Two years ago the Eighth Circuit reversed a Tax Court decision in a case involving a tax protestor because the IRS did not prove that the person signing the notice of deficiency had the authority to do so. I blogged about it here and predicted that the case would return to the Eighth Circuit after the Tax Court saw to it that the person issuing the notice had the delegated authority to do so. On May 16, 2018, the Eighth Circuit issued an opinion upholding the Tax Court’s decision on remand that the person signing the notice of deficiency had the authority to do so. The outcome is exactly what I predicted in my prior post but worthy of mention to close the loop. Because of the post-Graev challenges to penalty approval, it is possible that there will be an uptick in other challenges to IRS action. The Muncy case serves as a reminder that the IRS must follow a prescribed process in issuing the notice of deficiency (and other similar notices), that taxpayers can challenge the authority of the person issuing the notice and that the IRS must go through the steps to prove that it followed the rules even though going through those steps is burdensome. It also serves as a reminder that these challenges will generally not prevail.
Mr. Muncy tried to cheat on his taxes, got caught and was convicted of a willful attempt to evade and defeat his taxes for 2004. The IRS sent him a notice of deficiency dated September 7, 2011 signed on behalf of the IRS Commissioner by Ms. Miller who was a Technical Services Territory Manager at the time. She signed the notice pursuant to Delegation Order 4-8, as set out in IRM 22.214.171.124 (February 10, 2004). There are many delegations orders in the IRM which are constantly being updated. The IRS does a good job of following the IRM with regard to the delegation orders but it is certainly possible that it could make a foot fault. A mistake in signing notices of deficiency could have a broad impact on the validity of assessments since the person signing the notices usually signs a large number of them.
In the initial visit of this case to the Eighth Circuit, as described in the prior post, the Eighth Circuit was unconvinced that the IRS had provided the necessary proof that the person who signed the notice of deficiency had the authority to do so. The opinion did not suggest that the IRS had made a mistake but simply that the appropriate level of proof was lacking. So, it sent the case back to allow the IRS to put on proof that the person signing the notice was properly authorized to do so and the IRS put on that proof.
After the remand of this case, the Tax Court looked closely at Ms. Miller’s authority to sign the notice of deficiency and determined in T.C. Memo 2017-83 that she had the requisite authority under the delegation order to sign the notice. It made the following determination:
Petitioner contends that respondent’s deficiency determinations for tax years 2000 through 2005 are “null and void” because the notice of deficiency was not “issued and sent by a duly authorized delegate of the Secretary.” Petitioner’s argument regarding the authority of IRS employees is similar to those we have previously rejected, held to be without merit, and characterized as frivolous. See e.g., Roye v. Commissioner, at *15, *16 n.6; Cooper v. Commissioner , T.C. Memo. 2006-241, 2006 WL 3257397, at *2. We nonetheless address petitioner’s contention in accordance with the U.S. Court of Appeals for the Eighth Circuit’s instructions that we establish jurisdiction over the present matter.
Statutory notices of deficiency are valid only if issued by the Secretary of the Treasury or his delegate. Kellogg v. Commissioner, 88 T.C. 167, 172 (1987); see secs. 6212(a), 7701(a)(11)(B), (12)(A)(i). The technical services territory manager position is part of the Small Business/Self-Employed (SB/SE) division of the IRS. SB/SE territory managers were specifically delegated the authority to send notices of deficiency in Delegation Order No. 77 (Rev. 28), 61 Fed. Reg. 30937 (June 18, 1996) (effective May 17, 1996). See, e.g., Tarpo v. Commissioner, T.C. Memo. 2009-222, 2009 WL 3048627, at *4 (holding an IRS employee with the title “Technical Services Territory Manager” had the authority to sign and issue notices of deficiency, thus conferring jurisdiction on this Court). That delegated authority was reauthorized without substantive changes in Delegation Order 4-8, IRM pt. 126.96.36.199. Ms. Miller undoubtedly has the authority to sign and issue notices of deficiency. See, e.g., Batsch v. Commissioner, T.C. Memo. 2016-140, at *9 (stating a valid notice of deficiency was signed by the “Technical Services Territory Manager,” pursuant to Delegation Order 4-8). We therefore hold that we have jurisdiction.
After the Tax Court went to the trouble to address the delegation order, the Eighth Circuit expended little effort in affirming the Tax Court the second time around. It found Mr. Muncy relied on an overly technical reading of the delegation order and that the IRS had complied with the delegation order in having Ms. Miller sign the notice of deficiency. So, Mr. Muncy now has a big assessment and we have a roadmap for how the Tax Court approaches cases in which the taxpayer challenges the proof of delegation order to the person signing the notice.