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When the IRS reaches (in the words of Tax Court Judge Mark Holmes) the “we're taking your stuff” stage to collect back-taxes, taxpayers generally have the right to a collection due process (CDP) hearing at which a CDP hearings officer is duty-bound to independently and genuinely evaluate whether it’s proper for the IRS to move forward with seizing a taxpayer’s property. On May 20, 2021, the Tax Court, in Mason v. Commissioner, concluded the IRS had abused its discretion in the CDP process when it gave the green-light to the IRS collection division to take the taxpayer’s stuff without first genuinely conducting the aforementioned review.
In Mason v. Commissioner, Judge Holmes explained that the taxpayer “receive[s] a notice of intent to levy (a politely phrased letter that is nevertheless a threat to seize property to collect the tax owed). For more than twenty years, these threats have been accompanied by notices that a delinquent taxpayer is entitled to an informal administrative hearing, called a CDP hearing.” Further, quoting from the legislative history, the Court stated: “CDP was created as part of a broader effort to address the concern that ‘taxpayers who get caught in the IRS hall of mirrors ha[d] no place to turn that [wa]s truly independent and structured to represent their concerns.’” The Court added: “To help break those mirrors, a CDP hearing must be conducted by an impartial officer who has had no prior involvement in the determination and assessment of the underlying tax liability that is the subject of the hearing.”
The statutory rights to which the Court refers are set forth in Section 6330. There, Congress established rights for taxpayers to seek a CDP hearing before the IRS executes on final notices of tax liens or levies. As part of the CDP hearings process, taxpayers have a right to raise certain issues, and actually have those issues independently considered by the CDP hearings officer. The issues that taxpayers may raise are statutorily enumerated and include innocent spouse relief; challenges to the appropriateness of collection actions; the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability; and, most relevant to this post, collection alternatives. Such collection alternatives may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise (OIC).
The Mason v. Commissioner case involved an OIC. The Court reminded that under its precedent CDP is “more than just a rubber stamp for the Commissioner's determinations.” The Court explained that the CDP process “offers taxpayers the protection of a fresh look at the circumstances of their cases to ensure that the requirements of all applicable laws and procedures have been met, that the issues they raised have been considered and addressed, and that any proposed collection actions balance the government's need for efficient collection of taxes with the taxpayer's concern that collection be no more intrusive than necessary.” The context of the case, an OIC, was somewhat atypical. The Court explained: “We normally don't see appeals from the IRS's rejection or returns of OICs – we don't have jurisdiction to review them, and after a taxpayer exhausts her remedies within the IRS, that's the end of the matter.”
The Court noted an exception, however: “Congress gave us jurisdiction to review the Commissioner's determination after a CDP hearing, and told taxpayers that they could raise collection alternatives such as OICs at those hearings.” Because the Court found that the taxpayers had presented their OIC in the CDP hearing, but the CDP officer had failed to independently evaluate its merits, the Court concluded that the IRS had abused its discretion.
The Mason v. Commissioner decision demonstrates the Tax Court’s resolve that the OIC process not be turned into a rubber stamp on IRS collection activities. Rather than give lip service to rights in Section 6330, an OIC officer is required to genuinely consider good faith and non-frivolous challenges to collection actions and proposals for collection alternatives that are within the scope of Section 6330. If an OIC officer shirks these responsibilities, the Tax Court has jurisdiction to review the CDP officer’s actions and if appropriate provide relief to the taxpayer.
Peter A. Lowy, a shareholder in Chamberlain Hrdlicka’s Houston office, is best known for his tax controversy work and deep experience in the energy sector. He also advises corporations and other taxpayers in a broad spectrum of ...