The Freak Tackles The IRS

Let’s go hard procedural on this post.

He played defensive end in the NFL with the Tennessee Titans and Philadelphia Eagles from 1999 to 2010. At 6’4”, 260 pounds, 86-inch wingspan and 4.43 forty, NFL fans remember him as “The Freak.”

Jevon Kearse is in the tax literature.

It looks like a business deal went bad, because in 2010 he claimed a $1,359,000 bad debt deduction.

The IRS bounced it. The IRS now wanted over $430 thousand in tax. They issued a Notice of Deficiency (NOD) on May 11, 2012.

COMMENT: Procedurally, the IRS issues a NOD (also known as a SNOD) before it can officially assess the additional tax. Once assessed, the IRS can bring all its collection powers to bear.

Problem: Kearse says he never received the NOD.

Let us start our walk through IRS procedure.

Once assessed, the IRS sent Kearse a Notice of Federal Tax Lien.

COMMENT: One has the right to request a hearing (called a Collection Due Process hearing) in response.

Kearse requested a CDP hearing, at which he asserted that he never received the NOD and presented an offer in compromise (liability – for the home gamers) for $1.

COMMENT: There are three flavors of offer in compromise. The one we are talking about is when there is substantial doubt that the assessed tax is correct. At $1, that is exactly the point Kearse was making.

IRS Appeals tuned him down, and off to Tax Court they went.

A taxpayer has the right to challenge the underlying tax liability in a CDP hearing IF he/she never received the NOD or otherwise never had a chance to dispute the proposed assessment. This is a procedural requirement, and the Court can bring it up even if the taxpayer fails to.

Responsibility now shifted to the IRS. The Appeals officer had to prove that the IRS properly mailed the NOD. There are two general ways to do this:

(1) Reviewing an internal IRS document management system

(2) Reviewing a postal Form 3877 or an equivalent mailing list with date stamps and/or initials.

The IRS said they did the first option: they reviewed the internal system.

Kearse’s tax attorneys also got the Appeals officer to stipulate that she could not produce a Form 3877 or otherwise prove the mailing of the NOD.

NOTE: We will come back to the importance of a “stipulation” in a moment.

There is a second procedural issue here: the IRS can rely on its internal system unless the taxpayer alleges that the NOD was not properly mailed.

Which is what Jevon Kearse had done. The IRS could not rely on option (1).

Incredibly, the IRS finally found the Form 3877, explaining that the eventual success had resulted from an update to their systems.

The Court bounced the Form 3877.

What ….?

It has to do with the stipulation. You see, a stipulated fact is treated as conclusive evidence. It cannot be changed, barring extraordinary circumstances.

The IRS had to argue extraordinary circumstances.

And we have the third procedural issue: the IRS failed to do so.

Meaning the IRS was bound by its stipulation that it could not prove the mailing of the NOD.  

The IRS attorney flubbed.

Jevon Kearse won.

What a freak case.