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.
read more...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.
About Leslie Book
You’ve performed an incisive analysis of the role of CDP hearings and the Appeals Office in the collection process. Unfortunately for taxpayers, the Sixth Circuit in Agility Network Services opted for a narrow interpretation of the CDP remedy and effectively found that actions taken in a CDP proceeding are “in connection with the non-collection of taxes,” thus falling outside the scope of I.R.C. Section 7433. I suspect that this is far from the last word on the subject and that other Courts of Appeal will one day weigh in on this issue, with possible different results.
Generally speaking, in most situations a suit for damages based on improper collection action is a hollow remedy. Taxpayers who owe money to the IRS normally lack the resources to bring these types of actions, even where there is a clear violation of the law by IRS personnel. Taxpayers are not able to hire anyone on a contingency because the IRS is going to offset any damage award against the tax liability. The superpriority for attorney’s liens on recoveries created by attorneys (6323(b)(8)) does not apply in this situation.
Thus, when taxpayers sue for damages, they are often pro se, which significantly decreases their chances of a meaningful recovery.
So unless lots of brave, qualified attorneys are willing do some pro bono work in this area (I suspect that many people will not have the courage to do this, given that many IRS personnel are not going to be very happy with the attorney after the suit is filed), I don’t see the case law in this area developing very quickly.
I think the result in this particular case could change if the Settlement Officer issues a determination upholding the right of the IRS to levy in circumstances in which it is clear that the IRS does not have the right to take levy action.
Finally, notwithstanding my comments above, I do think that the mere existence of the remedy of a suit for damages based on unlawful collection actions serves a valid purpose. No rational employee of the IRS wants to do something that results in a meritorious lawsuit for damages based on improper collection action. While front line ROs may not be familiar with 7436, managers are more familiar with this section.
If you want to put real teeth into 7436, amend the Code to allow for a superpriority lien for fees against any recovery under than section or to prevent IRS from offsetting or levying on any recovery. Don’t think that will happen in my lifetime.
Mmm. I will have to disagree with the authors observation. While every taxpayer maintains the statutory right to appeal – that right and the appellate process it affords could certainly be construed as part and parcel of the collection process. However, that process should not be comingled with the specific decision made by the Appeals Officer – or Settlement Officer in this case. The root tenets for which the Office of Appeals exists are independence and impartiality from Collection or Examination activity. If we are to consider the entirety of Appeals to be a functional partner of Collection or Examination, haven’t we already defeated or at minimum degraded those tenets? This of course says nothing of the merits of the actual appeal. Even using the broadest interpretation, considering Appeals as “in connection with Collection,” would in my view only afford a rehash of the Appellate process – not an automatic reversal of the underlying Collection activity should the Appeals Officer err in fact or in judgment. This will certainly be revisited.