Before the IRS can start collecting unpaid tax liabilities by levy, §6330(b)(1) requires it to give taxpayers an opportunity for a Collection Due Process (CDP) hearing with the IRS Independent Office of Appeals.
Many taxpayers do not fully understand how CDP hearings work. First, they erroneously expect that a CDP hearing is a discrete and physical event where they (finally!) confront the evil IRS. Second, they erroneously expect that the point of the hearing is for the evil IRS to justify collection, including proving the correctness of the assessment. Finally, they expect that they can go to Tax Court and get a do-over if they don't like the result they get from the CDP hearing. Taxpayer with those expectations are doomed to disappointment.
Today’s lesson is for them. In Brian K. Bunton and Karen A. Bunton v. Commissioner, T.C. Memo. 2022-20 (Mar. 10, 2022), Judge Morrison gives a nice short lesson on what constitutes a CDP hearings. The taxpayers complained that their CDP hearing was defective because (1) the Settlement Officer (SO) had not given them an in-person hearing, and (2) the IRS did not show the assessment was correct. The Court rejected those complaints and in so doing, shows us what constitutes a CDP hearing. Details below the fold.
Law: What’s a Hearing?
The right to a hearing is sometimes required by the constitution (due process clause) and sometimes by a statute.
The constitutional dimension of an administrative hearing was limned by the Supreme Court in Londoner v. Denver, 210 U.S. 373 (1908). In that case, taxpayers in Denver Colorado had objected to a special property tax assessed on them for road improvements. The Denver City Council, sitting as a Board of Equalization had permitted objections to be submitted in writing. The taxpayer did that. After reviewing their submissions, the City Council refused to allow an in-person meeting because the submitted objections did not complain about the fairness of how the tax was to be apportioned. Instead the objections went to the legal question of whether the state had the power to tax.
The Colorado Supreme Court saw nothing wrong in this procedure. The U.S. Supreme Court did. It said: “If it is enough that, under such circumstances, an opportunity is given to submit in writing all objections to and complaints of the tax to the board, then there was a hearing afforded in the case at bar. But we think that something more than that, even in proceedings for taxation, is required by due process of law.” 210 U.S. at 376. That “something more” was this: “a hearing, in its very essence, demands that he who is entitled to it shall have the right to support his allegations by argument, however brief; and, if need be, by proof, however informal.” Id. Strongly implied by the facts of the case is that both those features of a hearing required a face-to-face meeting.
That was 1908. Administrative law nerds know that the idea of a “right to a hearing” got a huge boost from the Supreme Court in Goldberg v. Kelly, 397 U.S. 254 (1970), which put a lot of pressure on the concept of a “hearing” as a face-to-face confrontation. One of my favorite discussions of that is Henry J. Friendly, Some Kind of Hearing, 123 U. Pa. L. Rev. 1267 (1975). I am particularly mindful of his critique that “In the mass justice area the Supreme Court has yielded too readily to the notions that the adversary system is the only appropriate model” for conceptualizing the appropriate constitutional dimensions of a hearing. Id at 1316. Here’s why: “Under our adversary system the role of counsel is not to make sure the truth is ascertained but to advance his client's cause by any ethical means. Within the limits of professional propriety, causing delay and sowing confusion are only are his right but may be his duty.”
Judge Friendly’s notion is that an adversarial type of in-person hearing is not (nor should be) the only tool in the due process toolbox. That idea finds centuries of support in a variety of contexts where governmental needs result in depriving citizens of their property. Justice Cardozo reviews many of those contexts in Phillips v. Commissioner, 283 U.S. 589 (1931). That was a federal tax case where the Court upheld the federal tax system’s basic “pay-first-litigate-later” structure. In Phillips, the IRS was seeking to levy on the property of a transferee. The transferee sought to enjoin collection, objecting that taking the property without a pre-deprivation hearing violated due process. Wrote Justice Cardozo: “Where only property rights are involved, mere postponement of the judicial enquiry is not a denial of due process, if the opportunity given for the ultimate judicial determination of the liability is adequate." Id. at 596-97. The Court thus upheld the ability of the IRS to levy property without any prior opportunity for a hearing. There was no constitutional right to a pre-deprivation hearing about an assessed tax liability. More about that in next week's Lesson.
While there is no constitutional right to a pre-deprivation hearing, Congress has created a statutory right in §6330. Subsection (b) is even titled “Right To A Fair Hearing” and (b)(1) provides that if a taxpayer requests “a hearing in writing under subsection (a)(3)(B) and states the grounds for the requested hearing, such hearing shall be held by the Internal Revenue Service Independent Office of Appeals.”
Still §6330 nowhere defines what constitutes a “hearing.” That’s a gap, folks! And Treasury knows how to fill gaps: through regulations! Sure enough, the relevant Treasury Regulation on CDP (drafted by my former colleague Jerry Sekula under the supervision of, among others, Keith Fogg) explicitly contemplates that CDP hearings may or may not be in-person. The regulation seems to have been channeling Judge Friendly’s 1975 law review article. Here’s what it says:
“CDP hearings are much like Collection Appeal Program (CAP) hearings in that they are informal in nature and do not require the Appeals officer or employee and the taxpayer, or the taxpayer's representative, to hold a face-to-face meeting. A CDP hearing may, but is not required to, consist of a face-to-face meeting, one or more written or oral communications between an Appeals officer or employee and the taxpayer or the taxpayer's representative, or some combination thereof.” Treas. Reg. 301.6330-1(d), A-D6.
“In all cases, the Appeals officer or employee will review the case file, as described in A-F4 of paragraph (f)(2). If no face-to-face or telephonic conference is held, or other oral communication takes place, review of the documents in the case file, as described in A-F4 of paragraph (f)(2), will constitute the CDP hearing for purposes of section 6330(b).” Id. at A-D7.
The Courts have upheld the regulation’s concept that a CDP hearing does not have to be in-person. I think the leading case is still Living Care Alternatives of Utica v. U.S., 411 F.3d 621 (6th Cir. 2005). There, the IRS was seeking to collect about $450k in unpaid employment taxes from the taxpayer. One of the taxpayers objections was that the record that was produced for review consisted only of the Notice of Determination. There was no transcript of the “hearing” nor any official record. The taxpayer asked the Sixth Circuit to send the case back to Appeals to develop a record, pointing out that a couple of district courts had done so in other cases.
The Sixth Circuit refused to remand or to order a “hearing” as traditionally understood in administrative law:
“While this is a conventional remedy in administrative law cases, it was extraordinary in the area of tax collection. As discussed earlier, the notion of due process in tax collection is not the same as in other areas of the law. The IRS has historically had broad discretion and the right to levy on property without any pre-seizure process. The 1998 reform did provide for additional procedural protections, but it still does not require the creation of a formal record and conventional administrative review.” Id. at 629.
Yep. Tax exceptionalism strikes again! Similarly, the Tax Court has consistently held that what constitutes a proper CDP hearing—including whether it will in-person—is at the discretion of the SO. Only if that discretion is abused will the Tax Court remand for a new hearing. See Katz v. Commissioner, 115 T.C. 329 (2000). I think it helps that the administrative record is now far more robust than it was in Living Care. The IRS procedures create a more complete record for the Tax Court to use in its review, including the SO’s case file, which contains the SO’s case activity notes. See IRM 126.96.36.199 (08-26-2020)(“Administrative Record”).
Today’s case shows us how this works.
The IRS sought to collect unpaid taxes from Mr. and Mrs. Bunton for the tax years 2013, 2014, and 2015. The Buntons appear to be what most folks call tax protestors. IRS employees, of course, are statutorily prohibited from using that or similar terms. §3707 of the IRS Restructuring and Reform Act of 1998. I personally like to call them “hobbyists.” See Lesson From The Tax Court: Tax Protesting Is A Hobby That Eats, TaxProf Blog (Oct. 23, 2017).
I really like how Judge Morrison sets out the facts, because it reinforces a point that might strike some readers as ludicrous. He devotes a separate paragraph for each tax year. He first explains how, each year, the Buntons refused to report their wages from their good-paying jobs as income but instead submitted Forms 4852 (Substitute for Form W-2). They did that to claim a refund for their wage withholdings in 2013 ($40k), 2014 ($42k) and 2015 ($26k). Judge Morrison ends each paragraph with this sentence: “The IRS paid the refund.” So the cumulative effect is to leave the reader shaking their head at how the Buntons’ pathetically obvious scheme was apparently successful year after year after year. I’ll address that in a Comment below.
Eventually, however, the IRS caught up to them. It sent NODs to the Buntons at their home on Pepperwood Way, a San Jose neighborhood of modest 3 BR 2 BA homes that Zillow says are worth around $1.4 million. The NODs proposed to assess both taxes and penalties.
The Buntons did not file any Tax Court petition in response to the NODs. What they did instead was to send a letter filled with tax protester drivel to the IRS in response to the 2015 NOD. The only useful aspect to their letter was that they attached a copy of the NOD to it, thus showing that they had, in fact, received the NOD.
In March 2018 the IRS sent them a Ltr 11 (Notice of Intent to Levy and Your Right to a Hearing) for all three years. This time the Buntons got their act together and asked for a CDP hearing. They said they wanted to dispute the assessed taxes at a face-to-face hearing and only “if at the end of the hearing it is found that we owe the tax” would they agree to discuss collection alternatives. Op. at 4. In response to the SO’s request for information, the taxpayers simply sent letters demanding a face-to-face conference because they wanted to contest the liabilities. Eventually, they sent in a letter “filled with frivolous arguments, including that the Buntons were not ‘citizens of the United States Corporation.” Op. at 7.
Ten months after they asked for a CDP hearing, the SO gave up and issued a Notice of Determination allowing the IRS to proceed with collection. The Bunton’s petitioned the Tax Court, claiming that the SO abused her discretion by failing to give them their requested face-to-face hearing to (1) discuss their tax liability and then, only if they agreed they were liable, (2) discuss collection alternatives. Like Frank Sinatra, they wanted to do it their way. But that's not how CDP hearings work.
Lesson: Face-To-Face Meeting Is Opportunity Not A Right
While taxpayers have a right to a CDP hearing, they do not have a right to a face-to-face hearing. Instead, it’s at the discretion of the SO. The test is whether such a meeting would serve an important purpose. Here, after Judge Morrison recited all the steps this SO took to perform her duties under §6330, he finds that the SO did not abuse her discretion in refusing a face-to-face meeting, because such a meeting would serve no purpose.
First, as to the underlying liability, Judge Morrison points out that if the taxpayers had received the NODs, they could not dispute their liabilities in a CDP hearing. Here, the record showed the IRS properly sent NODs for the three years at issue to the Buntons’ last known address, on Pepperwood Way. Judge Morrison acknowledges that “the mere fact a notice is mailed does not mean it is received.” Op. at 9. But the Buntons’ broad assertion that they did not receive these NODs was belied by the fact that they actually responded to one and attached a copy of it to their response. Thus, there was nothing to have a hearing about and the “Office of Appeals did not abuse its discretion by deciding not to offer the Buntons a face-to face conference....”
Second, as to collection alternative, Judge Morrison again points out that there was nothing to have a hearing about since the taxpayers had neither identified any collection alternatives to the levy nor provided any information that the SO could use to balance the equities. Further, they did not even qualify for any collection alternative because, during the time they were playing games with the SO, they were also failing to file their tax returns.
This opinion does a great job at detailing all the steps the SO took to give these taxpayers an opportunity to explain why they could contest their liability, to explain why the IRS should not proceed with collection, and to offer arguments and submit information to support these explanations. The SO sent letters. The SO made phone calls. The SO asked for information. The SO gave additional time to send in information. That's what constitutes a CDP "hearing." These taxpayers offered no rational responses. They submitted no useful information.
So that was their CDP hearing. And that’s how CDP hearings work.
Comment: It does not seem right that it should be so easy to fool the IRS into sending you all the taxes paid through withholding by the simple expedient of submitting a fraudulent Form 4852. But this is an unavoidable part of the U.S. tax system. With over 160 million individual taxpayers submitting returns, the IRS cannot help but rely on taxpayers self-reporting their proper income and deductions as an initial matter. And, overall, we want that to be the case. We want taxpayers to get their proper refunds. Remember, the IRS is under constant pressure to balance two objectives: getting out refunds quickly and getting out the right amount to the right taxpayers. It's the classic tension between getting it right and gittin'-r-done. There is a structural processing issue that exacerbates the tension between those objectives: the IRS is unable to cross-check third-party information returns in real time because of differences in submission timelines: taxpayers submit returns much earlier than third parties submit their information returns. Further, what most folks don’t realize is that the IRS is subject to a hydra-headed dysfunctional Congressional oversight regime. I gave details in Lesson From Congress: Overbearing Oversight, TaxProf Blog (Jan. 28, 2019 — no Tax Court opinions during that long government shutdown). There we learn that even as the IRS gets beat up by one committee for failing to send out “timely” refunds, it gets beat up by another committee for sending out too many erroneous refunds. Both committees spend equal time disparaging the work of the IRS but in totally different directions. You might say they put the “Dis” in “Dysfunctional.”
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each Monday to TaxProf Blog for another Lesson From The Tax Court.