Tellock v. Commissioner: Tax Court Upholds IRS Levy Despite Late-Filed Returns and Noncompliance

The $36K Mistake: How a Late-Filed Return Left a Taxpayer Fighting an IRS Levy

When the U.S. Tax Court granted the IRS summary judgment in T.C. Memo. 2026-59, it closed the door on a taxpayer’s last chance to challenge a $36,594 levy notice for tax year 2016. The case underscores the Tax Court’s sweeping authority under Section 6330(d)(1), which empowers it to review IRS collection actions for underlying liabilities or procedural missteps. For taxpayers, the lesson is clear: a single missed filing deadline can transform a manageable tax debt into an unassailable IRS levy, with the Tax Court wielding final say over the agency’s actions.

The Tax Court’s decision was not a commentary on the IRS’s broader enforcement authority but a strict application of statutory and procedural rules that left the petitioner with no legal recourse to challenge the 2016 levy. The court’s ruling hinged on the petitioner’s failure to comply with fundamental requirements under Section 6330, the Collection Due Process (CDP) hearing statute, and the IRS’s verification of compliance—a process that the court treated as non-negotiable. By denying the petitioner’s arguments at every turn, the Tax Court reinforced its role as a gatekeeper of procedural fairness rather than a forum for taxpayer grievances, particularly when those grievances stemmed from noncompliance.

The court granted summary judgment under Rule 121, finding no genuine dispute of material fact—a conclusion that underscored the petitioner’s inability to present any evidence contradicting the IRS’s administrative record. The petitioner’s arguments, which framed the dispute as one of IRS overreach, were dismissed not because they lacked merit in isolation, but because they were procedurally barred by the very statute the petitioner sought to invoke. The court’s reasoning was unyielding: the IRS’s actions were not arbitrary or capricious because they followed the law to the letter, and the petitioner’s failures had forfeited any right to challenge the levy.

The Taxpayer’s Downward Spiral: A Timeline of Errors

The IRS levy for 2016 didn’t happen overnight. It was the result of years of missed deadlines, ignored notices, and unpaid taxes. The taxpayer’s problems began when he failed to file returns for 2016 and 2017. The IRS stepped in, using third-party data like W-2s to estimate taxes owed—$36,594 for 2017 alone, plus penalties and interest. The IRS sent Notices of Deficiency in 2020 and 2021, but the taxpayer didn’t respond, losing his chance to challenge the amounts in Tax Court.

By late 2022, the IRS issued a levy notice, giving the taxpayer a right to appeal through a Collection Due Process (CDP) hearing. He requested one in January 2023 but didn’t file the required returns or propose payment plans. The IRS Appeals Office gave him multiple chances to comply, but he missed deadlines repeatedly. After a hearing in April 2023, he finally filed his 2016 and 2017 returns in May—but it was too late. The IRS had already issued a levy determination. Later, the IRS accepted his late returns and reduced the balance to $299.45 for 2017, but the damage was done. The Tax Court ultimately upheld the levy, reinforcing that missed deadlines have serious consequences.

The case highlights the IRS’s aggressive use of Substitute for Return (SFR) assessments under Section 6020(b), which allows the agency to prepare and file a return on behalf of a taxpayer who fails to do so. SFRs are notoriously punitive because they omit deductions, credits, and exemptions, often resulting in inflated tax liabilities. In this instance, the IRS used third-party data like W-2s and 1099s to estimate the taxpayer’s 2016 and 2017 liabilities, leading to the $36,594 assessment for 2017. The taxpayer’s failure to file his own returns meant he waived the right to contest the SFR’s accuracy or challenge the underlying tax liability in a later CDP hearing.

The IRS’s reliance on SFRs is a growing trend, particularly for high-income non-filers. The agency has ramped up automated SFR assessments in recent years, as documented in IR-2023-100, which announced increased scrutiny of non-filers using data analytics. The taxpayer in this case fell squarely into that category, and the Tax Court’s decision reflects the harsh reality of SFR assessments: once the IRS prepares an SFR, the taxpayer’s only recourse is to file a delinquent return to replace it—something the petitioner failed to do until after the levy was already in motion.

The Dispute: Did the IRS Abuse Its Discretion or Did the Taxpayer Fail to Comply?

The dispute centered on whether the IRS’s levy for 2016 and 2017 was justified by the petitioner’s repeated failures to file returns or file a Tax Court petition after receiving Notices of Deficiency. The petitioner argued the IRS abused its discretion by refusing to consider collection alternatives such as an Offer in Compromise or Installment Agreement and challenged interest accrual on a zero tax liability for 2017. The IRS countered that the petitioner’s noncompliance—including failure to file returns for 2018 through 2023—precluded any relief, and that interest accrued under Section 6601(a) regardless of later adjustments.

The petitioner’s claim that the IRS abused its discretion hinged on two arguments: first, that the Appeals Officer failed to properly consider his financial hardship, and second, that the interest on the 2017 liability should be abated under Section 6404(e) because the IRS had conceded the underlying tax. The IRS, however, maintained that the petitioner’s noncompliance was so egregious that it justified the levy. The Appeals Officer’s decision was based on the fact that the petitioner had not filed returns for six consecutive years (2016–2023) and had ignored multiple notices from the IRS, including the Notices of Deficiency for 2016 and 2017.

The petitioner’s attempt to challenge the interest accrual was particularly weak. Section 6601(a) imposes interest on unpaid tax liabilities from the original due date of the return until the tax is paid. Even though the IRS later reduced the 2017 liability to $299.45, the interest continued to accrue from the original due date because the petitioner had not filed a return to stop the clock. The petitioner’s argument that the interest should be abated under Section 6404(e)—which allows the IRS to reduce or eliminate interest if it was caused by IRS errors or delays—was dismissed because the IRS had not made any errors in processing the petitioner’s case. The Appeals Officer had verified that the interest was calculated correctly, and the petitioner provided no evidence of IRS misconduct.

The Analysis: Why the IRS’s Levy Stands for 2016

The Tax Court’s decision in this case was not a commentary on the IRS’s broader enforcement authority but a strict application of statutory and procedural rules that left the petitioner with no legal recourse to challenge the 2016 levy. The court’s ruling hinged on the petitioner’s failure to comply with fundamental requirements under Section 6330, the Collection Due Process (CDP) hearing statute, and the IRS’s verification of compliance—a process that the court treated as non-negotiable. By denying the petitioner’s arguments at every turn, the Tax Court reinforced its role as a gatekeeper of procedural fairness rather than a forum for taxpayer grievances, particularly when those grievances stemmed from noncompliance.

Why the Petitioner’s Arguments Failed

The Tax Court ruled against the taxpayer because he missed key deadlines and procedural requirements. Under Section 6330(d)(1), the court can review IRS collection actions, but only if the taxpayer follows the rules. The taxpayer had received Notices of Deficiency for 2016 and 2017 but didn’t challenge them in Tax Court within 90 days. This barred him from later disputing the amounts in a CDP hearing. The court called this a "jurisdictional foreclosure," meaning he lost the right to challenge the tax itself.

The petitioner also tried to argue for interest abatement under Section 6404(e), but the court rejected this because it’s essentially a challenge to the underlying tax. Since he couldn’t dispute the tax, he couldn’t dispute the interest either. His late-filed Form 843 (a request to reduce interest) wasn’t considered because the IRS hadn’t formally ruled on it. The court’s message was clear: missed deadlines and procedural errors can’t be fixed by reframing arguments later.

The petitioner’s claim that the IRS abused its discretion by rejecting his collection alternatives was similarly dismissed. The Appeals Officer had repeatedly asked the petitioner to file his missing returns and propose a payment plan, but the petitioner failed to comply. Under Section 6159, which governs Installment Agreements, and Section 7122, which governs Offers in Compromise, the IRS is not required to consider collection alternatives if the taxpayer has not met basic compliance requirements—such as filing all required returns. The court noted that the petitioner had not filed returns for 2016 through 2023, which made him ineligible for any relief under these sections.

The Appeals Officer’s Role: A Check on the Process

The Tax Court upheld the Appeals Officer’s (AO) decision because he followed the law. Under Section 6330(c)(1), the AO must confirm the IRS acted correctly before approving a levy. The taxpayer claimed the AO didn’t verify the IRS’s actions, but the court disagreed. The AO’s review confirmed the tax was properly assessed for 2016, the IRS sent notices to the taxpayer’s last known address, a levy notice was issued legally, and the taxpayer owed the tax. The court refused to second-guess the AO’s work unless the taxpayer provided specific evidence of errors. Since he didn’t, the AO’s verification stood—and the levy was upheld.

The AO’s role in this case was critical. He was tasked with verifying that the IRS had followed all legal procedures before proceeding with the levy. This included confirming that the tax was properly assessed, that the taxpayer had been given proper notice, and that the levy was appropriate given the taxpayer’s financial situation. The AO’s decision to uphold the levy was based on the fact that the petitioner had not filed returns for six consecutive years and had ignored multiple notices from the IRS. The court deferred to the AO’s findings because the petitioner provided no evidence to contradict them.

Why Collection Alternatives Were Denied

The taxpayer’s last hope was to ask for an Offer in Compromise (OIC) or Installment Agreement (IA), but the court rejected this outright. Under IRS rules, you must file all overdue tax returns before even applying for these options. The Appeals Officer asked for returns from 2018 through 2023 multiple times, but the taxpayer never complied. The court called this a "non-starter," saying the taxpayer’s obligation was to prove compliance—and he didn’t. The AO’s refusal wasn’t unfair; it was the law.

The IRS’s strict compliance requirements for collection alternatives are well-documented. For an Installment Agreement under Section 6159, the taxpayer must be current on all filings and payments. For an Offer in Compromise under Section 7122, the taxpayer must also be compliant and provide detailed financial information. The petitioner’s failure to file returns for 2016 through 2023 made him ineligible for both options, and the court had no choice but to uphold the AO’s decision.

The petitioner’s argument that the AO ignored his financial hardship was also rejected. The AO had considered the petitioner’s financial situation but found that his noncompliance outweighed any hardship. The court noted that the petitioner had not provided any documentation to support his claims of financial distress, and his repeated failure to file returns demonstrated a pattern of noncompliance that the IRS was justified in addressing through a levy.

The Balancing Test: No Room for New Arguments

The taxpayer tried to argue that the levy was too harsh under Section 6330(c)(3)(C), which requires balancing tax collection needs against taxpayer concerns. But the court rejected this because he never raised it in his original arguments. Even if he had, the Appeals Officer had already considered his concerns and found the levy justified due to his noncompliance. The court’s refusal to entertain this late argument was a clear signal: new claims can’t be introduced after the fact.

The balancing test under Section 6330(c)(3)(C) is a critical safeguard for taxpayers, but it is not a catch-all for procedural errors. The court emphasized that the petitioner had waived his right to raise this argument by failing to present it during the CDP hearing. The Appeals Officer had already weighed the petitioner’s concerns and found that the IRS’s need to collect the tax outweighed any hardship the petitioner might face. The court saw no reason to revisit this decision.

The Court’s Authority: Reinforcing the Boundaries of CDP Review

This case is a textbook example of the Tax Court’s limited but potent role in CDP disputes. The court did not expand its jurisdiction or second-guess the IRS’s substantive decisions; instead, it strictly enforced the procedural rules that govern CDP hearings. By doing so, it reinforced several key principles:

First, jurisdictional limits matter. Taxpayers cannot use CDP hearings to re-litigate liabilities they had prior opportunities to challenge. Second, compliance is non-negotiable. Failure to file returns automatically disqualifies taxpayers from collection alternatives, regardless of their financial circumstances. Third, verification is sacred. The AO’s compliance with Section 6330(c)(1) is presumptively valid unless the taxpayer presents specific evidence of error. Finally, abuse of discretion is narrow. The court will not overturn the IRS’s decisions unless they are arbitrary or unsupported by the record.

The Tax Court’s power in this case was not in overruling the IRS but in upholding the integrity of the CDP process. The petitioner’s levy stood not because the IRS was blameless, but because the law left him with no legal avenue to challenge it. The court’s decision was a sobering reminder that CDP hearings are not a safety net for noncompliant taxpayers—they are a final check on procedural fairness, not a forum for substantive grievances.

Key Takeaways for Taxpayers

This case is a cautionary tale about the importance of following IRS rules. Here’s what taxpayers should remember:

The IRS’s use of a Substitute for Return (SFR) under Section 6020(b) highlights the risks of nonfiling. An SFR is an IRS-prepared return that estimates tax liability based on third-party data like W-2s and 1099s, but it doesn’t include deductions or credits the taxpayer might have claimed. This often results in a higher tax bill and no statute of limitations for assessment, making it critical to file your own return as soon as possible to replace the SFR.

When facing collection actions, Section 6330 provides a right to a Collection Due Process (CDP) hearing, but only if you act within 30 days of receiving a notice of lien or levy. Missing this deadline can foreclose your right to challenge the collection action entirely. The court’s decision in this case reinforces that Section 6330(d)(1) is not a second chance to dispute taxes you had a prior opportunity to challenge.

Interest continues to accrue under Section 6601(a) from the original due date of the return, and abatement requests under Section 6404(e) are rarely granted unless the IRS caused the delay. The Tax Court’s strict interpretation of these rules means that procedural errors—like missing the 90-day window to petition the Tax Court after a Notice of Deficiency—can permanently bar your ability to challenge the tax.

For those seeking relief, Section 6159 allows for Installment Agreements and Section 7122 allows for Offers in Compromise, but both require full compliance with filing and payment obligations. The Appeals Officer’s decision in this case demonstrates that the IRS will not consider collection alternatives if the taxpayer has not filed all required returns, including those for years after the one in dispute.

The lesson is clear: act fast, file everything, and follow IRS procedures—or risk losing your chance to challenge a levy.