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What is IRS Collection Due Process (CDP) Hearing
IRS Collection Due Process (CDP) Hearings: A Comprehensive Guide for Taxpayers
The Internal Revenue Service (IRS) has significant authority to collect unpaid taxes through actions such as tax levies and tax liens, which can severely impact a taxpayer’s financial stability. The IRS Collection Due Process (CDP) hearing is a procedural tax safeguard established under the IRS Restructuring and Reform Act of 1998 to protect taxpayers from aggressive IRS agents and automated IRS collection actions. This taxpayers guide provides a detailed overview of what a Collection Due Process hearing entails, the proper methods for obtaining one, and its benefits to taxpayers.
What is a Collection Due Process (CDP) Hearing?
IRS Collection Due Process (CDP) hearing is a formal legal administrative procedure that allows taxpayers to challenge IRS collection actions, such as a tax levy (seizure of assets like bank accounts, wages, or property) or a Notice of Federal Tax Lien (NFTL) (a legal claim against a taxpayer’s property). Enacted under Internal Revenue Code (IRC) Sections 6320 and 6330, the CDP hearing serves as a taxpayer’s opportunity to resolve tax disputes with the IRS Independent Office of Appeals before resorting to litigation. It ensures the IRS follows proper procedures and considers alternatives to enforced collection, balancing the government’s need to collect IRS taxes with the taxpayer’s right to due process oversight of government activity.
The CDP hearing is often described as a taxpayer’s “last best chance” to address tax controversies without court intervention. It provides a platform to:
Dispute the validity of the tax liability (under limited circumstances).
Propose alternative collection methods, such as installment agreements or Offers in Compromise (OIC).
Seek relief for financial hardship or innocent spouse claims.
Ensure the IRS has followed legal and procedural requirements.
What Does a CDP Hearing Look Like?
A CDP hearing is conducted by an impartial Settlement Officer from the IRS Independent Office of Appeals, who has had no prior involvement in the taxpayer’s case. This independence ensures a fresh perspective, fostering fair and impartial resolutions. The Collection Due Process hearing is not a courtroom proceeding but an administrative process that can occur in person, by telephone, or through written correspondence, depending on the taxpayer’s preference and the case’s complexity.
Key Objectives of a CDP Hearing
During the hearing, taxpayers can raise several issues, including:
Challenging the Tax Liability: If the taxpayer has not previously had an opportunity to dispute the tax debt (e.g., they did not receive a Statutory Notice of Deficiency or could not previously petition the Tax Court), they may contest the amount owed.
Proposing Collection Alternatives: Taxpayers can request options such as:
Installment Agreements: Monthly payment plans to settle the debt over time.
Offer in Compromise (OIC): A settlement to pay less than the full amount owed, often based on doubt as to collectibility or liability.
Lien Subordination: Requesting the IRS to prioritize another creditor’s lien over its own.
Currently Not Collectible (CNC) Status: Demonstrating financial hardship that prevents payment.
Innocent Spouse Relief: Arguing that the tax liability belongs solely to a spouse or ex-spouse.
Procedural Challenges: Verifying that the IRS followed proper notification procedures, such as sending notices to the taxpayer’s last known address via certified mail.
Financial Hardship: Demonstrating that a levy would cause significant economic hardship, such as inability to cover basic living expenses.
Procedural Benefits of Collection Due Process Hearing
Suspension of Collection Actions: Filing a timely CDP request suspends IRS collection efforts, including levies, until the hearing and any subsequent appeals are resolved. It also pauses the 10-year statute of limitations on collections.
Format: The hearing is informal and can be conducted via:
Face-to-face meetings at an IRS Appeals Office.
Telephone conferences (most common).
Documentation: Taxpayers must provide supporting documents, such as:
Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) or Form 433-B (Collection Information Statement for Businesses) for collection alternatives.
Evidence supporting claims of financial hardship, innocent spouse relief, or disputes over tax liability.
Outcome: After the hearing, the Settlement Officer issues a Notice of Determination, detailing:
Whether the IRS met procedural requirements.
The resolution of issues raised by the taxpayer (e.g., approval of a payment plan).
How to Obtain a CDP Hearing
Obtaining a CDP hearing requires strict adherence to IRS deadlines and procedures. Below is a step-by-step guide to securing this critical opportunity.
Step 1: Receive an Eligible IRS Notice
The IRS must notify taxpayers of their right to a CDP hearing when initiating certain collection actions. Eligible notices include:
Letter 3172: Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320.
Letter 1058 (or LT11): Final Notice of Intent to Levy and Notice of Your Right to a Hearing.
Notice of Jeopardy Levy and Right of Appeal.
Notice of Levy on Your State Tax Refund.
Post-Levy CDP Notice.
These notices are typically sent via certified or registered mail to the taxpayer’s last known address or delivered in person. It is critical to pick up certified mail, as refusing delivery or failing to claim it does not waive the IRS’s presumption of receipt.
Step 2: File Form 12153 Within 30 Days
To request a CDP hearing, taxpayers must submit Form 12153, Request for a Collection Due Process or Equivalent Hearing, within 30 days of the notice date. For lien notices, the 30-day period begins five business days after the filing of the NFTL. The form must be sent to the IRS address specified in the notice, typically via certified mail to ensure proof of submission.
Key Components of Form 12153:
| Section | Description |
|---|---|
| Taxpayer Information | Name, address, phone number, and Taxpayer Identification Number (TIN). |
| Notice Details | Type of notice (lien or levy), tax type, tax form number, and tax period(s). |
| Reason for Request | Specify objections (e.g., dispute liability, propose payment plan, claim hardship). |
| Hearing Preference | Indicate preference for in-person, phone, or correspondence hearing. |
| Supporting Documents | Include Form 433-A/B for collection alternatives or evidence for other claims. |
Table 1: Common Reasons for Requesting a CDP Hearing
| Reason | Description |
|---|---|
| Dispute Tax Liability | Challenge the amount owed if no prior opportunity to contest (e.g., no Notice of Deficiency received). |
| Propose Collection Alternative | Request installment agreements, OIC, or CNC status. |
| Innocent Spouse Relief | Argue that the tax debt is attributable to a spouse or ex-spouse. |
| Financial Hardship | Demonstrate that a levy would prevent meeting basic living expenses. |
| Procedural Error | Claim the IRS failed to follow proper notification procedures. |
Step 3: Prepare for the Hearing
Once the IRS receives a timely Form 12153, collection actions are suspended, and an Appeals Officer is assigned. Taxpayers should:
- Gather supporting documentation (e.g., financial statements, proof of hardship, or evidence disputing the tax liability).
- Consult a tax attorney to ensure all relevant arguments are raised, as only one CDP hearing is allowed per tax period.
- Specify the desired hearing format (in-person, phone, or correspondence).
Step 4: Attend the Hearing
During the hearing, the IRS Settlement Officer reviews the case, considers the taxpayer’s arguments, and evaluates proposed collection alternatives. The officer ensures the IRS followed all legal and procedural requirements. Taxpayers or their authorized representatives (e.g., tax attorneys) present their case, supported by documentation.
Step 5: Receive the Notice of Determination
After the hearing, the Appeals Officer issues a Notice of Determination, outlining the outcome. If the taxpayer disagrees, they have 30 days to file a petition with the U.S. Tax Court for judicial review. Unlike an Equivalent Hearing (available if the 30-day deadline is missed), a timely CDP hearing preserves the right to Tax Court appeal.
Benefits of a Collection Due Process Hearing
The CDP hearing offers several advantages for taxpayers facing IRS collection actions:
- Suspension of Collection Actions: Halts levies and protects assets during the hearing process.
- Independent Review: An impartial Appeals Officer evaluates the case, free from prior IRS involvement.
- Opportunity for Alternatives: Facilitates negotiation of payment plans, OIC, or hardship status.
- Judicial Appeal: A timely CDP request preserves the right to appeal to the U.S. Tax Court.
- Statute of Limitations Pause: Suspends the 10-year collection period, providing more time to resolve the debt.
Table 2: CDP Hearing vs. Equivalent Hearing
| Feature | CDP Hearing | Equivalent Hearing |
|---|---|---|
| Filing Deadline | 30 days from notice date | Up to 1 year from notice date |
| Collection Suspension | Yes, IRS halts levies | No, IRS may continue collection |
| Tax Court Appeal | Yes, within 30 days of determination | No judicial appeal available |
| Purpose | Formal review with full protections | Informal review with limited protections |
Common Pitfalls and Best Practices for Tax Lawyers
Pitfalls to Avoid
- Missing the 30-Day Deadline: Failure to file Form 12153 within 30 days forfeits the right to a CDP hearing and Tax Court appeal. An Equivalent Hearing is available within one year but lacks the same protections.
- Incomplete Form 12153: The IRS may reject forms missing required details or supporting documents.
- Frivolous Arguments: Raising non-legitimate issues (e.g., moral objections to taxes) can lead to rejection and penalties.
- Ignoring Certified Mail: Refusing or failing to pick up IRS notices does not invalidate the IRS’s actions.
Best Practices
- Act Promptly: File Form 12153 as soon as possible after receiving an eligible notice, using certified mail for proof.
- Engage a Tax Professional: A tax attorney can craft a compelling case, ensure procedural compliance, and maximize the likelihood of a favorable outcome.
- Provide Comprehensive Documentation: Include financial statements, proof of hardship, or evidence disputing the tax liability to strengthen your case.
- Keep Address Updated: Ensure the IRS has your current address to receive notices, as delivery to the “last known address” is legally sufficient.
Contact Us
The IRS Collection Due Process (CDP) hearing is a powerful tool for taxpayers facing liens or levies, offering a chance to pause collection actions, dispute liabilities, and explore payment alternatives. If you’ve received a Notice of Federal Tax Lien or Intent to Levy, seriously consider speaking with a tax attorney to discuss your CDP hearing options.