Lawsuit Barred for Individual Who Failed to Pay Full Tax Penalties

16 August 2019

The founder of a tax preparation business was barred from bringing a lawsuit in federal court because she failed to make full payment of her tax penalties. The taxpayer had challenged the Service’s assessment of penalties pursuant to understatement of tax because of her willful or reckless conduct for the tax years at issue. However, the taxpayer failed to comply with the statutory conditions for the exception to the full payment rule which stated that: (1) within 30 days after the day on which notice and demand of any penalty is made against a person who is a tax return preparer, such person pays an amount which is not less than 15-percent of the amount of such penalty and files a claim for refund of the amount so paid; and (2) the refund suit is filed within thirty days of the earlier of either the denial of the claim or six months from the filing of the claim. Not only did the taxpayer file her claim four months after the tax penalty was assessed against her, but the refund suit was also filed approximately one year after the filing of the claim. Moreover, the taxpayer’s contention that the tax at issue was divisible so the full payment rule was satisfied failed because there was no judicial precedent related to whether penalties assessed pursuant to Code Sec. 6694(b) were divisible. Further, a tax is only divisible where the resolution of one tax dispute necessarily determined the outcome for each of the other tax disputes. The taxpayer’s penalties were not divisible because resolving one on the merits still left each remaining penalty to be resolved; therefore, the government was immune from suit, and the district court lacked jurisdiction to consider the taxpayer’s claims because the full payment of a tax penalty was a jurisdictional prerequisite.

T.W. Davis, DC Md.