How Does the Balancing Test in the Collection Due Process Statute Work with the Variance Test in the Regulations?

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The recent case of Schumacher v. Commissioner highlights the balancing test and the variance rule at play in Collection Due Process cases.  By the time Mr. Schumacher settled on what might have been a winning argument in his case, the door to relief may have closed under the variance test but remained open as the court balanced the collection concerns. Because Mr. Schumacher did not provide enough information to allow it to find the collection action too intrusive, the Tax Court granted the summary judgment filed by the IRS.  When so many requests for CDP relief come from unrepresented taxpayers like Mr. Schumacher who do not really understand the process, the outcome demonstrates the problems of self-representation at the time of filling out the request for CDP relief and in following through on arguments.

The case also serves to put practitioners on notice of the requirement of the CDP regulation that an issue is not properly raised if the CDP request does not seek consideration of it or if the taxpayer does not follow through regarding that issue after being given a reasonable opportunity to do so. Finally, the case highlights the tension between the requirements in the regulation that the taxpayers raise all arguments in the request with the statutory requirement that the proposed collection action balance need for efficient collection of taxes with the legitimate concern of the taxpayer that any collection be “no more intrusive than necessary.”  The balancing test may create opportunities to challenge the IRS determination and to raise arguments not clearly raised in the request for a CDP hearing. The balancing test perhaps has greater meaning in lien CDP cases where fewer obvious bases for relief exist.


Mr. Schumacher did not file a return for 2007.  Eventually, the IRS prepared a substitute for return and sent a notice of deficiency.  He contested the notice by filing a Tax Court petition and obtained some reduction of the liability in a decision of the Tax Court issued by bench opinion.  The decision of the Tax Court gave the IRS the right to assess the amount of tax determined by the Court.  After assessment and a series of notices that did not result in payment, the IRS filed the notice of federal tax lien and sent Mr. Schumacher the appropriate CDP notice after the lien filing giving him the opportunity to discuss with Appeals whether the filing of the lien notice best served to collect the outstanding tax at that point.  He filed a CDP request seeking to contest the filing of the notice of federal tax lien.

CDP lien cases give the taxpayer the opportunity to raise all of the normal collection options such as currently not collectible, installment agreement, offer in compromise, delayed payment, etc., and give the taxpayer the potential right to litigate the merits of the liability or innocent spouse status.  CDP lien cases also require appeals to verify the procedural correctness of the IRS actions to that point and to balance the filing of the notice of federal tax lien with the legitimate concern of the taxpayer that any collection be “no more intrusive than necessary. Lien cases, however, present a different circumstance than levy cases because of the generally passive nature of the lien and the protections it provides in maintaining the status quo vis a vis certain assets.  The filing of the notice of federal tax lien does not threaten any specific taking of taxpayer’s property but just puts the world on notice that the taxpayer owes the tax.  What is the appropriate remedy for a taxpayer who does not want the IRS to put the world on notice that the tax is due?

Mr. Schumacher could not use the CDP process to litigate the merits of his tax liability because he had already done that.  He did not have an innocent spouse claim apparently.  If you do not think the IRS did anything wrong procedurally, you do not seek to litigate the merits or an innocent spouse claim, requesting a CDP hearing in a lien case presents limited options for Appeals and the Court to consider as an alternative to an action that simply perfects the federal tax lien vis a vis certain creditors.  Mr. Schumacher did not offer Appeals much to work with in the filing of his Form 12153.  He asked for two things: 1) that he could not pay the tax and 2) that the lien be “subordinated” because he owed child support.

Assuming that Mr. Schumacher could not pay the tax upon a calculation of his financial circumstances, the CDP lien proceeding does not offer much relief.  The IRS is not proposing to actual take anything from him but merely to perfect its lien.  Without more, this type of argument in a CDP lien case has little chance of success.  It did not succeed.

Subordination is a viable option with a notice of federal tax lien has been filed if the taxpayer seeks to borrow money that could lead to satisfaction of the tax liability.  IRC 6325(c) describes the circumstances that allow the IRS to subordinate.  Basically, the fact that he owed child support will not support a subordination request.  The notice of federal tax lien, in and of itself, will not interfere with his ability to pay child support.  Each month as he earns money, he can spend that money however he wants.  A lien does not prevent a taxpayer from receiving wages or other payments in the way that a levy would and the lien does not hinder the taxpayer from spending it.

Having made two arguments in the CDP requests that were losers and having not responded to the Appeals employee’s request for additional information, it is not surprising that a determination letter was issued sustaining the filing of the notice of federal tax lien.  While Mr. Schumacher may not be particularly good at filing tax returns or responding to IRS requests for information, he is good at filing documents that preserve his rights to contest the tax action.  He timely filed a Tax Court petition based on the determination letter.  In the Tax Court petition for the first time he begins to articulate an argument that actually could get him relief from a notice of federal tax lien.  He states in his petition that the filing of the notice of the lien allowing the world to know about his tax problems was “an unnecessary burden upon… [his] search for gainful employment…”

Now he has a potentially winning argument.

Even though Mr. Schumacher failed to put this argument on the Form 12153 requesting a CDP hearing has he missed the boat or does the statutory requirement for balancing contained in 6330(c)(3)(C) provide a separate basis for relief?  He received a second chance to raise the argument concerning the effect of the lien at the administrative level because the IRS joined with him in requesting a remand based on uncertainty about whether he received the notice of hearing. In many CDP cases because the IRS will consider an argument a taxpayer fails to mention in the original request even though nothing in the regulation requires it to do so.  Unless the Appeals employee handling the case provides explicit insight in the determination that the consideration of an item not brought up in the CDP requests comes because of the balancing provision, knowing whether this consideration resulted from balancing or administrative grace becomes difficult. It is one thing for the IRS to administratively allow a taxpayer to raise a new argument late and consider it; it is another thing to argue to the Court that you have the right to do so.  As a side note the Appeals employee did place Mr. Schumacher into currently not collectible status as she looked at his case on remand.  So, he did receive some form of relief just not relief from the filing of the notice of federal tax lien.

In the remand hearing Mr. Schumacher did make statements about the difficulty he was having finding a job and the effect that the notice of federal tax lien might be having on his job search.  The filing of the notice would lower his credit score and that score could be a factor employers would consider.  The existence of the notice would stop him from obtaining certain types of employment such as employment requiring a security clearance or employment as a financial advisor but he did not get specific about the link between his job search and his failure to obtain a job.  His lack of specificity makes it difficult for the Appeals employee to consider his concern either in the balancing of the harm or in allowing him to raise a new argument exercising administrative grace. In the supplemental determination letter, the Appeals employee again sustained the filing of the notice of federal tax lien as an appropriate collection action and once back in Tax Court the IRS moved for summary judgment.

In ruling for the IRS on the motion, the Court looked to his original request for CDP relief that failed to mention lien withdrawal.  It pointed to the regulation that required him to notify the IRS of the basis for relief he wanted and his failure to raise this in his request.

Judge Buch first addressed the lien subordination issue and found that Mr. Schumacher did not pursue that issue during his CDP hearing.  Therefore, he determined that lien subordination was not properly raised at the CDP hearing.  (As a side note and to repeat what I mentioned above, it is almost impossible to imagine how subordination would apply based on the information he provided.  I think Mr. Schumacher simply chose the wrong term because he did not understand subordination.)

Next, the judge looked at whether withdrawing the lien was a viable remedy that should survive the IRS motion for summary judgment.  In doing so he looked at the requirements of Tax Court Rule 121(d) regarding summary judgment.  It requires a genuine dispute yet Mr. Schumacher basically argued that he should not be required to prove a negative, viz., he should not have to argue specific facts about the impact of the notice.  Yet, that is precisely what he needed to do.  It is possible to show that a notice of federal tax lien can prevent you from getting a job in your field.  If he had shown that, he would have had a chance even though he did not originally raise this argument; however, he chose not to do so.  In failing to offer specifics about the impact of the notice, he failed to show the IRS abused its discretion in leaving in place the notice of federal tax lien.

While the variance argument existed as a possible way to dispose of this issue, the Court appears to have given him a fair opportunity to raise it after his initial failure to do so.  He ultimately loses the case not because of the latest of his bringing the argument but because of his failure to support the argument.  His failure to do may have resulted from a lack of facts but it also may have resulted from an inability to understand the importance of the facts he needed to marshal and why.   If you want the lien withdrawn, a normal request in a CDP hearing stemming from the filing of the notice of federal tax lien, you must pay careful attention to the bases for withdrawal offer in IRC 6323(j) and tailor your arguments to one or more of those bases.  He could not see how to do that and therefore failed.


  1. Keith informs us of a “variance rule” in CDP regulations that had escaped my notice for nearly 10 years. Yet I take solace in the fact that the announced “variance rule” does not exist.

    A CDP hearing requester is not required to raise all his issues in his CDP hearing request for three reasons:

    1. The law does not require him to do so. He need only “state[s] the grounds for the requested hearing.” I.R.C. § 6320(b)(1). If he does so, then the CDP requester may “raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy.” I.R.C. § 6320(c)(2)(A). The “grounds” for wanting the hearing are not identical to the “issue[s]” that relate to the unpaid tax or the collection action.

    2. The Treasury Regulations do not require him to do so. The regulations only oblige the CDP requester to state “[t]he reason or reasons why the taxpayer disagrees with the filing of the NFTL.” Treas. Reg. § 301.6320-1(c)(2)A-C1(ii)(E). But the “reason or reasons” cannot comprise the sole basis for the CDP hearing. See Treas. Reg. §301.6320-1(e)(1)(“The taxpayer may raise any relevant issue relating to the unpaid tax at the hearing….”)

    (And no, the word “relevant” that both statute and regulation use does not mean only the “ground” or “reason” for requesting the CDP hearing. The term “relevant issue” has been in the CDP statutes and regulation from the start; in contrast, the “ground” and “reason” language in those authorities was added in 2006 to reduce frivolous CDP hearing requests).

    3. A fair CDP hearing does not require him to do so. A requirement that the CDP hearing requester raise all his issues in his CDP hearing request would be fundamentally unfair. What if the CDP hearing requester learns later (even during the hearing) that he has an additional relevant issue or two that would preclude the collection action? A “variance rule” that would require him to adhere solely to what he said in his CDP hearing request would hardly qualify as collection “due process.”

    Additionally, Shumacher itself recognized no such CDP hearing request/CDP hearing “variance rule.” In discussing the lien subordination issue, the Tax Court noted only that at his hearing Mr. Shumacher failed to show that he qualified for lien subordination, which issue he had raised in his CDP hearing request. And in discussing lien withdrawal, the Tax Court considered an issue that Mr. Shumacher had not raised in his CDP hearing request, but had raised only at his supplemental CDP hearing.

    In short, no sparse CDP hearing request can cause the requester to miss the collection action relief boat. No CDP hearing requester need pray that the Appeals Office tosses him a statutory balancing test life ring.

    So much for the Appeals Office’s purported benevolence when it “consider(s) an argument a taxpayer fails to mention in the original request even though nothing in the regulation requires it to do so.”

  2. Norman Diamond says

    Jason T. asked: “What if the CDP hearing requester learns later (even during the hearing) that he has an additional relevant issue or two that would preclude the collection action?”

    That’s an understatement.

    What if the CDP hearing requester learns from an IRS exhibit submitted to Tax Court that he has an additional rrelevant issue that would preclude the collection action — and would in fact preclude the assessment, had the IRS ever issued a notice of deficiency or offered an appeals hearing before assessment? (I raised in court the fact that the settlement officer had refused to discuss the underlying liability despite my three demands, and the IRS used the precedent of Greene-Thapedi v. Commissioner to prevent Tax Court from redetermining wht was in fact an overpayment. If I ever get into Tax Court again, I will never again choose the small case procedure.)

    And that’s still an understatement.

    What if the CDP hearing requester learns from newspaper articles and then from TIGTA reports that he has an additional relevant issue that would prevent the collection action and would likely prevent the assessment? (At the time of the Tax Court trial, I did not know that IRS data entry clerk Monica Hernandez was a likely reason for the IRS not having records of withholding reported on my Form 1099-B. The IRS knew but they didn’t tell me.)

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