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Tax Court Holds IRS Assessment of Trust Fund Recovery Penalty Invalid Where No Final Administrative Determination Issued

In Romano-Murphy v Commissioner, 152 T.C. No. 16 (2019), the United States Tax Court held that an IRS assessment of a Trust Fund Recovery Penalty under 26 U.S.C. Section 6672 was invalid where the taxpayer appealed the IRS’s preliminary determination but failed to issue a final administrative determination before assessing.

The Trust Fund Recovery Penalty is one of the most notoriously hard penalties to fight once the IRS has made its determination. Nonetheless, the IRS occasionally engages in technical missteps which can save a taxpayer from being personally liable for a business entity’s unpaid employees’ trust fund portion of payroll taxes, like in Romano-Murphy v Commissioner, 152 T.C. No. 16 (2019) (full PDF of the opinion here).

In this case, the taxpayer protested to the Office of Appeals (an internal IRS appeal function) after a preliminary notice and the IRS simply assessed without making the final administrative determination. At the later collections phase, the taxpayer raised the discrepancy in a Collection Due Process (CDP) hearing, but the IRS determined all procedures leading up to the assessment were valid nonetheless. The taxpayer petitioned that CDP determination to Tax Court.

The U.S. Tax Court had initially held that the taxpayer was liable for the penalty. However, the taxpayer appealed to the 11th Circuit U.S. Court of Appeals, which vacated the Tax Court’s opinion and remanded it back for a ruling in an opinion at Romano-Murphy v. Commissioner, 816 F.3d 707 (11th Cir. 2016). On remand, the U.S. Tax Court reiterated the 11th Circuit’s holding that Section 6672(b)(3)(B) “requires the IRS to make a final administrative determination in response to a timely protest before it can assess the penalty.” Accordingly, the IRS violated that section in making its assessment and the Tax Court held that the IRS’s CDP determination was not sustained – meaning that the IRS will have to abate the penalty.

In my opinion, this case not only instructive as to the procedural requirements but also should be a lesson in tenacity. Winning in tax cases is not easy, especially when the IRS does not do its job or tends to affirm its own determinations. In addition, the Tax Court is not always a favorable forum. The taxpayer in this case filed her petition to the United States Tax Court in 2009 and the taxes were first assessed in 2007, and she did so pro se – without counsel (at least not on record). This was a journey that went over at least a dozen years. Kudos to the taxpayer in this case for going the distance.

Posted by Daniel Layton on 06/23/2019.

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