The IRS did not abuse its discretion in sustaining levy

The IRS did not abuse its discretion in sustaining a taxpayer’s proposed levy for a tax liability the taxpayer had not properly challenged, the Tax Court held.

Facts: Elizabeth White filed a delinquent Form 1040, U.S. Individual Income Tax Return, for 2019. On Dec. 14, 2020, the IRS mailed White a “math error” notice, informing her that her 2019 tax liability was being adjusted upward because of two errors on her return: an overstatement of withholding credits and a miscalculation of the taxable portion of her Social Security benefits. The notice informed White of her right to dispute these adjustments, but she did not do so. As of August 2021, her unpaid tax for tax year 2019 amounted to $6,924, including interest and penalties.

In August 2021, the IRS sent White a levy notice. White timely requested a Collection Due Process (CDP) hearing, checking a box requesting an offer in comprise (OIC). She listed the tax periods at issue as 2017–2019, although the levy notice pertained only to 2019.

White also indicated that she made payments totaling $7,141 between September 2019 and January 2020 to “settle any taxes owed.” However, the IRS had informed her in a letter dated Jan. 23, 2020, that the first $2,141 of the $7,141 in payments had been applied against her 2017 tax liability, with the remaining $5,000 reducing but not eliminating her 2018 liability. None of the $7,141 in payments reduced her 2019 tax liability.

In October 2022, the IRS mailed White a letter acknowledging receipt of her request and stating that it would be forwarded to the IRS Independent Office of Appeals. In December 2022, the case was assigned to a settlement officer (SO) in Appeals, who verified that: (1) the 2019 tax year had been properly assessed; (2) notice and demand for payment had been properly mailed to White’s last known address; (3) the $7,141 in payments White made between September 2019 and January 2020 had been properly applied to her 2017 and 2018 tax years; and (4) her balance for 2019 remained unpaid.

In December 2022, the SO sent White a letter scheduling a telephone conference for early 2023. The letter also stated that Appeals could consider a collection alternative only if she completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, accompanied by supporting financial information. The letter further stated that if she wanted to propose an OIC, she needed to submit Form 656, Offer in Compromise.

Days before the telephone conference, White spoke with the SO’s supervisor requesting copies of her administrative file and other documents and requested a face-to-face hearing. The supervisor noted that a face-to-face hearing might be convened if White submitted a completed Form 433- A “to enable consideration of a collection alternative.” White indicated that she was not interested in a collection alternative, at which point the supervisor informed her that the conference would take place by telephone, to which she agreed. The same day, the supervisor relayed the request to the SO, who sent White the documents.

The telephone conference was rescheduled for April 13, 2023. Up to this point, White had shown no intention to challenge her underlying tax liability for 2019 or propose a collection alternative and had not submitted any financial information to the SO. During the April 13 call, White stated that “she was going to submit another [hearing request] to cover all the years that have balances due.” The SO explained to her that the current hearing was limited to 2019 and that before requesting another CDP hearing, “she has to receive final notices for the tax years she wants to discuss.”

On May 8, 2023, the SO decided to close the case since White had not challenged her 2019 tax liability, was not interested in a collection alternative, and declined to provide any financial information to support her claim. On May 23, 2023, the SO sent White a notice of determination sustaining the proposed levy, explaining that, even though she had checked the box for an OIC, Appeals could not consider it because she did not submit an offer.

In a timely filed petition with the Tax Court, White requested that, even though she did not challenge the underlying tax liability, the “current tax year [2019] be held in abeyance until all tax years in which a hearing was requested be brought before the Court.” She also claimed that the SO abused his discretion by denying her request for a face-to-face hearing and neglecting to send her a copy of the administrative file she had requested. The IRS filed a motion for summary judgment to dismiss the case.

Issues: Where a taxpayer’s underlying tax liability is not in dispute, the Tax Court reviews the IRS’s determination in a CDP case for abuse of discretion only (Jones, 338 F.3d 463 (5th Cir. 2003)). Taxpayers may challenge their underlying tax liability at a CDP hearing only if they did not receive a statutory notice of deficiency or did not have a prior opportunity to dispute the liability (Sec. 6330(c)(2)(B)).

Even though White did not receive a statutory notice of deficiency for her 2019 tax liability, she did receive a math-error notice, which the court, in general, lacks deficiency jurisdiction to review (Sec. 6213(b)(1)). However, the court noted in the opinion that it has held that in a CDP case it may “review underlying liabilities arising from adjustments not subject to [its] deficiency jurisdiction” (McNeill, 148 T.C. 481 (2017)).

To preserve an underlying tax liability challenge in Tax Court, a taxpayer must properly raise that challenge during the CDP hearing. For an issue to be properly raised, the taxpayer must provide Appeals any evidence with respect to that issue after being given a reasonable opportunity to do so (in other words, taxpayers must explain what they believe their correct tax liability to be and supply the Appeals SO with some evidence to support that position).

The Tax Court found that White had not submitted any evidence to Appeals to dispute the existence or amount of her 2019 tax liability. Rather, she referred to the $7,141 in payments made from September 2019 to January 2020 as settling any taxes she owed. However, a dispute as to whether a payment was credited to a taxpayer’s account for a tax year is not a challenge to the taxpayer’s underlying tax liability for that year (Melasky, 151 T.C. 9 (2018), aff’d, 803 F. App’x 732 (5th Cir. 2020)).

Furthermore, since there was no conflicting evidence to the contrary, the Tax Court found that the IRS account transcripts were sufficient evidence to establish that the $7,141 in payments were not applied against White’s 2019 tax liability. Therefore, the court only reviewed whether the Appeals SO had abused his discretion in handling White’s case.

Abuse of discretion exists “when a determination is arbitrary, capricious, or without sound basis in fact or law” (Murphy, 125 T.C. 301 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006)). In determining whether an SO abused their discretion, the Tax Court considers whether the SO: (1) properly verified that the requirements of applicable law and administrative procedure were met; (2) considered any relevant issues the taxpayer raised; and (3) looked at “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of [the taxpayer] that any collection action be no more intrusive than necessary” (Sec. 6330(c)(3)). The court held that the SO in White’s case properly discharged his duties under these three provisions.

White asserted, though, that the SO abused his discretion by not providing her with the administrative file and copies of documents she requested. However, the SO’s case activity record showed that he mailed those items to White on Jan. 12, 2023. White further contended that the SO abused his discretion by not offering her a face-to-face hearing. The Tax Court noted, however, that it has repeatedly held that Sec. 6330 does not require a face-to-face hearing. Moreover, the court found that a face-to-face meeting was unjustified once White showed no interest in a collection alternative for 2019, since no financial information was submitted to the SO.

Holding: Because there were no disputes of material fact in the case and the SO did not abuse his discretion in sustaining the proposed levy, the Tax Court granted the IRS’s motion for summary judgment. The court noted that White was still free to submit an OIC or installment agreement at any time if supported by the appropriate financial information and that such an offer could cover her liabilities for multiple tax years.

■ White, T.C. Memo. 2024-53

— John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business; Matthew Geiszler, Ph.D., is a lecturer in accounting in the Brooks School of Public Policy; and Isaac Chasen is a J.D. candidate at Cornell Law School, all at Cornell University. To comment on this column, contact Paul Bonner, the JofA’s tax editor.