In 1927, the Commissioner of Internal Revenue established a Special Advisory Committee that was intended to serve as a forum to facilitate settlement of cases pending before the Board of Tax Appeals. Over the years, this forum evolved into the IRS Appeals Office. Throughout the various restructurings within the IRS, the Appeals Office’s mission has remained the same: to resolve tax controversies without litigation on a basis that is fair and impartial to both the IRS and the taxpayer. In 1998, Congress reiterated the importance of an independent Appeals Office by proclaiming:
[The IRS restructuring must] ensure an independent appeals function within the Internal Revenue Service, including the prohibition in the plan of ex parte communications between appeals officers and other Internal Revenue Service employees to the extent that such communications appear to compromise the independence of the appeals officers. [P.L. 105-206, Section 1001(a)(4)]
The IRS attempted to clarify the Appeals Office’s independent function when it announced the “Appeals Judicial Approach and Culture” (AJAC) Project in 2012. Since this proclamation, the IRS has issued interim guidance to implement the AJAC Project that is designed to maintain an independent Appeals Office that can resolve cases in a fair and impartial manner.
This article summarizes the IRS enforced collection procedures and evaluates the effect of the AJAC Project on the resolution of IRS collection cases.
IRS Enforced Collection Process
Generally, the IRS has two mechanisms to enforce collection of unpaid taxes: a Notice of Federal Tax Lien (NFTL), which attaches to the taxpayer’s assets, and a levy to seize taxpayer assets to satisfy the debt. The collection process generally begins with a series of notices reminding the taxpayer of the unpaid balance and informing the taxpayer of the IRS’s right to file an NFTL and issue a levy if the debt remains unpaid. If these notices go unanswered, the IRS is required to send the taxpayer a written Notice of Lien Filing when the NFTL is filed and a written Final Notice Letter of Intent to Levy when the IRS will issue a levy. These notifications also serve to inform the taxpayer of the right to request a Collection Due Process (CDP) hearing with the IRS Appeals Office to address the suitability of the IRS’s enforced collection actions. The request for a CDP hearing must be filed within 30 days from the date of these notices.
Given the changes implemented through the AJAC Project, it is imperative that taxpayers and their representatives develop their strategies for resolving collection cases early in the process. Effective resolution generally involves full payment of the liability, negotiation of a viable collection alternative, or presentation of a valid challenge to the underlying liability. If not resolved in a timely and effective manner, a taxpayer may face a protracted battle with the IRS on various fronts to reach a resolution.
Note that innocent spouse relief from joint and several liability pursuant to IRC section 6015 is beyond the scope of this article. Taxpayers and their advisors should consider the viability of innocent spouse relief in all collection cases involving joint returns.
Notice of Federal Tax Lien
A federal tax lien grants the IRS a legal claim against a taxpayer’s property when the taxpayer fails to pay taxes due and owing. The lien automatically attaches to the taxpayer’s property after demand for payment is made but the taxpayer fails to make such payment. Although the lien is valid at the time of creation, the IRS must perfect the lien by filing an NFTL in order to maintain priority over subsequent bona fide creditors.
A taxpayer should not delay the process of questioning a proposed NFTL filing. In certain cases, the taxpayer’s circumstances may warrant a filing deferral. These circumstances include a genuine doubt of liability, the satisfaction of the liability, the filing of a bankruptcy petition, or the presence of circumstances under which the NFTL will prevent the collection of the unpaid taxes. The taxpayer should request the conference with the revenue officer (RO) and the RO’s group manager to discuss the circumstances prior to the issuance of the lien filing notice.
If the RO and the manager decide to proceed with the filing of the NFTL, the taxpayer can file Form 9423, Collection Appeal Request, with the RO to request a Collection Appeal Procedure (CAP) hearing with an appeals officer. The taxpayer thereafter has an opportunity to seek an independent evaluation of the NFTL filing determination with the Appeals Office.
After the NFTL has been filed, the NFTL will be released within 30 days from satisfaction of the debt. This includes satisfaction through the submission of a qualified bond that guarantees payment. Furthermore, if the 10-year statutory period for the collection of tax expires, the IRS must release the NFTL within 30 days. A release is added to the taxpayer’s credit history to indicate satisfaction of the debt, but the NFTL filing remains on the taxpayer’s records.
To have the NFTL withdrawn from the record, the taxpayer must apply and qualify for an NFTL withdrawal by filing IRS Form 12277, Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. IRC section 6323(j) provides four statutory conditions in which a withdrawal is appropriate:
- The filing of the NFTL was premature or not in accordance with the IRS’s administrative procedures.
- The taxpayer entered into an installment agreement to pay the underlying liability in full, unless the installment agreement authorizes the filing of an NFTL.
- The withdrawal will facilitate the collection of the underlying liability.
- The withdrawal would be in the best interest of the taxpayer and the United States.
The IRS 2011 Fresh Start Initiative added two more instances in which the IRS is authorized to grant a withdrawal. First, taxpayers who satisfy the underlying liability can request a withdrawal, provided that they can demonstrate three years of filing, estimated payment, and federal tax deposit compliance. Next, qualifying taxpayers who owe $25,000 or less and enter into a direct debit installment agreement that pays the balance owed within the earlier of 60 months or the expiration of the collection statute are eligible, provided that they are in filing and payment compliance. Other requirements include making three consecutive payments on the direct debit plan and not defaulting on the current (or any previous) direct debit installment agreements. Only individuals, businesses that only owe income tax liabilities, or out-of-business entities qualify for this withdrawal request.
If the IRS denies a request for an NFTL withdrawal, a taxpayer must request a meeting with the RO and the RO’s manager to discuss the merits of the case. If the denial is sustained, a taxpayer must file Form 9423 to request a CAP hearing with an independent appeals officer. A taxpayer can address the merits of the withdrawal application with an appeals officer at the CAP hearing.
IRS Levy Procedures
A valid lien allows the IRS to seize a taxpayer’s assets to collect unpaid balances. The IRS is statutorily prohibited from issuing a levy before providing a written notice informing the taxpayer of the intended levy and of the taxpayer’s rights to a CDP hearing before the Appeals Office. The taxpayer has 30 days from the date of the notice to request a CDP hearing. This provision does not apply to levies for the collection of unpaid disqualified employment taxes, that is, an employment tax that was not paid during the two-year period subsequent to the granting of a CDP hearing related to the collection of employment taxes. Under those circumstances, the IRS is allowed to issue a levy before the CDP hearing, provided that the hearing takes place within a reasonable amount of time after the levy is issued.
Because taxpayers have a right to a fair and just tax system, an RO must exercise good judgment when evaluating a case for a potential levy. This includes a consideration of the taxpayer’s economic condition, because the IRS cannot sustain a levy that will create an economic hardship. The RO will also evaluate the taxpayer’s compliance history, efforts to pay the outstanding liability, and cooperation with the collection process when deciding whether a levy is appropriate.
Role of the Appeals Office in Collection Cases
The Appeals Office plays a vital role in enforced collection cases. A taxpayer can request the Appeals Office review of a collection decision at various points in the collection process. It is important to keep the timing of such requests in mind, because only the CDP hearing provides the taxpayer with an opportunity to seek Tax Court review.
The CAP hearing is available for taxpayers faced with pending collection actions, including the following:
- An NFTL has been or will be filed.
- An application for an NFTL has been withdrawn.
- A levy has been or will be issued.
- An installment agreement has been rejected, modified, or terminated.
When faced with these proposed actions, a taxpayer should attempt to resolve the matter with the RO and the group manager. If the taxpayer disagrees with the determination, however, the taxpayer can request a CAP hearing to have the merits of the decision evaluated by an appeals officer. The appeals officer’s review is limited to the relief requested in the CAP hearing application. For example, if a taxpayer challenges the proposed NFTL filing because circumstances warrant a filing deferral, the taxpayer cannot use the CAP hearing as an opportunity to negotiate an offer in compromise with the appeals officer; the offer must be submitted to the appropriate IRS division. Finally, an appeals officer’s decision in a CAP hearing is final; the taxpayer cannot challenge the determination by filing a Tax Court petition.
Unlike the CAP hearing, a taxpayer can raise multiple methods for resolving the case through a CDP hearing, including collection alternatives and valid challenges to the underlying tax liability. The collection alternatives include an installment agreement, offer in compromise, or granting of currently-not-collectible status. Furthermore, when the taxpayer has not had a meaningful opportunity to challenge an underlying liability, the taxpayer can bring forth evidence to demonstrate that the assessment should be set aside during the CDP hearing.
If a taxpayer requests both a CAP hearing and a CDP hearing, the IRS will require that the taxpayer forgo one of the requested hearings. If the taxpayer decides to forgo the CDP hearing, the taxpayer is giving up the right for the Tax Court to review the appeals officer’s decision.
Impact of AJAC Project
In a CDP or “equivalency” hearing, a taxpayer can propose collection alternatives or challenge an underlying tax liability if the taxpayer has not had a prior meaningful opportunity to challenge the liability. Under the AJAC Project, an appeals officer must refer a CDP case back to the Collection Unit if the collection file does not contain sufficient information to evaluate the appropriateness of a proposed collection alternative or if the taxpayer provides a new case information statement that must be verified to support a proposed collection alternative. For challenges to an underlying tax liability, the Appeals Office is required to retain jurisdiction. The case will be referred to examination if the taxpayer raises a new issue during the hearing.
For cases resolved through an installment agreement or through granting currently-not-collectible status, the appeals officer cannot recommend the filing of an NFTL. Rather, if the appeals officer determines that an NFTL should not be filed, the officer must indicate that the Collection Unit will have a right to file if there is a default. Furthermore, in cases in which the appeals officer believes that an NFTL is necessary, the officer must indicate that the Collection Unit may file an NFTL; the Appeals Office cannot initiate the NFTL filing.
The AJAC Project’s emphasis on the Appeals Office’s independent evaluation role is highlighted most by the rules governing evaluation of collection alternatives during a CDP or Equivalency hearing. Appeals officers are prohibited from developing independent facts. Therefore, the appeals officer cannot conduct a public record search for assets or request a taxpayer’s credit report to verify the information reported in a case information statement. For cases that require such verification, the appeals officer must refer the case to the Collection Unit for further development.
For CAP hearings and cases involving collection alternatives proposed outside of the CDP hearing, the AJAC Project reminds appeals officers that their review is limited to “review[ing] the case for appropriateness of the action, proposed or taken, based on law, regulations, policy, and procedures (national and local), considering all of the relevant facts and circumstances.” The review “is limited to sustaining Collection or otherwise directing Collection to take the appropriate corrective action, e.g., to release a levy.” Therefore, when a taxpayer files a CAP hearing request to release a levy, the taxpayer cannot propose an installment agreement to resolve the underlying collection issue during the CAP hearing. The installment agreement must be requested through the Collection Unit and will only be brought before the Appeals Office if the request is denied; in other words, the taxpayer is required to raise and develop the facts necessary to support a collection alternative with the Collection Unit. Likewise, the facts demonstrating why enforced collection is not appropriate must be developed at this level. It is only after the Collection Unit reaches a determination that the Appeals Office will review the case.
Overall, the AJAC Project should continue to reinforce the congressional mandate to establish an independent IRS Appeals Office. However, the compartmentalized approach to case resolution could cause issues for some taxpayers. The new regime makes it easier for a taxpayer who is unfamiliar with the process to get lost in myriad delays, meetings, and CAP hearings before fully resolving the case. Therefore, it is imperative that taxpayers and their representatives develop and implement a strategy early in the collection process.