Let’s start off on a positive note. The majority of taxpayers file and pay their taxes in a timely manner. However, there are the exceptions of course.
Some individuals inadvertently underreport their income, and before they become aware of it, the IRS has assessed the tax, coupled with additional penalty and interest. Or perhaps a taxpayer unintentionally claimed a credit, exemption or dependant that they were not eligible for, and now the IRS has sent them a notice with the proposed changes.
Then there is a small cluster of individuals who enthusiastically take on the IRS and its entire body of multifarious tax code. They look for “loopholes” in the regulations, and attempt to circumvent the law by searching for ciphers and coding that would seem to support their frivolous arguments.
These individuals refuse to acknowledge their filing responsibilities, and ultimately rack up large assessments that pyramid into unmanageable debt.
Tax Evasion verse Tax Avoidance
Before I talk about how to appeal an IRS notice, it’s important to understand the difference in the two types of individuals mentioned above. One can legally avoid taxes by structuring their income in a way that allows for maximum deductions. Evading tax however, is illegal.
The IRS will work with and respond to a taxpayer who errs on their return, and perhaps reluctantly, albeit truthfully, admits and understands the mistake, and practices good diligence about rectifying it.
The other category of individuals, those who refuse to honor their compliance responsibilities and make flippant arguments that question the constitutionality of IRS code, are left twisting in the wind. The IRS does not make it a practice to respond point by point to such trivial contentions.
For those who are interested in such things, the IRS makes a publication available on irs.gov entitled The Truth About Frivolous Tax Arguments. This journal lists all the common arguments, why they are incorrect and relevant tax court cases that support IRS policy.
What we will discuss is how to respond to, and ultimately appeal, an IRS notice to collect.
What is an Appeal?
When the IRS uses the term “appeal”, they are referring to the formal process of judicial review. The IRS has appeals procedures, and there are two different types of appeal programs, discussed later.
A taxpayer who simply disagrees with their balance due is not necessarily appealing it, by IRS definitions.
If you file a tax return with a balance owing, and the balance remains unpaid, then of course you will be billed for it, along with penalty and interest that are designed to be high in order to encourage voluntary and timely compliance.
However, if you receive an additional tax assessment, then you may decide to appeal the balance. The IRS encourages all taxpayers to make contact in a well-timed manner; some individuals may feel they should not contact the Service until they are able to enter into some kind of resolution. Please, contact the IRS as soon as you realize you owe and cannot pay, or as soon as you receive your first notice. They will work with you in an unproblematic and suitable way to resolve your issue.
Your Rights as a Taxpayer
Before you have to deal with the IRS and perhaps request an appeal, familiarize yourself with your rights. Review IRS Publication 1, Your Rights as a Taxpayer, as well as Publication 1660, Collection Appeal Rights. In some cases, these documents are sent with your notice.
The Service is under strong obligation to keep your tax matter private and confidential and administer professional service. You have the right to representation should you feel it necessary.
The IRS is happy to work with you or your authorized representative. However, before you compensate a third party to act on your behalf, keep in mind that there are no options available to Powers of Attorney that are not available to a taxpayer directly. A legal representative may have a better understanding of the collection process, but they cannot negotiate a resolution different than what a taxpayer could do by themselves.
This is especially true of the IRS Offer in Compromise program. You may have seen this referred to in TV and radio spots as the “pennies on the dollar” approach.
Let me be clear – this program is not based on the percentage of a dollar, is not offered as a “one time opportunity”, has a very low rate of acceptance compared to the multitude of submissions, and is designed for a taxpayer to complete themselves. Typical third party charges to prepare an Offer are likely upwards of a thousand dollars or more. If you contact the IRS, they will advise you of the likelihood of acceptance, and give you some general guidance on the offer program.
Types of Appeal
Back to the appeals process. The two appeal programs of the IRS are the Collection Appeal Program (CAP), and the Collection Due Process (CDP) appeal. Simply put, a CDP appeal is requested when you receive a final notice of intent to levy, or when a Notice of Federal Tax Lien has been filed against you. The CAP program is broader in scope, and can also be utilized to appeal most collection actions, including the two mentioned above.
Collection Due Process Appeal
The CDP appeal is requested via a Form 12153, Request for a Collection Due Process or Equivalency Hearing.
As mentioned above, the CDP appeal is generally requested when one has received either an intent to levy notice, or the notice advising you that the IRS has placed a lien against you.
Although many IRS notices may warn of a levy, this type of appeal is only exercised after you have received a formal Notice of Levy and Notice of Your Right to a Hearing. This is a certified letter that requires you to sign for it. The other time one would exercise CDP appeal rights would be after the receipt of the Notice of Federal Tax Lien. In each of the above cases, the Form 12153 is sent with the notices.
To summarize, file a CDP before a levy is issued, or when the final notice advising of intent to levy is received, and after a lien has been filed and you have received your copy. (The original paper lien is mailed to and housed in your local county jurisdiction.)
Just to clarify, a levy is a legal seizure of a taxpayer’s property to satisfy a debt. A levy may attach to a bank account, wages, retirement benefits, commissions or money received as an independent contractor. It’s a garnishment.
A lien is a claim on an individual’s property for payment or satisfaction of a debt, obligation or duty. It attaches to all property or rights to property the taxpayer has or acquires, whether real and personal, tangible or intangible. A lien on real property assures that should there be any disbursement of proceeds (such as from a sale or foreclosure) the IRS will obtain a portion. A lien will reflect on your credit report, and will factor into obtaining a line of credit. Even after the lien is released, the history of the lien filing will remain on your credit report and may still negatively impact your credit score.
It’s important to keep in mind the reason that one would file a CDP request. If you are filing a Form 12153, that means you are disagreeing with the IRS intent to levy, or the fact a lien was filed, not because you simply disagree with the balance itself.
The appeals branch of the IRS will consider a number of factors regarding if the intent to levy or if the lien was issued appropriately, and circumstances regarding the impact of these actions, but generally is not there to explain why a taxpayer owes, or to field disagreements about the balance.
A dispute over a balance can be resolved numerous ways. Should you not understand an assessment, an account representative will help you to do that over the phone. Before an additional tax assessment is even made, a proposed letter is generated, giving you a 30 to 90 day timeframe to review the proposed changes and either agree or disagree. If you fail to respond, the IRS will assess the balance by default.
Substitute for Return
Along those lines, if you fail to submit a return that is legally required to be filed, after numerous notices are sent, the IRS may assess a balance under the Substitute for Return Program. The assessment will be based on a filing status of single or married filing separate, with one exemption, and no additional credits, exemptions or deductions will be allowed. In other words, a balance will be created. This is done, frankly, to draw attention to the fact that a true and accurate return should have been timely filed by a taxpayer in the first place.
Should you wish to dispute this, you would then need to file an original return, unless you have already agreed to the substitute return, or paid off the balance owed. In that case, an amended return would need to be filed by submitting Form 1040X.
You have 30 days from the date of the notice to request a CDP hearing. Should you fail to apply for CDP appeal within 30 days, you may still request one under the Equivalency process. An equivalent hearing simply means that should the decision not be in your favor, you no longer have the ability to elevate the appeal to the next level. The appeal ends there with the decision being final.
Collection Appeal Program
The CAP appeal process is generally quicker and can be used to address a broader range of collection related actions. CAP can be used to appeal both a levy and a lien filing, either when the intent to take the action is expressed orally or in writing, or after the action has occurred. This type of appeal is also used to request reconsideration on a terminated or rejected installment agreement.
What’s the difference in these terms? A terminated installment agreement means you had one, and defaulted on it for some reason. A rejected installment agreement indicates that you or your Power of Attorney proposed a payment plan of a specific monthly dollar amount, and the IRS is now rejecting that proposal.
A CAP appeal is generally petitioned for verbally at the outset, since no form is utilized routinely for this request. Politely explain to the representative on the phone your desire to exercise your appeal rights over one of the above issues.
They will then schedule a 24-hour call back from a collection supervisor; this is the first step in the CAP process. Please do not insist you speak with a manager at that moment. Generally, the IRS cannot honor that request. A manager must be given time to thoroughly review your case history before being able to objectively act on your request.
If you do not resolve your disagreement with the collection manager, you may submit a written request for Appeals consideration, preferably by completing Form 9423, Collection Appeal Request. Or else verbally advise the manager you would like to elevate the issue to the Office of Appeals.
The Form 9423 is available on irs.gov. Check the action(s) you disagree with and explain why you disagree. You must also offer a solution to resolve your tax problem. Depending on what action you are appealing, you have only a set amount of time to request one. Be aware of these timeframes.
Other IRS actions can be appealed as well, including the rejection of your Offer in Compromise. This appeal would be handled by the Centralized Offer in Compromise Unit that handled your offer.
You can also appeal the proposal of a Trust Fund Recovery Penalty, which is a civil penalty assessed by a Revenue Officer or Revenue Agent after a detailed interview is done to determine an individual’s involvement with unpaid employee payroll liabilities.
An appeal can also be requested if the IRS formally denies your application to abate penalties. Information on how to do this will accompany your denial letter.
To ensure success of your appeal, thoroughly review the publications cited above so that you have an understanding of both your rights as a taxpayer, and the process of appeal. Be aware of what specific actions can be appealed by each program, and be sure to follow through with all target dates and timeframes. Above all, be courteous and professional in your dealings with the IRS. You can and should expect the same in return.