Tax collection is a process, not an event. The process can last ten years or more. During that time many different events may occur. Different events may bring with them different decision-makers within the IRS. The secret sauce of representing clients is that when you hit an unfavorable decision-maker, try to find a new one. An example of that is getting a CDP hearing. CDP hearings allow taxpayers to pause collection while they ask for alternatives to full collection, such as Offers In Compromise (OICs). The CDP hearing is conducted by a Settlement Officer (SO) in the IRS Independent Office of Appeals (Appeals).
Thus, the SO represents a new layer of decision-making. But what do you get with this new decision-maker? Today’s lesson teaches that you may not get what you think.
Michael D. Brown v. Commissioner, 158 T.C. No. 9 (June 23, 2022) (Judge Lauber), address what I think is a common misconception about CDP hearings: that Appeals makes decisions about collection alternatives. It does not. It reviews decisions made by the relevant IRS function. At issue in Brown was whether the IRS waited more than two years to reject his OIC, which was proposed as part of a CDP hearing. If so, then his low-ball OIC would be deemed accepted under §7122(f). Although the IRS unit that evaluated his OIC rejected it after a few months, the formal Appeals decision in the CDP hearing came more than two years later. Mr. Brown went to Tax Court, claiming the benefit of §7122(f). The Tax Court said no. Appeals did not reject the OIC; all it was doing was reviewing the rejection decision made by the IRS.
This was not a slam dunk win for the IRS. I think it’s worth your time to see why. Details below the fold.
Mr. Brown owes a sheet-ton of tax for multiple years, over $50 million for 2001-2007, 2009-2010, and 2014. That has given him multiple opportunities for CDP hearings and appeals, resulting, so far, in three published Tax Court opinions and two Circuit Court opinions. Plenty of time to hide...er....protect assets. But no relief from the obligation to pay. The collection machine grinds on. S-l-o-w-l-y.
Today’s case concerned collection of his 2009-2010 liabilities. In November 2017, the IRS sent Mr. Brown a levy CDP notice. He timely requested a CDP hearing. In April 2018 he submitted an OIC for $320,000 to resolve all his outstanding liabilities. My math tells me is a 0.64% offer. Tell me if your math is different. The SO sent the OIC to the COIC unit which decided it was processable and which, in turn, sent it a collection specialist in the IRS’s Laguna Niguel office.
In November 2018, the folks in Laguna said they could not act on the OIC because “other investigations are pending that may affect the liability sought to be compromised or the grounds upon which it was submitted.” Op. at 5. Ugh. That is NOT language you want to see. It basically means there is an open criminal investigation and the IRS will not accept an OIC under those circumstances. See IRM 220.127.116.11.1(2) (“Once a taxpayer has been advised of the open criminal investigation, if the assigned Special Agent has no objection, the taxpayer may be asked to withdraw the offer until the criminal matter is resolved. If the taxpayer declines to withdraw the offer, return the offer to the taxpayer under the criterion ‘other investigations are pending that may affect the liability sought to be compromised or the grounds upon which it was submitted.’”). Although it could also mean that there is an open fraud investigation. I’m not sure if that same phraseology is used. The IRM says only that the collection function should reject the OIC “using ‘the Other Investigations Pending criteria.’” See IRM 18.104.22.168 (rejecting an OIC when open fraud investigation).
Whatever that reason means, it meant that the IRS decided it would not look any further at Mr. Brown’s OIC and expressed that decision by returning the OIC to the SO. Mr. Brown’s representative asked the SO to reconsider the OIC, arguing that the reason given for its rejection was “bogus.” Op. at 5. The SO said he would keep the CDP case open pending resolution of the other investigations.
But then, in June 2020, Mr. Brown’s representative noticed that more than two years had gone by since he submitted the OIC. He asked the SO to deem the OIC accepted under §7122(f) since the SO had not rejected it with a formal Notice of Determination. The SO basically said “go away” and issued a Notice of Determination to let Mr. Brown test that theory in Tax Court.
Mr. Brown’s argument in Tax Court was, I think, based on some uncertainty in two aspects of the law: the two-year rule in §7122(f), and the function of Appeals in CDP hearings.
Law: The Uncertain Two Year Rule in §7122(f)
Section 7122 gives the IRS discretion to compromise tax liabilities. To ensure that the IRS actually exercises that discretion, §7122(f) creates a two-year rule: an “offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer.”
Thus, to apply the two-year rule, one needs to know both the date the OIC is submitted and the date it is rejected. The regulations are not entirely clear on that last date. They say a rejection occurs when “the IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reason(s) for rejection, and the right to an appeal.” Treas. Reg. 301.7122-1(f)(1). But then they say that written notice cannot be issued “until an independent administrative review of the proposed rejection is completed.” Treas. Reg. 301.7122-1(f)(2). And then they say that taxpayers can “administratively appeal a rejection of an offer to compromise to the IRS Office of Appeals” if they act within the 30 days after the date on the rejection letter. Treas. Reg. 301.7122-1(f)(3). So does (f)(3) imply that the “independent administrative review” referenced in (f)(2) is by some office other than Appeals? Or does (f)(2) mean a rejection is only in a proposed form until reviewed by Appeals? And how does this fit in a CDP hearing?
Confused? Well, the IRS has tried to clarify. Notice 2006-68 emphasizes the language in subsection (f)(1) of the regulation and the implication in (f)(3) to say that an OIC’s time in Appeals does not count:
“the date an offer is rejected for purposes of section 7122(f) is the date on which the Service issues a written notice of rejection under Treas. Reg. § 301.7122-1(f)(1). The period during which the IRS Office of Appeals considers a rejected offer in compromise is not included as part of the 24-month period because the offer was rejected by the Service within the meaning of section 7122(f) prior to consideration of the offer by the Office of Appeals.”
The Tax Court has accepted this interpretation of the statute and regulation given in Notice 2006-68. As has the Ninth Circuit Court of Appeals. In fact, Mr. Brown himself paved the way. In Brown v. Commissioner, T.C. Memo. 2019-121, aff’d in part, vacated in part, and remanded, 826 F. App’x 673 (9th Cir. 2020), Mr. Brown made a similar low-ball OIC in a different CDP hearing. Appeals sent it to the IRS to evaluate. The IRS offer specialist discovered there was an open Abusive Tax Avoidance Transaction investigation for the years covered by the OIC. So the IRS “returned” the OIC to Appeals and to Mr. Brown. Mr. Brown argued that this action in “returning” his OIC did not comply with §7122(f)’s requirement that the IRS “reject” the OIC within two years. So he claimed a deemed acceptance! Both the Tax Court and Ninth Circuit said no: when the IRS unit responsible for evaluating an OIC returns it to appeals, that is a rejection for §7122(f) purposes.
In today’s case, Mr. Brown again sought the benefit of the §7122(f) deemed acceptance rule, but for a different reason. In the earlier cases both the IRS “return” and the ultimate CDP “Notice of Determination” occurred within two years. The question was simply whether an OIC returned because IRS policy would not permit it to be considered should be treated as a rejection. In today’s case, he argues that because the CDP statute requires Appeals to “consider” collection alternatives, it is only when a Settlement Officer formally rejects the OIC at the end of the CDP process that the IRS has rejected it for §7122(f) purposes.
To understand his argument, let’s look at the ambiguous function of Appeals.
Law: The Ambiguous Function of Appeals In CDP
Before the IRS can start levying against a taxpayer’s assets, it must give the taxpayer the opportunity for a CDP hearing. §6330(a). CDP provides four important benefits to taxpayers: (1) It delays collection; (2) It forces the IRS to self-review its compliance with applicable procedural rules; (3) it fills a gap by permitting taxpayers a potential for pre-payment liability review; and (4) it gives taxpayers an opportunity to ask for collection alternatives such as OICs, and others. I explain all these in more detail in Lesson From The Tax Court: No Second Bit In CDP For Rejected OIC, TaxProf Blog (Mar. 1, 2021). Today’s lesson involves the fourth benefit.
Section 6330(b)(1) tells us that a CDP hearing “shall be held by the Internal Revenue Service Independent Office of Appeals.” Paragraph (2) of §6330(c) tells us that among the issues taxpayers can raise in CDP are “offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise.” §6330(c)(2)(A)(iii). And §6330(c)(3) says that Appeals “shall take into consideration...the issues raised under paragraph (2).”
And there the CDP statute stops! It does not say how Appeals is to “take into consideration” any collection alternatives proposed by the taxpayers. Is Appeals supposed to work the case? Is Appeals supposed to look at the information submitted by the taxpayer and decide whether the taxpayer qualifies for the requested collection alternative? The statute does not say.
Nor do the CDP regulations clarify. They say only that Appeals “will consider...any offers by the taxpayer for collection alternatives” (Treas. Reg. 301.6330-1(e), Q&A E1) and “will respond to any offers by the taxpayer for collection alternatives.” (Id. Q&A E8). Again, none of this explains how Appeals is to consider what the taxpayer submits. Does Appeals work the case? If not, what is its function?
Other statutes are also of little help. Notably, §7803(e), the statute that establishes Appeals as an independent office provides that “It shall be the function of the Internal Revenue Service Independent Office of Appeals to resolve Federal tax controversies” §7803(e).
The IRS interprets that language to mean that Appeals does not work cases but only reviews controversies when a taxpayer disagrees with a specific IRS function’s decision. After all, if your job is to “resolve” a “controversy” then that means you need a controversy to resolve in the first place. You see this reflected in recent internal guidance, such as this December 2021 memo making changes to IRM 8.7.8. While the memo was about TE/GE appeals, the following language is reflective of what the IRS believes Congress intended in §7803(e):
“To ensure fairness and impartiality, Appeals considers cases using a quasi-judicial approach. This approach generally prohibits Appeals technical employees (ATEs) from undertaking activities that are traditionally performed by examining officers, such as conducting investigative activities. As a result, for cases in which a taxpayer or representative raises a new issue, provides new information, or advances a new theory or alternative legal argument, Appeals must generally re-involve the originating function to develop the new issue, consider the new information, or evaluate the new theory or alternative legal argument.” (emphasis supplied)
Similarly, when you look at taxpayer-directed guidance, such as these Appeals FAQs, you will see over and over statements that Appeals does not work cases or issues. For example, “Given Appeals’ role of independence and impartiality, Appeals will resolve disputes regarding these issues and should not undertake actions that are the responsibility of Collection personnel and their managers.”
Similarly, the IRM guidance for how Appeals is to conduct CDP hearings tells the Settlement Officers (SO’s) to refer any proposed OIC to the Centralized Offers In Compromise Unit (COIC) for evaluation. IRM 22.214.171.124.4 (08-26-2020) (“Processing OICs”). It’s the COIC which then makes a determination—and that determination may be that the OIC is not processable—and sends that determination back to Appeals for review. IRM 126.96.36.199.1.1 (“Functional Responsibilities”). If processable, Collection then investigates the offer and determines whether to accept or reject it. IRM 188.8.131.52.1.1 (“Functional Responsibilities”). Appeals then reviews that determination just as it would if the taxpayer had originally submitted the OIC outside the CDP context and the matter had come to Appeals for review.
The purpose of not letting Appeals work OICs de novo is to ensure consistently in decision-making. In fact, IRM 184.108.40.206.3 cautions SOs: “DO NOT SIGN FORM 656 as COIC is responsible for signing it as part of the processability determination. Forward the offer to COIC for processing, even if it was received without a user fee or TIPRA payment.” In other words, even if the submission is obviously non-processable, Appeals cannot make that simple determination but must let COIC do that.
Alert readers will notice that the above authorities are all only internal IRS stuff. And their take on Appeals’ role does not inexorably flow from any particular statutory language. For example, one might well say that a CDP “dispute” for §7803(a) purposes, is the dispute on whether to permit continued enforced collection of the unpaid taxes. The various issues a taxpayer raises within the CDP are part of that larger “dispute” and are not each discrete disputes. This is a classic issue in the area of Civil Procedure, where the trick is to find the difference between what constitutes a separate “claim” on which relief can be granted and a separate “theory” about a claim. Let’s say a contractor screws up the remodel job in your house. Are there separate contract and tort “claims” for recovery or are those just separate “theories” supporting an overall claim of “you damaged me.” The Civil Procedure answer is: it depends!
That’s the importance of today’s lesson. We now know the Tax Court answer, in the form of a precedential opinion that supports the IRS interpretation of the function of Appeals in CDP. Appeals does not work the case. It reviews the work of others to resolve any taxpayer disagreement with that work. Let’s take a look.
Lesson: Appeals Does Not Work The Case, But Only Reviews a Rejection Already Made
Mr. Brown argued that §6330(c) places responsibility for making a “determination” squarely on Appeals and, thus, only Appeals can approve or reject an OIC. Under this view, the IRS collection function’s act of returning the OIC is just a “proposed” rejection. Judge Lauber describes the argument this way: “In essence petitioner contends that section 6330 overrides sub silentio the outcome dictated by section 7122(f), asserting that the notice of determination is the “critical event” under section 7122(f).” Op. at 11.
It’s a credible argument. First, it fits nicely with the language in Treas. Reg. 301.7122-1(f)(2). Recall that is the part of the regulation saying that there is no rejection of an OIC “until an independent administrative review of the proposed rejection is completed.” Second, there is at least one T.C. Memo opinion supporting the position that §6330 requires Appeals to do more than review another office’s determination. In Mason v. Commissioner, T.C. Memo. 2021-64, Judge Holmes said that the SO must consider the merits of an OIC as part of the required §6330 “consideration” of issues in a CDP hearing. There, the IRS had rejected the taxpayer’s OIC, believing it to have been submitted solely to delay collection. Agreeing with the taxpayer that “the CDP process is aimed very deliberately to give most taxpayers an opportunity to delay collection,” Op. at 21, Judge Holmes held that the SO abused her discretion when she refused to consider an OIC on its merits, even though she found it had been properly rejected for having been submitted precisely for purposes of delay. You can find the details at Lesson From The Tax Court: CDP Settlement Officer Must Work Previously Rejected OIC, TaxProf Blog (May 24, 2021).
Judge Lauber rejects Mr. Brown’s argument and rules that in a CDP hearing, the relevant rejection is the one made by the IRS COIC function, and by the SO’s later adoption of that rejection at the end of the CDP hearing. Judge Lauber gives three reasons.
First, he says his interpretation is truer to the purpose of §7122(f). “In enacting section 7122(f) Congress expressed its expectation that the IRS would respond fairly promptly to OICs, rather than letting them sit in a pile for two years or more. *** Here the IRS was faithful to Congress’ mandate: It took prompt action on petitioner’s OIC, returning the offer to him within six months and explaining why his offer was no longer processable.” Op. at 12.
Second, he points out that what the taxpayer gets in the CDP process is the opportunity for administrative review of a rejected or returned OIC. “It is not uncommon for taxpayers to submit an OIC (as petitioner did here) at the outset of a CDP hearing. If that offer is returned by the COIC unit, the taxpayer may urge the SO to reverse that decision.” Id. That is exactly what Mr. Brown did. Citing to Mason, Judge Lauber notes that submitting an OIC during CDP gives taxpayers a broader review opportunity than submitting one outside of CDP because they can get Appeals to review determinations of non-processability as well as rejections. You don’t get a new person to work the issues, you get a new set of eyes to review the work done.
Finally, Judge Lauber points out that a different rule would undermine the purpose of CDP: to give the taxpayers an opportunity for a global resolution of a tax problem. It would encourage taxpayers to delay CDP proceedings and pressure SO’s “to issue a notice of determination prematurely, lest the OIC be deemed accepted. But doing so would risk reversal and remand for failure to address all relevant issues.... That would prolong the case even further, defying logic and undermining Congress’ intent.” Op. at 12 (quote and citations omitted).
Appeals does not work the case. Its job in CDP is to review the rejection or return of an OIC. And reviewing a rejection is different from making the rejection.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each week to TaxProf Blog to review another Lesson From The Tax Court.