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Benefits of a Collection Due Process Hearing

Oct 2, 2019

One of the crown jewels in the tax collection world is the Collection Due Process hearing or CDP. After dealing with the IRS Collection Division (Automated Collection System (ACS) or a Revenue Officer (RO)), the taxpayer’s next recourse is to petition to have their case heard before a Settlement Officer (SO) at a Collection Due Process Hearing. The job of the SO (separate and distinct from ACS and the RO) is to perform an objective balancing act between the government’s need to collect the unpaid taxes as quickly as possible with the citizen’s ability to pay such taxes. The SO’s job is to perform enough due diligence to render a decision on the tax liability and the means by which the taxpayer can pay any outstanding tax balance. The key, in most cases, for the taxpayer is submitting the petition for a CDP hearing in a timely manner. Once ACS issues a Letter 11 or the RO issues a Letter 1058, which are letters threatening to levy (take the taxpayer’s assets), the taxpayer has 30 days to request (via Form 12153) a CDP hearing. If the petition is submitted timely (within the 30 days of the levy notices), the taxpayer can appeal the ruling in the CDP hearing to the United States Tax Court for their review of the case. If the 30 days is missed, a hearing can still take place, but without the benefit of the Court’s review.

In the case Taryn L. Dodd (T.C. Memo. 2019-107), Ms. Dodd reported the sale of a piece of real estate on her 2013 return, but could not pay the tax, which exceeded $207,000. Ms. Dodd had doubts as to the tax liability amount and her ability to pay the tax. The IRS Collection Division threaten to levy Ms. Dodd’s assets. Ms. Dodd filed a timely CDP application and met with the SO. At the initial CDP Hearing, the SO told Ms. Dodd that she needed to provide certain financial forms in order to have collection alternatives considered. The SO ignored the tax liability issue. The SO did not consider collection alternatives because the taxpayer submitted no financial information. The SO offered no additional time and three days later issued a notice sustaining the levy.

The case was then taken to the Tax Court.  The case was remanded (returned) by the Court back to the IRS and, oddly enough, to the same SO for a supplemental CDP Hearing. The SO then advised Ms. Dodd to file a 1040X (amended return) with a deadline of 20 days. Ms. Dodd missed the filing deadline set by the SO. Again, the SO sustained the levy.

The case was returned back to the Tax Court. The Court noted that the SO need not wait indefinitely for information, but must display some degree of patience. The Court, on August 22, 2019, found that the IRS had abused its discretion and, again, returned the case back to the IRS, suggesting that a different SO be used this time.

On the one hand, one could look on the IRS somewhat sympathetically. Ms. Dodd appears not to have lifted a finger, other than petitioning hearings before the IRS and the Tax Court. However, on the other hand, the role of an IRS Settlement Officer is just that – settle the case, using the balancing act standards. A CDP hearing that has been timely filed ensures that a truly objective party -- the U.S. Tax Court, if needed -- is the ultimate reviewer of the CDP Hearing results. The leverage that this provides the taxpayer is significant.     

The take away: When subjected to collection enforcement by the IRS, taxpayers (and their representatives) should consider the CDP Hearing as a vital tool in working out an arrangement with the IRS.

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Daniel Gibson

Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.

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