Understanding IRS Tax Appeals

Tax Lawyer

IRS’ CDP Appeal Program

We are pleased to feature this guest post from our colleagues at Mankus & Marchan, Ltd. discussing the intricacies of the appeal program, the appeal office, and tax court issues. © Copyright reserved.

In 1998, Congress passed the IRS Restructuring and Reform Act (“R&RA”). This act provided, among other things, that the IRS must issue a final notice and demand for payment (by certified mail) to a taxpayer (business or individual) with unpaid tax liabilities before it can take enforcement action to collect the tax balance due. The R&RA also required this notice to state that the taxpayer has a right to a collection due process (“CDP”) hearing with an IRS’ Appeals officer if he/she/it files such an appeal within 30 days from the date of such a final demand.

This portion of the R&RA was incorporated into IRC §6330 and gave the taxpayer the right to a hearing before an independent appeals officer of the IRS in order to dispute the tax liability and/or to propose alternative ways to settle it through other means, such as an offer in compromise (“OIC”), for example. Under IRC§7122, an OIC allows the IRS to settle the taxpayer’s liability for less than the full amount due, depending on the taxpayer’s financial wherewithal and other relevant circumstances.

One purpose of IRC§6330 was to protect the taxpayer from an overzealous collection agent of the IRS and to provide the taxpayer with another chance to work out the tax liability before an allegedly impartial (and less zealous) employee of the IRS’ Appeals office. In the 25 years since the enactment of this statute, it’s not clear to this practitioner that the intended purpose of this statute has fully achieved its aspirational goals.

While it is true that R&RA gave taxpayers additional due process rights, including jurisdiction to petition the U.S. Tax Court for a hearing before a Judge, in practice it still continues to have procedural problems. Below is a list of some of the procedural problems I have encountered in the last twenty five years.

Employees of the IRS Appeals Office

1. The employees who handle the CDP appeals for the IRS Appeals office are known as “Settlement Officers” (“S/Os”). S/Os are often former employees of the Collection Division of the IRS, known as “Revenue Officers” (“R/Os”). As R/Os, they have been trained to collect delinquent taxes and have been doing so for a number of years. They have reached Grade 12, the highest grade for regular R/Os, before they are promoted to Grade 13 S/Os. Therefore, they often have an imbued collection mentality and find it hard to be objective and independent, as required by IRC§6330. The S/Os are often skeptical about taxpayers who have unpaid tax liabilities and have the mentality that “I pay my taxes and believe that everyone else should, too.” Alternatively, they justify their attitude with the statement that “settling with a taxpayer for less than the full amount due is not fair to the other taxpayers who pay their taxes in full.” These S/Os are sometimes less inclined to take special circumstances of the taxpayer into account, such as age, or health issues, for example. They are also less inclined to give the taxpayer a second chance after a business failure, or after an acrimonious and difficult divorce, for example. Consequently, some S/Os pay only lip service to being an independent arbiter between the IRS Collection Division and the taxpayer, as required by IRC§6330, as well as IRS’ numerous regulations.
2. Under IRS regulations and policy guidelines, the S/O must act as an independent arbiters between the taxpayer and the R/O. The R/Os are usually the ones who initially determined the financial wherewithal of the taxpayer to pay the taxes due, also known as the “collection potential.” If the R/O reject the taxpayer’s offer of settlement through an OIC, for example, the S/O must review the file and determine if the R/O made the proper decision under the IRS’ procedures and guidelines. This requires the S/O to re-review the detailed financial documents and information submitted by the taxpayer to the R/O. On the surface, this sounds fairly straightforward; in practice, however, it’s much more complex. 
3. Due to the budget cuts imposed on IRS by Congress over the past ten years, the IRS has been obligated to make staffing cuts and has shrunk from about 120,000 employees nationwide ten years ago to about 80,000, through 2021. This has resulted in increased workloads for the employees, including for the S/Os of the Appeals office. The S/Os have less time to devote to each taxpayer’s situation. In cases involving taxpayers with more complex financial pictures, the S/Os often agree with the R/O’s decision and just say no to the taxpayer’s proposal for settlement with the IRS through an OIC – not because that is the correct decision under IRS regulations, but because they would rather deny the request than be second-guessed by a manager for accepting less than the “collection potential.” Worst yet, to be put under a cloud of suspicion by the Treasury Inspector General for Tax Administration (“TIGTA”) for maybe showing favoritism to a particular taxpayer.
4. Another problem presented by the budget and staffing cuts is the increased delays in handling the IRS’ workloads. Once the taxpayer submits an OIC, it may take months for IRS to assign the case to an employee for review. The financial documents submitted with the OIC, such as the taxpayer’s bank statements, for example, become outdated and then require the taxpayer to submit updated information once it is assigned to an IRS employee. If the taxpayer also files a CDP appeal under IRC§6330, there are additional delays before the case is assigned to an S/O.
5. Being former R/O’s, however, some S/O’s often feel obligated to review the case de novo, for fear of being blamed by their managers for not doing a thorough financial analysis. Against IRS’ own regulations, the S/Os often require the taxpayers to present even more updated financial documents and information rather than deciding on whether the R/O made the right decision based on the financial documents that had been presented to him/her some months, or years, before. This adds more time and expense to the taxpayer to start all over again with the S/O, with little hope that the S/O is more sympathetic than the R/O who reviewed the case to begin with.
6. While the S/Os I’ve dealt with in the past are often overcautious about accepting an OIC for fear of being blamed by their managers for accepting an amount less than the collection potential, most of the managers of the S/Os that I’ve dealt with do not get involved with the details of the case and leave it up to the S/Os to make the final decisions. The managers are usually just as overloaded as the S/Os. Having no practical recourse for a managerial review, the taxpayer is then left with no options if he/she doesn’t agree with the decision of the S/Os, other than to incur additional time and expense to file a petition in the US Tax Court for a judicial review.

US Tax Court Issues

1. The US Tax Court is not a panacea, either. It is just as overloaded with cases as IRS itself. Besides an overload of cases, many of the tax court petitions are filed by pro se taxpayers who are not knowledgeable about the rules, regulations and procedures of the tax court. This leaves the judges and IRS Counsel’s attorneys overworked, frustrated and inclined to give short shrift to even meritorious cases. 
2. IRS attorneys have begun the routine practice of filing motions for summary judgment in many cases and ask the tax court judges to dismiss the cases on grounds that there are no issues of material fact between the taxpayers’ petitions and IRS‘ answers to those petitions. I’ve had at least one of my cases dismissed on summary judgment by a US Tax Court Judge even though there were significant issues of material fact. If you’re concerned this could happen in your case, working with an experienced tax lawyer is wise. Unfortunately, the taxpayer could not afford the fees and the additional delays to file an appeal of this decision to the US District Court. He chose another route that resulted in zero dollars for the IRS, rather than the $200,000.00 that had been ultimately offered with the OIC.
3. The IRS attorneys also take the position that the facts in these cases be limited to the documentary file and that no new evidence be admitted by the taxpayer at trial. The documentary file usually is limited to the documents in IRS’ records. One of the problems with this approach, however, is that many of the interactions between the taxpayers and the S/Os, such as the required CDP appeal conference, is conducted verbally and has no documentary record, other than the CDP Determination prepared and issued by the S/O. Not surprisingly, these CDP determinations are biased and present the perspective and point of view of the S/Os.
4. Finally, the legal standard of review by the US Tax Court is “abuse of discretion,” which means that the Judge in the US Tax Court will not overturn the decision of the S/O, unless the taxpayer can prove to the Judge that the S/O abused his/her discretion. That is a very difficult standard to overcome.

In conclusion, the positive news is that while the R&RA has not worked as ideally as had been hoped for, IRS has begun to accept many more OICs, compared to its historical record before the passage of the R&RA in 1998. I’ve had a number of OICs accepted by the IRS, usually by more experienced and knowledgeable R/Os and S/Os who used their common sense, in addition to their knowledge of IRS’ procedures and regulation. It also helped that, despite their heavy workload, they possessed good communication skills.