As all of us who represent taxpayers before the IRS Collection Division know only too well, the Revenue Officer handling a particular client’s case may not agree with our ever so reasonable suggestions about what should be done. In these situations, thanks to the IRS Restructuring and Reform Act of 1998, we now have greatly expanded rights to bypass the Revenue Officer and pursue an independent administrative appeal. Indeed, there are now three separate ways to obtain independent review of threatened collection actions. Using one or more of these approaches, it should be possible to avoid levies and seizures and to reach a more acceptable resolution for any client who honestly seeks to address his or her delinquent taxes on a fair and reasonable basis.
Collection Due Process Hearings
Effective for collection actions after January 18, 1999, the IRS Restructuring and Reform Act provides an important new procedural right — the “Collection Due Process Hearing.” These CDP hearings are mandated by IRC §6320 and §6330, which were added to the Code by the 1998 Act, and the IRS has just issued proposed regulations implementing the new statutory requirements.2
Under the new Collection Due Process rules, immediately upon the filing of a notice of federal tax lien, and prior to the issuance of a levy, the IRS must provide notice regarding a taxpayer’s right to an independent hearing in the Appeals Office:
IRC §6320 (LIENS):
(a) Requirement of Notice:
(1) In general: The Secretary shall notify in writing the person described in section 6321 of the filing of a notice of lien under section 6323.
(2) Time and method for notice: The notice required under paragraph (1) shall be–
(A) given in person,
(B) left at the dwelling or usual place of business of such person, or
(C) sent by certified or registered mail to such person’s last known address, not more than 5 business days after the day of the filing of the notice of lien.
IRC §6330 (LEVIES):
(a) Requirement of Notice Before Levy:
(1) In general: No levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made. Such notice shall be required only once for the taxable period to which the unpaid tax specified in paragraph (3)(A) relates.
(2) Time and method for notice: The notice required under paragraph (1) shall be–
(A) given in person,
(B) left at the dwelling or usual place of business of such person, or
(C) sent by certified or registered mail, return receipt requested, to such person’s last known address, not less than 30 days before the day of the first levy with respect to the amount of the unpaid tax for the taxable period.
For both liens and levies, the CDP notice must include information in “simple and nontechnical language” about the proposed collection action and the procedures for seeking a hearing. In addition, the notice must contain a brief statement regarding the law as well as the administrative alternatives by which the taxpayer can obtain a release of the lien or avoid the threatened levy.
With respect to liens, the CDP notice must be issued to the taxpayer within five days after the lien is filed. The Service has devised a new form letter to use for this notification, captioned “Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320.” Accompanying the form letter will be a copy of Publication 1660, “Collection Appeals Right,” which the IRS has just revised to cover the new requirements imposed by the 1998 Act. For levies, the CDP notice must be issued thirty days before the levy is served.
Request for hearing
In the case of both liens and levies, the taxpayer has thirty days after the date of the CDP notice to file a request for a hearing. If a timely request is filed, the Appeals Office will consider the case and render a written determination concerning the appropriateness of the lien filing or the proposed levy. The request for a CDP hearing must be in writing, and must contain the taxpayer’s name, address, and phone number, the type of tax and tax periods, and a statement of the reasons the taxpayer disagrees with the filing of the lien or the threatened levy. The request must be signed by the taxpayer or an authorized representative. While no specific format is required, the Service has just released a new form, the “Request for Collection Due Process Hearing” (Form 12153), for this purpose.3
At the CDP hearing, the taxpayer may challenge the appropriateness of the lien or threatened levy, raise available spousal defenses, and offer collection alternatives. However, the taxpayer cannot raise issues which were presented and considered at any previous CDP hearing or other previous administrative or judicial proceeding in which the taxpayer “meaningfully participated.”4 In addition to these procedural matters, substantive defenses to the underlying liability can be raised, but only if the taxpayer did not receive a statutory notice of deficiency (if applicable) or did not otherwise have an opportunity to dispute the tax. Both IRC §6320 and §6330 contain the same parameters for the mandated hearing:
(c) Matters Considered at Hearing: In the case of any hearing conducted under this section–
(1) Requirement of investigation: The appeals officer shall at the hearing obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.
(2) Issues at hearing:
(A) In general: The person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy, including–
(i) appropriate spousal defenses,
(ii) challenges to the appropriateness of collection actions, and
(iii) offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise.
(B) Underlying liability: The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.
Absent a waiver by the taxpayer, the hearing will be conducted by an Appeals Officer with no prior involvement in the case. The standard to be applied in the CDP hearing is whether the proposed action “balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.”
Stay of collection action
Pending a requested CDP hearing, and while an Appeals Officer has the matter under consideration before issuing a written determination, enforced collection action will be withheld. The running of certain statutory limitations periods are also suspended, including the statute of limitations on collection and the statute of limitations on criminal prosecution.
Judicial review of CDP determinations
If the CDP hearing in the Appeals Office does not produce a satisfactory resolution, the 1998 Act allows for judicial review. Within 30 days of the date the Appeals Office issues its written determination, the taxpayer may seek review in the Tax Court or the appropriate Federal District Court.5 The Tax Court is the proper forum for review if the underlying tax is of a type over which the Tax Court would normally have jurisdiction, such as income, gift, and estate taxes.6 Litigation will be in the District Court for determinations involving other types of liabilities, such as the trust fund recovery penalty and certain excise taxes.7
In any such judicial review, the taxpayer cannot raise issues that were not raised in the CDP hearing. This makes it extremely important to raise all possible issues in the Appeals Office hearing to avoid being foreclosed from raising such issues in subsequent CDP litigation. The courts will review Appeals determinations as to the validity of the underlying tax (and any related innocent spouse defenses) on a de novo basis. However, disputes over procedural matters, such questions of the appropriateness of collection actions, are subject to an “abuse of discretion” standard. In most cases, this will probably make it difficult for the taxpayer to convince the court to overturn the prior determination of the Appeals Office.
CDP “Equivalent” Hearings
It is important to know that even if the taxpayer fails to ask for a CDP hearing within the specified 30 day period, the Appeals Office will nevertheless provide an opportunity for a conference if asked. The Service has coined the term “equivalent hearing” for such a proceeding. The equivalent hearing will be substantially similar to the CDP hearing, with several important exceptions. First, the Service will not be under a statutory obligation to cease enforced collection action during the pendency of the hearing (although as a policy matter enforced collection action will probably be withheld anyway). Since there is no requirement for the cessation of enforced collection action, the statutory limitations periods will not be suspended. Second, unlike the formal CDP hearing, a taxpayer will not be entitled to seek judicial review from the Appeals Office determination resulting from an equivalent hearing.
CDP “Retained Jurisdiction” Hearings
Finally, the Service anticipates offering a third kind of CDP hearing, termed a “retained jurisdiction” hearing. Under the new procedures, once the Appeals Office takes jurisdiction over a case pursuant to the filing of a Request for Collection Due Process Hearing by the taxpayer, it retains jurisdiction for as long as collection activity continues in the case. The retained jurisdiction hearing will arise when the taxpayer asserts that a change in circumstances warrants reconsidering the previous determination. In protracted tax collection cases, of course, taxpayers’ personal and financial circumstances do often change. All this raises the possibility that once the Appeals Office is forced into a case by the filing of a Form 12153, the case will remain in the Appeals Office “inventory” for many months or years. Appeals Officers, much to their chagrin, will become de facto Revenue Officers. Like the “equivalent hearing” discussed above, the “retained jurisdiction” hearing does not extend the statute of limitations on collections, nor is the withholding of enforced collection action mandated.
Collection Appeals Program
The Collection Appeals Program (or CAP) was adopted by the IRS in April 1996, and was expanded in January 1997. And because tax laws and procedures grow by accretion, it remains in place along side the new Collection Due Process hearing structure. The CAP program gives taxpayers the right to appeal a variety of collection actions, including liens, levies, seizures, and the threatened termination of installment agreements.8 Though useful within its limits, the CAP doesn’t cover certain important and common sources of conflict with the Collection Division. Specifically, it doesn’t cover the 100% penalty, penalty abatements and appeals of denials thereof, or offers in compromise.9
Before a taxpayer is permitted to invoke the appeal rights available under the Collection Appeals Program, he or she must first discuss the disputed issues with the Revenue Officer’s manager. You should not assume that the manager will simply back up his or her Revenue Officer, though this is often what happens. Each Revenue Officer carries so many cases in inventory that the manager is not on top of every action being taken in every case by every Revenue Officer in his group. However, to make any progress with the manager, you need to be prepared to present the facts in a brief, clear and coherent manner. And most importantly, you must be prepared to suggest and defend a reasonable and appropriate alternative to the protested action. Finally, you should document your compliance with CAP obligation to seek relief from the manager by appropriate correspondence or memo.
The CAP process is initiated by filling a Form 9423, “Collection Appeal Request.” The form is submitted under penalties of perjury and may be signed by either the taxpayer or the taxpayer’s authorized representative. Collection action will usually be suspended while the Collection Appeal Request is being evaluated by the Service, but only if the Form 9423 is filed within two days of the manager conference.10 If a seizure has been made, the taxpayer has ten business days from the date the Notice of Seizure is issued to file the appeal.
Appeals Officers are expected to close CAP cases within five business days. They, therefore, try to hold a conference within two days of receipt of the case, although taxpayers are allowed a reasonable delay when warranted (generally not exceeding five days). The Appeals Officer will review the case based on the law, policy, procedures, and all the facts and circumstances. If it is determined that the collection action complained of is consistent with standard IRS policies and procedures, the action will be upheld.
Immediately upon making the decision in a CAP case, the Appeals Officer will inform both the Collection Division and the taxpayer, if possible within the five day time frame. The decision may initially be given verbally, and then followed by a written closing letter. Enforcement action may resume after notification of the decision if Appeals has sustained the Collection Division’s position. Decisions are binding on the taxpayer and the Collection Division. The taxpayer may not thereafter appeal the same issue again, as for instance in connection with a subsequent levy on the same asset. Please note that whereas a decision under the new CDP hearing process can be the subject of judicial review, there is no such right with respect to an Appeals Officer’s decision under the CAP program.
Application for Taxpayer Assistance Order
The third parallel track for contesting adverse collection actions is the filing of an “Application for Taxpayer Assistance Order to Relieve Hardship” or “ATAO” (Form 911 — who says the IRS doesn’t have a sense of humor?). The ATAO is filed with the Office of the Taxpayer Advocate (formerly called the Problem Resolution Office).11
The Restructuring and Reform Act, through amendments to the Internal Revenue Code and structural changes to the IRS itself, has substantially increased the independence and authority of the National Taxpayer Advocate12 (a post now held by W. Val Oveson13).
The Manual explains that the Office of the Taxpayer Advocate has the power to halt adverse collection actions, even if only temporarily so that other procedures can be pursued:
Normal procedures and appeal processes should be used before resorting to an ATAO. However, if these procedures or processes are not appropriate because they will not be timely in resolving the hardship, or were not followed and a “significant hardship” exists, an ATAO should be considered. It is never incorrect to invoke the “stop and review” aspect of an ATAO.
The Office of the Taxpayer Advocate, by issuing a Taxpayer Assistance Order (Form 9102) in response to an ATAO, can accomplish great things on behalf of a beleaguered taxpayer. Specifically, a TAO can be issued to relieve “a significant hardship as a result of the manner in which the Internal Revenue laws are being administered.”14 What constitutes a significant hardship is now specified by statute:
- an immediate threat of adverse action;
- a delay of more than thirty days in resolving taxpayer account problems;
- the incurring of significant costs (including fees for representation); or
- irreparable injury to or long term adverse impact on the taxpayer.
In applying these factors to a particular case, the Taxpayer Advocate is required to construe them “in the manner most favorable to the taxpayer.”15 And although it may require some modification in light of the 1998 Act, at present the Manual contains the following list of actions which may be ordered by a TAO:
- Release levies, and bank or third party levies prior to payout; and, personal property seizures prior to sale;
- Stop or postpone IRS actions which deal with receiverships and bankruptcies;
- Stop or postpone IRS actions which deal with the statute of limitations for collection or assessment;
- Stop or postpone actions relating to the collection of taxes; or,
- Suspend any other provisions of law administered by the IRS.
The most important part of constructing an effective ATAO is the description and substantiation of the hardship the taxpayer will suffer from the collection action at issue. The Manual concedes that whether a certain set of facts constitutes a hardship is highly subjective. Bear in mind, however, that according to the IRS, “enforcement action, in and of itself, is not a hardship without additional factors.” Your job, as the taxpayer’s advocate, is to explain the consequences of the enforcement action. In doing so, it is often helpful to cite those specific provisions of the Internal Revenue Manual which come closest to your client’s situation, and for this reason the following excerpt from the Manual warrants close review:
(a) Hardships could include, but are not limited to, exceptional emotional stress experienced by taxpayers in dealing with tax problems, the threat of a poor credit rating caused by erroneous enforcement action, gross disservice to the taxpayer, pending eviction, possible loss of job, the refusal to rescind a Statutory Notice of Deficiency when the statute is not in jeopardy, significant personal emergencies, or other situations of similar magnitude to the taxpayer.
(b) In addition, imminent bankruptcy and failure to meet payroll could be considered hardship in specific circumstances. An example of a hardship causing imminent bankruptcy could be in the situation where a delay occurs in processing a refund causing a poor cash flow situation that will force the taxpayer into bankruptcy. An example of a hardship causing a failure to meet payroll could be a situation where a levy is served on a payroll account when there are alternative sources of collection. 16
The Manual then follows the above expression of general principles with several specific examples.17
(a) A wage levy that impaired the taxpayer’s ability to purchase needed medication or medical care. The Service’s unawareness causes an unintentional negative impact and would qualify for an ATAO if the employee contacted cannot or will not relieve the hardship.
(b) A payment is not properly applied to a taxpayer’s account, thus prohibiting the taxpayer’s receipt of a refund. After numerous contacts with the Service, supplying dates, the taxpayer is suffering emotional stress and files a Form 911 for relief. An ATAO is appropriate to request action to substantiate the credit and authorize the refund.
Again, the goal is to explain in the Form 911 how the taxpayer’s situation fits the standards in the Code and in the Manual. In that way, the caseworker will find it easier to justify giving you the relief you seek.
One of the many benefits to pursuing the ATAO procedure is that the Service must respond very quickly. Although sometimes viewed more as a goal than a requirement, the Manual provides that the Taxpayer Advocate will generally make a determination within two days of receipt of the hardship verification. For cases involving enforcement actions, the Taxpayer Advocate will make the relief determination within one day of receiving the results of the “functional review.” The functional review is a process by which the Taxpayer Advocate sends the case to the IRS unit involved in the matter for consideration. Importantly, the Manual requires that the “function” suspend all enforcement actions until a final decision on relieving the hardship is made, and must report back to the Taxpayer Advocate within two days unless a different deadline is established. If the Taxpayer Advocate disagrees with the function’s findings, he or she will discuss the issue with the division chief, with the Taxpayer Advocate having the power to overrule the chief and issue a Taxpayer Assistance Order when they cannot reach an agreement.
The IRS Restructuring and Reform Act of 1998 has added the “Collection Due Process hearing” as a third way to obtain appeals consideration and even judicial relief. The CDP hearing now takes its place with the Collection Appeals Program and the Application for Taxpayer Assistance Order. These three techniques present multiple and at times overlapping opportunities to seek an independent review of threatened collection actions, and to thus convince the Collection Division to accept more reasonable solutions with regard to unpaid taxes. Indeed, these remedies are so powerful and so easily available that they give new meaning to the term “voluntary tax system.”
1 Mr. Haynes is an attorney with offices in Burke, VA, and Burtonsville, MD, and is a member of the Maryland Society of Accountants’ Newsletter Committee. From 1973 to 1981 he was a Special Agent with the IRS Criminal Investigation Division in Baltimore, and in 1980 was named “Criminal Investigator of the Year” by the Association of Federal Investigators. He specializes in civil and criminal tax disputes and litigation, IRS collection problems, and the tax aspects of bankruptcy and divorce. (phone 703-913-7500; website www.bjhaynes.com)
2 See TD 8809 and TD 8810, announcing Prop. Regs. §301.6320-1T and §301.6330-1T.
3 The new Form 12153 can be downloaded from the Internal Revenue Service website at http://ftp.fedworld.gov/pub/irs-pdf/f12153.pdf.
4 As the procedural rules and related judicial decisions are developed, there will be many battles over the interpretation of the phrase “meaningfully participated.”
5 The written determinations will be communicated by one of two new pattern letters, one for matters under the jurisdiction of the Tax Court, and another for items appealable to the District Court. Both will include a statement of the requirements for seeking judicial review.
6 The Tax Court has just added new rules to its Rules of Practice and Procedure to govern these CDP cases (see Rules 330-332). Chief Judge Mary Ann Cohen has expressed grave concern over the potential impact of what may be a flood of CDP litigation.
7 If the taxpayer files a timely appeal, but in the wrong court, another 30 day period will be allowed for the filing of a petition for review with the proper court.
8 See IRS Publication 594 “Understanding the Collection Process,” which is mailed to all taxpayers with the final notice of intent to levy. See also IRS Publication 1660 “Collection Appeal Rights for Liens, Levies, Seizures and Installment Agreement Terminations.”
9 The Service’s rejection of a proposed Offer in Compromise is nevertheless subject to administrative appeal. See my article on Offers in Compromise in the December-January 1999 issue of The Free State Accountant.
10 The Revenue Officer may determine the enforcement action should continue during the CAP appeals process if withholding action would be detrimental to the collection of the tax. Enforcement action will generally continue on “Repeat Delinquent cases,” i.e. cases in which business taxpayers who owe over $10,000 in withholding taxes and have at least three TDA’s which accrued in the past three years. See IRM 5614.
11 The Form 911 can be submitted by mail or by fax where quick action is necessary.
12 See IRC §§7803(c)(1) and 7811(a).
13 Mr. Oveson was formerly Director of the Department of Taxation and Lieutenant Governor of the State of Utah. His e-mail address is firstname.lastname@example.org); telephone 202-622-6100.
14 IRC §7811(a).
15 IRC §78811(a)(3).
16 See IRM §518(13).33.
17 See IRM §12(16)0, par. 126.