Lesson From The Tax Court: The Limits Of Collection Due Process

One lesson I teach my students is that taxpayers are generally best off resolving issues with the IRS before seeking judicial help. Another lesson is that taxpayers have multiple opportunities to work with the IRS in the collection process.  So just because one opportunity fails does not mean the taxpayer is out of options.

Today we see a great example of both lessons in Eric Wilfred Olson v. Commissioner, T.C. Memo. 2023-123 (Oct.10, 2023) (Judge Weiler).  There, the taxpayer attempted to use the Collection Due Process (CDP) opportunity to stave off enforced collection of some $77,000 of tax liabilities.  He was also trying to get spousal relief for his wife.  The Tax Court gave him no relief because he had failed to properly try and resolve these issues at the administrative level.  However, just because CDP relief was not available did not mean the taxpayer was out of options to obtain the relief he appears to have sought.

The case also shows the limits of CDP’s delay benefit.  While delay is certainly a common benefit of the CDP process, that benefit was limited in this case for two reasons.  First, this was a tax lien CDP case, which mean the IRS had already established the priority of the tax lien by filing a Notice of Federal Tax Lien (NFTL) before the CDP process started. §6320(a).  So the CDP process in such cases does not affect the IRS ability to use its lien powers.  Second, the taxpayer here filed his Tax Court petition in October 2022 and Judge Weiler issued his decision less than one year later.  That’s awesomely fast for a CDP case.  See Lesson From The Tax Court: The Long And Short Of CDP, TaxProf Blog (Apr. 6, 2020).  No wonder Lew (“Don’t Contact Me”) Taishoff gives Judge Weiler the cognomen “Speedy”!

Details below the fold. 

Facts and CDP Results
The years at issue are 2016 and 2018.  Mr. Olson and his wife filed joint returns for those years but filed them late and failed to pay the taxes they self-reported.  In March 2022 the IRS filed a Notice of Federal Tax Lien and sent the taxpayers the CDP notice (Letter 3172) required by §6320(a).

Mr. Olson responded and timely requested a CDP hearing.  His wife did not respond.  Mr. Olson asked for three types of relief: (1) abatement of penalties that were part of the assessment; (2) an Installment Agreement (IA) and (3) innocent spouse relief for his wife.

To support these requests at the CDP hearing in August 2022, Mr. Olson submitted a completed Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals).  Hey, that’s a lot more than many taxpayers do!

It was not enough.  The Settlement Office (SO) denied all three requested reliefs.

(1) As to the requested penalty abatement, Mr. Olson was denied first time penalty abatement because he had received abatement of penalties in the past.  So it was not his first time.  Further, he did not give the SO any evidence that he had some reasonable cause for his failures to timely file.

(2) As to the IA request, the SO told him he was not eligible for an Installment Agreement (IA) until he showed he was current in his filing obligations and submitted proof of estimated tax payments for 2022.  The relevant regulation does not explicitly require current compliance as a condition to granting an Installment Agreement.  It does, however, provide that “the Commissioner has the discretion to accept or reject any proposed installment agreement.” Treas. Reg. 301.6159-1(c)(1)(i) (emphasis supplied).  And the IRS has exercised that discretion to require current compliance.  IRM 5.14.1 contains multiple instructions that require taxpayers to be fully compliant in order to get into an IA.  See e.g. 5.14.1.2(12) (“Current returns for taxes must be filed and current deposits paid before an IA can be approved and the taxpayer must remain tax compliant for the entire term of the IA, or they will default on the agreement..”); IRM 5.14.1.4.2(4) (“Taxpayers must be in compliance with all filing and payment requirements prior to approval of IAs.”)

These administrative requirements for discretionary IA’s are consistent with the statutory requirements for mandatory IAs in §6159(c). That provision requires the IRS to accept IAs in certain small-dollar cases, but then goes on to say the IRS does not have to do so when the taxpayer has failed to file returns or pay liabilities in the five years before the proposed IA.

(3) As to the innocent spouse request, Mr. Olson indicated on the CDP request that he wanted to ask for that relief on behalf of his wife.  But no one ever filed the proper administrative request, which must be done on Form 8857.  And it is the person seeking relief who must submit that form, not their spouse.  Moreover, Mr. Olson’s wife did not sign onto Mr. Olson’s CDP request nor submit one of her own

The SO sent Mr. Olson a Notice of Determination (NOD) about all this and Mr. Olson timely petitioned the Tax Court for review, raising the same three issues and now, for the first time, contesting the liability that had been self-reported on the 2016 and 2018 returns.

Lesson 1: Tax Court Can’t Help Those Who Don’t Help Themselves
Sure, the Tax Court may have some awesome God-like powers, but here we learn here that the Tax Court cannot help those who don’t help themselves.  Judge Weiler explains the limits of Tax Court relief as to each issue and basically ties those limits to Mr. Olson’s failures at the administrative level.

(1) As to Mr. Olson’s new request for re-determination of his tax liabilities, Mr. Olson failed to deal with that in his administrative CDP hearing.  Accordingly, the Tax Court could not consider that issue.  Judge Weiler explains: “The Court’s review of CDP cases is limited to issues that taxpayers raise at a CDP hearing. The Court will not consider Mr. Olson’s underlying tax liabilities since they were not properly raised during the CDP hearing.” Op. at 5 (citations omitted).

(2) As to the penalty abatement Judge Weiler explained that Mr. Olson’s failure at the administrative level was in not producing evidence of a reasonable cause for failure to file.  In fact, Judge Weiler notes that the SO’s case notes indicated that “Mr Olson stated he did not have any reasonable cause just not being timely in doing his taxes.”  Op. at 7.

(3) As to the requested IA, Mr. Olson failed to show the SO that he had filed his returns for the three years preceding the 2022 CDP hearing and he failed to show he had made estimated tax payments for 2022.  Judge Weiler explains that the Tax Court cannot fix that failure: “An SO does not abuse her discretion when she declines to accept a collection alternative for a taxpayer who is not in filing compliance.” Op. at 7.

(4) Finally, as to the request for spousal relief for his wife, Mr. Olson’s failure lay in not having his wife participate in the CDP hearing and make the request herself.  Judge Weiler explains: “In previous Orders from this Court, we instructed Mr. Olson that innocent spouse relief is asserted by the spouse who will receive the benefit of the relief, and Ms. Olson is not a party to this case.” Op. at 8.

Lesson 2: CDP Is Not The Only Opportunity For Relief
While Mr. Olson was unsuccessful in using CDP to contest his self-reported liabilities or get a penalty abatement or get an installment agreement or get spousal relief for his wife, he has (or had) other opportunities to try for each of those.

Judge Weiler is kind enough to point out some of those opportunities the opinion.  For example, Judge Weiler notes that Mr. Olson’s wife remains free to make her own spousal relief request “if so inclined.” Op. at 8, note 4.

Further, Judge Weiler points out “We note that Mr. Olson remains free to negotiate with the IRS...an installment agreement, supported by the requisite information.”  Op. at 8, note 5.  When you look at the IRS website instructions for submitting IA requests, you see there are no time restrictions.

Similarly, requests for penalty abatement are not limited to CDP hearings.  However, Mr. Olson does not appear well positioned to get out of his timely filing and timely payment penalties for 2016 and 2018.  For example, in his CDP request he said that COVID had severely impacted his income.  While that could well be true, it is not clear how that creates a reasonable cause for failing to timely file or pay his pre-COVID 2016 and 2018 taxes.

As to the merits of the tax liabilities for the 2016 and 2018 tax years, it is important to note they were self-reported.  Taxpayers usually “contest” those types of liabilities by filing a timely claim for refund on an amended return!  Mr. Olson failed to do that.  Still, if Mr. Olson actually pays the assessed liabilities, then that will give him two years to contest the merits of the liability in an administrative claim for refund and, if denied, contest that denial in court.  See §6511(a), §6532(a), and §7422.

Thus, while CDP is one opportunity for relief, it is not the only opportunity.

Lesson 3: Delay Is Not Always Your Friend
Taxpayers generally like the delay they can impose on the IRS collection machine by following the CDP opportunity.  Kicking the can down the road is a time-honored move by debtors in the eternal battle against creditors.

But in this case, there are two reasons why delay did not benefit Mr. Olson.  First, it extends the time for the IRS to take any collection action against him.  The IRS normally has 10 years from the date of assessment to collect unpaid tax liabilities, §6501(a).  But invoking the CDP process tolls that limitations period until there is a final resolution (either by a final Tax Court decision or by the time running out to file a Tax Court petition), plus 90 days.  See §6330(e)(1).

Second, as to tax lien CDP hearings under §6320, the damage is already done before the CDP hearing takes place.  Delay does not affect the IRS’s ability to collect using the lien.  That is because once the IRS files its NFTL, that makes the tax lien maximally effective.  There is nothing else the IRS needs to do except let the lien work its passive-aggressive magic.  That is, once the NFTL is filed, then all competing creditors are on notice, making it very difficult to sell real property or obtain a loan without paying off the lien.  Thus, the delay in the CDP process has minimal effect on the tax lien.

In contrast, when a CDP hearing is about the IRS ability to use its levy powers, that is when delay gives taxpayers space and time to potentially shield their assets from later seizure.

Bottom Line: There are limits to the benefits of the CDP process, but neither taxpayers nor their representatives should consider CDP as the only opportunity to obtain relief from enforced collection of the full amount of an unpaid liability. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return each Monday (or Tuesday if Monday is a federal holiday) to TaxProf Blog for another Lesson From The Tax Court.

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