Opinion
12122-21L
06-06-2023
CARRIE L. ANDERSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Richard T. Morrison, Judge.
We grant the Motion for Summary Judgment (Doc. 20) filed by respondent ("the IRS") on March 29, 2023, and opposed by petitioner Carrie L. Anderson. We sustain the supplemental notice of determination of the Independent Office of Appeals ("Appeals") dated June 29, 2022. In the supplemental determination, Appeals sustained a proposed levy to collect a $5,000 frivolous tax submission penalty under § 6702(a) for tax year 2016. We have jurisdiction to review the determination under § 6330(d)(1).
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Background
On September 20, 2017, Anderson filed a tax return for 2016 falsely claiming that her credit union had withheld $58,542 of federal income tax from her income as part of a fictitious transaction in which the credit union, in order to meet its "daily depository quota with the Federal Reserve," had exchanged her demand deposit for a security interest in an unnamed asset of the credit union and then transferred to her a full ownership interest in the unnamed asset. The return stated that Anderson had conducted an "extensive study of Title 26 of the Code of Federal Regulations," but that she not was not a "tax code expert." She said: "If you [i.e., the IRS] can find a mistacke [sic] or error, please notify me within 30 days that I may take corrective action. Otherwise, thank you for processing my return promptly."
Compared to the $58,542 amount it claimed as having been withheld from Anderson's income, Anderson's return reported relatively little amounts of income.
Specifically, it reported $2,690 of wages, $20,541 of taxable IRA distributions, and $2,016 of taxable Social Security benefits.
The return requested a $59,631 refund from the IRS. This amount is equal to (1) a total tax liability of $1,183 minus (2) $60,814 of tax withholding ($58,542 of which was falsely claimed).
For purposes of resolving the IRS's Motion for Summary Judgment, we assume that the false claim of withholding credit was a fraud perpetrated by Anderson's tax return preparer (Catharine Harvey), not by Anderson herself. Espinoza v. Commissioner, 78 T.C. 412, 416 (1982) ("The opposing party is to be afforded the benefit of all reasonable doubt, and any inference to be drawn from the underlying facts contained in the record must be viewed in a light most favorable to the party opposing the motion for summary judgment.").
On April 15, 2017, the IRS updated its records to show that, as reported by Anderson's return, $60,814 had been withheld from Anderson's income as income tax withholding for 2016. The IRS granted Anderson the $59,631 refund she requested for 2016. It did so through two mechanisms: first, it gave Anderson a credit against her 2015 tax liability of $5,200.50 (a credit made on April 15, 2017) and second, it paid Anderson a cash refund of $54,430.50 (a refund made on October 12, 2017).
On May 17, 2018, the IRS issued a Letter 3176 to Anderson warning her that her 2016 return contained a frivolous position and that if she did not correct the return she would be subject to a $5,000 penalty under § 6702(a). We assume for purposes of resolving this motion for summary judgment that only when she received the letter did Anderson realize that the claim for refund regarding income tax withholding by her credit union was part of a fraudulent scheme on the part of her tax return preparer.
After receiving the Letter 3176, Anderson did not correct her fraudulent 2016 Form 1040.
On June 17, 2019, the IRS assessed a $5,000 frivolous tax submission penalty under § 6702(a) against Anderson for the return.
On November 1, 2019, the IRS issued a notice to Anderson that it proposed to levy to collect the frivolous tax submission penalty for tax year 2016, and associated interest, in the amount of $5,118.92.
On November 25, 2019, Anderson timely requested a CDP hearing in response to the November 1, 2019 notice of proposed levy.
On March 25, 2021, the IRS issued a notice of determination sustaining the proposed levy for tax year 2016. SOn April 8, 2021, Anderson timely filed a Tax Court petition.
On August 5, 2021, Anderson filed a First Amended Petition (Doc. 6). Anderson asserted that she had not received any correspondence about a CDP hearing and that she had been having trouble receiving mail.
On May 13, 2022, the Court remanded the case for a supplemental CDP hearing due to Anderson not receiving written notification of her CDP hearing (Doc. 15).
At the supplemental hearing, Anderson gave conflicting accounts of her involvement in the fraudulent scheme embodied by her 2016 tax return. She gave the IRS a copy of Better Business Bureau article warning customers about her tax-return preparer's firm. Anderson explained that her own involvement was "due to a scam." These communications were seemingly meant to suggest that she was defrauded by her tax-return preparer. However, Anderson also admitted that in her "gut" she knew the return was probably wrong. And she admitted that her judgment was impaired by her need for money to buy a new car.
Anderson also told Appeals that the IRS had disregarded her request in her 2016 return to notify her within 30 days of any mistake or error. She explained that the IRS's failure to do so violated the Taxpayer Bill of Rights: in particular, the "Right to be Informed" and the "Right to Quality Service." Because of these violations, she alleged, she should not be liable for the frivolous tax submission penalty for her 2016 return. In the course of the hearing, Appeals advised Anderson that she could request a penalty reduction under § 6702(d) by submitting a Form 14402.
On August 29, 2022, Appeals issued a notice of supplemental determination. [No. 21 at 11] Appeals sustained the proposed levy. Appeals stated that Anderson's "request for penalty abatement is … denied" and that Anderson had "filed frivolous return information."
On March 29, 2023, the IRS filed a motion for summary judgment. In the motion, the IRS alleged that Appeals had obtained verification that the requirements of any applicable law or administrative procedure had been met. The IRS alleged that Anderson had failed to present Appeals any evidence with respect to her liability for the frivolous tax submission penalty for tax year 2016, and therefore did not properly raise her underlying liability for this penalty and is precluded from disputing the liability in this Tax Court proceeding. The IRS contended that even if Anderson had properly raised her underlying liability before Appeals, there is no genuine dispute of material fact regarding her liability for the frivolous tax submission penalty. The IRS contended that Appeals did not err in its consideration of collection alternatives. The IRS contended that Appeals did not err in balancing the need for collection with Anderson's interest that the collection action not be unnecessarily intrusive.
On April 19, 2023, Anderson filed a Response to Motion for Summary Judgment (Doc. 23). The response was signed under penalties of perjury. In her response, Anderson asserted that her tax return preparer had convinced her to file her 2016 return the way she did, that when she received a refund from the IRS she "felt what she had been told was the truth," and that it was only when she received the May 2018 letter from the IRS that she "realized this transaction was fraudulent." She again alleged that the IRS had violated the Taxpayer Bill of Rights. Although she explained that at some point she had been put into non-collectible status due to inability to pay, and that she had made an offer in compromise that had been rejected, she did not allege that Appeals erred in its handling of collection alternatives. The "Conclusion" portion of the response contains the following statement:
Petitioner's defense is clear and simple. Had the IRS employee performed their job efficiently, accurately, and correctly, Petitioner's tax return would never have been processed. Petitioner has had to fight for her Rights all of her life. Now, at the age of 69, she is tired! Petitioner admits that she used poor judgment in trusting someone she though she really knew; however, this was not willfully done on the part of the Petitioner.
Discussion
In a CDP hearing, Appeals must obtain verification that the requirements of any applicable law or administrative procedure have been met. § 6330(c)(1). At the hearing, a taxpayer may raise any relevant issue, including offers of collection alternatives. § 6330(c)(2)(A). A taxpayer may also raise the underlying liability at the hearing. § 6330(c)(2)(B). In making its determination, Appeals must consider the issues raised by the taxpayer. § 6330(c)(3)(B). It must also balance the need for collecting taxes with interest of the taxpayer that the collection action not be unnecessarily intrusive. § 6330(c)(3)(C).
In reviewing the determination of Appeals, the Tax Court does not review challenges to the underlying liability unless they were properly raised in the CDP hearing. Treas. Reg. § 301.6330-1(f), Q&A-F3. An issue is not properly raised if the taxpayer fails to request consideration of the issue by Appeals, or if consideration is requested but the taxpayer fails to present to Appeals any evidence with respect to that issue. Id. The underlying liability refers to the liability the IRS seeks to collect, including the liability for a tax penalty.
In her response to the motion for summary judgment, Anderson does not allege that Appeals made any error in obtaining verification of fulfillment of legal and procedural requirements. Although she alleges that the IRS violated the Taxpayer Bill of Rights, Anderson only does so in explaining why she does not think she is liable for the underlying frivolous tax submission penalty. She does not challenge the handling of collection alternatives by Appeals.
We hold that Anderson did properly raise the merits of the underlying liability before Appeals. Therefore, she is entitled to challenge her liability for the frivolous tax submission penalty in this Tax Court proceeding.
We hold that she is liable for the penalty.
I.R.C. § 6702(a) imposes a $5,000 penalty if (1) a person files what purports to be a tax return, (2) the purported return is substantially incorrect on its face, and (3) the purported return is based on a position which the Treasury Department has identified as frivolous. First, Anderson's Form 1040 for 2016 purported to be a tax return. Second, it is substantially incorrect on its face because it reported that $60,814 of income tax was withheld from $25,260 of total income. Third, it is based on a position that has been identified by the Treasury Department as frivolous in § III(2) of IRS Notice 2010-33. The conditions of § 6702(a) are therefore satisfied.
Anderson's asserted good-faith belief that the position was correct does not serve as a defense to the §6702(a) penalty. The penalty provision has no "reasonable cause" exception. The only exception is found in § 6702(d), which allows the Treasury Department to reduce the amount of the penalty if it determines that the reduction would "promote compliance with and administrative of Federal tax laws." For a person to be considered for a § 6702(d) reduction, the Treasury Department has determined that the person must submit Form 14402. Rev. Proc. 2012-43, § 4.01(1). Anderson did not submit a Form 14402. Even had she done so, she would not have met the other requirements for penalty reduction under § 6702(d), which are found in Revenue Procedure 2012-43.
Although Anderson alleges that the IRS violated the Taxpayer Bill of Rights (Publication 1; § 7803(a)), and we although assume these allegations to be true for the purpose of resolving the motion for summary judgment, any such violation would not relieve Anderson of her liability for the § 6702(a) penalty liability.
There are no facts in dispute that absolve Anderson of the § 6702(a) penalty.
Conclusion It is
ORDERED that the respondent's March 29, 2023 motion for summary judgment is granted; and it is further
ORDERED and DECIDED that the Supplemental Notice of Determination Concerning Collection Action(s) under Section 6320 and/or 6330, dated August 29, 2022, is sustained.