The IRS requests that one alert them of
change-of-address when one moves. There is even a form, but I do not often see
the form used in practice. Normally the IRS is alerted when one files the next
tax return with the new address.
It is, by the way, a good idea to alert the IRS of a
change of address in case you have the misfortune of tax notices. There is a clock
for certain tax notices, and once they start it can be difficult to reverse the
clock.
I will give you one, as it has become more repetitive
in practice than I would have liked: the notice of deficiency, also called a
“statutory” notice of deficiency. I generally refer to it as the SNOD.
We have talked about the SNOD before. The IRS wants to
reduce its tax assessment to a judgement. That requires the intervention of a
court - the Tax Court in this case - and the IRS sends out a multipage,
impressive, imposing if not intimidating notice to the taxpayer.
Who in turn collects it with other tax documents -
unread - and drops the bundle off a-half-year later (or more) when it is time
to meet with the CPA.
There is a problem here: one has 90 days to respond to
a SNOD.
Which has passed. The level of difficulty has
increased. The matter has already defaulted in favor of the IRS, of course, as
the taxpayer never responded. The IRS has unleashed its Collections berserkers,
who have little interest whether you actually owe the tax or not.
Here is a Collections story from several years ago.
The IRS proposed changes to a client’s tax return. Sure enough, the SNOD got
lost in the mail, was stolen from the mailbox, was thrown in the trash,
whatever. The IRS changed numbers here and there. Some numbers were small and
of minor import. Others were 1099s issued to our client but belonging elsewhere
among related taxpayers. Then there was the big number: the rollover of a 401(k)
or IRA. A 1099 is issued for a rollover, although it is normally a nontaxable
event. The 1099 has a unique code for a rollover. The IRS, the taxpayer and
accountant see the code, and everybody moves on.
Not this time.
The IRS did not see the code. Underreported income! Fair
share! Tax the rich! The IRS went through its dunning notice series, eventually
its SNOD, and then Collections activity. They filed a lien. They were irate, as
they thought the taxpayer was ignoring them.
The taxpayer had no idea. It was only when trying to
sell some real estate that the lien – and the rest of the story - came to
light.
We went all Sherlock on what had happened.
We filed an amended return to reverse the IRS adjustment.
We had Collections hold back the war dogs to allow the IRS time to process the
amended return.
Which never happened. Collections came back more frenzied
than before.
The system had failed. We wanted to know where that
amended return was. The IRS is not built for self-reflection, BTW, but we
eventually found the return. Someone in Kansas City had started to work the
file, I presume quitting time arrived and – as an example of why people hate
government unions – never got back to our client. Never. As in ever.
Yeah, the matter eventually got resolved, but it had
become a sinkhole of professional time. I did talk with a very pleasant IRS
attorney from Nashville, who - once the matter got to her - moved heaven and
earth to reverse the lien.
And there you have an example of how not responding to
a SNOD can sour someone’s life.
And an example of why I believe that the IRS should be
required to reimburse a tax professional’s time when the IRS fails to follow procedures
or otherwise just do their job.
Let’s look at Keith Phillips.
Phillips went to prison in 2010.
Somewhere in there something else bad happened: he was
injured and lost almost all vision in his right eye. He filed a civil lawsuit
against the prison and received a $201 thousand settlement in 2014. He did not
file a tax return for 2014.
Nor would I. Damages for physical injuries are
nontaxable, and this sounds very physical to me.
The IRS thought otherwise and wanted almost $52 grand
in tax, plus penalties, interest, a safe room, coloring books and a binkie
while they worked through the microaggression.
They sent a SNOD.
Phillips had no idea. He was in prison.
The Tax Court rubber-stamped the assessment. The IRS
began collection activity. They sent letters to the same address as the SNOD but
heard nothing back. They filed a tax lien. They notified the State Department
that Phillips was seriously delinquent, and State should begin revoking his
passport. That State Department matter was fortunately sent to Phillip’s
correct address.
Now Phillips was wondering what had happened, although
he had no plans to travel overseas in the near future. He filed with the Tax
Court.
IRS:
More than 90 days have passed. We
win, you lose. Why? Because you are a loser, you big loser you.
Phillips: Hey,
IRS, you sent the SNOD to the wrong address.
IRS: Nope,
we sent it to the right address.
Phillips: I
never lived at this address.
IRS: You
did. We have a USPS notice for change of address.
Phillips: Let
me see it.
IRS: Knock
yourself out, loser.
Phillips: This is my son. We have the same name. He
was living with his mom. I had been here … in prison … years before this change
of address was sent.
IRS: Oops.
If the SNOD is sent to the wrong address, then the
SNOD is not valid. To the IRS’ credit, this error is not common, but it
happens.
Mind you, this does not technically mean that the
matter is over. Phillips never filed a return for 2014, so the statute of
limitations has never started for that year. On the other hand, now that the
IRS is aware that the settlement was for personal injury – and thus nontaxable –
what is the point?
Our case this time was Phillips v Commissioner,
T.C. Memo 2024-44.
