Recently, we were in the process of updating “IRS Practice and Procedure,” which caused me to read some Collection Due Process decisions I failed to catch as they came off the wire. While the four opinions discussed here do not represent major shifts in the way the Tax Court approaches CDP, they are worth mention for addressing discrete corners of the law. This issues I discuss here are only a portion of the issues addressed in these cases. It’s clear that CDP litigation continues at a high level within the Tax Court.
This case holds that a taxpayer cannot use the CDP process to rehash a prior rejected offer in compromise (OIC). Mr. Galloway actually submitted two OICs that the IRS rejected. As an aside, from the description of the OICs in the Court’s opinion, the rejections seemed appropriate strictly from an asset perspective, since he did not want to include the value of a car he owned but allowed his daughter to use. He is not the first person I have encountered who seems to feel that providing their property for the use by their children should preclude the IRS from using it as a source of collection. This view will fail every time.
After rejection of his second OIC, he appealed the decision. Appeals sustained rejection, which led not too long thereafter to his opportunity for a CDP hearing, which he used to complain about the decision to reject his offer. The Appeals office hearing the CDP case declined to review the rejection of the OIC, finding that section 6330(c)(4) precluded Mr. Galloway from raising this argument. The Tax Court agreed with the determination of Appeals, finding that the statute did not allow him to raise the merits of the administrative determination rejecting the offer during the CDP case. The court cited to the trio of circuit court decisions decided a few years ago holding that the inability of the taxpayer to appeal administrative determination to court did not change the outcome based on the language of the statute. See our prior discussions on those cases here.
The Court did not speculate on what Mr. Galloway might have done instead of arguing that the prior determination of Appeals was wrong. I think he could have resubmitted an OIC during the CDP process that either took into account the changes in his circumstances since the prior OIC submission or that offered more than the previously rejected amount, based on his better understanding of the offer criteria. Had he submitted an offer that was not identical to the one previously rejected, I think Appeals would have considered it as part of the CDP process. The rejection of the prior offer did not foreclose his further use of the offer process but did foreclose further argument about the rejected offer.
This case holds that the taxpayer could raise the merits of delinquency penalties by the backhanded method of challenging the application of payments. Taxpayer failed to pay employment taxes over an extended period of time and failed to file the necessary returns but at some point made payments on the earliest periods. In the CDP hearing taxpayer argued satisfaction of the earliest periods and eventually provided an analysis showing payments equal to the tax paid.
The Court treated this as a challenge to the merits of the delinquency penalties imposed. Unfortunately, taxpayer did not designate its payments, which meant that the payments it made were not applied in the manner it expected and it argued in the CDP hearing. Taxpayer also looked at the transcripts without appreciating the impact of accruals not reflected in the assessed portion of the transcript but accruing nonetheless.
This case holds that the IRS can collect on restitution based assessments even when the taxpayer has an agreement with the Department of Justice to make payments on the restitution award. Taxpayer engaged in significant criminal tax activity for which he was successfully prosecuted. The prosecution resulted in a significant restitution order. Like the majority of taxpayers who go through the criminal tax process and spend time in jail, taxpayer’s assets and ability to earn income significantly diminished as a result. He agreed to pay DOJ $100 a month or 10% of his income. At the time of the CDP case he was not working and did not appear to have many prospects for future employment.
He argued that the IRS did not have the right to file a notice of federal tax lien or to levy upon him because DOJ was collecting on the liability. Citing Carpenter v. Commissioner, 152 T.C. 202 (2019), the Tax Court said that the IRS did have the right to pursue collection from him. Obviously that right, at least with respect to levy, is tempered by the requirement in IRC 6343 not to levy when it would place someone in financial hardship, but no blanket prohibition existed to stop the IRS from collecting and therefore to stop it from making a CDP determination in support of lien or levy.
Although losing the case on the issue of the IRS basic authority to collect, the taxpayer did manage to remove penalties and interest through the CDP process. The case is a good one to read for anyone dealing with a restitution based assessment to show the interplay between DOJ and IRS in the collection of this type of assessment, as well as to show the limitations of restitution based assessments compared to “regular” assessments.
This case involves, inter alia, a business owned by a single individual and the mailing of the CDP notice to the business owner rather than the business. The Tax Court finds that sending the CDP notice to the individual rather than the business does not create a problem here, since the sole owner of the business would receive the notice were it addressed to the business rather than to him personally.