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by Bryan T. Camp

Failure of Collection Due Process, Pt. 1: The Collection Context

Bryan T. Camp is an associate professor of law at Texas Tech University School of Law. This column is written to help readers navigate the laws of tax administration by (1) guiding them through the thickets of particular procedural problems and (2) giving them a sense of the larger tax administration forest. 2004 Bryan T. Camp. All rights reserved. This months column will begin a look at why the collection due process (CDP) provisions of sections 6330 and 6320 are a failure, both in concept and execution. In my first column, I showed how tax administration has historically been inquisitorial in nature, according to the two characteristics I used to define that term.1 To the extent that the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) moves tax determination and collection away from those two characteristics, the system becomes less inquisitorial and more adversarial. In my last column, I showed how the RRA 98 reforms were generally the result of inaccurate data being misanalyzed by conceptually confused rhetoric. I contended that a central problem with RRA 98 came from the lawmakers unthinking attempt to move the tax determination and collection processes from inquisitorial to adversarial. In this months column, I want to offer CDP as one example of how Congress, by mixing concepts, made a mess of it. However, before I can explain just how CDP fails both tax collection and taxpayers, I must first give a tour of what is perhaps the, well, shadiest part of the tax administration forest: the collection process. This months column will endeavor to simply describe both the collection process and how CDP changed it. Next

month I shall critique the CDP provisions and examine both the IRSs and the Tax Courts responses to them (finally getting around to Montgomery, I promise). My purpose in this and next months column is to show how CDP fits poorly into an otherwise inquisitorial collection process because, at bottom, adversarial review operates best over individualized processes but collection continues to be a bulk process. That is, the CDP provisions of sections 6330 and 6320 promise independent third-party review of each IRS collection decision about each individual taxpayer, thus removing decisional power from the IRS to third parties and demoting the IRS from decisionmaker to mere litigant. That unlinking of the evidence gathering from decisional power moves the tax collection process away from the first characteristic of an inquisitorial system.

CDP provides only partial adversarial review; it allows courts only one snapshot review of what is an ongoing process: the never-ending hunt for taxpayer assets.
To the extent CDP works, it is bad news for the IRS because traditionally most IRS collection decisions are made in the aggregate and not on an individual basis. The upshot is that CDP requires an individualized review of an aggregate decision, which basically wastes time and decreases both legitimate collections and the legitimacy of collections. Forcing the IRS to make individualized decisions slows the process down and results in less collection. That might be a good tradeoff if the adversarial process improved IRS decisionmaking. But, as I hope to explain below, CDP has only slowed the process, not changed it. To the extent that CDP does not deliver on its rhetorical promise, it is bad news for taxpayers, particularly those who need third-party review the most: those who suffer from poor IRS decisions about how to collect tax. CDP provides only partial adversarial review; it allows courts only one snapshot review of what is an ongoing process: the never-ending hunt for taxpayer assets. So at the one time the taxpayer can subject the IRS to outside scrutiny, the taxpayer is generally contesting a decision made early in the collection process when the IRS does not know a great deal about the taxpayer and is therefore not in a good position to make good individualized decisions about how to collect the tax. Early in the process, the Service operates on collection accounts en masse. Later individualized collection decisions may be inappropriate, but there is no hope for court review at that time. Nor should there be, but that is all grist for next months mill.

See The Inquisitorial Process of Tax Administration, Tax Notes, June 21, 2004, p. 1549. There I suggested that an inquisitorial administrative system contains two interrelated characteristics: (a) the power to decide a legal issue being combined with the power to decide what evidence is necessary or enough to make the substantive determination, and (b) discovery of truth being preferred over restrictions on government intrusions into personal privacy (autonomy is the word I used in prior columns). I thank Leandra Lederman and others too shy to be named for their thoughts and comments on this column. All remaining errors are mine, and I invite readers to bring them to my attention.

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Next month I will give some thoughts on how an inquisitorial tax collection system might do a better job of monitoring and improving IRS collection decisions while preserving the IRSs decisional authority until an assessed tax is fully paid. The taxpayer advocate, in her thorough and thoughtful December 2003 report to Congress, contended that the IRS could and should improve the CDP process administratively. I respectfully disagree, as I hope to explain next month. Legislation is the only answer to CDP problems. This months task, however, is to give the reader a sufficient context to follow next months arguments and so I ask your indulgence as I introduce you to the strange and dark world of tax collection. Part 1 will give a brief overview of the three most important collection powers. Part 2 will emphasize the bulk processing techniques used to exercise those powers, and Part 3 will explain CDP reforms and their legislative history. From that alone the discerning reader will infer why I believe CDP is a failure.

The Tools of the Collection Trade The Services three main administrative collection tools are the offset power, the tax lien, and the levy. As to the first, not only does the Service enjoy the same common law power of offset available to every creditor, it is also statutorily empowered to set off any overpayment against any tax liability.2 RRA 98 left the offset powers alone and so shall I, in this column.

What confuses many folks is the relation between the tax lien and the NFTL. There is only one tax lien, although there may be multiple NFTLs.
The tax lien is often misunderstood. It arises automatically under section 6321 once the IRS properly assesses a liability, sends the taxpayer notice and demand for payment, and the taxpayer fails to pay. Once it arises, it works by dropping virtual sticky notes claiming Pay Me on all property the taxpayer has or acquires. Like the moon, it has phases: the secret phase and the revealed phase. Just as a new moon cannot be seen, but is nonetheless up there, so the tax lien cannot initially be seen, but its still up there, dropping those invisible sticky notes on all the taxpayers property. The lien is good against the taxpayer and some competing creditors, but is not recognized as valid against four large categories of creditors.3 Only when the IRS properly files a public document, the Notice of Federal Tax Lien (NFTL), is

the tax lien revealed. Once revealed by the NFTL, the tax lien is good against almost all comers (with a very few exceptions, listed in section 6323(b)). At least as to realty, the lien does most of its work by just sitting there, passively, until the taxpayer tries to dispose of the property to which it is attached. While the IRS can enforce the lien by either inquisitorial process (levy) or adversarial process (court action), there is little need to do so for realty because the lien will generally get paid off when the taxpayer sells. What confuses many folks is the relation between the tax lien and the NFTL. There is only one tax lien, although there may be multiple NFTLs. My students often commit the error of saying that the IRS filed a lien. Nope. The IRS never files a lien. The IRS files only the NFTL and that is just a notice of the one and only tax lien. Others make the same error, sometimes in embarrassingly public ways. For example, in an April 8, 2004, memorandum Treasurys acting deputy inspector general for audit (who you think would know better) wrote that the IRS has the authority to attach a claim to the taxpayers assets, called an NFTL, for the amount of the unpaid tax liability.4 Thats wrong. There is only one tax lien. It arises automatically. The IRS may indeed file NFTLs in many different locations if the taxpayer has geographically dispersed assets, but the NFTL does not attach to anything. The one and only tax lien is put there by operation of law, not IRS employees. The third tool, levy, is also often misunderstood. Section 6331 gives the IRS the power of distraint and seizure by any means to collect an unpaid tax liability. This is what the term levy means.5 It is the power to

(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

2 See United States v. Munsey Trust, 332 U.S. 234, 239 (1947) (The government has the same right which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him.); section 6402, Authority to Make Credits or Refunds. 3 Section 6323(a). Called the four horsemen, the four categories are: purchasers, mechanics lienors, holders of security interests, and judgment lien creditors.

The memo is transmitting the Treasury Inspector General for Tax Administration report Statutory Review of Compliance with Lien Due Process Procedures, Report 2004-30-086, Doc 2004-8363, 2004 TNT 75-35 (April 2004). The report itself contains the same error. 5 For reasons unknown to me, the IRS gives the term levy a different meaning in its internal guidance. The IRS distinguishes between a levy and a seizure whereas the code makes no such distinction. In Service jargon, a seizure is what is done to something that can be sold, usually tangible realty or personalty, while a levy is done to something that cannot be sold, generally intangible property such as payments due the taxpayer from a third party, or money. See generally IRM Part 5 (Collecting Process) at chapters 5.10 (Seizure and Sale) and 5.11 (Notice of Levy), especially 5.11.1.1.2 (Notice of Levy vs. Seizure), found at http://www.irs.gov/irm/part5/ ch10s01.html (last visited August 13, 2004). That distinction is not evident from the statute or from its history, which the IRS admits. Id. Note that the GAO has a different read on the distinction between levy and seizure. It believes that the Service differentiates between the levy of assets in the possession of the taxpayer (referred to as seizure) and the levy of assets, such as bank accounts and wages, which are in the possession of third parties, such as banks or employers (referred to as a levy).GAO Report Tax Administration, GAO-02-604 (May 22, 2002) at note 5. The GAO gives no citation or reason for why it believes that to be the Services distinction and I do not think the GAO is correct. But the main point is that the code contains no distinction: The power to levy is the power to seize. Same, same. Still, unless I say otherwise, I will follow the Services lexicon.

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take any property of the taxpayer to satisfy a properly assessed and unpaid tax liability. Section 6331(d) requires the IRS to give the taxpayer a general notice of its intent to use that tool at least 30 days before making the first levy. Historically, the purpose of that notice was to give the taxpayer an opportunity to approach the IRS and resolve the account before the IRS seized property. A levy is often confused with a lien, but they are separate tools. Unlike the tax lien, it takes IRS employee action to attach the levy to specific property whereas the lien attaches by operation of law. Levies also generally operate only on property in the here and now, whereas the tax lien automatically attaches to all future acquired property as well as current property.6 The two tools also operate independently. For example, the Service can use a levy to enforce a lien, even if the property being seized is no longer owned by the taxpayer (such as when the taxpayer deeds property to a family member). Likewise, the Service can levy property owned by the taxpayer, even if, for whatever reason, the tax lien no longer attaches to that property (such as when the IRS mistakenly releases the lien).7

Collection as Bulk Processing

The Service does its collection work in three stages: (a) a notice process, (b) the automated collection system (ACS), and (c) the collection field function (CFf). To the extent one stage does not resolve the account, the account moves to the next stage. The first two stages are highly automated, relying heavily on collection decisions made to apply to the vast majority of account receivables. I call them aggregate decisions because they are based on aggregate data or policy and are not very sensitive to the facts and circumstances unique to a particular account. The CFf stage is the only stage in which a specific account is assigned to an individual IRS employee (a revenue officer) who has significantly more latitude and discretion on how to effect collection of the amount owed depending on the taxpayers circumstances. Lets look at each stage in brief.8

The first stage, worked out of the various Campuses (formerly known as service centers) is a series of notices and demands for payment, spaced several weeks apart and sent to the taxpayers last known address.9 All forms and notices are computer-generated and computer-mailed with very little human intervention. Several key decisions and assumptions built into the process are what I am calling aggregate decisions. For example, the tax code requires only one notice and demand for payment before the tax lien arises, and requires only a single notice of intent to levy and of the right to a CDP hearing before the Service may make multiple levies.10 Nonetheless, the IRS has decided that additional demands for payment will often resolve the account, and so the aggregate decision has been to send nonbusiness taxpayers four notices and business taxpayers three notices, spaced several weeks apart. No individual decides this for each account: It is an institutional decision made for the bulk processing of account receivables.11 Likewise, although the code requires notices be sent to the taxpayers last known address, the operational decision of what that means is an aggregate decision, which is made so that human intervention is not required to verify an address for each of the three million or so yearly tax modules that carry a balance due.12 Instead, the address in the IRSs main data system is deemed the last known address.

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6 United States v. McDermott, 507 U.S. 447, Doc 93-3795, 93 TNT 67-14 (1993). 7 This is the clear import of the language in section 6331 that authorizes the Service to levy either all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter. . . . (Emphasis supplied.) Of course, the collection period must still be open. 8 In todays column I focus on the TDA process and not the TDI process. TDA stands for Taxpayer Delinquent Account, which means there is a balance due on a filed return, either because the taxpayer did not pay enough to cover the selfreported liability or because the taxpayer has not paid an assessed deficiency. TDI is the acronym for Taxpayer Delinquency Investigation, and it involves finding taxpayers who did not file returns and getting them to file and, if necessary, pay any resultant liability. Note that nonfilers may also be eligible for refunds, if their withholding exceeds their liability or if they are eligible for a refundable credit, like the EITC. TDIs are also worked through each of the three stages, but through a slightly different matrix of actions.

9 While the Service has at times attempted to be more proactive in this phase of the collection process by staffing collection call sites to reach out by phone to taxpayers rather than relying on written notices, resource constraints have pretty much squelched this approach. Computers are cheap. Humans cost money. And the humans are needed to staff incoming calls for tax help. See generally TIGTA Report 2004-30-083, Trends in Compliance Activities Through Fiscal Year 2003, Doc 20049294, 2004 TNT 84-16 (April 2004) (hereafter Trends Report) Appendix V, Figures 5 and 6 for trends in compliance staffing between fiscal 1996 and fiscal 2003. Since TDI processing is somewhat more labor-intensive than TDA processing, it should come as no surprise that the Service responded to the dwindling resources by focusing on TDA processing and letting TDI processing slide. See TIGTA Report 2003-30-186, Some Automated Collection System Business Results Have Recently Improved, but More Emphasis on Nonfilers is Needed, Doc 2003-20491, 2003 TNT 179-28 (September 2003) (suggesting that the collection process was neglecting TDI work and recommending that the IRS reevaluate resources for the TDI program, to reinforce a balanced program ensuring filing compliance does not erode). 10 Sections 6321, 6331(d), and 6330. 11 The collection statistics suggest this decision is a good one. They show that in recent years the IRS has collected almost as much money from the later notices (between $10 billion and $11 billion) as from the first ($11 billion to $14 billion). See Table 16, Delinquent Collection Activities, Fiscal Years 2000-2003, in 2003 IRS Data Book, March 2004, at http://www.irs.ustreas.gov/ taxstats/article/0,,id=97168,00.html (last visited August 8, 2004). 12 Truth be told, there is no uniform definition within the IRS for a tax module. The term will hopefully either go away or become an explicitly defined data element in the new CADE system. See IRS Rolls Out New Tax Return Processing System,

(Footnote continued on next page.)

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The goal of the notice process is to get the taxpayer to call into the campus and speak with a customer service representative (CSR) to resolve the account. Resolving the account means either fully paying it, or entering into one of three main collection alternatives: (1) installment agreements, which fully pay the liability (and interest) over time; (2) offers in compromise, which pay off an agreed-on percentage of the liability (either at once or in installments) in satisfaction of the debt; or (3) removal to currently-not-collectible (CNC) status, which continues the liability on the IRS computers, but removes it from active collection status until later information (such as a tax return showing increase in income) shows that the taxpayer now has assets with which to pay the liability.13 Being removed from active collection status means only that the IRS will not file an NFTL or send out levies. It does not affect the operation of the tax lien, and the Service will still offset future overpayments against the debt.14

Tax Notes, July 26, 2004, p. 367. Generally, a tax module is one type of tax liability for one tax period. See, e.g., TIGTA Report 2003-30-186, note 9 supra at 22. 13 The Service could accomplish the same result through abatement under the authority of section 6404(c), which would take these accounts off the receivables that the IRS reports to Congress, but for historical reasons the IRS keeps the accounts in inventory by assigning them the computer transaction code 53, which is derived from Form 53, the precomputer form that collectors used to excuse themselves from having to account for collection of these accounts. Before the 1952 plan of reorganization, collectors were politically appointed positions, separate from the commissioner. They were responsible for collecting the accounts sent to them by the commissioner and had to account for any failure to collect the amounts due. The then-existing regulations provided that collectors: may also present claims for credit of taxes not erroneously assessed but found to be uncollectible. See section 3218 of the Revised Statutes. In such cases the collector or deputy collector who made the demand for payment and is conversant with the facts may prepare the claim for credit on Form 53. Even though the collector is so credited with the amount allowed as uncollectible, nevertheless the obligation to pay still remains upon the person assessed. Art. 1303, Regulations 69 (1926). Even though Congress added section 6404(c) in 1954 to codify that prior administrative practice, see H. Rep. 83-1337 at A412, the advent of computers allowed the Service to simply put a computer code on the account without having to abate the assessment, which made it simpler to reactivate the account if and when the taxpayer acquired more assets. Thus those accounts still show up in the Services accounts receivable, even though there is little realistic hope of collecting on them. 14 The offset tool is another example of the Service making aggregate collection decisions that any overpayment will be captured and applied to any outstanding liability. Taxpayers in dire financial straits may ask to bypass the offset, but because the aggregate decision has been made to offset, they must convince an individual employee to reverse that decision and allow the overpayment to be refunded to them. For a good description of that system and its limitations, see Field Service Advisory FSA-N-151971-01 (Dec. 14, 2001), IRS FSA 200213012, Doc 2002-7632, 2002 TNT 62-47. That is one bulk processing decision that Congress missed in enacting CDP, so the Service
(Footnote continued in next column.)

If the taxpayer does not respond, or cannot resolve the account at the notice stage, the account moves to the ACS stage. As its name implies, ACS is also automated; it too operates from campuses. That is the stage in which the IRS will first send out levies and file NFTLs.15 Again, let me emphasize that this work is done mainly by computer systems with little human intervention. Information on types and locations of taxpayer assets (such as employer name, bank accounts, etc.) is automatically transferred from various other IRS databases to the ACS system and a computer algorithm determines the most likely levy sources.16 The notices required by section 6331(d) and 6330 (which, as I explain below, amount to the same thing) are automatically issued by computer on form letter LT11, with no human intervention.17 The computer system will not allow levies to issue if the CDP notice was sent less than 45 days before the date of the LT11 (the extra 15 days are built in to allow time for taxpayer CDP requests to be input into the system).18 An IRS employee reviews the information presented on the screen and decides how many levies to send or NFTLs to file, but even then the employee exercises little discretion on what to do and engages in little individualized decisionmaking.19 The decisions have been made beforehand, in the aggregate. The point of the levies at this stage is not so much to actually collect anything as to get the taxpayer to call into the campus and resolve the account. Oftentimes,

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can still make the aggregate decision to do offsets and force taxpayers to justify a change to that decision, rather than having to go through a process that makes individualized decisions for each individual account. There are also other collection alternatives (such as getting a discharge in bankruptcy, convincing the IRS that deferring collection will facilitate future payments, etc., see Chief Counsel Notice 2003-016 Collection Due Process Cases (May 29, 2003), Doc 2003-13375, 2003 TNT 105-12, but the three listed above are far and away the most common. 15 The IRS uses a Notice of Levy to perform the levy. For a good description of the difference between automated and manual levies, see TIGTA Report 2004-30-094, Additional Efforts Are Needed to Ensure Taxpayer Rights Are Protected When Manual Levies Are Issued, Doc 2004-9708, 2004 TNT 89-30 (April 2004). 16 See IRM 5.19.4.3.2 (12-01-2000) (Levy Sources and ACS Display) at http://www.irs.gov/irm/part5/ch18s09.html (last visited Aug. 13, 2004). 17 See IRM 5.19.4.3.4 (04-24-2001) (Pre-Levy Requirements (I8 Processing)), at http://www.irs.gov/irm/part5/ch18s09. html (last visited Aug. 13, 2004). These notices used to be sent with the fourth notice for IMF accounts and the third notice for BMF accounts during the notice phase, but the IRS has moved that to the ACS stage to allow CSRs to call taxpayers first, although resource constraints have prevented much use of CSRs for that purpose. See Id. 18 See IRM 5.19.4.3.5(1) (01-11-2001) (Levy Routing and Duties), describing the 45-day hold period as a 45 day followup. TIGTA found the computerized systemic levy process worked better than the manual process at complying with the 30-day wait period. See TIGTA Report 2004-30-094, note 15 supra. 19 Along those lines, note that the ACS process does not generate paper files. All data are kept in electronic format, which is then picked up by the Integrated Collection System if the account is transferred to the field.

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taxpayers who do not respond to notices may well respond if a levy hits, say, their paycheck, or goes to a third party they would prefer not to know of their tax troubles. Although the IRS is authorized to use summons to collect information, it generally does not do so at this stage, relying instead on whatever information it has previously obtained from the taxpayer and relying on the taxpayer to provide the rest. To get a feel for the bulk nature of the ACS collection process, one needs to look at the numbers. In fiscal 2003, the last full year for which information is available, the ACS system sent out just over 1.5 million levies.20 Thats about 6,000 levies a day. As many as that seems, and as much as that is by far the highest number for any full fiscal year since RRA 98 went into effect, it is little more than half as many levies as the ACS system sent out in fiscal 1997, the last full year before RRA 98. That year, the ACS sent out 2.9 million levies. Likewise, ACS closed 2.6 million accounts (tax modules) in fiscal 2003 (compared with 3.1 million in fiscal 1997). The data for NFTLs is similar, although it shows, interestingly enough, an increased use of NFTLs over even the pre-RRA 98 levels, perhaps to balance the decreased use of levies. That volume represents a bulk processing operation, not an operation in which individual IRS employees receive paper files and work individual accounts. Six years after RRA 98, the ACS process is still much slower than it was before RRA 98, as evidenced by the reduced dollars collected per full-time equivalent (FTE). In fiscal 2002, ACS collected almost $2.6 billion using 2,696 FTEs, which comes to $964,000 per FTE. In fiscal 1998, however, ACS collected $4.1 billion using almost the same number of FTEs (2,661), which comes to $1.54 million per FTE.21 In a series of reports, the Treasury Inspector General for Tax Administration concluded that many factors contributed to the slowdown in collections overall: budget constraints, diversion of existing resources to implement RRA 98, and IRS employee hesitancy in enforcing collection deadlines given to delinquent taxpayers.22 One factor is undoubtedly CDP. First, whereas the CDP notice used to be issued during the notice process, it is now issued during the ACS process with the computer instructed to not send the CDP notice unless at least one post-notice-process contact with the taxpayer has been tried (even if for a different tax or a different tax period).23 So some IRS employee (or computer) has to try and contact the taxpayer one more time. That adds time without adding much individualized decisionmaking. Second, a significant number of taxpayers request CDP hearings (over 98,000 in fiscal 2003) and so CSRs find themselves processing CDP requests of

some taxpayers rather than reviewing levy screens and pushing buttons to send out levies and file NFTLs on other taxpayers.24 Processing CDP requests is a valuable use of time if CDP hearings add any value to the collection process for either taxpayers or the IRS. It is a waste of time, however, if CDP hearings add little to the process except delay. Either way, CDP adds time to the ACS process and thus delays collection. Accounts not resolved through the notice or ACS processes are assigned to ROs in the CFf. Again, since each RO can handle only so many accounts, accounts are assigned priority using a predetermined algorithm, once again representing an aggregate decision. So only some get assigned and the others wait their turn in what is called the Queue. Although ROs use computers to generate levies and NFTLs, they may also generate them manually, as they engage in the more traditional methods of searching for delinquent taxpayers and their assets.25 It is only here, in the CFf, that an individual IRS employee works each case individually in the stereotypical way most people think of when they think of the IRS doing collection.

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Accounts not resolved through the notice or ACS processes are assigned to ROs in the CFf.
CFf cases essentially represent the failure of bulk processing to resolve an account and the need for more human intervention. Those accounts involve either the more recalcitrant or inarticulate taxpayers, that is, taxpayers who either will not pay (for ideological or other reasons) or cannot fully pay and are functionally incapable of interacting with the bulk processing system. As might be expected, there are more of the wont-pays in the CFf mix than in the ACS mix. The statistics show that a larger percentage of taxpayers whose accounts end up in the CFf have the resources but not the desire to pay their taxes. One can infer this from comparing the ACS ratio of accounts fully paid with the total number of accounts resolved with the same CFf ratio. Thus, in fiscal 2003 the ACS resolved about 2,556,000 accounts, 724,000 being fully paid and the rest being resolved through one or more of the collection alternatives mentioned above. That means 28.3 percent of accounts resolved through ACS were resolved by full payment. In contrast, of the 880,939 accounts closed by the CFf, 330,934 of them, or 37.6 percent, were resolved by full payment.26 But although a higher percentage of accounts are closed with full payment by CFf, and although more dollars are ultimately collected through CFf than ACS, CFf is far less efficient. One sees that in the fact that many fewer accounts are resolved by CFf and, more importantly, fewer dollars are collected per FTE: In fiscal 2002, CFf

20 TIGTA, Trends Report, note 9 supra at 28, Figure 17. All data in this paragraph comes from Appendix V of this report, Figures 1-19. 21 FTE represents a single person working about 2080 hours. These stats come from TIGTA Report 2003-30-186, note 9 supra at 6. 22 See id. 23 See IRM 5.19.4.3.4 (04-24-2001) (Pre-Levy Requirements (I8 Processing)), at http://www.irs.gov/irm/part5/ch18s09. html (last visited Aug. 13, 2004).

24 See National Taxpayer Advocate 2003 Annual Report to Congress at 46 (Dec. 2003), Doc 2004-787, 2004 TNT 12-122. 25 See TIGTA Report 2004-30-094, note 15 supra. 26 The numbers come from TIGTA, Trends Report, note 9 supra at 26-7, Figures 14 and 15.

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collected $362,224 per FTE, in contrast to the $964,000 per FTE collected by ACS.27 In short, the more individualized the collection process, the less money is collected over a longer time requiring more resources. Again, that tradeoff may be worthwhile if compensated by achievement of other values. As I showed last month, the values promoted by the 1997-1998 reformers were the adversarial values of individual autonomy. As I hope to show next month, a better value to aim at might be human dignity, which is not necessarily the same. To finish this months column, however, I will explain how RRA 98 affected the above processes.

The RRA 98 Changes

Before RRA 98, collection was inquisitorial. Once the IRS had properly assessed a tax liability and asked for payment, it could then act to collect that liability without any recourse to the courts. The full payment rule of Flora v. United States, 362 U.S. 145 (1960), and various prohibitions such as those in the Anti-Injunction Act (section 7421(a)) and the Declaratory Judgement Act (28 U.S.C. section 2201(a)), prevented taxpayers from revisiting the substance of their tax liabilities until all the money had been collected. Section 7426 is a good example of that policy. That section gives a cause of action against the Service for wrongful levy. Notably, however, section 7426(a) provides that a levy cannot be contested by the person against whom is assessed the tax out of which such levy arose. In other words, the taxpayer being collected against cannot sue. Moreover, section 7426(c) prevents taxpayers from using a third party as a stalking horse by providing that the assessment on which the levy is based shall be conclusively presumed to be valid. It was, and still is, simply impossible to argue the validity of the Services tax determination in a wrongful levy context. Those procedural barriers to court review gave the Service a huge advantage over regular creditors who had to get court permission to collect via a judgment, then docket the judgment to perfect liens on realty, and then go through the sheriff to execute process and perfect liens on personalty. To collect information, private creditors

had to obtain court approval to depose the debtor or to engage in other discovery. In contrast, the Service enjoyed inquisitorial collection powers. It got to collect first and litigate later.28 It alone decided how to collect and what assets to collect from.29 It alone decided whether to compromise the liability or to accept installment payments. It could summons the taxpayer or third parties for information about assets and obtain summary enforcement of the summons. But for all of that it was slow. A quick-moving taxpayer could forestall collection for years and even decades by moving assets. I used to tell my students that the IRS was like a slow-moving giant chicken searching for food. A single peck could snap up any tidbit of property or rights to property (especially true after Craft), but the chicken was so slow that a nimble and well-advised taxpayer could repeatedly well dodge the pullet. And now the RRA 98 restraints mean the chicken is no longer even free-range. As enacted, the CDP provisions of section 6330 require that before the Service may levy on property of a taxpayer it must give the taxpayer a notice of his right to a CDP hearing (CDP Notice).30 The taxpayer then has 30 days to request the hearing and may contest the proposed collection action at the hearing and ask that the account be resolved by one of the three main collection alternatives I describe above. Taxpayers may also use the CDP hearing to ask for spousal relief under section 6015. Otherwise, the purpose of the hearing is to verify that the liability to be collected was properly assessed and other procedural requirements prerequisite to collection have

(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

27 The CFf number comes from the TIGTA, 2004 Trends Report, note 9 supra at 23, Figure 8; the ACS number comes from the TIGTA 2003 Automated Collection System Business Results Report, note 9 supra. These two reports do not match up completely. Although one can say with confidence that the CFf collected more dollars than the ACS in fiscal 2002, it is not clear what the true numbers are. The 2003 report says that the ACS process collected $2.6 billion, see p. 3 of the report, but the 2004 report says that ACS collected only $1.25 million, see p. 24, Figure 9. I cannot account for that difference. One possible explanation for the different numbers is that the 2003 report includes the dollars collected from both the notice process and the ACS process while the 2004 report excludes dollars collected from the notice process. That is unlikely, however, because the IRS reports that the notice process collected just under $24 billion in fiscal 2002. See Table 16, Delinquent Collection Activities, Fiscal Years 2000-2003, in 2003 IRS Data Book, March 2004, at http://www.irs.ustreas.gov/taxstats/article/ 0,,id=97168,00.html (last visited Aug. 8, 2004).

28 As the Supreme Court noted in Bull v. United States, 295 U.S. 247, 260 (1935), the usual procedure for the recovery of debts is reversed in the field of taxation. Payment precedes defense, and the burden of proof, normally on the claimant, is shifted to the taxpayer. The assessment supersedes the pleading, proof and judgment necessary in an action at law, and has the force of such a judgment. The ordinary defendant stands in judgment only after a hearing. The taxpayer often is afforded his hearing after judgment and after payment, and his only redress for unjust administrative action is the right to claim restitution. 29 The only exception was if the IRS needed to enter private property to seize personalty it needed to obtain, ex parte, a court order permitting it. G.M. Leasing v. United States, 429 U.S. 338 (1977) (requiring warrant for entry onto private premises to seize assets but allowing warrantless seizure of property in public areas). Note that the G.M. Leasing decision itself reversed the prior practice of warrantless entries onto premises solely on the basis of administrative determination. Before G.M. Leasing, the Court had viewed the matter solely as an issue of due process. Phillips v. Commissioner, 283 U.S. 589 (1931). Indeed, it was the limitless nature of the discretion given to the Service by the levy statute, section 6331(a), that prompted the G.M. Leasing court to impose a Fourth Amendment restriction on the Service. 429 U.S. at 357-358 (rejecting governments argument that section 6631 contained sufficient internal restraints on Service employees discretion as to what property to seize, and concluding: to give the statute that reading would call its constitutionality into serious question. We therefore decline to read it as giving carte blanche for warrantless invasions of privacy). 30 Section 6320 makes similar provisions for when the IRS files an NFTL. Section 6330 contains all the details of the hearing and section 6320(c) makes most of the section 6330 provisions applicable to section 6320 hearings.

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been met. While CDP hearings are supposedly primarily about collection (hence the name), section 6330 also allows taxpayers to litigate the merits of the underlying tax liability, but only in some circumstances. This is the critical statutory language in section 6330(c)(2)(B): The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.31 If the taxpayer does not like the CDP hearing results, the taxpayer can petition for court review in either the Tax Court or, if the Tax Court does not have jurisdiction over the underlying liability, in U.S. district court. Section 6320 requires the Service to give taxpayers a separate CDP notice within five days after it files the first NFTL against a taxpayer for a given tax liability. Although a separate CDP hearing may be held, the statute itself suggests that the levy CDP hearing be combined with the NFTL CDP hearing to the extent practicable.32 As I illustrated last month, the lawmakers in 1997 and 1998 used highly adversarial rhetoric to criticize IRS collection activity. I wont review the rhetoric here, but suffice to say that the CDP provisions, proposed by the Senate taxwriters and eventually codified in sections 6320 and 6330, promised a significant adversarial check on the Services ability to administratively collect unpaid tax liabilities.33 They were part of the overall effort in RRA 98 to reduce the IRS to the status of an ordinary creditor that must obtain court approval for collection actions.34 The legislative history of CDP reflects not just the taxwriters belief in adversarial process as a check on IRS abuse, but also their misunderstanding of the deficiency process, the collection process, and the function of an assessment.35 As I discussed last month, the formal act of assessment has historically functioned as a judgment,

giving the Service the right to collect the liability assessed without seeking the permission of external third parties.36 Some assessments come after the deficiency process, but most do not. The Senate taxwriters assumed, however, that assessments are always preceded by notices of deficiency. They also assumed that most tax delinquencies result from extra tax liabilities found by the Service through the deficiency process.37

(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

The prelevy CDP notice adds nothing to the preexisting section 6331(d) notice of intent to levy. There is simply no individualized decision for the taxpayer to protest about.
As a result of those assumptions, the CDP provisions proposed by the Senate Finance Committee and passed by the full Senate contained two critical features that would have made CDP a full-blown shift to adversarial process and would have severely restricted IRS collection activity: (1) they allowed taxpayers to force court review of each and every collection decision made by the IRS in their individual case, thus completely confounding ACS, as described above, and essentially forbidding the IRS from making aggregate decisions about collection; and (2) they allowed every taxpayer to contest the merits of an assessment in all CDP hearings, thus effectively trashing the Flora full-pay rule, circumventing the amended return process, and reducing the legal effect of an assessment from a judgment-equivalent to a nullity.38 The Senate proposal was too much even for the otherwise cowed Clinton administration. Treasury protested, both formally and informally, that Congress should not allow taxpayers to turn CDP hearings into contests over the accuracy of the assessed tax liability and that giving taxpayers repeated opportunities to invoke court review of collection decisions would potentially kill collection. The main thrust of Treasurys formal and informal comments was that allowing taxpayers to contest their liability in a CDP hearing was giving them multiple bites at the apple.39

This language is made relevant to section 6320 CDP hearings by section 6320(c). 32 Section 6320(b)(4). 33 The CDP provisions were the creation of the Senate taxwriters; there was no such provision in the House version of RRA 98. 34 See, e.g., the Senate Finance Committee Report, S. Rep. 105-174 (Apr. 22, 1998) at 67 explaining CDP provisions were intended to put taxpayers at a position similar to what they would have in dealing with any other creditor. That language could presumably be read as evidence of congressional intent to disapprove of the language in Bull, quoted above, and to favor resolution of liability before payment rather than afterwards. Of course, one would have to also presume that the taxwriters knew what they were doing, a doubtful proposition, but this goes to issues of inter-branch relationships, which I will touch on in discussing Montgomery, next month. 35 See generally Bryan T. Camp, Tax Administration as Inquisitorial Process and the Partial Paradigm Shift in the IRS Restructuring and Reform Act of 1998, 56 Fla. L. Rev. 1, 119-128 (2004); see also Judge Laros and Judge Gales concurring opinions in Montgomery, 122 T.Ct. No. 1, Doc 2004-1409, 2004 TNT 15-9, where they very nicely set out the history.

31

See also the Bull quote above. My example of this last month was the Senate Finance Committees astounding proposal to suspend interest under section 6404(g) on underpayments of tax if the IRS did not send taxpayers a notice of deficiency within one year of the return filing date. See Tax Notes, July 26, 2004, at 439, 442-3. 38 That is, to the extent that a taxpayer disagrees with a prior self-determined tax liability (which the IRS has relied on to make an assessment) the taxpayer can file an amended return. But the IRS is the decisionmaker on tax liability; the Tax Court has long held that a taxpayer cannot force the IRS to accept an amended return. Goldstone v. Commissioner, 65 T.C. 113 (1975). If the IRS refuses to accept the amended return, then the taxpayer is left with no choice under Flora but to pay the liability as a condition precedent to suing for a refund. More on this next month. 39 See, e.g., the OMB Statement of Administration Policy on IRS Reform, Doc 98-14262, 98 TNT 87-17 (May 6, 1998), which
37

36

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The conference committee modified the Senates CDP proposal in two ways that left just enough oversight to delay collection, but not enough to fulfill the rhetorical promise of full adversarial review just enough to do damage; not enough to do taxpayers much good. First, rather than allowing taxpayers to contest all collection actions and the merits of liabilities in all situations, thus forcing the Service to defend each decision at the individual account level, the conference committee revised the language to allow for only two CDP hearings: one after the first NFTL and one before the first levy.40 More importantly, the Service did not have to specify to the taxpayer what assets it proposed to levy. Thus, the prelevy CDP notice adds nothing to the preexisting section 6331(d) notice of intent to levy. There is simply no individualized decision for the taxpayer to protest about. Second, the conference committee restricted taxpayers ability to contest liability decisions to only those times when taxpayers had not actually received a notice of deficiency or otherwise had an opportunity to dispute the liability. The conference committee report explained the statutory language this way: The validity of the tax liability can be challenged only if the taxpayer did not actually receive the statutory notice of deficiency or

has not otherwise had an opportunity to dispute the liability.41 As implied by this explanatory language, the entire focus of the staff was still on the deficiency process. For example, the phrase not otherwise had an opportunity to dispute the liability was not meant to address situations in which the Service issued a 30-day letter and the taxpayer agreed to it, in which case the taxpayer would not receive the statutory notice of deficiency but would otherwise have had the opportunity to force the Service to issue one. In short, that language was added to prevent taxpayers from agreeing to the revenue agents report, then later challenging the liability in the CDP hearing on the technicality that no notice of deficiency was actually received. In sum, the IRS has historically exercised its inquisitorial power to collect millions of unpaid accounts by using bulk processing, in which it makes aggregate decisions affecting all delinquent taxpayers. The thrust of the decisions is to force taxpayers to come to the IRS with sufficient information about their assets so the IRS can collect the tax or else decide that it cannot collect the tax. The adversarial rhetoric behind the Senate CDP proposals assumed that CDP could provide each individual taxpayer independent third-party review of each individualized collection decision. That simply ignores how collection works and so CDP was modified in conference to essentially give taxpayers just one shot at court review of the initial IRS decision to file an NFTL or issue a notice of levy. As a result of those two changes, while the CDP proposals as enacted became less fowl (for the IRS) than the Senate proposals, they did not become fish. They were a hybrid, Frankensteinian creature, whose clumsy operation I shall describe next month in Part II of my exploration of why CDP is a failure.

(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

emphasized that the bill would allow additional appeals and court challenges before the IRS can collect tax from a taxpayer who refuses to pay, even if the taxpayer has voluntarily selfassessed the amount due or a court has held that the taxpayer owes the tax. 40 The Senate proposal would have required the IRS to tell taxpayers of its intent to file an NFTL, thus allowing taxpayers to hop quick-like-a-bunny over to the bank or real estate agent and extract all the equity from their realty by sale or refinance to avoid losing the equity to the tax lien. The conference committee changed section 6320 to allow the Service to file the NFTL first and then, within five days, send the NFTL CDP notice to the taxpayer.

41

H. Rep. 105-599 at 265 (emphasis supplied).

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