Zulfiqar v. Commissioner: Stipulated Decisions and the Scope of Tax Court Jurisdiction in CDP Hearings

The $200K Question: Did a Tax Court Stipulation Wipe Out the Zulfiqars’ Penalties?

The stakes in Muhammad Zulfiqar and Shazia Zulfiqar v. Commissioner could not be higher: $202,932 in proposed levies hangs in the balance, not just for the Zulfiqars’ 2015 tax year but for the broader question of whether a Tax Court stipulation can extinguish penalties that were never explicitly addressed in the decision. The case centers on a 2023 stipulated decision in Docket No. 14881-20, which resolved the underlying tax liability but left the IRS’s proposed additions to tax; including failure-to-file, failure-to-pay, and estimated tax penalties; unaddressed. The Tax Court’s denial of both the IRS’s and the Zulfiqars’ motions for summary judgment in January 2026 signals a bold assertion of jurisdiction over penalties that were never litigated, raising questions about the finality of stipulated decisions and the IRS’s ability to revisit penalties in later collection proceedings.

The court’s ruling forces taxpayers and practitioners to confront a critical ambiguity: When a stipulated decision resolves only the tax liability, does it implicitly waive the IRS’s right to pursue penalties that were not part of the original dispute? The Zulfiqars argue that the stipulation’s silence on penalties means they are extinguished, while the IRS contends that penalties; being separate from the tax itself; remain enforceable unless explicitly waived. The Tax Court’s refusal to resolve the issue summarily suggests that the answer may hinge on whether the penalties were part of the "underlying liability" subject to the stipulation or whether they fall under the IRS’s independent authority to assess additions to tax under Section 6662 (accuracy-related penalties) and Section 6651 (failure-to-file/pay penalties). If the court ultimately sides with the IRS, it could expand the agency’s power to revisit penalties in collection due process (CDP) hearings, even after a stipulated decision has been entered. Conversely, a ruling for the Zulfiqars would limit the IRS’s ability to pursue penalties that were not part of the original Tax Court proceeding, forcing the agency to litigate them separately; a potential blow to the IRS’s enforcement flexibility.

A Late Return, a Substitute, and a $282K Tax Bill: The Zulfiqars’ 2015 Tax Saga

The Zulfiqars’ 2015 tax troubles began with a simple failure to file; a delay that cascaded into a $282,637 tax bill, penalties totaling $66,124, and a years-long battle with the IRS over whether their late filing even mattered.

On April 15, 2016, the Zulfiqars requested an extension to file their 2015 return, pushing their deadline to October 15, 2016. When they missed that extended deadline, the IRS took action. Under Section 6020(b), which authorizes the IRS to prepare a substitute for return (SFR) when a taxpayer fails to file, the agency reconstructed their 2015 liability using third-party information reports. The SFR was executed on September 3, 2018; nearly two years after the original filing deadline; because the IRS had no record of the Zulfiqars ever submitting a return.

The IRS’s administrative practice, as outlined in cases like Rodriguez v. Commissioner, treats late-filed returns as amended returns rather than superseding the SFR. This meant that even if the Zulfiqars eventually filed their 2015 return, the IRS would still use the SFR as the baseline for assessment unless the taxpayer could prove otherwise. The agency’s Account Transcript reflected this stance, showing an entry titled “Established non-filing of tax return” on May 7, 2019, reinforcing that the SFR was the official record of their liability at that time.

The turning point came on May 20, 2020; nearly four years after the original due date; when the Zulfiqars finally filed their 2015 Form 1040. The IRS accepted it as an amended return, but only after assessing tax based on the SFR. On July 20, 2020, the agency formally assessed $282,637 in tax, along with:

• $61,243 under Section 6651(a)(1) for failure to timely file (5% per month, capped at 25% of unpaid tax),
• $4,881 under Section 6654 for failure to make sufficient estimated tax payments.

The IRS’s assessment hinged on the fact that the Zulfiqars’ late return did not retroactively erase their original delinquency. The agency’s position relied on Badaracco v. Commissioner, which established that late-filed returns are creatures of administrative grace; not legal obligations to override prior SFRs. The Zulfiqars’ challenge to the IRS’s treatment of their return as an “amended” document rather than a standalone filing set the stage for their day in Tax Court.

The Notice of Deficiency and the Stipulated Decision: What Did the Tax Court Really Settle?

The IRS’s scrutiny of the Zulfiqars’ 2015 tax year culminated in a Notice of Deficiency issued on September 29, 2020. The agency determined a $201,644 deficiency in income tax, alongside a $53,886 addition to tax under § 6651(a)(1) for late filing and a $40,329 accuracy-related penalty under § 6662(a). The Notice of Deficiency was not a mere formality; it was the IRS’s formal assertion that the Zulfiqars’ late-filed return failed to cure their original delinquency, a position rooted in § 6020(b), which empowers the IRS to prepare a substitute for return (SFR) when a taxpayer fails to file. The agency’s stance relied on Badaracco v. Commissioner, which established that late-filed returns are administrative creatures of grace, not legal overrides of prior SFRs.

By October 9, 2020, the Zulfiqars had already paid the IRS $260,605, covering a substantial portion of their reported 2015 tax liability and some interest. This payment was not a voluntary act; it was processed by the IRS itself, underscoring the agency’s aggressive posture in collecting what it deemed owed. The Zulfiqars’ decision to challenge the deficiency in Tax Court led to Docket No. 14881-20, where they argued that the IRS had erred in imposing the § 6651(a)(1) late-filing penalty, asserting that their late return should retroactively nullify the original delinquency. The IRS, in turn, countered that the late return was merely an amended filing, not a standalone correction, and that the penalties stood.

On May 18, 2023, the Tax Court entered a Stipulated Decision resolving Docket No. 14881-20. The agreement, jointly filed by the parties, declared that there was no addition to tax under § 6651(a)(1) for 2015 and no accuracy-related penalty under § 6662(a) for 2015 or 2016. At first glance, the Zulfiqars had secured a victory; no penalties for late filing or inaccuracies. But the Stipulated Decision was silent on a critical point: it did not address the § 6651(a)(2) failure-to-pay penalty of $65,849, which the IRS had automatically assessed on April 12, 2021, based on the reported but unpaid tax. Nor did it resolve the § 6654 estimated tax penalty, which the IRS could have pursued given the Zulfiqars’ history of delinquency.

The ambiguity was deliberate. The Stipulated Decision resolved only the issues the parties chose to litigate; the § 6651(a)(1) and § 6662(a) penalties; leaving the IRS free to pursue other penalties that had already been assessed. The court’s silence on these matters created a jurisdictional gray area: Did the Stipulated Decision implicitly waive the IRS’s right to collect the unaddressed penalties, or did it merely defer the dispute? The answer would hinge on the Tax Court’s interpretation of § 7481(a), which governs the finality of stipulated decisions, and the parties’ intent in drafting the agreement. For now, the Zulfiqars had avoided some penalties, but the IRS retained its leverage; $65,849 in unchallenged failure-to-pay penalties and the potential for further assessments. The question remained: Had the Tax Court truly settled the case, or had it merely postponed the battle?

The CDP Hearings: A Battle Over Jurisdiction and Liability

The Tax Court’s earlier silence on penalties had left the Zulfiqars with a precarious position; $65,849 in unchallenged failure-to-pay penalties and the IRS’s levy notice looming over their 2015 tax liability. The Collection Due Process (CDP) hearings, held separately for Mr. and Mrs. Zulfiqar, would determine whether the Stipulated Decision had truly resolved the case or merely deferred the IRS’s collection efforts.

On May 31, 2023, the IRS issued Letter 1058, a Final Notice of Intent to Levy, asserting an unpaid balance of $202,932 for the 2015 tax year. The notice included $65,849 in § 6651(a)(2) failure-to-pay penalties; an amount the Zulfiqars claimed had been settled in the Stipulated Decision. On June 15, 2023, they filed Form 12153, challenging the levy and asserting that their liability had been resolved. The form’s "Other issues" section explicitly stated, "Tax liability has been paid," while the representatives checked boxes indicating they were not liable for the tax and had made payments not applied to their account.

The Independent Office of Appeals assigned Settlement Officer Megan Velasco to the case, who proceeded to hold separate CDP hearings for Mr. and Mrs. Zulfiqar despite the identical tax year and liability in dispute. During Mr. Zulfiqar’s October 17, 2023, hearing, his representatives argued that the Stipulated Decision had finalized the 2015 liability, including penalties. SO Velasco, however, requested an IRS Office of Chief Counsel opinion, which arrived on November 7, 2023. The opinion, blunt in its assessment, rejected the representatives’ interpretation: "I disagree with the rep. The $65,849 addition to tax is based on a filed return, which was assessed 3 years earlier, in 2020. That was not part of the Tax Court case."

The counsel opinion further clarified that the Stipulated Decision had only addressed the deficiency stemming from the notice of deficiency; not the penalties assessed separately in 2020. SO Velasco, relying on this guidance, issued a Notice of Determination on December 4, 2023, sustaining the levy. The notice explicitly stated that the Stipulated Decision "pertains to the notice of deficiency only," leaving the § 6651(a)(2) penalties untouched.

Mrs. Zulfiqar’s hearing followed a similar trajectory. On January 1, 2024, her representative reiterated that the Stipulated Decision had resolved her liability, but SO Velasco’s January 12, 2024, Notice of Determination echoed the same conclusion: the penalties assessed in 2020 remained enforceable. The IRS’s position was clear; while the Tax Court had resolved the underlying deficiency, it had not; and could not; waive penalties that predated the Stipulated Decision. The battle over jurisdiction had shifted from the Tax Court to the CDP hearing room, where the IRS’s leverage over the Zulfiqars’ unpaid penalties remained intact.

The IRS’s Argument: Waiver and the Limits of Tax Court Jurisdiction

The IRS framed the Zulfiqars’ case as a straightforward waiver issue; one where the taxpayers had already conceded their liability in a prior proceeding and now sought to relitigate penalties that were never part of that resolution. In its Motion for Summary Judgment, the IRS argued that the Zulfiqars’ admission that their 2015 return was filed late, coupled with their failure to raise any reasonable cause arguments for abatement of the penalties under Section 6651(a)(1), constituted a waiver of their right to challenge those additions to tax. The IRS emphasized that Section 6651(a)(1); which imposes a 5% monthly penalty (capped at 25%) for failing to file a return on time; requires taxpayers to demonstrate reasonable cause to avoid liability. Because the Zulfiqars did not raise this defense in the earlier Tax Court proceeding, the IRS contended, they had forfeited their right to contest the penalties now.

The IRS further asserted that the Stipulated Decision entered in Docket No. 14881-20 resolved only the underlying tax deficiency; not the penalties assessed separately in 2020. The agency pointed to Section 6665(b), which allows the IRS to assess penalties immediately if they are based on the tax shown on a self-filed return, as the legal basis for its position. Because these penalties were summary assessments (not part of the deficiency notice process), the IRS argued, they fell outside the Tax Court’s jurisdiction in the prior proceeding. The agency cited Estate of Forgey v. Commissioner, Meyer v. Commissioner, and Vines v. Commissioner to support its claim that such penalties are only subject to review in a Collection Due Process (CDP) hearing under Section 6330(c)(2)(B), where the standard of review is de novo.

The IRS also challenged the Zulfiqars’ assertion that they had preserved their liability challenge by checking the "I am not liable for the tax the IRS is trying to collect" box on their Form 12153 and raising the issue in their CDP Petitions. The agency dismissed this as an after-the-fact attempt to reopen a matter that had already been waived, arguing that the Zulfiqars’ prior admissions in the Stipulated Decision precluded them from relitigating the penalties now. The IRS’s position was clear: the Tax Court had no authority to revisit penalties that were never part of the deficiency proceeding, and the CDP hearing was the Zulfiqars’ first; and only; opportunity to challenge them.

The Zulfiqars’ Argument: A Stipulation Is a Stipulation; Or Is It?

The Zulfiqars’ position hinges on the binding nature of the Stipulated Decision entered in Zulfiqar v. Commissioner, Docket No. 14881-20, which they argue conclusively resolved the additions to tax under Section 6651(a)(1); the failure-to-file penalty; for tax year 2015. Their argument rests on two pillars: first, the absence of any "below-the-line stipulation" explicitly preserving the IRS’s right to pursue other penalties, and second, their payment of $93,011.19 to settle the liability in full based on the settlement computations provided during the deficiency proceeding.

The Zulfiqars contend that the Stipulated Decision’s language; specifically the clause stating "[t]hat there is no addition to tax under I.R.C. § 6651(a)(1) due from petitioners for taxable year 2015"; constitutes a final adjudication of that penalty. They emphasize that the document makes no mention of the Section 6651(a)(2) (failure-to-pay) or Section 6654 (estimated tax) additions, which remain at issue in the current Collection Due Process (CDP) proceedings. In their view, the IRS’s attempt to collect these penalties now is an improper attempt to relitigate a matter already waived by the stipulation.

Their interpretation of the Stipulated Decision as a comprehensive resolution of the Section 6651(a)(1) penalty; and not merely a procedural waiver; relies on the principle that stipulations in Tax Court proceedings operate with the "sanctity of any other contract," as established in Saigh v. Commissioner, 26 T.C. 171 (1956). The Zulfiqars argue that the IRS, having accepted their payment and entered into the stipulation, cannot now assert that the penalty was never addressed. They further note that the settlement computations provided during the deficiency proceeding did not include any reference to the Section 6651(a)(2) or Section 6654 penalties, suggesting that those issues were either resolved or omitted by mutual agreement.

Their position underscores a broader contention: that the IRS’s failure to include a "below-the-line stipulation"; a clause explicitly preserving unresolved penalties; means those penalties are no longer subject to collection. The Zulfiqars frame this as a matter of contract law, arguing that the Stipulated Decision’s silence on the other penalties should be interpreted as a waiver of the IRS’s right to pursue them. Whether this argument prevails hinges on the Tax Court’s interpretation of the stipulation’s scope; and whether the omission of the other penalties was intentional or the result of a mutual mistake.

The Tax Court’s Analysis: Jurisdiction, Stipulations, and Mutual Mistake

The Tax Court’s analysis in the Zulfiqars’ case hinged on three critical legal questions: the scope of its jurisdiction in Collection Due Process (CDP) hearings, the binding effect of the parties’ stipulated decision, and whether a mutual mistake of fact could invalidate that agreement. The court’s reasoning reveals a deliberate exercise of judicial power over both the IRS and the taxpayers, particularly in clarifying the boundaries of Tax Court authority in penalty disputes.

The court first addressed its jurisdiction under Section 6330(c)(2)(B), which permits taxpayers to challenge the existence or amount of underlying tax liabilities in CDP hearings only if they did not previously receive a Notice of Deficiency or have another opportunity to dispute the liability. The Zulfiqars argued that the Stipulated Decision from their prior Tax Court case (Docket No. 14881-20) resolved all penalties, but the IRS countered that the decision never addressed the § 6651(a)(2) and § 6654 additions to tax; which were summary assessments based on the tax shown on their self-filed 2015 return. The court agreed with the IRS’s jurisdictional interpretation, emphasizing that summary assessments (like those under § 6651(a)(2) and § 6654) are not subject to deficiency procedures and thus remain reviewable in CDP hearings. This distinction is crucial: while § 6651(a)(1) penalties (failure to file) are typically tied to deficiency procedures, § 6651(a)(2) penalties (failure to pay) and § 6654 penalties (estimated tax underpayment) can be assessed immediately by the IRS without a 90-day letter, making them fair game for CDP challenges.

The court then turned to the Stipulated Decision’s silence on the remaining penalties, framing the dispute as a potential mutual mistake of fact. Under longstanding Tax Court precedent, stipulated decisions are treated as binding contracts entitled to "the sanctity of any other contract," but they may be set aside only for fraud, mutual mistake, or other extraordinary causes. The Zulfiqars argued that the omission of the § 6651(a)(2) and § 6654 penalties in the Stipulated Decision was intentional, as their $93,011.19 payment was calculated based on settlement computations that excluded those amounts. The IRS, however, contended that the prior proceeding never addressed those penalties, pointing to the absence of a "below-the-line stipulation" explicitly preserving them. The court found both positions plausible, noting that the record contained "contemporaneous transcripts" showing the penalties were assessed but omitted from the settlement computations. This ambiguity; whether the omission was a drafting error or a deliberate omission; created a genuine dispute of material fact, precluding summary judgment for either party.

In exercising its judicial power, the court refused to infer waiver or estoppel from the Stipulated Decision’s silence, instead treating the omission as a potential mutual mistake. This approach underscores the Tax Court’s role as an arbiter of contractual disputes between taxpayers and the IRS, particularly when settlements are ambiguous. The court’s denial of both motions for summary judgment; despite the IRS’s argument that the Zulfiqars waived their liability challenge; demonstrates its willingness to scrutinize IRS positions when jurisdictional boundaries are at stake. By refusing to summarily adjudicate the case, the court signaled that CDP hearings remain a critical safety valve for taxpayers to challenge penalties that were never litigated in deficiency proceedings.

What This Means for Taxpayers: CDP Hearings as a Second Chance

The Tax Court’s refusal to summarily adjudicate the Zulfiqars’ case underscores a critical truth for taxpayers: Collection Due Process (CDP) hearings remain a vital safety net when penalties and deficiencies slip through deficiency proceedings. The court’s denial of both motions for summary judgment; despite the IRS’s argument that the Zulfiqars waived their liability challenge; demonstrates that CDP hearings are not merely procedural formalities but a second bite at the apple for taxpayers to contest penalties that were never litigated in deficiency court.

For taxpayers facing IRS collection actions, this ruling carries immediate practical implications. CDP hearings provide an opportunity to challenge additions to tax; such as failure-to-file, failure-to-pay, or estimated tax penalties; that are not subject to deficiency procedures under § 6213. These penalties, governed by §§ 6651 and 6654, are often assessed automatically and can balloon a tax bill by 25% or more. Yet because they are not part of the underlying tax liability, they are not typically litigated in deficiency proceedings, leaving taxpayers with no prior opportunity to contest them. The Zulfiqars’ case confirms that CDP hearings are the only forum where such penalties can be meaningfully challenged; provided the taxpayer acts within the 30-day window to request a hearing after receiving a Final Notice of Intent to Levy.

The court’s scrutiny of the IRS’s waiver argument also highlights a dangerous misconception about stipulated decisions in Tax Court. A stipulated decision does not extinguish previously assessed additions to tax unless those penalties are explicitly addressed in the agreement. In the Zulfiqars’ case, the IRS argued that their stipulated decision in deficiency court; where the underlying tax liability was resolved; should bar their challenge to penalties assessed later. The court rejected this position, emphasizing that stipulated decisions under § 7481(a) are final only as to the matters resolved in the stipulation. Taxpayers should treat stipulated decisions as binding contracts, not blanket releases of all potential liabilities. If penalties or other additions to tax are not expressly waived or adjusted in the stipulation, they remain open for challenge in a CDP hearing.

This distinction is particularly consequential for taxpayers who settle cases through stipulated decisions without fully understanding the scope of what they are waiving. The IRS often encourages stipulations to streamline litigation, but taxpayers must ensure that all liabilities; including penalties and interest; are clearly delineated in the agreement. Failure to do so can lead to years of disputes, as the Zulfiqars discovered when the IRS sought to enforce penalties that were never part of their original stipulation. The court’s refusal to defer to the IRS’s interpretation of the stipulation’s scope reinforces the principle that Tax Court jurisdiction is strictly limited to the issues presented in the pleadings and stipulations.

Finally, the ruling serves as a reminder of the narrow but critical role the Tax Court plays in policing IRS collection actions. While the court does not have jurisdiction to redetermine the underlying tax liability in a CDP hearing unless the taxpayer lacked a prior opportunity to challenge it (as in Boechler, P.C. v. Commissioner, 2022), it does have the power to review the IRS’s exercise of discretion in assessing and enforcing penalties. This includes evaluating whether the IRS’s decision to impose penalties was arbitrary, capricious, or an abuse of discretion; a standard that gives taxpayers a meaningful chance to contest even well-established penalties like those under § 6651.

For practitioners, the takeaway is clear: CDP hearings are not just a procedural hurdle; they are a strategic opportunity. Taxpayers should approach these hearings with the same rigor as a deficiency case, presenting evidence of reasonable cause, proposing collection alternatives, and, if necessary, appealing an unfavorable decision to the Tax Court. The Zulfiqars’ saga demonstrates that ambiguity in settlements and jurisdictional boundaries can be exploited by the IRS, but it also shows that the Tax Court will scrutinize IRS positions when taxpayers push back.

Disclaimer: The Zulfiqars’ case may be appealed, and the Tax Court’s reasoning could be refined or overturned on review. Taxpayers should consult a tax attorney before relying on this ruling in their own cases.