Lesson From The Tax Court: No Second Bite In CDP For Rejected OIC

One overarching theme of my Tax Procedure course is that tax collection is a process, not an event.  Many events occur during the time between assessment of a liability and the collection of that liability, and it is easy to fixate on them in isolation, forgetting their place in the process.  One important event can be a Collection Due Process hearing and subsequent appeal to Tax Court.  Since I started writing these posts (back in September 2017) we’ve learned a lot of lessons from the Tax Court about the shape and scope of CDP.  In Craig L. Galloway v. Commissioner, T.C. Memo. 2021-24 (Feb. 24, 2021) (Judge Urda), we learn that what a taxpayer can do in a CDP hearing may be limited by earlier events in the collection process.  Details below the fold.

Law:  CDP Benefits 
Once the IRS assesses a tax liability against a taxpayer, it has a broad and powerful set of administrative collection tools, notably the lien and levy powers.  These tools allow it to collect the assessed liability without have to first sue in court.  Bull v. United States, 295 U.S. 247, 260 (1935) (assessment has the force of a court judgment).

As to liens, a common misconception is that the IRS must take action to create the tax lien. Nope.  Section 6321 provides that the tax lien arises automatically as a matter of law once the IRS makes a proper assessments, gives the taxpayer proper notice of the assessed tax, and the taxpayer then fails to pay.  The IRS does, however, need to act to make the federal tax lien a public record in the localities where the taxpayer either lives or owns property.  The IRS does that by filing a Notice of Federal Tax Lien (NFTL).

As to levies, §6331 provides that the IRS has the power to seize “all property and rights to property” of the taxpayer to satisfy the assessment.

The IRS hammers on taxpayers with both of these collection tools mostly through the ACS, its collection machine.  But before the IRS can start levying (and immediately after it files an NFTL) §§6320 and 6330 require it to give taxpayers an opportunity for a hearing before the Office of Appeals.  This is called the Collection Due Process (CDP) hearing.  Formally, the purpose of the hearing is for Appeals to review the case and make sure that administrative collection actions are appropriate.  Informally, it is a chance for taxpayers to work out a deal with the IRS by proposing creative alternatives to full use of the lien and levy collection tools.

Putting both the formal and informal purposes together, a CDP hearing provides five benefits for taxpayers.

Benefit 1:  Delay!  This is often the biggest benefit.  We learned why in Lesson From The Tax Court: The Proper Role of Delay in CDP, TaxProf Blog (Sept. 30, 2019).  However, sometimes delay actually hurts taxpayers as I explained in Lesson From The Tax Court: The Long and Short of CDP, TaxProf Blog (Apr. 6, 2020).

Benefit 2: Double-Check.  At a CDP hearing Appeals is supposed to conduct a review to be sure the IRS has not screwed up collection procedure.  In legal lingo, §6330(c)(1) requires Appeals to “obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.”  IRM 8.22.5.4 tells Appeals employees how to do that.  If the IRS has messed something up, that helps taxpayers.  See Benefit 1.

Benefit 3: Pre-Payment Liability Review.  Taxpayers may be able to object to (and get review of) the underlying tax liability at a CDP hearing.  Section 6330(c)(2)(B) limits this benefit, however, to only those taxpayers who “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”  We learned about that in Lesson From The Tax Court: The Eye Of The CDP Needle, Tax Prof Blog (May 4, 2020).

Benefit 4: Collection Alternatives.  A CDP hearing allows taxpayers the opportunity to explain to a high-level IRS employee why the taxpayer cannot fully and immediately pay the assessed tax.  Taxpayers can apply and argue for a payment alternative such as an Offer In Compromise (OIC), an Installment Agreement (IA), a Partial Pay Installment Agreement (PPIA), or relegation to Currently Not Collectible (CNC) status.  As with Benefit 3, §6330(c) limits this benefit, using an issue preclusion rule.  A taxpayer may not ask for a collection alternative if the taxpayer tried for that collection alternative in either a previous CDP hearing or “any other previous administrative of judicial proceeding.”  §6330(c)(4)(A).

Benefit 5: Spousal Relief.  A CDP hearing allows taxpayers the opportunity to ask for relief permitted by §6015, including asking for equitable relief under §6015(f).  It is not clear how the Tax Court will apply, or decline to apply, the special scope and standard of review that Congress stuck in §6015(e)(7) in the 2019 Taxpayer First Act, 133 Stat. 981 .  We learned the general lesson for how the Tax Court reviews CDP cases in Lesson From The Tax Court: The Scope and Standard of Review in CDP Cases, TaxProf Blog (Nov. 25, 2019).

Today’s Lesson is about Benefit 4 and its limitation.

Facts
Mr. Galloway sold cars on commission.  In 2014 he reported gross income of about $250,000.  Apparently he was out of work for part of that year and much of the income resulted from his breaking into his retirement savings.  His total tax liability was about $95,000.  His tax withholdings were only about $33,000, leaving a balance due of about $62,000.  He did not pay that amount with the return.

In 2016, Mr. Galloway submitted a first OIC for $9,138.  The opinion does not say whether it was a lump sum or periodic payment OIC.  Regardless, the Centralized Offer In Compromise unit (COIC) decided he could fully pay the amount due and rejected the offer.  Mr. Galloway did not seek further administrative review.

In 2017, Mr. Galloway submitted a second OIC for $8,900.  This one was a periodic payment offer over a 24 month period.  Once again COIC rejected the offer, based on its determination that his could fully pay the liability over time:  his monthly income of $4,902 less allowable expenses of $3,217 left plenty of money for him to pay off his liability in full within the 110 months remaining in the collection period.

This time, Mr. Galloway asked Appeals to review the rejection.  He submitted a detailed letter which, inter alia, argued that COIC’s determination of his monthly income was improper because his income was commission-based and the $4,900 was the highest grossing month he had reported, not his average. In February 2018, Appeals upheld the COIC determination to reject the OIC.

In March 2018 Mr. Galloway received a CDP Notice, to which he promptly responded.  During the CDP hearing, Mr. Galloway again asked Appeals to accept the 2017 OIC that the COIC had previously rejected.  The Appeals Settlement Officer (SO) said no.  But she did tell Mr. Galloway that he was free to ask for a different OIC if he had experienced changes in the monthly income from that which he had reported as part of the rejected OIC.  She also told Mr. Galloway that she would consider a longer-term IA at an amount lower than the COIC had determined to be Mr. Galloway’s reasonable payment potential.  She gave him a deadline to take action.

In August 2018, when Mr. Galloway had taken no action in response to the SO’s deadline, she issued a Notice of Determination.  That’s pretty quick work for a CDP hearing!

Mr. Galloway timely petitioned the Tax Court, thus obtaining another 2.5 years of delay at the end of which we learn the following lesson.

Lesson:  No Second Bite In CDP for Rejected OIC
Mr. Galloway was fixated on the rejection of his 2017 OIC.  Despite the invitation of the SO to submit a new OIC, he decided to stick with the old one and rehash the same arguments Appeals had previously rejected.  Bad decision.   It is true that getting OICs and IAs for commission-based taxpayers is tricky, but spending years fighting an OIC offered at a single point in time is not a smart strategy because...collection is not an event, it's a process.  That is the point of the §6330(c)(4) preclusion rule: only one bite at each OIC apple.

Judge Urda explains how the §6330(c)(4) preclusion rule has two components: (1) the OIC must have been part of a prior administrative proceeding and (2) Mr. Galloway must have participated meaningfully in that proceeding.  As to the first, Judge Urda explains that “consideration by the Office of Appeals constitutes an administrative proceeding within the meaning of §6330(c)(4)(A).”  As to the second, Judge Urda finds Mr. Galloway’s letter to Appeals shows that he took full advantage of his opportunity to get Appeals to review the COIC rejection of his 2017 offer.

Comment:  The Difference Between A Second Bite and A New Apple
We end with where we began: collection is a process, not an event.  At the end of his opinion, Judge Urda plants the seed that just because Mr. Galloway does not get a second bite at reviewing the merits of his 2017 OIC, nothing prevents him from submitting a new OIC, or from asking for an IA.  As a taxpayer’s situation changes over time, so may the taxpayer’s eligibility for an alternative to fully paying a tax liability.

Judge Urda’s advice is a helpful reminder that losing out on a CDP hearing is not the end of the collection process.  I am sure readers hope that Mr. Galloway is doing well and earning good money.  If that is so, then he needs to pay his tax liabilities.  If that is not so, however, he can ask for a new OIC or IA.  He does not need the CDP event to do that. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return to TaxProf Blog each Monday for a new Lesson From The Tax Court.