The Internal Revenue Service has lost a chance to collect $300,000 because it misplaced the tax file of a New Jersey couple.
A sharply critical U.S. Tax Court says the IRS showed "lack of due diligence" and doesn't deserve to collect.All along, the administrative file had been in a storage box in New York City, but nobody thought to look there when it was needed for a trial in Tax Court last year. Without the file, the government couldn't prove its claims, and the court dismissed the case against the couple, Peter and Mary Pietanza of North Brunswick, N.J.
More recently, the IRS finally located the file and tried to get the court to reopen the case on grounds that "new evidence" had been discovered. The court said no, because the evidence wasn't new at all, just lost. "Litigation must end some time," commented Judge Helen A. Buckley.
Thus ended the case that began with the Pietanza tax return for 1980. The IRS thought the couple claimed too many deductions for losses in partnerships.
It sent the Pietanzas a series of increasingly stern dunning letters. By last year, the bill with nine years of accumulating interest had reached $284,000 and IRS threatened to seize the couple's "property, wages and other assets."
But in a non-criminal case, the IRS usually can't enforce collection unless it first sends the taxpayer a formal "notification of deficiency" within three years after a return is filed, giving the taxpayer 90 days to pay up or appeal to Tax Court. The Pietanzas say they never received such a notification.
The IRS said it mailed the notification to the Pietanzas in time, and had a receipt for a registered letter addressed to the couple, but it couldn't provide the court with the required copy of the notification because it was in the missing file.
At trial, the evidence was that the file had been handled by IRS attorneys in Newark and Washington, but settled in the agency's Brooklyn office and stayed there, partly because an agent didn't open a box of material assigned to him.