Raymond S. Edwards

United States Tax Court
T.C. Summary Opinion 2023-29RAYMOND S. EDWARDS,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 2237-20SL. Filed September 27, 2023.
—————
Raymond S. Edwards, pro se.
Mehrin Bakht, for respondent.
SUMMARY OPINION
PANUTHOS, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 1 of the Internal Revenue Code in effect
when the Petition was filed. Pursuant to section 7463(b), the decision
to be entered is not reviewable by any other court, and this Opinion shall
not be treated as precedent for any other case.
In this collection due process (CDP) case, petitioner seeks review
pursuant to sections 6320(c) and 6330(d)(1) of the supplemental
determination by the Internal Revenue Service (IRS or respondent)
relating to his Form 941, Employer’s Quarterly Federal Tax Return, for
the periods ending March 31, June 30, September 30, and December 31,
2015, and March 31, 2016, and his Form 940, Employer’s Annual
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C., in effect at all relevant times, and regulation references are to
the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times.
Served 09/27/23
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Federal Unemployment (FUTA) Tax Return, for the period ending
December 31, 2015.
In a notice of supplemental determination dated January 2, 2020,
the IRS sustained the lien action for petitioner’s employment tax
liabilities for the periods ending March 31, 2015, through March 31,
2016, and petitioner’s FUTA tax liability for the period ending December
31, 2015.
The issues for decision are (1) whether petitioner’s failure to
timely file returns and timely pay employment taxes was due to
reasonable cause and not willful neglect, such that he is not liable for
additions to tax for the periods in issue and (2) whether respondent
abused his discretion in the application of petitioner’s voluntary
payments.
Background
While a stipulation of facts was not agreed to, respondent offered
proposed Exhibits to which petitioner did not object. The record consists
of a number of documents and petitioner’s testimony.
Petitioner was a resident of New York when he timely filed the
Petition.
Petitioner operated a daycare center business in Brooklyn, New
York, that he started in September 2014. Between October 2015 and
February 2016 the entity license for the daycare was suspended. During
this time petitioner continued to pay employees. Petitioner did not
timely file his quarterly Forms 941 for the periods ending June 30,
September 30, and December 31, 2015, and did not timely file his Form
940 for the period ending December 31, 2015.
The IRS assessed tax liabilities for the periods at issue, plus
additions to tax and interest. On February 14, 2019, the IRS sent
petitioner a Notice of Federal Tax Lien (NFTL) filing. Petitioner timely
submitted Form 12153, Request for a Collection Due Process or
Equivalent Hearing, on March 7, 2019.
I. Initial CDP Hearing
The IRS Independent Office of Appeals (Appeals) assigned the
case to an Appeals officer (AO). On August 6, 2019, the AO issued
petitioner a letter to schedule a teleconference on September 25, 2019,
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and requested a Form 433–A, Collection Information Statement for
Wage Earners and Self-Employed Individuals, a Form 656, Offer in
Compromise, proof that petitioner was paying his current estimated tax
payments, and proof that petitioner was making his current federal tax
deposits. Petitioner did not contact the AO on September 25, 2019, nor
did he provide any of the requested documents.
Petitioner obtained representation from Handel Edwards, a
financial planner, who contacted the AO and requested an abatement of
penalties. The AO informed Mr. Edwards that requesting abatement
for the failure to pay addition to tax was premature because petitioner
had not yet paid the tax. The AO suggested proposing an installment
agreement or alternatively providing the previously requested financial
information so that Appeals could calculate petitioner’s ability to pay.
Petitioner was informed that he had until November 22, 2019, to either
accept the proposed installment plan or to make contact to discuss
alternatives. Petitioner did not accept the installment plan, nor did he
contact the AO to discuss alternatives.
A notice of determination was issued on January 2, 2020,
sustaining the NFTL filing.
In July 2021 petitioner submitted a check to the U.S. Treasury
for $35,524. The check specified that the amount was to be applied
against the Form 941 principal amounts for the first quarter of 2015
through the first quarter of 2016. This payment was intended to be
applied to the principal tax only, which amounted to $23,547. Contrary
to petitioner’s directions, the $35,524 was not applied solely against the
outstanding total principal of $23,547, but against the total amounts
remaining outstanding for the periods ending March 31, June 30,
September 30, and December 31, 2015 (which included penalties and
interest). The remaining balance of the amount paid in July 2021
($1,435) was applied against the total amount remaining outstanding
for the period ending March 31, 2016. After the payment was applied,
there remained an unpaid tax liability including additions to tax and
interest.
II. Supplemental CDP Hearing
On January 24, 2022, the Court issued an order remanding
petitioner’s case to Appeals for a supplemental CDP hearing. Appeals
assigned the case to a settlement officer (SO).
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Petitioner informed the SO that a delay in obtaining an unexpired
PIN from the IRS caused the delays in setting up an Intuit account with
the Electronic Federal Tax Payment System (EFTPS) to electronically
and timely file and pay his taxes. Petitioner was informed of alternative
methods to file and submit payments by the SO over the phone. The
instructions for getting help filing taxes while an EFTPS is being set up
were available during the periods at issue. Petitioner set up the EFTPS
system in February 2016.
On July 8, 2022, the SO determined that petitioner did not meet
the criteria for abatement. Accordingly, Appeals issued a Supplemental
Notice of Determination Concerning IRS Collection Actions under
Internal Revenue Code Sections 6320 or 6330, sustaining the NFTL
filing.
Discussion
I. Standard of Review
Sections 6320(c) and 6330(d)(1) grant this Court jurisdiction to
review an SO’s supplemental determination after a CDP hearing.
Section 6330(c)(2) prescribes the matters that a taxpayer may raise at a
CDP hearing, including spousal defenses, challenges to the
appropriateness of the collection action, and collection alternatives.
Where the validity of the underlying tax liability is properly in issue, the
Court reviews the SO’s supplemental determination de novo. Goza v.
Commissioner, 114 T.C. 176, 181–82 (2000). Where the validity of the
underlying tax liability is not properly in issue, the Court will review
the SO’s administrative supplemental determination for abuse of
discretion. Sego v. Commissioner, 114 T.C. 604, 610 (2000).
“A taxpayer’s underlying tax liability includes penalties and
additions to tax that are part of the unpaid tax that the Commissioner
seeks to collect.” Dykstra v. Commissioner, T.C. Memo. 2017-156, at *16.
A taxpayer has not had an opportunity to dispute the underlying tax
liability before a CDP hearing where the Commissioner assessed the tax
reported in the taxpayer’s return and did not issue the taxpayer a notice
of deficiency. See Shaddix v. Commissioner, T.C. Memo. 2022-11. In
determining whether the taxpayer had an opportunity to dispute his
liability, the regulations distinguish between liabilities that are subject
to deficiency procedures and those that are not. Employment tax
liabilities are not subject to deficiency procedures. See Romano-Murphy
v. Commissioner, 152 T.C. 278, 292 (2019), supplementing T.C. Memo.
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2012-330; see also Durda v. Commissioner, T.C. Memo. 2017-89, at *6–7.
With respect to such liabilities, the regulations provide that “[a]n
opportunity to dispute the underlying liability includes a prior
opportunity for a conference with Appeals that was offered either before
or after the assessment of the liability.” Treas. Reg. § 301.6320-1(e)(3),
Q&A-E2.
Petitioner’s liabilities stem from the tax he reported in his
untimely and timely filed returns, and respondent did not issue
petitioner a notice of deficiency. Petitioner did not have a prior
opportunity to dispute the liabilities at issue. Therefore, the underlying
tax liabilities are at issue and the standard of review is de novo. 2
When this Court remands a case to Appeals, we review the
position taken in the last supplemental determination instead of any
prior notices. See Kelby v. Commissioner, 130 T.C. 79, 86 (2008). We
review the supplemental notice of determination regarding the
additions to tax de novo.
II. Additions to Tax
A. Burden of Proof
Section 6651(a)(1) provides for an addition to tax in the event a
taxpayer fails to file a timely return, determined with regard to any
extension of time for filing, unless it is shown that such failure is due to
reasonable cause and not due to willful neglect. Section 6651(a)(2)
provides for an addition to tax for failure to timely pay the amount of
tax shown on a return, unless it is shown that such failure is due to
reasonable cause and not due to willful neglect. Under section 7491(c),
the Commissioner bears the burden of production with respect to
additions to tax. If the Commissioner meets this burden, the taxpayer
has the burden of proving that the failure to timely file or pay was due
to reasonable cause and not willful neglect. See § 6651(a)(1) and (2);
Higbee v. Commissioner, 116 T.C. 438, 447 (2001).
2 Respondent initially indicated the Court should review the SO’s
determination under an abuse of discretion standard. Upon direction by the Court,
respondent filed a posttrial memo and agreed that the Court should review the SO’s
determination de novo.
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B. Failure to Timely File
Section 6651(a)(1) provides for an addition to tax of 5% of the tax
required to be shown on the return for each month or fraction thereof
for which there is a failure to file the return, not to exceed 25% in total.
Because the record shows that petitioner’s employment tax returns for
the periods ending June 30, September 30, and December 31, 2015, and
the FUTA return for the period ending December 31, 2015, were not
timely filed, respondent has met his burden of production.
Consequently, petitioner has the burden of showing that his failure to
file was due to reasonable cause and not willful neglect. See § 6651(a)(1);
Higbee, 116 T.C. at 447.
Whether a taxpayer had “reasonable cause” and lacked “willful
neglect” are questions of fact, and the burden of establishing these facts
is on the taxpayer. United States v. Boyle, 469 U.S. 241, 245 (1985). To
prove reasonable cause for failure to timely file a return, the taxpayer
must show that he exercised ordinary business care and prudence and
was nevertheless unable to file the return within the prescribed time.
Crocker v. Commissioner, 92 T.C. 899, 913 (1989); Treas. Reg.
§ 301.6651-1(c)(1). A taxpayer can show that he did not act with “willful
neglect” if he can “prove that the late filing did not result from a
‘conscious, intentional failure or reckless indifference.’” Niedringhaus
v. Commissioner, 99 T.C. 202, 221 (1992) (quoting Boyle, 469 U.S.
at 245–46).
Petitioner testified that after filing his first two payroll tax
returns, he believed he would be unable to file accurate returns using
the method he had used for the first two returns. Petitioner sought
advice on paying payroll taxes and began efforts to implement an
EFTPS. Petitioner contends that his failure to timely file was due to
delay in receiving a PIN from the IRS to set up an EFTPS. However, on
the basis of the record, we cannot conclude that the IRS was at fault for
the delayed PIN. Further, a delayed PIN is not reasonable cause to
excuse an untimely filing. There were alternative methods petitioner
could have used to file returns, and petitioner has not demonstrated that
these methods were otherwise unavailable. See Boyle, 469 U.S.
at 249–50 (“Congress intended to place upon the taxpayer an obligation
to ascertain the statutory deadline and then to meet that deadline,
except in a very narrow range of situations . . . .”). The SO noted: “IRS
research shows the T[axpayer] started out filing and paying his first
quarter operating timely, and mad[e] a partial F[ailure to Deposit] for
his second quarter operating, so this indicates he must have had some
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knowledge or was receiving guidance from somewhere on the
filing/F[ailure to Deposit] responsibilities.” At trial petitioner admitted
that during the March 31, 2015, to March 31, 2016, periods, he did not
attempt to file payroll or FUTA returns. We are not persuaded that
petitioner’s unsuccessful effort over the course of a year to implement a
tax system when other methods of paying the tax were available,
demonstrate reasonable cause and establish that he did not act with
willful neglect.
There is an apparent inconsistency within respondent’s records
regarding the addition to tax for failure to timely file assessed on
petitioner’s Form 941 filing for the period ending March 31, 2015. The
addition to tax for failure to timely file is inconsistent with the SO’s
notes and the account record for the period ending March 31, 2015. In
the account transcript and the SO’s notes, it appears that petitioner
timely filed the Form 941 for the period ending March 2015 but was
assessed an addition to tax for failure to timely file. The SO noted: “The
penalties assessed as [Failure to Deposit], [Failure to Pay], [Failure to
Timely File]. A review of IDRS[3] shows the following: . . . [March 2015
period] - filed timely on 4/30/2015.” Additionally, petitioner’s account
record for the Form 941 return for the period ending March 2015 reflects
that petitioner’s March 2015 Form 941 “[r]eturn due date or return
received date (whichever is later)” is April 30, 2015. This account record
indicates that petitioner was assessed a “[p]enalty [of $1,320] for filing
tax return after the due date.” On the basis of respondent’s own records
and notes, we are not satisfied petitioner was correctly assessed an
addition to tax for failure to timely file his Form 941 for the period
ending March 31, 2015.
On the basis of the foregoing, we sustain respondent’s
supplemental determination except to the extent that petitioner is not
liable for the addition to tax for failure to timely file the Form 941 for
the period ending March 31, 2015.
C. Failure to Timely Pay
Section 6651(a)(2) provides for an addition to tax when a taxpayer
fails “to pay the amount shown as tax on any return . . . on or before the
date prescribed for payment of such tax.” Because the record shows that
3 The IRS uses a computer interface called the IDRS to retrieve data from those
systems. Upon request from an authorized person, the IRS can generate transcripts
of account to show some of the information stored in its computer systems. See
generally Internal Revenue Manual 21.2.3 (Sept. 6, 2022).
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petitioner’s employment tax returns for the periods ending March 31,
June 30, September 30, and December 31, 2015, and March 31, 2016,
and FUTA return for the period ending December 31, 2015, were not
timely paid, respondent has met his burden of production.
Consequently, petitioner has the burden of showing that his failure to
pay was “due to reasonable cause and not due to willful neglect.”
§ 6651(a)(2).
A taxpayer may show reasonable cause for failure to pay timely
by showing he exercised ordinary business care and prudence in
providing for payment of his tax liability but was either unable to pay
the tax or would have suffered undue hardship if he had paid the tax on
the due date. Fran Corp. v. United States, 164 F.3d 814, 816 (2d Cir.
1999); Russell v. Commissioner, T.C. Memo. 2011-81, 2011 WL 1314673,
at *8 n.9; Treas. Reg. § 301.6651-1(c)(1). Paying the tax on the due date
creates an undue hardship for a taxpayer if making the payment on time
creates “the risk of a substantial financial loss.” Ruggeri v.
Commissioner, T.C. Memo. 2008-300, 2008 WL 5411919, at *4 (quoting
Merriam v. Commissioner, T.C. Memo. 1995-432, 1995 WL 522813,
at *13, aff’d, 107 F.3d 877 (9th Cir. 1997) (unpublished table decision)).
We consider whether a taxpayer exercised ordinary business care and
prudence by applying a facts and circumstances test.
Petitioner testified that when he finally filed the payroll tax
returns in February 2016, he was experiencing a cashflow problem due
to the closure of his business. Petitioner asserts that paying the tax on
the due date would have caused irreparable harm to his business.
During this time, instead of decreasing personnel and decreasing
expenses, petitioner continued to pay his employees. Petitioner testified
he was afraid they would leave for other jobs if he did not. Petitioner
was provided multiple opportunities to provide financial documents
demonstrating the risk of substantial financial loss that he would have
endured. See Ruggeri v. Commissioner, 2008 WL 5411919, at *4.
Petitioner failed to provide such documents. As a result, we are unable
to conclude from the record before us that petitioner was unable to pay
or would have endured undue hardship by paying the tax on the due
date.
Even if we were to conclude that petitioner was unable to pay or
would suffer undue hardship, he provided no evidence as to why he was
unable to pay the amounts due once the business was reopened in March
2016.
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We sustain respondent’s determination with respect to the failure
to pay addition to tax.
III. Designated Payment
Petitioner also asserts that respondent abused his discretion in
applying petitioner’s voluntary payment in a manner other than that
directed by petitioner.
A taxpayer may “designate how voluntary tax payments should
be applied” by the IRS. Dixon v. Commissioner, 141 T.C. 173, 185 (2013).
The IRS “must honor a taxpayer’s designation of a voluntary tax
payment.” Id. at 186; see also § 6656(e)(1). The designation of payments
does not go to the underlying tax liability, so the proper standard of
review is abuse of discretion. See Melasky v. Commissioner, 151 T.C. 89,
92 (2018), aff’d, 803 F. App’x 732 (5th Cir. 2020); Goza, 114 T.C.
at 181–82. An abuse of discretion occurs if the AO exercises his
discretion “arbitrarily, capriciously, or without sound basis in fact or
law.” Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Petitioner contends that the check for $35,524 submitted on July
14, 2021, was meant to be applied against the outstanding Form 941
principal tax amounts for the periods between March 2015 and March
2016. However, this payment was applied against the total outstanding
Form 941 liabilities for the March 31, June 30, September 30, and
December 31, 2015, periods, which included additions to tax and
interest. As a result of the IRS application of the payment, there were
insufficient funds to pay off the total outstanding liability in full for the
period ending March 2016.
As indicated, petitioner’s July 14, 2021, check specifies “941
Principal amounts for 1st qrt 2015 – 1 qrt 2016” on the memo line. The
SO noted on April 5, 2022:
T[axpayer] made a payment to IRS on 7/14/2021 with the
intent for it to be applied to principal tax only, he provided
a copy of the [payment] proving this. A review of each
module shows the total unpaid tax on the account was
$23,546.70, his payment was $35,524.37, which he stated
was provided for him by IRS customer service. Therefore,
although the [payments] were not applied properly, the
[taxpayer] has sufficiently paid for the tax on the included
mod[ule]s.
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Additionally, the SO noted that the “IDRS does not show the tax as being
paid since [payments] directed for the tax were also applied to
Pen[alties]/Int[erest]. The T[axpayer] did not want any of the [payment]
to be applied to pen[alties]/int[erest] since he was disputing the
penalties.” The SO acknowledged that petitioner finally paid the back
taxes in full in July 2021.
The record clearly demonstrates that petitioner intended to
designate how the tax payment should be applied, namely, to pay off the
remaining principal tax amounts owed for the relevant periods. See
Dixon, 141 T.C. at 185. The IRS did not follow these instructions.
Respondent abused his discretion in the improper application of
voluntary payments.
IV. Conclusion
We sustain the amounts subject to the notice of lien with the
exception that (1) petitioner is not liable for the addition to tax for failure
to timely file the Form 941 return for the period ending March 31, 2015,
and (2) respondent abused his discretion in his application of petitioner’s
July 2021 payment as described herein.
To reflect the foregoing,
An appropriate order and decision will be issued.