I am not a fan of the Collection Due Process (CDP) provisions Congress stuffed into the Code in 1998. I call them “Collection Delay Process.” It’s not that I favor taxpayer abuse! But I think the source of abuse is rarely bad-acting IRS employees. Bulk processing is generally the culprit. The combination of computer-processing and over-whelmed employees creates an assessment process that runs over taxpayers who do not understand how to stop it or slow it down and who cannot afford to hire lawyers to do that for them. And then, the end of that assessment process starts the engine of the collection train. CDP is designed to keep the train from going down the wrong collection track before it leaves the station. But CDP is a badly designed mechanism. That was my conclusion in 2009, after I studied almost 1,000 CDP cases. I have seen nothing in the past 10 years to change my mind.
Those who disagree with me point to cases like the one I’m blogging about today: James Loveland Jr., and Tina C. Loveland v. Commissioner, 151 T.C. No. 7 (Sept. 25, 2018), a reviewed decision written by Judge Buch. This is one of the rare cases where the Tax Court found that the IRS had abused its discretion in deciding to proceed with collection. Here it looks like CDP prevented the collection train from running over the Lovelands. The case provides a good lesson for what works, and what does not work, about CDP. Keith Fogg also has a good post on this case over at Procedurally Taxing, explaining why it is a reviewed opinion.
The case is also an interesting lesson about Tax Court Procedure. While the case is ostensibly a ruling on an IRS motion for Summary Judgment, Judge Buch effectively grants Summary Judgment to the taxpayers...who never asked for it. This disposition—while sensible enough---is apparently an unwritten rule of Tax Court procedure. At least I did not see a rule. Nothing in 121. Maybe I missed it. But I think the Court is silently borrowing from Federal Rules of Civil Procedure 56.
The IRS tax collection system runs on the presumption that all delinquent taxpayers have the resources to pay their taxes but simply won’t. Until taxpayers provide information on why they cannot pay, they are presumed to be “won’t-pays.” And it is hard to convince an IRS collection employee that you are a “can’t-pay.” First you have find one to talk to. Then you need good information presented in an easily digestible format. IRS employees dealing with a high volume of taxpayers---many of whom are hobbyists---do not always give the information provided a careful look if it is in less than perfect form. So it should be no surprise that probably the most common reason (or excuse) IRS employees give to move an account off their desk is a taxpayer’s failure to supply requested information. One sees that frequently in Notices of Determination from the Office of Appeals in CDP cases. One even sees it sometimes in Tax Court cases, such as Hernandez v. Commissioner, T.C. Memo 2018-163 (September 25, 2018) where Judge Vasquez suspended trial to give the taxpayers four extra months to provide information regarding expenses, continued to warn them they needed give information when trial resumed, and ultimately bemoaned that “petitioners refused to cooperate with the Court.” Yep. That’s all too familiar to many IRS employees.
If the taxpayer cannot convince an IRS employee to move them off the collection train, the taxpayer is then carried on down the tracks as a won’t-pay.
Historically, the IRS has used ACS to get taxpayers to come talk. It does so by spitting out massive numbers of levies and Notices of Federal Tax Lien (NFTL). I encourage my students to think of these are not so much revenue collection devices but as information collection devices. That is, most NFTLs and levies collect only a little bit of money, but they motivate taxpayers to call in and start a dialogue to resolve the delinquent account, to get off the collection train, by showing collection personnel they are really can’t-pays and not won’t-pays. Sure, as the National Taxpayer Advocate regularly reminds us, the better practice would be to have IRS employees make outcalls to delinquent taxpayers. But humans are expensive and machines are cheap. So the IRS saves employee time for receiving calls from taxpayers pricked by an NFTL or levy.
One can bucket NFTLs and levies into three types. First are those spit out automatically by the Automatic Collection System (ACS) computers. These are computer-issued NFTLs and levies. Second are a smaller number generated by the computers but only after an IRM employee reviews a screen of potential levy sources and selects the sources to be hit. That happens in ACS and also happens in the field by Revenue Officers using the Integrated Collection System (ICS) computers. Call these computer-assisted NFTLs and levies. Finally, a relatively small number of NFTLs and levies are totally generated by humans. Call these manual NFTLs and levies.
Since 2016 there has been a huge drop in overall NFTLs and levies because that year the IRS stopped computer-issued NFTLs and levies, as explained in this September 7, 2018 TIGTA Report. Doing so resulted in a 55% drop in NFTLs and an 80% drop in levies between FY11 and FY17. You see that in the numbers reflected in Table 16 of each year’s IRS Data Book. The 2017 Data Book reports that the IRS filed 446,000 NFTLs in FY17 and 590,000 levies in FY17. In comparison, the same table in the 2011 Data Book reports that the IRS filed over 1,000,000 NFTLs and issued over 3,000,000 levies in FY11.
The reason for the slowdown in computer activity was workflow considerations in the face of the relentless Congressional Budget cuts since 2010. The IRS simply did not have the workforce to process the volume of taxpayers calling in after getting hit with an NFTL or a levy at the historically high levels. So IRM management slowed everything down. That is what TIGTA reported.
Still, sending out hundreds of thousands NFTLs and levies is a non-trivial number and one of those NFTLs hit Mr. and Mrs. Loveland in October 2016. The NFTL was filed to secure the IRS’s claim for about $60,000 in unpaid taxes for 2011-2014. The Lovelands properly invoked the CDP hearing process via §6320.
During the resulting CDP hearing the Lovelands told their story. They explained that they had previously worked with what Judge Buch calls “a collection officer” in 2015 to try and secure a Partial Pay Installment Agreement (PPIA) or an Offer In Compromise (OIC) for the delinquencies. In other words, they had previously tried to convince an IRS employee that they were can’t-pays. As part of that effort they told the IRS employee about their severe medical problems. And they completed Form 433-A with attachments in 2015. That's the form where a taxpayer is supposed to list all their assets and income stream.
The IRS employee rejected the OIC. The Lovelands started an Appeal but dropped it because they still wanted to work with the same IRS employee on the PPIA. As part of their negotiations, the Lovelands proposed a $800 per month PPIA. And they made at least two payments while trying to get a home equity loan to bring their total tax delinquency below $50,000 so they could qualify for a streamlined Installment Agreement. But then the NFTL hit, screwing up the loan.
Based on that story the Lovelands asked the Office of Appeals Settlement Officer to order the IRS to withdraw the NFTL because (1) the collection employee should have accepted their prior OIC because of exceptional circumstances (serious medical issues); and (2) the employee should have accepted their proposed $800 per month PPIA.
The Settlement Officer rejected the Loveland’s requested withdrawal and approved the NFTL. First, the Settlement Officer refused to review their OIC because by failing to use their prior opportunity to get that OIC reviewed they had now lost that opportunity. Second, the Settlement Officer refused to consider their PPIA because, the Notice of Determination said, the Lovelands “did not provide any financial information.” That is, the Settlement Officer had asked the Lovelands to fill out a new Form 433 and they had not. Notice how the basis for the decision is procedural and not substantive.
1. Appeals Should Prefer Substance over Procedural Form
The main lesson I take from this case is that the Office of Appeals abuses its discretion when it elevates procedure over substance. Sure, procedure is important, but I read this case as holding that the Office of Appeals abused its discretion because it failed to engage with the substance of what these taxpayers were trying to say. They were trying to say they were can't-pays and that the IRS should accept something less than the full liability owed.
First, Judge Buch held that the taxpayer’s could raise the OIC in their CDP hearing, rejecting the idea that the taxpayers were procedurally barred simply because they had refused a previous opportunity to go to Appeals. He pointed out that the statute prohibits Appeals from considering an issue only when “the issue was raised and considered ...in any other previous administrative or judicial proceeding.” §6330(c)(4)(A)(i). (my emphasis). Applying that statute to this case, Judge Buch pointed out: “whether a previously rejected collection alternative can be raised at a CDP hearing...is not a question of whether there was a prior opportunity, but whether there was a prior proceeding.” (Judge Buch’s emphasis). Since the Lovelands did not have a actual prior hearing in Appeals regarding the rejected OIC, Appeals could have darned well taken a fresh look at it!
And in considering the OIC, Judge Buch encouraged the Office of Appeals to consider whether an effective tax administration OIC was appropriate. Judge Buch pointed out that the taxpayers had not used those magic words but any dweeb reading their letter would understand that’s what they were after by their repeated claim of economic hardship and recitation of their medical condition. In other words, the taxpayers were presenting some important information about why they were can’t-pays and their failure to use the right words or ask for prior review did not give the Office of Appeals an easy out from actually considering their information.
Second, Judge Buch was puzzled by the Office of Appeals refusal to consider the PPIA on the grounds that the Lovelands did not provide financial information. They had. Sure, perhaps the information was too old or otherwise insufficient. But the Notice of Determination gave no hint of that. So Judge Buch directed the Office of Appeals to consider that information. Again, it was not the “right” form, but its substance still deserved consideration.
2. Be Careful What You Ask For
This opinion was triggered by an IRS Motion for Summary Judgment (SJ). Tax Court Rule 121 governs motions for SJ and says that the Court might grant or deny the motion. It says nothing about the Court granting SJ to the non-movant.
No doubt this is a sensible result. After all, if the basis for the Court denying the SJ motion is that the Office of Appeals abused its discretion, there is nothing else for the Court to decide. It needs to dispose of the case. That is why the Federal Rules of Civil Procedure, in Rule 56(f), provide that a court may “(1) grant summary judgment for a non-movant; (2) grant the motion on grounds not raised by a party; or (3) consider summary judgment on its own after identifying for the parties material facts that may not be genuinely in dispute.”
But what rule is this Tax Court result based on? The Tax Court Rule 121(c) on SJ incorporates something close to FRCP 56(f)(3), but not (f)(1) or (f)(2). So where does the Court get the authority to grant SJ to the non-movant? One answer might be: the common law of procedure. Courts, after all, have an inherent power to manage their dockets. That’s the idea in Tax Court Rule 1(b), which provides: “Where in any instance there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.” And the Federal Rules are, in turn, based on and still informed by a common law of procedure. See e.g. Ashcroft v. Iqbal, 556 U.S. 662 (2009) (glossing FRCP 8(a)(2) by imposing a plausibility requirement on pleadings that assert claims for relief).
The lesson here is just a reminder that Tax Court practice and procedure is a kissin’ cousin to federal district court practice, and this is an example of where they kiss.
Coda: When teaching my course on Tax Practice and Procedure, I try to emphasize to students the difference between the concepts of “releasing a lien” and “withdrawing an NFTL.” In this case, for example, the Lovelands were asking for the IRS to withdraw the NFTL from the county property records, and not to release the entire tax lien. Judge Buch’s opinion mixes those two actions, sometimes referring to their CDP request as one to “release” and sometimes referring to it as a request to “withdraw.” It does no harm here, but I would encourage readers to avoid the mix-up in their own practice because each action has a very different impact on a taxpayer’s credit score. You can find a good explanation of that at the usual place, Procedurally Taxing. This post is a great place to start.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.