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.