No relief for trust fund recovery penalty

A taxpayer was not entitled to challenge her underlying Sec. 6672 trust fund recovery penalty (TFRP) in a Collection Due Process (CDP) hearing or in Tax Court and was not entitled to innocent-spouse relief under Sec. 6015 for the penalties. The court also found the IRS did not abuse its discretion in rejecting her collection alternatives.

Background

Angela M. Chavis was secretary of record, and her then-husband was president, of Oasys Information Systems Inc., which withheld payroll taxes from its employees’ wages but did not remit them to the government. In July 2015, the IRS issued the couple a Letter 1153, Notice of Trust Fund Recovery Penalty. Attached to it was Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, advising the couple of its proposed assessment of a TFRP against each of them for the unpaid payroll taxes, which totaled $146,682 over nine calendar quarters between 2011 and 2014. Chavis signed a postal form acknowledging receipt of the Letter 1153 but did not appeal the assessment. In November 2015 the IRS assessed the TFRP against her.

In 2019, the IRS issued Chavis a Notice of Federal Tax Lien (NFTL), showing an unpaid balance of $126,919 on account of Oasys’s payroll tax liability. Chavis timely requested a CDP hearing, stating in her request she could not pay the balance of the NFTL and was entitled to innocent-spouse relief. She also requested a withdrawal of the NFTL. She claimed that her now ex-husband was responsible for the payroll taxes and that she had received no prior notice regarding them.

Two months later, Chavis filed Form 8857, Request for Innocent Spouse Relief, claiming she was entitled to relief because she “had no dealings with Oasys.” She also requested relief on the basis of her inability to pay. An IRS settlement officer (SO) submitted the innocent-spouse relief request to the Cincinnati Centralized Innocent Spouse Operation (CCISO). After reviewing her case, CCISO informed her that she did not meet the basic eligibility requirements for Sec. 6015 relief because her request related to payroll tax liabilities rather than a jointly filed income tax return.

Chavis’s CDP case was then assigned to an SO in the IRS Appeals Office. The SO again explained that Chavis was not entitled to Sec. 6015 relief. She also explained that Chavis could not challenge her liability for the TFRP in the CDP hearing because she had had a prior opportunity to challenge the TFRP liability but had not done so.

The SO and Chavis also discussed collection alternatives, including having her account placed in currently-not-collectible (CNC) status. To pursue CNC status, the SO told Chavis she needed to complete Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, together with supporting financial information. Chavis did so, and the SO referred it to an IRS collection specialist for analysis.

Based on this information, the collection specialist determined that Chavis could pay $2,831 per month toward her TFRP liability and thus did not qualify for CNC status. Chavis disputed this amount with the SO, who recomputed the amount, taking into account her mortgage expenses. The SO determined that with these included, Chavis could pay $1,685 per month and therefore was still not entitled to CNC status. The SO also considered Chavis’s request for lien withdrawal and determined that she did not meet the criteria for lien withdrawal under Sec. 6323(j).

Having concluded that Chavis was not entitled to relief, the IRS issued a notice of determination sustaining the lien filing. Chavis petitioned the Tax Court to review the IRS’s determination. In Tax Court, the IRS moved for summary judgment, contending that Chavis’s underlying liability was not properly before the court, that innocent-spouse relief did not apply to the tax liability at issue, and that the SO did not abuse her discretion in sustaining the collection action.

The Tax Court’s decision

The Tax Court granted the IRS’s motion for summary judgment, holding that Chavis could not challenge the underlying TFRP liability, that she was not entitled to any form of innocent-spouse relief for the TFRP liability, and that the IRS’s sustaining the collection action was not an abuse of discretion.

Challenge of underlying liability: A taxpayer may challenge an underlying tax liability in a CDP case only if he or she did not receive any statutory notice of deficiency for the liability or did not otherwise have an opportunity to dispute the liability. Under the regulations and Tax Court precedent, a taxpayer has the opportunity to dispute a TFRP liability by filing an appeal with the IRS when he or she receives a Letter 1153.

The evidence showed that the IRS had sent Chavis a Letter 1153 regarding the TFRP liability at issue and that she had received the letter. Chavis admitted she received the letter. The letter informed her that she could appeal the proposed TFRP assessment and how to do so, but Chavis did not appeal it. Therefore, the court found that she had a previous opportunity to dispute her TFRP liability and was not entitled to challenge it in her CDP hearing or advance a challenge in the Tax Court.

Innocent-spouse relief: In considering Chavis’s request for innocent-spouse relief, the Tax Court first turned to the innocent-spouse relief provisions under Secs. 6015(b) and 6015(c), which both by their terms only allow relief to be granted from liabilities shown or that should have been shown on a joint federal income tax return. The court found that Chavis’s TFRP liabilities were not shown on a joint federal income tax return and did not result from the filing of such a return. Instead, the court determined that her TFRP liabilities resulted from her failure, as an officer of Oasys, to ensure that the payroll taxes that the company collected from its workers were properly paid over to Treasury. Thus, Chavis was not eligible for innocent-spouse relief under Sec. 6015(b) or 6015(c).

The Tax Court then considered Sec. 6015(f). Under this provision, the IRS may allow equitable relief to a taxpayer who does not qualify under Sec. 6015(b) or Sec. 6015(c) if, “taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either).”

The Tax Court concluded that Sec. 6015(f), like Secs. 6015(b) and 6015(c), only applies to joint income tax liabilities. In Rev. Proc. 2013-34, the IRS set out the procedures governing equitable relief, and the court stated that these procedures confirmed that Sec. 6015(f) only applies to joint income tax liabilities. The court found further support for its position in Regs. Sec. 1.6015-1(a)(1)(iii), which states that Sec. 6015(f) only applies to “joint and several liability for Federal income tax” and H.R. Rep’t No. 105-599, 105th Cong., 2d Sess., 254 (1998), which states that Sec. 6015(f) applies only to “any unpaid tax or deficiency arising from a joint return.” Thus, although a TFRP liability is a form of “unpaid tax,” since the liability did not arise from a joint return, the court concluded that Chavis was also not entitled to relief under Sec. 6015(f).

Abuse of discretion — collection alternatives: Chavis proposed two collection alternatives. The first was having her account placed in CNC status. The second was the withdrawal of her NFTL. The Tax Court held that the IRS SO did not abuse her discretion by denying these forms of relief.

To be entitled to CNC status taxpayers must demonstrate that, on the basis of their assets, equity, income, and expenses, they have no apparent ability to make payments on the outstanding tax liability. The SO determined that Chavis could pay $1,685 per month, so she was not entitled to CNC status. Chavis argued for various reasons that the SO’s calculation of the amount she could pay was incorrect. However, the court rejected all of her complaints about the SO’s work and found that even if information that the SO did not have when she made her decision justified lowering the amount Chavis could pay, a lower amount would not have altered the SO’s determination that Chavis was not entitled to CNC status.

Regarding a withdrawal of the NFTL, a taxpayer is only entitled to that relief if four conditions set out in Sec. 6323(j) are met. The conditions are (1) the filing of the notice was premature or otherwise not in accordance with IRS administrative procedures; (2) the taxpayer has entered into an installment agreement with the IRS; (3) the withdrawal of the notice will facilitate collection of the tax liability; or (4) the withdrawal of the notice would be in the best interest of the taxpayer (as determined by the national taxpayer advocate) and the United States. The court found that two of these conditions did not apply in Chavis’s case and that she did not establish that the other two were met. Thus, it was not an abuse of discretion to deny the withdrawal of the NFTL.

Reflections

If Chavis’s various statements regarding her involvement with Oasys are true, it is possible that if she had properly challenged her status as a responsible person under Sec. 6672, she might not have been held liable for a TFRP for Oasys’s unpaid payroll taxes, despite the fact that she was an officer of the corporation. However, she chose not to respond when she received the Letter 1153, and it cost her dearly.

Chavis, 158 T.C. No. 8 (2022)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.