Taxpayer allowed to challenge underlying liability in CDP hearing

By James A. Beavers, CPA, CGMA, J.D., LL.M.

A taxpayer who received a letter proposing an assessment of trust fund recovery penalties (TFRPs), but who did not show up for an Appeals conference that he had requested because he had not received the letter scheduling the conference, had not had a prior opportunity to dispute his underlying TFRPs.


Rickey Barnhill was a director of Iron Cross Inc., a company that failed to pay over to the IRS employment withholding taxes for its employees for 10 quarters in 2010—2012.

The IRS sent Barnhill a Letter 1153, Trust Fund Recovery Penalty, proposing to assess TFRPs under Sec. 6672 against Barnhill as a responsible person for Iron Cross. Barnhill received the Letter 1153.

Barnhill filed an appeal with the IRS Office of Appeals challenging the determination. Appeals sent Barnhill a Letter 5157 scheduling a conference. The letter also described Barnhill's options for giving information and making arguments at the conference. Barnhill claimed that he never received the letter. Thus, he did not participate in the conference. Appeals rejected Barnhill's appeal, determined that he was a responsible person for Iron Cross, and assessed Sec. 6672 penalties against him.

The IRS then filed a Notice of Federal Tax Lien (NFTL) against Barnhill, and he timely requested a Collection Due Process (CDP) hearing before Appeals. At the CDP hearing, Barnhill tried to dispute his underlying liability for the penalties. Appeals rejected Barnhill's challenge, finding that, because Barnhill had received the Letter 1153, he had had a prior opportunity to challenge the liability in his TFRP appeal. Consequently, it issued a determination sustaining the NFTL filing.

Barnhill timely filed a petition in Tax Court for a review of Appeals' determination. He argued that he is not liable for the TFRPs because he was not a responsible person at Iron Cross, the amounts of the TFRPs were grossly overstated, and Appeals erred by concluding that he was not entitled to challenge his liability in the CDP hearing.

The IRS filed a motion for summary judgment, asserting, as had Appeals, that Barnhill's receipt of the Letter 1153 gave him a prior opportunity to challenge his liability for the TFRPs for purposes of Sec. 6330(c)(2)(B) and therefore he was not entitled to challenge it at his CDP hearing.

The law

Sec. 6630(c)(2)(B) states:

The person may also raise at the [CDP] hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.

For purposes of Sec. 6330(c)(2)(B), a prior conference with Appeals, offered before or after assessment, is an "opportunity" to dispute the underlying liability (Regs. Sec. 301.6320-1(e)(3), Q&A-E2). In the specific context of CDP cases involving TFRPs, the Tax Court has held that a taxpayer has an "opportunity" to dispute his or her liability for a TFRP when he or she receives a Letter 1153. Thus, if the taxpayer receives a Letter 1153 and takes the resulting "opportunity to dispute" the underlying TFRP liability at the Appeals conference, or forgoes the opportunity by not timely requesting a conference, then the taxpayer cannot challenge the underlying tax liability in a subsequent CDP hearing.

The Tax Court's decision

The Tax Court held that Barnhill's receipt of the Letter 1153 was not an opportunity to dispute the underlying taxes for purposes of Sec. 6330(c)(2)(B) if he did not subsequently receive the Letter 5157. The court focused on what the receipt of the Letter 1153 meant and how that was different from having the opportunity to dispute the underlying liability in a CDP hearing.

Receipt of the Letter 5157: For purposes of determining whether to grant summary judgment, the court assumed that Barnhill had not received the Letter 5157. Whether Barnhill received the letter was a matter to be determined at trial, not in a hearing to determine whether the case should go to trial.

Receipt of the letter as opportunity: The Tax Court found that receipt of a Letter 1153 itself does not constitute the opportunity, but instead makes available, provides the means for, or gives rise to the opportunity for a taxpayer to challenge the TFRP liability. According to the court, the opportunity to challenge a TFRP liability plainly takes place in the Appeals hearing. Thus, it reasoned that the hearing constitutes the opportunity. A taxpayer who has received a Letter 1153 but is waiting for his or her scheduled hearing is still awaiting the opportunity.

In the court's view, this interpretation is consistent with the statutory text. Sec. 6330(c)(2)(B) sets out two circumstances that bar a liability challenge, that "the person [1] did not receive any statutory notice of deficiency for such tax liability or [2] did not otherwise have an opportunity to dispute such tax liability." In the TFRP context (where, unlike the income tax context, the taxpayer does not receive a statutory notice of deficiency and the first rule cannot apply), the statute provides that the right to challenge the underlying liability does not rely on the receipt of the Letter 1153 but on the taxpayer's having a prior chance to dispute the liability.

The court admitted that it was true "that the clause 'the receipt of a Letter 1153 constitutes an opportunity' is shorthand that our opinions have sometimes used" in the TFRP context. In those cases, however, the taxpayers received a Letter 1153 and then either prosecuted an unsuccessful appeal or failed to request one. None of those cases involved a circumstance like Barnhill's, in which the taxpayer timely submitted his initial protest to Appeals but then, because he never received Appeals' follow-up in Letter 5157, was deprived of his opportunity to participate in an Appeals conference.

In the CDP context, when Appeals sends its initial letter to the taxpayer scheduling a conference but receives no response, it usually sends the taxpayer a "last chance" letter to enable him or her to complete the process. But in Barnhill's case, when Appeals received no response to its initial scheduling letter (Letter 5157), it simply closed the case a mere two days later and instructed Collection to assess the penalties. The court stated, "There may be good and sufficient reason for this brisk efficiency, but we cannot say that it gave Mr. Barnhill an 'opportunity' to dispute his liability."

Harmless error: The IRS also argued that even if it was required to provide Barnhill a conference, its failure to do so was "harmless error" because an Appeals officer had reviewed his claims and arguments regarding his TFRP liability before rendering her decision. Observing that an Appeals conference was more than an Appeals officer's review of the case — for example, allowing the submission of additional and new information and discussions about preliminary findings by the Appeals officer, the facts and the law, and settlement — the Tax Court rejected this argument. Even if the Appeals officer conscientiously had considered Barnhill's initial appeal, the court found it could not say that the omission of the conference was harmless.


Apparently, as a footnote to the case discusses, the IRS refused to provide the CDP hearing because Appeals had already considered Barnhill's arguments regarding his underlying tax liability when reviewing an offer in compromise based on doubt as to liability that he submitted. However, the Tax Court determined that since it held that for purposes of denying summary judgment Barnhill could challenge his liability in a CDP hearing, "relegating the liability challenge" to a non-CDP hearing was an abuse of discretion by the IRS.

Barnhill, 155 T.C. No. 1 (2020)

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