On remand from the Eleventh Circuit, the Tax Court, in Romano-Murphy v. Comm’r, 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 in September of 2006, 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 that the IRS’s failure to follow the procedural requirements may have saved the taxpayer from a $350,000 bill although it remains to be seen whether the IRS will attempt to reassess the penalty on the theory that the statute of limitations on assessments has been tolled for almost thirteen years under section 6672(b)(3)(B) based upon the taxpayer’s timely protest of the proposed assessment.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.

Photo of Michael M. Lloyd Michael M. Lloyd

Michael Lloyd practices in the areas of tax and employee benefits with a focus on information reporting and withholding on cross-border payments (e.g., Forms 1042 and 1042-S) and Foreign Account Tax Compliance Act (FATCA), backup withholding, employment taxation, the treatment of fringe benefits…

Michael Lloyd practices in the areas of tax and employee benefits with a focus on information reporting and withholding on cross-border payments (e.g., Forms 1042 and 1042-S) and Foreign Account Tax Compliance Act (FATCA), backup withholding, employment taxation, the treatment of fringe benefits, cross-border compensation, domestic information reporting (e.g., Forms W-2, 1099, 1095 series returns), penalty abatement, and general tax planning and controversy matters. Mr. Lloyd advises large U.S. and foreign multinationals regarding compliance with information reporting and withholding issues, as well as a range of other federal and state tax issues.