This article provides some background on Collection Due Process (CDP) and the progress of the Collection Due Process Summit Initiative. Please note that readers are invited to take part in the Low Income Taxpayer Representation workshop on December 3, 2019 in Washington, D.C. The Workshop will consist of a Summit meeting open to all interested practitioners.
What is Collection Due Process?
CDP is a procedural safeguard created by Congress as part of the Internal Revenue Service Revenue and Restructuring Act of 1998. It requires that the IRS follow a set of procedures to ensure that taxpayers have due process protections when facing IRS levy and lien actions.1 Although it has long been held that taxpayers with assessed federal tax debts do not have any right to due process protections when it comes to the government’s authority to collect for those tax debts,2 Congress required this step in recognition of the need to curb potential IRS abuses in actions seizing and filing Notices of Tax Liens against property rights.3 Treasury then adopted a robust set of regulations defining the CDP procedures the IRS must follow.4 A key element of the CDP procedures permits taxpayers (or their representatives) to request a hearing before the IRS Office of Appeals and gives taxpayers the opportunity to present a collection alternative. These collection alternatives include installment agreements, requests for Currently Not Collectible status, and Offers in Compromise proposing a settlement to pay less than the full amount owed. While less common in application, the CDP hearing could also enable taxpayers to challenge the assessed liability, but only if they can prove they received no prior opportunity to do so.5
CDP may be used in a specific—though not uncommon—scenario where the IRS has assessed balances against a taxpayer for one or more years or periods, and the taxpayer has not fully paid the tax due. The IRS must have initiated collections and sent the taxpayer a series of notices.6 If full payment is not made, then the IRS will send either a Final Notice of Intent to Levy or a Notice of Federal Tax Lien. If the taxpayer is facing a levy, the IRS must send the Final Notice of Intent to Levy prior to actually levying. If the taxpayer is facing a Notice of Federal Tax Lien, the IRS must send a Notice of Federal Tax Lien within 5 business days after filing the lien in the county where the taxpayer resides and/or owns property. The taxpayer has the right to request a CDP hearing within 30 days of receiving either notice. Upon receiving the CDP hearing request, the IRS will send the case to Appeals. Eventually a Settlement Officer from the Office of Appeals will be assigned to handle the hearing. If the taxpayer and the IRS agree upon a collection alternative, then the IRS will close the case and the taxpayer will presumably comply with the terms of the collection alternative submitted. If the taxpayer and the IRS do not agree on a collection alternative (or the taxpayer does not participate adequately to present a cognizable collection alternative), the Settlement Officer will issue a Notice of Determination giving the taxpayer 30 days to petition the U.S. Tax Court for review of the hearing’s outcome. Review by the Tax Court is subject to an “abuse of discretion” standard of review, whereby the Tax Court must determine whether or not the IRS abused its discretion in not accepting the requested collection alternative.
This discussion raises the question of why a taxpayer would want to request a CDP hearing. There are several reasons. First, once a request for a CDP hearing is timely made, the IRS must suspend collection efforts against the taxpayer. While this tolls the collection statute, it can give a taxpayer time to gather documentation for a collection alternative. There may also be some unique situations where it makes sense to submit a collection alternative through CDP. For example, if a taxpayer seeks an Effective Tax Administration offer in compromise on the basis of public policy or equity, submitting this through CDP is the preferable route because of the opportunity for judicial review.7 The prospect of judicial review can provide additional leverage: for example, in the case of an offer in compromise based on doubt as to collectability with special circumstances, where the special circumstances warrant a departure from the standard income and expense analysis that the IRS would generally undertake. Suppose a taxpayer owes $30,000 to the IRS and has $10,000 of equity in a mobile home but can neither borrow against it nor find affordable alternative housing upon a sale. If a taxpayer argues that the value of the mobile home should not count as equity for purposes of the offer in compromise, it raises a special circumstance that asks the IRS to depart from its regular economic analysis that would otherwise posit the $10,000 equity in the home as part of the offer. It may make sense to submit this offer in compromise through CDP to have the possibility of judicial review in the event neither IRS Collections nor Appeals is willing to accept the special circumstances argument.
A final comment is warranted regarding taxpayers’ low usage rate of the CDP process. In 2017, the IRS mailed 1,226,950 notices giving taxpayers rights to CDP hearings.8 Only 25,928 CDP hearings were requested, an incidence of merely 2.1%. This low usage rate has been consistent over time. In 2011 (coincidentally at the apex of economic woes caused by the Great Recession), the IRS mailed a record 2,778,321 notices, but only 36,755 taxpayers requested CDP, an incidence of only 1.3%. In fact, from 2003 to 2017, taxpayers requested CDP in only 1.4% of all cases. This suggests that the vast majority of taxpayers do not benefit from the CDP protections and explains current efforts to reform CDP to make it more accessible to taxpayers and more efficient for the IRS, taxpayers and their representatives.
The Collection Due Process Summit Initiative
The Collection Due Process Summit Initiative was born at a panel of the Individual & Family Taxation Committee at the Tax Section’s 2019 May Meeting in Washington, D.C., titled “CDP – Beyond the Weeping and Gnashing of Teeth; What Can Be Done to Fulfill CDP’s Beneficial Intent?”9 The panel was a robust discussion of CDP issues with a goal of looking for solutions by examining CDP in its various stages (more on those later). This was aided by work already done by Keith Fogg10 and Carolyn Lee.11 This prompted engaging conversations for what improvements could be made to assist taxpayers, the IRS, and the Tax Court in reaching better CDP.
The panel formed the core of a CDP Summit Initiative. The vision is to continue the discussion, leading to presentations and articles such as this one, with the ultimate goal of bringing about positive CDP changes that benefit all parties involved and have the collateral impact of increasing CDP usage rates. The first step was improvements the panel and audience identified which, along with other CDP issues noted over time, became part of an opportunities and recommendations list. From there, we identified other individuals inside and outside the IRS who have been interested or influential in CDP practice. The list includes private practitioners, law professors, LITC directors, and IRS departments of Chief Counsel, Collections, Appeals, and the Taxpayer Advocate Service. We identified a core group to steer the CDP Summit Initiative as well as working groups focused on the different stages of the CDP process.
Collaboration from the IRS has been key because it would be counter-productive to meet without IRS involvement. The goal of the CDP Summit Initiative is to search out improvements and learn what can be done to implement them. If improvements are not possible with current resources, we want to discuss why that is the case. One suggested approach is a “yes, if” approach – i.e., a determination that the goal could be met with these resources. If a piece of the puzzle is missing, what can be done to find a realistic resolution? It should be noted that the IRS is constantly working to improve their procedures and processes. There have already been improvements to CDP this year, whether as a result of the CDP Summit Initiative or of ongoing developments at the IRS.
We considered three key stages for this initiative. First is an entry-level administrative stage concerned with notices and other communications. Second is the part of the administrative stage concerned with interactions between taxpayers and the IRS Office of Appeals. Third is the judicial phase of CDP, mainly focused on taxpayers’ interactions with IRS Chief Counsel and the United States Tax Court. It has become clear in identifying priorities within each stage that there is also a need to collect data and understand how the possible adoption of future technology by the IRS might impact CDP, so we are contemplating developing a working group focused on data and technology issues.
Notices and Communications
In this stage, the focus is on official documents and electronic communications between the IRS and taxpayers regarding CDP. For example, this stage considers items such as the CDP notice that the taxpayer receives based on a lien or levy,12 as well as the supplemental IRS Publication 594 and Form 12153 (and instructions) that are often included in the envelope with the notice. A main criticism of CDP communications is that taxpayers often do not understand their CDP rights or are confused by the process. The low response rate mentioned earlier may be in part a result of the CDP notice format. The letter the taxpayer receives is framed as a billing notice from the IRS. There is a mention on the first page that the taxpayer has the right to a hearing. For those curious about that hearing, there is a paragraph on the next page discussing the “Right to Request a Collection Due Process Hearing.” These are part of several pages, so that important paragraph may get lost in the mix.
The taxpayer is next directed to Form 12153, Request for Collection Due Process. There, the taxpayer would fill out a two-page form based on attached instructions. Where to send the form may be confusing to taxpayers, since it is mailed to an address on the lien or levy CDP notice mailed to the taxpayer. Those notices often include an address relevant to the CDP hearing request as well as a different address (or multiple different addresses) relevant for taxpayer payments to the IRS for the amount due. Since there may be two or more addresses listed on the first two pages of the IRS notice, taxpayers may not easily find the correct addresses for their responses.13
Similar criticisms apply to Publication 594. It is a dense read with technical jargon focused on collection issues beyond CDP hearings. That is a sharp contrast to EITC Publications 962 or 3211, each two-page publications with pictures designed for taxpayers who may have less understanding of intricate tax processes.
The CDP Summit Initiative participants hope to identify opportunities for clearer, more direct taxpayer guidance so that taxpayers understand their CDP rights. Ideally, the initiative will ensure that there are no artificial barriers preventing taxpayers from acting on those rights.
Interacting with IRS Appeals
This administrative stage focuses on what happens after a taxpayer requests CDP, the form has been received by the IRS, and there is interaction with the IRS Office of Appeals. The Summit Initiative foresees opportunities for streamlining interactions between taxpayers and the IRS. It is considering how the IRS could better accommodate taxpayers and what improvements could benefit the IRS by reducing the delays and taxpayer or representative confusion that reduce process efficiency. In many instances, these opportunities offer mutual benefit for both taxpayers and the IRS.
An opportunity that the Summit Initiative has identified involves screening timely filed CDP requests as soon as possible so that an IRS employee can be assigned to contact the taxpayer if they have indicated on the Form 12153 either that they would like an installment agreement or that they cannot pay the balance. The employee could request that the taxpayer fax or mail a collection information statement and try to reach an acceptable collection alternative without having to send the case on to a Settlement Officer within the Office of Appeals. Based on personal experience of the authors, the IRS appears to be assigning employees to handle preliminary screenings of financial information in some CDP cases, but it may not be a consistent practice throughout the country. A broader use of this approach could resolve cases earlier in the process and prevent many cases from being assigned to Settlement Officers, a win-win for both taxpayers and the IRS.
Another opportunity that seems simple to implement and beneficial to both taxpayers and the IRS is to provide a centralized mailing address for taxpayers and practitioners to use to submit their Form 12153 and accompanying documents. This would allow IRS agents to receive and catalog the forms as they come in and apply a centralized screening mechanism based on the suggestion above. Additionally, staff within a centralized office could determine which Appeals Office would best handle the CDP request based on inventory levels and perhaps specialization. Using a centralized mailing address would be an improvement from the current system of requiring taxpayers to send their requests to the address on the notice of levy or lien, as that is confusing for taxpayers and requires the Service to track forms across many different addresses.
While the statutory and regulatory provisions enabling and defining CDP have been in place for over 20 years, a number of questions still remain regarding the Tax Court’s authority and jurisdiction in CDP cases. For example, it is not clear whether equitable tolling is available for petitions and whether IRS administrative/mailing processes permit adequate notice to identify when the 30-day period to petition the court following receipt of a Notice of Determination begins. The CDP Summit Initiative intends to convene a working group to explore these and other topics and craft recommendations to be shared with the Tax Court and IRS.
Other questions affect how the IRS Office of Chief Counsel handles the CDP cases on its dockets and to what extent it may settle CDP cases by accepting collection alternatives. A recent update to the Chief Counsel Division Manual (CCDM) provides guidance on Settlement of Docketed CDP cases.14 It provides specifically that:
Settlement through acceptance of a collection alternative such as a new offer in compromise or installment agreement where there has been no abuse of discretion by Appeals may be appropriate when it is necessary for the fair treatment of a taxpayer or when a lack of settlement could result in unfavorable legal precedent. Otherwise, the determination should be defended and the taxpayer should be encouraged to submit a collection alternative after the litigation is concluded.
This language authorizing settlement through acceptance of collection alternatives in some cases seems to offer an appealing alternative to filing Motions for Summary Judgment (more common) or litigating CDP cases to trial (less common). The CCDM further provides that:
Counsel does not have the authority to directly accept collection alternatives from taxpayers on behalf of the Service. If Counsel seeks to settle a docketed CDP case through a collection alternative, Counsel must request the assistance of the Service to evaluate and accept or reject the proposed collection alternative.15
The CCDM likely describes a practice that has been in place for some time. Nonetheless, it puts a spotlight on the question of how Counsel and Appeals (and possibly Collection) could best collaborate. With these new questions come new opportunities.
The Future of the CDP Summit Initiative
Three panels dealt with the CDP Summit Initiative during the Tax Section’s 2019 Fall Tax Meeting in San Francisco. The first panel, led by author Erin Stearns, was part of the Tax Bridge on the Road, sponsored by the Young Lawyers Forum and Diversity committees, called “What is Collection Due Process? A Practical Introduction to the Stages of CDP.” The panel introduced young tax lawyers to the CDP process. The Individual & Family Taxation committee included a panel led by author William Schmidt titled “Collection Due Process Notices: Much Needed Works in Progress,” that discussed in-depth several of the issues raised in this article. The Pro Bono & Tax Clinics committee held a panel titled “Prior Opportunities to Dispute Liability in Collection Due Process: An Oversized Reaction to Insufficient Action.” Led by Carolyn Lee, the panel explored whether an individual had a prior opportunity to dispute a liability in connection with a CDP hearing. Discussions following the panels were encouraging, and with the input of those additional interested parties, the Initiative can move forward and collaborate toward change.
As noted above, in December, the Low Income Taxpayer Representation workshop will be focused on the Collection Due Process Summit Initiative. The event is from 8:30 a.m. to noon on Tuesday, December 3rd, in Washington, D.C. The workshop will be a three-hour summit on these CDP topics. There will be breakout sessions focused on the stages of CDP plus discussions to review the issues and foster solutions. This session is open to interested practitioners, not just those who represent low-income clients. The goal is to hear feedback from any tax attorneys who want to improve the CDP process.
Readers, we want to hear from you. Do you want to see further CDP discussion after December? What issues have your clients faced in CDP that you believe are pressing? If you have ideas or suggestions for the CDP Summit Initiative, please contact William Schmidt (firstname.lastname@example.org), Erin Stearns (email@example.com), or Carolyn Lee (firstname.lastname@example.org). ■