Seemingly minor details can have a big financial impact: in an earlier post, I discussed a tax refund case that failed because the plaintiff could not establish timely mailing of its refund claim, a jurisdictional prerequisite. The IRS is also bound to establish mailing in certain contexts, as a recent decision by the Federal Circuit illustrates.
In Welch v. United States, 2012 U.S. App. LEXIS 10099 (Fed. Cir. May 18, 2012), the question was whether the IRS had provided sufficient proof that it had made a timely mailing of the statutory notice of deficiency. The taxpayers won a substantial tax refund because the IRS could not provide sufficient evidence.
Generally, the IRS has three years to assess additional tax after a taxpayer files a return, although that time frame can be extended by agreement, which often happens during an audit. See I.R.C. § 6501(a), (c)(4)(A). Section 6503(a) of the Internal Revenue Code provides that the assessment statute of limitations is also tolled when the IRS sends the taxpayer a statutory notice of deficiency under Section 6212(a). The result of a timely notice of deficiency is two-fold: it tolls the statute for ninety days to permit the taxpayer to file for review with the Tax Court, and it tolls the statute for an additional sixty days in the event that no petition is filed by the taxpayer. I.R.C. §§ 6213; 6503(a)(1). To obtain the benefit of these tolling provisions, the IRS has to provide evidence that it mailed the statutory notice of deficiency within the existing limitations period. Section 6212(a) of the Code authorizes the use of registered or certified mail for this purpose, but it does not require it, and courts have recognized that regular mail or hand delivery will also suffice.
Because the IRS must establish timely mailing of the notice of deficiency, the Internal Revenue Manual provides a routine procedure to assure that proof can be established: PS Form 3877 is to be completed, indicating that notices of deficiency were mailed, listing the tax years at issue, providing the item number for the certified or registered mail item, and noting the name and address of the taxpayer. The form is then countersigned and dated at the Post Office by the relevant postal employee. Welch v. United States, 2012 U.S. App. LEXIS 10099, slip op. at *12-*13. When the IRS can produce both a date-stamped copy of the notice of deficiency and the Form 3877, it is entitled to a presumption of mailing, and the taxpayer has the burden of rebutting that presumption with clear and convincing evidence. Id. at 14-15.
In Welch, however, the IRS did not follow this protocol, and the main evidence that it had to establish mailing consisted of entries in an appeals officer’s Appeals Case Memoranda indicating first, that a request had been made to IRS counsel to approve the issuance of a notice of deficiency in specific amounts and for specific years, and second, that the statutory notice had been approved. Id. at 4-5. Tax assessments were then entered for the relevant tax years, and their validity was dependent upon proof of timely mailing of the statutory notice of deficiency.
If the statutory deficiency notices for the relevant tax years were timely mailed, then the taxpayers had no right to a refund, but if timely mailing was not established, they were entitled to recover taxes, interest and penalties paid pursuant to the assessment.
While the IRS prevailed in the Court of Federal Claims, on appeal the taxpayers were able to establish that for one of the tax years, its proof fell short. Two tax years were at issue, 1992 and 1995. For 1992, the IRS prevailed because it had a copy of the 1992 deficiency notice along with a return receipt card, signed by a resident of the taxpayers’ apartment building, and presented testimony indicating that notices of deficiency were sent to the taxpayers and that the return receipts related to the only certified mail sent to them. The IRS also produced a copy of a letter to the taxpayers’ representative transmitting a copy of the deficiency notice. Id. at 21-22 & n.3. As for 1995, the IRS lacked a copy of the statutory notice, and had no ability to demonstrate that the return receipt cards that it presented related to a notice for the 1995 tax year. Id. at 25-26. The Federal Circuit held that this was not sufficient evidence to establish that a notice of deficiency was mailed, reasoning that the usual presumption of regularity should not apply on the basis of the scant evidence presented by the government. Id. at 29-31. As a consequence, it directed the entry of judgment in favor of the taxpayers, who were seeking a refund of over $725,000 for the 1995 tax year.
Jim Malone is a tax lawyer based in Philadelphia. © 2012, Malone LLC.