Misleading Taxpayers with Collection Letter

This is not the first post on the way the IRS collection letters mislead taxpayers.  This is also not the first post on the notice stream of letters sent in collection cases after assessment of tax.  This may be the first post in which I feel like I am writing about a deliberate attempt by the IRS to mislead taxpayers with a form.  I find the statements the IRS has deliberately chosen to make in Notice CP504 false and can only conclude that it has made these statements after giving thought to what it says in the letter because I know these letters receive much scrutiny before the IRS uses them.

Letters in the collection notice stream satisfy statutory requirements and collection goals.  Section 6303 requires the IRS send a notice and demand letter after it makes assessment when insufficient funds exist on the account to satisfy the liability.  The IRS should send this letter within 60 days of assessment; however, its failure to do so impacts the creation of the federal tax lien and not the validity of the assessment.



The notice stream fulfills two other statutory requirements – those found in IRC 6331(d) and 6330.  The interplay of these two sections creates the basis for the discussion in this post.  Because the IRS has chosen to misrepresent its authority to levy in Notice CP504, examining the role of these sections must precede the discussion of the misrepresentation itself.

Dating back at least the 1860s, Congress gave the IRS, and its predecessors, authority to levy on the assets of taxpayers who failed to pay their federal taxes.  Levy provides the IRS with a powerful administrative tool which, prior to 1998, involved no judicial check on the IRS before the levy occurred.  Before 1998, however, Congress did require that the IRS send taxpayers a notice of intent to levy 30 days before it could begin administratively taking their property.  The code section requiring this notice is IRS 6331(d).  This section provides:

1.     In general. Levy may be made under subsection (a) upon the salary or wages or other property of any person with respect to any unpaid tax only after the Secretary has notified such person in writing of his intention to make such levy.

2.     30-day requirement. The notice required under paragraph (1) shall be –

  1. Given in person
  2. Left at the dwelling or usual place of business of such person, or
  3. Sent by certified or registered mail to such person’s last known address,

No less than 30 days before the day of the levy.

In 1998 Congress decided that IRC 6331(d) provided inadequate protection to taxpayers before the IRS could levy on their property.  To remedy this failing, Congress did not remove section 6331(d) but added section 6330.  Now, the IRS had two notices it must provide to taxpayers before it could levy.  The new notice created in section 6330 not only gives the taxpayer notice of the IRS intent to levy but also gives the taxpayer the right to contest the levy by filing a Collection Due Process (CDP) request before the levy may occur.  Today, it is easy to forget that the section 6331(d) requirement still exists because it receives almost no attention but the statute still requires the IRS to provide this notice as well and the IRS does so.

In 1998, the IRS decided to make the last letter of its notice stream of collection notices, normally the 4th letter, a letter that combined the taxpayer’s notice rights under both 6331(d) and 6330 into the same letter.  It continued this practice for many years though no legal requirement exists that the same letter provide the notice required by both statutes.  Conversely, no statutory requirement causes the IRS to put the notices into separate letters.

At some point in the recent past, the IRS decided that it would split the notice required by 6331(d) and 6330 into two separate letters.  One of the reasons, a major reason, for combining the two notice requirements into one letter was cost.  Each statutorily required notice came with a requirement that the IRS send the notice by certified mail.  The CDP notice requires not only that the IRS mail it certified, but also that the IRS request return receipt.  Combining the two notices allowed the IRS to meet the costly statutory requirement of certified mail with one rather than two mailings.  Because of the number of notices of intent to levy sent each year and the extra cost of sending two letters by certified mail, the IRS could save several million dollars each year simply by combining the two notices.

The IRS has now decided that it will send the taxpayer, as the third notice in the notice stream, a section 6331(d) notice.Here is the notice sent to one of the clients of the Harvard clinic.  The IRS titles the notice “Notice of Intent to Levy.”  In the body of the notice, the IRS says that if the taxpayer does not pay the tax by the date specified in the letter, the IRS may levy on the taxpayer’s property and rights to property including: 1) wages, real estate commissions, and other income; 2) bank accounts; 3) personal assets (e.g., your car and home) and 4) Social Security benefits.  The problem with this notice and with these statements (some might say threats) arises because, at the time the IRS sends this notice, it has not yet provided the taxpayer with the CDP notice.  Without the CDP notice, the IRS cannot levy upon a taxpayer after 1998 and yet, it says to taxpayers in Notice CP504 that it can.  At best, the letter misleads taxpayers about their rights and viewed at worst, the letter contains false statements known by the IRS employees designing this letter as such.

To test the letter and the statements that the IRS could levy as a result of it, the Harvard clinic sent a Form 12153 to the IRS requesting a CDP hearing for a client who had received Notice CP504.  Even though the letter does not mention section 6330, it describes a procedure the IRS can only take after sending a CDP notice.  So, we thought that by sending a CDP request we would see what would happen.  We expected that the IRS would not provide our client with a CDP hearing, but it seemed better to try and find out.  First, we obtained the permission of our client to file the CDP request after explaining to him our reasons for wanting to do so.  In the first case in which we requested a CDP hearing, we eventually received a letter from the IRS saying that the client could not have a CDP hearing because the IRS had not sent a CDP notice.  Before we could petition the Tax Court from that letter, which might be characterized as a notice of decision from which the Tax Court has in certain circumstances granted jurisdiction, the IRS sent another notice of intent to levy citing to section 6330, and we did not want to impair the taxpayer’s ability to use the CDP process, so we filed another CDP request based on the notice which cited to section 6330 and have our case under consideration for an offer in compromise.

Another client received this notice and we sent another CDP request to the IRS.  In the second case, the IRS has neither responded to our request nor sent a notice citing to section 6330.  We will continue, with client permission, to send in requests for CDP hearings whenever our clients receive a notice of intent to levy stating that the IRS can levy upon their property.  We hope one day to uncover the mystery of how the IRS thinks that it can levy in 2016 based on a 6331(d) notice without sending a 6330 notice.  If anyone out there can help us to solve this mystery, we would appreciate your assistance.  For the moment, I remain of the opinion that Form CP504 seeks to purposely mislead taxpayers.  I find the letter offensive.  I believe it violates taxpayer rights.  I think the IRS should immediately stop sending a letter entitled Notice of Intent to Levy containing instructions in the body of the letter about the taking of a taxpayer’s property when the IRS has no authority to do so.

After the Tax Court Finds It Lacks CDP Jurisdiction, Seventh Circuit Says It Should Keep Quiet About Other Collection Issues

We welcome back frequent guest blogger, Carl Smith, who discusses a recent 7th Circuit case that rejects a line of cases decided by the Tax Court concerning the scope of its authority when dismissing a Collection Due Process case.  Keith

In a precedential opinion issued on November 18 in Adolphson v. Commissioner, the Seventh Circuit affirmed the Tax Court’s dismissal of a Collection Due Process (CDP) petition under section 6330(d)(1) for lack of jurisdiction. The Tax Court dismissed the petition because the IRS had never issued a notice of determination after a CDP hearing – a ticket to the Tax Court.  But, the Seventh Circuit was unhappy that the Tax Court also went on to consider (though, ultimately reject) the taxpayer’s argument that there had been no CDP hearing and no notice of determination (NOD) only because the IRS failed to send a notice of intention to levy (NOIL) to the taxpayer at the taxpayer’s last known address.  In effect, the Seventh Circuit said that where the Tax Court lacks jurisdiction because of the lack of an NOD, the Tax Court should keep quiet about other potential collection issues – such as, in this case, whether the IRS had issued an NOIL to the taxpayer’s last known address before it had started levying.  The Seventh Circuit particularly rejected a line of Tax Court opinions beginning with Buffano v. Commissioner, T.C. Memo. 2007-32 – which, according to the Seventh Circuit, the Tax Court has only intermittently followed – in which the Tax Court has considered as part of its jurisdictional dismissals, issues going to the validity of NOILs.

This post will discuss Buffano, the unpublished order issued by Judge Carluzzo in Adolphson, and the Seventh Circuit opinion in Adolphson.


Readers are no doubt aware that before the IRS issues a CDP NOD (a ticket to the Tax Court), the IRS Office of Appeals must hold a CDP hearing.  CDP hearings can only be requested after the IRS validly issues an NOIL or NFTL.  One way for the IRS to validly issue an NOIL or NFTL is to send it by certified or registered mail to a taxpayer’s last known address.  Sections 6320(a)(2)(C) and 6330(a)(2)(C).  If certified or registered mail is used for an NOIL, levy is prohibited for the 30-day period in which a taxpayer can request a CDP hearing.  Section 6331(d)(1) and (2).  If a CDP hearing is requested, no levy is allowed and the collection statute of limitations is suspended until the CDP hearing (and any judicial appeals) are over.  Section 6330(e)(1).


In Buffano, the first the taxpayer knew about collection was when the IRS sent a levy to his employer.  The taxpayer was upset that he had not, before then, received an NOIL.  The taxpayer sent a Form 12153 requesting a CDP hearing with respect to the taxes being levied, and the IRS decided that, since it had sent an NOIL to what it had thought was the taxpayer’s last known address (even though the NOIL was returned by the USPS undelivered), the IRS had done all it needed to do to commence levy.  Since the request for a CDP hearing was made more than 30 days after the IRS mailed the NOIL, the IRS instead gave the taxpayer an equivalent hearing.  At the end of the equivalent hearing, the taxpayer was unsatisfied with the equivalent letter, and, within 30 days, filed a petition in the Tax Court under section 6330(d)(1).

The IRS moved to dismiss the case for lack of jurisdiction on the ground that no NOD following a CDP hearing had been issued.  Thus, the taxpayer had not received a ticket to the Tax Court.  The taxpayer cross-moved to dismiss for lack of jurisdiction on a different ground:  No NOIL had validly been sent to his last known address.  The court decided that it had to determine the reason for the jurisdictional dismissal that was inevitable in the case.  The Tax Court held that the NOIL had not been sent to the taxpayer’s last known address.  Thus, it was invalid, and the dismissal was predicated on the NOIL’s invalidity.  Presumably, the Tax Court expected that this holding would mean that the IRS had to send a new NOIL to the taxpayer for the same taxes before the IRS could commence any levy.

In subsequent cases presenting the same fact pattern as Buffano, the Tax Court has sometimes (but not always) followed Buffano and issued a ruling on whether or not the NOIL was mailed to the last known address.  If the NOIL was mailed to the last known address, then the Tax Court has dismissed for lack of jurisdiction on the basis of a lack of an NOD.  If the NOIL was not mailed to the last known address, the Tax Court has dismissed for lack of jurisdiction on the basis of a lack of a validly-mailed NOIL.  See, e.g., Anson v. Commissioner, T.C. Memo. 2010-119; Space v. Commissioner, T.C. Memo. 2009-230; Kennedy v. Commissioner, T.C. Memo. 2008-33.

Adolphson Tax Court Order 

Mr. Adolphson’s fact pattern was quite similar to Buffano – i.e., he first learned of collection from an actual levies on third parties who held his funds, but he had never before received an NOIL. Unlike Buffano, he did not thereafter ask for and get an equivalent hearing, but went straight to the Tax Court.  In the Tax Court, Mr. Adolphson first moved to restrain further levies and for the Tax Court to order the IRS to refund what had already been levied – arguing that the IRS had not sent an NOIL to his last-known address and citing Buffano.  Then, the IRS cross-moved to dismiss for lack of jurisdiction because of the absence of an NOD.  The IRS, however, attempted to show it had mailed an NOIL to his last known address.  Since Mr. Adolphson had not filed returns for many years, there was a serious issue as to which address was his last known address.

In an unpublished order at Docket No. 21816-14L, issued on February 3, 2015, Special Trial Judge Carluzzo granted the government’s motion, first stating:

Petitioner agrees that the Court is without jurisdiction in this matter. That being so, his motion to restrain must be denied as our authority to grant the relief he seeks arises only in cases where our jurisdiction under section 6330(d) has properly been invoked. See sec. 6330(e). Petitioner, however, disagrees with respondent’s ground for the dismissal.

Then, the judge distinguished Buffano as follows (footnote omitted):

Petitioner’s reliance upon Buffano is misplaced. The record in Buffano contained information showing the address shown on the taxpayer’s relevant Federal income tax return, the starting point for purposes of establishing a taxpayer’s last known address. See sec. 301.6212-2(a) Proced. & Admin. Regs.; Kennedy v. Commissioner, 116 T.C. 255 (2001); Abeles v. Commissioner, 91 T.C. 1019 (1988). Petitioner has not established what, if any, address was shown on his Federal income tax return(s) most recently filed before the relevant notices of intent to levy were issued.  Furthermore, under the circumstances before us and contrary to petitioner’s suggestion, the address shown on respondent’s November 5, 2012, letter to him is hardly determinative as to his “last known address” for purposes of section 6330.

Because of the paucity of information as to petitioner’s last known address, we decline to make any finding on the point in resolving the jurisdictional motion before us. To the extent that there are any irregularities in the assessment process giving rise to the above-mentioned liabilities, or to the collection of those liabilities, petitioner’s remedies, if any, lie in a different Federal court.

Adolphson Seventh Circuit Opinion 

The Seventh Circuit affirmed the Tax Court, but using a lot of words criticizing both the Tax Court’s rulings and the DOJ lawyers’ briefs and oral argument.  In a 16-page opinion, the panel took apart Judge Carluzzo’s barely 3-page order.

Initially, the panel stated that, if it were going to apply the Buffano line of cases, it disagreed that the IRS had shown that it mailed an NOIL to the taxpayer’s last known address.  In particular, the panel noted that some of the IRS evidence of mailing consisted of improperly-authenticated transcripts that only indicated the issuance of one or more NOILs, but there was no evidence in the record of any mailing or evidence of even the address used.  The panel accused Judge Carluzzo of improperly shifting the burden of proof on mailing to the taxpayer and wrote:  “In other words, had the tax court followed Buffano and required the Commissioner to prove proper mailing, the ‘paucity of information’ should have led to a win for Adolphson.” Slip op. at 10-11.

The panel was also critical of the DOJ lawyers for, among other things, (1) not taking a position on whether the Buffano line of cases was correct, (2) not taking a position on whether Judge Carluzzo correctly distinguished Buffano, (3) making no attempt to justify the IRS collection behavior in the case, and (4) unhelpfully arguing that “Adolphson, proceeding pro se, erred by asking the tax court to enjoin further collection efforts and refund money already collected, rather than asking the court to invalidate the levies.”  Id. at 11.  “Instead, the Commissioner insists that Adolphson is relegated either to an administrative claim before the IRS or a refund suit in district court, while maintaining that ‘whether the IRS mailed a Notice of Intent to Levy to taxpayer’s last known address is not relevant in this case.’” Id.

Turning to the law, the panel wrote:

Notwithstanding this unwillingness to confront the salient issue, the Commissioner is correct that, absent a notice of determination, the tax court lacks jurisdiction under 26 U.S.C. § 6330(d).  A decision invalidating administrative action for not following statutory procedures is a quintessential merits analysis, not a jurisdictional ruling. The Buffano line of cases therefore represents an improper extension of the tax court’s statutorily defined jurisdiction.

Id. at 12 (citations omitted).

The panel blamed the Tax Court’s error in Buffano on its uncritically importing into CDP, from its deficiency jurisdiction case law, the practice of allowing a taxpayer who files a late deficiency petition to ask that the court determine that the notice of deficiency was not sent to the last known address, and, so, the Tax Court lacked deficiency jurisdiction because of an invalid notice.  Calling the deficiency jurisdiction practice “less problematic”, the panel distinguished it from determining whether an NOIL was properly sent to a last known address, since the challenged notice in a deficiency case is the ticket to the Tax Court (the “jurisdictional hook”), whereas an NOIL is not.  In a passage I find confusing, the panel wrote:

Although calling this ground for dismissal [of an improperly-mailed notice of deficiency] “jurisdictional” is a misnomer, the logical underpinning is the same: The tax court is determining whether the IRS has met statutory requirements to proceed with collection, but there isn’t a question of whether or not the jurisdictional hook exists (were there no deficiency, there would be nothing to collect).

Id. at 14.  Earlier in the opinion, the panel had written:

This [Buffano] practice of invalidating collection activity [in a CDP case] where the tax court lacks statutory authority to proceed also violates the Tax Anti‐Injunction Act, 26 U.S.C. § 7421(a), which (with exceptions inapplicable here) provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” This statute deprives courts of jurisdiction to enter pre‐collection injunctions and “protects the Government’s ability to collect a consistent stream of revenue” by ensuring that “taxes can ordinarily be challenged only after they are paid, by suing for a refund” under 28 U.S.C. § 1346(a)(1). By invalidating levies despite the absence of a notice of determination under § 6330—a taxpayer’s jurisdictional hook to enter tax court—decisions such as Buffano stand in direct opposition to the Act.

Id. at 12-13 (citations omitted).

Ultimately, the panel concluded that a taxpayer in Mr. Adolphson’s position is left only the remedy of a refund suit.  I would call that remedy completely useless, since one can only get a court to order a refund in such a suit if one has overpaid one’s taxes.  Lewis v. Reynolds, 284 U.S. 281 (1932).  It is of no relevance in a refund suit whether the IRS improperly forced all or part of the tax payments by a procedurally-improper levy.

The panel regretted that it saw no statutory remedy for Mr. Adolphson’s plight:

The framework used in Buffano to scrutinize the IRS’s compliance with its statutory obligations does have equitable appeal; a taxpayer to whom the IRS fails to mail a Final Notice of Intent to Levy and, through no fault of her own, misses the 30-day window to request a CDP hearing might otherwise be left without an opportunity to petition the tax court prior to seizure of her assets. This is the system devised by Congress, however . . . .  Troubling though this [refund suit] “remedy” may be, given the expense and potential delays inherent in such a suit, there is no lawful basis for expanding the tax court’s jurisdiction to resolve the perceived problem. Absent a notice of determination, the tax court simply has no lawful authority to hear a taxpayer’s claim under § 6330(d).

Adolphson, at 15-16.


Because Mr. Adolphson was pro se and the DOJ’s briefing was so unhelpful, the panel may have misunderstood certain things about tax procedure when it wrote the opinion.  The opinion conspicuously fails to mention three possible avenues for relief for him.

First, section 6330(e)(1) suspends the collection statute of limitations if a person requests a CDP hearing.  In this case, no CDP hearing was requested because no NOIL was issued to the last known address (probably).  Section 6330(e)(1) goes on to provide:

Notwithstanding the provisions of section 7421(a), the beginning of a levy or a proceeding during the time the suspension under this paragraph is in force may be enjoined by a proceeding in the proper court, including the Tax Court.  The Tax Court shall have no jurisdiction under this paragraph to enjoin any action or proceeding unless a timely appeal has been filed under subsection (d)(1) and then only in respect of the unpaid tax or proposed levy to which the determination being appealed relates.

Since there was no NOD here to which an appeal under subsection (d)(1) could be timely, the Tax Court lacked that injunctive power under subsection (e)(1).  I don’t see the district court having injunctive power under (e)(1), either, since the injunctive power is provided during the period of the suspension.  Since no CDP hearing was requested (probably, since no NOIL was issued to the last known address), no suspension period is in effect.

Second, the Supreme Court acknowledged a judicial, equitable exception to the anti-injunction act in Enochs v. Williams Packing & Navigation Co., 370 U.S. 1 (1962).   To succeed under that exception, a taxpayer must show (1) that under no circumstance could the government prevail, and (2) that there is equity jurisdiction – i.e., that the taxpayer would suffer irreparable harm if the government’s actions were not enjoined.  While I think that an IRS levy made without previously sending a proper NOIL might meet the first requirement, merely being forced to pay money would doubtless not be considered irreparable injury.  However, there might be irreparable injury if, say, the levies would end up forcing the taxpayer’s business into bankruptcy.

Short of injunctive relief, though, Congress has provided in section 7433 a suit for money damages on account of negligent wrongful collection actions.  But, under this section, a taxpayer is limited to actual damages – and I am not sure merely paying taxes prematurely constitutes actual damages.  However, collateral damage – such as the levies ending up causing the taxpayer to lose clients or to go into bankruptcy – would seem to be compensable damages.

I also don’t think the Adolphson court appreciated how the dismissal of a deficiency petition for lack of jurisdiction because of an invalid notice doesn’t amount to an injunction against the IRS.  The Tax Court has jurisdiction to find facts necessary to its jurisdiction. When the Tax Court determines that a notice of deficiency wasn’t valid, that is a jurisdictional fact found by the court that could be used by a taxpayer in later litigation to collaterally estop the IRS from, say, judicially foreclosing on the tax lien that arose from the deficiency.  By contrast, if the Tax Court holds an NOIL was invalid, the court would be deciding an issue not necessary to its CDP jurisdiction, so the discussion would be dicta.  A taxpayer could not use this dicta to collaterally estop the IRS in later litigation from arguing that the NOIL was valid. The result of a ruling in a Buffano-type case that the NOIL wasn’t properly mailed is simply an advisory opinion to the IRS not to pursue collection under that NOIL. The IRS usually follows that advice. But, since the Tax Court shouldn’t be issuing advisory opinions, perhaps that is part of why I agree with the Seventh Circuit that Buffano is incorrect.

Finally, Adolphson may also call into question Craig v. Commissioner, 119 T.C. 252 (2002), where the Tax Court held that it has jurisdiction under section 6330(d)(1) to hear a case where the IRS mistakenly issued an equivalent hearing letter, rather than an NOD.  In Craig, the Tax Court said it would treat the equivalent hearing letter as an NOD.  Adolphson seems to suggest that when no NOD was actually issued, the Tax Court should just keep quiet about any other merits issue, as it lacks jurisdiction under section 6330(d)(1).


What is a Prior Opportunity to Contest the Liability for Purposes of Collection Due Process?

Today, we welcome back guest blogger A. Lavar Taylor.  Lavar’s practice is based in Southern California; however, he handles tax cases across the country.  His latest challenge involves representing taxpayers seeking the opportunity to litigate the merits of their liability in the Tax Court in the context of Collection Due Process (CDP) cases.  The Tax Court has followed the IRS’s lead in its interpretation of prior opportunity to dispute a tax liability.  Both the Tax Court and the IRS deny taxpayers the opportunity to litigate the merits of the underlying liability in many circumstances in which the taxpayer had the opportunity for an administrative hearing even though that administrative hearing with Appeals could not lead to a court hearing.  Because of Lavar, three Circuit Courts of Appeal will soon hear oral argument on the question of what is a prior opportunity to dispute a tax liability which bars a taxpayer from challenging the merits of the underlying tax liability in a collect due process tax case under IRC 6330(c)(2)(B).  Last year when I wrote a new chapter on CDP for the Saltzman and Book treatise, IRS Practice and Procedure, I was struck by the number of unresolved CDP issues that still remain.  I consider this issue the most vexatious of the unresolved issues and the one where the regulations deviate to the greatest extent from the intent of the statute.  We will closely follow Lavar’s efforts and we have written on this before here and here.  If he can succeed in pushing back on the current interpretation of prior opportunity, he will open up for many taxpayers the chance to litigate large liabilities without the need to pay to litigate.  Keith

Back in February of this year, Carl Smith noted in a guest post  that three Circuit Courts of Appeal would be considering the question of the circumstances under which a taxpayer is barred from challenging the merits of the underlying tax liability in a Collection Due Process case under section 6330(c)(2)(B) because of a “prior opportunity” to contest the underlying liability.  Our firm was retained to handle these appeals.  Briefing in all three cases is now complete.  Oral argument in the 7th Circuit case is set for November 9.  Oral argument in the 10th Circuit case is set for November 14.  Oral argument in the 4th Circuit case is set for the last week of January.


This issue is an important one.  For taxpayers who lack the resources to pay the disputed liability in full and pursue a suit for refund in District Court or the Court of Claims, particularly those taxpayers against whom the IRS may assess (or has already assessed) taxes and/or penalties without resorting to the deficiency procedures, resolution of this issue could determine whether they will ever be able to challenge in court the merits of those taxes or penalties. (The prior statement ignores the fact that taxpayers theoretically can file bankruptcy and commence an objection to the IRS’s proof of claim or an adversary proceeding under section 505 of the Bankruptcy Code.  Bankruptcy is not a feasible option for many taxpayers, however.)

For those taxpayers who have the means to both pay the disputed liability in full and litigate the merits of the liability in a refund suit in District Court or the Court of Claims, resolution of this issue will decide whether they can ever challenge the disputed liability in the Tax Court, which is procedurally more “taxpayer friendly” than District Court or the Court of Claims and is far less expensive in which to litigate than either of these other two fora.

The parties’ briefs are lengthy, although none of the attorneys involved on either side were paid by the word. The briefs are lengthy because resolving this issue in a proper manner requires a detailed knowledge of tax procedure that most appellate Judges lack.  I’m not going to summarize the briefs here, but copies of our opening brief, the government’s responding brief, and our reply brief in the 7th Circuit case can be found here, here, and here.

If you have the time, I strongly recommend reading the briefs.  They contain a number of surprises.  Of particular interest is the fact that the government is arguing that the taxpayers in these three cases are also barred by section 6330(c)(4) from challenging the merits of the liabilities.   This is a new development.  Section 6330(c)(4) has previously been interpreted by the IRS Office of Chief Counsel as only applying to collection-related issues, not to liability-related issues.  IRS Chief Counsel’s prior position, however, has not prevented the Department of Justice from arguing that section 6330(c)(4) prohibits the taxpayers-appellants in these three cases from challenging  the merits of the underlying liabilities.   There are other surprises in the briefs as well, but I leave it to the readers of this blog post to discover them on their own.

The fact that three Courts of Appeal will be considering these issues simultaneously creates the possibility of a Circuit split.   Indeed, the “split” could even be a “fracture,” with the possibility of each Circuit going its own direction.  Of course, we hope for a unanimous reversal of the Tax Court by all three Circuits.

The last interesting point is that I will get to spend Election Day in Chicago.  Having grown up in downstate Illinois, I’m familiar with the unofficial state slogan of Illinois, which is “Vote Early, Vote Often.”  I jokingly suggested to one of my colleagues that, having voted early here in California, my trip to Chicago might afford me the chance to vote more than once.  He responded that I should check to see whether the records show that I have continuously voted in Illinois since leaving the state almost 40 years ago.  He has a point.  When I’m not busy preparing for oral argument, I will check that out.


Don’t File Your Collection Due Process Case Right Before the Statute of Limitations Expires

The case of United States v. Barbara Holmes provides an example of how a request for Collection Due Process (CDP) relief can extend the statute of limitations on collection and keep open the ability for the IRS to bring suit that might have otherwise expired.  Plaintiff’s attorney, who also happens to be her husband, may have made a reasonable decision to file the CDP request and the title of this post goes too far in suggesting that a taxpayer should never file a CDP request at the very end of the statute of limitations on collection; however, when the statute is short, careful thought about taking action, like making a CDP request or making an offer in compromise, must precede the request that will extend the statute of limitations on collection.


The facts here demonstrate the dysfunction of the IRS more than the estate and bear discussion in analyzing what happened.

Mrs. Holmes is the executrix of the Estate of Shirley Bernhardt. The estate tax return was filed on July 16, 1998 and nothing in the opinion indicates that the return was untimely.  The estate tax return reported a liability of $700,024.34 which was remitted with the return.  The IRS audited the return, sent a notice of deficiency and eventually settled the Tax Court case.  As a result of the Tax Court case, on July 16, 2004, the IRS assessed an additional $233,309.20 plus interest; however, the assessment was erroneous because it failed to properly apply the state estate tax credit.  The opinion does state how the mistake was corrected but I expect that the IRS reduced the assessment with a partial abatement.  The remaining balance on the account at the time the IRS brought suit probably exceeded $200,000.

Although the opinion does not discuss it, I expect that the IRS properly issued notice and demand and then sent other letters in the notice stream. The opinion does state that on December 27, 2004, the IRS placed the case in the queue for collection by a revenue officer.  The opinion in this case comes from the Federal District Court in Houston causing me to believe that the collection case would have been assigned to a revenue officer group somewhere in southern Texas.   That group must be mighty shy of revenue officers because the case sat in the queue for approximately nine years.  The opinion does not state whether any payments occurred during that period or why the liability remained outstanding but on August 19, 2013, the opinion states that the IRS filed notices of federal tax lien in connection with the Estate’s unpaid taxes.

The filing of the notice of federal tax lien triggers the requirement that the IRS send to the taxpayer a CDP notice pursuant to IRC 6320 giving the taxpayer the opportunity for a hearing with Appeals and the opportunity to go to Tax Court, if Appeals issues a notice of determination.  The IRS has a lien under IRC 6324 for unpaid estate taxes that exists with full force without the need for the filing of a notice of federal tax lien. The IRS does not file a notice of federal tax lien for estate taxes but the estate tax lien expires after 10 years.  The IRS has the ability to file the notice of federal tax lien on the assessment it made after winning the Tax Court case.  Because of the gap here between the end of the estate tax lien in 2007 ten years after the death of the decedent and the filing of the notice of federal tax lien in 2013, the IRS placed the collection of the debt at risk to other creditors.  The actions regarding the collection of this debt suggest a high level of dysfunction in the collection division.

The opinion then says that the IRS sent to the taxpayer on September 27, 2013 the final notice of intent to levy. This notice would give the estate separate CDP rights and trigger its own 30-day period for filing a CDP request.  On October 5, 2013, the taxpayer sent to the IRS, by certified mail, a request for a CDP hearing.  That request clearly came within 30 days after the mailing of the levy notice and should have triggered a CDP hearing.  Assuming that nothing else had extended the statute of limitations on collection, the request for the CDP hearing also came during the 10th year after the assessment, at a time when there were about eight months left on the statute of limitations for collection.

When you get that close to the end of the statute of limitations on collection, you must carefully evaluate what you think will happen during the next eight months in order to decide if making the CDP request is in your best interest or if you think that letting the statute continue to march toward the end of the time period will bring the best result. There is no right answer because you do not know what the IRS will do during that eight months but you should have a very clear idea of what you expect to gain by bringing the CDP case if you go that route.

I do not know what benefit the taxpayer thought she might obtain by bringing the CDP case. She could not contest the underlying liability because the liability resulted from a Tax Court decision.  The one benefit I see to a CDP case in these circumstances is the ability to make an offer in compromise that you have the opportunity to have the Tax Court review if you think the IRS rejected it inappropriately.  I have written before that I think the IRS should not process offers in compromise from decedent’s estates for the same reasons it refuses to process offers from bankruptcy estates because a regime exists for contesting the non-payment of those types of liabilities.  Even though the IRS has not adopted my suggestion, getting an offer through on unpaid estate taxes can prove very difficult because of the personal liability of the executor and the existence of the like lien on the transferred property.

For some reason, Mrs. Holmes thought that brining a CDP case would prove beneficial; however, the IRS frustrated her attempt to obtain a CDP hearing. At the time of her request, the government was in the throes of one of the many government shut downs.  When the government shuts down, mail stacks up.  When mail stacks up, short cuts can occur in processing the mail when the disgruntled employees return from their paid time off.  For whatever reason, the CDP request was lost and this is where the case gets interesting.

The lost CDP request caused the general momentum on the case the IRS collection division was finally beginning to build to come to a standstill. The opinion does not say what happened between October 5, 2013 and May 2, 2014, just 10 weeks before the statute of limitations is set to expire if nothing suspends it.  On that day, counsel for the estate sent a letter to the IRS including a copy of the original CDP request from October 5, 2013.  Apparently, the May 2 letter did not convince the IRS that a timely CDP request was made by the estate because on June 2, 2014, counsel for the estate sent another letter to the IRS again arguing that the CDP occurred timely; however, this time he withdraws the CDP hearing request and instead asks for an equivalent hearing.

The estate sends a third letter on July 8 and on July 11, 2014, just five days before the statute of limitations would run on the 10-year period following assessment, the IRS sends the estate a letter saying it accepted the timely request for a CDP hearing. How nice.

The opinion does not say what happened as a result of the IRS accepting the CDP hearing request, but the parties must not have reached an agreement during the CDP process or this case would not exist. On March 10, 2015, the IRS filed suit against Mrs. Holmes individually, and in her capacity as executrix of the estate, and it filed suit against Mr. Holmes individually.  The estate argued that the suit was filed out of time.  The IRS argued that the estate’s timely request for a CDP hearing suspended the statute of limitations on collection and made the suit timely.

The Court found that the estate was estopped from making the argument that the misplacement of the CDP request by the IRS prevented the IRS from proving that the statute of limitations was suspended by that request. The Court ruled that the estate had a duty of consistency.  It had argued with the IRS and written to it several times that it had timely filed the CDP request and it could not argue that a timely CDP request did not exist.

“The elements of the duty of consistency are (1) a representation or report by the taxpayer; (2) on which the Commissioner has relied; and (3) an attempt by the taxpayer after the statute of limitations has run to change the previous representation or to recharacterize the situation in such a way as to harm the Commissioner.” Citing to Herrington v. Commissioner.

Because of its determination regarding the duty of consistency, the Court granted summary judgment with respect to the estate; however, the Court refused to grant summary judgment against Mr. and Mrs. Holmes in their individual capacities because of missteps the IRS had made with respect to the assessment. The estate may not have any funds remaining.  So, getting summary judgment against the estate provides a first step for the IRS to collect the unpaid estate tax liability but it may need to win the case against the individual defendants in order to collect the liability.  This could give further opportunity to report on the case.

No matter what the outcome, the filing of the CDP request during the final year of the statute of limitations on collection kept open the time frame for the IRS to bring this suit. Maybe the IRS would have brought the suit within the un-extended time frame.  We will never know.  The decision of the taxpayers to request the CDP hearing may have been the correct decision, but it is one that should occur only with a careful weighing of the perceived benefits against the granting to the government of additional time and the bringing to the government’s attention a case it has allowed to languish for almost 10 years.

You Can’t Get There From Here: Tax Court Rejects Partial Pay Installment Agreement Request

Last week in Heyl v Commissioner the Tax Court rejected a taxpayer’s request for a partial pay installment agreement (PPIA). We have not discussed that collection tool and the case provides a chance to do so.

Heyl filed returns for three years but failed to pay the tax; he owed about $15,000, including penalties. After receiving a notice of intent to levy and a notice of federal tax lien filing, he requested a CDP hearing. In the hearing request he stated that he could not pay the balance; there was no issue as to the amount he owed. There was a telephone hearing and correspondence; the settlement office requested (and received) other delinquent income tax returns, and Heyl submitted a collection information statement. The collection information statement (the Form 433 series) showed negative monthly income as well as few assets, with one exception: an unoccupied and unleveraged house in Maine that was worth $87,500. It was Heyl’s hope that he could live in retirement at the Maine house, and continue to keep it unleveraged despite the federal tax debt.

IRS had different views, and the order in this case discusses generally what a taxpayer with equity in an asset must demonstrate to keep that asset out of the collection mix.


In one of the letters to the settlement officer (SO), Heyl requested to pay IRS about $100/year for five years. The SO recognized this as a partial pay installment agreement request. A PPIA allows for IRS to accept essentially on a payment plan a series of payments that will result in IRS receiving less than the full amount of the assessed liability. Congress amended the installment agreement and offer statutes in 2004 to allow IRS and taxpayers to enter into those. They are in effect offers in compromise which use the installment agreement process for a mutually agreed upon lesser amount than both the taxpayer and IRS agree is owed. The idea behind the PPIA is that it is better to get something rather than nothing.

The SO rejected the request based on the view that Hoyle should liquidate or leverage the Maine house and use those proceeds to fully pay the tax. Heyl appealed to Tax Court, and the Tax Court sustained the determination on summary judgment. Here’s how the court got there.

As with most installment agreements and with all offers, the IRS has wide discretion in granting an alternative to enforced collection. The discretion is not absolute, however.

The Internal Revenue Manual provides guidance:

[b]efore a PPIA may be granted, equity in assets must be addressed and, if appropriate, be used to make payment. In some cases taxpayers will be required to use equity in assets to pay liabilities.” IRM (Sept. 19, 2014).

Taxpayers can push back on a request to use the equity in assets and withstand requests to leverage or liquidate assets if liquidating or selling would cause “economic hardship.” That is a term of art, and sweeps in standards in the regs under Section 6343 and the IRM. To show economic hardship Heyl would have to demonstrate that the sale or leveraging of the asset would render him unable to meet his necessary living expenses. Those relate to the health, welfare or production of income.

The order in Heyl provides some detail on those concepts:

Necessary expenses are those representing “the minimum a taxpayer and family needs to live.” See Thompson v. Commissioner 140 T.C. 173 (2013) (PPIA only allows for necessary expenses); IRM pt. (Oct. 2, 2009). The regulations and administrative guidance reflect an understanding of economic hardship placing the taxpayer into “dire circumstances,” not merely being forced to change one’s accustomed to or desired lifestyle. See Speltz v. Commissioner, 454 F.3d 782, 786 (8th Cir. 2006) affg 124 T.C. 165 (2005).

Heyl argued that his was a hardship case because “his future retirement will bring a meager social security check, and that living rent or mortgage free upon retirement may make the difference between ‘misery and subsistence.’”

The Tax Court disagreed, though in so doing suggested ways that a taxpayer might be able to show hardship in differing circumstances:

Petitioner failed to allege any specific fact suggesting the sale or leveraging of the unoccupied Maine home will alter his income expense estimates and render him unable to meet his current necessary living expenses…

We also note that petitioner’s filing status is single and he has no dependents. Petitioner is in his early sixties and operates a sole proprietorship. In addition, he does not allege any disability or extraordinary circumstance prevents him from working, or continuing to operate his business. Petitioner argued that the economic downturn impeded his earning potential, but expresses a belief that his “piece of the economy won’t be weak forever.”

Parting Thoughts

The case reminds me that while this did not work out for Heyl, installment agreements generally are a good tool for taxpayers who may have equity in assets but who wish to avoid enforced collection, especially if there are circumstances that support economic hardship. For example, Keith previously discussed the power of installment agreements in our last discussion of the Antioco case in Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement. The PPIA can be a good option, though when there is an asset that can satisfy the liability the taxpayer will have to offer specific evidence as to why selling or borrowing against the asset jeopardizes the taxpayer’s ability to meet current or likely future necessary expenses. The taxpayer will have to put in evidence on, for example, health issues for the taxpayer or a dependent, or an imminent down the road downturn in income. General statements about the difficulties of a future life in retirement are insufficient. Given that in some circuits (as here) the taxpayer was bound to the record below, the offering of that specific evidence has to be done at Appeals, and not at Tax Court. Even with those good bad facts, when a taxpayer has a history of noncompliance, the IRS still has significant discretion to reject the alternative.



Treasury Inspector General Report on Timeliness of Lien Notices

On July 7 the Treasury Inspector General for Tax Administration (TIGTA) issued a report on the timeliness of the IRS in sending out notice to taxpayers and to their representatives after it files the notice of federal tax lien (NFTL).  Section 6320, creating Collection Due Process (CDP) rights following the filing of the NFTL, requires that the IRS send notice of the filing of the NFTL within 5 business days after the filing of the NFTL.  IRS procedures and seemingly Section 6304  require that notice of the NFTL also go to the taxpayer’s representative.  If the IRS fails to send out the notice of the NFTL to the taxpayer who is the subject of the lien or to the taxpayer’s representative, the failure can have consequences to the taxpayer in the effort to pursue rights.

During the past year, I had two cases in which I represented taxpayers against whom the IRS filed an NFTL. In those cases, the notice of the filing was not sent to me until several days after it was mailed to the taxpayer.  By the time I received the notice, 10 days or more of the 30 day period to request a CDP hearing had run.  Because of my experience, I read the TIGTA report with interest.  As discussed below, the Tax Court has held that the failure to notify the representative does not extend the time period within which the taxpayer must exercise their CDP rights.  This makes the study of the IRS effectiveness in providing notice to representatives all the more important.


TIGTA found that of a sample of “162 undelivered lien notices identified nine cases for which lien notices were not timely sent to the taxpayers last known addresses because the lien notices were sent to the taxpayers’ old addresses even though IRS systems reflected their new addresses.” With respect to the notice sent to representatives, TIGTA found that for “six of the 37 sample cases for which the taxpayer had an authorized representative, the IRS did not notify the taxpayers’ representatives of the NFTL filings.  TIGTA estimated that 22,866 taxpayers may have been adversely affected.”

What happens when the representative does not receive a copy of the Notice of Deficiency and the taxpayer fails to timely petition the Tax Court? The failure to send the notice to the representative does not give the taxpayer a basis for getting into the Tax Court after the 90-window has closed, see McDonald v. Commissioner, Bond v. Commissioner (a CDP case refusing to allow taxpayers to raise the merits of a liability based on the failure of the IRS to send the statutory notice of deficiency to petitioner’s representative), Houghton v. Commissioner, and Allen v. Commissioner.

What happens when the representative does not receive a copy of the CDP notice? Unlike the Notice of Deficiency which deals with examination issues, the CDP notice concerns collection.  In 2015, the Tax Court in Godfrey said the failure to provide notice to the authorized representative in a CDP case has the same consequences as the failure to provide notice when sending the notice of deficiency, which is to say that no consequences to the IRS result from that failure.  We posted on Godfrey here, here, and here.  Godfrey does not appear to have appealed the decision.

IRC 6304(a)(2) provides that the IRS “Without the prior consent of the taxpayer given directly to the Secretary or the express permission of a court of competent jurisdiction, the Secretary may not communicate with a taxpayer in connection with the collection of any unpaid tax . . . if the Secretary knows the taxpayer is represented by any person authorized to practice before the Internal Revenue Service with respect to such unpaid tax and has knowledge of, or can readily ascertain, such person’s name and address, unless such person fails to respond within a reasonable period of time to a communication from the Secretary or unless such person consents to direct communication with the taxpayer…”

In a 2001 Chief Counsel Advisory opinion discussed in the Godfrey post, Chief Counsel’s office takes the position in footnote 7 that the 6320 (or 6330) notice must go to the taxpayer by statute and that Section 6304 prohibition on communication with the taxpayer without the consent of the representative does not does not alter that requirement.  A more nuanced argument exists concerning the impact of using the IRS power of attorney form and whether the language of the POA form gives the Service additional rights.

The TIGTA report contains a chart of NFTL filings in the five year period running from 2011 through 2015. NFTLs have dropped by almost half during that period.  The biggest drop resulted from the change in the threshold for filing as a result of the Fresh Start initiative from $5,000 to $10,000.  That change is not hard and fast, as the IRS can file the NFTL at any dollar level and it is not required to file the NFTL at any dollar level; however, in general, IRS employees will follow the manual guidance to the extent they have the ability to work a case.  The dropoff in the most recent years probably reflects some reduced enforcement action due to the reduced staff.

The TIGTA report on providing notice to taxpayers after the filing of the NFTL is one of a number of reports Congress required TIGTA to perform on an annual basis in the Restructuring and Reform Act of 1998 (RRA 98).  TIGTA notes that over the past five years it has found that the IRS almost always complies with the requirement to provide timely notice to the taxpayer but has not always met internal guidelines with respect to practitioner notice.  The report does not address the legal requirement provided in IRC 6304 concerning practitioner notice probably because of the Chief Counsel guidance that IRC 6304 does not create a requirement here.

The error rate for providing notice to authorized representatives in 2016 was consistent with the error rate over the past five years and shows that one in five notices of the filing of the NFTL does not get sent to the authorized representative despite internal guidance and a statute that specifically provide that the notice must be sent to the representative. TIGTA did not make any recommendations concerning the failure to notify authorized representatives this year because it had made them in the past and the IRS system for fixing the problem did not get implemented until after the sample period.  TIGTA indicated that it would revisit the issue next year.

If you do not receive notice as a representative on any collection case in which you have a power of attorney on file with the IRS and have checked the box that you want copies of correspondence, then the IRS has failed to meet its statutory, not internal, requirement. We have posted about IRC 6304 before here, here, and here.  Given the relatively high percentage of cases in which the IRS has not sent out the notice to the POA, a number of these cases should exist.  TIGTA does not address the timeliness of sending out the copy of the notice to the representative.  My impression from the report was the significantly delayed notices I received would count toward the 84% of the cases in which the IRS complied and were not measured by TIGTA as a form of IRS non-compliance.  Yet, a significant delay when the taxpayer has only 30 days to act can have a significant influence on the outcome of a matter.

If you are concerned about receipt of the notice of the filing of an NFTL either by yourself as the representative or by your client, you may want to read this report and possibly some of the prior reports. If Congress is going to require TIGTA to provide us with this information, we should find ways to use it in situations in which the IRS fails to comply with the requirements.  The failure to comply with notice requirements in collection cases may eventually lead to a different outcome than the failure to comply in examination cases.  Godfrey may not be the final word in this litigation.  IRC 6304 does not come with any directions about the remedy for failure to comply with its provisions and little litigation exists in the tax context.  If you seek a remedy because of a violation of IRC 6304, you might look to litigation in the consumer debt collection area after which the statute is patterned.

African Diamond Scam and Millions in Alimony: (and Some Reasonable Cause and Chenery)

The beginning of some of Judge Holmes’ Tax Court opinions resemble screenplays. Take the opening paragraph from last week’s Leslie v Commissioner.

Fade in:

These cases arise from the unhappy end to a marriage. Maria Leslie got $5.5 million from her former husband under an agreement that said it would be taxable to her and deductible to him. She sent part of it–about $400,000–to an internet scamster who claimed he would invest it for her in an African diamond scheme but who made off with the money. She says the $5.5 million was a nontaxable property settlement and the $400,000 was a theft loss. She also says the IRS should have considered her request for an alternative to forced collection of her tax debt.

A colleague of mine in the Villanova graduate tax program sent me the link to this opinion because of its bringing to life some of the issues we teach in our introductory income tax class. Tax and tax procedure can be dry, especially to outsiders, but Judge Holmes knows and shows these cases have a very real human dimension.

Back to the Leslie case itself. I will simplify the facts and procedural aspect of the case to highlight the main procedural issues, which relate to whether mental illness constitutes reasonable cause and whether IRS counsel can supplement Appeals’ explanation as to why it rejected a collection alternative.


There were a few years where Leslie received payments under the divorce agreement from her ex-husband, a good portion of which was contingent on a fee her ex, a lawyer, was due to get from his work in a class action suit stemming from the Enron mess. (That litigation eventually led to a $50 million fee for her ex, by the way).

As her marriage broke down and following the divorce, Leslie began to suffer from major psychological illnesses. The opinion notes she had a “lengthy battle with a myriad of psychological and mental-health problems. She began suffering–and currently suffers–from severe major depression, and from schizoaffective disorder dependent-personality disorder. Her condition darkened once the marital- separation negotiations began in 2003, and she began to plan her own death.” The mental health issues led Leslie to an involuntary psychiatric stay and a long list of medications that the opinion notes Leslie was on for many years.

One of the consequences of the upheaval in Leslie’s life was that she did not tend to her tax affairs. She filed many of her returns late, though for most of the years she initially reported the payments from her ex as taxable alimony. She did not report the losses from her diamond misadventures. With unpaid assessments stemming from the alimony and late filed returns, the case gets to Tax Court via CDP, and in the CDP proceeding she filed amended returns claiming the payments from her ex were property distributions and thus nontaxable. She also filed a return claiming the losses from her diamond investment were theft losses. That was important because the theft loss rules treat those losses as ordinary and also allow the victim to carry the losses back and forward as essentially net operating losses.

The opinion has a terrific discussion about the difference between taxable alimony and nontaxable property settlements, and also whether the scamming (which involved a promise of a million dollars if Leslie coughed up $400,000 to help “export” the diamonds) resulted in a theft loss deduction or just a loss stemming from a bad investment. I will not spend time here on the property/alimony or theft loss issues, though note that the IRS prevailed on the alimony issue (with the case turning on the conclusion that under California law the requirement for the ex to make the payments would have terminated if Leslie died even though the agreement did not so provide) but lost on the theft loss issue (because under California law the parting of her money amounted to theft by false pretenses).

The opinion also discusses a couple of interesting procedural issues. To those I turn.

Late Filing and Reasonable Cause

The IRS also assessed late filing penalties. At issue was whether her mental illness amounted to reasonable cause. The opinion discusses how incapacity can amount to a defense to the late filing penalty, with the taxpayer having to show that a mental or emotional disorder “rendered [her] incapable of exercising ordinary business care and prudence during the period in which the failure to file continued.” (citing Wilkinson v. Commissioner, T.C. Memo. 1997-410). Despite the many troubles Leslie was facing the opinion concluded that she did not meet that standard:

But the standard is a tough one to meet, and we did not see enough evidence of her inability to manage her other business affairs during this time. She was, for example, living in substantial part on the income from eight rental properties she got in the divorce, which required her active involvement in their management. We acknowledge she had problems doing this, but because she was still able to live on this income we find that her ability to “carry on normal activities” was not so impaired as to be an inability. See id [Wilkinson v Comm’r]. This is not enough to excuse a late filing.

This is a tough outcome, and when I read the earlier parts of the opinion describing Leslie’s medication and hospitalization I thought it was enough to support reasonable cause. As the opinion notes, however, many cases that explore incapacity emphasize how the illness relates to an inability to manage affairs outside the tax world. Given that Leslie was apparently actively managing her rental properties, or able to sufficiently delegate the responsibilities from the rental business, she came up short.

Chenery and CDP

The other part of the opinion dealt with Leslie’s request for an installment agreement at CDP. Appeals’ determination rejected the request, though it did so with little explanation. At Tax Court, IRS sought to explain why Appeals was within its considerable discretion to reject the collection alternative. That ran smack into the Chenery principle. We have discussed SEC v Chenery, and how taxpayers are pushing its application in deficiency cases. See, for example, Tax Court Rules that APA and Administrative Law Principles Do Not Bar IRS From Amending Answer and Asserting New Grounds for Deficiency and Stephanie Hoffer and Chris Walker’s guest post A Few More Words on Ax and the Future of Tax Court Exceptionalism.

Essentially, Chenery stands for the proposition that the courts are not supposed to allow agencies to argue a new reason for their determination, or justify agency actions based upon arguments or issues that were not properly made below. While the Tax Court is less than bullish on its use in deficiency cases, its use in CDP cases involving collection issues is more entrenched.

At Tax Court, IRS argued that the settlement officer acted within his discretion in not allowing a collection alternative because Leslie did not provide information about the cost of her life and health insurance premiums. Unfortunately for the IRS, the determination made no reference to the missing premium information:

The Commissioner does argue on brief here that the SO was within her discretion to deny collection alternatives because Leslie didn’t supply information about her health- and life-insurance premiums. This was, however, just about the only financial information that Leslie didn’t supply. Even more important, this specific failure–a failure to supply complete information about health- and life- insurance premiums–is not cited in the notice of determination as a reason for refusing to consider an alternative to enforced collection. In reviewing notices of determination, we follow the Chenery doctrine.

After setting out the IRS’s failure, the opinion then proceeds to give effect to Chenery in CDP:

Applying Chenery in a CDP case means that we can’t uphold a notice of determination on grounds other than those actually relied upon by the IRS officer who made the determination. See Chenery I, 318 U.S. at 87-88; Spiva v. Astrue, 628 F.3d 346, 353 (7th Cir. 2010) (agency has the responsibility to articulate its reasoning); Salahuddin, 2012 WL 1758628, at *7 (“[O]ur role under section 6330(d) is to review actions that the IRS took, not the actions that it could have taken”). Those grounds must be clearly set forth so that we do not have to guess about why an officer decided what he did. See Chenery II, 332 U.S. at 195.

As the opinion notes, Leslie had previously submitted a 433 A, and the SO’s failure to prepare an allowable expense worksheet rendered the determination and the SO’s actions overall as not rational:

This makes the determination not rational, in contrast to the run-of-the-rejection-mill case where a taxpayer submits no information or leaves out assets.


The upshot is a remand, where Appeals will have to provide more personalized analysis of Leslie’s finances and work with her to try at least see if an installment agreement is possible. The opinion stands as a reminder between the considerable differences in the procedural posture of deficiency cases from CDP cases. In deficiency cases, IRS still has considerable leeway in making arguments in Tax Court that were not made below. In CDP cases, the Tax Court will be much more vigilant in keeping IRS to what it previously said. It is not enough for the IRS to be right; it has to be right because it was what Appeals considered and explained previously.




A Day Late and a Chance For Wise Tax Administration Wasted

Collection due process gives taxpayers chance to pause the wheels of collection. It gives the Tax Court the chance to consider even under a fairly permissive abuse of discretion standard collection issues that were previously subject to absolute agency discretion, and still are when brought outside CDP. One interesting aspect of CDP is its giving taxpayers an opportunity to challenge the merits if the taxpayer did not receive a stat notice or otherwise have an opportunity to contest the liability. We have discussed the challenges that Tax Court judges have been facing in determining what is a “prior opportunity” for these purposes. There are a few cases that are teeing up that issue, and we are watching them.

Last week in Cox v Commissioner (summary opinion) the Tax Court considered an issue that we have not discussed before but it is one that used to bother me when I directed a tax clinic and had taxpayers in similar circumstances. In Cox, a potential responsible person had an opportunity prior to the CDP hearing to raise a challenge to the trust fund liability so the liability challenge was technically not part of the CDP determination. Nonetheless the potential responsible person had compelling evidence that suggested the liability was wrong; despite that evidence neither Appeals nor Counsel considered the merits and argued that Cox could not raise the issue. The regulations and the IRM provide that Appeals can but is not required to consider liability issues in such cases, and any decision regarding the liability is outside the collection determination and not subject to court review. In Cox, the Tax Court reluctantly sustained the determination, and in so doing implicitly criticizes IRS for kicking this one down the road.

I will describe the case and why it makes for bad tax administration below.



In early 2014, IRS sent Cox a proposed trust fund recovery penalty on Form 1153 for the last quarter in 2010 and the first two in 2011 for employment tax liabilities relating to a construction company that Cox used to own. Form 1153 implements the legislative change from 1996 that is found in Section 6672(b) that gives the potential responsible officer 60 days to file a protest and request a hearing with Appeals on the proposed assessment (Keith discussed some of this in his post on the 11th Circuit case of Romano-Murphy v Comm’r earlier this year). The 60th day for responding fell on a Saturday. Unfortunately for Cox, he hand-delivered the protest to the IRS and sent a copy by certified mail on the following Tuesday; had he hand-delivered it or mailed it on Monday it would have been timely.

No timely protest meant no hearing for Cox. IRS, moving quickly, assessed the tax a few weeks later and soon thereafter issued a notice of intent to levy. Cox timely filed a 12153 and requested a chance to present evidence showing that in fact he sold the business before the last quarter in 2010. The Appeals Settlement Officer stated that even though he did not have a chance to present that evidence to Appeals previously (since Appeals did not hold a pre-assessment hearing) the Form 1153 gave him the opportunity to have IRS consider the liability “but [Cox] had failed to timely perfect that opportunity.” Cox petitioned to Tax Court and he case went to trial (though I wonder why it was not disposed of with a summary judgment motion).

At trial, Cox testified that he sold the construction company “before the last quarter of 2010 and that the new owner, not petitioner, would have been the responsible person.” Moreover Cox testified that “he had paid the employment tax liabilities for all quarters that ended before he sold the company. Petitioner adduced written evidence at the trial showing when he had sold the company, and he further indicated that the buyer’s testimony would support his position.”

The opinion recounted that the Tax Court has previously held that the receipt of the 1153 amounts to an opportunity to dispute the liability, and that IRS was not authorized to waive the time limits to respond to that notice. While the opinion does not cite to the CDP regulations, the regulations provide that Appeals can consider liability issues in these circumstances but it removes those considerations from the CDP proceeding (and thus judicial inquiry) and with no guidance gives Appeals absolute discretion over the consideration:

In the Appeals officer’s sole discretion, however, the Appeals officer may consider the existence or amount of the underlying tax liability, or such other precluded issues, at the same time as the CDP hearing. Any determination, however, made by the Appeals officer with respect to such a precluded issue shall not be treated as part of the Notice of Determination issued by the Appeals officer and will not be subject to any judicial review. Because any decisions made by the Appeals officer on such precluded issues are not properly a part of the CDP hearing, such decisions are not required to appear in the Notice of Determination issued following the hearing. Even if a decision concerning such precluded issues is referred to in the Notice of Determination, it is not reviewable by the Tax Court because the precluded issue is not properly part of the CDP hearing.

Reg 301.6330-1(e) Q&A11 (emphasis added).

The opinion concludes that Cox did not have the right to challenge the merits of the assessment given his failure to take advantage of his prior opportunity reflected in his receipt of the Form 1153. Yet, the opinion reflected some unease given that the evidence suggested that the assessment was likely wrong:

So we are faced with (1) an anomalous circumstance where petitioner might have been able to successfully contest the underlying liabilities and (2) the resulting question of whether it was an abuse of respondent’s discretion not to permit him to attempt to do so.

The opinion noted that Cox could pay a portion of the assessment in the separate quarters and bring a refund claim and if necessary a refund suit in federal district court or the Court of Federal Claims. Yet, the opinion implicitly criticizes Appeals and Counsel for failing to consider the merits even though it was not required to do so:

We understand that respondent was precluded from considering petitioner’s appeal of the proposed assessment because it was untimely, but respondent is not otherwise statutorily prohibited from considering petitioner’s arguments during the CDP hearing (after an assessment has already been made).

Nevertheless, this Court’s role is to review what has transpired and to decide whether there has been an abuse of discretion. Because respondent was not required to consider petitioner’s underlying liabilities as part of the CDP hearing, respondent’s failure to do was not an abuse of discretion.

Parting Thoughts

Allowing a collection action to proceed when there seems to be compelling evidence that the assessment is wrong makes little sense. This seems especially like a bad outcome when there may be evidence that could easily dispose of the case and where the person at issue appears to have previously been compliant and barely missed the deadline. The outcome of this case is more costs to Cox and IRS and possibly DOJ if Cox pursues his remedy via a refund proceeding. That does not make sense for any party.

On the other hand, many taxpayers who miss their opportunity to raise the merits of the underlying issue want to do so in the CDP context. Appeals and Counsel have a difficult job drawing the line when to allow someone to present this evidence. Where the evidence seems clear and straightforward as it does in Cox, it is hard not to fault the government employees for refusing to recognize the obvious and taking the necessary steps to fix the problem with the least amount of effort for everyone. Knowing when to exercise this administrative authority is often difficult. The easier path for IRS employees is to view this as someone else’s problem. Perhaps the answer is a little more guidance to the employees on when they should exercise this discretion and a little more leeway from supervisors to allow them to do it because it may result in the right answer and less work for the taxpayers and others downstream in the process who otherwise have to deal with the case.