It happens all the time. Taxpayers are assessed tax liabilities by the Internal Revenue Service (IRS). To make matters worse for many taxpayers, they fail to timely petition the United States Court to contest the assessment. In many cases, had such a taxpayer timely petitioned the United States Tax Court, the federal liability at issue could have been significantly reduced or even eliminated. Unfortunately, in such a situation, short of paying the liability in full and filing a claim for refund, the IRS offers few post assessment remedies. This article discusses how a Collection Due Process may be utilized to contest an IRS assessment.
The Law Governing Collection Due Process Hearings
On July 22, 1998, Congress enacted Internal Revenue Code Sections 6320 and 6330. These Internal Revenue Code Sections provides taxpayers with an opportunity to contest or debate with a disinterested IRS Appeals Officer, the validity and amount of an underlying tax liability and the appropriateness of collection techniques being utilized by the IRS. In most cases, a taxpayer will have the opportunity to petition the United States Tax Court if the taxpayer disagrees with the Appeals Officer’s post hearing decision.
Notification Required to be Given to Taxpayer by the IRS
These mandates for due process in IRS collection matters significantly changed the way in which the IRS may collect an assessed tax liability. The Internal Revenue Code Section 6320 provides that within five days after the filing of a Notice of Federal Tax Lien, the IRS must provide the affected taxpayer with written notice of the filing of a federal tax lien and the amount owed to the government. Internal Revenue Code Section 6320 also requires the IRS to inform the taxpayer regarding the procedures available to release the lien. Finally, and most important, Internal Revenue Code Section 6320 requires that the IRS provide the taxpayer with the available administrative appeal rights, including the right to request a Collection Due Process Hearing. Internal Revenue Code Section 6330 requires that the IRS provides written notice to a taxpayer no less than 30 days before any intended levy of property. The procedural requirements of Section 6330 are identical to Section 6320. The notice required by Internal Revenue Code Sections 6320 and 6330 state that the notice may be served on the taxpayer, in person, or left at the taxpayer’s residence or usual place of business, or sent by certified or registered mail to the taxpayer’s last known address.
If a taxpayer disagrees with the proposed lien or levy action, the taxpayer has 30 days from the date of the correspondence to contest the IRS’ proposed lien or levy action in a Collection Due Process Hearing.
Hearing Requirement for A Collection Due Process
If a timely Request for a Collection Due Process Hearing is filed, the Internal Revenue Code provides that the hearing will be held before an Appeals Officer who had no prior involvement in the case. In conducting the hearing, a disinterested Appeals Officer is required to determine that all procedural requirements for collections have been met and that any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer.1 The Appeals Officer will not consider an issue that was raised and considered at an earlier Collection Due Process Hearing or in a judicial proceeding where the taxpayer “participated meaningfully.”2
However, a taxpayer may raise “any relevant issue relating to the unpaid tax or a proposed levy.” 3 Issues that could be raised in a Collection Due Process include, but are not limited to, 1) challenges to the amount or existence of a tax liability; 4 2) offers to utilize alternative collection mechanisms, such as an offer in compromise or an installment agreement; and appropriateness of the collection actions being taken or proposed to be taken. 5
A timely requested Collection Due Process Hearing will suspend all enforced IRS collection actions such as levy actions. However, the statute of limitations on collections will be extended during this time.
Tax Court Jurisdiction
At the conclusion of a Collection Due Process Hearing, the Appeals Officer will issue a letter of determination. A party may appeal an adverse determination issued by the Appeals Officer within 30 days of the date of the letter. 6 In order to appeal an adverse determination by an Appeals Officer, a taxpayer must file a petition with the United States Tax Court. The United States Tax Court has promulgated Tax Court Rules 330 through 334 to provide procedural guidance to parties seeking to appeal a Collection Due Process Hearing.
Can A Taxpayer Utilize a Collection Due Process Hearing Procedure to Contest a Liability After He or She Already Had the Opportunity to Contest the Liability in Tax Court?
As discussed above, a party may dispute the amount or validity of an underlying tax liability only if the taxpayer did not receive a statutory notice of deficiency or otherwise have an opportunity to dispute the assessment. In addition, a party may raise any issue unless that same issue has been addressed in a previous administrative or judicial proceeding in which the person raising the issue had an opportunity to meaningfully participate.
Therefore, parties who are assessed a liability by the IRS prior to receiving a statutory notice of deficiency are free to contest an IRS liability in a Collection Due Process Hearing and ultimately litigate the issue before the United States Tax Court. With that said, it is inevitable that some taxpayers will attempt to use the Collection Due Process Hearing procedures to attempt to contest a tax liability assessed by the IRS after previously being afforded an opportunity to contest the liability through traditional means (i.e., the taxpayer was issued a statutory notice of deficiency, but failed to timely petition the Tax Court). Are these taxpayers precluded from contesting an IRS liability through a Collection Due Process Hearing procedure and are these taxpayers barred from petitioning the United States Tax Court? Maybe not. Below we will discuss when a taxpayer who missed responding to a statutory notice of deficiency may utilize a Collection Due Process Hearing to contest a tax.
Suppose the IRS assessed a tax liability against a taxpayer for the 2010 tax year in the amount of $100,000. For the purposes of this example, we will assume that the IRS properly issued to this taxpayer a statutory notice of deficiency and the taxpayer failed to timely petition the Tax Court. Now, let’s assume that this taxpayer files an amended tax return for the 2010 tax year and the amended return claims deductions that were not claimed on the original 2010 tax return. Finally, let’s assume that the 2010 amended tax return reflects a tax liability of only $10,000 or a $90,000 difference from that of the IRS’ assessment. Can the taxpayer from our example dispute the amount or validity of the $90,000 difference between the IRS assessment and the amended tax return through a Collection Due Process Hearing?
A broad reading of Section 6320 and 6330 indicates that the taxpayer in our example can dispute the difference between the amended tax return and IRS assessment. The statutory language of Sections 6320 and 6330 provides that a party may raise any issue unless that same issue has been addressed in a previous administrative or judicial proceeding in which the person raising the issue had an opportunity to meaningfully participate. The relevant statutory language does not foreclose a taxpayer from contesting an IRS assessment for an entire tax year after a statutory notice of deficiency is issued. Sections 6320 and 6330 only prohibits taxpayers from contesting underlying tax liabilities in which he or she had the opportunity to dispute. In above example, the taxpayer filed an amended return claiming deductions that were not claimed on his or hers original 2010 tax return. Arguably, this taxpayer did not have a meaningful opportunity to dispute or contest the deductions claimed on the amended tax returns in a previous administrative or judicial hearing. Since the taxpayer in our example may not have had the opportunity to contest or dispute the deductions claimed on the amended tax returns in an administrative or judicial hearing, our taxpayer may potentially raise the underlying liability reflected on the amended tax returns in a Collection Due Process Hearing and upon appeal to the United States Tax Court.
As of the date of the writing of this article, the author is unaware of any decisions issued by the United States Tax Court specifically addressing this issue on point. Thus, there currently are more questions than answers regarding whether a taxpayer may utilize an amended return to contest a federal income tax liability. However, the author of this article will state that he has effectively utilized this strategy to contest federal liabilities through Collection Due Process Hearings and in cases brought before the United States Tax Court and settled with opposing counsel before the United States Tax Court. Therefore, the IRS is well aware of the litigation hazards for the government in denying taxpayers the opportunity to contest an IRS liability through an amended tax return in the context of a Collection Due Process Hearing.
Obviously, the theory discussed above will now apply to all taxpayer who failed to timely respond to the IRS. However, a significant number of taxpayers may benefit through the strategies discussed in this article. Therefore, in any case which a taxpayer has the opportunity to file a Request for a Collection Due Process Hearing, it is extremely important to carefully review the tax returns for the tax years at issue to determine if amended tax returns may be filed.
About Moskowitz LLP
Moskowitz LLP is San Francisco-based tax law firm that caters to clients on a local, national and global scale. The tax attorneys, CPA’s, and EA’s at Moskowitz LLP, some of whom have practiced in tax for over 30 years, have helped professionals, small businesses and private citizens with tax conflicts including, but not limited to, tax audits, liability disputes, and criminal defense against evasion and fraud charges - and also as it applies to international tax compliance. We have an established reputation for producing results, even in cases deemed "un-winnable" by larger firms, and can also assist with effective tax planning and tax collection matters.
IRC Section 6330(c)(3)(C).
IRC Section 6330(c)(4)(B).
IRC Section 6330(c)(2)(A).
IRC Section 6330(c)(2)(B) provides that a taxpayer may contest a tax liability as long as the taxpayer has not previously received a statutory notice of deficiency, or otherwise had an opportunity to dispute the tax liability raised in the hearing. It should be noted that IRC Section 6330(c)(2)(B) is silent if a taxpayer may file an amended tax returns after a notice of deficiency is issued for a particular year and if a taxpayer may take the position that the amended tax return supersedes a notice of deficiency.
IRC Section 6330(c)(2)(A).
IRC Section 6330(d)(1).
Disclaimer: Because of the generality of this blog post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.