In Lewis, 128 TC 48 (2007), the Tax Court held, in a case of first impression, that Regs. Sec. 301.6330-1(e)(3), Q&A-E2, is valid. This regulation interprets Sec. 6330(c)(2)(B), which specifies when taxpayers can raise their underlying tax liability in a Sec. 6330 collection due process hearing on unpaid taxes.
The statutory scheme regarding collection due process hearings is complicated. In 1998, in the IRS Restructuring and Reform Act, P.L. 105-206, Congress enacted Secs. 6320 and 6330, which provide statutory appeal rights to taxpayers subject to IRS liens and levies. Secs. 6330(a) and (b) provide, in general, that the Service cannot collect unpaid taxes by levy before giving taxpayers notice and the opportunity for an IRS Appeals Office hearing. Sec. 6330(b)(3) requires an impartial hearing officer who has had no prior involvement with the underlying tax liability. Sec. 6330(c)(2)(A) allows taxpayers to raise any issue relevant to the proposed collection activity at this hearing, including innocent spouse status, offers in compromise, installment agreements, and assets used to satisfy the tax liability.
Sec. 6330(c)(2)(B) also allows taxpayers to raise “the underlying tax liability” as an issue at a collection due process hearing if the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.” Sec. 6330, the rest of the Code, and the legislative history do not define the phrase “otherwise have an opportunity to dispute such tax liability.” Sec. 6330(d) allows the taxpayer to appeal to the Tax Court the Service’s determination in a collection due process hearing. (For determinations made after October 16, 2006, all appeals are to the Tax Court; before October 17, 2006, certain appeals were to federal district court.) The language of Secs. 6330(c) and (d) clarifies that if the underlying tax liability cannot be raised at the hearing under Sec. 6330(c)(2)(B), it cannot be raised in an appeal of the hearing’s results to the Tax Court.
The IRS Restructuring and Reform Act also added Sec. 7123, which requires the Service to prescribe procedures allowing taxpayers to request early referrals of unresolved issues from the examination or collection division to the IRS Office of Appeals, where an informal conference is held with the taxpayer. This appeal is separate from and occurs prior to the Sec. 6330 Appeals Office hearing; taxpayers have no right to appeal the conference results to the Tax Court.
Regs. Sec. 301.6330-1(e)(3), Q&A-E2, which specifies when taxpayers can raise the underlying tax liability at the Sec. 6330 Appeals Office hearing, states that a prior opportunity to have a conference with Appeals prevents taxpayers from raising the underlying tax liability at the Sec. 6330 Appeals Office hearing. The conference can be held before or after the assessment of the liability.
Sec. 6211(a) defines a deficiency as the amount by which the legally imposed tax exceeds the amount shown on the return (plus any tax previously assessed, less any rebates). Sec. 6212(a) allows the Service to send a notice of deficiency to the taxpayer, and Sec. 6213(a) in general allows a taxpayer to appeal the deficiency to the Tax Court prior to the assessment and collection of the tax. Therefore, under Sec. 6330(c)
(2)(B), a taxpayer who receives a notice of deficiency cannot raise the underlying tax liability issue in a Sec. 6330 Appeals Office hearing. (There are a small number of situations in which the taxpayer can appeal to the Tax Court without receiving a notice of deficiency; see Secs. 7436(a) and (b) and 6404(h)(1).)
However, under Sec. 6665(b), there are some situations in which the IRS can, in general, assess additions to tax without first issuing a deficiency notice, including Sec. 6651 (failure to file a return or to pay the tax shown on a return by the due date) and Secs. 6654 and 6655 (failure of individuals and corporations, respectively, to pay estimated taxes). In these situations, no appeal to the Tax Court is allowed unless an exception in Sec. 6665(b) applies. In contrast, the Tax Court ruled in a reviewed opinion (Montgomery , 122 TC 1 (2004)) that taxpayers who self-assessed their tax liability on their return but did not pay the tax had not had any opportunity to dispute their underlying tax liability. Therefore, the taxpayer could raise the underlying tax liability issue in a Sec. 6330 Appeals Office hearing and could also appeal the hearing’s result to the Tax Court.
Secs. 7422(a) and (f) allow another approach to appeal the underlying tax liability issue to the courts: pay the tax and file a refund claim with the Service. If the IRS denies the refund claim, the taxpayer can sue for the refund in federal district court; see, e.g., Farley, TC Memo 2004-168.
Facts of Lewis
Lewis and his wife jointly filed their 2002 return in January 2004. They enclosed $11,636 tax due. The Service assessed additions to tax totaling $3,200 for late filing and late payment under Sec. 6651. The Lewises requested an Appeals Office conference, where they argued that the additions should be abated because their accountant had cancer. The appeals officer denied their appeal.
In May 2005, the IRS sent the Lewises a Letter 1058, Final Notice, Notice of Intent to Levy and Your Right to a Hearing Under Sec. 6330(a). At the hearing, the Lewises again raised the reason their return was late, which is the underlying tax liability issue here. They did not raise any collection issues. The appeals officer determined that they could not raise the underlying tax liability issue. The Lewises appealed to the Tax Court. The Service argued that if taxpayers have an opportunity for a conference with the IRS Office of Appeals, they cannot raise the underlying tax liability issue in a Sec. 6330 Appeals Office hearing because the conference with the Appeals Office counts as “an opportunity to dispute such tax liability” under Sec. 6330(c)
(2)(B) and Regs. Sec. 301.6330-1(e)(3), Q&A-E2. Therefore, according to the Service, the Lewises should not have access to the Tax Court on the underlying tax liability issue.
Generally agreeing with the Service, the Tax Court ruled that when taxpayers do not receive a notice of deficiency, they are not entitled to raise the underlying tax liability issue at a Sec. 6330 hearing if they participate in an Appeals Office conference. The Tax Court pointed out that Congress mandated a meaningful and impartial appeals process in the 1998 legislation. Therefore, the conference should serve as the opportunity to contest the underlying tax liability issue. The Tax Court also agreed with the IRS that the Lewises did not have access to the Tax Court in this situation.
Even though it ruled that Regs. Sec. 301.6330-1(e)(3), Q&A-E2, is valid, the Tax Court did not adopt the IRS position that the mere opportunity to participate in an Appeals Office conference was sufficient to satisfy “an opportunity to dispute such (underlying) tax liability” under Sec. 6330(c)(2)(B). However, arguably it is sufficient, given this language in Sec. 6330(c)(2)(B). Also, the Tax Court pointed out that several district courts have adopted the IRS position; see, e.g., Pelliccio, 253 FSupp2d 258 (D. Conn. 2003).
Practitioners should advise clients to use the Appeals Office conference if they disagree with IRS adjustments that do not result in a deficiency notice. The holding in Lewis clarifies that if this appeal is used, there will be no opportunity for a later Sec. 6330 appeal concerning the underlying tax liability. More important, Sec. 6330(c)(2)(B), Regs. Sec. 301.6330-1(e)(3), and Lewis all strongly imply that the opportunity for the Appeals Office conference— where taxpayers do not request the conference—will result in the same consequences. In these circumstances, the only possible appeal to the courts concerning the underlying tax liability is for taxpayers to pay the tax, file for a refund, and sue in district court if the Service rejects the refund claim.