Deficiency notice invalid because IRS cannot prove last known address

The Tax Court held that the IRS failed to prove that it had complied with the procedure set forth in Regs. Sec. 301.6212-2 to update the tax-payer’s last known address based on the U.S. Postal Service’s (USPS’s) National Change of Address (NCOA) database. Therefore, the court concluded that the deficiency notice sent to the taxpayer was invalid because the IRS had not sent it to the taxpayer’s last known address. 

Background 

Keith Phillips filed a federal tax return in March 2004 for tax year 2003. On this return, which he filed jointly with his then-wife, he listed his address as 75 Hazeltine Ave., Youngstown, Ohio 44506. 

In January 2010, Phillips began serving a prison sentence, which continued through January 2017. During this time, Phillips ended up suffering an injury that resulted in permanent loss of nearly all the vision in one of his eyes. He filed suit against the prison over the injury, and in 2014 he received a $201,011 personal injury settlement. However, he did not file an income tax return for tax year 2014. 

Having not received a return for 2014 from Phillips, in September 2018, the IRS prepared a substitute for return (SFR) for 2014 that reported his personal injury settlement as income. Based on this SFR, the IRS determined a deficiency in tax and penalties totaling over $75,000. It sent a notice of deficiency later in September 2018 to Phillips at 157 Roslyn Drive, Youngstown, Ohio 44505 (Roslyn address). 

Phillips did not reply to the notice, so the IRS filed a tax lien against him and sent a notice of filing a federal tax lien to him at the Roslyn address. Phillips again did not respond to the notice and did not pay the alleged liability. 

The IRS in 2021 certified Phillips to the State Department as an individual owing a seriously delinquent tax debt. It also issued Phillips a CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the State Department, dated May 3, 2021, which it sent to 120 N. Richview Ave., Youngstown, Ohio 44509. 

On the same day this notice was issued, Phillips filed a petition with the Tax Court seeking review of the notice of deficiency. In his petition, Phillips contended that the IRS incorrectly determined that the personal injury settlement he received in 2014 was taxable income. 

In September 2021, the IRS filed a motion to dismiss for lack of jurisdiction because Phillips had failed to file a timely Tax Court petition. In November 2021, the IRS filed a first supplement to its motion, attaching a copy of the notice of deficiency and USPS Form 3877, Firm Mailing Book for Accountable Mail. Later in November 2021, Phillips filed a response to the IRS’s motion that stated that he never lived at the Roslyn address. 

In February 2023 the IRS filed a reply to Phillips’s response to its motion to dismiss. In it (according to the Tax Court), the IRS appeared to argue that third-party reporting related to Phillips’s ex-wife supported changing his last known address to the Roslyn address. Within a week, Phillips filed a sur-reply in which he again argued that he never lived at the Roslyn address, but his son, who shares the same name, might have been living with his ex-wife at that address. 

The Tax Court in May 2023 ordered the IRS to file a second supplement to its motion, detailing the address shown on Phillps’s last-filed return and how it determined his address. In June 2023, the IRS filed the second supplement in which it asserted for the first time that Phillips’s address had been updated to the Roslyn address in accordance with a notification from the USPS’s NCOA database (NCOA notification). 

Under Regs. Sec. 301.6212-2, a taxpayer’s last known address will be updated if the taxpayer’s name and last known address in the IRS’s records match the taxpayer’s name and old mailing address contained in the NCOA database. The regulation does not provide additional information about the NCOA database or the matching process. 

To support its assertion that Phillips’s last known address had been updated, the IRS attached Integrated Data Retrieval System (IDRS) transcripts of his account. The IDRS is a computer interface that allows the IRS to retrieve a portion of the data it possesses regarding each taxpayer’s federal tax obligations and generate transcripts with respect to such information. 

In February 2024, the Tax Court issued an order to the parties to file additional documents, including, with respect to the IRS, additional information on the NCOA notification. The IRS did not comply with this part of the order and in its response only included an explanation of the general process it follows upon receipt of an NCOA change-of-address notification. 

In his response to the order, Phillips filed an unsworn declaration in which he represented that he never lived at the Roslyn address, that it was his belief that his deceased former spouse had lived there, and that his adult son Keith M. Phillips Jr. may have lived at the Roslyn address with his mother. 

On Feb. 28, 2024, the Tax Court held a hearing on the IRS’s motion to dismiss, in which Phillips testified that he did not submit a USPS change-ofaddress request in or around 2010 that requested his address be changed to the Roslyn address. 

Issue before the Tax Court

The Tax Court does not have jurisdiction over a taxpayer’s case and must dismiss it if the notice of deficiency on which the case is based is invalid. The court interpreted Phillips’s contentions regarding not living at the Roslyn address or filing a USPS change-of-address form as a challenge to the validity of the notice of deficiency because the notice was not sent to his last known address. Thus, to determine whether the notice was valid and it had jurisdiction, the court was required to decide whether the IRS had properly mailed the notice to Phillips’s last known address. 

The Tax Court’s decision 

The Tax Court held that the notice of deficiency was invalid because it was not mailed to Phillips’s last known address, and it dismissed the case. It held that the notice was not sent to Phillips’s last known address because the IRS failed to prove that it had complied with the procedure set forth in Regs. Sec. 301.6212-2 to update Phillips’s last known address based on the USPS’s NCOA database. 

To make its determination, the Tax Court found it was required to analyze the facts and the application of Regs. Sec. 301.6212-2, using the framework traditionally used in Collection Due Process cases. Generally, under this framework, in a last-known- address inquiry, the IRS must first show it has carried its initial burden to show that it properly mailed the notice of deficiency to the tax-payer. If it does, the burden of going forward shifts to the taxpayer to rebut the presumption by demonstrating irregularities in the procedure. Finally, if the taxpayer rebuts the presumption, the IRS has the burden of production to show that the notice was properly mailed. 

Applying this framework to Phillips’s last-known-address inquiry, the court explained that the focus of the analysis was whether the IRS properly updated his last known address in its system. For the second step, Phillips would need to allege irregularities in this matching process to rebut the presumption. Finally, if Phillips rebutted the presumption, the IRS would bear the burden of proving by competent and persuasive evidence that it properly updated Phillips’s last known address. 

IRS’s initial burden: The IRS was required to initially show that it had matched Phillips’s name and old address in the NCOA notification to that information in the IDRS. The Tax Court found the IRS could do this under the presumption of official regularity, which presumes that a public officer, absent evidence to the contrary, has properly discharged their official duties in accordance with proper procedure. Therefore, the court determined the IRS had met its initial burden. 

Phillips’s rebuttal of the presumption: Taxpayers may not rebut the presumption that they submitted a change of address form with self-serving testimony alone. In Phillips’s case, besides his naked assertion that he did not file a USPS change-of-address form, his response to the IRS’s motion suggested that his son, who had the same name, may have lived with his ex-wife at the Roslyn address. He also provided proof that he was incarcerated when the IRS processed the USPS form. 

In the Tax Court’s view, this lent credibility to Phillips’s claim that he did not submit the USPS form. The court found that the evidence thus demonstrated “irregularity in the matching process: either [the IRS] did not receive the NCOA Notification or the information contained in the NCOA Notification matched [Phillips’s] son’s account rather than his account.” The court concluded the evidence was enough to rebut the presumption established in the first step and shift the burden of production back to the IRS. 

IRS’s burden to show proper update: Because Phillips rebutted the IRS’s presumption of official regularity, the IRS had the burden of production to show that it complied with Regs. Sec. 301.6212-2 in updating Phillips’s last known address. To show compliance, the IRS provided the Tax Court two transcripts from the IDRS, called FINDSD and IMFOLE transcripts. A FINDSD transcript provides a taxpayer’s name and address, while an IMFOLE transcript records account transactions, designated by transaction codes and document locator numbers. 

The IRS typically introduces IDRS transcripts to show that a taxpayer has not notified the IRS of a change of address. When the IRS in past cases has produced IDRS transcripts as proof of its affirmative actions, the Tax Court has refused to rely on the transcripts to prove the validity of the actions. 

However, in Phillips’s case, the Tax Court found that it need not reach the question of whether the IRS can generally rely on the IDRS to show evidence of compliance with the lastknown- address regulation, because the IDRS transcripts the IRS gave the court contained no information relating to the process of matching Phillips’s information to the NCOA notification in 2010, only the result of the process. Even if they could be used as evidence of compliance with the regulation, the transcripts the IRS provided were not competent and persuasive evidence that the IRS complied, as the court found that the Service’s inconsistent explanations for the change of address diminished the transcripts’ credibility. 

The Tax Court also found other inconsistencies than the address change in the transcripts. As an example, according to an entry in the FINDSD transcript, Phillips’s address was updated in 2008, but there was no corresponding entry in the IMFOLE transcript. However, for all other address changes reflected on the FINDSD transcript, there were corresponding entries in the IMFOLE transcript. 

The transcripts’ unexplained irregularities caused the Tax Court to question their accuracy. Thus, it found that the IDRS transcripts were not competent and persuasive evidence that the IRS had properly updated Phillips’s address. With no other evidence before it, the court concluded the IRS had not carried its burden of showing compliance with Regs. Sec. 301.6212-2. 

Because the IRS failed to prove its compliance with the regulation, the Tax Court held that the notice of deficiency was not sent to Phillips’s last known address and was invalid. Therefore, it further held it lacked jurisdiction and dismissed the case. 

Reflections 

Phillips is out of the woods for now, but as the Tax Court states in its final footnote to his case, nothing in its opinion should be construed as limiting the IRS’s ability to issue Phillips a new notice of deficiency for 2014 that is properly mailed to his last known address. Whether the IRS will continue to pursue payment of this deficiency remains to be seen. 

Phillips, T.C. Memo. 2024-44

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.