Sometimes the IRS makes a mistake. Taxpayers are supposed to receive a notice of deficiency for tax liability before an assessment so they have an opportunity to dispute their tax liability, but sometimes taxpayers simply don’t receive this notice. In that case, the Internal Revenue Code affords those taxpayers an opportunity to challenge the merits of their tax assessment in a Collection Due Process (CDP) hearing.
The remedy being referred to here is provided under IRC Section 6330(c)(2), which states that a person may raise challenges to the existence or amount of the underlying tax liability for any tax period at the hearing if they failed to receive a notice of deficiency for tax liability or did not have a chance to dispute such tax liability.
For example, suppose a taxpayer failed to receive a notice of deficiency or did not otherwise have a prior opportunity to dispute their tax liability. This taxpayer may request Appeals to determine the underlying tax in a collection due process hearing.
Underlying Tax Liability
What is an underlying tax liability? It is the total amount of tax, which includes interest and penalties assessed for a particular tax period, including tax assessed under the deficiency procedures, tax reported on a tax return, or a combination of both.
Requirements for the Consideration of the Merits of Tax at Issue
Appeals has the discretion to consider the merits of a taxpayer’s liability. It is not obligated to do so if the taxpayer received a notice of deficiency or otherwise had a previous opportunity to dispute the liability.
Receipt of Notice of Deficiency
Issuing the notice of deficiency to a taxpayer’s last known address is not enough to bar “underlying tax liability” challenges in a CDP case. There must be sufficient proof that the taxpayer actually received the notice of deficiency or refused its delivery (actual receipt rule).
The IRS may rely on the presumptions of official regularity and delivery to meet the burden of proof in the absence of direct evidence. Once the presumption of official regularity and delivery arises, the taxpayer’s burden is shifted to rebut the presumption. The presumption may be rebutted if the notice of deficiency is returned to the IRS marked “undeliverable.” Also, if the notice is returned unclaimed, the presumption may be rebutted by credible testimony denying its receipt.
Suppose the notice of deficiency comes to your residences, but your adult son receives it. In this case, you may still show that you did not receive the notice of deficiency delivery (Lepore v Comm’r, TC Memo, 2013-135, at 4-5). However, if you fail to pick the notice of deficiency that is properly delivered, you may lose the chance to challenge the actual receipt of the notice (Sego, 114 TC 604 at 610; Lehmann, TC Memo. 2005-90, at 7).