William Schmidt: What is Collection Due Process?
Collection Due Process, or CDP, is a procedural safeguard created by Congress as part of the Internal Revenue Service Revenue and Restructuring Act of 1998. It requires that the IRS follow a set of procedures to ensure that taxpayers have due process protections when facing IRS levy and lien actions.
Although it has long been held that taxpayers with assessed federal tax debts do not have any right to due process protections when it comes to the government’s authority to collect for those tax debts, Congress required this step in recognition of the need to curb potential IRS abuses in actions seizing and filing Notices of Tax Liens against property rights. Treasury then adopted a robust set of regulations defining the CDP procedures the IRS must follow.
A key element of the CDP procedures permits taxpayers (or their representatives) to request a hearing before the IRS Office of Appeals and gives taxpayers the opportunity to present a collection alternative.
These collection alternatives include installment agreements, requests for Currently Not Collectible status, and Offers in Compromise proposing a settlement to pay less than the full amount owed. While less common in application, the CDP hearing could also enable taxpayers to challenge the assessed liability, but only if they can prove they received no prior opportunity to do so.
CDP may be used in a specific—though not uncommon—scenario where the IRS has assessed balances against a taxpayer for one or more years or periods, and the taxpayer has not fully paid the tax due.
The IRS must have initiated collections and sent the taxpayer a series of notices. If full payment is not made, then the IRS will send either a Final Notice of Intent to Levy or a Notice of Federal Tax Lien.
If the taxpayer is facing a levy, the IRS must send the Final Notice of Intent to Levy prior to actually levying. If the taxpayer is facing a Notice of Federal Tax Lien, the IRS must send a Notice of Federal Tax Lien within 5 business days after filing the lien in the county where the taxpayer resides and/or owns property.
The taxpayer has the right to request a CDP hearing within 30 days of receiving either notice. Upon receiving the CDP hearing request, the IRS will send the case to Appeals. Eventually a Settlement Officer from the Office of Appeals will be assigned to handle the hearing.
If the taxpayer and the IRS agree upon a collection alternative, then the IRS will close the case and the taxpayer will presumably comply with the terms of the collection alternative submitted. If the taxpayer and the IRS do not agree on a collection alternative (or the taxpayer does not participate adequately to present a cognizable collection alternative), the Settlement Officer will issue a Notice of Determination giving the taxpayer 30 days to petition the U.S. Tax Court for review of the hearing’s outcome.
Review by the Tax Court is subject to an “abuse of discretion” standard of review, whereby the Tax Court must determine whether or not the IRS abused its discretion in not accepting the requested collection alternative.
This discussion raises the question of why a taxpayer would want to request a CDP hearing. There are several reasons. First, once a request for a CDP hearing is timely made, the IRS must suspend collection efforts against the taxpayer. While this tolls the collection statute, it can give a taxpayer time to gather documentation for a collection alternative.
There may also be some unique situations where it makes sense to submit a collection alternative through CDP. For example, if a taxpayer seeks an Effective Tax Administration offer in compromise on the basis of public policy or equity, submitting this through CDP is the preferable route because of the opportunity for judicial review.
We will further explore issues around CDP next week.
Until then, please review our webpage on information about the KLS Low Income Taxpayer Clinic.
Note: This article first appeared in the ABA Tax Times Newsletter, Fall, 2019. By By Erin H. Stearns, Associate Professor of Practice and Director, Low Income Taxpayer Clinic, Sturm College of Law, Denver, CO and William Schmidt, Director, Low Income Taxpayer Clinic, Kansas Legal Services