Proposal to Amend Treasury Regulation Section 301.6303-1 to Conform to Internal Revenue Code Section 6303 and Relevant Court Decisions

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Proposal to Amend Treasury Regulation Section 301.6303-1 to Conform to Internal Revenue Code Section 6303 and Relevant Court Decisions1

By A. Lavar Taylor and Grace Alcantara2

EXECUTIVE SUMMARY

Section 6303(a) of the Internal Revenue Code of 1986, as amended (the "Code") requires that the Internal Revenue Service ("IRS") give notice and demand for payment to each person liable for an unpaid tax liability within 60 days after the tax has been assessed. Where the IRS has failed to provide proper notice and demand within 60 days of assessment, courts have held that the IRS may not take administrative collection action to collect the unpaid liability, such as filing a Notice of Federal Tax Lien or issuing levies. In addition, the failure to provide a taxpayer with a timely notice and demand prevents the accrual of the failure to pay penalty under Code section 6651(a)(3) as well as the further accrual of interest under Code sections 6601(c) and 6601(e). Section 301.6303-1(a) of the Treasury Regulations ("Regulation") provides that the IRS’s failure to provide a notice and demand for payment of a tax liability within 60 days after the tax has been assessed, as required by the Code, does not invalidate the notice and demand for payment. Thus, the Regulation purports to allow the IRS to pursue administrative collection action and impose failure to pay penalties and interest, even when they have failed to issue the taxpayer a timely notice and demand for payment.

This Regulation is inconsistent with the statutory language of the Code and court rulings that a failure by the IRS to issue a notice and demand for payment within the 60 day statutory window prevents the statutory tax lien from arising and precludes the IRS from taking levy action. The Regulation could actively mislead taxpayers who do not hire representation by a professional familiar with applicable case law. Taxpayers are improperly charged penalties and interest and are inappropriately subject to administrative collection action by the IRS.

This paper proposes to amend the Regulation to state that a notice and demand is not valid if first provided outside of the 60 day statutory window. A failure by the IRS to send a notice and demand for payment within 60 days of the date of assessment prevents the statutory tax lien from arising, precludes the IRS from taking levy action and precludes the accrual of interest and penalties where notice and demand is a prerequisite to imposing interest and penalties.

I. DISCUSSION

A. The Code Provisions Dealing With Notice and Demand for Payment

Code section 6303(a) provides:

"Where it is not otherwise provided by this title, the Secretary shall, as soon as practicable, and within 60 days, after the making of an assessment of a tax pursuant to section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. Such notice shall be left at the dwelling or usual place of business of such person, or shall be sent by mail to such person’s last known address." (emphasis added)

This language is straightforward. After the IRS assesses a tax liability, the IRS must give notice to each person liable for the assessed liability within 60 days of the making of the assessment. The requirement that notice and demand be provided within 60 days of the date of assessment is just that, a requirement.

Notice and demand for payment is a statutory prerequisite to the creation of a lien for an unpaid tax liability. It is also a statutory prerequisite for the IRS taking levy action to collect an unpaid assessment. Code section 6321 provides that "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with costs that may accrue in addition thereto) shall be a lien in favor of the United State upon all property and rights to property, whether real or personal, belonging to such person" (emphasis added).

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Similarly, Code section 6331(a) provides that, "[i]f any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax * * * by levy upon all property and rights to property (except such property as is exempt under Code section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax" (emphasis added).

Code section 6155 states that "[u]pon receipt of notice and demand from the Secretary, there shall be paid at the place and time stated in such notice the amount of any tax (including any interest, additional amounts, additions to tax, and assessable penalties) stated in such notice and demand." (emphasis added)

Code section 6651(a)(3) imposes a penalty for failure to pay an assessed deficiency in taxes where the taxpayer fails to pay the amount owed "within 21 calendar days from the date of notice and demand therefor (ten business days if the amount for which such notice and demand is made equals or exceeds $100,000)," unless the taxpayer is able to show that the failure to pay is due to reasonable cause and not to willful neglect.

Code section 6601(c) suspends the running of interest on deficiencies in income, estate and gift taxes where a taxpayer waives the restrictions on assessment of a deficiency under Code section 6213(d). This suspension begins 30 days after the filing of the waiver with the Secretary and ends "with the date of notice and demand" for payment of the deficiency.

Code section 6601(e)(1) states that "interest prescribed under this section on any tax shall be paid upon notice and demand." Code section 6601(e)(2) provides as follows:

"Interest shall be imposed under subsection (a) in respect of any assessable penalty, additional amount, or additions to the tax (other than an addition to tax imposed under section 6651(a) (1) or 6652 or under part II of subchapter A of chapter 68) only if such assessable penalty, additional amount, or addition to the tax is not paid within 21 calendar days from the date of notice and demand therefor (10 business days if the amount for which such notice and demand is made equals or exceeds $100,000), and in such case interest shall be imposed only for the period from the date of the notice and demand to the date of payment."

There are other provisions of the Code which refer to "notice and demand" for payment.3

B. Case Law Involving Situations Where the IRS Failed to Send Timely Notice and Demand Under Code Section 6303(a)

Courts of Appeal have consistently held that the IRS’s failure to give a taxpayer timely notice and demand for payment under Code section 6303(a) prevents the statutory tax lien imposed by Code section 6321 and prevents the IRS from taking levy action. In United States v. Coson,4 the Ninth Circuit held that giving a taxpayer a timely notice and demand for payment was a prerequisite to the arising of a statutory tax lien. The IRS’s lien was not valid without proper notice and demand for payment from the taxpayer.

Similarly, in United States v. Berman,5 the trial court held that the IRS failed to send the taxpayer a valid notice and demand for payment.6 On appeal, the IRS conceded that it had failed to send the taxpayer a valid notice and demand and conceded that its failure to send the taxpayer a valid notice and demand (a) precluded the IRS from taking administrative collection and (b) prevented the statutory lien from arising under Code section 6321. The Sixth Circuit reversed the trial court only because the trial court had held that the failure of the IRS to send a valid notice and demand precluded the IRS from obtaining a judgment for the unpaid taxes. The Sixth Circuit held that the failure to provide a valid notice and demand after making an assessment does not preclude the IRS from obtaining a judgment for the unpaid assessment.

In United States v. Chila,7 the Court agreed that the failure of the IRS to send a valid notice and demand to the taxpayer precludes the IRS from taking administrative collection action with respect to the unpaid taxes, while holding that such a failure does not bar the IRS from filing suit to reduce the assessment to judgment. The Court stated that "[w]e conclude that the trial court correctly interpreted the [notice and demand] requirements of Code section 6303 as applying only in the case of a summary enforcement procedure." The Court also cited with favor the case of Security Indus. Ins. Co. v. United States8, which discussed this same issue. Lower courts have also concurred with this result.9

In a slightly different context, the Third Circuit held that a proof of claim filed in a bankruptcy proceeding was not a valid "notice and demand" for purposes of Code sections 6303(a) and 6601(e)(2). Consequently, interest on the assessed penalties did not start running until the entry of a Bankruptcy Court judgment against the taxpayer for the penalties.10 The Court expressly refused to address the question of whether interest would have started accruing on the penalties if a notice and demand had been issued after expiration of the 60 day window, but before entry of judgment. The Court interpreted the language of Code section 6303(a) literally, concluding that the filing of a proof of claim for penalties in a bankruptcy case filed by a taxpayer is not the same thing as sending a demand for payment of penalties to the taxpayer’s last known address or personally delivering such demand to the taxpayer. This literal interpretation is consistent with other Court of Appeals’ holdings that a failure to send a timely notice and demand for payment precludes the IRS from taking administrative collection action.

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C. Regulation Section 301.6303-1(a) and Internal IRS Memoranda

Regulation section 301.6303-1(a)-1(a) states:

(a) General rule. Where it is not otherwise provided by the Code, the district director or the director of the regional service center shall, after the making of an assessment of a tax pursuant to Code section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. Such notice shall be given as soon as possible and within 60 days. However, the failure to give notice within 60 days does not invalidate the notice. * * *

The language of this Regulation is internally inconsistent. First, the Regulation states that the notice and demand shall be given within 60 days of the date of the assessment. The Regulation also states that the failure to give the notice and demand within this 60 day window does not invalidate the notice and demand. These two sentences simply cannot be reconciled. The first sentence imposes a 60 day deadline for the IRS to send a notice and demand, while the second sentence effectively says that there is no deadline for the IRS to send a notice and demand. Furthermore, the statutory language itself requires that the notice and demand be provided within 60 days of the date of the assessment of the taxes in question. Thus, the last sentence of the Regulation quoted above is not consistent with the language of the statute.11

The IRS Chief Counsel’s Office ("Chief Counsel") issued two advice memoranda to discuss the question of whether a document that would otherwise qualify as a "notice and demand" for purposes of Code section 6303(a) constitutes a valid "notice and demand" for purposes of Code section 6303(a) if it was sent to a taxpayer outside of the 60 day statutory window. In Blackston v. United States, supra, and Crowd Management Services, Inc. v. United States12, Chief Counsel addressed a situation where the Kansas City Service Center had failed to send out "regular" notices and demand for payment within 60 days of the assessment in approximately 17,000 cases. The first notices that were sent to the taxpayers were notices of intent to levy (under Code section 6331). These notices were sent to taxpayers within 60 days after assessment.

This memorandum discussed case law, such as Blackston and Crowd Management Services, which holds invalid that the portion of the Regulation which states that the IRS’s failure to issue a notice and demand within 60 days of the date of assessment does not invalidate the notice and demand. Because the notices of intent to levy were sent within 60 days of the date of assessment, the memorandum concluded that the notices of intent to levy constituted valid notices and demand for payment without concluding whether Regulation section 301.6303-1(a) is valid. The Memorandum did not cite to or discuss any case law which contradicts the holdings of Blackston and Crowd Management Services.

More recently, Chief Counsel issued a Program Manager Technical Assistance Memorandum13 ("Memorandum") which directly addresses the question of whether notice and demand for payment must be given within 60 days of assessment for the IRS to be able to collect a tax liability "through lien and levy," along with the validity of Treasury Regulation section 301.6303-1(a). The Memorandum concludes that the IRS may proceed with collection by lien and levy even where a notice and demand is not made within 60 days of assessment, provided that notice and demand is made before administrative collection action is taken.

The Memorandum provides two reasons for reaching this conclusion. First, it notes that neither Code section 6321 nor section 6331, both of which require that notice and demand be given to the taxpayer before the IRS can proceed with certain actions, specify a time period in which notice and demand must be given before the statutory lien arises under section 6321 or before the IRS can take levy action under Code section 6331. The Memorandum concludes that, because Code sections 6321 and 6331 do not impose any time limit on sending a notice and demand for payment to the taxpayer, the failure of the IRS to send a taxpayer a notice and demand within 60 days of an assessment, as called for by Code section 6303(a), does not bar the statutory tax lien from arising under Code section 6321 and does not bar the IRS from proceeding with levy action under Code section 6331 if a notice and demand is sent to the taxpayer outside of the 60 day statutory window.

Second, the Memorandum notes that, under the Supreme Court’s decision in Mayo Foundation for Medical Education and Research v. United States,14 the portion of Regulation section 301.6303-1(a) which holds that a notice and demand sent outside of the 60 day statutory window is nevertheless a valid notice and demand must be upheld if it is a "reasonable construction" of the statute. The Memorandum notes that "[n]o court decision to date has expressly relied on the validity of the Regulation in light of this deference standard." The Memorandum concludes that the Regulations in question are a reasonable construction of the statute because the Regulation "is consistent with the overall statutory scheme for Treasury to provide by Regulation that the untimeliness of notice and demand will not render the notice and demand invalid." The Memorandum does not cite to or discuss any case law to support the position taken. The authors of this paper are not aware of any such case law.

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D. The Problems with the Regulations and Chief Counsel’s Recent Memorandum

The most obvious problem with the statement in Regulation section 301.6303-1(a) that a notice and demand issued outside of the statutory 60 window is nevertheless a valid notice and demand is that it is inconsistent with the Code. Where Congress has imposed a requirement that the IRS do something by a particular date, these Regulations may not excuse the IRS from complying with that deadline.

This is particularly so where the act to be taken is critically important in protecting the rights of taxpayers. The timely sending of a notice and demand for payment is an important protection for taxpayers.15 In other contexts, courts have held that the IRS may not ignore statutory deadlines.16

The logic relied upon by Chief Counsel in its Memorandum is faulty. If the IRS can disregard statutory deadlines merely by issuing Regulations, the IRS could routinely thwart the will of Congress. Based on the logic used in the Memorandum, the IRS could issue a Regulation extending the statute of limitations on collection beyond the period established by Congress. The IRS could also issue a Regulation extending the statutory deadline for providing taxpayers with notice of third party record keeper summonses issued under Code section 7609. The IRS does not have the ability to disregard the language of the statute when it issues Regulations.

The fact that no court has held Regulation section 301.6303-1(a) invalid since the Supreme Court issued its ruling in Mayo, does not offer any support for Chief Counsel’s position. The standard used by the Court in Mayo is the same standard used by the Court to determine the validity of all types of Regulations. That standard says that Regulations that are inconsistent with the statutory language must be struck down.17 Where a statute requires that a notice and demand be sent within 60 days of the assessment, the IRS may not issue a Regulation stating that it is permissible to issue a valid notice and demand more than 60 days after the assessment.

Similarly, the fact that neither Code sections 6321 nor 6331 specify when a notice and demand must be sent does not provide any support for the position that the IRS may issue a valid notice and demand more than 60 days after the date of assessment. The language of Code section 6303(a) itself indicates that all notices and demands must be given within 60 days of assessment "[w]here it is not otherwise provided by this title." The use of this quoted phrase indicates that the 60 day period for providing all notices and demands applies everywhere in the Code unless specifically provided otherwise.

The Regulation, as is stands, is misleading and unfair to taxpayers. Most matters involving disputes over interest and penalties will arise in the context of Collection Due Process appeals. In fact, the recent Chief Counsel Memorandum was generated in response to an inquiry regarding what position to take in Collection Due Process appeals. Most taxpayers and their representatives (if any) in Collection Due Process cases are simply unaware that a failure to send a timely notice and demand prevents the IRS from taking administrative collection action and, in appropriate situations, prevents the accrual of interest and failure to pay penalties. Thus, these taxpayers end up being improperly charged with interest and penalties and are improperly subjected to administrative collection action. A change to the Regulation will provide notice to taxpayers, their representatives, and IRS employees so that the rules are applied uniformly to all taxpayers, not just taxpayers who hire sophisticated representatives. Even where taxpayers are aware of this issue, it will not make economic sense for them to fight the IRS’s extremely aggressive position. In most cases, the time and expense associated with fighting the IRS on this issue could prevent taxpayers from challenging the IRS’s position.

The IRS should rethink its position, both as a matter of logic, and to encourage tax compliance. When taxpayers see the IRS take a position that allows itself to ignore a statutory mandate imposed by Congress, there is an adverse impact on voluntary compliance. The long term costs to the IRS of taking a position that it can effectively ignore the will of Congress could be greater than its costs to comply with the statutory mandate of Congress.

E. Proposed Amendment to the Regulation

This paper proposes that Regulation section 301.6303-1(a) be amended to read as follows:

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"(a) General rule. Where it is not otherwise provided by the Code, the district director or the director of the regional service center shall, after the making of an assessment of a tax pursuant to Code section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. Such notice shall be given as soon as possible and within 60 days. If the district director or director of the regional service center fails to give notice within this 60 day period, any notice issued after the expiration of this 60 day period shall not be a valid notice and demand for purposes of this Title. The failure to give notice within 60 days does not invalidate the underlying assessment and does not preclude the taking of collection action for which a valid notice and demand is not a prerequisite. * * *"

This change comports with the requirements of the statute and the case law discussed above. Taxpayers will remain liable for the assessed liabilities and are free to pay the amounts legally owed. But taxpayers will not be required to pay interest and penalties that are not properly owed. And taxpayers will not be subject to liens which are legally improper and will not be subject to levy action which is improper.

The IRS will still be free to send requests for payment to taxpayers, make in person payment requests, collect amounts owed by offsetting overpayments of taxes from other tax periods and institute suit in District Court if the taxpayer refuses to pay.

II. CONCLUSION

Regulation section 301.6303-1(a) is inconsistent with Code section 6303(a) and the court decisions interpreting it. Such Regulation section should be changed to comport with the terms of the statute and to eliminate the existing unfairness.

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Notes:

1. The comments contained in this paper are the individual views of the authors who prepared them, and do not represent the position of the State Bar of California or the Los Angeles County Bar Association. Although the participants on this project may have clients affected by the rules applicable to the subject matter of this paper and may have advised such clients on applicable law, no such participant has been specifically engaged by a client to participate on this paper.

2. A. Lavar Taylor is a shareholder in the Law Offices of A. Lavar Taylor, APC and is an Adjunct Professor of Law at Chapman University School of Law, and can be reached at (714) 546 0445 ext. 116 and by email at ltaylor@taylorlaw.com. The views expressed herein do not necessarily reflect the views of the Law Offices of A. Lavar Taylor or of Chapman University School of Law. Grace Alcantara is an attorney in Costa Mesa, and can be reached by email at alcan103@mail.chapman.edu. The authors wish to thank David Rice and Dennis Perez for their valuable comments.

3. See, e.g., I.R.C. §§6601(b)(5), 6671 and 6672(b)(2).

4. United States v. Coson, 286 F.2d 453 (9th Cir. 1961).

5. United States v. Berman, 825 F.2d 1053 (6th Cir. 1987).

6. See United States v. Berman, 86-1 U.S.T.C. para. 9439 (S.D. Ohio 1986).

7. United States v. Chila, 871 F.2d 1015 (11th Cir. 1989), cert. denied, 493 U.S. 975 (1989).

8. Security Indus. Ins. Co. v. United States, 830 F.2d 581 (5th Cir. 1987).

9. See Blackston v. United States, 778 F.Supp. 244 (D. Md. 1991) (holding that the failure to send a notice and demand within the 60day statutory period precluded levy action and expressly rejecting the Regulation discussed below as being inconsistent with the statutory language of section 6303(a)), see also Crowd Management Services, Inc. v. United States, 792 F. Supp. 87 (D. Ore. 1992) (concluding that the language of the Regulation discussed below is inconsistent with the statutory language of I. R.C. §6303(a)).

10. Resyn Corporation v. United States of America (In the Matter of Resyn Corporation), 945 F.2d 1279 (3rd Cir. 1991).

11. See Blackston v. United States, supra, and Crowd Management Services, Inc. v. United States, supra.

12. Service Center Advice memorandum, SCA1998-004 (June 2, 1998).

13. POSTS-103745-11 (Jan. 24, 2012).

14. Mayo Foundation for Medical Education and Research v. United States, 131 S. Ct. 704 (2011).

15. See, e.g., Martinez v. United States, 669 F.2d 568 (9th Cir. 1982) (failure to provide taxpayer with notice and demand before taking levy action required IRS to return all funds which had been collection from the taxpayer), Mrizek v. Long, 187 F. Supp 830 (N.D. Ill. 1959) (failure to provide taxpayer with notice and demand violates the Due Process clause of the Constitution).

16. See, e.g., Perlowin v. Sassi, 711 F.2d 910 (9th Cir. 1983) (failure by the IRS to issue a notice of deficiency within 60 days after termination assessment, as required by 26 U.S. Code §6851(b), renders termination assessment void). See also Goodwin v. United States, 935 F.2d 1061 (9th Cir. 1991) (failure of the IRS to send a timely notice of sale to a taxpayer by personal delivery or by certified mail invalidates IRS sale of taxpayer’s property, even though such notice had been sent by regular mail).

17. Supra Note 14.