Tax Court in Brief | Dawveed v. Comm’r | Restitution-Based Assessment and Collection Due Process

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The Tax Court in Brief – March 6th – March 10th, 2023

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Tax Litigation:  The Week of March 6th, 2022, through March 10th, 2023

Dawveed v. Comm’r, T.C. Memo. 2023-28| March 6, 2023 |Lauber, J. | Dkt. No. 19385-21L

Summary: In this collection due process (CDP) case, Mehlek Dawveed sought review of the determination by the IRS to uphold a notice of Federal tax lien (NFTL) and a notice of intent to levy for 2010. The IRS took these actions to facilitate collection of restitution it had assessed against Dawveed following his criminal conviction. In 2016 Dawveed was indicted on counts of violating 18 U.S.C. §§ 287 (false claims) and 1343 (wire fraud), and section 7212(a) (obstructing administration of the internal revenue laws). The indictment alleged that Dawveed had engaged in a fraudulent scheme to obtain a tax refund of $977,558 for 2010. In 2012 Dawveed again attempted to file a false amended return for 2010 aiming to secure an additional refund. In 2018, Dawveed pleaded guilty to one count of violating 18 U.S.C. § 1343 (wire fraud). He was sentenced to 36 months in prison, followed by 3 years of supervised release. Also, the court ordered, pursuant to 18 U.S.C. § 3663(a)(3), that Dawveed pay restitution of $788,991 to the IRS for unrecoverable losses resulting from his fraudulent scheme.

Dawveed was released from prison early, and the court entered a consent order of forfeiture, reciting Dawveed’s agreement to forfeit all property derived from proceeds traceable to his offense, including $788,991 and certain real property. Thereafter, an IRS special agent assigned to Dawveed’s case completed Form 14104, Notification of Court Ordered Criminal Restitution Payable to IRS, notifying the IRS civil compliance officers of the final amount of restitution owed.

Later, the IRS made a restitution-based assessment (RBA) against Dawveed of $788,991 and mailed a Notice CP94, Criminal Restitution Final Demand Notice, demanding payment. The IRS then sent him a Notice CP504, Final Balance Due. Dawveed did not pay. So, the IRS filed an NFTL and sent Dawveed a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing (lien notice). Finally, the IRS mailed a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice).

Dawveed timely submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing. Dawveed sought withdrawal of the NFTL and discharge of the tax lien but proposed no other collection alternative. He asserted that he had “no ownership or interest in any real property” and was “unable to pay off the remaining balance.” The case was assigned to an SO from the IRS Independent Office of Appeals. The SO verified that the lien and levy notices were sent by certified mail to Dawveed’s last known address and that Dawveed actually received both notices. Although requested to do so, Dawveed did not submit a completed Form 433–A, Collection Information Statement for Wage Earners and Self-Employed Individuals, with supporting financial information. Having received no further information from Dawveed, the SO closed the case. Thereafter, the IRS sent him a notice of determination sustaining the NFTL filing and the proposed levy. He timely petitioned the Tax Court for review. Dawveed and the IRS filed competing motions for summary judgment relating to the NFTL and the parties’ associated collection and enforcement rights.

Key Issues:

Primary Holdings: No, the SO properly discharged all of responsibilities under applicable collection procedure law. Dawveed’s underlying liability consisted of the restitution-based assessment that the IRS has made. Dawveed was precluded from challenging the RBA liability, and thus, the Court reviewed the collection due process determination for abuse of discretion only. The IRS properly followed the RBA procedures. After Dawveed had exhausted all appeals, the IRS assessed the restitution ordered by the sentencing court. And the IRS assessed no additions to tax or underpayment interest in connection with the RBA.

Key Points of Law:

Summary Judgment Standard. The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Tax Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, the Court construes factual materials and inferences drawn from them in the light most favorable to the non-moving party. However, the non-moving party may not rest upon mere allegations or denials of pleadings but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d).

Restitution. Section 6201(a)(4)(A) provides that “[t]he Secretary shall assess and collect the amount of restitution under an order pursuant to section 3556 of title 18, United States Code, for failure to pay any tax imposed under this title in the same manner as if such amount were such tax.” The IRS may not make such an assessment until the defendant has exhausted all appeals and the restitution order has become final. See id. at § 6201(a)(4)(B). Restitution-based assessments (RBAs) are exempted from the usual period of limitations on assessment. See id. at § 6501(c)(11).  The usual restrictions on assessment imposed by section 6213 likewise do not apply to RBAs. See id. at § 6213(b)(5). The IRS is not required to send the taxpayer a notice of deficiency before making an RBA.

Standard of Review for Challenges to Collection Due Process. In reviewing an IRS administrative determination in a CDP case, and where the validity of a taxpayer’s underlying liability is properly at issue, the Tax Court reviews the IRS’s determination de novo. Sego v. Commissioner, 114 T.C. 604, 610 (2000). Where the taxpayer’s underlying liability is not properly before the Court, the Court reviews the IRS’s determination for abuse of discretion only. Jones v. Commissioner, 338 F.3d 463, 466 (5th Cir. 2003). Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). A taxpayer may challenge the underlying tax liability at a CDP hearing only if the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity” to dispute it. 26 U.S.C. § 6330(c)(2)(B). And a taxpayer is precluded from advancing an underlying liability challenge in the Tax Court “if it was not properly raised in the CDP hearing.” Thompson v. Commissioner, 140 T.C. 173, 178 (2013).  In an RBA matter, the amount of restitution may not be challenged by the person against whom assessed on the basis of the existence or amount of the underlying tax liability in any authorized proceeding. See 26 U.S.C. § 6201(a)(4)(C).

Factors to Consider in Abuse of Discretion Review. In deciding whether the IRS settlement officer (SO) abused discretion in sustaining the proposed collection actions, the Court considers whether the SO (1) properly verified that the requirements of applicable law or administrative procedure were met, (2) considered relevant issues the taxpayer raised, and (3) considered whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary. See id. at §§ 6330(c)(3), § 6320(c); see also Miccosukee Tribe of Indians of Fla. v. Commissioner, T.C. Memo. 2015-216, 110 T.C.M. (CCH) 446, 448 (“Minor defects may be overlooked where the taxpayer knows of and pursues the right to administrative and judicial review.”); Stein v. Commissioner, T.C. Memo. 2004-124, 87 T.C.M. (CCH) 1358, 1364 (“Because the [CDP] hearing had been timely requested within the prescribed 30-day period, petitioner’s claims that respondent did not send Letter 3172 to petitioner’s last known address and that petitioner never received it are beside the point.”).

Insights: In Dawveed’s situation, the IRS afforded Dawveed numerous opportunities and notices relating to the restitution-based assessment that was determined pursuant to Dawveed’s criminal conviction and consent order. The IRS settlement officer went to great lengths to attempt to work with Dawveed in the collection review and assessment matter. Dawveed basically ignored the SO’s many requests for self-help and disclosure. Dawveed was likely in the difficult position of inability to pay. However, that did not excuse him from inhibiting the IRS’s evaluation of collection alternatives, and ultimately, the IRS had no choice but to proceed with the NTFL and other collection efforts to recover the underlying restitution-based assessment.