IRS Appeals abused its discretion by abruptly ending CDP hearing

IRS Appeals abused its discretion by closing a taxpayer’s Collection Due Process (CDP) hearing two days after inviting him to further discuss collection alternatives, the Tax Court held.

Facts: Kevin Long had unpaid federal tax liabilities totaling $963,398 for tax years 2012 through 2018, of which $133,358 was for tax year 2018, the year in question. On June 20, 2019, the IRS filed a Notice of Federal Tax Lien (NFTL) for the 2018 tax liability. During the following week, the IRS sent Long a notice advising him of his right to request a CDP hearing in which to review the NFTL filing and discuss collection alternatives.

Long timely submitted Form 12153, Request for a Collection Due Process or Equivalent Hearing, which indicated he was requesting an installment agreement (IA) or offer in compromise (OIC) as a collection alternative. He submitted Form 656, Offer in Compromise, offering to settle his $963,398 of unpaid federal tax liabilities for tax years 2012 through 2018 for $5,494, based on “doubt as to collectability.” He also submitted Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, as part of his OIC, reporting total monthly income of $33,924, consisting of wages and net business income, and $33,936 of monthly living expenses. Included in Long’s monthly living expenses were court-ordered payments of $22,601. He further reported that he had $100 cash on hand and a balance of $5,214 in his checking account.

Long’s OIC was initially reviewed by IRS Offer Examiner Rose Ingrassia. Ingrassia concluded that Long’s monthly income was $33,869 and his monthly living expenses were $10,122, apparently disallowing his claimed court-ordered expenses. Based on this information, Ingrassia rejected Long’s OIC, claiming that the amount offered was less than his reasonable collection potential (RCP), which she calculated to be $2,517,225.

Administration of Long’s CDP hearing was assigned to Settlement Officer Susan Bradford, who was forwarded the OIC from Ingrassia. Long wrote Bradford, claiming that Ingrassia had overstated his monthly income by $22,601. He also attached to the letter a copy of his marital settlement agreement showing his weekly court-ordered payments for alimony and child support as well as private school tuition for his children. Bradford informed Long that her initial determination of his RCP was $714,489, not the $2,517,225 calculated by Ingrassia. In calculating the RCP, Bradford allowed the tuition expenses and a portion of his court-ordered alimony and child support obligations, totaling approximately $9,000 per month. However, Bradford stated that “[m]ore review may be needed to allow the foregoing expenses.”

On May 6, 2021, Long provided Bradford a spreadsheet revising his RCP to $511,929, which was less than Bradford’s initial calculation but more than his own original offer of $5,494. Five days later, Bradford sent Long an “Appeals Offer in Compromise Memorandum” (OIC memo) recalculating his RCP as $594,709. The OIC memo also indicated that Appeals “preferred a partial payment installment agreement,” while requesting additional substantiation of certain expenses. Long provided the substantiation on May 17, 2021, while still claiming that his monthly business income was overstated. Bradford was out of the office for most of May.

On June 4, 2021, not having not heard from Bradford regarding his May 17, 2021, mailing of the requested additional material, Long sent a follow-up letter requesting an update on the status of his OIC. Bradford replied on June 7, 2021, with a draft revised OIC memo disallowing the private school tuition expenses and readjusting her initial RCP to $1,078,114. In a cover sheet, Bradford stated, “There is still a CDP Lien case open, so we can discuss another collection alternative, such as an Installment Agreement” and “Let me know if you want to set up a time to discuss.” However, nowhere in the revised OIC memo was a specific deadline mentioned.

On June 9, 2021, Bradford drafted an “Appeals Offer in Compromise Rejection Memorandum,” noting in her case activity record that there had been “no contact from [Long] regarding setting up an IA based on the OIC rejection being sustained” and that she was “closing [the] case accordingly.” One week after receiving the revised OIC memo, Long sent Bradford a letter urging that the RCP reflect “the full amount” of his court-ordered alimony and child support. Bradford replied the same day, stating that the “offer case has already been closed as a rejection” and “the CDP case has been written up to issue a Notice of Determination.”

IRS Appeals, on June 15, 2021, in sustaining the NFTL, issued a “Notice of Determination Concerning Collection Actions under [Sec.] 6320 or 6330,” stating that it was rejecting Long’s OIC and could not consider the IA since the IRS had not heard back from him as of June 10, 2021. About a month later, Long filed a petition with the Tax Court urging the court to remand the case for further consideration by IRS Appeals.

Issues: When a taxpayer fails to pay a federal tax liability within 10 days after notice and demand, the government may impose a lien “on all the property of the delinquent taxpayer” (Sec. 6321), and Sec. 6323(f) authorizes the IRS to file an NFTL. No later than five business days after filing the NFTL, the IRS must provide written notice of that filing to the taxpayer (Sec. 6320(a)).

After receiving the written notice, the taxpayer may request a CDP hearing before IRS Appeals (Sec. 6320(b)(1)), at which time Appeals must determine if the collection action may proceed. In making this determination, IRS Appeals must consider several factors (Secs. 6330(c) and 6320(c)). First, an Appeals officer must verify “that the requirements of any applicable law and administrative procedure have been met by IRS personnel” (Sec. 6330(c)(3)(A)). Appeals must also consider any issues raised by the taxpayer, including proposed collection alternatives (Sec. 6330(c)(2)(A)). Lastly, Appeals must determine if the collection action is “no more intrusive than necessary” (Sec. 6330(c)(3)(C)). However, once Appeals issues its determination, the taxpayer may, within 30 days of the notice of determination, petition the Tax Court for review of the determination (Sec. 6330(d)(1)).

Since Long did not challenge the underlying tax liability, the court reviewed Appeals’ determinations for abuse of discretion (Goza, 114 T. C. 176 (2000)). In applying the abuse-of-discretion standard, the court must find the NFTL was “arbitrary, capricious, or without sound basis in fact or law” in complying with “the legal requirements of an administrative hearing” (Murphy, 125 T.C. 301 (2005), aff ’d, 469 F.3d 27 (1st Cir. 2006); Charnas, T.C. Memo. 2015-153).

Long claimed that IRS Appeals abused its discretion by not providing him an opportunity to propose an IA. Although the regulations do not provide a time for a CDP hearing to be concluded, they specify that the hearing must be concluded “as expeditiously as possible under the circumstances” (Regs. Sec. 301. 6320-1(e)(3), Q&A E-9). Since CDP hearings act as a forum for disagreement about collection actions, Appeals must give “proper and fair consideration to [the] issues that [the taxpayer] raised” (Hamilton, T.C. Memo. 2022-21).

In siding with Long, the court held that the “remarkably hasty termination” of his CDP hearing was arbitrary and capricious, constituting an abuse of discretion by IRS Appeals. The IRS and Long established a clear pattern of responding to each other’s communications within five to seven days. However, the revised OIC memo, dated two days before the OIC rejection, was the first correspondence that did not include a specific deadline for Long to respond.

The court stated that there was no reason for Long to expect that the nonurgent request to “[l]et me know if you want to set up a time to discuss” created a two-day deadline, especially since he had responded to the revised OIC memo within the normal five- to seven-day period of previous correspondence, and in his response he was still trying to negotiate the disallowance of the private tuition expenses and partial disallowance of the alimony and child support payments. Also, two days were inadequate for Long to respond to the revised OIC memo, considering he held a full-time job while at the same time running a business, all the while trying to consult with his attorney.

The court conceded that the IRS should be able to set reasonable deadlines, which might be as short a time as two days in some instances. However, no deadline was set in the revised OIC memo, and Long had demonstrated his commitment to cooperating with IRS Appeals in the past. The record also indicated that he was interested in either an IA or OIC.

Holding: The court concluded that the IRS abused its discretion by closing Long’ case two days after Appeals’ reply, not giving him a chance to propose an IA or respond to the content of the revised OIC memo. The closing of the CDP file two days after receiving no response, the court found, was an arbitrary action with no sound basis in law or fact. Therefore, IRS Appeals had abused its discretion by issuing a notice of determination without adequately addressing all the collection alternatives raised by Long. Accordingly, the court remanded the case to IRS Appeals for further consideration.

■ Long, T.C. Memo. 2023-130 .

— Olivia Larson is a student in the School of Industrial and Labor Relations, and Thomas Godwin, CPA, CGMA, Ph.D., and John McKinley, CPA, CGMA, J.D., LL.M., are both professors of the practice in accounting and taxation in the SC Johnson College of Business, all at Cornell University. To comment on this column, contact Paul Bonner, the JofA’s tax editor.