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Where Does Designation of Payment Fall in the List of Items Appeals Must Verify in a Collection Due Process Case

Posted on Oct. 14, 2015

The recent case of Au v. Commissioner sort of raises the issue of verification in a Collection Due Process (CDP) case.  I say sort of because I read the case to raise that issue but it does not appear that the parties or the Court viewed the case as raising this issue.  Because of the way the pro se taxpayer presented the case, the Court did not focus on the issue of verification but rather on the taxpayer’s failure to follow through by providing information the IRS requested.

Section 6330(c)(1) requires that Appeals verify that all “requirements of any applicable law or administrative procedure have been met.”  Mr. Au was unrepresented in the Tax Court case and probably in the CDP hearing as well.  The IRS had assessed a trust fund recovery penalty (TFRP) for unpaid employment taxes at a business where he was a principal.  The opinion says that he attached to the Form 12153 requesting the CDP hearing a statement “I request that the equivalent hearing be held in the jurisdiction of Honolulu, Hawaii.”  On the form itself he requested “(1) a CDP hearing or an equivalent hearing; (2) an offer-in-compromise (OIC); and (3) a lien discharge.”  My guess is that Mr. Au did not have a clear picture of what he was requesting.  It appears that he said nothing about application of payments on the TFRP when he submitted the Form 12153.  Despite the conflicting language in his request concerning whether he sought a CDP hearing or an equivalent hearing, the IRS and the Court treated his timely filed request as one seeking a CDP hearing.  The IRS issued a determination letter upholding the proposed levy action, he timely petitioned the Tax Court and it sustained the IRS determination.  In doing so, the Court does not address whether Appeals had a duty to verify the proper application of payments.  This post will explore that duty.

Part of the opinion deals with the issue of whether he could get a face to face hearing in Hawaii and the opinion finds in essence that he waived his chance for such a hearing by not responding to Appeals offer for such a hearing in a timely fashion.  I will not spend more time on that issue but the case suggests by implication that giving a taxpayer 15 days to make the request for a face to face hearing is sufficient.  That request came early in the case and the time to respond passed before he made his desire clear.  It does not appear that the request to have the hearing in Honolulu contained in his request for a CDP hearing provided any benefit to him in seeking to have the face to face conference.

In his initial correspondence with the Settlement Officer after the submission of the Form 12153, Mr. Au asserted “that he had made voluntary payments of over $300,000 that the IRS should have applied against his TFRPs.”  Appeals issued a determination letter upholding the IRS decision to levy to collect the taxes.  Mr. Au renewed his argument about designation at the CDP hearing before the Tax Court.  The Court found the following:

Generally, a taxpayer must raise an issue at a CDP hearing to preserve it for this Court’s consideration.  Gianelli v. Commissioner, 129 T.C. 107, 115 (2007); sec. 301.6330-1(f)(2), Q&A-F3, Proced. & Admin. Regs.  The merits are not properly raised if the taxpayer mentions an issue but fails to present Appeals with any evidence regarding that issue after being given a reasonable opportunity to do so.  See Delgado v. Commissioner, T.C. Memo. 2011-240; sec. 301.6330-1(f)(2), Q&A-F3, Proced. & Admin. Regs.

There is nothing in the record to show that petitioner provided any evidence to Settlement Officer Cochran in regard to this issue.  Settlement Officer Cochran gave petitioner sufficient time to submit evidence of his alleged designation, but he failed to do so.  Instead, petitioner simply made unsupported statements that he had properly designated the application of voluntary payments against his TFRPs.  Accordingly, we find that petitioner did not properly raise this issue during the CDP hearing, and therefore he cannot dispute this issue before this Court. (emphasis added)

I wrote recently about the concept of variance in CDP cases.  The concept clearly relates to affirmative issues a taxpayer seeks to raise such as collection alternatives to levy, e.g., OIC or Installment agreement, whether the taxpayer can contest the underlying merit of the liability or raise innocent spouse status.  Section 6330(c)(1) is not clear, however, about what must be verified.  Is the proper application of a payment something that the IRS must verify as part of its administrative practice or is it an affirmative matter the taxpayer must properly raise or is it something in the middle?

In Lee v. Commissioner, a full T.C. opinion decided earlier this year, Judge Wells confronted the issue of verification in a TFRP case. Les wrote about this case. The Lee case does not specifically address the designation issue and whether it is a matter subject to verification but it does give some additional definition concerning verification in the TFRP context. The discussion of verification in Lee supports the view that Appeals has an affirmative responsibility to verify in these cases even if it left open all of the possible issues included in the verification process.

Designation of payment comes up frequently in TFRP cases because the responsible person making payments to the IRS on their own behalf or through the entity wants to have the payments applied to the portion of the liability for which the responsible person bears personal responsibility in order to eliminate or reduce their personal exposure. Most TFRP cases involve unpaid employment taxes and that appears true in Mr. Au’s case. When a corporation fails to pay its employment taxes, the unpaid taxes include both withheld income and social security taxes owed by the individual employees of the business as well as the employer portion of the employment taxes (basically half of the social security and Medicare taxes.) The TFRP imposes a personal liability on responsible persons of the corporation only for the withheld taxes that the corporation holds for the IRS in trust and not for the employer portion of the employment taxes. Frequently, responsible persons, or potentially responsible persons, will individually pay or cause the corporation to pay a portion of the outstanding employment tax liability and will designate that the IRS apply the payment to the trust fund portion of the outstanding liability in order to reduce or eliminate the TFRP. The IRS position of designation resides in Revenue Procedure 2002- 26 where IRS states that it will apply a voluntary designation from taxpayer in the manner requested by the taxpayer. Issues concerning designation usually turn on whether the payment was voluntary or the designation was clear. The Revenue Procedure and the process for designation suggests that the issue of designation makes the case more clearly a verification issue than a merits issue.

Judge Vasquez treats designation of payment as a merits issue and applies the regulation to deny the taxpayer the opportunity to raise the issue before the Court since he raised but did not pursue the issue before Appeals.  I find the issue a close one.  I would not necessarily advocate that Appeals should have to verify in each case whether the taxpayer designated the application of his payments and whether the IRS properly followed the designation request; however, if the taxpayer raises that the IRS has improperly followed an administrative practice, it seems that the IRS should have the duty to at least take a look and go as far as it can on this issue.  Without help from the taxpayer in the form of a copy of the correspondence or other indicia of designation, the IRS may not be able to determine if its administrative procedures were properly followed but it could take a look.  The statute may require it to do so.

This was not a small matter or a case where designation had no impact.  If the responsible officer has paid $300,000 on a trust fund or employment tax debt, it should be possible for the Appeals employee to go into the system of the IRS and take a look at those payments.  With that amount of money at issue, it is also possible that a revenue officer was involved in the collection of the tax.  Should the Appeals employee affirmatively charged with verifying the correctness of the IRS in following its administrative procedures have a duty in a CDP case to look to see if the IRS properly applied the payments where the taxpayer alleges it did not do so?

I think the Appeals employee did have some responsibility to verify that the IRS properly followed administrative procedures regarding the application of payments as a part of the verification process.  Therefore, is seems that the Court should have looked at that verification rather than simply denying the taxpayer any review of this issue because he did not provide sufficient information to the Appeals employee.  The Court may well have ended up back at the same result because the Appeals employee could not find any designation by the taxpayer in the IRS records and therefore verified that the IRS followed procedures based on the information available; however, that would seem a better result under the statute than treating this as a merits issue on which the taxpayer bears complete responsibility.  Because the issue of designation may require something more than just looking at IRS records, it straddles a line between the duty of the IRS and the duty of the taxpayer leaving an unclear picture of the responsibility of each.

The Au case appears to present an issue of first impression, but the Court delivers it in a non-precedential memo opinion.  Because the taxpayer was pro se, both Appeals and the Court were at a disadvantage in dealing with the issue.  Congress did not clearly define the scope of section 6330(c)(1).  This opinion does nothing to clear the waters.  Since the opinion does not bind the judges on the Court by setting precedent, others arguing that IRS has not properly posted designated payments should raise the argument that the Appeals employee has a duty to verify the proper posting of payments pursuant to section 6330(c)(1).  Providing information and assistance to Appeals in verifying the proper application would help in reaching the correct result.

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