Procedure & Administration
The Fifth Circuit held that for purposes of the starting date of the limitation period for filing a Tax Court petition, a notice of determination that is returned to the IRS as undeliverable is null and void if the IRS did not exercise reasonable diligence to determine the taxpayer’s correct address.
Background
After receiving an assessment for over $660,000 in unpaid taxes, Pamela Terrell filed with the IRS Form 8857, Request for Innocent Spouse Relief, dated September 20, 2006, listing her then-current address (in North Richland Hills) on the form. Soon after filing the Form 8857, she moved to a new address (in Dallas). Terrell claimed that she mailed a change of address form to the IRS, but she provided no evidence that she did.
On December 13, 2006, the IRS mailed a confirmation of receipt of Form 8857 to the North Richland Hills address, but the Post Office returned the letter to the IRS as undeliverable on January 24, 2007. On February 7, 2007, the IRS mailed to the same address two preliminary notices of determination denying relief, informing Terrell that she had 30 days to request a review of the determination from IRS Appeals. On February 28, 2007, the Post Office returned the preliminary notices to the IRS as undeliverable.
Having not received a request for review from Terrell, the IRS mailed a Notice of Determination on April 6, 2007, to the North Richland Hills address, denying Sec. 6015 relief and stating that Terrell had 90 days to petition the Tax Court for review (the first notice). On April 11, 2007, Terrell filed her 2006 tax return, listing the Dallas address as her current address. On May 7, 2007, the Post Office returned the notice to the IRS as undeliverable. After receiving the returned notice, the IRS searched its database, found the Dallas address, and remailed the notice to that address on May 14, 2007. The notice the IRS sent to the Dallas address was identical to the one sent on April 6, 2007, and also listed April 6, 2007, as the date of determination of Terrell’s claim. Terrell received the notice in mid-May and filed a petition with the Tax Court on July 13, 2007.
The IRS moved to dismiss the petition for lack of jurisdiction because Terrell had not filed it within 90 days after April 6, 2007. Terrell responded that the 90-day limit began to run only in mid-May when she actually received the notice or, in the alternative, that the Tax Court should exercise its equitable power to allow her petition. After a hearing, the Tax Court dismissed Terrell’s petition for lack of jurisdiction.
The Tax Court held that it was barred from hearing Terrell’s claim because her petition fell outside the 90-day limit of Sec. 6015(e). It ruled that Terrell had not demonstrated that the IRS did not send the first notice to her last known address, finding that the IRS acted with reasonable diligence to ascertain her last known address because, after the Post Office returned the first notice, the IRS searched its database, found Terrell’s current address, and sent the second notice. Thus, The Tax Court held that under the 90-day rule in Sec. 6015(e), Terrell had to file her petition by July 5, 2007, and because she did not file the petition until July 13, 2007, it lacked jurisdiction. Terrell appealed the decision to the Fifth Circuit.
The Fifth Circuit’s Decision
Terrell argued in the Fifth Circuit that the IRS did not mail the notice to her “last known address” because it had failed to conduct a “reasonably diligent” search for her address before mailing the notice. As a result, the 90-day limitation period for filing a petition in Tax Court did not begin until she received the second notice, making her petition timely and giving the Tax Court jurisdiction.
Reasonable diligence: The Fifth Circuit held that the Tax Court erred in finding that the IRS exercised reasonable diligence. The Tax Court’s decision about whether the IRS had met the standard was based on what the IRS did after it had mailed the first notice and the Post Office returned it. The Fifth Circuit found that the Tax Court instead should have focused on the IRS’s actions before it sent the first notice.
According to the court, under the reasonable diligence standard, when the IRS knows or should know at the time of mailing that the taxpayer’s address on file may no longer be valid because previous mailings have been returned, it must investigate further to determine the correct address before mailing any additional correspondence. Because the Post Office had returned letters the IRS had mailed to Terrell before it mailed the first notice, the IRS should have known that the address was not valid and should have tried to determine her correct address before mailing the first notice. Therefore, the IRS had not exercised reasonable diligence in determining Terrell’s correct address and the notice should not have been treated as mailed to her last known address.
Start of limitation period: Having determined that the IRS did not send the first notice to Terrell’s last known address, the Fifth Circuit considered on which date Terrell’s 90-day limitation period for filing a Tax Court petition began. The IRS argued that the court should apply the “no prejudice” rule, which the First, Second, Third, Sixth, Ninth, and Eleventh Circuits have espoused. Under this rule, despite failing to mail a notice of determination to a taxpayer’s last known address, the IRS satisfies the statutory notice requirement if the taxpayer actually receives the notice without delay prejudicial to his or her ability to petition the Tax Court. According to the IRS, despite not receiving the first notice, Terrell still had ample time after receiving the second notice to respond to the notice within 90 days of the mailing of the first notice.
Terrell argued that the court should apply the “actual notice” rule, which the Fourth, Seventh, and D.C. Circuits have adopted. Under this rule, when the IRS fails to send the notice to the taxpayer’s last known address but the taxpayer receives subsequent actual notice, the limitation period begins to run on the date the taxpayer receives actual notice. Under this rule, the 90-day period began when Terrell received the second notice the IRS sent.
The Fifth Circuit, however, held that because the IRS not only failed to send the first notice to Terrell’s last known address but also had the notice returned as undeliverable, the first notice as sent was null and void. Therefore, the court based its decision on whether Terrell timely filed her Tax Court petition on the date that the IRS sent the second notice, because this was the date that the IRS sent a valid notice of determination to Terrell. Applying this rule, Terrell had filed her petition timely, so the Tax Court had erred in dismissing her case.
Reflections
As the Fifth Circuit pointed out, the no-prejudice rule could not apply in the present case because the rule concerns only situations in which the original notice sent by the IRS, despite being delayed by IRS error, is actually received by the taxpayer. Therefore, the court said it was not deciding in the present case whether the Fifth Circuit would adopt the no-prejudice rule or the actual-notice rule in situations in which a taxpayer actually received the first notice the IRS sent.
Terrell , No. 09-60822 (5th Cir. 11/1/10)
