Collection Due Process Hearing Updates
The 5th Circuit has just recently upheld the tax court in Dalton v. Commissioner. I see three essential lessons in play.
But first, you might be asking, is a Collection Due Process Hearing?
A collection due process hearing is where a taxpayer gets to appeal a tax collection technique or an assessment with the IRS office of Appeals. The IRS appeals office is independent from the rest of the IRS and its stated purpose, as part of the 1998 tax reform act, is to make sure the IRS is acting fairly.
The right to collection due process hearing is triggered after a Final Notice of Intent to Levy, a Notice of a Federal Tax Lien and after a deficiency notice. If a taxpayer fails to appeal or appeals improperly there is no right to tax court — as a taxpayer must exhaust all administrative remedies available.
Lesson 1: Follow your own orders.
In this case, the taxpayers created trust to protect assets, primarily a home. The taxpayers got behind on tax obligations. They moved back into the trust property, and even refinanced the property — in their own name. They claimed the IRS could not touch this property. That is, the IRS could not seize it or claim it as their assets, simply they no longer possessed title to the property.
At the Collection Due Process hearing, the appeals officer disagreed. Reasoning that if they taxpayer’s truly lost control over the house, they would not have treated the house as their own. The appeals officers treated the house as a dissipated or existing assets and rejected their offer in compromise claiming he had the discretion to do so. The 5th Circuit agreed.
Lesson 2: Are you sure you want to go to tax court?
It’s easy to Monday-morning-quarterback the decision to take this matter to tax court. I am sure there were great reasons the Dalton’s tax attorney, Ralph A. Dyer. Esq., had to file a tax court petition (NOTE: There are certainly court opinions out there that do not make me look good — the truth does not always get reported accurately to say the least). But there are significant downsides, not just the time and expense, that were most likely discussed.
You see, the problem with tax court is that the 10 years the IRS has to collect on a debt is ‘tolled’ or stopped while the tax court case is pending. For example, in the case, the taxes were assessed on August 11 and September 29, 1997. So if the taxpayers did nothing, the tax debts would have been wiped out by September 29, 2007. That is, they would have owed nothing to the IRS.
However, the taxpayer did three notable things that stopped this 10-year period from running. First, they filed an offer in compromise. Then they filed a request for a Collection Due Process Hearing. Lastly, they filed a tax court petition. All three of these filings tolled the statute of limitations.
So it is quite possible when we add up all the time the statute of limitations was tolled, there still may be 8 years left the IRS has to collect. That’s right, a debt that could have been gone in 2007, may stick around until 2020!
Again, I am not saying it was wrong to gamble at tax court (and subsequent appeal to 5th circuit). I am just pointing out the inherent risk going to tax court, a risk that they may have been well-aware of.
Lesson 3: The Offer in Compromise may not be the optimum solution for the taxpayers/The Offer in Compromise may be in the IRS’ advantage.
Most people automatically think of the offer in compromise as the solution to a tax debt. But there are two other collection alternatives that could help out the taxpayers by stopping levies and seizure and still allow the 10-year clock to run. The first is a partial payment installment agreement. If a partial payment installment agreement is made, the taxpayers will pay an nominal amount each month until the statute expires or they come into money to full pay the obligation And in this case, it is likely the IRS would grant this — after all, the IRS isn’t looking to seize their house. Their just not willing to treat it as something with zero value to the taxpayers’ negotiation purposes. Or if the taxpayers have no disposable income (which is likely — based upon the fact that Mr. Dalton is disabled) the IRS could just them them into Non-collectable status.
And ironically, instead of paying the $5000.00 they offered, the entire tax debt could expire without the IRS ever collecting a dime. It could have totally been in the IRS’ best interest to get the sure $5000.00 than maybe wait another 8 years and get nothing.
That is certainly a reasonable position, unfortunately for the taxpayers, it was not the winning position.
NOTE: Because this is employment tax trust fund debt, they cannot file bankruptcy to discharge the debt, unlike personal 1040 tax debts.
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