IRS Settlement Officer Acted Unreasonably in Closing Taxpayer's CDP Case

(Parker Tax Publishing September 2019)

The Tax Court denied an IRS motion for summary judgment and held that there was a question of material fact as to whether, in a supplemental collection due process (CDP) hearing, a settlement officer (SO) abused her discretion by failing to give the taxpayer enough time to submit an amended return for the year at issue and by not advising the taxpayer of the information required to resolve her challenge to her underlying tax liability. The Tax Court found that the SO's action was unreasonable, particularly considering that the court had previously remanded the taxpayer's case for a supplemental hearing after the IRS admitted that the SO abused her discretion in the first CDP hearing. Dodd v. Comm'r, T.C. Memo. 2019-107.

Background

Taryn Dodd filed a tax return for 2013 reporting a tax liability of $183,976. The return was not accompanied by a payment. In August 2014, the IRS assessed the tax reported on the return plus penalties and interest. Dodd did not pay these liabilities. As of September 2016, her assessed liability exceeded $207,000.

In September 2016, the IRS sent Dodd a Notice CP92, Seizure of Your State Tax Refund and Your Right to a Hearing. Dodd requested a collection due process (CDP) hearing, contending that she was not responsible for the underlying liability and could not pay the tax. She explained that most of the liability arose from a $1,073,312 gain on the sale of real estate owned by an LLC of which she was a member. Dodd said that all of the sale proceeds had been wired to a bank to pay off a line of credit of the law firm for which worked as a legal secretary and that she had erroneously reported the gain on her 2013 return.

A settlement officer (SO) from the IRS Appeals Office was assigned to Dodd's case. The SO sent Dodd a letter scheduling a telephone conference. The letter informed Dodd of the necessary paperwork for the SO to consider collection alternatives but did not address Dodd's contention that she did not owe the tax and did not invite Dodd to file an amended return. At the hearing, the SO told Dodd that no collection alternatives could be considered because Dodd had supplied no financial information as of that date. The SO did not offer Dodd any additional time to supply this information and did not address her challenge to her underlying tax liability. Three days after the hearing, the IRS issued Dodd a notice of determination sustaining the levy. The notice incorrectly asserted that Dodd did not raise a challenge to the existence or amount of the underlying liability.

Dodd petitioned the Tax Court for review of the IRS's action. In May 2018, the IRS moved to remand the case for a supplemental CDP hearing. The IRS conceded that the SO abused her discretion by not considering Dodd's challenge to her underlying tax liability and said that Dodd should have been given additional time to submit an amended return or other information to dispute her liability. The Tax Court ordered a supplemental CDP hearing at which Dodd would be allowed to provide an amended return and supporting documentation to dispute her underlying liability. The Tax Court further directed that Dodd be given the opportunity to submit additional information necessary for the Appeals Office to consider her request for placing her case in "currently not collectible" status.

On remand, Dodd's case was assigned to the same SO. On June 13, 2018, the SO sent a letter scheduling a telephone conference for July 10, 2018. The letter was three pages of single-spaced text and closely resembled the letter scheduling the original hearing. However, the second letter included an additional bullet point stating that Dodd's 2013 tax liability was determined based on the documents she submitted and the return she filed and that if any figures were in error, she should submit a Form 1040X amended return by July 3, 2018, for the SO's review. The letter did not warn Dodd of any negative consequences if she did not submit the amended return before the hearing. Dodd did not submit an amended 2013 return or any financial information before the hearing. During the July 10, 2018, telephone conference, Dodd stated that she had been busy and forgot to get the information to the SO before the conference. The SO told Dodd that to dispute her liability, she had to have submitted an amended return by the conference date. The SO sustained the levy and, the very next day, closed Dodd's case.

Dodd took her case back to the Tax Court. The IRS moved for summary judgment, contending that Dodd was precluded from challenging her underlying tax liability in the Tax Court because she failed to submit an amended 2013 return before the supplemental hearing. Dodd responded that she did not receive $1 million from a real estate transaction in 2013 and that her only income that year was her salary. She said she needed advice on the procedures for completing an amended return and did not have time to secure such advice before the supplemental hearing. She also said she had questions about the implications of filing an amended return for other taxpayers involved in the LLC transaction (apparently including the law firm where she worked).

Analysis

The Tax Court denied the IRS's motion for summary judgment after finding that, at the very least, there was a question of material fact as to whether the SO abused her discretion in handling Dodd's case on remand. The court directed the IRS to show cause why the case should not be remanded once again for another supplemental hearing - ideally, the court said, before a different SO - that was genuinely designed to determine Dodd's underlying tax liability for 2013 and address her request for a collection alternative.

The Tax Court said that, considering that Dodd's case had already been remanded due to the SO's failure to consider Dodd's challenge to her underlying liability or give her enough time to submit relevant information, one might have expected the Appeals Office to take all steps reasonably necessary to accomplish the purpose of the remand. Instead, the SO sent Dodd a lengthy letter, a small part of which invited Dodd to submit an amended return. As Dodd had already clearly explained to the SO her position, the court found that submission of an amended return omitting the $1 million of sale proceeds would not have added much to the SO's sum of knowledge.

According to the court, the SO should have asked Dodd for factual information that would support her position, but the SO's June 13, 2018, letter simply asked Dodd for an amended tax return. The court also noted that the letter did alert Dodd that her failure to submit an amended return would preclude her from challenging her underlying liability. Moreover, although Dodd appeared at the supplemental hearing with questions about filing an amended return, the SO did not address those questions or give Dodd additional time to supply the necessary information and closed the case the very next day. The court said that this action was unreasonable, particularly in light of the IRS's acknowledgement that the SO pulled the trigger too quickly the first around. The court explained that although an SO is not required to wait indefinitely for the taxpayer to submit requested documentation, an abuse of discretion may be found where the taxpayer is not afforded a reasonable amount of time to comply with document requests and deadlines.

For a discussion of appealing a levy in a CDP hearing, see Parker Tax ¶260,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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