There was a time when Congress felt that the IRS had gone too far in its collection activities and needed additional judicial oversight. This concern with IRS collections prompted Collection Due Process (CDP) which came into existence in the Restructuring and Reform Act (RRA ’98). Upon creation, the CDP became a game-changer in some aspects of tax resolution.
The Policy Behind Collection Due Process
The importance of treating taxpayers fairly in the collection process led to the reformation of IRS operations. In principle, taxes and penalties must be imposed justly and not just merely imposed. There was a need for structural reform and protections included in the Internal Revenue Code (Code) to make taxpayers experience fair treatment. Ideally, CDP will help change the attitude of taxpayers toward the IRS (Service).
CDP Procedures Before Collection
The Service has two (2) primary administrative collection tools: lien and levy. Due to the RRA ’98, effective January 19, 1999, before the Service seeks to make a levy or file a notice of federal tax lien (NFTL), it must apply the CDP procedures.
What is CDP?
A taxpayer who receives a notice of levy or a notice of federal tax lien from the Service can pursue a tax appeal, particularly a collection due process hearing. It is an opportunity for him to dispute the notice sent to him.
The taxpayer can also request a CDP after receiving other notices like Notice of Jeopardy Levy and Right of Appeal, Notice of Levy on State Tax Refund, or Notice of Your Right to a Hearing.
Taxpayer’s CDP Rights
When the Service files an NTFL, it must give it to the taxpayer within five (5) business days. It provides a taxpayer with the right to an administrative, and potential judicial, hearing on whether filing the NTFL best serves the collection of the unpaid taxes. On the other hand, if the Service wants to initiate a levy against a taxpayer’s property or rights to property, it must first give the notice of intent to levy to the taxpayer at least thirty days before initiating the levy. The notice provides the taxpayer with the same administrative and judicial rights (Section 6320, IRS)
CDP Hearings
Taxpayers who wish to contest or further discuss the initiation of a lien or levy imposed by the Collection Division may go to the Appeals Division.
CDP hearings are held with an employee of the Office of Appeals. To ensure that hearings are impartial, the Internal Revenue Code (IRC) mandates that the hearing officer must not have prior involvement with the taxpayer. In addition, the statute requires that the hearing officer and the taxpayer must meet, although it need not be an “in-person” meeting.
A Bird’s Eye View of a CDP Hearing
Most of the time, a CDP Hearing is informal and held over the phone. However, a taxpayer may make a timely request for a face-to-face hearing. The Settlement Officer from Appeals assigned to a case will go over the facts and documents presented by a taxpayer to resolve the matter.
Consult With Tax Counsel
A Collection Due Process hearing can be a critical step in tax resolution, but it’s not one that guarantees a particular result. Accordingly, it’s important for the taxpayer to consult with tax counsel and evaluate tax resolution strategies early in the collection process.
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