Diego E. Salazar v. Commissioner

Late Petition Saved by IRS Waiver, But Penalties Stick

Ordinarily, missing the 30-day deadline to petition the Tax Court is a fatal error, depriving the court of jurisdiction. But in a recent case, a taxpayer got a reprieve because the IRS effectively waived the deadline by remanding the case for a supplemental hearing. Despite surviving this procedural hurdle and signing an installment agreement "under protest," the taxpayer ultimately lost his challenge to penalties and interest. The Tax Court granted Summary Judgment for the IRS.

A History of Delinquency and Preparer Fraud

Following a recent Tax Court ruling, a taxpayer who filed his petition late still had a chance to argue his case because the IRS remanded the case for a supplemental hearing. Despite this, the Tax Court granted Summary Judgement for the IRS.

The saga began with delinquent Federal income tax returns for 2014 and 2015, which the petitioner filed on December 27, 2016. He filed timely returns for 2016 and 2017. All four returns were prepared by Vilsaint St. Louis of Victory Tax Services. The IRS commenced an examination of the four returns, and the petitioner participated. However, his claimed deductions were disallowed because he failed to substantiate them. The petitioner later conceded that he “significantly overreported deductions” on his 2014–2017 returns and that “he failed to retain records and properly document his deductions.”

On January 30, 2019, the IRS issued the petitioner a Notice of Deficiency (Notice) for 2014–2017. The Notice determined a deficiency in tax for each year, along with a 20% accuracy-related penalty under Section 6662(a). Section 6662(a) imposes a penalty of 20% on the portion of an underpayment of tax attributable to, among other things, negligence or disregard of rules or regulations. For 2015 only, the IRS also determined an addition to tax under Section 6651(a)(1) for failure to timely file. Section 6651(a)(1) imposes a penalty for failing to file a tax return by the due date, unless such failure is due to reasonable cause. The deficiencies totaled $47,560, the penalties totaled $9,512, and the addition to tax for 2015 was $657. The Notice informed the petitioner of his right to dispute these adjustments by petitioning the Tax Court, but he did not do so.

On August 12, 2019, the IRS assessed the liabilities as determined in the Notice. Over two years later, on October 27, 2021, in an effort to collect the unpaid liabilities, the IRS issued the petitioner a Notice of Intent to Levy and Your Collection Due Process Right to a Hearing (levy notice). The liabilities appearing on the levy notice included the liabilities determined in the Notice, plus interest and additions to tax for failure to pay under Section 6651(a)(2). The interest shown on the levy notice totaled $5,802, and the Section 6651(a)(2) additions to tax totaled $11,890.

The IRS mailed the levy notice to the petitioner at his address in Davie, Florida. He timely requested a Collection Due Process (CDP) hearing by submitting Form 12153, Request for a Collection Due Process or Equivalent Hearing. He requested a collection alternative in the form of an Installment Agreement (IA). He did not challenge his underlying tax liabilities for 2014–2017. On February 11, 2023, Appeals assigned the case to Settlement Officer (SO) Aliza Cohen. She verified that the petitioner’s tax liabilities for 2014–2017 had been properly assessed and that all applicable legal and administrative requirements had been satisfied. Despite the lack of a submitted Form 433-A, Collection Information Statement, SO Cohen offered him an IA calling for payments of $1,645 per month. The petitioner ultimately accepted the offer "under protest and with full reservation of rights."

Jurisdictional Saves and Procedural Walls

Following the offer of an installment agreement, the Tax Court then considered two key preliminary issues: first, whether it even had jurisdiction to hear the case given the late filing of the petition; and second, whether the petitioner was procedurally barred from challenging the underlying tax liabilities.

The court first addressed the timeliness of the petition. Section 6330(d)(1) provides that a taxpayer has 30 days from the date of a determination under that section to petition the Tax Court for review. Here, the Notice of Determination was dated June 29, 2023, meaning the petition was due by July 29, 2023. The petition was mailed September 2, 2023, and filed September 5, 2023, well past the deadline. However, citing Boechler, P.C. v. Commissioner, 142 S. Ct. 1493 (2022), the court noted that the 30-day filing deadline is a non-jurisdictional claim-processing rule subject to equitable tolling. Boechler established that because the deadline isn't jurisdictional, it can be waived by the IRS. The Tax Court Rules, specifically Rule 39, state that a party must assert any matter constituting an avoidance or affirmative defense. In this case, despite acknowledging the late filing in its answer, the IRS later filed a Motion to Remand the case to Appeals. Therefore, the court concluded that the IRS had waived any affirmative defense regarding timeliness or, alternatively, had implicitly acquiesced to the petitioner’s argument for equitable tolling based on his claim of not receiving a copy of the determination notice.

The second key dispute concerned the petitioner's ability to challenge the underlying tax liabilities. Section 6330(c)(2)(B) generally prevents a taxpayer from challenging the existence or amount of an underlying tax liability in a Collection Due Process (CDP) hearing if they received a statutory notice of deficiency or otherwise had a prior opportunity to dispute the liability. The IRS argued that the petitioner did have a prior opportunity to dispute the accuracy-related penalties for 2014-2017 when he received the Notice of Deficiency. The petitioner countered that "fundamental fairness" warranted abatement due to his preparer's fraud.

The Court's Ruling: Preclusion and Discretion

Judge Lauber addressed the taxpayer's arguments, finding them unpersuasive. Regarding the underlying tax liability, the court explained that under Section 6330(c)(2)(B), a taxpayer cannot challenge the existence or amount of an underlying tax liability in a Collection Due Process (CDP) hearing if they received a statutory notice of deficiency or otherwise had a prior opportunity to dispute the liability. The IRS argued that the petitioner did have a prior opportunity to dispute the accuracy-related penalties for 2014-2017 when he received the Notice of Deficiency. The petitioner countered that "fundamental fairness" warranted abatement due to his preparer's fraud.

The court found that because the IRS mailed the Notice of Deficiency to the taxpayer's last known address on January 30, 2019, regarding the 2014-2017 tax years, the petitioner did have a prior opportunity to dispute the accuracy-related penalties. The notice was timely issued within three years of the filing of the taxpayer's returns, as required by Section 6501(a), which governs the period of limitations on assessment. Because the taxpayer failed to petition the Tax Court in response to the Notice of Deficiency, he was precluded from challenging the penalties during the CDP proceeding.

While the taxpayer was precluded from challenging the penalties, he could challenge the interest and additions to tax under Section 6651(a)(2), which imposes a penalty for failure to pay, because those amounts were not determined in the Notice of Deficiency. However, the court noted that the taxpayer only challenged the accuracy-related penalties and interest during the supplemental hearing, and did not challenge the additions to tax for failure to timely pay.

Regarding interest abatement, the court cited Section 6404(e), which authorizes the IRS Secretary to abate interest attributable to unreasonable errors or delays by the IRS in performing a ministerial or managerial act. The court found the taxpayer supplied no evidence of such errors or delays. The taxpayer conceded that his argument for abatement, based on "fundamental fairness," did not fit within the statutory categories. Therefore, the court reviewed the IRS’s determinations for abuse of discretion only.

An abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. Section 6330(c)(3) outlines factors to consider in determining if the Settlement Officer (SO) abused discretion, including verifying that the requirements of applicable law or administrative procedure were met, considering relevant issues raised by the taxpayer, and balancing the need for efficient tax collection with the taxpayer's legitimate concerns. Judge Lauber found that the SO properly discharged all her responsibilities. The SO verified that notice and demand for payment were made within 60 days of the assessment and secured a copy of the notice and U.S. Postal Service Form 3877, verifying that the notice was sent to the taxpayer’s last known address.

The SO also considered collection alternatives. Section 6159(a) authorizes the IRS to enter into a written agreement allowing a taxpayer to pay a tax liability in installments if it concludes that the agreement will facilitate full or partial collection of such liability. The SO generously offered the taxpayer an installment agreement (IA) even though he had supplied no financial information and had neglected to submit a Form 433–A, which is typically required to evaluate a taxpayer's ability to pay. The taxpayer ultimately accepted her offer by executing a Form 433–D, agreeing to an IA with a monthly payment of $1,637. Because the taxpayer’s execution of the IA eliminated the need for current collection action with respect to his 2014–2017 liabilities, the SO properly concluded that the proposed levy, while appropriate when initially issued, would not be sustained.

Takeaways: Tolling and the 'Prior Opportunity' Trap

Tax practitioners should note several key takeaways from this case. First, the Tax Court acknowledged that the IRS's actions—specifically filing for a remand after the Supreme Court's decision in Boechler, P.C. v. Commissioner, 142 S. Ct. 1493 (2022)—could constitute a waiver of the 30-day deadline for petitioning the Tax Court under Section 6330(d)(1). That section governs the timeline for appealing a Collection Due Process determination. The Supreme Court in Boechler established that this deadline is not jurisdictional and is therefore subject to equitable tolling. The IRS, by seeking remand, implicitly conceded the timeliness of the petition, even though it was initially filed late.

Second, the case reinforces the rigid application of the "prior opportunity" rule under Section 6330(c)(2)(B). That section states a taxpayer can only challenge the underlying tax liability in a CDP hearing if they did not receive a notice of deficiency or have a prior opportunity to dispute it. Here, the taxpayer's attempt to retroactively challenge accuracy-related penalties based on alleged preparer fraud years after receiving the Notice of Deficiency was futile. The court held that the taxpayer had a prior opportunity to dispute the penalties and was therefore precluded from raising the issue during the CDP proceeding.

Finally, the taxpayer's attempt to sign an Installment Agreement (IA) "under protest" proved inconsequential. The court emphasized that to preserve an underlying tax liability challenge, the taxpayer must properly raise the challenge during the CDP hearing itself. This includes explaining the basis for the challenge and providing supporting evidence. Because the taxpayer failed to adequately challenge the underlying penalties, interest, or additions to tax during the CDP process—including providing evidence to support an abatement under Section 6404(e) which allows the IRS to abate interest attributable to unreasonable errors or delays—the court reviewed the IRS's determinations only for abuse of discretion, a very difficult standard for taxpayers to overcome.