Collection due process hearing

What Is a Collection Due Process Hearing?

A Collection Due Process (CDP) hearing is a formal administrative proceeding within the realm of U.S. federal tax law, specifically under taxpayer rights and tax collection. It provides individuals and businesses with an opportunity to appeal certain collection actions proposed or taken by the Internal Revenue Service (IRS). This crucial safeguard allows taxpayers to challenge the IRS's intent to levy their assets or file a notice of federal tax lien. The CDP hearing process is managed by the IRS Independent Office of Appeals, ensuring an impartial review of the taxpayer's case before enforcement actions proceed.⁵⁵, ⁵⁶

History and Origin

The Collection Due Process hearing was established by the IRS Restructuring and Reform Act of 1998 (RRA 98). This landmark legislation significantly enhanced taxpayer protections and introduced specific due process rights regarding IRS collection actions.⁵³, ⁵⁴ Before RRA 98, taxpayers had fewer formal avenues to dispute tax collection efforts by the IRS. The enactment of Internal Revenue Code (IRC) Sections 6320 (for liens) and 6330 (for levies) created the statutory basis for CDP hearings, mandating that the IRS provide taxpayers with notice and an opportunity for a hearing before most enforcement actions.⁵⁰, ⁵¹, ⁵² Congress intended these procedures to increase fairness and afford taxpayers adequate notice and a meaningful hearing before the IRS could seize their property.⁴⁹

Key Takeaways

• A Collection Due Process (CDP) hearing offers taxpayers an administrative avenue to dispute IRS collection actions, such as tax liens or tax levies.
• It is a statutory right under Internal Revenue Code Sections 6320 and 6330, enacted by the IRS Restructuring and Reform Act of 1998.
• CDP hearings are conducted by an impartial Settlement Officer from the IRS Independent Office of Appeals, who has no prior involvement in the taxpayer's case.⁴⁶, ⁴⁷, ⁴⁸
• Taxpayers can discuss alternatives to enforced collection, such as an installment agreement or an offer in compromise, and may dispute the underlying tax liability if they haven't had a prior opportunity to do so.⁴⁴, ⁴⁵
• A timely request for a CDP hearing generally suspends IRS collection activity and preserves the taxpayer's right to petition the U.S. Tax Court if they disagree with the Appeals Office's determination.⁴², ⁴³

Interpreting the Collection Due Process Hearing

A Collection Due Process hearing is interpreted as a critical opportunity for taxpayers to assert their rights and resolve tax disputes with the IRS without immediate recourse to court. It serves as a forum where taxpayers can present their financial situation, challenge the appropriateness of a proposed tax levy or tax lien, or even dispute the existence or amount of the underlying tax liability if they previously had no opportunity to do so.⁴⁰, ⁴¹ The independent nature of the IRS Office of Appeals, which conducts these hearings, is central to their effectiveness. The Appeals Officer or Settlement Officer aims to balance the need for efficient tax collection with the taxpayer's concern that any collection action be no more intrusive than necessary.³⁸, ³⁹

Hypothetical Example

Consider Sarah, a freelance graphic designer who receives a "Notice of Intent to Levy and Notice of Your Right to a Collection Due Process Hearing" from the IRS for unpaid income taxes from a previous year. Sarah believes the tax liability is incorrect due to a misunderstanding of certain business deductions.

Upon receiving the notice, Sarah, within the 30-day deadline, files Form 12153, "Request for a Collection Due Process or Equivalent Hearing," with the IRS. In her request, she states her disagreement with the proposed levy and provides a brief explanation of her deductions.

The IRS schedules a CDP hearing with an Appeals Officer. During the hearing, Sarah explains her tax situation, providing documentation for her business expenses. She also proposes an offer in compromise, suggesting a payment plan based on her current financial hardship, as an alternative to a levy on her bank account. The Appeals Officer reviews her case, considering her evidence and proposed collection alternatives, and works with her to reach a mutually acceptable resolution, potentially adjusting the liability or establishing a suitable payment arrangement.

Practical Applications

Collection Due Process hearings are applied in several key scenarios within federal tax administration:

• Preventing Levies: If the IRS intends to seize assets like bank accounts, wages, or property, a timely CDP request can prevent the tax levy from occurring until the hearing is concluded.³⁶, ³⁷
• Challenging Liens: When the IRS files a Notice of Federal Tax Lien against a taxpayer's property, a CDP hearing allows the taxpayer to dispute the validity or appropriateness of the lien.³⁴, ³⁵
• Proposing Collection Alternatives: Taxpayers can use the hearing to propose alternative payment options, such as an installment agreement, an offer in compromise (OIC), or requesting placement in currently not collectible status due to financial hardship.³², ³³ These alternatives aim to resolve the tax debt in a manner that is less financially disruptive than a levy or lien.
• Disputing Underlying Tax Liability: In specific circumstances, if a taxpayer did not receive a statutory notice of deficiency or otherwise had no prior opportunity to dispute the tax liability, they can raise challenges to the existence or amount of that liability during the CDP hearing.³⁰, ³¹
• Ensuring Procedural Compliance: The hearing also ensures that the IRS has followed all legal and administrative procedures related to the proposed collection action.²⁸, ²⁹

More information on the process can be found on the IRS's official page on Collection Due Process FAQs.²⁷

Limitations and Criticisms

While Collection Due Process hearings offer significant taxpayer protections, they do have limitations. One key limitation is the strict 30-day deadline for requesting a CDP hearing after receiving the notice. Missing this deadline means the taxpayer loses the right to a CDP hearing and, crucially, the right to appeal the Appeals Office's determination to the U.S. Tax Court. In such cases, taxpayers may only be eligible for an "Equivalent Hearing" (EH), which, while similar in process, does not offer the right to judicial review.²⁵, ²⁶

Another limitation concerns disputing the underlying tax liability. While possible, this is generally only permitted if the taxpayer did not receive a statutory notice of deficiency or did not otherwise have a prior opportunity to dispute the liability. If a taxpayer has already had a chance to contest the amount owed, the Appeals Officer typically cannot reconsider that specific issue during the CDP hearing.²³, ²⁴

Furthermore, while the hearing is intended to be informal, navigating the process and effectively presenting a case, especially regarding complex financial statements or legal arguments, can be challenging without the assistance of a tax professional. Some argue that despite the intent of the RRA 98 to protect taxpayers, the complexity of tax law and IRS procedures can still disadvantage unrepresented individuals. While the Taxpayer Advocate Service provides assistance, their capacity may be limited.²²

Collection Due Process Hearing vs. Collection Appeals Program (CAP) Hearing

Taxpayers often confuse a Collection Due Process (CDP) hearing with a Collection Appeals Program (CAP) hearing, as both are administrative appeal options concerning IRS collection actions. However, key differences exist in their scope, timing, and appeal rights.

The key distinction lies in the right to judicial review: a taxpayer who goes through a CDP hearing retains the right to petition the U.S. Tax Court if dissatisfied with the Appeals Office's determination, a right not afforded by a CAP hearing.

FAQs

What is the purpose of a Collection Due Process (CDP) hearing?

The primary purpose of a Collection Due Process (CDP) hearing is to provide taxpayers with a formal opportunity to dispute certain IRS collection actions, such as proposed tax liens or tax levies, and to propose collection alternatives. It ensures taxpayers' due process rights are honored before the IRS takes enforced collection actions.¹⁰, ¹¹

How do I request a Collection Due Process (CDP) hearing?

You request a CDP hearing by completing and submitting IRS Form 12153, "Request for a Collection Due Process or Equivalent Hearing," to the address provided on the IRS notice you received. This form must typically be submitted within 30 days of the date on the notice informing you of your right to a hearing.⁷, ⁸, ⁹

What can I discuss during a Collection Due Process (CDP) hearing?

During a CDP hearing, you can discuss alternatives to enforced collection (like an offer in compromise or an installment agreement), raise challenges to the appropriateness of the collection action (such as a tax levy or a tax lien), and, under specific circumstances, dispute the existence or amount of the underlying tax liability if you haven't had a prior opportunity to do so.⁵, ⁶

What happens if I miss the deadline for a CDP hearing?

If you miss the 30-day deadline for requesting a Collection Due Process (CDP) hearing, you may still be eligible to request an "Equivalent Hearing" (EH). While an Equivalent Hearing offers a similar administrative review process, its primary drawback is that you generally lose the right to appeal the Appeals Office's determination to the U.S. Tax Court.³, ⁴

Will the IRS stop collection actions if I request a CDP hearing?

Yes, generally, a timely request for a Collection Due Process (CDP) hearing will suspend IRS collection activity, such as a proposed tax levy, until the hearing process is complete and a determination is made by the Appeals Office. This pause allows time for the taxpayer and the IRS to resolve the issue.¹, ²