Background to a Fair Collection Due Process Hearing

In a previous Taxing, Briefly article, we discussed the IRS collection process including Collection Due Process (CDP) appeal procedures.  As we noted in that article, a CDP appeal is a taxpayer’s opportunity to dispute the appropriateness of a lien or levy.[1] In this post, we’ll discuss the disqualification of an IRS Appeals Officer for prior involvement in a collection due process hearing and the IRS’s vehement arguments against such “fairness” in a CDP hearing.

When someone fails to pay tax, the IRS will assess the liability against her and send a notice and demand letter.[2] After that, things only get worse for the taxpayer. The taxpayer’s tax liability will become a lien in favor of the IRS against all of its property,[3] and if the taxpayer does nothing, shortly thereafter, the taxpayer will receive a notice of intent to levy (a politely phrased letter that is nevertheless a threat to seize property to collect the tax owed). For more than twenty years, these threats have been accompanied by notices that a delinquent taxpayer is entitled to an informal administrative hearing, called a CDP hearing.[4]

The CDP procedures are “more than just a rubber stamp for the IRS’s determinations.”[5] Instead, it offers taxpayers the protection of a fresh look at the circumstances of their cases to ensure that the requirements of all applicable laws and procedures have been met, that the issues they raised have been considered and addressed, and that any proposed collection actions balance the government’s need for efficient collection of taxes with the taxpayer’s concern that collection be no more intrusive than necessary.[6]

The CDP procedures were created as part of a broader effort to address the concern that taxpayers who get caught in “the IRS hall of mirrors” had no place to turn that was “truly independent” and structured to represent their concerns.[7] To help break those mirrors, a CDP hearing must be conducted by an “impartial officer” who “has had no prior involvement in the determination and assessment of the underlying tax liability that is the subject of the hearing.”[8]

That officer may also “not engage in ex parte discussions of the strength and weakness of the issues of a case that would appear to compromise the Appeals officer’s independence.”[9] To put a cherry on top of this independence sundae, or a tittle on the “i” as it were, the Office of Appeals was recently rebranded to the “IRS Office of Independent Appeals.”

Setting the Stage: Fair CDP Hearings under the Code

For this, we must look first to the Code.  As alluded to above, CDP rights arise twice in the collection process.  The first instance is when the IRS issues a Notice of Filing a Federal Tax Lien, which is governed by IRC § 6320.  The second instance is when the taxpayer does not knuckle under to the IRS’s demands for payment, and the IRS issues a Notice of Intent to Levy, which is governed by IRC § 6330.  The two Code sections are structured very similarly.  Indeed, IRC § 6320(b)(1)-(3) and IRC § 6330(b)(1)-(3), both of which fall under the caption “Right to a Fair Hearing,” are nearly identical.[10]

If a taxpayer requests a CDP hearing in writing and states the grounds for the requested hearing, the hearing will be held by the IRS’s Independent Office of Appeals.[11] Most importantly to this article, the CDP hearing must be “conducted by an officer or employee who has had no prior involvement with respect to the unpaid tax [at issue] before the first hearing” under either IRC § 6320 or IRC § 6330.[12]

That’s all well and good, but what is “prior involvement” and when is an Appeals officer “truly independent”? For this, we’ll look at the Cox v. Commissioner case decided by the Tax Court in 2006 and reversed by the Tenth Circuit Court of Appeals in 2008.

Setting the Stage – The CDP Proceedings in Cox

After receiving a “Final Notice–Notice of Intent to Levy and Notice of Your Right to a Hearing” regarding their unpaid tax year 2000 liability, the taxpayers—Louis and Christine Cox—requested a CDP hearing pursuant to IRC § 6330, seeking a less intrusive collection method.  Appeals officer Bruce Skidmore was assigned to the taxpayer’s CDP appeal.[13]

Bruce held a CDP hearing in August 2003 regarding the taxpayers’ tax year 2000 liability. Although the taxpayers had not submitted all requested information by that date, they ultimately filed tax returns for 2001 and 2002, reporting liabilities for each year with unpaid balances. They also submitted financial information and requested that their account be placed in “currently uncollectible status” because they had “insufficient income to meet necessary allowable expenses.”[14]

After reviewing the information that the taxpayers provided—regarding their 2000 liability—Bruce concluded that he could not recommend an alternative to a levy. As part of his review, Bruce considered the 2001 and 2002 tax returns and was concerned that the taxpayers reported a 2002 tax liability of $146,460 but only made $1,000 in estimated payments, notwithstanding the fact that they earned almost $100,000 in net income during the first seven months of 2003.

Good old Brucie ultimately concluded taxpayers had the ability to make payments toward their outstanding tax liability and that they were not eligible for an installment agreement or offer-in-compromise because they were not in current compliance regarding estimated taxes for 2003. In November 2003, Appeals issued a Notice of Determination holding that the proposed levy for 2000 was appropriate.

Meanwhile, because taxpayers filed their 2001 and 2002 tax returns without payment, the IRS issued to them a Notice of Intent to Levy with respect to these liabilities. As before, taxpayers requested a CDP hearing, and as before, Bruce was assigned to their case. Louis and Christine requested that Bruce recuse himself, because of his prior involvement in the 2000 CDP hearing—which is clearly not a waiver under IRC § 6330(b)(3).

Bruce consulted with his team manager, who agreed with Bruce that there was “no compelling reason to make a reassignment since it was not technically required,” and it “would do nothing but create delay.”[15] After being so informed, taxpayers continued to protest Bruce’s involvement, claiming that the resolution of their prior case involved discussion of their 2001 and 2002 liabilities.

Bruce then held a CDP hearing in June 2004, and he once again concluded that the taxpayers did not qualify for a collection alternative. Appeals subsequently issued a Notice of Determination concluding that the proposed levy for 2001 and 2002 was appropriate.

The taxpayers filed a petition with the Tax Court, arguing in part that they did not receive a fair CDP hearing for 2001 and 2002 by an “impartial Appeals Officer” with no prior involvement in the case as required by IRC § 6330(b)(3). The tax court rejected each of these arguments and affirmed Appeals’ determinations.[16]

On appeal, the taxpayers argued that the tax court erred in holding that Bruce, who conducted the CDP hearing for tax year 2000, was not disqualified by IRC § 6330(b)(3) from conducting the CDP hearing for tax years 2001 and 2002.

What is an Impartial IRS Appeals Officer?

Moving beyond the Code, the Tenth Circuit first looked to the Treasury Regulations, which answers their own question of what is considered to be “prior involvement” by stating that prior involvement by an employee or officer of Appeals includes participation or involvement in an Appeals hearing (other than a CDP hearing held under either IRC § 6320 or IRC § 6330) that the taxpayer may have had with respect to the tax and tax periods shown on the CDP Notice.[17]

The court next looked to the plain language of IRC § 6330(b)(3), which “clearly and unambiguously” provides that an appeals officer conducting a CDP hearing shall have had “no prior involvement” with respect to the unpaid tax specified on the CDP Notice.  Although the Tax Court interpreted this to mean only that an appeals officer had not previously conducted a non-CDP hearing for the taxpayer for the taxpayer regarding the collection of the same unpaid tax, the Tenth Circuit was not persuaded.

In its saltiest response to the Tax Court, the Tenth Circuit observes that “we assume…Congress says what it means.”[18]

But the Appeals court was not done.  The library was still open, and the next victim was the IRS, itself.  “An agency may not read ambiguity into a statute in order to reach a practical result,”[19] meaning that the IRS could not use a skewed interpretation of the statute just because it made their jobs easier.

“While interpreting IRC § 6330(b)(3) narrowly makes it less likely that appeals officers will have to recuse themselves from hearing taxpayers’ cases and easier for Appeals Officers to assign officers to CDP hearings,” the court found “no legal support for doing so.”[20]

By using the term “involvement,” Congress deliberately implemented a broad restriction on IRS appeals officers to ensure their impartiality. Congress, however, did not once “state any intent to narrow the meaning of ‘prior involvement’ to prior involvement in a hearing, let alone one specifically regarding the tax liability listed on the CDP Notice.”[21]

Indeed, a review of the legislative history of IRC § 6330(b)(3) reveals that Congress’ only statement regarding that provision is that it authorizes “a taxpayer to demand a hearing to take place before an appeals officer who has had no prior involvement in the taxpayer’s case.”[22]

In fact, the court goes on, Congress expressly contemplated only one scenario where an appeals officer with prior involvement in the taxpayer’s case could conduct a subsequent CDP hearing, namely that the same appeals officer can conduct a pre-levy CDP hearing pursuant to IRC § 6330 and a pre-lien CDP hearing pursuant to IRC § 6320 regarding the same unpaid liability.[23] Congress did not, however, provide for other exceptions, nor did it express any intent, whatsoever, that additional exceptions could be provided all willy-nilly by the IRS when it made their jobs a bit easier.  Forshame, Felicia,[24] you lazy administrative heifer.

But the Tenth Circuit wasn’t quite done. Not by a long shot.

The court’s conclusion was “further supported” by the “very purpose” of IRC § 6320(b) and IRC § 6330(b), to wit, to provide taxpayers with similar due process protection “in dealing with the IRS that … they would have in dealing with any other creditor.”[25] Central to that purpose is the taxpayer’s fundamental right to an impartial appeals officer, no different than the right to an impartial decisionmaker in any other due process context.[26] Limiting the definition of “prior involvement” to prior CDP hearings “impermissibly narrows that protection.”

As a consequence, the Appeals court summarily rejected the IRS’s claim that “the very notion of ‘involvement’ by an ‘officer or employee’ of the Appeals Office has no meaning if the specified tax and tax period have never previously been the subject of collection activity within the purview of Appeals.”

What’s more, it did not matter whether or not Bruce was biased against the taxpayers due to his prior involvement—all that mattered was that he had prior involvement with the taxpayers’ liabilities.  As a consequence, the taxpayers were entitled to a CDP hearing before an impartial appeals officer in accordance with the statute.

Nonacquiescence and Generally Stamping its Administrative Feet

Needless to say, the IRS was not pleased with the Tenth Circuit’s censure of their bad behavior.  It huffed, and it puffed, and it issued a nonacquiescence six months after the Appeals court gave Appeals a bit of a black eye.[27]  Not to be outdone by itself, the IRS updated the Internal Revenue Manual shortly thereafter and pitched a bit of a tantrum about the Cox decision.

Specifically, IRM pt. 8.22.5.4.1.1.1 observes that in Cox, “the Tenth Circuit Court of Appeals ruled that prior involvement exists where the hearing officer considered the tax and tax periods that are the subject of the current CDP case as part of a prior CDP case involving collection of other tax periods.” Nevertheless, the IRS went on, that’s, like, only their opinion, man.

The Office of Chief Counsel disagrees with the Cox decision, so in cases where appeal lies outside of the jurisdiction of the Court of Appeals for the 10th Circuit, Appeals will not follow this decision. However, under the Golsen rule,[28] Appeals must follow the Cox decision in cases that can’t be meaningfully distinguished, and the appeal lies in the 10th Circuit.

Thus, in the IRS’s opinion, the Tenth Circuit’s broad pronouncement that no “prior involvement” actually means no “prior involvement” applies only in Colorado (they’re all high anyway), New Mexico (gila monsters an coyotes don’t pay taxes), Oklahoma (carpetbaggers, all of ‘em), Utah (stupid Mormons), Kansas (rock chalk Jayhawk, and don’t complain), and Wyoming (the three taxpayers in Wyoming are generally very respectful).

A Note on Frivolity and Remand

The possibility that an Appeals officer had “prior involvement” with respect to the unpaid tax participated in the conduct of the taxpayer’s hearing will not be grounds for a remand or a new CDP hearing where all of taxpayer’s arguments against the collection action were frivolous, groundless, poppycock, or pure horse manure.[29]

But what about violating the Constitutional Separation of Powers doctrine?  Not unsurprisingly, Constitutional arguments have been made.  At least twice.[30]  In the Tucker case, the taxpayer challenged the constitutionality of the Appeals settlement officers who conducted his CDP hearing and the team manager who signed and issued the notices of determination.  Mind you, Larry Tucker wasn’t challenging the constitutionality of the decision that Appeals made, but Appeals itself.[31]

Ol’ Larry argued that certain employees of the Internal Revenue Service’s Office of Appeals are “Officers of the United States,” so that their appointments must conform to the Constitution’s Appointments Clause.[32]  Dear Judge Gustafson patiently dealt with Crazy Larry at the Tax Court level with the patience and grace that he always shows petitioners, even though who are undeserving of said patientia et gratia.

Although it bruised Appeals’ administrative ego, the Tax Court and later the D.C. Circuit held that Appeals officers were “inferior” officers, and as such, the Appointments Clause had no application, whatsoever, to the Appeals officers.[33]  Aldo Fonticiella (likely a distant cousin of Arthur “the Fonz” Fonzarelli), fared no better in his 2019 Tax Court case where he made substantially the same argument.[34]

Takeaways

If you are outside of the Tenth Circuit, do not expect the IRS to follow the Cox decision.  In fact, you should expect them to spit at your feet and/or thumb their nose at you if you even mention the Cox decision.  That being said, I cannot any fault in the Tenth Circuit’s reasoning.  There is nothing in the language of the statute or in the Congressional record surrounding the passage of IRC § 6320(b)(3) or IRC § 6330(b)(3) that would suggest that Congress intended “prior involvement” to be so narrowly circumscribed.

Very few cases have been decided on the subject since Cox, and so it is not entirely clear how the Tax Court will rule on the issue if the appeal lies outside of the Tenth Circuit.

Note also, winning the battle of “prior involvement” does not mean that you have won the CDP war.  It merely means that you get another bite at the CDP apple with a fresh appeals officer…who likely works in the same office as the old appeals officer…who is not your best friend after your litigation interrupted her (Felicia’s) lunch hour when she normally watches her stories.

Footnotes:

[1] There’s a great discussion on the history and application of the CDP procedures written by my Tax Court judicial hero, Judge Mark Holmes, in the case of Mason v. Commissioner, T.C. Memo. 2021-64.

[2] IRC § 6201; IRC § 6303(a).

[3] See IRC § 6321.

[4] IRC § 6330(a); IRC § 6331(d).

[5] Lewis, 128 T.C. at 60.

[6] See Cox v. Commissioner, 126 T.C. 237, 248 (2006) (citing IRC § 6330(c)(3)), rev’d, 514 F.3d 1119 (10th Cir. 2008).

[7] See Lewis v. Commissioner, 128 T.C. 48, 60 (2007).

[8] Cox, 126 T.C. at 251 (quoting Criner v. Commissioner, T.C. Memo. 2003-328, 2003 WL 22843085, at *8).

[9] Hoyle v. Commissioner, 136 T.C. 463, 470 (2011), supplementing 131 T.C. 197 (2008).

[10] This was confirmed by the Tax Court in Baber v. Commissioner, T.C. Memo. 2009-30, *2 n.3 (stating that “[a]lthough Cox v. Commissioner, 514 F.3d at 1124 n.6, dealt with IRC § 6330, IRC § 6320 is a related provision…that entitles a taxpayer to similar protections after the IRS issues a notice of lien” and that “IRC § 6320(b)(3) and IRC § 6330(b)(3) are identical except that the language ‘under this section or IRC § 6330’ in the former is the reverse of the phrase ‘under this section or IRC § 6320’ in the latter”).

[11] IRC § 6320(b)(1); IRC § 6330(b)(1).

[12] IRC § 6320(b)(3); IRC § 6330(b)(3).  Note that a taxpayer can waive this requirement.  Id.

[13] Cox, 514 F.3d at 1121.

[14] Id. at 1122.

[15] Id.

[16] See Cox, 126 T.C. at 261.

[17] Cox, 514 F.3d at 1124-25 (citing Treas. Reg. § 301.6330-1(d)(2), Q-D4, A-D4).

[18] Id. at 1125 (citing Sundance Assoc., Inc. v. Reno, 139 F.3d 804, 809 (10th Cir. 1998)).

[19] Id.

[20] Id.

[21] Id.

[22] S. Rep. 105–174, at 68 (1998).

[23] See IRC § 6330(b)(3); H.R. Rep. No. 105–599, at 266 (1998); H.R. Rep. No. 105–599, at 266 (1998).

[24] For an introduction to Felicia, Briefly Taxing’s personification of IRS ineptitude, look no further than the McCarthy opinion from 2020.

[25] S. Rep. No. 105–174, at 67.

[26] See Withrow v. Larkin, 421 U.S. 35, 46–47 (1975) (holding that “[n]ot only is a biased decisionmaker constitutionally unacceptable but our system of law has always endeavored to prevent even the probability of unfairness”).

[27] 2009-22 I.R.B. 1044 (June 1, 2009) (IRS ACQ).

[28] Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir.1971), established the rule that the Tax Court will “follow a Court of Appeals decision which is squarely in point where appeal from [the Tax Court’s] decision lies to that Court of Appeals” (the Golsen rule).

[29] Perkins v. Commissioner, 129 T.C. 58, (2007).

[30] Tucker v. Commissioner, 676 F.3d 1129 (D.C. Cir. 2012), aff’g 135 T.C. 114 (2010); Fonticiella v. Commissioner, T.C. Memo. 2019-74 (2019).

[31] Larry did challenge the decision, but on abuse of discretion grounds.

[32] Art. II, § 2, cl. 2 (the “Appointments Clause”) provides that

[The President]…shall nominate, and by and with the Advice and Consent of the Senate, shall appoint…Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

[33] Tucker, 676 F.3d at 1132 (citing Freytag v. Commissioner, 501 U.S. 868, 880–81 (1991) and, you know, common freaking sense).

[34] Fonticiella, T.C. Memo. 2019-74, slip op. at *12-*13.

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