On remand from the Eleventh Circuit, the Tax Court determined that the failure of the IRS to provide a pre-assessment appeals hearing invalidated the IRS’s assessment of trust fund recovery penalty under section 6672 and proposed levy to collect the same. In July 2006, the IRS sent a letter to the chief operating officer of a healthcare staffing company proposing assessment of a trust fund recovery penalty against her for the business’s failure to withhold and pay over employment taxes. The letter indicated that the COO had the opportunity to protest the decision to the IRS Office of Appeals. The COO sent a response requesting an Appeals conference but the IRS failed to act on it and then subsequently assessed the penalty. The COO later requested a collection due process hearing after receiving a notice of intent to levy and notice of federal tax lien filing. As is typically the case, the Settlement Officer issued a determination that the assessment and collection activity, including the proposed levy, were valid, leading to the COO’s challenge in Tax Court.
The Tax Court upheld the assessment after examining the merits of the underlying liability, essentially dismissing the taxpayer’s procedural claim that she was entitled to a pre-assessment hearing. In March 2016, the Eleventh Circuit overturned the Tax Court’s decision, ruling that a taxpayer who timely protested a proposed trust fund recovery penalty assessment was entitled to a pre-assessment conference under section 6672, and remanded the case to determine if the failure to provide a pre-assessment Appeals conference was a harmless error. The court had refused to rule on the issue indicating that it could see both sides of the argument. On one hand, it stated that the taxpayer was “not completely denied a right to be heard,” and thus her due process rights were not violated. But, the court also acknowledged the importance of enforcing procedures required by law that an agency failed to follow.
On remand, the Tax Court determined that, as part of the collection review procedure, an Appeals Officer must verify that the pre-assessment hearing was provided before enforcing the levy. Because the COO did not receive the hearing, the Tax Court determined the most appropriate remedy was to invalidate the assessment and the proposed levy. The Tax Court rejected the IRS’s argument that the assessment and subsequent levy were valid because the taxpayer received a collection due process hearing. The case highlights the important distinction between a collection due process hearing before a Settlement Officer and an Appeals conference before an Appeals Officer. Although both take place within the IRS Office of Appeals, Appeals Officers typically have more substantive knowledge of the tax law, and which forum a dispute is heard in can affect whether the taxpayer ultimately prevails. In this case, it seems likely that the IRS’s failure to follow the procedural requirements saved the taxpayer from a $350,000 bill as neither court seemed to believe that she was not liable for the assessed penalty but for the procedural failing.