I recently wrote about the Tax Court’s decision in Onyango v. Commissioner, 142 T.C. No. 24 (2014) in which the Court held that an individual who received the certified mail notification that would/should have led that individual to go to the post office and pick up the notice of deficiency had, for purposes of I.R.C. 6330(c)(2)(B), received the notice of deficiency. Instead of timely going to the post office, the individual made no effort, or no timely effort, to go to the post office to pick up the notice and the Court, properly in my view, determined that this failure precluded the individual from contesting the merits of his tax liability through the CDP statute even though he never “had” the opportunity to do so prior to the assessment.
Because this individual’s behavior mirrors the behavior of many clients who come to my clinic and who come to clinics around the country, I want to talk about the current system and how it could change to address the situation created by fairly large class of individuals who do not either pick up, open or deal with their mail. As someone who has previously confessed to having some misgivings about CDP, my suggestion here may be too radical and may foster behavior we want to discourage but the current system fails many individuals. If we really want CDP to work, it may be worth examining taxpayer behaviors matched against statutory requirements.
The traditional system of tax assessment, as it has morphed over the past three to four decades, does not work for a large class of citizens. With the advent of correspondence examination (Corr Exam) and automated collection sites (ACS) in the 1980s, the IRS makes no personal touch on a segment of the population most in need of a personal touch in order to understand their rights.
Instead, we have created a system that sends correspondence to the least competent taxpayers rather than giving them an individual in their community assigned to their case. So, the current system of examining the poorest individuals consists of sending 2-3 letters, which a high percentage of individuals ignore or misplace and then granting the IRS permission through the statute to assess an additional tax liability. We follow up the first letter writing campaign, which was so successful, with another one, consisting of 3-4 letters before the statute gives the IRS the right to levy.
The IRS levies and takes the taxpayer’s wages or bank account or social security payments. It now has the attention of the taxpayer who now has almost no statutory rights to contest either the liability or the collection process. It is too late to go to Tax Court either to contest the underlying merits of the assessment or to use the CDP process. Just when these taxpayers are ready to address their problem, they have a limited, almost entirely administrative path remaining. The nicely paved road to Tax Court has given way to a goat path up the hill to administrative relief.
To its credit, the IRS did not even need to create the goat path but it does make it possible for the taxpayer to address the merits through audit reconsideration, the collection through an equivalent hearing or a CAP appeal or an offer in compromise based on doubt as to liability. Still, the taxpayer has lost all rights to go to court should the administrative path prove unsuccessful. The inventories of low income taxpayer clinics are filled with these taxpayers because the impersonal Corr Exam and ACS process to which low income people are assigned does not meet their needs.
Perhaps we say they get what they deserve because they are making the decision to ignore their mail. We might say that we tried in 1998 by creating CDP to take care of the problem created by the 1980s development of Corr Exam and ACS. I think there is another way to look at the situation.
When the current procedures for tax administration were built, the rich or upper middle class were the ones interfacing with the tax system. The refund process served as the relief valve everyone thought existed when a bad assessment occurred. The Flora rule, which goes back to ancient times before Corr Exam and ACS, effectively bars low income taxpayers, as well as many others, from using the Courts through the refund process to redress a bad assessment (See Flora v. U.S., 362 U.S. 145 (1960) (holding that a taxpayer generally must pay the full amount of income tax deficiency assessed by IRS before he or she may challenge its correctness by suit in federal district court or Court of Federal Claims for refund under 28 U.S.C. § 1346(a)(1)); see also 26 U.S.C. § 7422 (requiring taxpayers to file claim with IRS prior to commencing refund suit)). The less friendly confines of the District Court compared to the Tax Court also makes the refund route an uphill procedural battle for the unrepresented or poorly represented taxpayer.
The creation of the CDP remedy and the potential relief valve of tax merits litigation during the collection period, may have seemed like an idea that would provide relief to many who missed the initial opportunity to contest the tax – for whatever reason, but for most taxpayers the CDP opportunity which wraps the notice of intent to levy in a package that can result in litigation on the collection activity if not the underlying merits, comes in yet another envelope, usually number 7 or 8, that the taxpayer will toss or set aside not knowing or understanding the importance of their actions.
The decision in Onyango v. Commissioner and a recent post on the low income taxpayer listserv (published at the end of this post) by a relatively new tax clinician struggling through the possibilities for remedial action made me think about the problem and possible solutions. For a client who has squandered the statutory opportunities for merits relief something other than the illusive opportunity for such relief through CDP needs to happen. The necessary relief should provide a meaningful opportunity for a group of taxpayers, by and large but not exclusively low income, who are now a part of the tax procedure system which developed its procedures before they joined the party.
What might be done to rethink how this group of individuals who did not participate in the tax system when the procedures developed and who only get examination or collection contacts from a unit of IRS employees but never receive an individual case assignment? My first facetious thought was to just levy first. If you go ahead and take their money at the front you have their attention. Then give them rights instead of waiting until all of their statutory rights are gone, as a result of correspondence, before taking their money and getting their attention. While this idea is relatively simple in concept, I cannot put it forward with any sense that it represents the right thing to do.
Instead, we might rethink Flora or rethink CDP.
Suppose we were building the refund rule at a time when the highest number of examinations, by a long shot, were done by Corr Exam and most of the people ending up with tax liabilities had no ability to fully pay the taxes. Would we have ended up with the Flora rule? Would the Supreme Court have required the low income taxpayers now caught up in the tax system because we have decided to use the tax system to deliver social benefits to fully pay the tax in order to get into court? I do not think it would. I think the Flora decision reflects the times. At that time people who chose not to go to Tax Court generally were middle class or upper class citizens or entities that missed the Tax Court without the systemic impediments facing low income taxpayers. Once they missed the Tax Court, they generally, but not always, had the means to go after the liability by paying and suing in district court.
What if we changed Flora or changed 6330(c)(2)(B) to allow a taxpayer to raise the merits of the underlying liability in Tax Court after a levy had occurred if the taxpayer was examined by Corr Exam instead of by an individual examiner assigned specifically to their case? If the change occurred by revoking Flora in Corr Exam cases, taxpayers could file a claim for refund after the collection of any amount of the taxes assessed as a result of the Corr Exam and not just after full payment. Such a change would acknowledge that examining taxpayers through correspondence often fails to meaningfully engage them in the process and allowing them to go through the full refund claim process, including the opportunity to go to Court if agreement were not reached, provides on the back end the full consideration of their case that Corr Exam does not offer. I would also open the doors to Tax Court in this type of litigation because the Tax Court has developed that type of procedures and culture that works better for low income taxpayers than the current procedures in District Court.
Alternatively, and less satisfactorily in my view, CDP could change to allow taxpayers to address the merits in the CDP process if they did not receive the notice using the current test or if they were examined by Corr Exam. This option still limits relief to those who open and process their incoming mail and does not address my concern that many taxpayers do not react to mail but react to a taking of their property. The merits litigation, if allowed, would follow the traditional rules. The Tax Court would examine that aspect of the CDP determination consistent with its deficiency jurisdiction, i.e., de novo. The taxpayer would have the burden of raising the amount or existence of the liability in the request for CDP relief. I note that CDP cases could initially go to either Tax Court or District Court but now go exclusively to Tax Court which I think is a good result.
I doubt that either of the changes I am proposing would result in a massive opening of litigation on the merits of taxes but it would have the effect of saying to a group of people who were not around when the current tax procedures were developed that we value them. We want to give them an opportunity to contest their liability in a court proceeding if it cannot be resolved administratively and even though we, as a government, do not have the resources to examine their returns individually rather than on a group basis, we still want them to have every opportunity to contest the liability if they feel they do not owe it.
CDP sought to relieve the pressure created by Corr exam and ACS. I think it has provided some relief but fails in the area of underlying merits for the reasons identified by the Tax Court in its recent opinion. The IRS seeks to relieve the pressure through its creation of the audit reconsideration process but without the opportunity for court that does not offer full relief when administrative resolution fails. The tax procedure system needs to adapt to the inclusion in the process of a group of individuals not contemplated when it was built. We can say that those individuals need to adapt to the system but that ignores reality. Making a change will cost very little compared to the fairness it would provide.
Here is the recent post on the low income taxpayer listserv that highlights the dilemma clinicians representing low income taxpayers regularly face:
For some reason, although 26 USC 6330(c)(2)(b) and the instructions to a CDP request form state that you can’t raise the underlying liability in a CDP hearing if the taxpayer had received the Statutory Notice of Deficiency, I had been thinking that the taxpayer could still submit an Offer In Compromise based upon doubt as to liability in the CDP context.
Upon further reflection and reading of the Internal Revenue Manual, I now think that if I submit an OIC-DATL in this situation it is just going to get rejected.
But, I would still like to challenge the underlying liability.
It strikes me that the options are either (a) withdraw the CDP and file the OIC-DATL outside of the CDP context, or (b) to file a Request for Audit Reconsideration, which as I understand it would also be separate and apart from the CDP process, and not entitled to any judicial review – if we went this route, client would lose the CDP opportunity, and then if the Audit Reconsideration was rejected, client wouldn’t have recourse to CDP and attendant judicial review
Alternatively, even though it doesn’t directly attack the underlying liability, could we file an OIC-ETA based upon Public Policy/Equity (assuming that the debt will be determined collectible or not otherwise addressable as an ETA Hardship), which could be done in the CDP hearing context and which would be subject to judicial review if rejected?
Does anyone have any thoughts about whether it would be better to pursue the Audit Reconsideration/OIC-DATL and forgo the CDP opportunity, or to pursue an OIC-ETA Public Policy/Equity in the CDP context?