IRS Appeals: Complete Guide to Disputing the IRS
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What is the IRS Office of Appeals
The Internal Revenue Service (IRS) Office of Appeals (Appeals) is an administrative tribunal of the IRS. The purpose of Appeals is to provide taxpayers with an opportunity to have a second review, or second set of eyes, on any contentious or tax controversy issue with the IRS. While Appeals Officers are employees of the IRS, their responsibility is to work independently. Appeals Officers should remain impartial to either side and resolve disputes according to the letter of the law. Given this, the law prohibits Appeals Officers from having discussions with or contacting the IRS employee(s) from whom worked the taxpayer’s case before an appeal. Taxpayers may appeal examination adjustments, offers-in-compromise rejections, installment agreement rejections, modifications, or terminations, levies, liens, penalties, interest, and trust fund recovery penalty assessments. The appeals conference is usually conducted over the phone, however, in some circumstance’s taxpayers may be granted an in-person meeting with the Appeals Officer. Taxpayers may represent themselves or have their designated representative handle the hearing for them. The IRS Office of Appeals oversees two main appeal processes. These are the Collection Appeals Program (CAP) and the Collection Due Process (CDP) appeal. Further details on each are below.
Collection Appeals Program (CAP)
The Collection Appeals Program (CAP) was implemented by the IRS to provide taxpayers with the ability to appeal certain collection actions. CAP appeals are final, meaning the taxpayer cannot appeal a determination from a CAP appeal. The Appeals Officer hearing a CAP appeal will review the collection action or proposed action for appropriateness based on law, regulation, and IRS policy and procedures. According to IRS Publication 1660, CAP appeals are available to taxpayers for the following IRS actions:
- Before or after the IRS files a Notice of Federal Tax Lien (NFTL)
- Before or after the IRS levies or seizes your property
- Termination, or proposed termination, of an installment agreement
- Rejection of an installment agreement
- Modification, or proposed modification, of an installment agreement
CAP appeals provide taxpayers with a broad range of circumstances in which to bring an issue to Appeals. CAP appeals are always available to taxpayers under the above circumstances, even if they have time-lapsed a CDP request or have used the one-time CDP request for the tax year in question (discussed in more detail below). Appeals will expedite CAP appeals with the goal to resolve the case within 5-15 business days. Usually, the Appeals Officer will conduct the CAP hearing with the taxpayer within two days of the taxpayer filing the CAP. These timelines are intentionally short for two reasons. First, to prevent abusive filing with the intent solely to delay collection. Second, to provide taxpayers immediate redress in the event of frivolous or hasty collection actions by IRS Collections. The main differences between a CAP appeal and a CDP appeal are that CAP Appeals Officers cannot consider collection alternatives during the appeal they may only determine the appropriateness of the action or proposed action and CDP appeal determinations may be appealed to the United States Tax Court, while CAP determinations are final.
Collection Due Process Appeals (CDP)
The Collection Due Process (CDP) appeal process was implemented by the IRS to resolve tax issues with taxpayers in a fair and impartial manner. CDP appeals permit a taxpayer to propose a collection alternative to resolve the underlying taxes owed. Taxpayers may appeal CDP determinations to the United States Tax Court. During a CDP appeal, the law requires the Appeals Officer to verify that the law and the administrative procedures were followed, consider all relevant issues relating to the unpaid tax, and balance the government’s need for efficient tax collection with the public concern that any IRS collection action be no more intrusive than is necessary. According to IRS Publication 1660, a CDP appeal is available to taxpayers who have received the following IRS notices:
- Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320 (appealing a tax lien)
- Final Notice – Notice of Intent to Levy and Notice of Your Right to a Hearing
- Notice of Jeopardy Levy and Right of Appeal
- Notice of Levy on Your State Tax Refund – Notice of Your Right to a Hearing
- Post Levy CDP Notice
Taxpayers have a limited period to request a CDP appeals hearing after receiving one of these notices. Usually, this period is 30 days. Further, taxpayers only pursue one CDP appeal per tax assessment for any tax period. The addition of penalties and interest to an outstanding tax assessment does not create an additional appeal unless the original assessment did not contain penalty and interest assessments. The appeals office may still hold a hearing for a CDP appeal request if the taxpayer files late. The IRS calls this type of hearing an Equivalent Hearing (EH). EHs operate with the same resolution objectives as a CDP appeal. However, the rules don’t require the Appeals Officer to place a hold on any collection actions. Further, the Appeals Officer will issue a Decision Letter instead of a Determination at the conclusion of an EH. This Decision Letter may not be appealed to the United States Tax Court unless the issue at appeal was either spousal relief under IRC 6015, abatement of interest under IRC 6404(h), or timeliness of the CDP appeal request.
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The Offer-in-Compromise (OIC) program is a settlement program where the taxpayer and the IRS agree to a settlement resolution for a sum less than what the taxpayer owes. This settlement amount provides full satisfaction of the taxpayer’s delinquent tax liabilities. Both the taxpayer and the IRS must meet numerous conditions, rules, and procedures for the IRS to accept an OIC. Generally, the IRS has a separate department separate from the Appeals Office that will make initial determinations as to the acceptability, pursuant to law and regulations, of an OIC. Given this, the IRS grants Appeals the power to make OIC determinations under the following circumstances:
- OICs that are appealed by taxpayers after being rejected
- OICs submitted as an alternative to collection as part of a CDP or EH appeal
- OICs that are under evaluation when the IRS files a NFTL and the taxpayer requests a CDP or EH appeal
Any proposed levy actions that were suspended pursuant to the OIC submission will continue to remain suspended while appeals reviews a rejected OIC. The taxpayer has 30 days to appeal the rejection of an OIC. While Appeals is reviewing a rejected OIC, they are not allowed to contact the IRS department that rejected the offer and must review the OIC with independent judgment. The law also requires Appeals to make independent determinations regarding the OIC. Often, the IRS allows taxpayers the opportunity to increase their offer amount instead of rejection by the OIC specialist reviewing their OIC submission. Taxpayers who forgo that opportunity to have better success at Appeals should understand that Appeals operates independently and there is no guarantee that Appeals will make that same opportunity available.
Trust Fund Recovery Penalty Appeals
The Trust Fund Recovery Penalty (TFRP) is a penalty that the IRS assesses on a responsible person when a business fails to pay employee payroll withholdings. Generally, the IRS defines a responsible person as the person who has the duty to perform or the power to direct the act of collecting, accounting for, or paying over the payroll taxes. The IRS bases a TFRP assessment on the employee’s portion of employment tax, not the employer’s portion. Before IRS assesses a TFRP, they will mail IRS Letter 1153 – 60 Day Notice of Proposed Assessment to the taxpayer. This letter will provide details for the taxpayer to appeal the proposed TFRP assessment. As the name suggests, the time period for filing this appeal is 60 days. The responsibility of Appeals is determining the correct amount of the assessments, making final determinations as to responsibility and willfulness, and to evaluate the hazards of litigation when resolving TFRP appeals. Appeals lists three types of settlements: (1) factual settlements, (2) allocation settlements, and (3) hazards settlements. Factual settlements may result in fully sustaining the penalty, full concession of the penalty by the IRS, or something in between. An example of a factual issue would be an appeal asserting misapplied payments by the IRS. Allocation settlements resolve the case by allocating the TFRP among multiple responsible individuals. In this settlement scenario, each must agree, and the individuals must pay the liability in full. Hazards of litigation settlements will be made based on how Appeals believes a court would interpret the law, factual complexities, or specific evidence. Some examples are situations where all of the facts are not known, there is a lack of evidence to support a TFRP assessment, or credibility of witnesses is in question.
Penalty Abatement Appeals
The IRS issues penalties in many different scenarios for which a taxpayer has failed to comply with the law or regulations. Given that, the IRS has a penalty abatement procedure where taxpayers may be granted relief from these penalties under certain circumstances. If the IRS denies a penalty abatement request, taxpayers may appeal the denial to Appeals. Appeals must use the same procedures when reviewing the basis for penalty abatement. The vast majority of taxpayers seek penalty relief based on reasonable cause. Appeals will consider all facts and the law, taxpayer circumstances and compliance history, and hazards of litigation. Appeals overturn most abatement rejections for reasonable cause relief based on hazards of litigation grounds. This is because consideration of hazards of litigation is only available to Appeals. When the IRS is making the initial determination of whether reasonable cause exists for penalty abatement purposes, they do not take hazards of litigation into account. For penalty abatement reviews, Appeals defines hazards of litigation as uncertainties in the outcome of the court’s decision in the event of a trial. Appeals will consider new arguments that support the taxpayer’s position.
Appealing Federal Tax Lien and Tax Levies
A federal tax lien is created by operation of law (IRC 6321) after the IRS makes a demand for payment on a past due tax liability. However, the IRS must record this lien in the appropriate state/local recording office to put the public and other creditors on notice that the lien exists. The IRS calls this filing a Notice of Federal Tax (NFTL). The IRS must notify taxpayers of the filing of a NFTL within five days after the filing. Taxpayers then have 30 days to appeal the filing of the NFTL via the CDP appeal process. Additionally, taxpayers may appeal an NFTL before or after it has been filed at any time via the CAP appeal process.
The IRS has the power to levy any non-exempt property, or right to property, of the taxpayer’s to collect delinquent taxes. However, before the IRS may proceed with a levy action, they must provide the taxpayer with the opportunity to appeal via the CDP appeal process. The IRS must give this notice to the taxpayer at least 30 days before any levy action. As discussed above, the taxpayer may also appeal levies via the CAP appeal process at any point in time. However, the appeal of any levy under the CAP appeal process for property that has been seized must be made within ten business days after the taxpayer has received the Notice of Seizure from the IRS. The burden of choosing which appeal process to file the appeal under rests solely with the taxpayer. Taxpayers who file a CAP appeal but are still eligible to have an appeal heard via the CDP appeal process (with Tax Court appeal rights), must be mindful of the CDP filing deadline as a pending CAP appeal will not toll this deadline. Additionally, any issues that the taxpayer has previously raised in a CAP appeal that appeals have concluded may not be raised again in a CDP appeal. Meaning, the taxpayer loses the ability to appeal those issues to the U.S. Tax Court. Regardless of the type of appeal, Appeals will assign an Appeals Officer to work the case who has had no prior involvement with the taxpayer or the case. If the taxpayer is appealing via the CDP process, the Appeals Officer will first review the case file to make sure that the appeal is timely. Thereafter, appeals will follow the following timeline. First, the Appeals Officer will verify that the proper procedures required by law have been met by the IRS to file an NFTL or proceed with a levy. Next, the Appeals Office will conduct a hearing with the taxpayer or the taxpayer’s representative. At the hearing, the taxpayer may raise any relevant issue. Commonly, the issues raised are spousal defenses, challenges to the appropriateness of collection actions, offers of collection alternatives, economic hardship, and challenges to the underlying liability. Appeals will issue a determination taking into consideration whether the IRS followed the requirements of the IRC and administrative procedures, the issues raised by the taxpayer and whether the NFTL filing balances the need for the efficient collection of taxes with the public concern that any collection action is no more intrusive than necessary.
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Installment Agreements Appeals
An Installment Agreement (IA) is a payment plan with the IRS where the taxpayer agrees to pay the delinquent taxes owed in monthly installments over an agreed upon period of time. Taxpayers may appeal rejected, modified, proposed for modification, terminated, and proposed for termination IAs via the CAP appeal process. When the IRS rejects an IA request, the IRS provides the taxpayer with a notice of rejection. Taxpayers have 30 days from the date on that notice to file their CAP appeal. When the IRS would like to modify and IA, they will first notify the taxpayer of the proposed modification. If the taxpayer does not respond to this proposal notice, the IRS will proceed with the modification. Taxpayers may appeal either the proposed modification or the modification via the CAP appeal process within 30 days of receiving notice either. The IRS may terminate an IA with or without notice. Generally, for the IRS to terminate an IA without notice, they must have reason to believe that collection of the delinquent liability is in jeopardy. Therefore, most terminations happen after the IRS provides the taxpayer the notice. The IRS may send a proposed termination notice to the taxpayer if the taxpayer had failed to make IA payments when due, failed to pay other tax liabilities when due, failed to provide updated financial information, previously provided inaccurate financial information or failed to pay a modified amount. Taxpayers have 30 days from the date on the termination or proposed termination notice to file a CAP appeal.