What is a Genuine Opportunity to Dispute a Tax Liability?

Published Categorized as IRS Collections, IRS Collections, Tax Relief
Genuine dispute IRS debt, Austin Tax Attorney

Taxpayers are able to dispute a tax liability before the IRS can take certain collection actions. But what if the IRS does not afford the taxpayer with a genuine opportunity to dispute the liability as required by law? The court addresses this in Dood v. Commissioner, T.C. Memo. 2019-107.

Facts & Procedural History

The taxpayer was a secretary at a law firm. She had a line of credit with the law firm that she worked for. This line of credit was paid off when an LLC that she owned an interest in, sold real estate that the LLC owned. Because the LLC was taxed as a partnership, the real estate gain flowed through to her personal income tax return. It isn’t clear why the payment of the credit line wasn’t taxable to her, but the taxpayer asserted that the income was reported on her tax return in error.

The IRS attempted to collect the tax liability. The taxpayer filed a Collection Due Process hearing request to ask the IRS Office of Appeals to consider the underlying liability. Appeals failed to do so, the taxpayer asked the court to review the matter, and the court remanded the case to Appeals to consider the liability. This court case stemmed from the actions of the appeal officer after the case was remanded back to Appeals.

About Collection Due Process Hearings

Collection Due Process (“CDP”) hearings afford taxpayers an opportunity for the IRS Office of Appeals to review the case before the IRS Collections function proceeds with enforced collection. This is a fundamental right afforded by Congress. It was created by Congress given perceived IRS abuses prior to the late 1990s.

Importantly, CDP hearings also provide a court remedy if the hearing is not handled properly. This is a particularly valuable feature of CDP hearings as it puts the IRS on notice that its work will be reviewed.

CDP hearings can be particularly helpful in situations where the taxpayer’s return (or later assessment from an IRS audit) is incorrect. It can take quite a while to get these issues corrected with the IRS. During that time, the IRS Collection function may continue to attempt to collect the disputed tax. The CDP hearing process can put a hold on collections while the taxpayer tries to get the IRS to fix the underlying tax problem. If the IRS Appeals Office has the CDP hearing before this happens, then the IRS Office of Appeals can assist with the liability as part of the hearing.

But what happens if the IRS Office of Appeals does not provide a genuine opportunity to dispute the underlying tax liability? What if Appeals simply closes the case back to the IRS Collection function?

A Genuine Opportunity to Dispute the Liability

For CDP hearings, the law says that the taxpayer has the right to challenge the underlying tax liability:

The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.

Many disputes involving CDP hearings where the underlying liability is in dispute relate to whether the taxpayer had a prior opportunity to dispute the tax liability. More specifically, these disputes often relate to whether the IRS sent notices to the taxpayer’s last known address. This wasn’t the issue in the present case.

In the present case, the issue was whether Appeals afforded a genuine opportunity for the taxpayer to dispute the liability.

On remand to Appeals, Appeals sent one letter to the taxpayer to schedule the hearing. This letter included one sentence asking that an amended tax return be provided prior to the hearing.

The taxpayer apparently had questions about the implications of filing an amended return and intended to discuss these questions with the appeals officer during the hearing. The appeals officer closed the case the day after the hearing, as the taxpayer did not provide an amended tax return prior to the hearing.

What is a Genuine Opportunity to Dispute the Liability?

The court concluded that Appeals did not afford the taxpayer a genuine opportunity to dispute the underlying tax. The court:

  • noted that, at a minimum, the IRS letter should have explained the consequences of not providing an amended tax return in advance of the hearing.
  • implied that the IRS Appeals letter should have asked for additional facts, not just an amended tax return.
  • stated that the amended tax return wouldn’t have added anything to the issue at hand given that the IRS was apprised of the facts for the taxpayer’s argument.

On the last point, it should be noted that Appeals frequently asks for amended returns in situations like this. It does this as the settlement officer who handles the CDP hearing will often ask an appeals officer (who is more accustomed to considering tax return matters) to sign off on the tax return or simply forward the return to the IRS service center for processing.

The court made it clear that in cases like this, the Appeals has to afford the taxpayer additional time to provide the amended return.

The court remanded the case back to Appeals, with the suggestion that Appeals have a different settlement officer work the case.

This court case provides something taxpayers can cite if Appeals closes their case prematurely.