Ask The California Employment Tax And Payroll Tax Attorney – The IRS Assessment Process And The Importance Of Form 3877

By Robert S. Schriebman

2024

Introduction

The IRS must go through many internal procedures when it issues a proposed assessment. The usual assessment of federal income taxes takes the form of a statutory notice of deficiency or “90-Day Letter.” The primary statutes are IRC §§ 6212 and 6213. The essence of IRC § 6212 is that the IRS is required to send the proposed assessment to the taxpayer’s last known address and be able to prove that all internal procedures have been observed. When this happens, the assessment is presumed to be properly issued. A properly issued assessment requires that the taxpayer file a petition in the US Tax Court within 90 days. If the taxpayer fails to file a petition, the taxpayer is not allowed to challenge the underlying assessment in a collection due process (CDP) proceeding.

If the taxpayer claims that he did not receive the deficiency notice, the IRS has the burden of proving that it went through all required internal procedures to make sure the notice was properly issued and delivered to the taxpayer’s last known address. One of the most important steps the IRS must take is to prove the issuance of the notice is by producing a proper USPS Form 3877 (Firm Mailing Book For Accountable Mail). In IRS jargon this is known as the “Certified Mailing List.” The form requires signatures by the proper IRS employee and the counterpart at the US Post Office.

In the recently decided Saul Bradley case, the Tax Court explained why Form 3877 is so important. This article will discuss the Bradley decision and the necessity of proper procedures involving Form 3877.

The Saul Bradley Case

Saul Bradley v. Commissioner, US Tax Court, TC Memo, 2024-7, January 22, 2024

Bradley was audited by the IRS and assessed for back income taxes for the year 2013. In 2015, the IRS issued a deficiency notice to Bradley, but he did not file a petition in the Tax Court. He eventually received a notice to file a CDP petition which he did file in a timely fashion. At the CDP hearing, he informed the Settlement Officer (SO) that he never received the deficiency notice. If Bradley could prove defects in the assessment process, the IRS may be statute barred from reissuing a new assessment notice. In that event, Bradley would not owe anything for the year 2013. On the other hand, if the IRS could prove that it followed correct internal procedures by sending the notice timely to Bradley’s last known address, Bradley would not be allowed to challenge the merits of the finalized assessment. Bradley would owe the taxes and would have to fully pay the assessment before he could have a hearing on the merits. This hearing would be either in the US District Court or the US Court of Federal Claims. He would not be allowed back to the Tax Court.

The SO ordered Bradley’s internal files. He was looking for the all-important internal document, Form 3877.

The Law As It Relates To the Issuance of a Deficiency Notice

A taxpayer may dispute his underlying liability in the CDP hearing, but only if he did not receive a valid notice of deficiency or otherwise have a prior opportunity to contest his liability. For purposes of determining whether a taxpayer may challenge the underlying deficiencies, actual receipt of the notice of deficiency must be determined. IRC § 6330(c). The IRS bears the burden of proving, by competent and persuasive evidence, the existence of the notice of deficiency and its proper mailing. Producing a properly completed Form 3877 showing that the notice of deficiency was sent to the taxpayer’s last known address is a must for the IRS. A properly completed Form 3877 is one completed in compliance with the established IRS procedures for mailing. The Certified Mailing List shows the name and addresses of taxpayers who were sent certified notices on a specific day. The form must also be signed and initialed by the IRS agent who issued the notices. Form 3877 must be signed by the USPS employee who accepted deliveries of deficiency notices on a specific date. If stamped signatures are used, the Form is not valid. The IRS must produce other evidence that Form 3877 is legally sufficient. In Bradley’s case the signatures were stamped. Therefore, the Tax Court looked for other evidence of proper mailing.

A completed Certified Mailing List (Form 3877) may serve as evidence that the notice of deficiency was properly mailed to the taxpayer. In the Bradley case the Tax Court held that the stamped signatures were minor defects. The IRS proved proper mailing by showing that Bradley’s deficiency notice was indeed delivered to the USPS and the address was Bradley’s current and proper mailing address. Bradley did not contest that the address listed on Form 3877 was an improper address. The address on the deficiency notice matched the address on Form 3877. The Tax Court concluded that the notice of deficiency was indeed properly issued.

Conclusion

If a taxpayer can prove defects in the IRS internal assessment process, especially defects in the issuance of the notice of deficiency, the taxpayer may be able to walk away from the entire assessment.  Who knows?

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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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