Proposal to Amend Treasury Regulation Section 301.6303-1 to Conform to Internal Revenue Code Section 6303 and Relevant Court Decisions

• Publication year: 2014
• Author: By A. Lavar Taylor and Grace Alcantara

Proposal to Amend Treasury Regulation Section 301.6303-1 to Conform to Internal Revenue Code Section 6303 and Relevant Court Decisions1

By A. Lavar Taylor and Grace Alcantara²

EXECUTIVE SUMMARY

Section 6303(a) of the Internal Revenue Code of 1986, as amended (the "Code") requires that the Internal Revenue Service ("IRS") give notice and demand for payment to each person liable for an unpaid tax liability within 60 days after the tax has been assessed. Where the IRS has failed to provide proper notice and demand within 60 days of assessment, courts have held that the IRS may not take administrative collection action to collect the unpaid liability, such as filing a Notice of Federal Tax Lien or issuing levies. In addition, the failure to provide a taxpayer with a timely notice and demand prevents the accrual of the failure to pay penalty under Code section 6651(a)(3) as well as the further accrual of interest under Code sections 6601(c) and 6601(e). Section 301.6303-1(a) of the Treasury Regulations ("Regulation") provides that the IRS's failure to provide a notice and demand for payment of a tax liability within 60 days after the tax has been assessed, as required by the Code, does not invalidate the notice and demand for payment. Thus, the Regulation purports to allow the IRS to pursue administrative collection action and impose failure to pay penalties and interest, even when they have failed to issue the taxpayer a timely notice and demand for payment.

This Regulation is inconsistent with the statutory language of the Code and court rulings that a failure by the IRS to issue a notice and demand for payment within the 60 day statutory window prevents the statutory tax lien from arising and precludes the IRS from taking levy action. The Regulation could actively mislead taxpayers who do not hire representation by a professional familiar with applicable case law. Taxpayers are improperly charged penalties and interest and are inappropriately subject to administrative collection action by the IRS.

This paper proposes to amend the Regulation to state that a notice and demand is not valid if first provided outside of the 60 day statutory window. A failure by the IRS to send a notice and demand for payment within 60 days of the date of assessment prevents the statutory tax lien from arising, precludes the IRS from taking levy action and precludes the accrual of interest and penalties where notice and demand is a prerequisite to imposing interest and penalties.

I. DISCUSSION

A. The Code Provisions Dealing With Notice and Demand for Payment

Code section 6303(a) provides:

"Where it is not otherwise provided by this title, the Secretary shall, as soon as practicable, and within 60 days, after the making of an assessment of a tax pursuant to section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. Such notice shall be left at the dwelling or usual place of business of such person, or shall be sent by mail to such person's last known address." (emphasis added)

This language is straightforward. After the IRS assesses a tax liability, the IRS must give notice to each person liable for the assessed liability within 60 days of the making of the assessment. The requirement that notice and demand be provided within 60 days of the date of assessment is just that, a requirement.

Notice and demand for payment is a statutory prerequisite to the creation of a lien for an unpaid tax liability. It is also a statutory prerequisite for the IRS taking levy action to collect an unpaid assessment. Code section 6321 provides that "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with costs that may accrue in addition thereto) shall be a lien in favor of the United State upon all property and rights to property, whether real or personal, belonging to such person" (emphasis added).

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Similarly, Code section 6331(a) provides that, "[i]f any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax * * * by levy upon all property and rights to property (except such property as is exempt under Code section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax" (emphasis added).

Code section 6155 states that "[u]pon receipt of notice and demand from the Secretary, there shall be paid at the place and time stated in such notice the amount of any tax (including any interest, additional amounts, additions to tax, and assessable penalties) stated in such notice and demand." (emphasis added)

Code section 6651(a)(3) imposes a penalty for failure to pay an assessed deficiency in taxes where the taxpayer fails to pay the amount owed "within 21 calendar days from the date of notice and demand therefor (ten business days if the amount for which such notice and demand is made equals or exceeds $100,000)," unless the taxpayer is able to show that the failure to pay is due to reasonable cause and not to willful neglect.

Code section 6601(c) suspends the running of interest on deficiencies in income, estate and gift taxes where a taxpayer waives the restrictions on assessment of a deficiency under Code section 6213(d). This suspension begins 30 days after the filing of the waiver with the Secretary and ends "with the date of notice and demand" for payment of the deficiency.

Code section 6601(e)(1) states that "interest prescribed under this section on any tax shall be paid upon notice and demand." Code section 6601(e)(2) provides as follows:

"Interest shall be imposed under subsection (a) in respect of any assessable penalty, additional amount, or additions to the tax (other than an addition to tax imposed under section 6651(a) (1) or 6652 or under part II of subchapter A of chapter 68) only if such assessable penalty, additional amount, or addition to the tax is not paid within 21 calendar days from the date of notice and demand therefor (10 business days if the amount for which such

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