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What is a Prior Administrative Hearing?

Posted on Oct. 2, 2018

In Loveland v. Commissioner, 151 T.C. No. 7 (2018) the Tax Court answered a previously unanswered question necessary in some Collection Due Process cases for determining the scope of the hearing. The court determined that a prior administrative hearing means a hearing before Appeals and that meeting with a revenue officer (and presumably a revenue agent) does not satisfy the language of IRC 6330(c)(4)(A)(i) or Treasury Regulation 301.6320-1(e)(1). The court issued the case in a precedential opinion because of this aspect but it contains other interesting issues as well. The taxpayers brought their case pro se. The court reaches its opinion in the context of a motion for summary judgment.

The Lovelands present a factual situation quite similar to many clients of low income taxpayer clinics. He retired from working as a boilermaker and she retired after a career as a teacher. The Great Recession significantly impacted their finances in a negative way and each has had a major health issue to deal with. Because of the negative financial and health issues happening in their lives, the Lovelands stopped paying taxes during the years 2011-2014 and accumulated about $60,000 in federal tax debt.

The opinion does not say exactly what they did to accumulate the debt but the fact pattern reminded me of so many formerly middle class clients I saw following the recession who had to dip into their retirement funds to keep afloat. These individuals ended up at the Villanova tax clinic with significant tax liabilities similar to the Lovelands’ and often by that point had lost their jobs, their houses, their cars and had little prospect of repaying the taxes. We saw so many of these cases for a few years that my students threw me a 72(t) party on the day I turned 59 and ½ because they had come to appreciate the significance of all of the exceptions to the 10% excise tax imposed by that Code section.

The IRS sent the Lovelands a notice of intent to levy. They entered into negotiations with a collections officer and sought an offer in compromise. The description in the opinion leads me to believe that they submitted a complete offer package and that they sought a special circumstances offer which would allow them to pay less than what the IRS would calculate as their reasonable collection potential. I suspect that they did this because they had a house or some other asset of value they sought to keep because their health issues would prevent them from borrowing on the house.

The collection officer rejected the OIC finding that they had the ability to fully repay the taxes. They initially appealed the decision; however, they also sought to pursue discussions about an installment agreement (IA). The IRS told them that if they appealed the rejection of the OIC they could not simultaneously negotiate an IA, so they withdrew the appeal of the OIC rejection and continued negotiations with the collection officer about an IA.

While they discussed the IA, the Lovelands sought to borrow about $11,500 against real estate they owned in order to reduce their tax liability below $50,000 so they could qualify for a streamlined IA. On the day they submitted the loan application, the IRS filed a notice of federal tax lien (NFTL) which killed the loan application. They requested a CDP hearing with respect to the filing of the NFTL and requested release of the NFTL so they could obtain the financing to pay the IRS.

The Appeals employee assigned to the CDP case sent them a letter asking for a Form 433-A to support their requested collection alternative. They responded by asking the Appeals employee to take a second look at the OIC which included a completed 433-A (OIC). The Appeals employee declined to consider the OIC or a partial pay IA but she was kind enough to calculate a full pay IA in 84 months which would cost them $853 per month.

The court found that:

On April 7, 2017, the Appeals officer closed the Lovelands’ appeal. On April 11, 2017, a notice of determination was sent to the Lovelands informing them of the Commissioner’s determination and their right to appeal the decision to the Tax Court. The notice states that the Lovelands’ requested the withdrawal of the lien and an installment agreement. The notice also states that the Appeals officer did not consider their proposed installment agreement because the Lovelands ‘did not provide any financial information.’ Neither the notice of determination nor the case history notes discussed Mr. Loveland’s medical condition or the effect of his disability on the Lovelands’ ability to pay the tax liability.

In response to the motion for summary judgment, the Lovelands argued that in giving the Form 433-A (OIC) to the Appeals employee they did submit financial information and they also argued that the NFTL was causing financial hardship.

The court states that:

We are faced with a unique question here: whether negotiations with a collections officer constitute a previous administrative proceeding under section 6330(c)(4)(A)(i)….The Lovelands made an offer-in-compromise in a separate collection proceeding that is not before us. Then, in the CDP hearing underlying this case, they renewed their offer-in-compromise.

The statute says that an issue cannot be raised if “the issue was raised and considered at a previous hearing under section 6320 or in any other previous administrative or judicial proceeding.” In this case the issue does not turn on whether there was a prior opportunity for a hearing as many cases have litigated but rather whether there was a prior proceeding. The court points out that the standard for a prior opportunity differs from whether a prior proceeding occurred. The applicable regulation, 301.6320-1(e)(3), Q&A-E7 explicitly provides that a prior opportunity to dispute the underlying liability precludes consideration of the underlying liability in a subsequent CDP hearing. We have written extensively on that issue here, here and here.

The regulation is “noticeably silent” with regard to “spousal defenses, challenges to the appropriateness of the NFTL filing, and offers of collection alternatives” leaving open the opportunity for taxpayer to raise these issues in a CDP hearing if they did not have a previous administrative hearing. The court then finds that in refusing to consider the OIC requested by the Lovelands the IRS abused its discretion. Similarly, the court finds that it abused its discretion in refusing to consider the partial pay installment agreement and the court took pains to point out that the record did not show any failure on the part of the Lovelands to provide requested information.

The court also found that the Lovelands used words in their communication with the Appeals employee that she should have interpreted as economic hardship giving rise to the consideration of an effective tax administration offer in compromise. Because the Appeals employee never evaluated this claim, the IRS abused its discretion in failing to consider this as well. The court remanded the case to Appeals. One hopes that Appeals can find a way to work with the Lovelands and that their case will not return to the Tax Court.

The case creates new law for taxpayers not arguing the merits of the tax liability by making clear that only a prior administrative hearing and not a prior opportunity for an administrative hearing has a preclusive effect on the collection issues such as spousal defenses, collection alternatives and lien filing that a taxpayer may want to raise in a CDP hearing. It will be interesting to see if the IRS agrees with this legal conclusion by the court or seeks to appeal the issue.

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