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Picking the Wrong Collection Due Process Notice to Petition

Posted on Oct. 14, 2014

A recent collection due process (CDP) case, Johnson v. Commissioner puts a pro se taxpayer in a tough situation when he failed to petition based on his first CDP hearing. Mr. Johnson wanted to raise the merits of the underlying tax liability. He was told, perhaps erroneously, he could not do so in his first CDP hearing for the tax year. He chose not to petition the determination in that case. He got a second bite at the CDP apple and tried to raise the merits argument again only to learn that he may have lost his opportunity when he failed to petition following the initial CDP determination. It’s a tough result and one of the few summary opinions we have featured on the blog.

Mr. Johnson filed his 2005 return and got examined. The IRS determined he owed more tax and sent him a notice of deficiency to his last known address. The notice was returned unclaimed after three failed attempts. This raises the possibility that he could argue the merits of the underlying tax liability in a subsequent CDP case but also raises the possibility that he would be denied that opportunity by the application of the rule set out in the Onyango opinion (Be sure to visit the comments on this blog post).

So, it is a “known unknown” to Judge Lauber in the Johnson case whether Mr. Johnson could raise the merits of the underlying liability in his subsequent CDP case or whether his failure to act regarding these notices may have barred him. It turns out not to matter.

When Mr. Johnson failed to pick up the notice of deficiency, the IRS assessed the liability and began sending him collection notices ending with the CDP notice. He received the CDP notice and requested an appeal. The SO told him that he could not challenge the 2005 liability through the CDP process because he did not file a Tax Court petition when the IRS sent the notice of deficiency. While this advice may have missed the mark, Mr. Johnson chose not to file a petition with the Tax Court in response to the notice of determination. [The opinion does not say whether he received the notice of determination. If he did not receive the notice of determination for a reason that would not upset the Onyango rule and if he did not receive the notice of deficiency for a reason that would not create a bar based on Onyango, he might have had an interesting argument in his second CDP case. Being unrepresented, Mr. Johnson probably did not think about this too much. The case highlights the difficulties facing an unrepresented litigant.]

While Mr. Johnson did not win his CDP case either on the merits or in seeking a collection alternative, if he sought one, he also did not pay the tax after the CDP hearing causing the IRS to take further collection action. The opinion does not provide the amount of the assessment against Mr. Johnson but the timing would place the collection sometime near the issuance of the Fresh Start rules in May 2012, increasing the amount of deficiency needed to trigger the filing of the notice of federal tax lien from $5,000 to $10,000 (of course the IRS could file the notice at any amount if it decided to do so).

In its further collection efforts, the IRS decided to file a notice of federal tax lien with respect to Mr. Johnson’s 2005 liability. By filing the notice of federal tax lien, the IRS triggered a new round of CDP rights for Mr. Johnson under IRC 6320. He received the notice giving him those rights. He requested a hearing. He again asked that the SO consider the underlying merits of the tax claiming that he did not owe the tax. He was again told that he could not raise the merits in his CDP hearing but this time the SO, SO2, pointed to both the failure to petition when the notice of deficiency was sent and the failure to petition when the first notice of determination was sent. The SO2 sent a determination letter upholding the filing of the notice of federal tax lien and Mr. Johnson petitioned the Tax Court choosing the Small Tax Case Procedure.

Judge Lauber noted that the original SO may have made a mistake in refusing to allow Mr. Johnson to raise the merits of the underlying liability. In a footnote he explains that the record contains no evidence concerning Mr. Johnson’s failure to claim the notice of deficiency despite three failed attempts to deliver it. Because of the incomplete record, the decision of the initial SO to deny Mr. Johnson the right to raise the merits may have correctly stated the legal situation or may not have. Either way, Mr. Johnson had the opportunity to contest that determination and he would have had the opportunity to litigate the underlying merits of the liability, had he petitioned the determination and asked the Tax Court to determine that the failure of receipt did not bar him from raising the merits.

Unfortunately, Mr. Johnson’s failure to petition following the first notice of determination sealed his fate with respect to his ability to raise the merits. The Court assumes that he received that notice of determination and nothing in the record appears to suggest he did not. Since he had the opportunity to contest the merits by petitioning from that notice of determination, assuming the right still existed, he lost his right to contest the merits at that point.

The case not only points to the difficulties facing a pro se taxpayer in navigating the system, it provides a lesson about petitioning from a notice of determination. Mr. Johnson’s receipt of two notices of determination separated in time does not present a common situation but also does not present a unique one. This situation can arise. A taxpayer who wants to raise the merits of the liability must seize the first opportunity or see the CDP process cleanse the system of any rights to pursue the merits that might have existed after a failure to receive the notice of deficiency.

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