Seventh Circuit Opinion on Role of Notice of Deficiency and Last Known Address Requirement (3/7/15)

In Gyorgy v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 3100 (7th Cir. Feb. 27, 2015), here, the Court addressed certain key aspects of tax procedure relating to the key role of the notice of deficiency.  For practitioners (other than novice practitioners), this is perhaps redundant to information they already know.  In some way, it is probably redundant for students also.  Still it is a pretty good summary of the process, so I offer it here.  In most cases, I will eliminate most case or other citations, except when I think they are important:  I include the Code sections because the Code is important.  The excerpts are:

We begin with an overview of the CDP process and the taxpayer's right to appeal. The Internal Revenue Code (the "Code") directs the Treasury Secretary—acting through the IRS—to determine, assess, and collect federal taxes. See I.R.C. §§ 6201(a), 6301. It also requires taxpayers to file returns as prescribed by the IRS. See id. § 6011(a). If the IRS finds that a person has unpaid taxes for a given year, it must notify him of the deficiency before it can collect the debt. See id. §§ 6212(a), 6213(a). Once the IRS mails notice, the taxpayer may petition the tax court to redetermine the correct amount of the deficiency. Id. §§ 6213(a), 6214(a). If he does not file a timely petition (normally within ninety days), then the deficiency "shall be assessed, and shall be paid upon notice and demand." Id. § 6213(c). 

If the taxpayer does not pay, then his tax liabilities become a lien on his real and personal property. Id. § 6321. To protect the government's rights against other secured creditors with respect to the encumbered property, the IRS must generally file a notice of the tax lien with the appropriate state authority. See id. § 6323(a), (f). It must then inform the taxpayer that it filed the lien notice. Id. § 6320(a). 

The taxpayer is entitled to challenge the lien in a CDP hearing before the Appeals Office, which is an independent bureau within the IRS. Id. § 6320(b). The "hearing" is informal and may consist of correspondence, telephone conversations, or in-person meetings. Treas. Reg. § 301.6330-1(d)(2), . In general, the taxpayer may raise any relevant issue. I.R.C. § 6330(c)(2)(A). That includes a challenge to his underlying tax liability if he did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability. Id. § 6330(c)(2)(B). The appeals officer must consider the issues raised by the taxpayer and verify that the IRS followed proper procedures. § 6330(c)(3). 

After the hearing, the Appeals Office issues a notice of determination containing its findings and conclusions. Treas. Reg. § 301.6330-1(e), Q&A-E8. If the taxpayer is dissatisfied, he can appeal the determination to the tax court. I.R.C. § 6330(d)(1). If his underlying tax liability was properly at issue in the CDP hearing, the tax court reviews that issue de novo. It reviews the Appeals Office's other determinations for abuse of discretion. Jones v. Comm'r, 338 F.3d 463, 466 (5th Cir. 2003) ("In a collection due process case in which the underlying tax liability is properly at issue, the Tax Court ... reviews the underlying liability de novo and reviews the other administrative determinations for an abuse of discretion." (citing Craig v. Comm'r, 119 T.C. 252, 260 (2002))). 

The tax court's decision is in turn subject to review in the appropriate court of appeals. I.R.C. § 7482(a)(1). We review tax court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." Id. 

With this background in hand, we turn to the two issues on appeal. 

A. Validity of the Deficiency Notices 

Before the IRS can assess or collect a tax deficiency, it must "send notice of such deficiency to the taxpayer" under § 6212 of the Code (subject to a few exceptions that are irrelevant here). See id. §§ 6212(a), 6213(a). Gyorgy contends that the IRS violated this mandate when it mailed the deficiency notices for 2002 and 2003 to his former address on Octavia Street, and that the notices were therefore invalid. 

The Appeals Office disagreed and found that the IRS properly issued the notices. Because that conclusion was an administrative determination unrelated to the amount of Gyorgy's tax liability, the tax court's standard of review was abuse of discretion. We apply that same standard on appeal. Accordingly, our review is "highly deferential."  

Gyorgy's main complaint is that he did not receive the deficiency notices at issue. But that does not render them invalid, for nothing in § 6212 requires actual notice. Rappaport v. United States, 583 F.2d 298, 301 (7th Cir. 1978) (per curiam). On the contrary, subpart (b)(1) provides that a deficiency notice "shall be sufficient" if it is "mailed to the taxpayer at his last known address." I.R.C. § 6212(b)(1). This rule gives the IRS a "safe harbor" by permitting constructive notice where, for instance, the taxpayer has "failed to inform the Service of a change of address." Borgman v. Comm'r, 888 F.2d 916, 917 (1st Cir. 1989). Congress was concerned that requiring actual notice in such cases would impose an almost impossible burden on the IRS to keep track of every taxpayer's whereabouts. See Gaw v. Comm'r, 45 F.3d 461, 465 (D.C. Cir. 1995) (discussing the legislative history of the last-known-address rule), nonacq., 1996-1 C.B. 1, 1996-2 C.B. 1; Lewis v. Comm'r, 72 T.C.M. (CCH) 790, 792 (1996) (same); H.R. Rep. No. 70-2, at 22 (1927) ("It is obviously impossible for the Commissioner to keep an up-to-date record of taxpayers' addresses."); S. Rep. No. 70-960, at 30 (1928) (same). 

The last-known-address rule Congress adopted "provides a method of notification which insures that the vast majority of taxpayers will be informed that a tax deficiency has been determined against them." Jones v. United States, 889 F.2d 1448, 1450 (5th Cir. 1989). The vast majority, but not all: as Gyorgy points out, a taxpayer who no longer lives at his last known address likely will not receive notice and will therefore miss his opportunity to petition the tax court for a redetermination under I.R.C. § 6213(a) (requiring the filing of a petition within ninety days after notice is mailed). But such taxpayers have other avenues to contest their liability. They can, for example, raise liability in a CDP hearing, see I.R.C. § 6330(c)(2)(B), seek an audit reconsideration, see Tucker v. Comm'r, 135 T.C. 114, 148 (2010), aff'd, 676 F.3d 1129 (D.C. Cir. 2012), or pay the tax and then seek a refund, see I.R.C. § 7422(a); 28 U.S.C. § 1346(a)(1). Or, of course, they can avoid the problem in the first place by keeping the IRS informed of their current address. See Goulding v. United States, 929 F.2d 329, 331 (7th Cir. 1991) (holding that the taxpayer bore responsibility to notify the IRS of a different address). 

The determinative question, then, is not whether Gyorgy received the deficiency notices for 2002 and 2003 (he did not), but whether the IRS mailed them to his "last known address" under § 6212(b)(1). To decide that question, we first discuss the governing definition of "last known address" and then apply it to this case.
1. Definition of "Last Known Address" 

In numerous places—not just § 6212(b)(1)—the Code authorizes or requires the IRS to send notice to a taxpayer's "last known address." n6 But the Code itself does not define that phrase, and for many years neither did the implementing regulations. So the task of construing "last known address" was left to the courts.
   n6 See, e.g., I.R.C. §§ 6015(e) (notice of final determination regarding spousal relief); 6110(f)(3)(B), (4)(B) (notice of disclosure proceedings); 6245(b)(1) (notice of partnership adjustment); 6303(a) (notice of tax assessment and payment demand); 6320(a)(2)(C) (notice of filing of notice of lien); 6330(a)(2)(C) (notice of right to hearing before levy); 6331(d)(2)(C) (notice of intention to levy); and 6335(a) (notice of seizure). 

In Eschweiler v. United States and earlier decisions, we defined it as the address "where 'the Commissioner reasonably believes the taxpayer wished to be reached at the time the notice of deficiency was sent.'" 946 F.2d 45, 48 (7th Cir. 1991) (per curiam) (quoting Goulding, 929 F.2d at 331); see also McPartlin v. Comm'r, 653 F.2d 1185, 1189 (7th Cir. 1981) (endorsing the tax court's definition: the "last permanent address of a definite duration to which the taxpayer has directed the Commissioner to send all communications" (internal quotation marks and citation omitted)). We held that "the IRS need only exercise reasonable diligence" under the particular circumstances of each case to determine the taxpayer's last known address. Eschweiler, 946 F.2d at 48 (citing Eschweiler v. United States, 877 F.2d 634, 636 (7th Cir. 1989)). 

In discharging its duty of reasonable diligence, we allowed the IRS to "rely on the address found in the return being audited, unless there is clear and concise notification from the taxpayer directing the Commissioner to use a different address." Eschweiler, 946 F.2d at 48 (internal quotation marks and citation omitted). This rule placed the burden on the taxpayer to notify the IRS of a change of address. Id. Other circuits adopted similar rules, with some differences in the exact formulation. See id. at 48 n.5. 

Ten years after Eschweiler, the Treasury Secretary promulgated a new regulation defining "last known address" wherever that phrase appears in the Code. See 66 Fed. Reg. 2817 (Jan. 12, 2001) (notice of final rulemaking). Treasury Regulation § 301.6212-2, entitled "Definition of last known address," provides in relevant part: 

(a) General rule. Except as provided in paragraph (b)(2) of this section, a taxpayer's last known address is the address that appears on the taxpayer's most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address. Further information on what constitutes clear and concise notification of a different address and a properly processed Federal tax return can be found in Rev. Proc. 90-18 (1990-1 C.B. 491) or in procedures subsequently prescribed by the Commissioner.
(b) Address obtained from third party—
(1) In general. Except as provided in paragraph (b)(2) of this section, change of address information that a taxpayer provides to a third party, such as a payor or another government agency, is not clear and concise notification of a different address for purposes of determining a last known address under this section.
(2) Exception for address obtained from the United States Postal Service—(i) Updating taxpayer addresses. The IRS will update taxpayer addresses maintained in IRS records by referring to data accumulated and maintained in the United States Postal Service (USPS) National Change of Address database ... (NCOA database).... [A] new address in the NCOA database is the taxpayer's last known address, unless the IRS is given clear and concise notification of a different address.... 

The last-known-address inquiry under § 301.6212-2 focuses on the information that was in the IRS's possession at the time it mailed the deficiency notice at issue. See I.R.C. § 6212(b)(1) (making notice sufficient [*20]  "if mailed to the ... last known address") (emphasis added); Treas. Reg. § 301.6212-2(a) (focusing on the information the IRS "is given"); Eschweiler, 946 F.2d at 48. 

Under subpart (a) of the regulation, a taxpayer's last known address is presumptively the one shown on his most recently filed and processed tax return. To update his address, the taxpayer must file a new return or give the IRS "clear and concise notification." Thus, as under our prior case law, see Eschweiler, 946 F.2d at 48, it is the taxpayer's responsibility to properly notify the IRS if he wants correspondence sent to an address other than the one on file. The revenue procedures in effect when the IRS issued Gyorgy's deficiency notices permitted notification either in writing—through a signed statement, a response to certain correspondence from the IRS, or the IRS's change-of-address form—or by oral statement directly to an IRS employee who initiated contact with the taxpayer. See Rev. Proc. 2001-18 § 5.04-05, 2001-1 C.B. 708 (effective Feb. 20, 2001), superseded by Rev. Proc. 2010-16, 2010-1 C.B. 664 (effective June 1, 2010). Additionally, subpart (b)(2) of the regulation treats a new address in the postal service's NCOA database as sufficient notification. 

Other than information in the NCOA database, however, a new address obtained from a payer or another third party does not count as clear and concise notification. Treas. Reg. § 301.6212-2(b)(1). This rule is consistent with our prior decisions allowing the IRS to rely on the documents submitted by the taxpayer. See, e.g., Eschweiler, 946 F.2d at 49; see also Greenstein v. Comm'r, 60 T.C.M. (CCH) 379, 382 (1990) (holding that forms submitted by third parties "[did] not provide sufficient notification of an address change"). Indeed, because notice sent to a temporary or unverified address may be ineffective, "the IRS would run a risk in relying on address information about a taxpayer submitted by a third party." Gille v. United States, 33 F.3d 46, 48 (10th Cir. 1994). If the deficiency notice is invalid, the IRS's tax assessment is generally unenforceable. See I.R.C. § 6213(a). And if the normally applicable three-year statute of limitations has expired, see id. § 6501(a), the IRS may be unable to collect the taxes at all. 

Neither party here contends that § 301.6212-2 exceeds the Treasury Secretary's authority to "prescribe all needful rules and regulations for the enforcement of [the Code]," I.R.C. § 7805(a), or that it is otherwise invalid. So for purposes of this decision we accept the regulation as controlling under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843-45 (1984). See Stoops v. One Call Commc'ns, Inc., 141 F.3d 309, 311 (7th Cir. 1998) (accepting regulations as controlling where neither party challenged their propriety). In other words, we look to § 301.6212-2 for the governing definition of "last known address." Cf. Planes v. United States, No. 8:05-CV-1242, 2006 U.S. Dist. LEXIS 72407, at *13 (M.D. Fla. Oct. 4, 2006) (following Treas. Reg. § 301.6212-2), aff'd per curiam, 239 F. App'x 480 (11th Cir. 2007); Lewis v. Comm'r, 98 T.C.M. (CCH) 174, 176 (2009) (same). Because our pre-2001 judicial definition of "last known address" is consistent with § 301.6212-2, however, we also continue to follow our earlier cases.n7
   n7 There are two exceptions. First, we follow § 301.6212-2(a)'s presumption that the last known address is the one listed on the taxpayer's most recently filed return; whereas our earlier decisions presumed it was the address on the return being audited, see Eschweiler, 946 F.2d at 48, though subsequent returns were also relevant, see id. at 48 n.5 (citing McPartlin, 653 F.2d at 1190). Second, we treat a new address in the NCOA database as sufficient to update the last known address under § 301.6212-2(b)(2), even though none of our prior cases established such a rule. See Nat'l Cable & Telecomm. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 982 (2005) ("A court's prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.").

Students and practitioners will find some real gems worthy of further consideration in the excerpts quoted, but I focus here on a fundamental question.  What would the taxpayer gain from the holding he sought that the notice of deficiency was invalid.  Normally, where the last known address issue is litigated, the consequence of a holding that the IRS did not properly send to the last known address is that the predicate notice of invalid, therefore the assessment is invalid, and therefore, because the assessment statute of limitations has expired, the IRS no longer can asses and therefore the taxpayer does not owe the underlying tax liability.  But, the IRS has an unlimited statute of limitations in the cases of returns that were never filed and fraud.  See § 6501(c)(1) and (3), here.  In the case, Gyorgy filed no tax returns, so, even if he prevailed on the issue of last known address, the IRS still has the ability to assess.  (I presume that he did not do the § 6020(a), here, substitute for return which he signed, thus making it a return.)

Students should also look at footnote 7 above which discusses an important Chevron issue presented in Brand X.