Court Blesses The Appointment of A Receiver To Sell A Taxpayer’s Personal Residence

It is not that often that the IRS will go after a taxpayer’s personal residence to satisfy a tax debt but it does occasionally happen. About a year or so in Principal Residences as Collection Target: TIGTA Criticizes IRS Practice I discussed how TIGTA had identified how the IRS pursued judicial lien foreclosure suits rather than administrative collection tools when it targets a taxpayer’s principal residence to satisfy an assessed liability. As I noted, there are differing procedures and statutory rules with respect to the administrative versus judicial collection path, including that before conducting the administrative seizure of a principal residence the IRS must obtain written approval from a federal district court judge that includes a more formalized consideration of whether the seizure would create a hardship.

In US v Mikulin, a taxpayer filed a motion in objection to the government’s motion to vacate his personal residence and appoint a receiver to sell that residence, arguing in large part that the TIGTA report showed that the IRS violated his rights by pursuing his residence via judicial collection rather than by administrative seizure. Mikulin sought relief from the prior order under Federal Rule of Civil Procedure 60(b), claiming that by pursuing a judicial path to going after his residence the government ignored his age and the hardship that he would experience if the IRS were able to sell his house.


In a brief opinion, a federal district court in Texas noted that the argument was brought too late, but it also addressed using the taxpayer’s attempt to use a TIGTA report in support of an affirmative request for relief. It noted that the “report carries no statutory or legal authority and is merely a report of an audit conducted by the Treasury Inspector General For Tax Administration.” In addition, Mikulin had expressed the view that TIGTA’s report was akin to an admission by the IRS that by pursuing a judicial remedy it acted contrary to his rights, but the opinion emphasized that TIGTA reports, other than the “management responses” within, do not reflect IRS policy.

Moreover, the court noted that even if the report suggested that the government should never foreclose on a personal residence  to satisfy a tax obligation, which it noted that it did not, Mikulin “cites no authority which accords the [TIGTA] report the force of law nor does he provide any evidence demonstrating how it would have changed the judgment obtained by the United States in this case.”

The court eventually granted the government’s request to appoint a receiver to sell the residence, which the government alleged had a value of over $1 million. In the meantime, the case reflects the differing requirements associated with judicial collection of residence, though it is not clear that there would be a different outcome of the government had pursued Mikulin’s house only via an administrative seizure.

It is perhaps worth a reminder that in its report last year TIGTA, echoing a prior TAS recommendation, suggested that IRS should work with Treasury to propose a legislative amendment that would “amend the law (I.R.C. § 7403) so that taxpayers are afforded the same rights and protections whether the IRS is conducting a Federal tax lien foreclosure or a seizure on their property”.  The report perhaps one day Congress will assist but as Mikulin shows that is of little solace to someone who faces a judicial collection suit that targets a personal residence.

And, as Keith has reminded me, the issue as to whether a judicial approach penalizes a taxpayer is more nuanced than the opinion and the taxpayer suggest. The failure by the IRS to seek administrative seizures probably benefits taxpayers more than it harms them. For example, the judicial route brings into play the Rodgers factors that applies to selling jointly owned property, which an administrative sale does not. (for a discussion of Rodgers see one of our many posts on the topic, such as this). And the taxpayer has the right to bring up the underlying liability. On the downside is that a suit brings more publicity potentially and the suit also allows the IRS the opportunity to obtain a judgment, which it will almost always (and should always) request if the sale of the property does not fully satisfy the outstanding liability. And an administrative sale might lead to a depressed sales price, because of the uncertainties of the “as is” title that the IRS gives in an administrative sale as well as the depression on the price that the right of redemption offers, a right that arises in administrative but not judicial sales.

Extending the Statute of Limitations on Collection

In a pair of recent cases, taxpayers argued unsuccessfully that before the IRS brought suit against them the statute of limitations on collection had expired.  We have written before about the difficulty in calculating the statute of limitations in collection cases and about the government’s penchant for bringing the cases close to the statute expiration period.  You can find earlier posts here, here, here and here.  If a taxpayer is uncertain whether the statute of limitations on collection has expired prior to the bringing of the suit, there is little downside to the taxpayer of putting the government to its proof regarding the statute of limitations.  The government almost always wins these cases because the lawyers in Chief Counsel and Department of Justice Tax Division do a good job at calculating the statute.  In the two cases I will discuss today, the government attorneys again calculated the time period correctly though different statute of limitation provisions governed each case.  In both cases the taxpayers raised as a defense to suspension of the statute the IRS failure to suspend collection when it should have.


In United States v. Sparkman, No. 5:21-cv-00788 (C.D. Cal. 2023) the taxpayer owed over $600,000 stemming from a Tax Court decision in 2005, Sparkman v. Commissioner, TC Memo 2005-136.  He substantially reduced his liabilities in the Tax Court case but still had a sizable liability which he did not pay.  Because of his outstanding liability and the inability of the IRS to collect on it administratively, the government filed a suit in May 2021 seeking to reduce the liability to assessment.

After the Tax Court decision, Mr. Sparkman appealed to the 9th Circuit and continued to seek redress in the Tax Court where there are just as many docket entries after the decision as before.  More importantly for purposes of this case, the IRS sent him a CDP levy notice in August 2006 and he timely requested a hearing.  The IRS issued a determination letter in March 2008.  Running on a parallel track was a CDP lien notice just a couple months later and a determination letter issued at the same time as the letter issued with respect to the levy.  He timely filed Tax Court petitions with respect to both determinations and the Tax Court issued decisions on both in December 2009.

In January 2012 he sought an installment agreement.  The discussion regarding the installment went on for some time.  The decision details all of the back and forth which principally centered around the view of the IRS that he should sell some property to pay down his debt.  In June of 2013 a deal was struck regarding an acceptable installment agreement amount and in January 2014, he began to make the payment.  In making the payments, Mr. Sparkman designated them to be applied to his 2007 liability which was assessed in 2013 after an audit.  This designation violated the installment agreement since it essentially meant he was not making payments on the liabilities covered by that agreement.  The IRS terminated the installment agreement in March 2016.

The IRS framed the issues as follows: 1) whether the CDP hearings and Tax Court cases suspended the statute of limitations on collection and 2) whether the installment agreement request and subsequent discussions also suspended the statute.  Mr. Sparkman argued that the IRS failed to honor his CDP request and engaged in illegal collection activities.  Without deciding if the IRS engaged in illegal collection activities, which it said was irrelevant, the court found that the CDP request and Tax Court case suspended the collection statute of limitations for the period stated by the IRS.  This was a relatively simple and straightforward calculation that really raised no new issues.

With respect to the installment agreement suspension, things get a little stickier as is normal with this basis for suspension of the collection statute.  Section 6502 suspends the statute for the period during which a proposed installment agreement is pending and for 30 days immediately following the termination of an installment agreement.  Treasury Regulation 301.6331-(4)(a)(2) provides that an installment agreement is pending when accepted for processing.  The court cited to “IRS Practice and Procedure” at 15.06[1] to find the three circumstances supporting acceptance for processing: 1) a request for an installment agreement is received before a case is referred by the IRS to the Department of Justice; 2) the request contains sufficient information for the IRS to decide if the proposal is acceptable and 3) the IRS has not returned the proposed installment agreement.  Mr. Sparkman said the installment agreement was not pending for the entire period because at some points in the discussion the IRS told him his proposal was unacceptable; however, the court finds that there was an ongoing negotiation for 546 days leading to the acceptance of the installment agreement.

This is murky water.  The court finds a period most beneficial to the IRS.  I cannot say that it is wrong but only that the concept of pending installment agreement is one that places a heavy burden on parties trying to nail down the statute of limitations.

A second case decided was decided not long after Sparkman.  The case of United States v. Colasuonno, No. 7:21-cv-10877 finds that the government timely filed a suit to collect based on the suspension of the statute of limitations caused by a bankruptcy filing.  The IRS brought this suit on December 20, 2021, seeking to reduce its liability to judgment.  Mr. Colasuonno has a substantial liability for Trust Fund Recovery Penalty and was successfully prosecuted in conjunction with the liability.  He filed a chapter 7 petition on July 24, 2009.  Because the TFRP liability is entitled to priority status no matter how old it is and because BC 523(a)(1)(A) excepts from discharge all taxes entitled to priority status, the bankruptcy had no ability to assist him in removing the TFRP liability.  Nonetheless, it suspends the statute of limitations on collection since the bankruptcy automatic stay prevents the IRS from pursuing collection which it is in effect.  He received a discharge in the bankruptcy case on June 8, 2011.  The discharge would lift the automatic stay with respect to collection action against Mr. Colasuonno though not necessarily against assets in the bankruptcy estate.

Similar to the argument made by Mr. Sparkman, Mr. Colasuonno takes the position that the IRS should not receive the benefit of an extended statute of limitations by virtue of the bankruptcy because it violated the automatic stay and sought to collect from him by filing a notice of federal tax lien after the filing of the bankruptcy petition.  The IRS argues that if it violated the automatic stay Mr. Colasuonno could bring an action against it with respect to the violation but that has nothing to do with the statute extension caused by the filing of his bankruptcy petition.  The court analyses the relevant statutory provisions and agrees with the IRS.  It finds that Mr. Colasuonno’s remedy for a stay violation is to bring a specific suit for an injunction and/or to recover damages caused by the violation but that he cannot use the stay violation to change the statutory calculation of the time of the suspension. Calculating the suspension of the statute based on the period of the bankruptcy stay, the court finds that the suit was timely filed.

I agree with the decision of the court here as well.  It is unfortunate for both defendants that they did not, or allegedly did not, receive the full measure of the stay on collection that they should have received by filing a CDP or bankruptcy case.  They have the right to be compensated for the IRS missteps but that right does not stop the clock on a suspension described by statute.  These cases point out the different actions by a taxpayer that can suspend the statute of limitations on collection as well as the conclusion that the suspension goes into effect whether or not the IRS complies with the reason for granting the suspension.

Court Invokes Aesop’s Fables In Denying Government’s Request For Injunctive Relief

Recently Keith and Marilyn Ames wrote a separate subchapter in Saltzman and Book IRS Practice and Procedure addressing a district court’s authority to grant the government’s request for injunctive relief. These cases often arise when there are multiple quarters of unpaid employment taxes. In these cases, in addition trying to reduce an assessment to judgement, the government has requested broad injunctive relief to ensure future compliance. If a taxpayer fails to comply with the terms of the injunctive relief, the government can seek judicial sanctions, including imprisonment.

In US v Olson a federal district court in Indiana denied the government’s request for injunctive relief, finding that the government had failed to make the case that relief was necessary or appropriate.


Olson involves Bradley and Shirley Olson and their plumbing businesses. In its complaint the government alleged that the Olsons had about $300,000 in unpaid employment tax obligations over an almost ten-year period. The Olsons failed to respond, and the government requested that the court enter a default judgement for the unpaid assessed tax.

The government also sought injunctive relief, asking the court to compel the Olsons to follow the law in the future, report regularly to the IRS on their compliance, and grant the IRS the right to periodically inspect their books and records.

The district court reduced the assessment to judgement but denied the request for injunctive relief. The government asked the court to reconsider, and the court denied the request.

In denying, the court began its opinion with a tale from Aesop: 

A Dog, to whom the butcher had thrown a bone, was hurrying home with his prize as fast as he could go. As he crossed a narrow footbridge, he happened to look down and saw himself reflected in the quiet water as if in a mirror. But the greedy Dog thought he saw a real Dog carrying a bone much bigger than his own.

If he had stopped to think he would have known better. But instead of thinking, he dropped his bone and sprang at the Dog in the river, only to find himself swimming for dear life to reach the shore. At last he managed to scramble out, and as he stood sadly thinking about the good bone that had been lost, he realized what a stupid Dog he had been.

It is very foolish to be greedy.

Aesop & Milo Winter, The Aesop for Children 96 (1919).

From Aesop to the Tax Code

As we have previously discussed (see, for example, Keith’s 11th Circuit Reverses and Imposes an Injunction Against a Corporation for Failing to Pay), Section 7402(a) gives district courts broad equitable powers “as may be necessary or appropriate for the enforcement of the internal revenue laws.” Under this statutory authority, the government has successfully obtained injunctive-type relief that has resulted in court orders compelling future employment tax compliance that is backstopped by an order requiring more regular taxpayer reporting so the government can keep close watch on any future missteps.

The Olson opinion acknowledges the statutory power, although its initial opinion on the matter focused on a slightly different statutory footing that addresses injunctive powers on third parties like preparers, a remedy that the government has also increasingly sought.

From there, the opinion discussed the standard in the Seventh Circuit to grant injunctive relief, looking to a balance of the harms test, considering the potential harm to the government, the public and the affected parties. In discussing that balancing test, the Olson court notes that the Seventh Circuit invokes the standards for injunctive relief under Federal Rules of Civil Procedure 65(b), which considers the following:

Under Rule 65, “injunctive relief is appropriate if the applicant demonstrates ‘(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.’”

Much of the discussion turns to the government’s allegations that absent an injunction, its remedies are inadequate. The court strongly disagreed, first noting that inadequate is not the same as ineffectual, but rather must be “seriously deficient as compared to the harm suffered.”

And on that standard, the complaint as well as a revenue officer’s declaration came up short:

Here, the Government argues that it does not have an adequate remedy at law because “the IRS’s efforts to bring the Olsons into compliance have failed and because the Olsons will likely continue to obstruct the execution of the federal tax laws through their non-compliance.” Maybe, but none of that proves an inadequate remedy at law. The Government has shown here its ability to calculate Defendants’ tax obligations and to obtain a judgment in that amount. There is no reason to believe the Government couldn’t do so later if it determined that Defendants continued to violate the tax laws.

The opinion distinguishes cases where there was an inadequate remedy stemming from a money judgement alone, looking to cases where the courts blessed injunctions that reached individuals who were peddling tax protestor schemes or who had set up a return preparer shop that specialized in bogus returns.

For good measure, the court sees its role differently than the government:

The Court sees no basis to exercise its discretion to issue the broad injunction requested by the Government. The Court does not read § 7402 as allowing the IRS to deputize the federal courts into its enforcement arm every time a taxpayer is delinquent. To do so would be a waste of this Court’s valuable time and resources. No matter the standard, then, the Government’s request for an injunction is denied.


The court noted that the government did a little better than the dog in Aesop’s fable as “it will keep its original bone—but it will be no more successful at grabbing the illusory bone in the river.”

Employment tax noncompliance is a major IRS compliance focus, and is a big part of the tax gap.  It is not surprising that the government views the equities differently than the district court judge.

We will keep an eye on this to see if the government appeals.

For readers who want to dig deeper on the issue of injunctions, we review the differing standards that courts have applied in government requests for injunctive relief in Chapter 15 of Saltzman and Book.

District Court Rejects Claim That Government Must Choose Either Administrative or Judicial Collection Path To Collect An Assessed Tax

Collection suits that the government brings are not rare, but it is much more common for IRS to collect on assessed taxes using its considerable arsenal of administrative powers. Offsets and levies comprise the bulk of enforced collection, and the IRS can also serve to protect its interest by filing a notice of federal tax lien.

Last month I took note of the case of US v Varner, a district court case out of the Northern District of Ohio. In that case, the government sought to collect a few million dollars of income taxes from an old (2003) assessment; there was also a considerable liability due to delinquent employment taxes. The taxpayer was a previously successful car dealer who had fallen on hard times.

In addition to bringing a legal action to reduce the assessment to judgment, the IRS had, prior to bringing the suit, levied on amounts owed to the taxpayer on promissory notes that two entities paid Mr. Varner each month.  The existence of this levy indicates that Mr. Varner had previously received his right to a Collection Due Process hearing and the opportunity it provides to go to Tax Court.

Varner argued that the tax law creates a “two-track system for the United States to collect a tax assessment. In his view, either the IRS may attach a levy or the United States may proceed in federal court, but it may not do both at once.” In essence, his argument was that the levy precluded the judicial collection action.

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To challenge the government’s suit, Varner filed an emergency motion asking the court to return the matter to the IRS Collection division, which would allow Defendant to administratively appeal the attachment of the levies, (he alternatively asked the court to order the government to comply with the prejudgment remedy procedures of the Federal Debt Collection Procedures Act).

In denying the motion, the court first brushed aside the government’s half-hearted attempt to argue that the Anti-Injunction Act barred the motion. The AIA, which bars suits to restrain the assessment or collection, does not typically act to bar a motion that a defendant brings in connection with a collection suit filed by the IRS. 

That conclusion led the court to focus on Varner’s main argument:

Defendant relies on a provision in the Internal Revenue Code providing that the United Sates may collect a tax assessment “by levy or by a proceeding in court.” In relevant part, that statute reads: “Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court[.]” I.R.C. §6502(a). Defendant reads “or” in this statute as exclusive, meaning that the United States may collect its tax assessment either by levy or in court, but not both.

After discussing how the word “or” can be ambiguous, the court discussed how defendant was relying on an SOL provision, not a provision addressing or curtailing how the government may collect.

And more substantively, the court addressed how administrative levy and judicial collection are not mutually exclusive:

Second, the Internal Revenue Code elsewhere provides the circumstances in which a levy may and may not attach. I.R.C. §6331(a). The IRS may place a levy where a “person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand.” Id. That provision continues, “No levy may be made” (subject to exceptions) where the taxpayer has pending a court proceeding “for the recovery” of taxes already paid. Id.§6331(i)(1). Active litigation to collect a tax, however, does not foreclose the IRS‘s ability to levy on property. Nor is the converse true. The United States may bring a civil action “[i]n any case where there has been a refusal or neglect to pay any tax, . . . whether or not levy has been made.” I.R.C. §7403(a). These provisions confirm that federal law enables the United States to attach a levy and to proceed in court to collect a tax assessment. These options are not mutually exclusive. Accordingly, Section 6502(a) uses “or” inclusively to allow the United States to employ both collection methods at the same time.


Varner wanted to get the matter back to Collection, and take advantage of the Collection Appeals Program where he felt he would have more luck with arguments based on his financial hardship. He also invoked the Taxpayer Bill of Rights and its right to appeal matters in an independent forum.

As the court noted, the right to pursue administrative appeals to collection actions is separate from the government’s power to use its judicial collection tools. The paths are distinct, and as the opinion notes, once the government attempts to foreclose on a lien or reduce an assessment to judgment a court is not going to compel the government to dispense with its right use the courts to facilitate a possible payment of an unpaid assessed liability.

Hall v. Meisner: An Overreach of State Tax Collection Activity

This week, guest blogger Anna Gooch of the Center for Taxpayer Rights returns with a post about a fascinating 6th Circuit case dealing with the seizure powers of states and the Constitution’s Takings Clause.  Anna has been coordinating the Center’s nationwide survey of state taxpayer rights as well as the Center’s current workshop series, Reimagining Tax Administration: State Tax Practices & Taxpayer Rights.  All of us tax folks who only focus on federal tax controversies should especially read on – state tax practice is fascinating!  — Nina Olson

Federal tax practitioners are frequently reminded of the awesome powers the United States is given as a super-creditor – federal tax liens apply to all of a taxpayer’s interest in present and future property, and the reach of levies is much more expansive than that of private creditors. With the strength of the federal government a seemingly ever-present concern for taxpayers (exacerbated by politicians and the media), the ability of state and local governments to wreak havoc on taxpayers’ lives can easily slip through the cracks. Perhaps due to balanced budget requirements and limited scrutiny from practitioners and oversight groups, state governments are free to exercise their power with impunity – usually. In one recent case, the Sixth Circuit held that a Michigan law allowing strict foreclosure in the case of overdue property taxes oversteps not only the U.S. Constitution, but also the limitations established by over 800 years of legal precedent.

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The four plaintiffs in Hall et al. v. Meisner et al. each owned property in the city of Southfield, Oakland County, Michigan. When each owner failed to pay the property tax due, the county initiated foreclosure proceedings pursuant to the Michigan General Property Tax Act. The county then conveyed the properties to the city for the amount of the overdue tax (plus penalties and interest). In turn, the city transferred the properties to a for-profit entity for a nominal amount. This entity then sold the properties at fair market value. At no point during any of these transactions did any of the plaintiffs receive a refund of the equity they had in their property. The General Property Tax Act permits this. When a Michigan government entity is the creditor, as it is in the case of property tax, the government can pursue “strict foreclosure,” where the government receives absolute title to the property without a sale. The plaintiffs then sued, claiming that this practice violates the Takings Clause of the 5th Amendment.

Before I discuss the court’s explanation of why Michigan’s actions here violated the Takings Clause, an explanation of the Michigan General Property Tax Act is warranted. I found that the process set out in the act is best understood with a timeline.

  1. March 1, Year 1: Overdue property tax assessed in Year 0 becomes “delinquent.”
  2. March 1, Year 2: The county may begin foreclosure proceedings. If the county chooses not to, the state may initiate the foreclosure instead.
  3. June 15, Year 2: The county (or the state) must file a petition for foreclosure. The property owner is notified of their right of redemption.
  4. March 31, Year 3: A judgment for foreclosure is entered, giving the county (or the state) absolute title to the property.

Assuming the county is the foreclosing entity, the state has right of first refusal to purchase the property at either fair market value or the value of the tax due, whichever is greater. If the state declined this right, the city or locality in which the property is located could purchase the property for the amount of the tax due. The entity that ends up owning the party, whether the state, county, or city, is then permitted to conduct a public sale of the property. The original property owner is never entitled to receive a refund of their equity in the property. 

The court found that Michigan violated the Takings Clause by writing the General Property Tax Act by “defining away” the property interest that the plaintiffs had as equitable title. By ipse dixit (shoutout to my high school Latin teacher), Michigan wrote the law in such a way that ensures that the Takings Clause does not apply. According to the state and the district court, “The foreclosing governmental unit – the County – had not obtained any surplus at all from its disposition of the plaintiffs’ homes, because it conveyed them (to the City of Southfield) for merely the amounts of their tax deficiencies.” Because the General Property Tax Act allows strict foreclosures when the government is the party that initiates the foreclosure, the equitable title to the property is transferred with the legal title when the county (or state) receives absolute title to the property. Thus, there is no remaining property interest to take. Citing the U.S. Supreme Court, the Sixth Circuit finds that “a State may not sidestep the Takings Clause by disavowing traditional property interests long recognized under the law.”

So, which traditional property interests did Michigan disavow? The court readily found the practice of strict foreclosure afforded to government entities violates hundreds of years of British and American legal principles. Beginning with the 12th century introduction of mortgages into European law, the court emphasized that throughout history, the unilateral elimination of equitable title was considered “an intolerably harsh sanction.”  Before the practice of foreclosure by sale became the standard, courts (and the drafters of the Magna Carta) recognized the importance of reimbursing a defaulting property owner for the loss of the value of the property to the extent the value exceeded the debt. One solution to this was (and remains) the right of redemption given to property owners. For European courts, a mortgage was just a mortgage, just as a debt is just a debt – there is no inherent right to additional equity that accompanies either.

American courts agreed with their European predecessors. Describing the history, the Hall court writes that “American courts were uniformly hostile to strict foreclosure” where absolute title was awarded to the creditor, citing cases that found the practice “unconscionable” and with “no appropriate place” in a legal system where a default on a mortgage or debt does not convey legal title to the creditor. To satisfy the competing interests of the creditor’s interest in its security and the landowner’s equitable interest, American courts – including those in Michigan — almost uniformly adopted foreclosure by sale, which was generally required to be public. The practice of foreclosure by sale extended not only to mortgages, but also to tax debts. The U.S. Supreme Court firmly agreed with this position. Holding that a creditor is entitled only to the value of the debt owed, “a tax collector had ‘unquestionably exceeded his authority’ when he had sold more land than ‘necessary to pay the tax in arrear.’” Put bluntly, “According to the long-settled rules of law and equity in all the states whose jurisprudence has been modelled upon the common law, legal title to the premises in question vested in the creditor upon the debtor’s default, yet the landowner still held ‘equitable title’ to the property.”

Though the Hall court does not discuss federal foreclosure procedures, it is important to note the difference between the government foreclosure process in the Michigan Property Tax Act and that in federal law. The law governing IRS foreclosures and the proceeds from those foreclosures conforms with the centuries of European and American law discussed in this case because it requires that the IRS return any remaining equity to the taxpayer-owner. Moreover, it mandates that the IRS take additional steps before allowing seizure and sale.  Both the Internal Revenue Code and the IRM provide that in the event that there are excess proceeds from the sale, those proceeds should either be returned to the property owner or given to junior creditors, whoever is entitled to them under the applicable state law. This is the key difference, and one that protects taxpayer rights in a way that the Michigan law does not. Regardless of whether the IRS chooses to pursue an administrative foreclosure or a judicial foreclosure, there are several steps that must be taken before the action can begin. Indeed, foreclosure must be a last resort for the IRS where other collection mechanisms have failed. Christine discusses what proving this involves here. Additionally, the IRS must give notice not only to the property owner, but also to those who occupy the property. The IRS’ procedures for initiating and conducting a foreclosure sale are not perfect, as discussed by the Taxpayer Advocate here, but they are in line with centuries of law designed to protect property owners and their equitable interest in their property.  

Equitable title arises before a sale or other transfer; in not holding a public sale, Michigan ignores rather than extinguishes equitable title when the government initiates foreclosure proceedings in response to unpaid tax debt. Internationally, there is a rich history in this area, with near unanimity in the conclusion that strict foreclosure improperly discards the owner’s equity in their land. Michigan’s General Property Tax Act and the lawsuit that followed are just one example of the power that state governments have when collecting tax debts and the importance of advocacy to keep this power in control and to protect taxpayer rights at the state and local levels.

Consequences of the (Fake) Notice of Intent to Levy

At the recent Fall ABA meeting there was a panel discussing Collection Appeals (which Christine was a panelist on). A discussion arose about the purpose of the CP504 “Notice of Intent to Levy,” since it is not a “real” notice of intent to levy for IRC § 6330 purposes. It is, however, a “real” notice of intent to levy for IRC § 6331(d) purposes… but what is the distinction, and when does it matter?

I have historically looked at the CP504 as little more than an IRS scare tactic strongly encouraging voluntary payment. My view has since changed, thanks in part to the ABA meeting. In this post, I’ll talk about the importance of the CP504 and why the language on the notice does such a bad job of explaining what actual legal consequence it carries that it almost shouldn’t carry legal consequence at all.

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This is not the first time Procedurally Taxing or the tax community at large has weighed in on the problems of the CP504. Keith posted about how misleading the notice is back in 2016. The main issue Keith raised was that the CP504 misleads people into thinking that if you don’t respond to the CP504 Notice the IRS can levy on things that it cannot levy on (yet).

In other words, it misleads people.

The IRS heard Keith’s complaint, and admirably took some steps to remedy the issue by changing the language of the CP504 Notice a few years later. Keith posted about this small step forward with a copy of the new CP504 Notice back in 2018.

Flash forward to present day, and a newly formatted CP504 Notice…

I don’t exactly know what decisions were made, but we appear to be back in the bad old days Keith had originally lamented. My clients routinely receive CP504 Notices like the one here. The offending language is exactly what Keith had highlighted before:

Consequences If You Don’t Pay Immediately

We may levy your income and bank accounts, as well as seize your property or rights to property if you fail to comply. Property includes wages and other income, bank accounts, business assets, personal assets (including your car and home), Social Security benefits, Alaska Permanent Fund dividends, or state tax refunds. [Emphasis in original]

Now I am but a humble tax lawyer and professor, but in reading this I can imagine someone concluding that failing to pay the IRS immediately upon receiving the CP504 means that the IRS could levy their income and bank account. Those are the bolded terms, after all. However, because I also know that to be untrue (the IRS cannot levy on my bank account and wages if I don’t respond to the CP504), I have tended to read the notice as being little more than a scare tactic and carrying no real legal consequence. My misunderstanding about the CP504’s consequences are in no small part because the consequences the CP504 focuses on so boldly are incorrect.

Actual Legal Consequences

But the CP504 actually does carry important consequences, such that it is a letter you should actually pay close attention to. The consequences it carries are so simple, it is a shame that the letter doesn’t really highlight them:

First, the CP504 is the notice that allows the IRS to levy on certain property prior to offering a CDP hearing. For my clients that is almost exclusively their state tax refunds. The CP504 mentions this in very small print at the bottom of page 2. The full list of pre-CDP Notice levy property is at IRC § 6330(f). I always knew the IRS could levy on state tax refunds prior to giving a CDP hearing, but admittedly never really considered the CP504’s role in that process.

Second, and generally less importantly, the CP504 notice bumps up the “failure to pay” rate from 0.5% per month up to 1%. See IRC § 6651(d). This is generally less important for my clients because the maximum amount of penalty cannot exceed 25% in the aggregate, and a lot of very late tax years hit that mark quickly. Also, most of my clients are able to settle their tax debts with an Offer in Compromise, such that penalties are irrelevant.

With Legal Consequences Comes… Legal Consequences

So now, despite the CP504 Notices best efforts, we have a clearer idea of what the CP504 Notice actually does. But what happens if the CP504 Notice is defective? Because it serves an actual, legal purpose, defects may carry actual legal consequences.

As Keith noted in his prior post, the IRS used to combine the IRC § 6331(d) notice and IRC § 6330 CDP opportunity into a single letter. Now those two statutorily required notices are “spread” across two letters. This may be a self-inflicted wound by the IRS. For one, an extra letter adds real costs to the IRS: both the 6331(d) and 6330 notices are supposed to be sent certified. Arguably having two (required) letters instead of one essentially doubles the IRS’s chances of screwing up.

Possibly, the IRS could argue that the current IRC § 6330 letter (usually, the LT11) also meets and incorporates the IRC § 6331(d) requirements, such that it current practice is really a belt-and-suspenders approach. In other words, a bad CP504 letter would be “fixed” by the later LT11 letter. I don’t know that this argument has ever been raised. But even if it was, it would certainly not prevail for levies that precede the LT11 (for example, state tax refunds). Accordingly, the issuance of the CP504 Notice remains worth looking into.

For a CP504 Notice to meet the IRC § 6331(d) requirements it must be sent (by registered or certified mail) to the taxpayers last known address no less than 30 days before the levy. I somewhat doubt that any such letter that isn’t sent certified/registered would be considered invalid. (I couldn’t find any freely available cases, but U.S. v. MPM Financial Group, Inc. (2005 WL 1322801, at *4 (E.D. Ky. May 27, 2005) aff’d, 215 F. App’x 476 (6th Cir. 2007) makes that point. The real issues are timing and address concerns.

Beginning with the last known address: this has primarily been an important topic on deficiency notices for some time (see posts here and here, among others). There is always a chance (perhaps a significant chance, given the IRS’s IT infrastructure) that the IRS will send a notice to the wrong last-known address. In such a case if the taxpayer doesn’t otherwise have actual knowledge of the notice, it should invalidate the CP504 Notice from serving its IRC § 6331(d) “notice” function.

What happens after a defective CP504 Notice has been mailed may be interesting. If the IRS levies on your state tax refund you will thereafter get a “Notice of Intent to Levy” under IRC § 6330. In my experience, a lot of time the IRS will send a CP504 Notice well in advance of actually taking any other collection actions, such that they may have had the wrong address in their file for the CP504 Notice, and then have corrected it by the time of the actual state tax levy.

If the state tax refund levy was improper because there was no valid IRC § 6331(d) notice preceding it, arguably you should be returned the state tax refund proceeds. That, at least, is the argument I’d make in the CDP hearing: the IRS plainly did not follow “the requirements of any applicable law or administrative procedure” in taking the refund. Accordingly, you should get it back: a very important potential remedy, given the limitations on refund jurisdiction in Tax Court. This matters enough to many of my clients (Minnesota income tax returns have some lucrative refundable credits) that a detailed review of the CP504 Notice validity is warranted.

My Plea: Make the Letter Useful

Again, the CP504 really only carries two legal consequences: (1) precursor to levy on very specific property (that might not matter at all to people in states without an income tax) and (2) increase the failure to pay penalty rate. If the goal of the notice is to inform people about the legal consequences of being issued a CP504 notice it does a tremendously bad job of it. Instead it reads like a scare tactic.

Perhaps this serves a useful function for the IRS in getting some people to voluntarily pay, but I think it comes at a reputational cost, and scares people into sub-optimal resolutions. A lot of my clients receive state tax refunds each year (particularly state property tax refunds) which they count on. A lot of my clients also are very clearly “can’t pay” candidates for an Offer in Compromise or Currently Not Collectible status.

The IRS’s mission isn’t simply to “get the most money” out of people. If it was, then the CP504 Notice would probably be justified. Rather, the IRS’s purported mission is to “Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities[.]” It is hard to see a misleading letter as “helping them to understand,” and I’d say the CP504 is an example of straying from that mission.

TIGTA’s Annual Review of CDP Processing     

It’s the time of year when the Treasury Inspector General for Tax Administration (TIGTA) starts producing the annual reports required of it by the Restructuring and Reform Act of 1998.  It recently produced its report regarding the Collection Due Process program.  The report is short. 

To produce the report, TIGTA looked at a sample of CDP and Equivalent Hearing cases designed to produce a picture of CDP performance with a 95% accuracy rate.  This year it reported that in FY 2021 there were 28,667 CDP and Equivalent Hearing cases closed.  It sampled 91 of those cases finding that “Appeals complied with most of the I.R.C. and Internal Revenue Manual 8.22.4, Collection Due Process Appeals Program (May 12, 2022), requirements for processing hearing requests.”

The one area where TIGTA dinged Appeals, an area where it has dinged Appeals before and we have discussed before, here, here and here, concerned the statute of limitations on collection (CSED).  TIGTA found that in 20% of the reviewed cases the IRS got the CSED wrong.  In 10 of the cases it got the CSED wrong in a way that incorrectly extended the statute of limitations.  Based on this sample, it projected that 3,233 of the CDP and Equivalent Hearing cases closed in 2021 would have incorrect CSED in which the IRS sought to collect from taxpayers after the CSED expired.  This is way too high an error rate and it’s not the first time a high CSED error rate has been reported.  The IRS has got to learn how to calculate the CSED.

read more…

TIGTA found that in 8 cases in its sample the IRS miscalculated the CSED in  a way that wrongly reduced the period the IRS had to collect.  It extrapolated that this meant 2,586 of the CDP cases closed in 2021 had the CSED shortened.  While shortening the CSED does not imping on the taxpayer rights of the individual taxpayer, it does mean that collectively the taxpayers of the United States may not have as much collected from people who owe.

Calculating the CSED is hard with the exceptions that currently exist and the way they operate.  If the IRS cannot get this right – and it has demonstrated over a relatively long period of time that it cannot – perhaps Congress should look at simplifying the process.  The most obvious place to simplify it would be to do away with the really confusing extension related to installment agreements.  Eliminating that statute extension would probably bring the IRS error rate down significantly but TIGTA does not provide us with an analysis of the mistakes that it found.  Had it done so, it would have provided the IRS and the public with a better roadmap for pursuing success.

TIGTA found that Appeals correctly classified CDP and Equivalent Hearing requests; however, it did so based on the criteria published in the IRM and not based on case law.  TIGTA does not address cases in which a taxpayer sends in a CDP request after the 30 day period based on a good excuse or sends the CDP to the timely but not to the office requested by the IRS.  Because it does not look for these types of cases, TIGTA misses an opportunity to assist the IRS in updating its outdated IRM provisions.  It audits based on what the IRS says and not what the IRM should say.

TIGTA also does not audit the CDP letter which does a poor job of advising taxpayers of their rights.  It might consider in future years looking at why the uptake rate of CDP cases is so low and how that relates to the notice received by taxpayers.

For this year we know that the Appeals, and the IRS generally, struggles with the CSED.  Looking for ways to fix that other than continuing to point to IRM compliance might provide an overall benefit to the system.

Prior Opportunity and Other Collection Due Process Information

At the Court Practice and Procedure committee during recent ABA Tax Section meeting there was a panel on Collection Due Process (CDP.)  The panel put up some statistics on CDP from a few years ago that I will put into this post.  It also discussed a 15 year old case precedential CDP case, Perkins v. Commissioner, 129 T.C. 58 (2007) to highlight the narrow path it presents for obtaining a hearing on the merits of the underlying tax in contrast to most prior opportunity cases.  The panel also discussed the very recent case of Jackson v. Commissioner, T.C. Memo 2022-50 regarding the issue of variance in CDP cases.  In addition to providing the statistics, I will discuss the two cases.


The first slide depicts the number of CDP cases filed in the past two fiscal years:

The second slide provides data from 2018 regarding the percentage of taxpayers who make CDP requests:

The third and fourth slides provides information about the taxpayers most likely to make CDP requests:

In addition to discussing characteristics of typical CDP petitioners, the panel discussed the narrow path to getting the Tax Court to look at the merits of an assessable penalty provided by the Perkins case.  As we have blogged about in some depth, the Tax Court takes the view that having the opportunity to go to Appeals counts as a prior opportunity for purposes of determining if a taxpayer may raise the merits of the underlying liability in a CDP case.  Here is a link to a post discussing prior opportunity and linking to several other posts on this issue.  The concern arises regularly in assessable penalty cases such as the three cases Lavar Taylor took to the circuit courts and discussed in posts found in the linked post; however, it arises in other contexts as well. 

I find it unsatisfactory that a visit to Appeals qualifies as a prior opportunity.  Taxpayers had that type of opportunity prior to the passage of the CDP legislation.  Why would Congress have passed a statute giving taxpayers an opportunity to contest the merits of their liability that they already had?  The tenor of the statute seemed to be one of a broad exception to the Flora rule but which has now been interpreted to create a very narrow exception to the Flora rule and one which is almost impossibly narrow of the case of Lander v. Commissioner, 154 T.C. No. 7 (2020) is taken to its logical extreme since every taxpayer who does not receive their notice of deficiency has the opportunity to seek audit reconsideration.

A long introduction to reach the narrow exception provided by Perkins for obtaining a merits hearing in a CDP case.  In Perkins the IRS sent a math error notice and Mr. Perkins did not respond within 60 days allowing the math error assessment to stand without requiring the IRS to send a notice of deficiency; however, he appealed the increase in a letter that was forwarded to Appeal. While the case was pending in Appeals, the IRS sent a notice of intent to levy and he requested a CDP hearing in which he sought to contest the merits of the assessment.

Before Mr. Perkins had his CDP hearing, Appeals held a hearing on his original request treating it as a request for abatement and denying the request. In his CDP case Appeals declined to hear his merits request again stating he had a prior opportunity to contest it.  The Tax Court held that because his first request for an Appeals hearing was still pending at the time of his CDP request he had not had a prior opportunity.  The panelist at the ABA took the position that the same situation that faced Mr. Perkins could occur in other setting, such as assessable penalties, if the appeal of the merits of the assessable penalty was still pending at the time the taxpayer received the CDP notice.  Given the delays at Appeals caused by the pandemic, the chance that Appeals might take a long time to resolve an administrative appeal of an assessed liability may exist now to a greater extent than might ordinarily be true.

I don’t know how often collection of the tax gets out in front of an administrative appeal on the merits of an assessed liability.  Keeping Perkins in mind for those situation is important but may provide a benefit only in rare situations.

In the Jackson case the Court granted a summary judgment motion filed by the IRS.  In the Jackson case the taxpayers did not remit full payment with the return and the unpaid balance was high enough that the IRS filed a notice of federal tax lien (NFTL.)  The Jacksons did not file a CDP request in response to the NFTL.  They sought an installment agreement which the IRS rejected after which it sent a notice of intent to levy.  They did request a hearing in response to this CDP notice.  Petitioners sought an installment agreement in the CDP hearing; however, the Settlement Officer informed them that because they had failed to make necessary estimated tax payments their lack of compliance rendered them ineligible for this relief.  Appeals issued a notice of determination sustaining the proposed levy.

In Tax Court petitioners continued to seek an installment agreement but also abatement of interest and penalties.  The Court viewed this additional request as a variance from the issue raised in their CDP request.  It pointed to its prior decisions requiring taxpayers to raise issues with Appeals if they wanted to raise them with the Tax Court:

This Court considers a taxpayer’s challenge to an underlying liability in a collection action case only if he or she properly raised that challenge at the administrative hearing. Giamelli v. Commissioner, 129 T.C. 107, 115 (2007). An issue is not properly raised at the administrative hearing if the taxpayer fails to request consideration of that issue or if the taxpayer requests consideration but fails to present any evidence after receiving a reasonable opportunity to do so. Id. at 115-16; Gentile v. Commissioner, T.C. Memo. 2013-175, at *6-7, aff’d, 592 F. App’x 824 (11th Cir. 2014).

The Petition in this case appears to assign error to respondent’s assessments of section 6651(a)(2) additions to tax and statutory interest for the years in issue. However, respondent asserts that petitioners never challenged their underlying liabilities at the CDP hearing, and we agree. The record of the CDP hearing includes no evidence that petitioners challenged their liability for the additions to tax or sought an abatement of interest. Neither petitioners’ Form 12153 nor the attached cover letter references additions to tax or interest. Furthermore, SO Melcher’s case activity record indicates that Mr. Bolton specifically disclaimed a challenge to the assessments in issue during their telephone conference. According to SO Melcher’s notes, the only issue Mr. Bolton raised during their telephone conference was the rejected installment agreement. Petitioners have not set forth any evidence suggesting otherwise.

The Jackson case does not raise new issues. It merely serves as a reminder to raise all issues when requested a CDP hearing.