ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – AVOID BLOWING YOUR CDP RIGHTS – PART 3
By Robert S. Schriebman
This is Part 3 of a 3-Part series.
The Collection Due Process (CDP) has afforded protection to taxpayers for over twenty years. I am proud to have been the father of this revolutionary legislation. Prior to the enactment of CDP, taxpayers who owed the IRS had no prepayment rights to challenge IRS assessments or to work out solutions to their IRS debt. Taxpayers were at the mercy of Revenue Officers who had total discretion to issue liens and levies and even closing a taxpayer’s business.
IRC §§ 6220 and 6230 prevent the IRS from engaging in enforced collection action without first affording taxpayers the ability to challenge the assessment, remove a lien, negotiate an installment payment arrangement or take advantage of the Offer in Compromise process. Millions of taxpayers have taken advantage of this revolutionary legislation, including the right to have a hearing before the US Tax Court or US District Court without first having to pay what was demanded by the IRS. I worked hand-in-hand with the late Senator William Roth (Roth IRA) to create this process and make it a permanent part of American tax law.
Having said the above, taking advantage of the CDP process requires affirmative action on the part of the taxpayer. Not only must one timely file the appropriate paperwork requesting a CDP hearing, but one must also take the steps not to blow his/her right to the advantages afforded by this process. For example, one must communicate and cooperate with the assigned Settlement Officer (SO). More importantly, one should know when and how to challenge the underlying tax assessment.
In Part 2, I discussed when one cannot use the CDP process to challenge the appropriateness of the assessment. For example, if one is on the receiving end of a Trust Fund Recovery Penalty assessment (TFRP), there are procedures for challenging the assessment that are unique to the TFRP process. If one fails to exercise one’s rights during this process, one does not get a second bite at the apple that allows contesting the assessment during a CDP hearing. CDP rights are limited to establishing an installment payment arrangement, offer in compromise, or hardship suspension. One may also challenge the appropriateness of the IRS filing a tax lien. But one cannot contest the merits of the underlying assessment. Mohammad A. Kazmi learned this the hard way.
The Kazmi Case
The recent case of Mohammad A. Kazmi v. Commissioner, (TC Memo 2022-13, March 1, 2022)
serves as an example of the disaster awaiting a taxpayer who fails to challenge the deficiency at the right time and the right place. Mr. Kazmi was not allowed to contest the TFRP assessment in the CDP hearing.
Kazmi was employed by an urgent care facility. He was a parttime bookkeeper. He had no ownership in the business. He was not an officer. His name was not on any bank account. He did not have check-signing authority. At all times he worked under the authority and direction of Dr. S., the owner. Kazmi signed and filed corporate payroll tax returns. He also remitted payroll tax deposits and other payroll payments to the IRS. Despite this limited authority, an IRS Revenue Officer (RO) determined that Kazmi was a person responsible for collecting and paying over payroll taxes for 2 quarters in 2015 amounting to about $10,000. Dr. S. tried to intervene in Kazmi’s defense, and sent the RO a letter taking full responsibility for payroll tax compliance and requesting that Kazmi be relieved from any exposure. Nevertheless, the RO assessed Kazmi the TFRP.
As part of the TFRP process, the IRS is required to send the targeted taxpayer Letter 1153 explaining that the taxpayer has 60 days to challenge the TFRP assessment by submitting a written appeal. However, Kazmi made no appeal. The IRS then timely assessed the TFRP against Kazmi. The proposed assessment now became final and subject to IRS collection action.
Kazmi filed a petition in the US Tax Court to challenge the SO’s decision and he accused the SO of an abuse of discretion for refusing to honor his request to dispute his liability.
What the US Tax Court Held
Judge Paris of the US Tax Court sustained the SO’s position in denying Kazmi a hearing on the merits; there was no abuse of discretion on the SO’s part.
Employers have a duty to withhold or collect from an employee’s wages the employee’s share of federal tax and then must pay over the withheld amounts to the Treasury.
IRC § 6672(a) imposes the TFRP on the responsible person required to collect and pay over withheld payroll taxes and who willfully fails to collect those taxes and pay them over, or willfully attempts, in any manner, to evade or defeat that duty. The TFRP is known as an “assessable penalty.” Because the IRS can assess the TFRP against a person in Kazmi’s position without first having to send him a 90-day letter or Notice of Deficiency.
Who are the most likely targets for the TFRP? The likely targets are a corporate officer, shareholder, a member of the board of directors, a person having check signing authority or one having control over the day-to-day business fiscal affairs. (United States v. Kim, 111 F.3d 1351, 7th Cir. 1997.)
Whether we are discussing the IRS or the EDD, the two primary elements are always the same: responsibility and willfulness. “Willful” does not mean the responsible person must have a criminal or other bad motive… but simply a voluntary conscious and intentional failure in his duties to the Treasury.
Kazmi cannot challenge an underlying liability in a CDP hearing, and the Tax Court cannot review his liability because Kazmi had an earlier opportunity to dispute the assessment of the proposed liability. IRS Letter 1153 provided Kazmi with an administrative means for protesting the proposed TFRP assessment. He failed to timely challenge the proposed assessment at an Appeals Conference. Therefore, he is precluded by IRC § 6630(c) from challenging the underlying liability in his CDP hearing.
Kazmi Gets a Second Bite at the Apple
While Kazmi is precluded from contesting his liability during a CDP hearing, he nevertheless has an avenue available. The section 6672 penalty is divisible. This allows a taxpayer to litigate the penalty after having paid an amount corresponding to the tax withheld from a single employee. He can make a small token payment toward the TFRP, file a claim for refund with the IRS (Form 843), and if his refund claim is denied, he may file a refund suite in the District Court or the Court of Federal Claims.
The Kazmi case is a good example of what not to do. Filing a Protest with IRS Appeals and trying to resolve the matter of liability with an Appeals Officer is a heck of a lot cheaper than going through the costly and time-consuming refund process.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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