Lesson From The Tax Court: The Proper Role Of Delay In CDP

I often call CDP “Collection Delay Process.”  That is not pure snark.  Part of the purpose of CDP is to pause collection long enough to give taxpayers adequate time to present information to a human IRS employee and explain why the IRS should not be collecting from them.  What constitutes adequate time turns on the plausibility of the taxpayer’s story.  That is today’s lesson.  

The problem with CDP is that many, if not most, of the taxpayers who press the pause button do so simply for the purpose of delay and not for the purpose of explanation.  Time and again one finds taxpayers who invoke their CDP rights and then do nothing else.  They do not present a collection alternative, do not submit forms showing their assets and liabilities, do not respond to Appeals employee’s requests for information.  More importantly, they do not give a plausible story on why the IRS should stop collection.  Instead they give only excuses as to why they need more and more delay.

IRS employees in Appeals become jaundiced.  When so many requests lack substance, it is all too easy to start thinking that all requests lack substance.  The resulting temptation is to discount taxpayer excuses for delay and move ahead with collection. 

Two recent Tax Court opinions show both the frustrations felt by IRS Appeals employees and the dangers of assuming all taxpayers simply want delay.  Together they teach why delay is indeed a necessary part of the CDP process.  In Derrick Barron Tartt v. Commissioner, T.C. Memo 2019-112 (September 3, 2019)(Judge Lauber) the taxpayer sought delay for delay’s sake.  The case shows us the kind of situations that IRS Appeals employees see as a general rule.  In contrast, the case of Taryn L. Dodd v Commissioner, T.C. Memo 2019-107 (August 22, 2019)(also Judge Lauber) shows us the exception to the rule and why Appeals must sometimes give a taxpayer repeated and repeated and repeated opportunities to provide information.

Information and The CDP Process:

The IRS tax collection system is mostly run by computers, collectively called the Automated Collection System (ACS).  These machines are programmed to exercise the agency’s awesome administrative powers of collection by filing Notices of Federal Tax Liens and issuing Levies. 

The computerized collection process starts with a series of notices that ask the taxpayer to pay and warn of consequences if they do not.  These notices historically have generated the most dollars of post-assessment collection.  You used to be able to see that in the IRS Data Books in Table 16, but some years ago they changed the table to omit that information.  The last data I know of is in the 2006 IRS Data Book.  Table 16 there reported that of the $40.8 billion collected through enforced collection in FY06, $28.7 billion came from the automated Notices.

If a taxpayer does not respond to the series of automated notices, then §6320 and §6330 require the IRS to give taxpayers a Collection Due Process (CDP) hearing before the IRS cranks up the collection machine.  The CDP hearing gives taxpayers an opportunity to talk to a live IRS employee, called a Settlement Officer (SO), located in the Office of Appeals.  The purpose of the hearing is for Appeals to review the case and make sure that further administrative collection actions are appropriate.  What that really means is that it is a chance for the taxpayer to work out a deal with the IRS.

Generally, taxpayers seek to show they are just turnips such that the IRS should give up on trying to collect an admitted tax liability.  Sometimes, however, taxpayers use the CDP hearing to contest the underlying tax liability on the merits.  Section 6330(c)(2)(B) permits taxpayer to “raise at the hearing challenges to 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.” The Tax Court early on interpreted that language to mean that even when the IRS is attempting to collect only a self-reported liability, the taxpayer can ask for a review of the liability on the merits.  Montgomery v. Commissioner, 122 T.C. 1 (2004).

It’s easy for taxpayers to miss their CDP opportunity.  They only get 30 days from the date a notice is sent (by computer) to their last known address telling them about the opportunity.  If they miss the chance, then the ACS can start spitting out Notices of Federal Tax Lien (NFTL) and levies. 

Even if a taxpayer gets a CDP hearing, it is really just an opportunity to talk with an experienced collection employee.  The Settlement Officers (SOs) are drawn from the ranks of Revenue Officers.  They operate 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.” 

It’s hard to convince SOs that a taxpayer is a “can’t-pay.”  The Force of the won’t-pay presumption is strong within them.  In particular, SOs deal with a high volume of taxpayers---many of whom are hobbyists.  Thus, SOs do not always look carefully at the information provided by the taxpayer, especially when the information comes in less than perfect form.  It should be no surprise that probably the most common reason (or excuse) SOs give for approving collection (and to move an account off their desk) is that a taxpayer failed to supply requested information. 

Similarly, when taxpayers seek to contest the underlying liability, they bear the burden to give the information that will alter the assessment.  They often fail to do that.

One gets a glimpse of this 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.  He continued to warn them they needed give information when trial resumed.  They did not.  Judge Vasquez bemoaned that “petitioners refused to cooperate with the Court.”  SOs around the country would say: “welcome to my world.” 

Today’s lesson shows how, despite the operating presumption, Appeals still must give taxpayers a reasonable opportunity to provide the information.   What constitutes “reasonable” depends on the taxpayer’s story. 

The Dodd Lesson: A Plausible Story Deserves Delay

Ms. Dodd, a legal secretary, self-reported a tax liability of $184,000 on her timely filed 2013 return but only paid about $14,000 of it.  In September 2016 the IRS sent her a CDP notice and she timely requested as CDP hearing.  She wanted to contest the underlying liability because, she said, it arose from a sale of assets owned by an LLC of which she was a member.  All the sale proceeds, however, were wired to the bank account of the law firm where she worked to pay off that law firm’s line of credit.  She said she, personally, got none of the proceeds.  So the $1 million gain she had reported was not, come to think of it, her gain.  Please do not ask me why Ms. Dodd did not submit an amended return.  I do not know. 

The SO assigned to her case requested collection information, but did not say anything about what information she needed to support her liability challenge.  By the time of the telephone conference on February 28, 2017, Ms. Dodd had not provided the requested collection information.  The SO said “time’s up” and, in a very efficient three days, the SO’s recommendation to proceed with collection was approved and a notice of determination was sent.  It erroneously said she had failed to raise a challenge to the underlying liability.

Ms. Dodd timely petitioned the Tax Court.  About a year after her petition, an IRS Chief Counsel attorney caught the SO's error and asked the Tax Court to remand the case to Appeals so Ms. Dodd could explain her liability challenge.  Again, please do not ask me what Ms. Dodd was doing or thinking during this year’s worth of delay.  Please do not ask why she did not file an amended return or ask for audit reconsideration or do something.  As with so many other taxpayers, it appears to be a case that out of sight was out of mind.

The Tax Court granted the IRS motion for remand in May 2018.  The same SO worked the case on remand.  That SO now asked Ms. Dodd to submit an amended return by July 3rd for the hearing scheduled July 10th.  Once again, Ms. Dodd did not submit any information in response to the SO’s request.  In the July 10th conference call, the SO’s notes reflect that Ms. Dodd said she had “forgotten” she was supposed to get the information to the SO before the hearing.  The SO told her collection action would be approved and then, in another surprising burst of speed, got the recommendation approved and send to Ms. Dodd a mere 9 days later.

Judge Lauber found the SO was too efficient.  Even though Ms. Dodd had not filed an amended return---either on her own or with prodding---Judge Lauber held that she had given enough information in the initial CDP request and in the supplemental hearing that the SO should have done more to consider her challenge to the underlying liability.  In particular, Ms. Dodd had told the SO all the information about the transaction including the name of the bank where the money had been deposited.  Judge Lauber said “submission of an amended return omitting $1 million of sale proceeds would not have added much to the SO’s sum of knowledge.”  He notes that Ms. Dodd came to the supplemental hearing with questions about the how to file an amended return.  “But rather than address those questions or provide petitioner with additional time to supply the information that was needed, the SO closed the case the very next day.” 

In effect, Judge Lauber faults the SO for not helping Ms. Dodd properly amend her return.  The SO should have asked her for information from which the SO could determine whether the LLC had realized any gain on the sale of the assets and, if so, what amount was properly allocated to her interest in the LLC.  “But the SO did not advise her, either in the letter scheduling the supplemental hearing or during the hearing itself, of the factual information that was needed to resolve [her] challenge [to the underlying liability].”

With that, Judge Lauber remanded the case back to Appeals for a second time.  Please do not ask me why this taxpayer---employed by a law firm---did not consult with a professional or why, if she was too poor to consult with one, she did not reach out to a Tax Clinic.  When the IRS is breathing down your neck for some $200k and you are a secretary, you would think it is a matter worth your attention.  Maybe she will find some help on this second remand.  Maybe she will actually file an amended return, or get help from TAS.

The bottom line here, however, is that the taxpayer had a plausible story on why her tax liability might be wrong.  Accordingly, Appeals needed to give her more time, more delay, to support that plausible story.  That’s the point of the delay built into CDP. 

Folks, I would not recommend this gambit.  The Tax Court usually faults the taxpayer in these situations for failing to file an amended return.  See e.g. Millen v. Commissioner, T.C. Memo 2019-60.  What saved Mr. Dodd here was her plausible story. 

Mr. Tartt was not so fortunate.

The Tartt Lesson: A Bogus Story Deserves No Delay

Like Ms. Dodd, Mr. Tartt self-reported tax liabilities on his 2013, 2014, and 2015 returns but did not fully pay them.  The IRS was attempting to collect about $217,000 when it sent him a CDP notice in May 2017. 

Like Ms. Dodd, Mr. Tartt timely requested a CDP hearing.  In his request, he told his story.  He wanted to contest collection because of a “a Federal lawsuit in which the Government has denied due process of law that has resulted in loss of millions.”  The SO assigned to the case scheduled a hearing for August 2017 and made the standard requests for information. 

Like Ms. Dodd, Mr. Tartt was totally non-responsive to the requests for further information.  He had told his story. 

Unlike Ms. Dodd, however, Mr. Tartt blew off the hearing.  However, this SO nonetheless gave Mr. Tartt a second chance in the form of an additional two weeks after the scheduled hearing.  Mr. Tartt simply reiterated his story that “the United States owes more than owed” and therefore he did not believe it was proper to collect his taxes until the unrelated suit was “settled through the courts or settlement.” 

Also unlike in Ms. Dodd's case, this SO was more deliberate before issuing the notice of determination.  Although the SO made her recommendation in August 2017, or perhaps early September (the opinion does not say), the SO’s managers did not approve the recommendation until February 2018.  One important reason for this was that the SO here noticed that Mr. Tartt lived in a federally declared disaster area.  She called Mr. Tartt and left a voice mail pointing this out to him and inviting him to contact her about it.  That's a great SO!  But she never heard from him.  So in February the IRS issued a notice of determination. 

Mr. Tartt did respond promptly to the notice of determination by petitioning the Tax Court.  His petition reiterated the story he wanted to tell:  the IRS should not be allowed to collect his tax liabilities until his suit against the government was completed. 

Judge Lauber explains that Mr. Tartt did not present a plausible story deserving of any additional delay.  Judge Lauber points out that Mr. Tartt’s suit against the U.S. had been “deemed frivolous by every court to consider the question.”  Mr. Tartt’s story was so implausible, in fact, that Judge Lauber considered imposing §6673 penalties against him for excessive delay. 

Judge Lauber also questions whether the Tax Court would even have the authority to setoff mutual liabilities when one is a non-tax liability.  He writes “no legal authority exists for offsetting, against an assessed Federal tax liability, a claim against the Government in a totally unrelated matter.”   I am not so sure about that.

I think the Tax Court has ample power to apply settoff in the appropriate case.  To start with, the Tax Court unquestionably has the power to employ equitable doctrines.  For example, the Tax Court can apply the doctrine of equitable recoupment.  Estate of Branson v. Commissioner, 264 F.3d 904 (9th Cir. 2001).  That doctrine, however, only applies when a single "transaction, item or taxable event" is subject to two inconsistent taxes and the statute of limitations prevents access to the courts for one of the parties. United States v. Dalm, 494 U.S. 596 (1990).  Thus, it would not apply here, even if Mr. Tartt had actually received a non-tax judgment against the United States. 

If Mr. Tartt had been a judgment creditor of the U.S., however, I would think there is plenty of authority for the Tax Court to apply the doctrine of setoff.  Setoff is related to recoupment.  Setoff is an equitable right that allows parties who are mutual debtors and creditors to each other to net out their debts, even if those debts arise from separate transactions.  "The right of setoff...allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A." Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18 (1995)(internal quotes omitted).  For setoff purposes, the United States is deemed a single entity and it can certainly collect taxes by offsetting non-tax amounts the U.S. owes the tax debtor.  See e.g. In re HAL, 196 B.R. 159, 162 (9th Cir. BAP 1996), aff'd 122 F.3d 851 (9th Cir. 1997).

The bottom line, however, is that Mr. Tartt was not a judgment creditor and he did not deserve additional delay.  Unlike Ms. Dodd, he had told the SO only a frivolous story, not a plausible one.  He received all the delay he was entitled to under Collection Delay Process. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.