Tax & Business Insights

Collection Due Process Appeals 

Volume 19 Issue 4 --  July/August 2007

What is the best thing to do when a client receives notice of a proposed levy or lien?  Often the best thing will be to file for a Collection Due Process (CDP) Appeal.

The Internal Revenue Service (IRS) is required to send out notice of the CDP Appeal right following a lien or prior to a levy. Accompanying the notice of lien or final notice of intent to levy will be the paperwork needed to initiate a CDP Appeal, which must be filed within 30 days of the date on the notice.

A lien is a formal statement of debt that is filed with the appropriate recorder of deeds or other locations which informs the public that a tax debt is owed by, let’s say, “Sam.” Once the lien is filed, all of the properties owned by Sam are subject to the lien.

A levy, on the other hand, is the taking of Sam’s property or funds (i.e. bank accounts). For example, if the asset is a bank account and a levy is served, then after a required 21-day period the funds in the bank account on the date the levy is received may be taken, up to the amount of the levy. If the levy is served on other types of assets, such as accounts receivable or machinery, they will be seized by the IRS and, in some cases, sold.

If a CDP hearing request is filed, in most cases the lien or levy will be suspended and other alternatives, such as an installment agreement or offer in compromise, may be considered by the CDP appeal officer.

One reason some practitioners file CDP Appeals is to gain time. The revenue officer who requested the lien or levy is usually prevented from taking further collection action until a CDP appeals officer has reviewed the collection action.

How Does it Work?

In a CDP Appeal, a taxpayer may challenge the tax liability, if he or she has not previously had an opportunity to do so, or may propose other collection alternatives, such as an installment agreement or an offer in compromise.

There are also other reasons to file a CDP appeal. One, for example, is where a taxpayer has a third-party loan agreement specifying that, if a tax lien is filed, the entire mortgage or installment arrangement is accelerated and the full amount is due.

Also, a CDP Appeal may suspend a levy in situations where a business has insufficient cash flow to continue if the levy is fully enforced.  An appeals officer might suggest that an alternative such as an installment payment agreement be considered.           

In the “old days,” before the CDP Appeal system came into existence, practitioners and reasonable revenue officers could negotiate installment payment agreements for the taxpayer or take other steps without the necessity for the CDP Appeals system. If a revenue officer is assigned to the case and if it is the desire of the taxpayer to file a CDP Appeal but continue to work with the revenue officer on an installment agreement, it would be advisable to tell the revenue officer not to forward the matter to a CDP appeals officer until a reasonable period of time has expired.

If the revenue officer forwards the CDP Appeal to an appeals officer during the time the taxpayer’s representative is trying to work with the revenue officer, there can be substantial administrative problems. Appeals officers will not consider any collection alternative as long as a revenue officer is actively involved.

The period of time between filing for a CDP Appeal and hearing from an appeals or settlement officer can be quite lengthy, sometimes six months to a year. Then, the contact is usually by phone and the appeals officer can be in another part of the country. This does not preclude working with the appeals officer, but it makes a face-to-face meeting with a CDP person unlikely. Also, because these individuals are, after all, IRS employees, they are unlikely to grant any sweeping types of equitable relief.

If the request for a CDP hearing is filed within 30 days of receipt, it is possible to appeal the matter to the U.S. Tax Court. It appears from reading the opinions that this avenue has been taken far too often — in cases where there are really no grounds for appeal to the Court.

If the CDP hearing request is not filed within the required 30-day period, the IRS will grant what it calls an “equivalent hearing,” but an adverse determination in such a hearing cannot be appealed to the Tax Court.

The CDP Appeal system may eventually be repealed or limited because it does not work well and it is overused. A better alternative would be to require the IRS, and in particular IRS supervisors, to use discretion in dealing with taxpayers.

Until that happens, a CDP Appeal may be the client’s best course of action.

Copyright 2007
By Tax and Business Professionals, Inc.
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