IRS did not exercise due diligence to ascertain last known address.

To collect a deficiency in income tax, the IRS must mail a notice of deficiency to a taxpayer by certified or registered mail to the taxpayer's last known address. To challenge the assessment of a tax deficiency, the taxpayer must file a petition for redetermination in the Tax Court within 90 days of the mailing of the deficiency notice. The "last known address" to which the deficiency notice must be sent is the taxpayer's last permanent address or legal address known by the Service; it is the taxpayer's burden and responsibility to communicate any change of address. Yet, a notice sent to the wrong address will not satisfy the statutory requirement (and the 90-day period will not begin to run) if it is shown that the IRS failed to exercise reasonable care in determining a taxpayer's new address. This was the conclusion in a recent Second Circuit decision involving two address changes within one year, even though the taxpayer never moved.

In Sicari, 136 F3d 925 (2nd Cir. 1998), the taxpayer resided in the same house since 1976 with the official mailing address of "Route 208, Gardiner, New York 12525" (the "Route 208 address"). In 1991, the U.S. Postal Service changed the official mailing address to "Route 208, Box 1370, Gardiner, New York 12525" (the "Box 1370 address"), and in January 1992, the U.S. Postal Service again changed the official address, this time to "871 Route 208, Gardiner, New York 12525" (the "871 address"). In October 1992, the Service sent a statutory notice of deficiency by certified marl, return receipt requested, to the taxpayer at the Route 208 address. The U.S. Postal Service returned the envelope unopened and marked "Unclaimed" with the words "Return unclainled" handwritten on the envelope. The taxpayer claimed that he did not receive actual notice of the deficiency until 1995, when he met with an IRS agent in connection with an unrelated matter. The taxpayer commenced an action for redetermination in the Tax Court (which was dismissed as untimely), and then appealed the decision to the Second Circuit.

The Court of Appeals determined that the Service did not use reasonable diligence in preparing the notice of deficiency. When the notice was prepared, the IRS was aware that the taxpayer had begun using the Box 1370 address in numerous filings and correspondence, including extension requests and in connection with bankruptcy proceedings. In fact, the Service had used the Box 1370 address in correspondence to the taxpayer and had recorded the Box 1370 address in one of its computer databases. According to the court, "normally, reasonable diligence will require the Service to consult its own files, at least those maintained in computer databases in the district initiating the dispute notice." Therefore, reliance on the taxpayer's address shown on his most recently filed return was determined to be unreasonable, as the Service had actual knowledge at the time the notice was issued that the taxpayer had begun to use a new address, albeit a more precise refinement of his prior address.

Comments

The lack of diligence did not necessarily mean that the statutory notice was ineffective. The case was remanded to the Tax Court to determine whether the IRS could prove that the envelope containing the notice was in fact delivered to the taxpayer and was therefore effective (even though inadequately addressed). From Jerry L. Lerman, CPA, Goldstein Golub Kessler & Company, P C., New York, N.Y.