IRS Collection Due Process (CDP) hearings

You will recall that before 1998, there were actually no safeguards in place before the IRS took a taxpayer’s property. It was with the passage of RRA ’98 that we had Collection Due Process (CDP) hearings that were established under Code section 6320 and section 6330.

 

What is an IRS Collection Due Process (CDP) hearing?

Basically, these CDP hearings provide the taxpayer with an independent review of the IRS Office of Appeals of the decision to file a Notice of Federal Tax Lien or to take a levy action. [Section] 6320 provides for a hearing with respect to lien filings; [section] 6330 provides for a hearing with respect to levies. Even though these are different code sections for liens and levies, the manner in with the CDP hearing is conducted is the same, and you can find the rules for that spelled out in Code section 6330.

 

When does the IRS Send Notice of Tax Lien?

The IRS is required to send a notice within five days of a lien filing notifying the taxpayer of the existence of the lien and the right to an administrative hearing. Prior to levying, the IRS must notify the taxpayer of the right to the hearing. So, when it comes to levies, your client might receive more than one notice that the IRS is proposing to levy, so you need to read that letter carefully to make sure that you respond to the form that contains notification of your right to the hearing.

 

Making a Request for an IRS Collection Due Process (CDP) Hearing

The information about the Collection Due Process hearing is actually contained at the end to the letter, and it directs you to complete (or the taxpayer to complete) Form 12153 in order to request that CDP hearing. Right, and sometimes the form is actually enclosed with the letter, so you will know if that is the case.

 

Notice of Federal Tax Lien

In any event, you must receive this notice of the intent to levy or the Notice of the Federal Tax Lien, and then the taxpayer has 30 days to request a hearing. Appeals (IRS Appeals) then conducts the hearing and then issues a notice of determination, which is reviewable by the tax court. Now, that notice of determination is important and we will talk about that later in the presentation. Just so you will know, the IRS is generally required to suspend levy actions during the CDP hearing process and that’s statutory. It’s section 6330(e)(1).

 

Form 12153, Request for a Collection Due Process or Equivalent Hearing

There are exceptions to the rules, such as where collection of the tax is in jeopardy, but generally, levy action will be suspended. The taxpayer must make the request for the CDP hearing in writing within 30 days of the date that the notice was sent, and this is done by filling out Form 12153, Request for a Collection Due Process or Equivalent Hearing. The request has to include the taxpayer’s reasons for requiring the hearing, so there has to be an explanation there. Although, the regulations do allow a taxpayer to go back and cure that request, as long as the request itself was timely filed.

 

CDP Hearing Deadlines

If the taxpayer misses the 30-day deadline, it is still possible to qualify for an equivalent hearing, and this is provided for in the section 6320 and section 6330 regulations. An equivalent hearing is similar to a CDP hearing, but it does not carry the right of judicial review, so taxpayers have one year to request this equivalent hearing.

 

Offer in Compromise and CDP Hearing

The tax court ruled that review of the OIC prior to the CDP hearing was prior involvement and that was prohibited. So, you can see how a provision or a policy that is intended to provide efficiency… you have to watch and make sure that that efficiency isn’t being gained at the expense of your client’s rights, in this case, to an impartial appeals officer. The second thing is that ex parte communications are prohibited. This means that there generally cannot be any communication between the appeals officer and an IRS employee of a different function without the taxpayer or the taxpayer’s representative being given the opportunity to participate in that conversation.

 

What happens in a CDP Hearing?

Well, the appeals officer is required to consider what is called the “big three.” These big three are: verification that the applicable law or administrative procedures have been met; determining what issues can be raised under 6330(c)(2); and finally, doing the balancing test, which is whether the proposed collection action balances the need for efficient collection of taxes with a taxpayer’s legitimate concern that the collection action be no more intrusive than necessary. So, the first of these is the verification of law and procedure, and information on this can be found in the statute at Internal Revenue Code section 6330(c)(1).

 

What is a CDP Hearing?

What is important about this first section is the imperative word “shall;” that the appeals officer shall make certain verifications during the hearing. The first of these is to make sure that the collection statute end date is calculated correctly and that the assessment statute end date is calculated correctly. The appeals officer is also required to determine that the tax has been validly assessed, meaning that the notice of deficiency has actually been issued to the taxpayer. And the reason for that, we will see shortly. But just because the appeals officer is doing this doesn’t mean that you get to skate through on this because your job is also to make sure that these requirements have been met. You can determine the assessment statute end date; you can determine the collection statute end date; and you can determine whether the notice of deficiency was properly issued to the taxpayer. Similarly, you can also determine another one of the requirements, which is that the notice of intent to levy or the Notice of Federal Tax Lien was properly issued to your taxpayer.

 

Collection Due Process Hearing

The reason you want to make these inquiries and ascertain this information prior to the hearing is because you can make those statements with regard to these items, if you disagree with them, at the Collection Due Process hearing. And if, for example, the collection statute end date has passed, after the appeals officer opens the hearing, you can say, “By the way, you are trying to collect a tax that has expired,” and that may resolve the issue right then and there. In the alternative, if there is a dispute over one of these items, you should be sure to document the record. We are going to be talking… Jill started talking about the administrative record. We will be talking a lot about the administrative record, and we have already talked about some court cases. We will be discussing other court cases and throughout our discussion, you will see why the administrative record is so important. Every chance you have to document the administrative record, you should seize that chance to document the administrative record. By “document,” I mean certainly make sure the appeals officer is taking notes, but that doesn’t preclude you from coming to the hearing with a memo or from following up from the hearing with a memo to the appeals officer, making sure that your position is contained in the administrative record.

 

Collection Due Process hearing and Notice of Federal Tax Lien

A taxpayer may raise any issue related to the unpaid tax, and this would include spousal defenses (for instance, a request for innocent spouse relief). They can challenge the appropriateness of the collection action and the taxpayer can propose collection alternatives, and these can include an Offer in Compromise, an installment agreement, currently not collectable status, and all of this is provided for in section 6330(c)(2)(A). There are instances where the taxpayer may challenge the underlying liability by challenging the existence of a tax liability or the amount of the underlying tax liability. If the person did not receive a statutory notice of deficiency for that liability or did not otherwise have an opportunity to dispute such liability… and we are going to talk about this word “opportunity” because the statute says opportunity, not that they, in fact, went ahead and challenged the liability. So, if the taxpayer did receive the notice of deficiency or other notice that gave the opportunity to challenge the assessment administratively, the taxpayer cannot then turn around and say, “But wait, I’m at my CDP hearing, I want to do it again.” That’s not allowed under the rules, but if the liability was self-assessed, then the taxpayer may challenge the underlying liability at the CDP hearing.

 

Terms Related to CDP Hearing

The “Big Three” – Appeals must consider these three issues at a CDP hearing: verification that any applicable law or administrative procedure has been met; issues raised under IRC §6330(c)(2); and whether the proposed collection action balances the need for efficient collection of taxes with the taxpayer’s legitimate concern that the collection action be no more intrusive than necessary, also referred to as “the balancing test.” Collection Due Process (CDP) hearing – A CDP hearing provides a taxpayer with an independent review by the IRS Office of Appeals of the decision to file a Notice of Federal Tax Lien or take its first levy action. To request a hearing, the taxpayer must complete Form 12153, Request for a Collection Due Process or Equivalent Hearing, submit the form within 30 days of receiving the notice to the same address shown on the lien or levy notice, and identify all reasons for the taxpayer’s disagreements. Form 12153, Request for a Collection Due Process or Equivalent Hearing