Lisa B. Fagan
The U.S. Court of Appeals for the Third Circuit has ruled whether a remittance is a deposit or a tax payment payment turned on whether the taxpayer was provided with sufficient notice of the trust fund penalties being imposed [Ahmed v. Commissioner of Internal Revenue, CA3, Dkt. No. 22-1091, 4/7/2023].
President as responsible party.
Faisal Ahmed was President of Aspen Construction Corporation. Aspen accrued more than $600,000 in unpaid taxes to the IRS. These unpaid taxes are subject to trust fund recovery penalties (TFRPs) (see Payroll Guide ¶4290). The IRS then pursued Ahmed as a responsible party (see Payroll Guide ¶4296). Under Code Sec. 6672, an individual can be held personally liable for a penalty for the willful failure to collect, account for, and pay to the IRS the employment taxes of an employer.
Required notice controversy.
The IRS asserted that required notice was sent to Ahmed, however, it is unclear whether it was sent to his last known address. Further, Ahmed claimed he did not recall receiving the notice. When Ahmed failed to respond to the notice, the IRS proceeded to file Notice of Federal Tax Liens (NFTLs) against him. In response, he requested (and received) a Collection Due Process hearing with the IRS’ Independent Office of Appeals. After the hearing, the IRS issued a Notice of Determination sustaining the NFTLs. Ahmed then petitioned the U.S. Tax Court for a review, citing several procedural errors. The Tax Court sustained the IRS’ findings in part, but agreed that the Settlement Officer had failed to verify that the initial notice had been properly mailed, and that it did not have the jurisdiction to consider subsequent assessments for the TFRPs the IRS had made, and remanded the case back to the IRS.
Nature of remittance disputed.
In May 2020, the IRS Independent Office of Appeals conducted a supplemental Collection Due Process Hearing. However, before the Office of Appeals issued its ruling, Ahmed remitted $625,000 to the U.S. Treasury, specifying that it was “a Deposit in the Nature of a Cash Bond Under Code Sec. 6603.” A letter sent with the remittance requested that the IRS continue to confirm that it had satisfied all conditions for assessing the TFRP, and specifically stated that the remittance “should not be posted as a final payment to Taxpayer’s account.” The deposit was meant to freeze any additional interest from accruing.
The IRS disregarded those instructions and having found Ahmed ineligible for a deposit under Code Sec. 6603, posted the remittance in satisfaction of Ahmed’s liabilities, and the Tax Court dismissed his appeal as moot.
On appeal, the U.S. Court of Appeals for the Third Circuit reviewed the IRS’ treatment of Ahmed’s remittance.
Court’s reasoning.
The Court went through a step-by-step analysis, including looking at statutory guidance on taxpayer remittances. After concluding that no statute definitively governed the matter, the Court turned to the specific facts and circumstances of the case. The court reasoned that if the IRS failed to provide Ahmed proper notice as required under Code Sec. 6672, then his remittance was a deposit and not a payment. However, if proper notice was provided, much of the case was then moot.
Deposit vs. tax payment.
Because the Court had misgivings regarding whether Ahmed received sufficient notice, it vacated and remanded the case to the Tax Court for further factfinding. Also, the Court instructed the Tax Court that if it should determine that notice requirements were not met, Ahmed’s remittance must be treated as a deposit and resolve his challenges. However, if the Tax Court should determine notice requirements were indeed met, then it should determine whether Ahmed may seek interest abatement for penalties for the tax payment.
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