It was an interesting week for designated orders on collection due process (CDP) cases, with orders that really demonstrate the upsides and downsides to CDP protections. Professor Bryan Camp has sometimes referred to CDP as “Collection Delay Process” (as he notes here). Two of this week’s orders are illustrative of how the IRS might accelerate getting to collection where the petitioner appears to just be delaying for the sake of delaying, whereas one order reaffirms the purpose and value of judicial review when there may be a genuine issue of the proper collection actions. We’ll start with the IRS tactics for getting to collection when the taxpayer appears to be delaying just for delay’s sake.
Tactic One: Motion to Levy While the CDP Case is Pending. Squire v. C.I.R., Dkt. # 13308-19L: (order here)
This was one of those rare orders that is covered (albeit briefly) by Tax Notes Today (found here, paid subscription required). So what is going on in this case that makes it TNT worthy? At first blush, not much: it looks like so many other CDP cases we have covered on these hallowed pages: the taxpayer didn’t provide any financials or collection alternatives during the hearing, the IRS doesn’t believe the underlying liability is properly at issue, and so the case should be resolved. Usually we would see that in a summary judgment motion. But that is where this case separates itself from the pack: the IRS isn’t moving for summary judgment, but actually wants to move forward with levy while the CDP case is pending (i.e. docketed). (Also perhaps setting this case apart is that the petitioner is apparently a well-known attorney…)
Generally, levy (for any taxable year at issue) is prohibited while a CDP hearing (or appeal therefrom) is pending. See IRC 6330(e)(1). However, the prohibition on levy does not apply if (1) the underlying tax is not at issue, and (2) the IRS shows good cause why levy should go forward. IRC 6330(e)(2). Thus, in a “Motion to Permit Levy” the IRS will need to show those two things: the issue isn’t the underlying tax and there is a good reason to allow the levy to proceed right now, rather than after the Court (presumably) upholds the IRS Appeals determination that a levy is warranted.
We’ve seen the IRS struggle a bit through summary judgment motions in the past. How do they do on the Motion to Permit Levy?
Not too well.
First off, petitioner claims (apparently without any support) that the underlying taxes were put at issue in the Collection Due Process hearing. But Judge Leyden doesn’t even need to consider that issue, because even if the IRS did meet that element they’d fail on “good cause.” Judge Leyden acknowledges that “good cause” is a slippery term, but cites to Burke v. C.I.R., 124 T.C. 189 (2005) for some examples of where good cause to allow a levy may be found: essentially, where the taxpayer uses CDP to bring up frivolous arguments or needlessly delay collection.
The IRS thinks that the petitioner is very much in the game of needlessly delaying collection. And this is because this taxpayer seems to always end up in Tax Court -having filed four CDP petitions (including the instant case) in the last eight years. This pesky petitioner just keeps insisting on CDP and losing (or at least losing two of the four times: one is still pending, i.e. the order at issue, and the Court does not explicitly reference the outcome in the fourth).
But is constantly insisting on your rights the same as needlessly delaying collection? That is a bridge too far for Judge Leyden, especially given the paltry record for the docketed case. It is not yet clear that, in this present case, the petitioner has no leg to stand on and evidence would show that it is all a delay tactic. The record shows that the petitioner self-reported the tax due, and participated in the CDP hearing. The record does not show (or at least the IRS hasn’t put forth evidence) that frivolous arguments have been made, so the argument seems to boil down to “this person keeps losing. And they should know better (subtext: the petitioner in this case is an attorney, apparently at one point quite well known, who has run into some ethical issues in the past), so it is a delay tactic.”
I’m sympathetic to the IRS’s concern in this case, since it appears that petitioner keeps losing for the same uncorrected issue: failing to pay estimated taxes (compliance being a prerequisite for essentially every collection option). But I’m not sympathetic to the way the argument was presented. Where the IRS wants to accelerate collection by levying during a CDP case, they need to do better by: (1) properly showing the underlying tax isn’t at issue (in this case, the only exhibit to the motion was IRS certificates of assessment, which just don’t go far enough to prove the underlying tax isn’t/couldn’t be at issue); and (2) putting the administrative record before the Court so they can actually see the arguments that were raised in the CDP hearing, and then have some idea if they are frivolous. I think the IRS particularly failed with the latter, since (arguably) the administrative record could also show that the underlying tax wasn’t raised in the hearing and thus would not be properly at issue. The administrative record is (increasingly) critical in non-deficiency cases, which can hurt the IRS just as easily as it can hurt the taxpayer if it is not properly developed.
Tactic Two: Summary Judgment Done Right. Peele v. C.I.R., Dkt. # 5447-19L (order here)
In Peele we have another serial CDP user (more accurately, “abuser”) but a different outcome -this time a success for the IRS on the more traditional motion for summary judgment. From Judge Gustafson’s stern rebuke to the petitioner (warning of potential IRC 6673 penalties in the future) this may have actually been a better vehicle for the motion to permit levy than the previously discussed Squire case. So how did we get here?
Ms. Peele appears to be one of those individuals that loves filing complaints/petitions, but not taking essentially any other action to address the problem. Her failure to act begins by failing to file a tax return for the year at issue (2012), resulting in an SFR. She later filed a CDP hearing request for the resulting Notice of Federal Tax Lien but it was upheld by Appeals. Undeterred, Ms. Peele filed a Tax Court petition… and then did not show up in court or respond to a summary judgment motion. Astoundingly, the Tax Court granted the IRS summary judgment motion.
But Ms. Peele was not going to let these losses get her down. So she appealed the Tax Court decision to the 4th Circuit Court of Appeals. Where her case was dismissed for… any guesses? That’s right: failure to prosecute.
All this time, effort, and wasted judicial resources on the 2012 taxes she never filed… and it isn’t over. Remember, the chronology I just walked through was from a Notice of Federal Tax Lien (docketed here). The designated order for the week still involves the 2012 taxes, but from a Notice of Intent to Levy.
So has Ms. Peele changed in the intervening years? Is the threat of a levy enough to prompt her to action beyond just filing in court? For those debating human nature, this one can be chalked up as a win in the “people don’t change” column.
Again, Ms. Peele makes every timely request necessary for Court jurisdiction, but does nothing thereafter: a timely CDP request that she fails to follow through on (i.e. skips the hearing) and a timely petition to Court that she fails to follow through on (i.e. fails to respond to the IRS motion for summary judgment).
So a petitioner that was very likely only using CDP to delay can delay no longer: summary judgment is granted. It is not immediately clear to me that a motion to permit levy in this case would have gotten to quicker collection for the IRS but my bet is it would have had a greater chance of success than Squire because no reasons exist for the court to review (she didn’t participate in the hearing) and that, coupled with her history, strongly suggests a “delay” purpose.
But Wait! CDP CAN Be a Valuable Check on the IRS. Lecour v. C.I.R., Dkt. # 22905-18L (order here)
So we’ve had two previous cases where the IRS seemed to reasonably believe the petitioner was just trying to delay collection through CDP. Is that all CDP is? One intricate delay tactic? Maybe not… This final order stands for the value of CDP as a check against IRS collection personnel.
The Lecour’s (husband and wife) are represented by counsel, and appear to have been fairly well engaged with the IRS throughout the CDP process. Namely, they submitted financials and specifically proposed a payment alternative (in this case, an installment agreement) for their rather sizeable 2013 and 2014 balances (totaling approximately $96,000).
Paying down a $96,000 bill, even over the course of many years, can be a difficult task for many. Here, the petitioners sought to alleviate this difficulty by proposing an installment agreement that began with lower monthly payments in the first year ($500/month), and then ramped up after that ($1,500/month). The reasoning behind this proposed structure was to give the petitioners time to restructure their living expenses so that they could afford to pay more in the second year and onwards.
Of course, we wouldn’t be here unless the IRS had a problem with this proposal. And the IRS problem is one we’ve seen before: namely, that they believed the monthly amounts could be higher because their reported income should be higher and some of their necessary expenses should be lower.
Although some installment agreements for relatively low balances must be accepted as a matter of law (see IRC 6159(c)) the general rule (applicable in this case) is that the IRS has fairly broad discretion to enter into an agreement (see IRC 6159(a), noting the permissive language). Still, it is not boundless discretion, and installment agreements like these are exactly the sorts of cases where I appreciate the ability to get Court review rather than have the entirety of the decision rest in the IRS’s hands.
Of course, even with judicial review on proposed collection alternatives, taxpayers are often in a tough spot. As Judge Panuthos notes, review of collection alternatives involve an abuse of discretion standard and the Tax Court will not “substitute our judgment for that of the IRS, recalculate a taxpayer’s ability to pay, or independently determine what would have been an acceptable collection alternative.” That would appear to signal an uphill battle for the petitioner in this case. But perhaps there is hope… in the Internal Revenue Manual (IRM).
From the beginning it bears noting that the IRM does not create taxpayer rights and is not binding on the IRS (or the Tax Court). See, e.g. Thompson v. C.I.R., 140 T.C. No. 4 (2013) at footnote 16 for a list of cases on that point. In other words, it is not law.
However, the IRM does provide guidelines as to what the IRS’s policy is on the sort of financial analysis at play in nearly all collection cases. In other words, it provides some sort of yardstick for the Tax Court to consider how the IRS decided to exercise its discretion in collection: if the IRS completely ignores its own policy (reflected in the IRM) and doesn’t provide a reason why, that is a pretty good sign of “abuse of discretion.”
A couple things that the IRM provides in cases like this are (1) the permissive ability of the IRS to have provide the one-year “reorganization” period requested by petitioner (see IRM 5.14.1.4.1(2)) and (2) guidelines on allowable expenses (especially national and local standard expenses) in determining income that could be put towards the tax liability. If you deviate from those IRM provisions, you’d better clearly explain why.
And therein lies the problem for the IRS’s summary judgment motion. It just isn’t clear enough from the Notice of Determination (or record thus far) the exact reasoning for the number the IRS arrived at. If the numbers were clearly linked to the IRM positions (again, not binding) just saying so may well be reason enough. But where they aren’t following the IRM (or it isn’t clear that they are) you have an open question of whether the IRS employee was properly exercising discretion, or just doing their own thing -something CDP is likely intended to prevent.
And, thanks to Court review not operating as a rubber stamp on the IRS’s determination, you have protection before collection can take place. In the instant case, the IRS’s summary judgment motion is denied (effectively slowing down the collection action IRS hopes to accelerate) while the facts can be better determined, preventing potentially unaffordable or catastrophic levy. In other words, sometimes the process works.
Final Orders of the Week
For posterity’s sake, there were two other (essentially identical) designated orders from December 30 – January 3 in Giambrone v. C.I.R. They dealt with a motion for a protective order from a non-party to the suit and can be found here and here.