Constitutional Due Process in Tax Collection

Vol. 28 No. 2

By

Nina E. Olson is the National Taxpayer Advocate.

 

Most of my life has been spent mucking about in the procedural provisions of the Internal Revenue Code, and the overriding goal of my life’s work is to afford taxpayers with due process of law. Through my years preparing taxes for individuals and small businesses and later representing them in tax controversies, through founding the Community Tax Law Project and advocating for funding of low-income taxpayer clinics, through my congressional testimony in conjunction with the IRS Restructuring and Reform Act of 1998, through my writings, my teaching, and my speaking, and now as the National Taxpayer Advocate, I have strived to hold the Service accountable to its taxpayers.

Due process protections in tax administration. Other than when the government takes a person’s life or deprives a person of liberty, I can think of a no more significant interest than a person’s means to have life, liberty, and property. In our modern society, money is that means. On a weekly if not daily basis, the Service is the sovereign’s agent for taking from the populace its means to secure significant individual interests.

In the United States, deference to the sovereign’s awesome collection power runs deep. In an 1881 case, Springer v. United States, 102 U.S. 586 (1881), the taxpayer challenged on due process grounds the federal government’s seizure and sale of his real property in satisfaction of a tax debt. The Court held that the proceedings of the collector were not in conflict with due process. Chief Justice Marshall said, “The power to tax involves the power to destroy.” The Court then provided the rationale for its refusal to interfere with Congress’s power to collect taxes: “The prompt payment of taxes . . . may be vital to the existence of government. The idea that every tax-payer is entitled to delays of litigation is unreason. If the laws here in question involved any wrong or unnecessary harshness, it was for Congress . . . to see that the evil was corrected.”

In Phillips v. Commissioner, 283 U.S. 589 (1931), the taxpayer challenged the constitutionality of the recently enacted procedure for enforcing transferee liability for a tax in the same manner as it would against the underlying delinquent taxpayer. Here Justice Brandeis noted: “Property rights must yield provisionally to governmental need. . . . Where only property rights are involved, mere postponement of the judicial enquiry is not a denial of due process, if the opportunity given for the ultimate judicial determination of the liability is adequate.” The Court further noted that where the government delays collection of the tax pursuant to payment of a bond pending judicial review, such delay is a “privilege” that is “granted by the sovereign as a matter of grace solely for the convenience of the taxpayer.”

In Bob Jones University v. Simon, 416 U.S. 725 (1974), an educational institution sought injunctive relief from the Service’s revocation of its tax-exempt status because of the school’s racially discriminatory admissions policies. The petitioner alleged that the revocation violated its right to due process and equal protection under the laws. In discussing the Anti-Injunction Act, which provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court,” Justice Powell noted that “the principal purpose of this language is the protection of the Government’s need to assess and collect taxes as expeditiously as possible with a minimum of preenforcement judicial interference.” The history of judicial interpretation of the Anti-Injunction Act demonstrated that “the Act may not be evaded merely because collection would cause an irreparable injury, such as the ruination of the taxpayer’s enterprise.” Instead, where a taxpayer is attempting to show extraordinary and exceptional circumstances that would warrant injunctive relief, it must “be established that the Service’s action is plainly without a legal basis.” The Court concluded by acknowledging, “The degree of bureaucratic control that has been placed in the Service over those in petitioner’s position is susceptible of abuse, regardless of how conscientiously the Service may attempt to carry out its responsibilities.” But as in Springer, the Court referred the petitioner to Congress.

So, where are we? The courts seem to be saying that the government’s summary collection procedures pass constitutional muster so long as the taxpayer is afforded an eventual and ultimate avenue of judicial review. If Congress doesn’t like this approach, then it is up to Congress to act to provide taxpayers with protections beyond what is constitutionally required.

A policy justification for greater due process protections in tax administration. Congress over the years has acted to provide additional taxpayer protections. With respect to assessments, we now have access to a pre-payment forum, the United States Tax Court, in which to challenge the proposed assessment of most taxes. In matters pertaining to tax exemption, entities have access to pre-revocation judicial review. And, finally, in most collection matters, taxpayers have access to a onetime pre-levy and post-lien filing hearing, including judicial review of the government’s proposed collection activities under an “abuse of discretion” standard. Although the courts may hold that there is no constitutional requirement for pre-decisional hearings in the tax collection context, there are significant policy reasons for providing them.

Because due process serves the larger purpose of engaging individuals and making them feel heard in a meaningful way, regardless of the outcome, it helps ease the sense among many taxpayers that the government acts in arbitrary ways. Confidence in fairness, accuracy, and consistency of government, in turn, makes taxpayers more willing to participate in government.

If taxes are the lifeblood of government, then it is the taxpayers who provide that lifeblood. So, if the government wants a long life, it is in its self-interest that taxpayers remain financially viable and in long-term tax compliance. For many taxpayers, their financial viability and long-term tax compliance are most affected by Service collection activities, because it is at that point that tax assessments have an actual financial impact. Although the courts may say that this impact doesn’t rise to a constitutionally significant taking, money is the lifeblood of taxpayers to the same extent that money is the lifeblood of government. For that reason, even though the government doesn’t have to do it, it is good government policy to provide extra measures of protection against abuse in the collection arena. This recognition forms the basis of all the taxpayer protections that, over the years, have been enacted in the various taxpayer bills of rights.

Collection due process (CDP) hearings exemplify that extra protection. Let us remember that unlike most other creditors, the Service does not need to go before a judge to prove that a debt exists and obtain a judgment in order to file a lien or levy on assets. This is consonant with the “time out of mind” sovereign need for the efficient collection of taxes. Yet Congress authorized CDP hearings to impose a pause at the beginning of this process to make sure that the sovereign thinks about the taxpayer just a bit.

Similar to Tax Court and other judicial proceedings in the assessment context, judicial review of CDP hearings makes transparent what is happening to taxpayers. Transparency in tax administration is essential because it enables us to identify problems and affords us the opportunity to change things. However imperfect the CDP procedure may be, this procedural scrutiny tilts the balance a little bit away from an almost unchecked pre-deprivation collection authority to a meaningful review of a sample of Service collection activities. 

 

FOR MORE INFORMATION ABOUT THE SECTION OF TAXATION

- This article is an abridged and edited version of one that originally appeared on page 227 of The Tax Lawyer, Spring 2010 (63:3).

- For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

- Website: www.abanet.org/tax.

- Periodicals: NewsQuarterly, quarterly newsletter; The Tax Lawyer, quarterly journal; monthly e-Newsletter; The Practical Tax Lawyer (published by ALI-ABA in cooperation with the Section), subscription available to Section members at a significant discount.

- Books and Other Recent Publications: Careers in Tax Law: Perspectives on the Tax Profession and What It Holds for You; Effectively Representing Your Client Before the IRS: A Practical Manual for the Tax Practitioner with Sample Correspondence and Forms, 4th ed.; Property Tax Deskbook, 2009 ed.; Sales and Use Tax Deskbook, 2009–2010 ed.; The State and Local Tax Lawyer, Symposium ed.; The Supreme Court’s Federal Tax Jurisprudence: An Analysis of Fact Finding Methods and Statutory Interpretation from the Court’s Tax Opinions, 1801–Present.

 

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