usually, the IRS will send a notice of deficiency to the address on the most recently filed tax return.  The taxpayer will then argue that it was not sent to their last known address, requiring the taxpayer to provide documentary evidence that they provided clear and concise notice by submitting a change-of-address form (see, e.g., Gyorgy, 779 F.3d 466 (7th Cir.  2015)).  However, in Phillips’s case, the court noted that the parties’ arguments were the “opposite of what is typical” for this issue.  The IRS contended that there was clear and concise notification of a change of address, while Phillips argued that he “neither lived at the Roslyn address nor submitted the USPS change-of-address form.”

Generally, in a last-known-address dispute, the burden of proof falls on the taxpayer to show that they submitted clear and concise notification to the IRS of a change of address.  However, because Phillips did not have access to information that would allow him to prove that the IRS did not receive an NCOA notification or the information on the NCOA notification did not match the information in internal IRS records, the court placed the burden of proof on the IRS to show that it properly determined Phillips’s last known address by relying on the “alleged NCOA Notification.”

With the burden of proof allocated to the IRS, the Tax Court analyzed whether, under the three-step framework routinely used in Collection Due Process cases, the IRS had shown it had properly mailed the notice of deficiency to the taxpayer.  Under this framework, the IRS’s meeting of its initial burden may be carried with the presumption of official regularity, under which it is presumed that a public officer, absent evidence to the contrary, has properly discharged that person’s official duties in accordance with proper procedure.  If the initial burden is met with this presumption, the burden shifts to the taxpayer to demonstrate any irregularities in the procedure that rebut the presumption.  If the taxpayer demonstrates any such irregularities, the IRS has the burden of production to show that the notice was properly mailed.

In Phillips’s case, the IRS satisfied its initial burden with the presumption of official regularity, assuming that the IRS properly compared the NCOA notification With Phillips’s name and address recorded in its Integrated Data Retrieval System (IDRS).

Moving to the second step, the court found that Phillips could rebut the presumption through gcredible testimony or other competent evidenceh showing irregularities in the processing of the NCOA notification; however, self-serving testimony alone would not be enough.  In addition to providing testimony that he did not file a change-of-address form, Phillips also provided additional corroborating evidence that he was incarcerated when the IRS processed the USPS change-of-address form.  This, according to the court, demonstrated “irregularity in the matching process,” thereby rebutting the presumption of official regularity and shifting the burden of production back to the IRS to show that it complied with the regulations in updating Phillips’s last known address.

In the third step, the Tax Court focused on whether the IRS had provided “competent and persuasive evidence” of compliance with the regulations by updating Phillips’s last known address in its system.  As evidence of compliance with the regulation, the IRS provided the Tax Court with two transcripts from the IDRS.

The Tax Court found that the two transcripts, however, contained “no information relating to the process of matching [Phillips’s] information to the NCOA Notification in 2010, only the results of such process,” and there were inconsistencies between them.  Thus, the court found the transcripts were not competent and persuasive evidence of the IRS’s compliance.  With the IRS providing no additional evidence on the issue, the court held the Service had not carried its burden to show compliance with the regulation.

Holding: Having found the IRS had not proved it complied with the regulation with respect to the notice of deficiency it sent to Phillips, the Tax Court held the notice was invalid; therefore, the court lacked jurisdiction to hear the case.

The court’s decision, however, may not be the last word on the alleged deficiency.  A footnote stated that nothing in the opinion “should be construed as limiting [the IRS’s] ability to issue [Phillips] a new notice of deficiency for 2014,” assuming it is properly mailed to his last known address.

∎ Phillips, T.C. Memo.  2024-44 .  

— John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, and Matthew Geiszler, Ph.D., is a lecturer in accounting in the Brooks School of Public Policy, both at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.