What’s a Hearing for CDP Purposes

Brief Factual Background

Charnas is an attorney whose contingent fee income in some years was in the high hundreds of thousands; in another year it was less than $60,000. For a couple of years he filed his returns but did not fully pay. He filed a CDP request checking off all the boxes for collection alternatives, i.e., an installment agreement, OIC and the “I can’t pay balance” option.

After rescheduling his telephone hearing twice, Charnas had a third telephone hearing scheduled. Instead of arranging to talk on the phone, Charnas and his attorney drove to the Settlement Officer’s office to meet with her. She was out on sick leave so Charnas dropped off documents with the SO’s colleagues. He testified that he intended to explain to the SO how the 433A was misleading in his situation given his widely fluctuating income. He also testified that the SO’s colleagues said that the sick SO would get back to him and reschedule the hearing. The opinion summarizes the contents of the documents Charnas left with the SO as essentially detailing the taxpayer’s widely varied income from year to year:

Petitioner’s 2011 Form 1040 showed total income of $55,853 for the year, or $4,653 per month. In contrast, the estimated gross income for 2012 on petitioner’s Form 433-A was $413,733, or $34,479 per month. The Form 433-A also showed no significant assets owned by petitioner. The differing figures resulted from the fact that petitioner’s main income source, his contingency fees, varies widely year to year. For 2009 through 2012 petitioner reported adjusted gross income of $806,639, $364,096, $32,071, and $438,973, respectively. During the 30 days before he completed the Form 433-A, petitioner’s law firm income totaled only $485. Petitioner also noted the variable nature of his income on the Form 433-B. Next to “Annual Salary/Draw”, petitioner wrote “413732.55 (highly variable)” and in response to the question “Any Increase/decrease In Income anticipated” petitioner checked the “Yes” box and wrote “Income varies significantly from year to year”. Petitioner did not specify when or by how much his income would change, instead writing “Unknown” in the answer box. requesting these details…

When the SO returned to work, she reviewed the documents. What was not clear from the record is the efforts she made to reschedule the meeting (if at all). Although the SO spoke with Charnas’ attorney, the SO’s notes indicated that the attorney was not clear how Charnas reported his income in the years in question. It was not clear if the SO made efforts to allow the taxpayer a further opportunity to explain his circumstances. What the record did reveal was the SO’s review of the documents Charns dropped off. Her notes consist of two paragraphs discussing why Charnas could not qualify for a collection alternative (lack of current tax compliance and sufficient income based on his financial info).

The SO’s notes, however, failed to address Charnas’ fluctuating income, and how that fluctuation might affect eligibility for a collection alternative. The SO issued a determination, which stated as follows:

You requested an installment agreement, an offer in compromise, and cannot pay balance as collection alternatives. However, you are not in compliance with estimated tax requirements. Therefore, an installment agreement and offer in compromise could not be considered. Your 433A indicates that you have the ability to make payments, therefore a cannot pay balance as a collection alternative could not be considered. In addition, the taxpayer’s law firm is not in compliance with filing/paying requirements.

Charnas argued that the SO abused her discretion by failing to analyze his fluctuating income in the determination and essentially failing to give Charnas a hearing that CDP requires. The opinion lays out the facts in support of Charnas’ argument:

In making her determination SO Matthews did not consider the relevant issue, raised by petitioner, of his fluctuating income. Petitioner noted several times on the Form 433-B that the law firm’s future income was “unknown” because it “varied significantly” and was “highly variable”. Petitioner’s Form 1040 for 2011 showed only 13% of the estimated income listed for 2012 on the Form 433-A. SO Matthews did not weigh petitioner’s fluctuating income in either the notice of determination or the case activity report when assessing his ability to pay.

The IRS argued that Charnas failed to flag the fluctuating income issue properly at Appeals (he did not attach anything to his 433 elaborating on the fluctuation). Moreover, the IRS argued that Charnas sufficiently participated at the hearing but failed to make his case. In support of its position, the IRS referred to the CDP regulations and a number of cases which generally provide that there is no particular formality needed and that while IRS will in non-frivolous cases generally allow taxpayers a face-to-face hearing, that is not an absolute requirement.

In resolving the case and finding that the SO abused her discretion and thus remanding the matter back to Appeals, the Charnas opinon refers to a 2012 Tax Court case (Lewis v Commissioner) that essentially adopts a flexible approach to what is sufficient in light of the taxpayer’s circumstances:

In concluding in Lewis that the 10.5 minute phone conversation was insufficient to support issuing the notice of determination, the Court listed several errors that the settlement officer made: (1) he failed to review any of the issues the taxpayer had raised with respect to the complicated nature of his case, (2) he failed to indicate that the phone call would constitute the taxpayer’s CDP hearing, (3) he failed to follow up with the taxpayer before issuing the notice, and (4) the “determinations were made without the benefit of a scheduled CDP hearing in any format.” Id. at *5. The Court recognized that each individual defect standing alone might be insufficient to find an abuse of discretion, but that “the cumulative effect of such defects demonstrate[d] that * * * [the settlement officer] acted both arbitrarily and capriciously in rendering his determination.” Id.

In light of Lewis, the opinion concludes “that the cumulative effect of [Charnas’ SO’s] handling of petitioner’s CDP hearing demonstrates that she acted arbitrarily and capriciously in rendering her determination.”:

 SO Matthews failed to review the issue of petitioner’s fluctuating income, which he (1) traveled to the IRS office to highlight at the hearing scheduled for February 20, 2013, (2) noted on the Form would constitute petitioner’s hearing. She failed to follow up with petitioner and schedule a new CDP hearing in which he could plan to participate as requested. The cumulative effect was to limit petitioner’s hearing to a review of one set of documents and an unscheduled telephone conversation with petitioner’s representative.

Importantly, the opinion tethers its finding to the facts of the case. In some scenarios, the SO’s efforts would have been sufficient:

In another context, review of documents and one telephone conference may be sufficient to address a taxpayer’s concerns. However, SO Matthews made her determination without considering petitioner’s relevant, nonfrivolous reason for disagreeing with the collection action: his fluctuating annual income. On the basis of the foregoing, we conclude that SO Matthews deprived petitioner of the fair hearing to which he is entitled pursuant to sections 6330 and 6320.

Conclusion

It is still possible Charnas will not get relief; a taxpayer with fluctuating income presents challenges when considering a collection alternative. Yet the opinion adopts a nuanced approach to what Appeals needs to do in light of the issues that the taxpayer raises. CDP is not a one size fits all. The procedures Appeals employs should reflect what is needed in light of the particular issues the taxpayer raises. One takeaway is that if SO misses the scheduled meeting to which the taxpayer came the SO had better bend over backwards to make sure he is heard fully.