Procedural avenues for taxpayers with balances due to the IRS

By Brad Polizzano, J.D., New York, and Colin Walsh, J.D., Madison, Wis.

Editor: Mark Heroux, J.D.

Taxpayers have several procedural options to contest IRS enforcement actions. These range from formal administrative proceedings, e.g., Collection Due Process (CDP) hearings, to informal collection holds. The purpose of this discussion is to give a general overview of each of these procedures. Practitioners should understand when each process can be used and work with taxpayers to determine the most appropriate course of action.

CDP hearing requests

CDP hearing rights arise in two general situations: (1) CDP hearings in response to a Notice of Federal Tax Lien (NFTL) and (2) CDP hearings in response to a proposed levy action.

NFTL-based CDP hearings: The IRS must give written notice to a taxpayer of the NFTL, and this notice generally includes a notification of the right to a CDP hearing (Sec. 6320(a)). The IRS is required to hold a CDP hearing for an NFTL if the taxpayer requests one in writing and states the grounds for the requested hearing. This request must be filed during the 30-day period beginning the day after the end of the five-business-day period after the filing of the NFTL (Sec. 6320(a)). In the lien context, CDP hearing rights do not arise until after a lien is actually filed. This is in contrast to the levy-based CDP hearing rights.

Levy-based CDP hearings: The other instance in which a CDP hearing can be requested is when the IRS issues a final notice of intent to levy (Sec. 6330(a)). The taxpayer has 30 days from the date of the final notice of intent to levy to submit a CDP request. Once the request is filed, the case is assigned to a settlement officer. The settlement officer will not have been involved with the case beforehand (Sec. 6330(b)(3)). The settlement officer reviews whether the IRS action is proper (Sec. 6330(c)(2)(A)(ii)) and can also negotiate a collection alternative for the taxpayer, such as an installment agreement (Sec. 6330(c)(2)(A)(iii)).

Suspension of collection activity throughout the CDP processThe limitation periods under Secs. 6502 (collection after assessment), 6531 (criminal prosecutions), and 6532 (suits) are suspended beginning on the date the IRS receives a timely CDP hearing request (Sec. 6330(e)). The suspension period ends when the IRS receives a withdrawal of the hearing request from the taxpayer, the determination of the CDP hearing becomes final, or upon exhaustion of any right of appeal (Sec. 6330(e)).

A CDP request also suspends any levy action to collect liabilities listed on the CDP notice for the period during which the hearing and appeals are ongoing, plus 90 days (Sec. 6330(e)(1)). Levy actions listed in Sec. 6330(f), however, are not suspended. For instance, the IRS can levy a state tax refund or issue a levy if the IRS determines that collection of tax is in jeopardy. Perhaps most significantly, the IRS can levy overpayments from other tax periods or other taxes (Regs. Sec. 301.6320-1(g)). Neither Sec. 6320 nor Sec. 6330 prohibits the filing of an NFTL.

CDP hearing procedures: In general, a taxpayer is entitled to only one CDP hearing for the period to which the unpaid tax relates (Sec. 6320(b)(2)). A CDP hearing generally consists of either a face-to-face meeting and/or one or more written or oral communications between a settlement officer and the taxpayer. In some instances, the settlement officer's manager will be involved in the case. The taxpayer does not have the right to subpoena and examine witnesses at a CDP hearing.

Issues to raise at CDP hearings: At a CDP hearing, the taxpayer may raise any relevant issue relating to the unpaid tax, including appropriate spousal defenses, challenges to the appropriateness of the NFTL filing, and offers of collection alternatives. The taxpayer may also raise challenges to the existence or amount of the underlying liability as long as the taxpayer did not receive a statutory notice of deficiency for that tax liability or did not otherwise have an opportunity to dispute that tax liability (Sec. 6330(c)(2)(B)). Receipt of a statutory notice of deficiency for this purpose means receipt in time to petition the U.S. Tax Court. An opportunity to dispute the underlying liability includes a prior opportunity for a conference with IRS Appeals that was offered either before or after the assessment of the liability. An opportunity for a conference with Appeals before assessment of a tax subject to deficiency procedures is not a prior opportunity for this purpose (Regs. Sec. 301.6330-1(e)(3), Q&A E2).

Right to petition the Tax Court: To obtain judicial review of a notice of determination following a CDP hearing, the taxpayer may appeal the determination to the Tax Court within the 30-day period beginning the day after the date of the notice of determination (Regs. Sec. 301.6320-1(f)(1)). Where the underlying tax liability is not at issue, the court reviews a CDP hearing determination for abuse of discretion. Where the validity of the underlying liability is properly at issue, the court reviews the matter de novo (see Simon, T.C. Summ. 2005-151).

Equivalent hearing

If a taxpayer does not timely request a CDP hearing, the taxpayer may request an equivalent hearing. An equivalent hearing is available where a taxpayer misses the 30-day deadline to submit a CDP hearing request (Regs. Sec. 301.6330-1(i)(1)). The time to request an equivalent hearing ends one year from the same date that starts the 30-day period to request a CDP hearing (Regs. Sec. 301.6330-1(i)(2), Q&A I7). Procedurally, an equivalent hearing is nearly identical to a CDP hearing. However, a taxpayer may not appeal the decision of Appeals in an equivalent hearing (Regs. Sec. 301.6330-1(i)(2), Q&A I6).

An additional important distinction is that there is no guarantee for a hold on collection during an equivalent hearing. In CDP hearings, the collection hold is statutory. In practice, though, the IRS will most likely not take any collection action during equivalent hearings, so long as the taxpayer has acted in good faith. One benefit of an equivalent hearing is that because there is no statutory hold on collection, the collection statute of limitation continues to run.

Collection Appeals Program

In addition to the CDP hearing rights, taxpayers can also appeal certain collection actions under the Collection Appeals Program (CAP). The CAP is not mandated by statute. Rather, the IRS created the CAP under the implied authority of various Code sections, e.g., the taxpayer's right to appeal a rejected installment agreement under Sec. 7122(e).

The CAP is available for taxpayers when the IRS files an NFTL, when the service levies or seizes property, and when the IRS has terminated or proposed to terminate an installment agreement, rejected an installment agreement, or proposed to modify an installment agreement (Internal Revenue Manual (IRM) §8.24.1.3(2)). The CAP does not allow taxpayers to challenge the underlying tax assessment or to raise hardship issues. Trust fund recovery penalties, offers in compromise, and penalty abatement appeals will also not be considered in a CAP hearing.

Under CAP, as set forth in the IRM, there are short periods for the various steps taken by taxpayers and IRS officials. A CAP request is made by first contacting the revenue officer's manager by telephone. If the manager and the taxpayer disagree, a CAP request may be filed. A CAP request may also be filed if the manager does not respond to the taxpayer within 48 hours of the taxpayer's contacting the manager (IRM §8.24.1.3.4).

A CAP request is made by filing Form 9423, Collection Appeal Request. Form 9423 requires the taxpayer to state his or her disagreements with the IRS collection action and provide a solution for the tax problems. Absent fraud or the omission of pertinent information by the taxpayer, the CAP decision is binding on both the taxpayer and the IRS. Appeals attempts to hold a taxpayer's conference within two business days of receipt of the case and will attempt to resolve the matter within five business days (IRM §8.24.1.3.4).

Informal collection holds

Taxpayers that do not wish to use the CDP or CAP procedures also have less formal options. More specifically, the IRS will often grant informal "collection holds" on a taxpayer's account. Collection holds have no statutory or regulatory basis; rather, collection holds are an administrative tool. The IRS may grant collection holds of 30 to 180 days, depending upon the facts and circumstances.

Collection holds can be an effective tool when a taxpayer intends to pay a liability in full but needs a short time to aggregate funds; or when CDP or CAP rights are not yet available, e.g., there is a known liability, but the IRS has not yet filed an NFTL. A taxpayer can obtain a collection hold by working directly with a revenue officer in the field or contacting the IRS Service Center in the event of an unassigned liability.

Choosing the right path to resolution

Taxpayers have several forums available to address outstanding liabilities with the IRS. Some avenues are more formal than others, and practitioners and taxpayers must carefully navigate the procedural requirements to properly use the procedures to reach a resolution with the IRS.

EditorNotes

Mark Heroux, J.D., is a tax principal and leader of the Tax Advocacy and Controversy Services practice at Baker Tilly US, LLP in Chicago.

For additional information about these items, contact Mr. Heroux at 312-729-8005 or mark.heroux@bakertilly.com.

Unless otherwise noted, contributors are members of or associated with Baker Tilly US, LLP.

Newsletter Articles

50th ANNIVERSARY

50 years of The Tax Adviser

The January 2020 issue marks the 50th anniversary of The Tax Adviser, which was first published in January 1970. Over the coming year, we will be looking back at early issues of the magazine, highlighting interesting tidbits.

TAX RELIEF

Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.