Newsletter, Bar Association of Montgomery County, September 2013
By John Pontius, Tax Section Co-Chair
After a taxpayer receives multiple requests, in some cases threatening, from the Internal Revenue Service (“IRS”) requesting payment of an overdue tax balance, the IRS may resort to a wage garnishment or seizure of bank account funds to collect the overdue taxes. However, before taking such action, the IRS is required to provide due process to the taxpayer through a Notice of Intent to Levy and Notice of Your Right to a Hearing (“Notice”).
Once a taxpayer receives this Notice, he or she has 30 days from the date of the letter to request a Collection Due Process (“CDP”) Hearing or Equivalent Hearing. It is worth noting the distinctions between these two Hearings. A CDP Hearing will result in a Notice of Determination that is appealable to the U.S. Tax Court. Also, once the CDP Hearing is requested, the 10 year statute of limitations on IRS collection activity is tolled until the Hearing is completed. An Equivalent Hearing results in a decision letter, that is not appealable to the U.S. Tax Court. However, an Equivalent Hearing does not toll the 10 year collection period. As the rest of the procedures are the same for a CDP Hearing and an Equivalent Hearing, it will hereafter be referred to as a “Hearing.”
When requesting a Hearing it is important to provide a resolution option also known as a collection alternative, to the IRS. The appropriate option is generally based on the taxpayer’s ability to repay his or her taxes and the time period in which such repayment may be made. If the taxpayer is unable to pay the taxes, a request for Currently Not Collectible (“CNC”) status may be appropriate. If the taxpayer can pay only a portion of the taxes before the expiration of the 10 year collection period, an Offer in Compromise (“OIC”) may be appropriate. If the Taxpayer can fully pay the taxes within the collection period and is otherwise not a candidate for an OIC, an installment agreement is the best resolution option.
Upon receipt of the request for a Hearing, the IRS will assign an impartial Settlement Officer from the IRS Office of Appeals to the CDP Hearing. The Settlement Officer will send the taxpayer a letter informing him or her of the CDP process, request information and/or documents, and set the date for the Hearing. Typically the Settlement Officer will request the taxpayer to complete a Form 433, Collection Information Statement. The Form requires the taxpayer to list his or her assets as well as to provide monthly income and expenses and the taxpayer must submit supporting documentation (monthly bills, pay stubs, etc.). The Settlement Officer reviews this information to determine the Taxpayer’s monthly payment ability and reasonable collection potential.
The CDP Hearing is informal and can be done over the phone. It could involve multiple meetings between the taxpayer and the Settlement Officer and additional exchanges of documents. During the CDP Hearing, the Settlement Officer will review the taxpayer’s file to ensure he or she is in current filing and payment compliance. If the taxpayer has not filed tax returns and paid recent taxes, the Settlement Officer cannot accept resolution options and will approve the levy.
At the conclusion of the CDP Hearing, the IRS must provide a notice of determination. This notice will indicate whether the levy was sustained. If the levy is sustained, this notice creates jurisdiction to the U.S. Tax Court. The standard of review of the Tax Court is abuse of discretion of the Settlement Officer. If the levy is not sustained, it will specify a collection alternative. The keys to preventing a levy are current filing and payment compliance of all recent taxes as well as supporting the collection alternative with financial information.
Originally published in the Newsletter of the Bar Association of Montgomery County, Maryland.