Continued Developments in Taxpayer attempts to Litigate the Merits of Taxes in Collection Due Process Cases

As we have reported before, here, occasional guest blogger Lavar Taylor brought three appeals into the circuit courts.  Two circuit courts have ruled thus far and both sustained the decision of the Tax Court upholding the regulation promulgated by the IRS which prevents a taxpayer from bring a merits dispute in a collection due process (CDP) case if the taxpayer had the opportunity for a conference with Appeals prior to bringing the CDP case even if the opportunity to go to Appeals did not include an opportunity to contest the matter in court.  We are still waiting on the third circuit court in which Lavar made his arguments to decide the case that came before it in order to determine if a split in the circuits on this issue might lead to Supreme Court review.  Meanwhile, the Keller Tank decision decided by the 10th Circuit has had further developments and the Tax Court continues to decide cases on this issue.  Both the new developments in Keller Tank and the recent activity in the Tax Court deserve mention.


On March 31, 2017, the IRS filed a request with the 10th Circuit in the Keller Tank case entitled “APPELLEE’S MOTION TO AMEND OPINION TO CLARIFY AUTHORITY OF IRS OFFICE OF APPEALS OVER RESCISSION OF I.R.C. § 6707A PENALTIES.”  In the motion, the IRS requests that the 10th Circuit amend the opinion in the case, which was entirely favorable to the IRS, to remove language suggesting that the Appeals Office could rescind the 6707A penalty.  The motion states that the Commissioner has not delegated that authority to Appeals and that the opinion could mislead others.  You do not often see the winning party asking the court to rewrite its opinion but the reason for the request makes perfect sense for an agency trying to administer a statute and wanting to make sure that parties follow the correct procedure when requesting remedies.

Following on the heels of the motion by the IRS, on April 7, 2017, the taxpayer filed a PETITION FOR REHEARING AND REQUEST FOR REHEARING EN BANC.  In this petition, the taxpayer essentially asks the court to reconsider its decision and sets out the reasons why it should do so.  We will continue to follow the developments in this case as well look for the final circuit court opinion.

Meanwhile, back in the Tax Court a couple of decisions on this topic deserve brief mention and discussion.  The first was an order and decision issued by Judge Holmes on January 3, 2017 in White v. Commissioner, Dk. No. 9967-15L.  Mr. White filed his 2008 return in 2013.  The IRS not only assessed the taxes reflected on the return but also assessed penalties for late filing and late payment.  In his CDP case Mr. White wanted to contest the penalties.  Judge Holmes set out the timeline regarding the penalties and Mr. White’s efforts to contest them in the order:

-October 4, 2013 — Mr. White writes to IRS Appeals to ask for relief from the penalties;

– January 24, 2014 — IRS Appeals denies his request;

-April 9, 2014 — Mr. White files an administrative appeal of the denial;

-May 20, 2014 — while this administrative appeal is pending, the IRS sends Mr. White a notice of federal tax lien;

-June 6, 2014 — Mr. White files his request for a CDP hearing and states that he only wants to challenge the penalties;

-October 28, 2014 — The administrative appeal leads to a partial abatement of the penalties;

-December 24, 2014 — the Appeals settlement officer conducting the CDP hearing writes to Mr. White to schedule the hearing but warns him that his filing of a request with IRS Appeals and pursuit of an administrative appeal constituted his one chance to challenge his liability;

-March 17, 2015 — The Appeals settlement officer issues the notice of determination in which he rules that Mr. White may not challenge the penalties in a CDP hearing because he had challenged them administratively.

Mr. White pressed for consideration of the penalty assessment amount in the CDP hearing.  The IRS filed a motion for summary judgement.  Because he never received a notice of deficiency regarding the underlying taxes, since they are taxes on his return filed without remittance, Montgomery v. Commissioner would allow him to contest the taxes in the CDP hearing but what about the penalties which he contested prior to the CDP hearing in appeals in the penalty abatement context.

The relevant regulation is 26 CFR § 301.6320-1(e)(3), A-E2  and it provides:

“An opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability. An opportunity for a conference with Appeals prior to the assessment of a tax subject to deficiency procedures is not a prior opportunity for this purpose.”

The Court notes that the second sentence of the regulation does not apply because his opportunity for a conference with Appeals came after and not before the assessment of the tax.  In its brief in support of the summary judgment motion, the IRS cited to two trust fund recovery penalty cases in which the taxpayer received a hearing with Appeals but TFRP cases have their own special regime for obtaining Appeals conferences.  Even though the IRS apparently did not cite to Lewis v. Commissioner, 128 T.C. 48 (2007), Judge Holmes looks at it and finds the facts essentially identical.  On the basis of Lewis, he upholds the determination of Appeals and grants the motion for summary judgment.

The decision in White raises the question of what would have happened to Mr. White’s request to have the penalties reviewed by the Tax Court in the CDP case if he had not first sought to have Appeals look at them.  I think that he may have gotten his review.  If I am right, perhaps taxpayers should not engage in the penalty abatement process immediately after filing a late return but wait until the CDP process begins.  That is not the most efficient result but taxpayers who want the ability to challenge the denial of penalty abatement in court must wait for CDP or fully pay and sue for refund.

On March 29, 2017, Judge Lauber issued an opinion in Bitter v. Commissioner, T.C. Memo 2017-46.  The Bitter case is another 6707A case.  The Court picks up on the two recent circuit court decisions and cites them in the decision.  The case shows what taxpayers should expect if they seek to litigate the merits in a CDP case of this type of penalty.  The door is firmly shut and will only open if a circuit court agrees with the argument that the regulation goes too far by preventing taxpayers who can only obtain review from Appeals from raising the merits of the underlying liability in a CDP case.  Judge Lauber goes through all of the recent decisions if you want a thorough update on the state of the law in this area.

A Botched CDP Notice Leads to a Timely 6404 Interest Abatement Petition

Sometimes cases arrive in Tax Court in the most unusual way, and the case of Estate of Sager v. Commissioner is one such case.  On February 17, 2017, the Tax Court entered an order determining that it did not have jurisdiction over the case for purposes of reviewing a Collection Due Process (CDP) decision by Appeals following an equivalent hearing but that it did have jurisdiction over the case for purposes of reviewing an interest abatement “final determination” made as a part of the CDP decision.  It is nice that the Estate of Sager got into the door of the Tax Court on the interest abatement issue.  Whether this will cause the IRS to argue in the future that documents not necessarily, or perhaps not clearly, intended to serve as final determinations of interest abatement will trigger the running of the statutory period for filing petitions for interest abatement remains to be seen.


The tax year at issue in this case is 1997 and the return for that year was timely filed by the decedent, pursuant to extension, on July 27, 1998.  The IRS issued a notice of deficiency for that year on November 10, 2011.  I cannot determine from the order why the notice was timely but that does not seem to be an issue that concerned anyone.  A Tax Court petition was untimely filed in response to the notice of deficiency leading to the eventual assessment of $108,130.  Following assessment the normal collection actions took place, including the assignment of the case to a revenue office.  The revenue office eventually issued a notice of intent to levy on August 29, 2012; however, petitioner appears not to have filed a Tax Court petition in response to this notice.  On September 22, 2012, the revenue officer sent a CDP notice of filing the federal tax lien.  Petitioner did respond to the CDP lien notice and filed a request for a CDP hearing on October 24, 2012.

Petitioner noted in the request that more than 30 days had passed but asserted that the CDP notice was delivered to an invalid address.  In the end, the Tax Court determined that the CDP lien notice was sent to the wrong address.  Although the Court does not address the issue in the Order, the sending of a CDP lien notice to the wrong address raises an issue regarding the continued validity of the lien notice.  The IRS must send a CDP lien notice to the taxpayer within five days after the filing of the notice of federal tax lien.  What impact does sending an invalid notice have?  It seems that the Tax Court could never have jurisdiction over the CDP issues because of the invalid notice.  Because by the time the Tax Court gets to the issue of the validity of the notice and of the notice of federal tax lien almost a year from the filing of the petition had passed and because during that year the parties had resolved the lien issue, the Court did not dwell on the issue of the invalidity of the CDP notice.  The Internal Revenue Manual provides that, in general, if the IRS sends an invalid notice it must send a substitute notice and the Tax Court in Bongam v. Commissioner, 146 T.C. No. 4 (2016) held that a substitute notice of determination was proper after the mailing of an inappropriate motion..

Here, the address on the notice was the address at which petitioner’s former partner lived.  She brought the notice to petitioner on the 29th day after the notice was issued.  That did not provide the petitioner with enough time to file a timely request for a CDP hearing.  For notices of deficiency, the Tax Court has a rule that a notice mailed to the wrong address can become a valid notice if the notice makes it way to the taxpayer in time for the taxpayer to file a timely Tax Court petition.  Under that case law, learning of the CDP notice on the 29th day would not validate the CDP notice.  It is not clear that getting the wrongly addressed CDP notice to the taxpayer would save the CDP notice.  I will leave the issue for another post where the issue is clearly raised, but wanted to point out the issues lurking in this case before returning to the interest abatement determination.

When it received the untimely CDP request, the IRS gave the taxpayer an equivalent hearing.  During the equivalent hearing, the Settlement Officer (SO) considered the merits of liability and reduced the liability.  Because this action did not necessarily bear on the outcome before the Tax Court, the order gives few details that allow me to know how the taxpayer persuaded the SO to consider the merits.  It appears from the dismissal of the untimely petition in Tax Court of the effort of the taxpayer to litigate the notice of deficiency that the taxpayer had a prior opportunity to litigate the tax.  I surmise that the taxpayer was able to show the SO in a simple, straightforward way that the assessment was wrong and the SO was willing to address the issue even though not compelled to do so by the CDP process.  Les talked about this in a recent post in which the SO was unwilling to fix an easily recognizable mistake.  I have had spotty success seeking to get a merits adjustments from an SO where the taxpayer had a prior opportunity but the adjustment was easy to fix.  If I am correct about what happened here, it shows at least one SO who was willing to fix something simple and save the taxpayer time as well as other IRS employees.

The SO did not agree to abate interest.  The order does not describe why the taxpayer felt interest should have been abated.  Given the unusual timing of the issuance of the notice of deficiency, perhaps the lengthy delay in working the case had something to do with the request.  The taxpayer made a $50,000 payment during the CDP equivalent hearing process.  Because of the adjustments the SO made and the payment, the taxpayer essentially satisfied the liability; however, the SO issued a decision letter at the conclusion of the equivalent hearing setting out the adjustment to the tax and denying interest abatement.

The taxpayer filed a petition in Tax Court within 30 days of the issuance of the decision letter.  The IRS moved to dismiss since it had not issued a determination letter.  Essentially, it argued that the late filing of the request for a CDP hearing precluded the Tax Court from having jurisdiction.  The low income taxpayer clinic at Rutgers Law School entered the scene at this point and argued that the Tax Court had jurisdiction over the interest abatement aspect of the case.  The IRS conceded that the Tax Court “may” have jurisdiction over the interest abatement request while continuing to argument that it did not have jurisdiction over the CDP request.  The taxpayer argued that his case met the unusual conditions for treating a decision letter as a notice of determination and that the Tax Court did have jurisdiction over his case.  The Tax Court disagreed and distinguished this case from the very short line of cases holding that the Tax Court has jurisdiction over a CDP matter after the issuance of a decision letter.

While disagreeing with petitioner on the issue of jurisdiction over the CDP aspect of the case, the Tax Court held that the decision letter could serve as a final determination with respect to interest abatement.  In Gray v. Commissioner, the Tax Court previously held that a CDP determination letter could serve as the basis for a final determination regarding interest abatement.  The order in Sager takes the next logical step and holds that a decision letter can also serve that purpose.  The petition filed here came well within the 180 period after the notice of final determination.  The Court finds that “Respondent has not asserted nor proven that the decision letter was not meant to be a final determination on Mr. Sager’s interest abatement request.”  Therefore, the Court found it had jurisdiction to hear the interest abatement request and ordered the parties to file status requests regarding the interest abatement issue.

The order follows the Tax Court’s longstanding practice of finding jurisdiction in those situations in which the petitioner comes to the Court within the established time frames in the applicable statutes.  Not only had the Court made a similar holding regarding a CDP determination letter in the Gray case, but it has made similar decisions in other contexts as well.  I wrote recently about one in the whistleblower context.  The decision here allows the petitioner to move forward for a determination on interest abatement without going the more ordinary route of filing a Form 843.  This is good news for this taxpayer and good news generally unless the IRS can argue that this type of informal final determination precludes the taxpayer from seeking interest abatement if the taxpayer does not realize that the informal final determination closes the door when it goes unrecognized and the taxpayer does not act quickly in response to it.

Update on the Issue of the Prior Opportunity to Dispute a Liability in a Collection Due Process Case

On February 28, 2017, I wrote about the Keller Tank case in which the 10th Circuit followed prior Tax Court precedent and the language of the collection due process (CDP) regulations in denying a taxpayer the opportunity to raise the merits of underlying liability in a CDP case where the taxpayer had the administrative, but not judicial, opportunity to raise the issue prior to the CDP case.  In that post, I noted that Lavar Taylor argued three cases in different circuits with this identical issue in a very short time span.  On March 7, 2017, the 4th Circuit issued its opinion in Iames v. Commissioner, No. 16-1154, the second of those three cases.  The 4th Circuit reached the same conclusion as the 10th Circuit validating the regulation as a reasonable interpretation of the statute.  You can hear the oral argument here.  Judge Wilkinson wrote a strong opinion explaining the basis for his decision.  He not only supported the position of the IRS based on IRC 6330(c)(2) but also bought the government’s secondary argument under IRC 6330 (c)(4) which the 10th Circuit did not reach.  This leaves taxpayers hoping for relief through the CDP process with only one circuit remaining to change the course of the discussion at least in this round of attacks on the governing regulation.  The 4th Circuit had no discomfort creating a distinction between taxpayers with deficiency procedure taxes versus those whose liabilities do not use those procedures.  For those interested in a full blown discussion of this issue, come to the Pro Bono and Tax Clinics Committee meeting on Saturday May 13 at the ABA Tax Section meeting in DC or order the recording of the discussion.

Shredding Documents and Proving You Paid a Tax: Lawyer Cannot Prove Payment

This week’s summary opinion in Paynter v Commissioner is a relatively straightforward case in many respects: a taxpayer habitually filed his income tax return with a balance due; IRS sent him some collection notices; and he claimed to have paid but had no proof. It is not surprising that the Settlement Officer and the Tax Court held that Paynter was still on the hook.


Some aspects of the case that stand out. Paynter is a lawyer, and he justified his practice of not paying estimated taxes because, as he said at trial, “I never have and I don’t like the process.” Moreover, the year at issue was 2006; IRS sent a balance due notice in 2007 (about $16,000 in tax) but without any explanation did not send any other collection letters until 2014.

I guess it is not that surprising that some lawyers do not have stellar tax compliance practices and at times IRS seems to not engage in best collection practices. I also think it is not that surprising that “I don’t like the process” does not amount to reasonable cause as a defense to civil penalties.

Yet the case raises a bunch procedural issues. The taxpayer made an estoppel argument against the government based on the delay in seeking collection. The opinion notes that the delay caused the taxpayer hardship and that the IRS failed to explain why it sat on the assessment for close to 8 years. Yet, the opinion discusses the high bar that taxpayers must clear to win an estoppel argument:

  1.  the Government knew the facts of the taxpayer’s situation;
  2.  the Government intended that its conduct be acted on or acted so that the taxpayer had a right to believe it was so intended;
  3.  the taxpayer was ignorant of the facts; and
  4.  the taxpayer relied on the Government’s conduct to his injury.

On top of those requirements, in the Ninth Circuit (where an appeal would lie if it were not an S case) a party seeking to invoke estoppel must also prove the government’s affirmative misconduct, which requires misrepresentation or concealment of an affirmative fact. There was no evidence suggesting the IRS’s deliberately lied or made false promises, and the court, while not condoning the IRS’s delay, concluded that it did not preclude collection. While the case was old, it was still within the 10 year SOL on collection (the opinion did note, however, that the taxpayer did not raise a possible abatement of interest claim, which would have potentially led to some consequence for the delay).

Another interesting part of the opinion is its discussion of how long taxpayers should retain records. The court took judicial notice of the fact that the taxpayer’s bank was closed and the FDIC took over as receiver (discussing as well the standard under federal rules of evidence for it to do so). Due to the bank no longer being around and his 2013 shredding of his 2006 tax records, the taxpayer claimed he could not prove with documents that he paid the tax. He testified that he was certain that he did. He recalled that in either 2007 or 2008 he went in person to the Santa Rosa IRS office and paid in full his 2006 liability. Given the taxpayer’s practice of not paying estimated taxes, filing tax returns with no or little payment, and waiting for IRS bills before paying, the taxpayer also had a bunch of years when he paid following IRS sending a balance due letter. IRS had record of those other years’ payments but no record of the 2006 payment.

The taxpayer justified his absence of documentary proof in part on IRS standards for retaining records. The opinion notes that the IRS has general standards for record retention. IRS states on its web page that there is no hard and fast rule for record retention: “the length of time you should keep a document depends on the action, expense, or event which the document records.” The IRS generally ties the discussion to records relating to proving an item claimed on the return and the general 3-year SOL on assessment, rather than proving that a taxpayer has paid and the 10-year SOL on collection. Yet this case is a good reminder that it is on the taxpayer to prove payment, and testimony alone in the absence of proof is likely not enough if IRS records do not reflect payment.

Paynter also raises some old CDP issues we have previously discussed, including whether issues of payment amount to questions of liability or collection, an issue that the Tax Court has not resolved (see footnote 9) and is relevant because in some circuits in collection cases the Tax Court is bound to the record from Appeals. At the end of the day, the Tax Court concluded that Paynter failed to prove his case under any standard.

One question that the opinion does not directly address is the IRS’s failure to meet the RRA 98 requirement for IRS to send taxpayers an annual reminder of a balance due. There is no specific remedy if IRS fails to comply with that requirement, though I suspect it may have helped Paynter if he had sought interest abatement and this seems to be precisely the kind of case Congress had in mind when adding that requirement.

Sixth Circuit Holds Potential Misconduct in CDP Hearing Does Not Give Rise to Wrongful Collection Action

In Agility Network Services v US the Sixth Circuit held that a taxpayer who alleged that Appeals botched its collection due process hearing could not bring a wrongful collection action against the IRS because the hearing did not arise “in connection with any collection of Federal tax.”

In this post I will summarize the court’s reasoning and offer some observations on its approach.


Agility Network Services involves a CDP case that did not go well. The owner of Agility Network Services (Agility Network) and her husband were employees of the company. Agility Network had overdue employment taxes; after the IRS filed a notice of federal tax lien, it requested a CDP hearing. After seven months (and according to the taxpayer only after it got Taxpayer Advocate involved because the Revenue Officer would not forward the case file), the hearing was scheduled for December 2012. Once the hearing was scheduled and held, the taxpayer did not like the manner in which it was conducted and the outcome:

[The Appeals Officer] refused to investigate the taxpayers’ assertion that they tried to make payments but that the IRS refused to accept them; [the Appeals Officer] misstated the tax code and Internal Revenue Manual while offering excuses for [the Revenue Officer’s] failure to process the taxpayers’ CDP request; Allen refused to discuss the taxpayers’ requested installment plan, reasoning that they did not make enough money to justify one; and Allen denied the taxpayers’ request to abate penalties. Furthermore, [the Appeals Officer] stated at the hearing “that she knew . . . [the Revenue Officer’s] actions were made with the genuine intent to help the taxpayers.” The taxpayers contend that this statement proves [the Appeals Officer] had an impermissible ex parte communication with [the Revenue Officer]. The hearing ended with the taxpayers having discussed only one issue of the many they had planned to raise.

In May of 2013 (about seven months after the first meeting and I think prior to the issue of a determination) Appeals scheduled a follow-up meeting. In July 2013, and pursuant to the taxpayer’s request, a new Appeals Officer met with the taxpayer. At the follow-up meeting, the taxpayer requested that IRS withdraw the NFTL and agree to a proposed installment plan. The new Appeals Officer rejected the request (and a request to record the meeting), though this Appeals Officer based his installment agreement rejection on the grounds that the taxpayer earned too much money rather than too little.

After the unsatisfactory second meeting, the taxpayer began a voluntary $5,000 month payment. It also brought an action in federal district court seeking a restraining order against the IRS to prevent enforced collection and sought damages under Section 7433 alleging that the Appeals conduct in both hearings amounted to wrongful collection action. The district court found that the Anti-Injunction Act prevented the restraining order and that the Appeals Officer’s conduct did not arise in connection with a “collection action.”

On appeal the Sixth Circuit quickly affirmed the lower court’s tossing of the restraining order request on the grounds that the Anti-Injunction Act prevented the request to restrain the government’s collection efforts.

The Sixth Circuit gave the Section 7433 issue some more attention. Section 7433 provides for damages for wrongful collection actions. As Appeals has become more involved with collection matters some taxpayers have unsuccessfully sought to use Section 7433 to recover damages for misconduct that arises in a collection case in Appeals. We have previously discussed this issue; see Keith’s post on the Antioco case Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement, which Stephen also discussed in a Summary Opinions post. In those prior posts, we noted that the district court in Antioco held that in a CDP case the Settlement Officer was not engaged in collection action but was rather reviewing the collection action. That review was not enough to bring Appeals’ alleged misconduct within the scope of a Section 7433 wrongful collection claim.

Agility Network likewise concludes that 7433 is not a remedy for alleged misconduct in a CDP hearing but has a more robust appellate court consideration of the issue. In deciding against the taxpayer, the Sixth Circuit explained that it its view Appeals’ conduct in the hearings relates to affirmative rights that a taxpayer has in the collection process, rather than the government’s collection of taxes:

The relevant question, then, is whether an IRS agent acts “in connection with any collection of Federal tax” when she conducts a CDP hearing. Under the most reasonable interpretation of the phrase, the answer is no. In common parlance, an IRS agent acting in connection with tax collection would be taking an affirmative step to recover money owed to the government. In contrast, a CDP hearing is a right bestowed upon a taxpayer, at the taxpayer’s request, to provide protection from abusive or unduly burdensome tax collection. The hearing does not help the IRS collect on a tax debt, but in fact impedes collection, at least temporarily, to the taxpayer’s benefit

To be sure the Sixth Circuit also acknowledged that it was possible to take a broader reading of the phrase “in connection with any collection of Federal tax” to include CDP proceedings:

Under this reading, any IRS agency action involving a person who owes a tax debt is “in connection with tax collection.” Under this interpretation, an IRS agent acts in connection with tax collection during a CDP hearing because, at that point, the IRS has already initiated the levy or lien process against the taxpayer.

It rejected that broader reading for two reasons: one, such an approach renders the language in the statute limiting the remedy to collection actions superfluous, essentially encompassing “almost everything IRS agents do. The agency exists to collect revenue, after all.”

Second, the Sixth Circuit cited the maxim that courts are to narrowly interpret exceptions to sovereign immunity, leading it to note that between two reasonable interpretations courts should opt for the one that leads to a narrower waiver.

Some Observations

I think this presents a closer case than perhaps the opinion reflects. The rationale the court uses to distinguish a CDP matter from collection action is a bit outdated. While a CDP hearing is certainly a taxpayer right that arises only if a taxpayer properly invokes the proceeding, it is a statutory right that all taxpayers enjoy in the collection process. Once invoked, Appeals has jurisdiction to compel IRS to refrain from collection and also to dictate the manner that the IRS collects an agreed and assessed liability. To argue that CDP is only an impediment to collection misstates the possible benefit that CDP is meant to provide to the government. It is not in the government’s interest to collect a tax when the IRS fails to ensure that it followed its statutory or administrative procedures.

Collection cases are the mainstay of the Appeals docket. Like it or not Appeals is part and parcel of the collection process. There is a functional partnership between Appeals and Collection. This is especially apparent in cases where the taxpayer requests a withdrawal of an NFTL, where it is in the taxpayer’s strong interest to get prompt review of the request.  It is clear in this case that Appeals’ delay in considering and deciding contributed to the taxpayer dissatisfaction.  Under CDP, Appeals is statutorily charged with ensuring that the collection action balances the need for efficient collection action with the taxpayer’s concern that the action be no more intrusive than necessary.  In a CDP hearing, especially in the context of considering the request to withdraw a notice of federal tax lien filing, Appeals’ responsibilities seem to directly relate to the IRS’s collection of taxes.

What Does “Prior Opportunity to Dispute a Liability” Mean?

In Keller Tank Services II, Inc. v. Commissioner, No. 16-9001 (Feb 21, 2017) the 10th Circuit upheld the Tax Court’s determination of “prior opportunity to dispute a liability.”  The Tax Court, in turn, upheld the IRS determination of this phrase in the Collection Due Process (CDP) regulations.  The 10th Circuit went through a Chevron analysis of the statute and the regulation in making its decision to uphold the regulation.  We have discussed this issue previously here, here, here and here.  The last link discusses in detail that Keller Tank is the first of three recent circuit court arguments by Lavar Taylor challenging the regulation.

The result here is disappointing for those of us hoping that the CDP process can provide a pre-payment forum for tax liabilities, usually a penalty, that do not have the benefit of the deficiency process and are not divisible.  For these liabilities, the decision in Keller Tank places the taxpayer in the unenviable position of having an Appeals Officer as the only person standing between them and a sometimes crushing liability for which they will never have the opportunity to litigate because paying several million dollars to satisfy the liability and the Flora rule is not a possibility.


The IRS asserted a penalty under 6707A against Keller Tank for engaging in and failing to report a listed transaction.  This case does not reach the merits of the penalty assessment and finds that the taxpayer cannot contest the merits in the CDP case.  The 10th Circuit correctly points out that the taxpayer still has an opportunity to contest the merits through a refund suit.  It does not mention that in many cases that opportunity is illusory because of the amount of money the taxpayer would have to pay in order to satisfy the Flora rule.  The amount of the penalty in Keller Tank is not so high that it presents a practical inability to pay; however, I have no idea if the amount, though not astronomically high, still exceeds the taxpayer’s ability to pay.

Section 6330(c)(2) describes the matters that can be heard at a CDP hearing.  Subparagraph (B) under that section provides that

“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.”

Treas. Reg. 301.6320-1(e)(3) addresses matters considered at a CDP hearing.  The regulation is primarily in Q&A format.  Q-E2 asks the question:

“When is a taxpayer entitled to challenge the existence or amount of the tax liability specified in the CDP notice?”

A-E2 answers that question in a long paragraph that includes the following statement:

“An opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.  An opportunity for a conference with Appeals prior to the assessment of a tax subject to deficiency procedures is not a prior opportunity for this purpose.”

The language of the regulation stating that the conference with Appeals satisfies the requirement of section 6330(c)(2)(B) formed the basis for the appeal.  The taxpayer argues that this language conflicts with the intent of the statute.  The IRS refused to allow the taxpayer to argue the merits of the penalty in the CDP hearing because it had a prior opportunity to address the merits of the penalty during the assessment phase although that opportunity did not include the ability to contest the assessment of the penalty in a pre-assessment judicial forum.  According to the IRS, that opportunity arose after the IRS issued a 30-day letter because the taxpayer submitted a written protest challenging the grounds for issuing the penalty and participated in a telephone conference, which resulted in Appeals sustaining the penalty.  The Tax Court agreed with the determination CDP by Appeals on this point which was the only point raised by the petitioner in the CDP request.  On appeal to the 10th Circuit, Keller Tank argued that the refusal to allow it the opportunity to raise the merits of the penalty assessment in the CDP process violated the goal of the statute and that the regulation impermissibly frustrated that goal.

The regulation creates a clear distinction between taxes governed by the deficiency procedures and those that are not.  A taxpayer with a liability covered by the deficiency procedures can have a pre-assessment conference with Appeals at which Appeals sustains the liability proposed by the Examination Division.  If the taxpayer does not receive the notice of deficiency, the taxpayer can raise the merits of the underlying liability in the Tax Court in the context of a CDP hearing because of the failure of the opportunity to go to Tax Court prior to the assessment due to the non-receipt of the notice of deficiency.  In this situation, the IRS must have mailed the notice of deficiency to the taxpayer’s correct address or the taxpayer could set aside the assessment.  Yet, Congress recognized that sometimes taxpayers did not receive the notice of deficiency and sought to give them an opportunity to have their day in court because of the non-receipt of the notice.

In contrast a taxpayer with a liability not governed by the deficiency procedures offered an opportunity to meet with Appeals prior to or after the assessment of the liability, receives no opportunity to have their day in court through the CDP process even though they previously had no opportunity to go to court to contest the merits of the liability.  For these taxpayers, the right to contest the liability through the refund procedure remains their only path to court.  The regulation acknowledges that taxpayers whose taxes are assessed through the deficiency process are not limited to only using the refund procedure while forcing the refund procedure on those taxpayers whose liabilities did not related to a tax assessed through the deficiency process.  The 10th Circuit and the Tax Court find that regulation reaches a logical result in interpreting an unclear statute despite the distinction it draws between the types of taxes.

To sustain the Tax Court decision, the 10th Circuit engaged in a Chevron analysis of the regulation.  It first looked at the language of the statute to determine if the language of the statute spoke to the precise question at issue and determined that it did not.  The 10th Circuit agreed with the Tax Court that the “otherwise have an opportunity to dispute” language in the statute was ambiguous and was not defined in the 1998 legislation creating the language or elsewhere in the Internal Revenue Code.  That determination allowed the Court to move on to step 2 of the Chevron analysis which looks at the interpretation of the statute by the regulation in question in order to decide if that interpretation is based on a permissible construction of the statute.  The 10th Circuit again agreed with the Tax Court that a reasonable interpretation of “opportunity to dispute” includes “a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.”  A factor influencing both the Tax Court and the 10th Circuit is the failure of Congress to simply say that a taxpayer who has not had a prior opportunity for judicial review will receive on in the CDP process.  No doubt, this is a strong basis in support of the decision.

The 10th Circuit opinion has a paragraph that attempts to support its determination using logic I cannot follow.  It suggests that accepting the taxpayer’s argument would promote similarly situated taxpayers to skip the conference with Appeals and wait until collection begins so they can go directly to court.  Few taxpayers would want to pass up an opportunity to resolve their problem at the lowest level in the cheapest way simply so they could argue a case before a court.  Taxpayer’s argument in favor of an opportunity to go to court does not minimize the importance of Appeals and does not undercut the importance of the informal conference.  To the extent the 10th Circuit relied on this logic to reach its conclusion, I think its based its decision on flawed reasoning.

After reaching its conclusion, the 10th Circuit doubled back to address arguments presented by the taxpayer.  Keller Tank argued that the regulation impermissibly limits the jurisdiction of the Tax Court through a regulation because the regulation limits the matters the Tax Court may hear.  The 10th Circuit finds that the regulation does not diminish the Tax Court’s jurisdiction but only limits what may be heard in the administrative process before the IRS in a CDP proceeding.  Because the limitation is on the administrative process and not on the Tax Court, even though the Tax Court is limited to addressing matters that may be raised in the administrative hearing, the 10th Circuit finds that the regulation does not directly limit the Tax Court’s jurisdiction.  Not only is this logic unsatisfactory but the opinion goes on to throw in an additional paragraph here noting that taxpayers have the ability to bring a refund suit without discussing the realities of this ability.

Next, the 10th Circuit addresses taxpayer’s argument that the regulation contains internal inconsistencies.  Keller Tank first argued that the regulation “is inconsistent because it precludes liability challenges at a CDP hearing even when the taxpayer failed to exercise its opportunity to dispute liability at the Appeals Office and was therefore not actually heard.”  Because the statute on speaks to “opportunity” and not to an opportunity the taxpayer exercises, the 10th Circuit finds that the regulation is consistent with the statute and it promotes the statutory purpose of encouraging taxpayers to meet with Appeals.  Keller Tank next argued the regulation was inconsistent “because it precludes liability challenges at a CDP hearing for some, but not all, prior administrative opportunities.”  Keller Tank’s argument here goes to the discrepancy between taxes arises under the deficiency process and those outside that process.  The 10th Circuit simply finds that the distinctions are not “unreasonable or arbitrary or that it is inconsistent to treat different administrative proceedings differently.”

One down and two to go

Arguments occurred within a short time in three circuits.  Taxpayers have lost the first but have two more opportunities.  If the arguments do not succeed, perhaps the judicial interpretations of the language in the statute will persuade Congress to fix the inconsistency between deficiency and non-deficiency process taxes and allow all taxpayer to have a day in court before they must pay.  Congress seemed to want that result in 1998 when it passed the CDP provisions.  If the courts cannot be persuaded that Congressional language allows that result, it is time to push for legislative change.  Because many, though certainly not all, of the people assessed penalties through the non-deficiency process are people with whom few legislators will be excited to assist, getting a legislative change may prove difficult.



Quick Follow Ups on Vigon v. Commissioner and Private Debt Collection


I recently wrote about an order in the case of Vigon v. Commissioner in which Judge Gustafson provided instruction to respondent’s counsel because of a failure to lay the proper foundation for a the summary judgment motion.  IRS Counsel took the instruction to heart quickly and requested a continuance for a trial scheduled for February 22, 2017.  The IRS now agrees that petitioner is not liable for the penalties at issue in the case and stated in its motion that it was in the process of abating the penalties.  The IRS further stated that it was in the process of releasing the liens.  This is a great result for a pro se taxpayer who did not initiate the arguments resulting in these concessions.  The Court granted the continuance but had a question for the IRS:

“We understand how collection issues under section 6330(c)(2)(A) become moot if collection activity ceases. It is less clear how a liability challenge under section 6330(c)(2)(B) becomes moot merely upon an announced concession, which would not seem to have any res judicata or collateral estoppel effect. Perhaps a CDP petitioner who makes a liability challenge that the IRS concedes is entitled to decision in his favor on the liability issues.”

So, the Court ordered the IRS to make an appropriate filing by March 24, 2017, and to explain in the filing how it provide adequate relief to the petitioner on the merits side of this case.

Private Debt Collection

I also recently wrote about private debt collection and wanted to provide a quick update.

The IRS recently released sample CP40 notice letter.  The letter alerts the taxpayer that their account has been assigned to a PDC.  The hope is that the letter will prepare the taxpayer for the call(s) from the PDC and keep the taxpayer from having concerns that the PDC is a scam artist.



Appeals Abuses Discretion in a Collection Due Process Case by Failing to Engage in Financial Analysis

In an order issued on January 24, 2017, in the case of Brown v. Commissioner, Judge Holmes declines to uphold the determination by a Settlement Officer because she did not engage in an analysis of the impact of the taxpayer’s monthly shortfall in income necessary to pay expenses as it related to the assets he had available to satisfy his outstanding tax liability.  The analysis in the case provides an important look at how at least one judge on the Tax Court looks at the duty of Appeals in reviewing a CDP case as well as how he calculates ability to pay in the context of someone with assets but a negative monthly balance sheet.  The decision does not mean that the IRS cannot require the taxpayer use the assets to satisfy the outstanding liability but does mean that in the CDP process Appeals must analyze the need for the asset in order to make ends meet in the future.  We have talked about abuse of discretion previously but the Brown case seems to place a higher, though not inappropriate, burden on the IRS that most other cases we have reviewed.  The approach also follows a similar path to the one taken by Judge Gustafson in in some of his recent holdings discussed here and here  and breaks from some older opinions that did not delve as deeply into a situation the IRS appeared to ignore.


The IRS determined that Mr. Brown was a responsible officer of Hudson Steel Fabricators & Erectors, Inc.  After going through the appropriate process, it assessed a trust fund recovery penalty against him of almost $200,000.  He engaged in an administrative appeal of the determination of the TFRP and lost.  Eventually, the IRS sent him a CDP notice which caused him to timely request a hearing.  He wanted to bring back up the merits in the CDP concerning his underlying liability for the TFRP but Appeals said he could not and the Court agreed.  Based on the information available in the order, nothing suggests that he had failed to receive a fair hearing on the issue prior to assessment or that he had a clear basis for overturning the assessment, as in a case Les discussed previously.  In addition to trying to seek to have another hearing on the correctness of the TFRP assessment, he also raised the issue that his account should be placed into Currently Not Collectible (CNC) status rather than have the IRS levy upon his assets.  The Court focused on the CNC issue and how Appeals should go about determining when someone qualifies for CNC status.

Though not quick to do so, Mr. Brown submitted to the Settlement Officer not too long after the CDP hearing a Form 433-A, also known as a collection information statement (CIS).  The Settlement Officer reasonably told him that if he wanted her to consider CNC as an option he had to give her the CIS so that she would have a basis for making a decision.  The CIS showed that each month his income was less than his allowable living expenses.  The Settlement Officer seemed to accept that the income and expenses on the CIS correctly stated his living situation; however, the ability to qualify for hardship status, a predicate to CNC designation, also includes the taxpayer’s assets.  A taxpayer could have a negative monthly cash flow but have a savings account with a million dollars.  The IRS would not, in those circumstances, stand back from collection just because of the negative monthly cash flow.

In analyzing Mr. Brown’s assets, the Settlement Officer found that he had equity in a retirement account that totaled nearly $70,000 and a whole life policy worth more than $20,000.  The inquiry does not, or should not, however, stop once the SO finds assets of value.  In order to determine if a hardship situation exists, the SO should consider other factors.  Judge Holmes went to two IRS regulations from which he pulled guidance regarding the situation in which a taxpayer has an asset but also has expenses exceeding current income.  Treas. Reg. 301.6343-1(b)(4)(ii) discussing hardship status provides that the SO could consider a host of factors including: age, employment status, employment history, medical expenses, earning capability, number of individuals the taxpayer supports as well as the necessary reasonable expenses.  Treas. Reg. 301.7122-1(c)(3)(iii) discussing effective tax administration offers in compromise gives examples of hardship even where a taxpayer could fully pay the liability.  The regulation gives an example of someone whose retirement account represented their only asset.  The regulation provides that if “liquidation of the retirement account would leave him without adequate means to provide for basic living expenses, that is hardship.

Judge Holmes says that his role is not to decide whether Mr. Brown’s circumstances satisfied the conditions of hardship but whether the SO abused her discretion in denying him the relief he requested in the CDP case.  He describes his review as constrained by the Supreme Court’s decision in SEC v. Chenery Corp., 332 U.S. 194 (1947).  We have discussed Chenery before here (in a post that links to several other posts discussing Chenery), but it does not get cited in many CDP cases by judges other than Judge Holmes.  Here, the SO’s determination simply stated that Mr. Brown had an ability to pay because of his assets.  The SO made no effort to determine if he would need those assets in order to cover the monthly shortfall of expenses over income.  Judge Holmes cites to the case of Riggs v. Commissioner, TCM 2015-98 in which the Court held in a non-precedential opinion that if a taxpayer makes a request for CNC status a part of the CDP hearing the SO “must determine whether or not there is financial hardship.”  (emphasis in original).  Here, the SO states Mr. Brown has an ability to pay but does not perform the analysis set forth in the Internal Revenue Manual which discusses whether enforced collection “would not cause hardship.”

Because she did not analyze what would happen if the IRS took away all of his assets leaving him with an income shortfall each month, the determination abuses the discretion given to Appeals which means that the Court will not sustain the determination.  Judge Holmes denied the summary judgment request filed by the IRS but stated that it did not know if Mr. Brown would prefer a supplemental hearing on remand or an entry of decision in his favor.  I discussed before the uncertainty of victory in a CDP case and Judge Holmes acknowledges that in the choices he offers to Mr. Brown.  In an order entered in the case of Stark v. Commissioner  Judge Holmes provided a significant discussion of the choices facing a CDP petitioner who succeeds in showing that Appeals abused its discretion in sustained a CDP Notice.  The petitioner must choose whether to allow the court to deny permission to levy in the CDP Notice and “win” the CDP case in Tax Court or have the case remanded to Appeals to try to work out a collection alternative.  Judge Holmes allows victorious petitioners to choose after counseling them on the pluses and minuses of their options.  Winning means that the IRS cannot levy until it issues another CDP notice and, as Judge Holmes points out, it is unclear if the language of IRC 6320(b)(2) “means the taxpayer isn’t entitled to another hearing if the IRS issues a new notice of lien or levy after we don’t sustain the first one…. To date, no court has answered this question, and we don’t do so here either.  We bring it up to highlight the potential risk to the taxpayer.”

The order here is important for anyone arguing a CDP case and seeking CNC status which is a high percentage of persons seeking relief in the CDP process.  The fact pattern presented here is quite common.  Many taxpayers, at least a high percentage of taxpayers coming into my clinic, have allowable expenses that exceed their income.  Many taxpayers with tax liability are at or near the end of their working careers and hoping to rely on their savings to assist them in retirement.  Almost anyone on social security, even those with the highest monthly amounts of social security which my clients rarely receive, can have allowable expenses that exceed their monthly social security payments.  Judge Holmes’ approach would shelter from collection savings set aside to supplement the social security payments to the extent the income from those savings does not cause the taxpayer’s income to exceed allowable expenses.  Practitioners who have not regularly been making this argument should be taking a copy of this order together with the sources cited by Judge Holmes into their CDP hearings but also citing the same material to the ACS employee who the taxpayer will encounter before the collection of the account reaches the point of a CDP hearing.  The order should also cause Appeals to take notice and give direction to its employees about their responsibilities in reaching the determination and it gives Counsel employees another lesson in the primer on summary judgment motions that Judge Gustafson’s recent orders have provided.