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Taxpayer Should Not Have Been Precluded from Disputing Trust Fund Recovery Penalty

(Parker Tax Publishing August 2020)

In a case of first impression, the Tax Court held that a taxpayer who received an IRS Letter 1153, but did not receive the subsequent correspondence on a Letter 5157, was not afforded a prior opportunity under Code Sec. 6330(c)(2)(B) to dispute his underlying liability for a trust fund recovery penalty (TFRP). The Tax Court held that the taxpayer should not have been precluded from disputing that liability at a CDP hearing and the court said it could not rule out the possibility that the IRS Office of Appeals abused its discretion when it barred the taxpayer's liability challenge. Barnhill v. Comm'r, 155 T.C. No. 1 (2020).


Rickey Barnhill was a director of a company called Iron Cross, a company that did not file any tax returns, including employment tax returns, and did not pay the employment taxes. The IRS assessed employment taxes against Iron Cross for the 10 calendar quarters in 2010 - 2012. The IRS also proposed assessments totaling approximately $160,000 against Barnhill as trust fund recovery penalties (TFRPs) under Code Sec. 6672 for the unpaid trust fund taxes that were required to be withheld from employee wages and paid over to the IRS.

In November of 2016, the IRS sent Barnhill a Letter 1153, Trust Fund Recovery Penalty Letter, proposing to assess the TRFPs against him as a responsible person who had failed to collect and pay over Iron Cross's employment taxes. The letter informed Barnhill that if he did not agree, then within 10 days he could contact the IRS employee identified in the letter or within 60 days submit a written appeal or protest. The Letter 1153 indicated that filing an appeal was the first "stage" in the appeal process, rather than being the last chance in that process to submit information. Barnhill responded by mailing a protest to the IRS Office of Appeals (Appeals), challenging the proposed TFRP assessments.

In April of 2017, Appeals mailed to Barnhill (by regular mail, not certified) a Letter 5157. The letter identified an IRS Appeals officer to contact and scheduled a telephone Appeals conference for May 9, 2017. Barnhill did not receive the Letter 5157, nor did he receive Publication 4227, Overview of the Appeals Process Brochure, explaining the Appeals process, and the scheduled conference never occurred. As a result, he did not see the Appeals officer's suggestion that he could provide additional information before the Appeals conference. Further, Barnhill did not have the occasion, as described in the Letter 5157, to discuss any additional information or the Appeals officer's preliminary findings.

The Appeals officer did not attempt to contact Barnhill after the failed conference. Rather, two days later, Appeals sent to Barnhill a Letter 1536 that stated Barnhill's case was being returned to the Collection function for assessment of the liability as determined by Appeals. The IRS assessed the penalties and made notice and demand. When Barnhill did not pay the penalties, the IRS sent him a notice of federal tax lien (NFTL) advising him that the IRS had filed an NFTL with the court and that Barnhill had the right to a hearing with Appeals. Barnhill exercised that right. In the CDP request, Barnhill stated that he did not owe the tax, was not a responsible person, and was not given a meaningful opportunity to challenge the assessment.

The CDP hearing took place by means of written submissions and two telephone conferences between the Appeals officer and Barnhill's representative. Barnhill's representative submitted information about Iron Cross and Barnhill's role there. However, the Appeals officer ultimately concluded that, because Barnhill had previously received a Letter 1153 and had submitted an appeal, he was not entitled to challenge his liability at the CDP hearing. Her conclusion was not altered by Barnhill's contentions that he had not received the Letter 5157 and therefore had not been able to participate meaningfully in the Appeals conference about his TFRP liability. Appeals notified Barnhill that it was sustaining the NFTL filing.

Barnhill petitioned the Tax Court. He argued that he was not liable for the TFRPs because he was not a responsible person, that the amounts of the TFRPs were grossly overstated, and that Appeals erred by concluding that he was not entitled to challenge his liability in the CDP hearing. The IRS filed for summary judgment, asserting that Barnhill's receipt of the Letter 1153 was a prior opportunity for purposes of Code Sec. 6330(c)(2)(B), which provides that a taxpayer may contest the existence and amount of an underlying tax liability, but only if he did not receive a notice of deficiency or otherwise have an opportunity to dispute the tax liability. The IRS further argued that even if a hearing were required, any error would be harmless because the Appeals officer considered Barnhill's arguments before rendering her decision.

Tax Court's Analysis

The Tax Court denied the IRS's motion for summary judgment because it found that a question of fact existed as to whether Barnhill had been given a prior opportunity to dispute his liability for the TFRPs. The court noted that while it has previously held that a taxpayer's failure to pursue an Appeals conference after receiving a Letter 1153 constitutes forfeiture of the opportunity to dispute the underlying liability, the court had not previously addressed whether a taxpayer who pursues an Appeals conference but, through no fault of his own, is prevented from participating in it is also precluded under Code Sec. 6330(c)(2)(B) from later raising a liability challenge in a CDP hearing.

The Tax Court found that a taxpayer's receipt of a Letter 1153 is not an opportunity to dispute a TFRP liability but rather gives rise to such an opportunity in an Appeals hearing. The court found that this conclusion was supported by the text of Code Sec. 6330(c)(2)(B) because the "opportunity" referred to in the statute is different from the receipt of the notice that triggers the opportunity. The court said that it has consistently held that where a taxpayer takes all of the proper steps to avail himself of the opportunity to dispute his liability under Code Sec. 6330(c)(2)(B), the statute requires that the taxpayer in fact realize that opportunity.

The court found that Barnhill timely submitted his initial protest but, through no fault of his own, was not informed of the scheduling of the conference and was thereby deprived of his Appeals conference and of the opportunity (which the Letter 1153 had signaled) to submit additional information in a later stage to dispute his liability. The court observed that, in the CDP context, when Appeals sends its initial letter to the taxpayer scheduling a conference but receives no response, Appeals usually sends the taxpayer a "last chance" letter. But the court found that in Barnhill's TFRP case, when Appeals received no response to its initial scheduling letter (Letter 5157), Appeals simply closed the case a mere two days later and instructed Collections to assess the penalties. In the court's view, there may have been a good reason for this brisk efficiency, but the court could not say that it gave Barnhill an opportunity to dispute his liability. The facts did not suggest a deliberate, arbitrary refusal by Appeals to hear Barnhill's appeal, but in the court's view, a taxpayer who did suffer such a refusal could hardly have received any less of an opportunity to dispute the TFRP liability than Barnhill did.

The court rejected the IRS's harmless error argument because it found that the harmless error rule applies only when a mistake clearly has no bearing on the procedure used or the substance of the decision rendered. The court noted that Barnhill filed his appeal in response to instructions indicating a process with multiple stages, but did not receive the Letter 5157 or Publication 4227 explaining the Appeals process. The court found that the Letter 5157 indicated that the process should have allowed for additional information to be submitted and then should have allowed for a discussion of a settlement, the Appeals officer's preliminary findings, facts, arguments, and whether the law supported Barnhill's position, and any new information or issues raised by Barnhill. The court therefore concluded that even if the Appeals officer conscientiously considered Barnhill's initial appeal, it could not say that the omission of all the potential subsequent activity in the TFRP process was harmless.

For a discussion of the trust fund recovery penalty, see Parker Tax ¶210,108. For a discussion of the requirement for an opportunity to dispute an underlying liability, see Parker Tax ¶260,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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