The Tax Law Report

Collection Due Process Hearings

Willock v. Comm'r, T.C. Memo. 2009-178 (T.C. 2009) (parenthetical references are to the page number of the opinion).

The Willocks challenge the IRS's use of a lien to collect $191,724 in unpaid taxes and penalties related to their 2001 tax return. (2).  The Tax Court sustains the lien because the Willocks "offered no collection alternatives or other defenses to the lien." (6).

Chronology of Events

This opinion moves pretty fast; and fortunately so because it is not all that exciting. A chronology of events leading up to this opinion is helpful here:

December 7, 2005 - IRS mails a Notice of Deficiency to the taxpayers. (2).

April 11, 2006 - IRS assesses the tax, penalty, and interest because the taxpayer did not respond to the NOD within the requisite 90-day period. (2).

January 23, 2007 - IRS files Notice of Federal Tax Lien. (3).

January 30, 2007 - IRS mails taxpayer the Notice of Federal Tax Lien and Your Right to a Hearing Under IRC 6320 (Letter 3172). (3).

February 26, 2007 - Taxpayer requests a collection due process hearing (CDP). (3).

July 23, 2007 - IRS schedule telephone CDP hearing for August 14, 2007. (3).

August 14, 2007 - at the hearing, "[taxpayers] did not present any reason why the filing of the Federal  tax lien should not remain in place, nor did [taxpayers] present any collection alternatives during the hearing." (3).

August 23, 2007 - IRS mails taxpayers a Notice of Determination. (4).

October 1, 2007 - Taxpayers file petition with the Tax Court. (4).

October 7, 2008 - Tax Court holds hearing to discuss taxpayer's motion for summary judgment. (4).

June 18, 2009 - Tax Court denies taxpayer's motion for summary judgment. (4).

Tax Court's Decision

At the telephone CDP hearing, the Willocks disputed the amount of tax owed, that is, they disputed the underlying tax liability assessed by the IRS. (3). But, "[b]ecause the petitioners had a prior opportunity to dispute the underlying tax liability for 2001, they would not be permitted to do so during the CDP hearing." (3). In other words, the Willocks had an opportunity to dispute the amount of the liability and they let it pass. Consequently, at the CDP hearing they could only dispute the IRS's collection methods. As the Court points out, in the absence of any relevant arguments from the taxpayers, a lien is a lawful method of enforcing collection of an outstanding tax liability. (6).

Analysis

Section 6501(a) provides, as a general rule, that taxes must be assessed within three years after a return is filed. This is the basic statute of limitations provision in the Internal Revenue Code. There are exceptions to this general rule, one of which is in section 6501(c)(4)(A). This section states that if "both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon." In other words, the taxpayer can extend the three-year statute of limitations imposed on the Internal Revenue Service.

A review off the above chronology shows that the three-year limitation had expired long before the IRS assessed the tax on April 11, 2006. As is usually the case, there is more here than meets the eye. In footnote no. 2, the Tax Court states that the taxpayers signed Form 872 prior the expiration of the three-year statute of limitations. (4). Form 872 is an agreement between the taxpayer and the IRS that adheres to the requirements under section 6501(c).

I did a search of the IRS website and could not find Form 872. This leads me to believe the IRS has transitioned to a different form. Form 921 appears to be its replacement.

Collection Due Process Hearings

This case is important because the IRS is issuing levies left and right these days. This opinion is a good discussion of section 6330, notice and opportunity for hearing before levy.

How does a seemingly simply issue turn into an almost fifteen year dispute with the IRS? Ask the Kovaceviches. The issue is seemingly simple. The Kovaceviches say that the IRS did not properly apply five checks to their outstanding tax liability from 1992. Twenty-eight pages later the Tax Court says the IRS did apply the payments properly. In the interest of full-disclosure, there is a lot of the opinion I am leaving out.

The 1992 dispute started when the IRS determined Mr. Kovacevich was an employee of his law firm and not an independent contractor. Mr. K. challenged the determination in tax court and lost. As a result, his law firm owed back employment taxes. Mr. K’s business deductions as an independent contractor were disallowed, as well as his personal deduction for ½ self-employment tax paid. The law firm’s employment tax liability was settled by the self-employment taxes paid by Mr. K. The payments were credited to his firm’s liability pursuant to section 3402(d).

In April 2005, the Service sent Mr. K a notice of intent to levy for amounts still owed from 1992. Between the 1992 and today, the following events transpired:

1. 1999 – IRS deficiency notice for 1992 tax year
2. 2003 – Tax Court upholding deficiency notice
3. 2006 – Ninth Circuit upholds Tax Court’s decision

In response to the levy notice, the K’s requested a collections due process (CDP) hearing and presented copies of four checks they claimed were not applied to the 1992 tax year. The appeals officer upheld the levy because she considered the K’s “misapplied check” argument a challenge to the underlying tax liability; a matter not within the scope of a levy hearing under 6330(c)(2)(B).

The IRS concedes the officer’s reading of 6330(c)(2)(B) an error. Nonetheless, the Tax Court lays out a fine analysis of section 6330(c) beginning on page 12. The language of (c)(2)(A) states, “a person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy…” Since the K’s did not challenge the liability rather the unpaid amount, their check theory was within the scope of a hearing

Interestingly, because the appeals officer’s incorrect reading of 6330(c) is an “error of law . . . she necessarily abused her discretion, unless her error was harmless.” To show harmless error, the IRS asserts that the exclusion to 6330(c)(2)(A) under (c)(4) applies. Under 6330(c)(4) an issue “raised and considered at previous administrative or judicial proceeding” may not be raised again. Since one of the checks at issue was considered by the Tax Court at the 2003 deficiency trial it could not be properly considered at the CDP hearing.

To show harmless error for the remaining four checks, the IRS would need to show the checks were applied properly in the first place. Each check was considered in turn by the Tax Court. The Tax Court states, “a taxpayer who makes a voluntary payment may designate which liability he or she wishes to pay.” The Court then conducts an exhaustive analysis between the IRS’s records and the writings on each of Mr. K’s checks. Only one of Mr. K’s checks indicated the 1992 tax year. The other checks had writings that indicated other tax years and were properly applied accordingly.

The obvious problem with Mr. K’s argument – the Court points this out – is that if it is assumed for the sake of argument that the IRS erroneously applied his checks, he still owes money. The checks were in fact applied to one of the K’s tax liabilities. So shifting the checks from one tax year to another gets him nowhere. It suggests Mr. K’s motives for the fight were illogical from the start.

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