Editor: Valrie Chambers, Ph.D., CPA
Procedure & Administration
After experiencing years of devastating economic conditions, many individuals are finding that they are unable to keep up with their income tax obligations. So, how does a person recover from the economic crisis when the IRS is beating on the door with notices on a daily basis?
Recognizing the need for individuals to settle their affairs and move on with life, Congress created Sec. 6320(a), for liens, and Sec. 6330(a), for levies, to permit taxpayers to be heard by the IRS Office of Appeals before any levy and seizure is made on any property or right to property. The result was the creation of the Collection Appeals Program (CAP) and the Collection Due Process (CDP) program, which serve two mostly distinct, but sometimes overlapping, purposes. After reading descriptions of these programs, it will become clearer which one is best for a particular client’s situation.
According to the IRS, the CDP is available if a taxpayer receives one of the following notices:
- Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320;
- Final Notice—Notice of Intent to Levy and Notice of Your Right to a Hearing;
- Notice of Jeopardy Levy and Right of Appeal;
- Notice of Levy on Your State Tax Refund—Notice of Your Right to a Hearing; or
- Post Levy Collection Due Process (CDP) Notice.
CAP is available for taxpayers in the following situations:(1) before or after the IRS files a Notice of Federal Tax Lien or levies or seizes property, (2) if the IRS has terminated or proposed to terminate an installment agreement, rejected an installment agreement, or modified or proposed to modify an installment agreement (IRS Publication 1660, Collection Appeal Rights (2012)).
The first step in a collection case is to take action immediately to freeze collection activities and allow the client and the representative a chance to collect their thoughts (and information) and consider how to work out a plan that works best for the taxpayer. The practitioner should secure a Form 2848, Power of Attorney and Declaration of Representative, from each affected client (for joint returns each person must file a separate form) and contact the IRS to request an “account transcript,” one of three common types of transcripts. (The others are a return transcript and a wage and income transcript.)
The “account transcript” shows the dates and amounts assessed, including penalties and all other transactions, to determine the outstanding account balance. This is the record that the representative needs to work on collection issues. An account transcript can be secured quickly either online at irs.gov, by filing Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript, or by calling the IRS. The IRS normally sends out the transcript within two business days.
If collection procedures are still in the earlier stages, liens may not have been filed in the local governmental office, and levies may not have been sent to employers, banks, customers, etc.
An appeal of an IRS collection determination by the IRS Office of Appeals (Appeals) in a CDP hearing or a CAP hearing may allow a taxpayer to avoid unwarranted collection action. CAP is available before or after IRS notices are filed and generally results in a quicker Appeals decision. A major advantage of a CDP hearing compared to a CAP hearing is that the determination in a CDP hearing may be appealed to the Tax Court, but the decision in a CAP hearing is binding on both the IRS and the taxpayer, and cannot be appealed.
The timing for requesting consideration under the two methods is also different. A taxpayer must make a request for a CDP hearing within 30 days of receiving the first notice of a right to a hearing for a particular type of tax and period. If the taxpayer timely files the CDP hearing request, collection action ceases (and the statute of limitation under Sec. 6501 is suspended) until a final determination is made following the CDP hearing or a subsequent appeal to the Tax Court.
If the 30-day window is missed, the taxpayer will be offered a chance for an “equivalent hearing,” but that does not stop collection actions nor does it provide a chance to appeal the determination to Tax Court. The taxpayer makes a request for a CDP hearing by filing Form 12153, Request for a Collection Due Process or Equivalent Hearing, at the address shown on the lien or levy notice. If the case has been assigned to a revenue officer, it is advisable to also send a copy of Form 12153 to the revenue officer so he or she can suspend collection activities.
A taxpayer can pursue an appeal through CAP before or after the filing of a lien or levy or the seizure of property. If the taxpayer disagrees with an IRS employee’s decision and wants to appeal it, the taxpayer can ask the employee’s manager to review the case. If the taxpayer and the manager are unable to resolve the disagreement (or in certain cases, where the taxpayer is not contacted by the manager within two days of making the request for a conference), the taxpayer can request a CAP hearing. The request in most cases is made by filing Form 9423, Collection Appeal Request. Normally, in the case of liens, levies, and seizures, the IRS will not take any collection action until Appeals makes its decision, unless the IRS believes the collection of the tax is at risk.
One crucial distinction between the two processes is, if certain conditions are met, the underlying tax liability may be contested in a CDP hearing, but not in a CAP hearing. Also, in a CAP hearing, Appeals will not consider trust fund recovery penalties, offers in compromise, or penalty abatement appeals.
Strategically, since participation in CAP may be requested before the CDP notice under Sec. 6330(a) is issued, one must be careful in addressing issues prematurely by pursuing CAP. If an issue is raised and decided in a CAP hearing, the taxpayer is precluded from raising this issue in the CDP hearing (unless new information is presented) because the CAP hearing is considered to be a “previous administrative . . . proceeding” as described in Sec. 6330(c)(4). This premature action may prevent the taxpayer from contesting the issue in Tax Court.
During a CDP hearing, the taxpayer may raise any relevant issue relating to the unpaid tax or the proposed levy, including appropriate spousal defenses, challenges to the appropriateness of collection actions, and offers of collection alternatives (usually installment agreements or offers in compromise). A taxpayer may also challenge the existence or amount of the underlying tax liability for any tax period, but only if he or she did not receive a statutory notice of deficiency for that liability or did not otherwise have an opportunity to dispute the liability. The ability to contest the underlying tax liability is one of the most valuable features of the CDP over CAP. After a CDP hearing, the IRS issues its determination by sending the taxpayer a notice of determination by certified or registered mail. The taxpayer has 30 days to appeal the determination in Tax Court.
When taxpayers cannot pay their tax liabilities, the IRS may proceed with the collection of taxes and penalties, and that, in turn, can result in the taxpayer’s inability to borrow money to pay taxes or continue operating a business. By freezing collection activities, the CDP procedures and, to a lesser extent, the CAP procedures can provide tremendous benefits, providing a fair and equitable process for both the IRS and taxpayers.
Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, Texas. Robert Moïse is a partner with WebsterRogers LLP in Charleston, S.C. Prof. Chambers and Mr. Moïse are members of the AICPA IRS Practice & Procedures Committee. For more information about this column, contact Prof. Chambers at valrie.chambers@ tamucc.edu.