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Trends and Tactics in Collection Due Process Litigation During 2018

Posted on Dec. 28, 2018

Despite reaching the age of 20 this past July, CDP continues to create new issues for practitioners to learn and advocate. Twenty years ago I headed the project to write the regulation for the new CDP statute. Writing the regulation proved challenging because CDP was such a departure from federal tax collection practice to that point.   As we have learned over the past 20 years, we failed to anticipate many CDP issues as we wrote the regulations and new issues continue to present themselves.

Over the course of 2018, we have written a number of CDP posts. I have collected the posts here. The issues are broken down into categories for ease of organization. Along with panelist Tom Thomas (who presided over the publication of the CDP regulations 20 years ago), Steve Milgrom, an attorney who is the Litigation and Volunteer coordinator for San Diego Legal Aid, and Scott Hovey, an attorney with the Washington, D.C. field office of Chief Counsel (IRS)(and an intern in the Richmond District Counsel’s office 20 years ago when I headed that office), I participated in a panel on the CDP developments in 2018 at a recent ABA Tax Section conference for low income taxpayers.

Perhaps the most remarkable feature of the presentation was that when we ran over our time, we were the last panel of the day, and the moderator went to stop the discussion the audience insisted that Steve finish telling his story of the Dang case. This is a case which he handled/continues to handle in which the IRS refused to levy on his client’s IRA in order to help the client by allowing the client to satisfy the tax liability without incurring the 10% excise tax under IRC 72(t). Steve’s persistent and effective advocacy for his client in that case resulted in the client paying tax due without having to pay a penalty for making the payment. Read more about the case in the link below if you missed it when we first wrote about that case.

Jurisdiction (The Request) – CDP cases have two separate 30 day periods that taxpayers must successfully navigate in order to obtain an administrative and then a judicial review of their case. The first 30 day period starts with the issuance of a CDP Notice. The IRS must issue a CDP notice prior to taking most levy action. The IRS also must issue a CDP notice when it files a notice of federal tax lien. Because it does not know exactly when the local court will file the notice of federal tax lien, the IRS builds five days into the period after it sends the notice of federal tax lien to the local courthouse for filing. When it issues the CDP notice the taxpayer has 30 days (or 35 days for a lien notice) to send a request to the IRS seeking an administrative hearing with Appeals. The IRS has not made it easy to send in the requests and will deny a CDP hearing to taxpayers who do not carefully follow its procedures. The issue with which the Tax Court is now grappling is whether the failure to strictly follow the IRS procedures is a basis for denying a CDP hearing or whether substantial compliance might suffice. (For those with a subscription to Tax Notes, I published an article entitled “The Jurisdictional Ramifications of Where You Send a CDP Request,” there on November 12, 2018 that covers this issue in greater detail than our blog posts.)

Untimely CDP request –

Jurisdiction (The Petition) – If the taxpayer successfully requests a CDP hearing and Appeals decides to sustain the lien or levy, it will issue a determination letter giving the taxpayer 30 days within which to petition the Tax Court. If the taxpayer misses the 30 day deadline for a good reason, can the Tax Court accept the case based on equitable tolling or is the 30 day period to file the petition jurisdictional such that the Tax Court must deny the taxpayer entry into the court no matter how compelling the reason for late filing might be?

Is time to file CDP petition in Tax Court jurisdictional –

Starting the 30 day period – The taxpayer has 30 days to file the request or petition the Tax Court in a CDP case but when does that 30 day period begin? IRS letters do not always get mailed on the date on the letter. Many IRS employees flex and generate letters from their home which they do not print and mail until they come to work in the office on a later date. The date on the letter may be the date it was generated and not the date it was mailed. In the Weiss case the Revenue Officer dated the CDP Notice and took it to the taxpayer’s house; however, he did not personally deliver the notice as he had intended because the taxpayer had a large dog. The Revenue Officer mailed the letter two days later but the letter still contained the original date on which he had intended to effect personal service. The Tax Court decided that the date of mailing and not the date stamped or written on the letter that controlled.

When does period begin for arguing CDP –

Impact of CDP Request or Petition on the Statute of Limitations on Collection – Taxpayers who receive a CDP Notice must decide whether to request a hearing in part based on the impact the request will have on the statute of limitations on collection. Sometimes taxpayers do not seem cognizant of the impact their actions will have downstream. Every action in a CDP case should be taken with an eye on the statute of limitations clock. In addition to the cases discussed in the blog post see also Gilliam v. Commissioner, 121 AFTR 2d 2018-2211 (4th Cir. 2018)(unpublished opinion holding that taxpayer’s incorrect request for the IRS to review a levy could be perfected after the 30 day period and result in a CDP hearing rather than an equivalent hearing.)

Statute of Limitations and CDP –

Should Taxpayer Sign the Waiver Form Ending CDP – If the taxpayer reaches an agreement with Appeals, the Settlement Officer will ask the taxpayer to sign a waiver form terminating their CDP rights. While signing the form seems logical in some ways, what happens if the IRS does not follow the bargain you think you have struck? Would it be best to have the determination letter issued and go to Tax Court in order to get a more formal recordation of the agreement?

Waiving CDP rights –

Standard of Review – When the Tax Court reviews the CDP case it generally reviews the issue de novo if the taxpayer contests the underlying liability and reviews for an abuse of discretion if the taxpayer seeks a collection alternative. If the taxpayer contests the application of a payment made by the taxpayer to the IRS, what is the standard of review for that contest?

Standard of review –

Summary Judgment – When a taxpayer files a CDP petition in Tax Court seeking review of an issue decided on an abuse of discretion standard, Chief Counsel IRS frequently seeks to resolve the case by filing a motion for summary judgment. In seeking the motion for summary judgment, the government must follow certain steps and prove certain items. The Tax Court has criticized Chief Counsel attorneys regularly for seeking summary judgment without following the correct steps. How can you identify when you might have a defense to summary judgment based on the failure of the motion to include all necessary items?

Filing a correct summary judgment motion –

TBOR and CDP – CDP is a natural place to argue the application of the Taxpayer Bill of Rights. It could apply to the balancing test. The IRS could be required to verify that its actions complied with TBOR. In the recent case of Dang v. Commissioner, taxpayer argued that requiring him to liquidate his IRA in order to pay the tax liability violated the TBOR provision that a taxpayer should pay no more than the correct amount of tax. The taxpayer argued that the IRS should levy on the retirement account in order to save the cost of the 10% excise tax under IRS 72(t).  The Appeals officer who first heard the CDP case issued a determination letter saying that Appeals did not have the authority to grant the requested relief.  When the case reached Tax Court the Chief Counsel attorney almost immediately requested a remand to Appeals to allow Appeals to make a determination based on the requested relief.  The taxpayer opposed the requested remand as a waste of time but the Court granted the request and back in Appeals the relief requested by the taxpayer was granted.

There is another interesting TBOR case brewing in Tennessee, Freels v. Commissioner, Dk. No. 26674-17L.  Petitioner, like the petitioner in the Dang case discussed in the link below, faced a motion to remand filed by the IRS when the IRS attorney realized that the position taken by Appeals and Collection would not result in an affirmation by the Tax Court of the position taken in the determination letter.  Unlike the Dang case in which Judge Armen granted the requested remand, Judge Guy denied the remand in Freels in an order dated December 19, 2018.  Mr. Freels’ counsel, Mary Gillum who directs the low income taxpayer clinic at Legal Services of Middle Tennessee and the Cumberlands, made arguments similar to the arguments made by Steve Milgrom in Dang.  She argued that the IRS had failed to provide Mr. Freels with due process and violated his rights.  While the underlying nature of the violation of TBOR in the Freels case differs from the violation alleged in Dang, the nature of the argument is similar.  The Tax Court’s willingness to deny the remand and push forward for a resolution of the case (in taxpayer’s favor) may signal a new willingness to short circuit the dance back through Appeals to reach the right result and a victory for TBOR.

Arguing TBOR in CDP cases –

Seeking a Refund in a CDP case – The Tax Court position is that taxpayers cannot obtain a refund in a CDP case. Although the court issued a precedential opinion on this issue over a decade ago, it revisited the issue in some detail this year perhaps in anticipation of a challenge of the issue in the circuits.

Refund Jurisdiction in CDP cases –

Third parties and CDP – The IRS files nominee and alter ego liens and occasionally collects administratively from a third party. The IRS takes the position that third parties have no CDP rights. Third parties continue to push for some type of due process protection.

CDP rights of non-taxpayers –

When is CDP case in Tax Court over – Because of the unlimited ability to have a CDP case bounce back and forth between the Tax Court and Appeals, an issue exists concerning the end of the case. At some point the Tax Court case concludes. When that time arises, anything further the Tax Court has to say does not matter.

Ability of Tax Court to comment on CDP case after dismissal –

Can the Settlement Officer in a CDP case take actions that would trigger an action for wrongful collection – Occasionally, the Appeals employee handling a CDP case will do something that the IRS believes violates their rights. If the action occurs during the CDP phase of the case, is that a collection phase such that the wrongful action gives the taxpayer a right to bring an action for wrongful collection or is the CDP process something different from collection action?

Misconduct in CDP case does not permit wrongful collection case –

What is an administrative proceeding – A taxpayer can bring a CDP case to challenge the merits of a liability if the taxpayer did not have a prior opportunity to do so. The issue of prior opportunity implicates the ability to raise the innocent spouse issue as well. If the taxpayer can show that it did not have a prior administrative hearing in the innocent spouse context the taxpayer should have the ability to raise innocent spouse as a defense in a CDP hearing.

Administrative hearing –

Consideration of non-CDP Years – Can the IRS or the Tax Court consider years not included in the CDP notice in fashioning a remedy? Administratively, CDP would not prevent the IRS from providing relief if it chose to do so but the Tax Court is limited to the years in the notice. Morgan v. Commissioner, T.C. Memo 2018-98

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