By David van den Berg

Law360 (May 7, 2020, 8:16 PM EDT ) The IRS' collection due process program, which grants taxpayers a hearing before having to pay their debts, was already in need of reforms before the COVID-19 outbreak, and the pandemic is likely to delay program improvements and increase its backlog.

Use of the program remains low, and taxpayers too often don't know about their rights to request a CDP hearing, according to directors of low-income taxpayer clinics. Some directors have worked with Internal Revenue Service officials on improving the process, but that appears to be on hold for now. And with the IRS' operations limited because of the pandemic, prospects for improving the program in the near term are uncertain.

When the IRS' operations are fully restored, the agency will have to face a mounting set of problems that have grown while offices have been shuttered, and addressing problems with the CDP program is likely to be low on its list of priorities, according to Bob Probasco, director of the Texas A&M University School of Law's Low-Income Tax Clinic.

"In terms of really revamping the process, we may be now at least a year further away than we would have been otherwise in resolving this," Probasco said.

While the agency is currently tied up with doling out economic impact payments to mitigate the economic effects of the pandemic, and it still has to fulfill its obligations under recently passed laws such as the Taxpayer First Act and the Tax Cuts and Jobs Act, the CDP program remains vitally important, according to Caleb Smith, director of the University of Minnesota Law School's Ronald M. Mankoff Tax Clinic.

Due to the pandemic, many people will likely be unable to meet their tax obligations, which will likely lead to a surge in CDP cases down the road, Smith said.

"Once we're done focusing so heavily on getting money to people, the next thing is going to be, now people can't afford to pay back taxes, and CDP will probably take an even higher priority then," he said.

Congress created CDP hearings in the 1998 IRS Restructuring and Reform Act to provide taxpayers an independent review of a lien notice or proposed levy action by the agency's Office of Appeals. During the hearing, taxpayers can propose collection alternatives such as offers-in-compromise, and in some cases they can challenge the underlying liability.

An initiative known as the CDP Summit — a collaboration among private tax practitioners, law professors, directors of low-income taxpayer clinics and the IRS aimed at putting in place needed reforms to the CDP program — was launched as a result of a panel discussion at the American Bar Association Section of Taxation's 2019 May meeting on issues with the program. That effort, and government reports, have identified ways the program can be improved.

William Schmidt, a member of the summit's steering committee and director of the Low Income Taxpayer Clinic of Kansas Legal Services, said the summit identified a large list of problems, including some with notices not making it sufficiently clear to taxpayers that they have the right to request a hearing. The national taxpayer advocate's 2018 annual report to Congress similarly said the design and wording in CDP notices underemphasize important rights, and information on exercising those rights isn't clearly communicated.

The Treasury Inspector General for Tax Administration, in a 2019 report, noted that some taxpayers were incorrectly classified by the agency's Appeals office and either didn't receive the hearing to which they were entitled or got a hearing they shouldn't have. Taxpayers who do not timely request a CDP hearing can get an equivalent hearing, but levy actions aren't suspended and they can't petition the U.S. Tax Court, according to the report.

The CDP Summit has already resulted in some positive changes, according to Schmidt. After a discussion during a December low-income taxpayer representation workshop in Washington, the IRS chief counsel's office released legal advice saying requests for hearings that taxpayers incorrectly send to the wrong address would still be treated as timely filed, Schmidt said.

Since then, however, the initiative has stalled. Some summit participants took jobs with the IRS, and the pandemic has shifted remaining summit participants' priorities, Schmidt said.

"It has been a little inactive," he said. "It's my goal to get some conference calls going regarding different groups with notices, appeals and Tax Court focuses."

T. Keith Fogg, the director of the federal tax clinic at Harvard Law School's Legal Services Center, who is also involved with the summit, said he doesn't know when it will resume. For the time being, the pandemic has reduced some of the pressures on the CDP program, since the IRS has temporarily paused lien and levy enforcements through July 15 and will be slow to restart that work, Fogg said.

The summit's work so far has led to significant improvements in CDP notices, Fogg said, noting the newest version of the notice provides more information on the opportunity for a CDP hearing. However, more needs to be done to ensure that taxpayers understand they have to act to preserve their rights to a hearing under the CDP program, he said.

The IRS should allow equitable tolling to suspend the window for requesting a CDP hearing and also for filing a Tax Court petition after a CDP determination, he said.

Another issue the summit could address when it resumes is what can be litigated under the CDP program, he said.

One recent setback to the CDP program came in March in a Tax Court case, Joseph Thomas Lander et al. v. Commissioner, Fogg said. The court ruled that the IRS had the authority to enforce a lien to collect $183,000 in tax liabilities from an attorney and his wife because the agency attempted to notify them of deficiencies in a timely manner while he was imprisoned and allowed them the chance to appeal. Lander had argued the underlying assessment was improper and that he didn't have a chance to appeal its merits.

"The decision in Lander continues the evisceration of the ability to litigate the merits of a tax liability in CDP," Fogg said. "This is an area that might require a legislative push, as I am not confident that success will be achieved through litigation."

A. Lavar Taylor, a Southern California tax controversy attorney, said the agency should resolve the matter of what can be litigated in CDP through regulation.

A taxpayer may not raise issues in a CDP hearing if the issues have already been raised and considered at prior judicial or administrative hearings and the taxpayer meaningfully participated in those hearings, according to the national taxpayer advocate's 2019 annual report to Congress. Taylor said he'd lost three cases at the appellate level arguing taxpayers should have the opportunity to litigate their liabilities in CDP hearings if they haven't already had the opportunity to challenge them in court.

Not many taxpayers make use of CDP, though. According to the national taxpayer advocate's 2019 report, between 2003 and 2019 a mere 1.44% of taxpayers who received CDP notices requested a hearing, and less than 1% filed a petition in the Tax Court.

Eric Santos, executive director of the North Georgia Low Income Taxpayer Clinic, said several factors are driving the low participation rate, at least for those he works with. Most people aren't well versed in IRS procedures when they get their first lien or levy notice, and while the notices explain taxpayer rights, many struggle to understand them and finding effective help can be tricky, he said.

While the number of CDP cases may increase due to the pandemic, participation rates are not likely to follow suit, Santos said.

"The absolute number of CDP hearings might rise, but I'm not sure that the rate of CDP hearings requested as a percentage of all lien and levy notices will rise," he said.

Whether more hearings occur will depend on how IRS collection staffers manage their workload, Taylor said. He's not sure, he said, how nuanced an approach the agency will take to collection work starting July 15, but he was confident more taxpayers would find themselves struggling.

"You're going to have a lot of folks who have new tax problems or have a new inability to manage tax problems that were being managed," he said, adding that many people who weren't previously in the position of having to choose between paying taxes, and food or housing costs, will find themselves there.

--Editing by Robert Rudinger and Tim Ruel.

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