Tax Deficiency Petition Deadline Isn’t Absolute, Appeals Court Says

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It is an unfortunate truth that many U.S. taxpayers wait until the last minute to deal with the IRS. This may mean filing extensions on their tax returns, or delaying contacting a tax attorney to respond to a deficiency notice. But is there ever a good excuse for missing a U.S. Tax Court tax deficiency petition filing deadline? A recent Third Circuit Appeals Court decision has opened the door to filing late deficiency notices, at least a little.

IRS Tax Deficiency Notice Gets Lost in the Mail

Isobel Berry Culp and David Culp were U.S. taxpayers who settled a civil lawsuit in 2015. Each received just under $9,000, which they promptly reported as “Other income,” describing the settlement money as “PRIZES, AWARDS” on their tax returns the following year. Somehow, the IRS missed that disclosure, and the resulting tax payment. In November 2017, it issued a letter proposing to adjust their tax return and increase the taxes owed to reflect the supposed underpayment.

The IRS sent the letter, and had the post office confirmation to prove it, but the Culps say they never received it. The 30 days the IRS gave the Culps to respond came and went, so the IRS issued a notice of deficiency, which the Culps also never received. That notice had a 90-day window in which the Culps were permitted to challenge the tax deficiency determination by filing a petition in the U.S. Tax Court. They hadn’t received the letter, so they didn’t respond. The IRS repeated the process in 2018, again to no effect. So after the 90-day tax deficiency deadline had passed, the IRS issued a levy on the Culps’ property, and seized their Social Security payments and tax refunds.

The Culps objected since they had already reported the 2015 settlement income and paid the taxes on it. They filed a tax deficiency petition in the United States Tax Court, asking the court to set aside the tax deficiency determination and refund all payments and levies received by the IRS.

Tax Court Closes the Door on Late Tax Deficiency Lawsuit

But the Tax Court said they had missed their tax deficiency petition filing deadline. It held that by missing the 90-day window included on the tax deficiency notice, the Culps had lost all ability to contest the assessment in the Tax Court. It said the tax deficiency deadline was “jurisdictional” – meaning that the federal courts only had jurisdiction to resolve disputes if they were timely filed. Because of this, the Tax Court said the tax deficiency petition filing deadline was absolute. No amount of good cause could excuse the late filing of a tax deficiency redetermination petition.

The Culp case wasn’t the only one to be dismissed for this reason. Earlier this year, in Hallmark Research Collective v IRS, the taxpayer missed the tax deficiency deadline by one day due to COVID. Just like in Culp, the United States Tax Court said that the filing deadline was jurisdictional, and it had no ability to extend the deadline, even for good cause.

Third Circuit Appeals Court Says Tax Deficiency Filing Deadline Isn’t Absolute

But the Culps decided to appeal the decision to the Third Circuit Court of Appeals. The Appeals Court agreed with the United States Tax Court that the Culp’s complaint was late – they had missed their tax deficiency petition deadline by more than a year. The clock for filing a tax deficiency petition started ticking when the IRS sent the deficiency notice; not when the taxpayer received it. Because the IRS was able to provide the post office documentation that the notices had been sent, the Culps’ petition was late, and if the Tax Court had its way, the case would be dismissed.

However, it disagreed that this late filing stripped the courts of jurisdiction to hear the case. It framed the question saying:

“[I]s § 6213(a)’s 90-day requirement jurisdictional or is it a claims-processing rule?

The answer to that question was key to the Culps’ good cause defense for their late filing. If the requirement was jurisdictional, then the courts would have no ability to extend – or toll – the deadline for good cause. But if the requirement was just a claims-processing rule, then the courts could entertain their argument that they hadn’t known about the tax deficiency until the IRS seized their assets.

The Third Circuit said “an unfulfilled jurisdictional requirement carries harsh consequences,” so it said it would not apply the “jurisdictional” label lightly. Instead, the deadline would only create a barrier if Congress had clearly stated the procedural requirement was jurisdictional, based on the language of the statute itself. The Court applied a 2022 Supreme Court decision in Boechler, P.C. v Commissioner, which held that the text of a different filing deadline did not “clearly mandate a jurisdictional reading.”

The Third Circuit said that the language in the section describing the tax deficiency petition deadline was not even as strong as the language in Boechler. If that deadline “fell short of being jurisdictional, § 6213(a)’s limit must as well.” Nothing in the statute linked the tax deficiency petition deadline to the Court’s jurisdiction. Since Congress clearly knew how to limit the scope of the Tax Court’s jurisdiction, but didn’t do so when it came to the review of untimely redetermination petitions, the Third Circuit said the requirement was simply a claims-processing rule.

Third Circuit’s Ruling Opens the Door for Equitable Tolling of Late Claims

Because the Third Circuit said the statute was a claims-processing rule, that created the possibility for taxpayers to request an equitable tolling of the tax deficiency petition deadline. “Equitable tolling” pauses the statute of limitations when a taxpayer “pursued his rights diligently but some extraordinary circumstance prevents him from bringing a timely action.” In other words, a taxpayer can file their tax deficiency determination petition late if they had good cause for missing the deadline in the first place. Since Congress had not barred equitable tolling for cases brought under § 6213(a), and the filing deadline in tax deficiency cases is so short, the Court said the law should not be interpreted as “unbending.”

The IRS tried to argue that a claims-processing reading and equitable tolling would open the courts up to unnecessary tax deficiency determination lawsuits. However, the Court cited to an amicus brief from the Center for Taxpayer Rights which showed that the Tax Court dismisses only 600 petitions per year for being untimely out of the 2 million annual tax deficiency notices issued by the IRS. The Court said this small number “does not move the needle” on enforcement.

No one should aim to miss a statutory filing deadline in the hopes that equitable tolling can save them. But knowing that the tax deficiency petition deadline is not absolute may allow some taxpayers facing a short time limit to breathe a little easier. Still, the lengths the Culps had to go through to have their case heard should serve as a warning. As soon as you suspect the IRS is attempting to contact you about unpaid taxes, you should speak to an experienced tax attorney who can make sure you don’t miss your chance to respond.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 35 years experience. If the IRS is trying to collect unpaid taxes and penalties from you or your clients, contact Joe Viola to schedule a free consultation.

Categories: IRS Debt Collection