In Iames v. Commissioner, No. 16-1154, the US Court of Appeals for the Fourth Circuit upheld the US Tax Court’s ruling that once a taxpayer has unsuccessfully challenged his tax liability in a preassessment hearing before the Internal Revenue Service (IRS) Office of Appeals, he is precluded from challenging his tax liability in a collection due process (CDP) hearing under Internal Revenue Code (IRC) Section 6330.
IRC Section 6330, enacted by Congress to protect taxpayers from abusive or arbitrary collection practices, provides a set of procedural safeguards for taxpayers facing a potential levy action by the IRS: notice, an administrative hearing and judicial review. More specifically, before collecting a delinquent tax through a levy on a taxpayer’s property, the IRS must notify the taxpayer at least thirty days in advance of his right to an administrative hearing before the IRS Office of Appeals. IRC Section 6330(a) and (b). After the Office of Appeals makes its determination, the taxpayer may then petition the Tax Court for judicial review. IRC Section 6330(d)(1).
In general, the taxpayer may raise “any relevant issue relating to the unpaid tax or the proposed levy” at the CDP hearing. IRC Section 6330(c)(2)(A). There are, however, certain restrictions as to the circumstances under which a taxpayer may bring a CDP challenge. Under IRC Section 6330(c)(2)(B), a taxpayer can dispute the existence or amount of the underlying tax liability but only so long as he “did not otherwise have an opportunity to dispute such tax liability.”
The taxpayer in Iames had filed a protest with the Office of Appeals, challenging the imposition and amount of a proposed civil penalty from the IRS for an alleged reporting violation. An appeals officer then conducted a telephone conference with the taxpayer’s counsel where it was agreed to follow up with a second conference. The taxpayer though failed to respond to the officer’s requests to schedule this second hearing, and so the officer sustained the penalty and the IRS initiated its administrative collection process and notified the taxpayer of its intent to levy.
Attempts by the taxpayer to challenge his tax liability in a CDP proceeding were denied by the Office of Appeals because the taxpayer had been given the opportunity to raise any relevant issues relating to the unpaid tax at the earlier hearing. The Tax Court, reasoning that the “opportunity to dispute” referred to in IRC Section 6330(c)(2)(B) includes the opportunity to appeal to the IRS Office of Appeals, agreed that the taxpayer was barred from contesting his tax liability in a CDP hearing.
On appeal, the Fourth Circuit further analyzed whether a taxpayer’s chance to request an administrative hearing before the Office of Appeals qualifies as an “opportunity to dispute [his] tax liability” under IRC Section 6330(c)(2)(B) or if, as the taxpayer contested, CDP review is only precluded where the taxpayer had a chance to contest his liability in court.
In holding that administrative hearings, in addition to judicial ones, provide an adequate prior “opportunity to dispute,” the Fourth Circuit examined the purpose of the CDP hearing. The CDP hearing, the court explained, focuses on the collection of a predetermined liability, not on the merits of that liability. Review of the underlying tax liability at a CDP hearing, reasoned the court, was only permitted by Congress as a peripheral part of the hearing to remedy abusive collection practices and catch taxpayers who would otherwise fall through the cracks. The court concluded that Congress intended for CDP proceedings to concentrate on tax collections and not to become the primary vehicle for liability challenges. After all, noted the court, administrative appeals under IRC Section 6330 are called “collection” due process hearings for a reason.
Practice Point: In Iames, the Tax Court may have been reacting to the explosive growth of CDP cases overall on the court’s docket, and trying to ensure those cases are limited to their statutory purpose. The best practice is to raise any challenges to liability as early as possible.