Tax audits or collection matters sometimes result in unfavorable decisions at the initial level of review, to which you do not agree. Thus appealing an adverse tax decision is sometimes desired and/or necessary. By appealing an adverse tax decision, taxpayers have the opportunity to resolve a tax controversy, without litigation, on a basis that still protects their rights. McLaughlin Legal helps clients resolve all types of assessment and collection tax controversies through appeals procedures with the IRS, FTB, BOE, and EDD. As stated by the IRS, its Office of Appeals is committed to:
“resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the [IRS].”
But what does that mean for a taxpayer, and when can they get before an administrative appellate body?
When can I appeal a tax determination?
A tax appeal may be needed for any number of reasons, and based on any number of determinations. Some of the more common that McLaughlin Legal helps clients with include:
Audit appeals — After most tax audits, taxpayers may request an appeals conference. Generally appeals conferences are informal, yet quasi-judicial, meeting geared towards resolving the tax dispute and avoiding litigation. At the Federal level, an IRS audit appeal can occur before the issuance of a Statutory Notice of Deficiency (pre 90-day case) or after a petition is filed with the U.S. Tax Court (90-day or docketed case).
Penalty appeals — If the IRS has is preparing to assess a penalty, or a penalty abatement request has been denied, most taxpayers have the right to appeal that decision. Some of the penalties worked by the IRS Office of Appeals include:More info
Return related penalties — The IRS Office of Appeals can review any number of return related penalties, including those assessed under:
- IRC § 6662(c) – negligence or disregard of rules or regulations
- IRC § 6662(d) – substantial understatement
- IRC § 6662(e) – substantial valuation misstatement
- IRC § 6333 – civil fraud
- IRC § 6676 – erroneous claim for refund or credit
Return preparer penalties: Tax return preparers, just like taxpayers, may face various penalties. If those penalties are proposed, a tax prepare may be able to appeal such a determination. Some of the return preparer penalties that could be appealed include:
- IRC § 6694 – Understatement of Taxpayer’s Liability by a Tax Return Preparer
- IRC § 6695 – Other Assessable Penalties with Respect to the Preparation of Tax Returns for Other Persons
- IRC § 6713 – Disclosure or Use of Information by Preparers of Returns
Trust fund recovery penalty: In some cases the IRS can personally assess individuals for a portion of unpaid payroll taxes. Known as the “Trust Fund Recovery Penalty”, the law generally provides that:
“(a) General rule Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
(b) Preliminary notice requirement (1) In general No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212 (b) or in person that the taxpayer shall be subject to an assessment of such penalty. (2) Timing of notice The mailing of the notice described in paragraph (1) (or, in the case of such a notice delivered in person, such delivery) shall precede any notice and demand of any penalty under subsection (a) by at least 60 days. (3) Statute of limitations If a notice described in paragraph (1) with respect to any penalty is mailed or delivered in person before the expiration of the period provided by section 6501 for the assessment of such penalty (determined without regard to this paragraph), the period provided by such section for the assessment of such penalty shall not expire before the later of— (A) the date 90 days after the date on which such notice was mailed or delivered in person, or (B) if there is a timely protest of the proposed assessment, the date 30 days after the Secretary makes a final administrative determination with respect to such protest. (4) Exception for jeopardy This subsection shall not apply if the Secretary finds that the collection of the penalty is in jeopardy.
(c) Extension of period of collection where bond is filed (1) In general If, within 30 days after the day on which notice and demand of any penalty under subsection (a) is made against any person, such person— (A) pays an amount which is not less than the minimum amount required to commence a proceeding in court with respect to his liability for such penalty, (B) files a claim for refund of the amount so paid, and (C) furnishes a bond which meets the requirements of paragraph (3), no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until a final resolution of a proceeding begun as provided in paragraph (2). Notwithstanding the provisions of section 7421 (a), the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2). (2) Suit must be brought to determine liability for penalty If, within 30 days after the day on which his claim for refund with respect to any penalty under subsection (a) is denied, the person described in paragraph (1) fails to begin a proceeding in the appropriate United States district court (or in the Court of Claims)  for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the 30-day period referred to in this paragraph. (3) Bond The bond referred to in paragraph (1) shall be in such form and with such sureties as the Secretary may by regulations prescribe and shall be in an amount equal to 11/2 times the amount of excess of the penalty assessed over the payment described in paragraph (1). (4) Suspension of running of period of limitations on collection The running of the period of limitations provided in section 6502 on the collection by levy or by a proceeding in court in respect of any penalty described in paragraph (1) shall be suspended for the period during which the Secretary is prohibited from collecting by levy or a proceeding in court. (5) Jeopardy collection If the Secretary makes a finding that the collection of the penalty is in jeopardy, nothing in this subsection shall prevent the immediate collection of such penalty.
d) Right of contribution where more than 1 person liable for penalty If more than 1 person is liable for the penalty under subsection (a) with respect to any tax, each person who paid such penalty shall be entitled to recover from other persons who are liable for such penalty an amount equal to the excess of the amount paid by such person over such person’s proportionate share of the penalty. Any claim for such a recovery may be made only in a proceeding which is separate from, and is not joined or consolidated with— (1) an action for collection of such penalty brought by the United States, or (2) a proceeding in which the United States files a counterclaim or third-party complaint for the collection of such penalty.
(e) Exception for voluntary board members of tax-exempt organizations No penalty shall be imposed by subsection (a) on any unpaid, volunteer member of any board of trustees or directors of an organization exempt from tax under subtitle A if such member— (1) is solely serving in an honorary capacity, (2) does not participate in the day-to-day or financial operations of the organization, and (3) does not have actual knowledge of the failure on which such penalty is imposed. The preceding sentence shall not apply if it results in no person being liable for the penalty imposed by subsection (a).”
If the IRS proposes to assess a responsible person with the Trust Fund Recovery Penalty under IRC § 6672, that determination can also be appealed to the Office of Appeals.
FBAR penalties: A United States person must generally file an FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts, ) if that person has a financial interest in or signature authority over any financial account(s) outside of the U.S. and the aggregate maximum value of the account(s) exceeds $10,000 at any time during the calendar year. Failure to file this form may result in civil (and in some cases criminal) penalties. However, the assessment of any civil FBAR penalties may be appealed.
Collection Due Process (“CDP”) Hearings — A Collection Due Process (“CDP”) Hearing is an important tool in any tax collection case. The law generally provides that:
“(a) Requirement of notice before levy
(1) In general
No levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made. Such notice shall be required only once for the taxable period to which the unpaid tax specified in paragraph (3)(A) relates.
(2) Time and method for notice
The notice required under paragraph (1) shall be—
(A) given in person;
(B) left at the dwelling or usual place of business of such person; or
(C) sent by certified or registered mail, return receipt requested, to such person’s last known address;
not less than 30 days before the day of the first levy with respect to the amount of the unpaid tax for the taxable period.
(3) Information included with notice
The notice required under paragraph (1) shall include in simple and nontechnical terms—
(A) the amount of unpaid tax;
(B) the right of the person to request a hearing during the 30-day period under paragraph (2); and
(C) the proposed action by the Secretary and the rights of the person with respect to such action, including a brief statement which sets forth—
(i) the provisions of this title relating to levy and sale of property;
(ii) the procedures applicable to the levy and sale of property under this title;
(iii) the administrative appeals available to the taxpayer with respect to such levy and sale and the procedures relating to such appeals;
(iv) the alternatives available to taxpayers which could prevent levy on property (including installment agreements under section 6159); and
(v) the provisions of this title and procedures relating to redemption of property and release of liens on property.
(b) Right to fair hearing
(1) In general
If the person requests a hearing in writing under subsection (a)(3)(B) and states the grounds for the requested hearing, such hearing shall be held by the Internal Revenue Service Office of Appeals.
(2) One hearing per period
A person shall be entitled to only one hearing under this section with respect to the taxable period to which the unpaid tax specified in subsection (a)(3)(A) relates.
(3) Impartial officer
The hearing under this subsection shall be conducted by an officer or employee who has had no prior involvement with respect to the unpaid tax specified in subsection (a)(3)(A) before the first hearing under this section or section 6320. A taxpayer may waive the requirement of this paragraph.
c) Matters considered at hearing
In the case of any hearing conducted under this section—
(1) Requirement of investigation
The appeals officer shall at the hearing obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.
(2) Issues at hearing
(A) In general
The person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy, including—
(i) appropriate spousal defenses;
(ii) challenges to the appropriateness of collection actions; and
(iii) offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise.
(B) Underlying liability
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.
3) Basis for the determination
The determination by an appeals officer under this subsection shall take into consideration—
(A) the verification presented under paragraph (1);
(B) the issues raised under paragraph (2); and
(C) whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.
(4) Certain issues precluded
An issue may not be raised at the hearing if—
(i) the issue was raised and considered at a previous hearing under section 6320 or in any other previous administrative or judicial proceeding; and
(ii) the person seeking to raise the issue participated meaningfully in such hearing or proceeding; or
(B) the issue meets the requirement of clause (i) or (ii) of section 6702 (b)(2)(A).
This paragraph shall not apply to any issue with respect to which subsection (d)(2)(B) applies.
(d) Proceeding after hearing
(1) Judicial review of determination
The person may, within 30 days of a determination under this section, appeal such determination to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).
(2) Jurisdiction retained at IRS Office of Appeals
The Internal Revenue Service Office of Appeals shall retain jurisdiction with respect to any determination made under this section, including subsequent hearings requested by the person who requested the original hearing on issues regarding—
(A) collection actions taken or proposed with respect to such determination; and
(B) after the person has exhausted all administrative remedies, a change in circumstances with respect to such person which affects such determination.
(e) Suspension of collections and statute of limitations
(1) In general
Except as provided in paragraph (2), if a hearing is requested under subsection (a)(3)(B), the levy actions which are the subject of the requested hearing and the running of any period of limitations under section 6502 (relating to collection after assessment), section 6531 (relating to criminal prosecutions), or section 6532 (relating to other suits) shall be suspended for the period during which such hearing, and appeals therein, are pending. In no event shall any such period expire before the 90th day after the day on which there is a final determination in such hearing. Notwithstanding the provisions of section 7421 (a), the beginning of a levy or proceeding during the time the suspension under this paragraph is in force may be enjoined by a proceeding in the proper court, including the Tax Court. The Tax Court shall have no jurisdiction under this paragraph to enjoin any action or proceeding unless a timely appeal has been filed under subsection (d)(1) and then only in respect of the unpaid tax or proposed levy to which the determination being appealed relates.
(2) Levy upon appeal
Paragraph (1) shall not apply to a levy action while an appeal is pending if the underlying tax liability is not at issue in the appeal and the court determines that the Secretary has shown good cause not to suspend the levy.
(1) the Secretary has made a finding under the last sentence of section 6331 (a) that the collection of tax is in jeopardy,
(2) the Secretary has served a levy on a State to collect a Federal tax liability from a State tax refund,
(3) the Secretary has served a disqualified employment tax levy, or
(4) the Secretary has served a Federal contractor levy,
this section shall not apply, except that the taxpayer shall be given the opportunity for the hearing described in this section within a reasonable period of time after the levy.
(g) Frivolous requests for hearing, etc.
Notwithstanding any other provision of this section, if the Secretary determines that any portion of a request for a hearing under this section or section 6320 meets the requirement of clause (i) or (ii) of section 6702 (b)(2)(A), then the Secretary may treat such portion as if it were never submitted and such portion shall not be subject to any further administrative or judicial review.
(h) Definitions related to exceptions
For purposes of subsection (f)—
(1) Disqualified employment tax levy
A disqualified employment tax levy is any levy in connection with the collection of employment taxes for any taxable period if the person subject to the levy (or any predecessor thereof) requested a hearing under this section with respect to unpaid employment taxes arising in the most recent 2-year period before the beginning of the taxable period with respect to which the levy is served. For purposes of the preceding sentence, the term “employment taxes” means any taxes under chapter 21, 22, 23, or 24.
(2) Federal contractor levy
A Federal contractor levy is any levy if the person whose property is subject to the levy (or any predecessor thereof) is a Federal contractor.”
Thus before the IRS can levy a taxpayer, they are provided the opportunity to appeal that determination and discuss with the Appeals Officer such things as appropriate spousal defenses (like innocent spouse claims), collection alternatives (like an offer in compromise or installment agreement), and in some cases even the underlying tax liability itself.
Collection Appeals Program (“CAP”) — Since the last 1990’s, the IRS has used an administrative appeals program for certain collection actions called the Collection Appeal Program (“CAP”). A taxpayer can generally request a CAP hearing to challenge:
- Levy or seizure action that has, or will be, taken.
- A Notice of Federal Tax Lien (“NFTL”) that has been, or will be, filed.
- The denial of a request to issue a lien subordination, lien withdraw, or lien discharge.
- Rejection, proposed modification, or proposed termination of an installment agreement.
- Disallowed wrongful levy claim.
Unlike a CDP Hearing, the administrative decision of the IRS Office of Appeals is final and cannot be appealed to the U.S. Tax Court. A CAP is also unique because the IRS try to resolve the matter within only 5-days, as compared to a CDP case that can take months to resolve.
Offer in comprise rejection appeals — An offer in compromise (“OIC“) is the ability to offer some lesser amount to compromise a greater tax liability. After an initial offer in compromise is reviewed, an Offer Specialist may reject the offer; however, that rejection should come with appeal rights. At the IRS Office of Appeals a taxpayer may be allowed to present reasons as to why the Offer Specialist’s conclusion was wrong.
Why McLaughlin Legal?
McLaughlin Legal is boutique San Diego law firm, with special emphasis on defending taxpayers and resolving tax disputes. We have represented countless individuals and businesses in disputes with the IRS, FTB, BOE, EDD, CUIAB, and other taxing agencies. We are committed to three overarching principals:
- Concentrated practice areas — McLaughlin Legal prioritizes expertise. Our firm practices the very specific discipline of tax law, and we believe this focus is key to our success. When a client needs tax law services, such as defense in an IRS audit or drafting a detailed estate plan, McLaughlin Legal can match the level of service of any other law firm.
- Personalized service — McLaughlin Legal knows that each client’s goals, objectives, and issues are unique. We pride ourselves on a personalized approach to each client’s case and responsiveness to their needs. McLaughlin Legal is committed to having strong personal relationships with each individual client.
- Committed to clients — McLaughlin Legal believes that being responsive, trustworthy, patient, professional, and honorable are the foundations of a successful law firm. Our firm is driven by the highest commitment to protecting our clients’ rights and achieving the best results possible.
If you are interested in learning more about appealing an adverse tax decision, please feel free to contact us today for a free consultation.