This case is important because the IRS is issuing levies left and right these days. This opinion is a good discussion of section 6330, notice and opportunity for hearing before levy.
How does a seemingly simply issue turn into an almost fifteen year dispute with the IRS? Ask the Kovaceviches. The issue is seemingly simple. The Kovaceviches say that the IRS did not properly apply five checks to their outstanding tax liability from 1992. Twenty-eight pages later the Tax Court says the IRS did apply the payments properly. In the interest of full-disclosure, there is a lot of the opinion I am leaving out.
The 1992 dispute started when the IRS determined Mr. Kovacevich was an employee of his law firm and not an independent contractor. Mr. K. challenged the determination in tax court and lost. As a result, his law firm owed back employment taxes. Mr. K’s business deductions as an independent contractor were disallowed, as well as his personal deduction for ½ self-employment tax paid. The law firm’s employment tax liability was settled by the self-employment taxes paid by Mr. K. The payments were credited to his firm’s liability pursuant to section 3402(d).
In April 2005, the Service sent Mr. K a notice of intent to levy for amounts still owed from 1992. Between the 1992 and today, the following events transpired:
- 1999 – IRS deficiency notice for 1992 tax year
- 2003 – Tax Court upholding deficiency notice
- 2006 – Ninth Circuit upholds Tax Court’s decision
In response to the levy notice, the K’s requested a collections due process (CDP) hearing and presented copies of four checks they claimed were not applied to the 1992 tax year. The appeals officer upheld the levy because she considered the K’s “misapplied check” argument a challenge to the underlying tax liability; a matter not within the scope of a levy hearing under 6330(c)(2)(B).
The IRS concedes the officer’s reading of 6330(c)(2)(B) an error. Nonetheless, the Tax Court lays out a fine analysis of section 6330(c) beginning on page 12. The language of (c)(2)(A) states, “a person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy…” Since the K’s did not challenge the liability rather the unpaid amount, their check theory was within the scope of a hearing
Interestingly, because the appeals officer’s incorrect reading of 6330(c) is an “error of law . . . she necessarily abused her discretion, unless her error was harmless.” To show harmless error, the IRS asserts that the exclusion to 6330(c)(2)(A) under (c)(4) applies. Under 6330(c)(4) an issue “raised and considered at previous administrative or judicial proceeding” may not be raised again. Since one of the checks at issue was considered by the Tax Court at the 2003 deficiency trial it could not be properly considered at the CDP hearing.
To show harmless error for the remaining four checks, the IRS would need to show the checks were applied properly in the first place. Each check was considered in turn by the Tax Court. The Tax Court states, “a taxpayer who makes a voluntary payment may designate which liability he or she wishes to pay.” The Court then conducts an exhaustive analysis between the IRS’s records and the writings on each of Mr. K’s checks. Only one of Mr. K’s checks indicated the 1992 tax year. The other checks had writings that indicated other tax years and were properly applied accordingly.
The obvious problem with Mr. K’s argument – the Court points this out – is that if it is assumed for the sake of argument that the IRS erroneously applied his checks, he still owes money. The checks were in fact applied to one of the K’s tax liabilities. So shifting the checks from one tax year to another gets him nowhere. It suggests Mr. K’s motives for the fight were illogical from the start.