SCOTUS Reports

Tag: I.R.C. § 6672

  • Chavis v. Commissioner, 158 T.C. No. 8 (2022): Trust Fund Recovery Penalties and Collection Due Process Procedures

    Chavis v. Commissioner, 158 T. C. No. 8 (U. S. Tax Ct. 2022)

    In Chavis v. Commissioner, the U. S. Tax Court upheld the IRS’s decision to sustain a tax lien against Angela M. Chavis for trust fund recovery penalties (TFRPs) assessed due to her corporation’s failure to pay payroll taxes. The court ruled that Chavis could not challenge her underlying liability at the collection due process (CDP) hearing because she had a prior opportunity to contest it. Additionally, the court affirmed that ‘innocent spouse’ relief was unavailable for TFRP liabilities, and upheld the IRS’s decision not to place her account in ‘currently not collectible’ status, emphasizing the procedural limitations in CDP hearings and the distinct nature of TFRP liabilities from joint income tax liabilities.

    Parties

    Angela M. Chavis, Petitioner, pro se; Commissioner of Internal Revenue, Respondent, represented by Catherine S. Tyson.

    Facts

    Angela M. Chavis and her then-husband were officers of Oasys Information Systems, Inc. , a corporation that withheld payroll taxes from its employees but failed to pay those taxes to the government during 2011-2014. The IRS issued Chavis a Letter 1153, Notice of Trust Fund Recovery Penalty, proposing to assess TFRPs against her and her husband under I. R. C. § 6672. Chavis received the letter but did not challenge the proposed assessment. Subsequently, the IRS assessed TFRPs totaling $146,682 against Chavis. In an effort to collect this liability, the IRS issued Chavis a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing. Chavis requested a collection due process (CDP) hearing, during which she sought to challenge her underlying liability, requested innocent spouse relief under I. R. C. § 6015, and asked for her account to be placed in ‘currently not collectible’ status and for the lien to be withdrawn. The IRS denied these requests, leading to Chavis’s petition to the U. S. Tax Court.

    Procedural History

    The IRS issued a Letter 1153 to Chavis, which she received but did not challenge. After assessing TFRPs, the IRS issued a Letter 3172, prompting Chavis to request a CDP hearing. The settlement officer (SO) reviewed Chavis’s requests during the CDP hearing and denied them, leading to a notice of determination sustaining the lien filing. Chavis timely petitioned the U. S. Tax Court, which reviewed the case under the summary judgment standard. The court applied an abuse of discretion standard of review to the IRS’s actions since Chavis’s underlying liability was not properly at issue.

    Issue(s)

    Whether Chavis, having received a prior opportunity to challenge her TFRP liability upon receipt of the Letter 1153, was entitled to challenge her underlying tax liability at the CDP hearing or in the U. S. Tax Court?

    Whether Chavis was eligible for ‘innocent spouse’ relief under I. R. C. § 6015 for her TFRP liability?

    Whether the IRS abused its discretion in sustaining the collection action against Chavis?

    Rule(s) of Law

    I. R. C. § 6330(c)(2)(B) states that a taxpayer may challenge the existence or amount of her underlying tax liability in a CDP case only if she did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute it.

    I. R. C. § 6672(a) provides that any person required to collect, truthfully account for, and pay over payroll taxes, who willfully fails to do so, shall be liable for a penalty equal to the total amount of the tax evaded or not accounted for and paid over.

    I. R. C. § 6015 provides relief from joint and several liability on joint returns, but this relief applies only to liabilities shown on (or should have been shown on) a joint federal income tax return.

    Holding

    The U. S. Tax Court held that Chavis was not entitled to challenge her underlying TFRP liability at the CDP hearing or in the court because she had a prior opportunity to dispute it upon receipt of the Letter 1153. The court also held that Chavis was not eligible for ‘innocent spouse’ relief under I. R. C. § 6015 because her TFRP liability did not arise from any liability shown on a joint federal income tax return. Finally, the court held that the IRS did not abuse its discretion in sustaining the collection action against Chavis.

    Reasoning

    The court’s reasoning was based on the statutory framework governing TFRPs and CDP hearings. The court noted that TFRPs are ‘assessable penalties’ not subject to deficiency procedures, but taxpayers have the opportunity to dispute their liability by appealing a Letter 1153. Since Chavis received the Letter 1153 and did not appeal, she was precluded from challenging her underlying liability at the CDP hearing. Regarding ‘innocent spouse’ relief, the court interpreted I. R. C. § 6015 to apply only to liabilities arising from joint federal income tax returns, not TFRPs. The court upheld the IRS’s decision to deny CNC status and lien withdrawal, finding that the settlement officer properly calculated Chavis’s ability to pay and that Chavis failed to provide evidence supporting her claims. The court emphasized that the IRS’s actions were not arbitrary, capricious, or without sound basis in fact or law, thus not constituting an abuse of discretion.

    Disposition

    The U. S. Tax Court granted the IRS’s motion for summary judgment, sustaining the notice of determination and upholding the tax lien filing against Chavis.

    Significance/Impact

    Chavis v. Commissioner reinforces the procedural limitations on challenging underlying liabilities in CDP hearings when a prior opportunity to dispute existed. It clarifies that ‘innocent spouse’ relief under I. R. C. § 6015 does not extend to TFRP liabilities, which are distinct from joint income tax liabilities. The decision also underscores the IRS’s discretion in determining collection alternatives based on the taxpayer’s financial situation and adherence to administrative procedures. This case is significant for practitioners and taxpayers dealing with TFRPs, as it highlights the importance of timely challenging proposed assessments and understanding the scope of relief available in CDP proceedings.

  • Weber v. Commissioner, 138 T.C. 348 (2012): IRS Discretion in Applying Overpayments

    Weber v. Commissioner, 138 T. C. 348 (U. S. Tax Court 2012)

    The U. S. Tax Court upheld the IRS’s discretion to apply a taxpayer’s overpayment from one year to an outstanding penalty from a previous year, rather than to the taxpayer’s estimated tax for the following year as elected. Hershal Weber’s 2006 overpayment was applied to a 2005 trust fund recovery penalty, not his 2007 estimated tax. This ruling clarifies the IRS’s authority under I. R. C. § 6402 and impacts how taxpayers can expect overpayments to be managed.

    Parties

    Hershal Weber, as the petitioner, challenged the Commissioner of Internal Revenue, as the respondent, in the U. S. Tax Court.

    Facts

    Hershal Weber filed his 2006 federal income tax return in 2007, reporting an overpayment of $46,717 and electing to apply it to his 2007 estimated income tax. However, the IRS assessed a $1,002,339 penalty against Weber under I. R. C. § 6672 for unpaid trust fund taxes from S&G Services, Inc. for 2005. The IRS applied Weber’s 2006 overpayment to this penalty instead of his 2007 estimated tax. In 2008, S&G’s liability was satisfied by third-party payments, but Weber’s 2007 return still claimed the 2006 overpayment, resulting in a reported overpayment for 2007 that he elected to apply to 2008. The IRS adjusted Weber’s 2007 and 2008 returns to eliminate the claimed overpayments, leading to a balance due for 2008. Weber contested this in a collection due process hearing, arguing his penalty was overpaid and should satisfy his 2008 liability.

    Procedural History

    The IRS assessed the § 6672 penalty against Weber in 2007 and applied his 2006 overpayment to this penalty. Weber filed his 2007 return claiming the 2006 overpayment, and the IRS adjusted this and his 2008 return, leading to a balance due for 2008. After receiving a notice of proposed levy, Weber requested a collection due process hearing under I. R. C. § 6330. The IRS Office of Appeals upheld the proposed levy, and Weber appealed to the U. S. Tax Court, which granted summary judgment to the Commissioner.

    Issue(s)

    Whether the IRS abused its discretion under I. R. C. § 6402 in applying Weber’s 2006 income tax overpayment to his § 6672 penalty liability rather than to his 2007 estimated income tax as elected?

    Whether the Tax Court has jurisdiction in a collection due process hearing to adjudicate Weber’s claim of an overpayment of the § 6672 penalty?

    Rule(s) of Law

    I. R. C. § 6402(a) states that the IRS “may” credit an overpayment against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and “shall” refund any balance to such person. I. R. C. § 6402(b) authorizes the Secretary to prescribe regulations for crediting overpayments against estimated income tax for the succeeding year. 26 C. F. R. § 301. 6402-3(a)(5) allows a taxpayer to elect to apply an overpayment to estimated tax for the succeeding year, but § 301. 6402-3(a)(6) clarifies that the IRS retains discretion to apply overpayments to other outstanding liabilities.

    Holding

    The Tax Court held that the IRS did not abuse its discretion under I. R. C. § 6402 in applying Weber’s 2006 overpayment to his § 6672 penalty rather than to his 2007 estimated income tax. The Court further held that it lacked jurisdiction in the collection due process hearing to adjudicate Weber’s claim of an overpayment of the § 6672 penalty.

    Reasoning

    The Tax Court reasoned that I. R. C. § 6402 and the corresponding regulations grant the IRS broad discretion in applying overpayments. The IRS’s decision to apply Weber’s 2006 overpayment to the already assessed § 6672 penalty, rather than to the future 2007 estimated tax liability, was within this discretion. The Court emphasized that Weber’s election under 26 C. F. R. § 301. 6402-3(a)(5) to apply the overpayment to 2007 was not binding on the IRS. Regarding jurisdiction, the Court distinguished between credit elect overpayments, which could be considered in a collection due process hearing, and overpayments from unrelated liabilities, such as the § 6672 penalty, which require a separate refund suit. The Court noted that allowing such claims in a collection due process hearing would contradict the established refund litigation scheme and could lead to practical and conceptual issues, including the potential for delaying collection actions pending resolution of complex refund claims.

    Disposition

    The Tax Court granted summary judgment to the Commissioner, upholding the IRS’s determination to proceed with the levy to collect Weber’s 2008 income tax liability.

    Significance/Impact

    This case reinforces the IRS’s discretion under I. R. C. § 6402 to apply overpayments to any outstanding tax liability, rather than being bound by a taxpayer’s election. It clarifies that the Tax Court’s jurisdiction in collection due process hearings does not extend to adjudicating overpayment claims for unrelated liabilities, such as the § 6672 penalty, which must be pursued through separate refund litigation. This decision has practical implications for taxpayers, emphasizing the importance of understanding the IRS’s application of overpayments and the limitations of challenging such actions in collection due process proceedings.