Failure of Collection Due Process,
Pt. 1: The Collection Context
Bryan T. Camp is an associate professor of law at
Texas Tech University School of Law.
This column is written to help readers navigate the
laws of tax administration by (1) guiding them
through the thickets of particular procedural problems
and (2) giving them a sense of the larger tax administration forest.
© 2004 Bryan T. Camp.
All rights reserved.
This month’s column will begin a look at why the
collection due process (CDP) provisions of sections 6330
and 6320 are a failure, both in concept and execution. In
my first column, I showed how tax administration has
historically been inquisitorial in nature, according to the
two characteristics I used to define that term.1 To the
extent that the Internal Revenue Service Restructuring
and Reform Act of 1998 (RRA 98) moves tax determination and collection away from those two characteristics,
the system becomes less inquisitorial and more adversarial. In my last column, I showed how the RRA 98
reforms were generally the result of inaccurate data being
misanalyzed by conceptually confused rhetoric. I contended that a central problem with RRA 98 came from the
lawmakers’ unthinking attempt to move the tax determination and collection processes from inquisitorial to
adversarial. In this month’s column, I want to offer CDP
as one example of how Congress, by mixing concepts,
made a mess of it. However, before I can explain just how
CDP fails both tax collection and taxpayers, I must first
give a tour of what is perhaps the, well, shadiest part of
the tax administration forest: the collection process. This
month’s column will endeavor to simply describe both
the collection process and how CDP changed it. Next
1
See ‘‘The Inquisitorial Process of Tax Administration,’’ Tax
Notes, June 21, 2004, p. 1549. There I suggested that an ‘‘inquisitorial’’ administrative system contains two interrelated characteristics: (a) the power to decide a legal issue being combined
with the power to decide what evidence is necessary or enough
to make the substantive determination, and (b) discovery of
truth being preferred over restrictions on government intrusions
into personal privacy (‘‘autonomy’’ is the word I used in prior
columns). I thank Leandra Lederman and others too shy to be
named for their thoughts and comments on this column. All
remaining errors are mine, and I invite readers to bring them to
my attention.
TAX NOTES, August 30, 2004
month I shall critique the CDP provisions and examine
both the IRS’s and the Tax Court’s responses to them
(finally getting around to Montgomery, I promise).
My purpose in this and next month’s column is to
show how CDP fits poorly into an otherwise inquisitorial
collection process because, at bottom, adversarial review
operates best over individualized processes but collection continues to be a bulk process. That is, the CDP
provisions of sections 6330 and 6320 promise independent third-party review of each IRS collection decision
about each individual taxpayer, thus removing decisional
power from the IRS to third parties and demoting the IRS
from decisionmaker to mere litigant. That unlinking of
the evidence gathering from decisional power moves the
tax collection process away from the first characteristic of
an inquisitorial system.
CDP provides only partial adversarial
review; it allows courts only one
snapshot review of what is an
ongoing process: the never-ending
hunt for taxpayer assets.
To the extent CDP works, it is bad news for the IRS
because traditionally most IRS collection decisions are
made in the aggregate and not on an individual basis. The
upshot is that CDP requires an individualized review of
an aggregate decision, which basically wastes time and
decreases both legitimate collections and the legitimacy
of collections. Forcing the IRS to make individualized
decisions slows the process down and results in less
collection. That might be a good tradeoff if the adversarial process improved IRS decisionmaking. But, as I
hope to explain below, CDP has only slowed the process,
not changed it.
To the extent that CDP does not deliver on its rhetorical promise, it is bad news for taxpayers, particularly
those who need third-party review the most: those who
suffer from poor IRS decisions about how to collect tax.
CDP provides only partial adversarial review; it allows
courts only one snapshot review of what is an ongoing
process: the never-ending hunt for taxpayer assets. So at
the one time the taxpayer can subject the IRS to outside
scrutiny, the taxpayer is generally contesting a decision
made early in the collection process when the IRS does
not know a great deal about the taxpayer and is therefore
not in a good position to make good individualized
decisions about how to collect the tax. Early in the
process, the Service operates on collection accounts en
masse. Later individualized collection decisions may be
inappropriate, but there is no hope for court review at
that time. Nor should there be, but that is all grist for next
month’s mill.
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(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
by Bryan T. Camp
COMMENTARY / CAMP’S COMPENDIUM
The Tools of the Collection Trade
The Service’s three main administrative collection
tools are the offset power, the tax lien, and the levy. As to
the first, not only does the Service enjoy the same
common law power of offset available to every creditor,
it is also statutorily empowered to set off any overpayment against any tax liability.2 RRA 98 left the offset
powers alone and so shall I, in this column.
What confuses many folks is the
relation between the tax lien and the
NFTL. There is only one tax lien,
although there may be multiple
NFTLs.
The tax lien is often misunderstood. It arises automatically under section 6321 once the IRS properly assesses a
liability, sends the taxpayer notice and demand for
payment, and the taxpayer fails to pay. Once it arises, it
works by dropping virtual sticky notes claiming ‘‘Pay
Me’’ on all property the taxpayer has or acquires. Like the
moon, it has phases: the ‘‘secret’’ phase and the revealed
phase. Just as a new moon cannot be seen, but is
nonetheless up there, so the tax lien cannot initially be
seen, but it’s still up there, dropping those invisible sticky
notes on all the taxpayer’s property. The lien is good
against the taxpayer and some competing creditors, but is
not recognized as valid against four large categories of
creditors.3 Only when the IRS properly files a public
document, the ‘‘Notice of Federal Tax Lien’’ (NFTL), is
2
See United States v. Munsey Trust, 332 U.S. 234, 239 (1947)
(‘‘The government has the same right which belongs to every
creditor, to apply the unappropriated moneys of his debtor, in
his hands, in extinguishment of the debts due to him.’’); section
6402, Authority to Make Credits or Refunds.
3
Section 6323(a). Called ‘‘the four horsemen,’’ the four categories are: purchasers, mechanics lienors, holders of security
interests, and judgment lien creditors.
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the tax lien revealed. Once revealed by the NFTL, the tax
lien is good against almost all comers (with a very few
exceptions, listed in section 6323(b)). At least as to realty,
the lien does most of its work by just sitting there,
passively, until the taxpayer tries to dispose of the
property to which it is attached. While the IRS can
enforce the lien by either inquisitorial process (levy) or
adversarial process (court action), there is little need to
do so for realty because the lien will generally get paid off
when the taxpayer sells.
What confuses many folks is the relation between the
tax lien and the NFTL. There is only one tax lien,
although there may be multiple NFTLs. My students
often commit the error of saying that ‘‘the IRS filed a
lien.’’ Nope. The IRS never ‘‘files a lien.’’ The IRS files only
the NFTL and that is just a notice of the one and only tax
lien. Others make the same error, sometimes in embarrassingly public ways. For example, in an April 8, 2004,
memorandum Treasury’s acting deputy inspector general
for audit (who you think would know better) wrote that
‘‘the IRS has the authority to attach a claim to the
taxpayer’s assets, called an NFTL, for the amount of the
unpaid tax liability.’’4 That’s wrong. There is only one tax
lien. It arises automatically. The IRS may indeed file
NFTLs in many different locations if the taxpayer has
geographically dispersed assets, but the NFTL does not
attach to anything. The one and only tax lien is put there
by operation of law, not IRS employees.
The third tool, levy, is also often misunderstood.
Section 6331 gives the IRS ‘‘the power of distraint and
seizure by any means’’ to collect an unpaid tax liability.
This is what the term ‘‘levy’’ means.5 It is the power to
4
The memo is transmitting the Treasury Inspector General
for Tax Administration report ‘‘Statutory Review of Compliance
with Lien Due Process Procedures,’’ Report 2004-30-086, Doc
2004-8363, 2004 TNT 75-35 (April 2004). The report itself contains the same error.
5
For reasons unknown to me, the IRS gives the term ‘‘levy’’
a different meaning in its internal guidance. The IRS distinguishes between a ‘‘levy’’ and a ‘‘seizure’’ whereas the code
makes no such distinction. In Service jargon, a ‘‘seizure’’ is what
is done to something that can be sold, usually tangible realty or
personalty, while a ‘‘levy’’ is done to something that cannot be
sold, generally intangible property such as payments due the
taxpayer from a third party, or money. See generally IRM Part 5
(Collecting Process) at chapters 5.10 (Seizure and Sale) and 5.11
(Notice of Levy), especially 5.11.1.1.2 (‘‘Notice of Levy vs.
Seizure’’),
found
at
http://www.irs.gov/irm/part5/
ch10s01.html (last visited August 13, 2004). That distinction is
not evident from the statute or from its history, which the IRS
admits. Id. Note that the GAO has a different read on the
distinction between ‘‘levy’’ and ‘‘seizure.’’ It believes that the
Service ‘‘differentiates between the levy of assets in the possession of the taxpayer (referred to as ‘seizure’) and the levy of
assets, such as bank accounts and wages, which are in the
possession of third parties, such as banks or employers (referred
to as a ‘levy’).’’GAO Report ‘‘Tax Administration,’’ GAO-02-604
(May 22, 2002) at note 5. The GAO gives no citation or reason for
why it believes that to be the Service’s distinction and I do not
think the GAO is correct. But the main point is that the code
contains no distinction: The power to ‘‘levy’’ is the power to
‘‘seize.’’ Same, same. Still, unless I say otherwise, I will follow
the Service’s lexicon.
TAX NOTES, August 30, 2004
(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Next month I will give some thoughts on how an
inquisitorial tax collection system might do a better job of
monitoring and improving IRS collection decisions while
preserving the IRS’s decisional authority until an assessed tax is fully paid. The taxpayer advocate, in her
thorough and thoughtful December 2003 report to Congress, contended that the IRS could and should improve
the CDP process administratively. I respectfully disagree,
as I hope to explain next month. Legislation is the only
answer to CDP problems. This month’s task, however, is
to give the reader a sufficient context to follow next
month’s arguments and so I ask your indulgence as I
introduce you to the strange and dark world of tax
collection. Part 1 will give a brief overview of the three
most important collection powers. Part 2 will emphasize
the bulk processing techniques used to exercise those
powers, and Part 3 will explain CDP reforms and their
legislative history. From that alone the discerning reader
will infer why I believe CDP is a failure.
COMMENTARY / CAMP’S COMPENDIUM
Collection as Bulk Processing
The Service does its collection work in three stages: (a)
a notice process, (b) the automated collection system
(ACS), and (c) the collection field function (CFf). To the
extent one stage does not resolve the account, the account
moves to the next stage. The first two stages are highly
automated, relying heavily on collection decisions made
to apply to the vast majority of account receivables. I call
them aggregate decisions because they are based on
aggregate data or policy and are not very sensitive to the
facts and circumstances unique to a particular account.
The CFf stage is the only stage in which a specific account
is assigned to an individual IRS employee (a revenue
officer) who has significantly more latitude and discretion on how to effect collection of the amount owed
depending on the taxpayer’s circumstances. Let’s look at
each stage in brief.8
6
United States v. McDermott, 507 U.S. 447, Doc 93-3795, 93
TNT 67-14 (1993).
7
This is the clear import of the language in section 6331 that
authorizes the Service to levy either ‘‘all property and rights to
property (except such property as is exempt under section 6334)
belonging to such person or on which there is a lien provided in
this chapter. . . .’’ (Emphasis supplied.) Of course, the collection
period must still be open.
8
In today’s column I focus on the TDA process and not the
TDI process. TDA stands for ‘‘Taxpayer Delinquent Account,’’
which means there is a balance due on a filed return, either
because the taxpayer did not pay enough to cover the selfreported liability or because the taxpayer has not paid an
assessed deficiency. TDI is the acronym for ‘‘Taxpayer Delinquency Investigation,’’ and it involves finding taxpayers who
did not file returns and getting them to file and, if necessary, pay
any resultant liability. Note that nonfilers may also be eligible
for refunds, if their withholding exceeds their liability or if they
are eligible for a refundable credit, like the EITC. TDIs are also
worked through each of the three stages, but through a slightly
different matrix of actions.
The first stage, worked out of the various ‘‘Campuses’’
(formerly known as ‘‘service centers’’) is a series of
notices and demands for payment, spaced several weeks
apart and sent to the taxpayer’s last known address.9 All
forms and notices are computer-generated and
computer-mailed with very little human intervention.
Several key decisions and assumptions built into the
process are what I am calling aggregate decisions. For
example, the tax code requires only one notice and
demand for payment before the tax lien arises, and
requires only a single notice of intent to levy and of the
right to a CDP hearing before the Service may make
multiple levies.10 Nonetheless, the IRS has decided that
additional demands for payment will often resolve the
account, and so the aggregate decision has been to send
nonbusiness taxpayers four notices and business taxpayers three notices, spaced several weeks apart. No individual decides this for each account: It is an institutional
decision made for the bulk processing of account receivables.11 Likewise, although the code requires notices be
sent to the taxpayer’s ‘‘last known address,’’ the operational decision of what that means is an aggregate
decision, which is made so that human intervention is
not required to verify an address for each of the three
million or so yearly tax modules that carry a balance
due.12 Instead, the address in the IRS’s main data system
is deemed the last known address.
9
While the Service has at times attempted to be more
proactive in this phase of the collection process by staffing
collection call sites to reach out by phone to taxpayers rather
than relying on written notices, resource constraints have pretty
much squelched this approach. Computers are cheap. Humans
cost money. And the humans are needed to staff incoming calls
for tax help. See generally TIGTA Report 2004-30-083, ‘‘Trends in
Compliance Activities Through Fiscal Year 2003,’’ Doc 20049294, 2004 TNT 84-16 (April 2004) (hereafter Trends Report)
Appendix V, Figures 5 and 6 for trends in compliance staffing
between fiscal 1996 and fiscal 2003. Since TDI processing is
somewhat more labor-intensive than TDA processing, it should
come as no surprise that the Service responded to the dwindling
resources by focusing on TDA processing and letting TDI
processing slide. See TIGTA Report 2003-30-186, ‘‘Some Automated Collection System Business Results Have Recently Improved, but More Emphasis on Nonfilers is Needed,’’ Doc
2003-20491, 2003 TNT 179-28 (September 2003) (suggesting that
the collection process was neglecting TDI work and recommending that the IRS ‘‘reevaluate resources for the TDI program, to reinforce a balanced program ensuring filing compliance does not erode’’).
10
Sections 6321, 6331(d), and 6330.
11
The collection statistics suggest this decision is a good one.
They show that in recent years the IRS has collected almost as
much money from the later notices (between $10 billion and $11
billion) as from the first ($11 billion to $14 billion). See Table 16,
‘‘Delinquent Collection Activities, Fiscal Years 2000-2003,’’ in
2003 IRS Data Book, March 2004, at http://www.irs.ustreas.gov/
taxstats/article/0,,id=97168,00.html (last visited August 8,
2004).
12
Truth be told, there is no uniform definition within the IRS
for a ‘‘tax module.’’ The term will hopefully either go away or
become an explicitly defined data element in the new CADE
system. See ‘‘IRS Rolls Out New Tax Return Processing System,’’
(Footnote continued on next page.)
TAX NOTES, August 30, 2004
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(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
take any property of the taxpayer to satisfy a properly
assessed and unpaid tax liability. Section 6331(d) requires
the IRS to give the taxpayer a general notice of its intent
to use that tool at least 30 days before making the first
levy. Historically, the purpose of that notice was to give
the taxpayer an opportunity to approach the IRS and
resolve the account before the IRS seized property. A levy
is often confused with a lien, but they are separate tools.
Unlike the tax lien, it takes IRS employee action to attach
the levy to specific property whereas the lien attaches by
operation of law. Levies also generally operate only on
property in the here and now, whereas the tax lien
automatically attaches to all future acquired property as
well as current property.6 The two tools also operate
independently. For example, the Service can use a levy to
enforce a lien, even if the property being seized is no
longer owned by the taxpayer (such as when the taxpayer deeds property to a family member). Likewise, the
Service can levy property owned by the taxpayer, even if,
for whatever reason, the tax lien no longer attaches to
that property (such as when the IRS mistakenly releases
the lien).7
COMMENTARY / CAMP’S COMPENDIUM
Tax Notes, July 26, 2004, p. 367. Generally, a ‘‘tax module’’ is one
type of tax liability for one tax period. See, e.g., TIGTA Report
2003-30-186, note 9 supra at 22.
13
The Service could accomplish the same result through
abatement under the authority of section 6404(c), which would
take these accounts off the receivables that the IRS reports to
Congress, but for historical reasons the IRS keeps the accounts
in inventory by assigning them the computer transaction code
‘‘53,’’ which is derived from Form 53, the precomputer form that
collectors used to excuse themselves from having to account for
collection of these accounts. Before the 1952 plan of reorganization, collectors were politically appointed positions, separate
from the commissioner. They were responsible for collecting the
accounts sent to them by the commissioner and had to account
for any failure to collect the amounts due. The then-existing
regulations provided that collectors:
may also present claims for credit of taxes not erroneously assessed but found to be uncollectible. See section
3218 of the Revised Statutes. In such cases the collector or
deputy collector who made the demand for payment and
is conversant with the facts may prepare the claim for
credit on Form 53. Even though the collector is so credited
with the amount allowed as uncollectible, nevertheless
the obligation to pay still remains upon the person
assessed.
Art. 1303, Regulations 69 (1926). Even though Congress added
section 6404(c) in 1954 to codify that prior administrative
practice, see H. Rep. 83-1337 at A412, the advent of computers
allowed the Service to simply put a computer code on the
account without having to abate the assessment, which made it
simpler to reactivate the account if and when the taxpayer
acquired more assets. Thus those accounts still show up in the
Service’s accounts receivable, even though there is little realistic
hope of collecting on them.
14
The offset tool is another example of the Service making
aggregate collection decisions that any overpayment will be
captured and applied to any outstanding liability. Taxpayers in
dire financial straits may ask to bypass the offset, but because
the aggregate decision has been made to offset, they must
convince an individual employee to reverse that decision and
allow the overpayment to be refunded to them. For a good
description of that system and its limitations, see Field Service
Advisory FSA-N-151971-01 (Dec. 14, 2001), IRS FSA 200213012,
Doc 2002-7632, 2002 TNT 62-47. That is one bulk processing
decision that Congress missed in enacting CDP, so the Service
If the taxpayer does not respond, or cannot resolve the
account at the notice stage, the account moves to the ACS
stage. As its name implies, ACS is also automated; it too
operates from campuses. That is the stage in which the
IRS will first send out levies and file NFTLs.15 Again, let
me emphasize that this work is done mainly by computer
systems with little human intervention. Information on
types and locations of taxpayer assets (such as employer
name, bank accounts, etc.) is automatically transferred
from various other IRS databases to the ACS system and
a computer algorithm determines the most likely levy
sources.16 The notices required by section 6331(d) and
6330 (which, as I explain below, amount to the same
thing) are automatically issued by computer on form
letter LT11, with no human intervention.17 The computer
system will not allow levies to issue if the CDP notice was
sent less than 45 days before the date of the LT11 (the
extra 15 days are built in to allow time for taxpayer CDP
requests to be input into the system).18 An IRS employee
reviews the information presented on the screen and
decides how many levies to send or NFTLs to file, but
even then the employee exercises little discretion on what
to do and engages in little individualized decisionmaking.19 The decisions have been made beforehand, in the
aggregate. The point of the levies at this stage is not so
much to actually collect anything as to get the taxpayer to
call into the campus and resolve the account. Oftentimes,
can still make the aggregate decision to do offsets and force
taxpayers to justify a change to that decision, rather than having
to go through a process that makes individualized decisions for
each individual account. There are also other collection alternatives (such as getting a discharge in bankruptcy, convincing the
IRS that deferring collection will facilitate future payments, etc.,
see Chief Counsel Notice 2003-016 ‘‘Collection Due Process
Cases’’ (May 29, 2003), Doc 2003-13375, 2003 TNT 105-12, but the
three listed above are far and away the most common.
15
The IRS uses a ‘‘Notice of Levy’’ to perform the levy. For a
good description of the difference between automated and
manual levies, see TIGTA Report 2004-30-094, ‘‘Additional
Efforts Are Needed to Ensure Taxpayer Rights Are Protected
When Manual Levies Are Issued,’’ Doc 2004-9708, 2004 TNT
89-30 (April 2004).
16
See IRM 5.19.4.3.2 (12-01-2000) (‘‘Levy Sources and ACS
Display’’) at http://www.irs.gov/irm/part5/ch18s09.html (last
visited Aug. 13, 2004).
17
See IRM 5.19.4.3.4 (04-24-2001) (‘‘Pre-Levy Requirements
(I8 Processing)’’), at http://www.irs.gov/irm/part5/ch18s09.
html (last visited Aug. 13, 2004). These notices used to be sent
with the fourth notice for IMF accounts and the third notice for
BMF accounts during the notice phase, but the IRS has moved
that to the ACS stage to allow CSRs to call taxpayers first,
although resource constraints have prevented much use of CSRs
for that purpose. See Id.
18
See IRM 5.19.4.3.5(1) (01-11-2001) (‘‘Levy Routing and Duties’’), describing the 45-day hold period as a ‘‘45 day followup.’’ TIGTA found the computerized systemic levy process
worked better than the manual process at complying with the
30-day wait period. See TIGTA Report 2004-30-094, note 15
supra.
19
Along those lines, note that the ACS process does not
generate paper files. All data are kept in electronic format,
which is then picked up by the Integrated Collection System if
the account is transferred to the field.
(Footnote continued in next column.)
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TAX NOTES, August 30, 2004
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The goal of the notice process is to get the taxpayer to
call into the campus and speak with a customer service
representative (CSR) to resolve the account. ‘‘Resolving
the account’’ means either fully paying it, or entering into
one of three main collection alternatives: (1) installment
agreements, which fully pay the liability (and interest)
over time; (2) offers in compromise, which pay off an
agreed-on percentage of the liability (either at once or in
installments) in satisfaction of the debt; or (3) removal to
currently-not-collectible (CNC) status, which continues
the liability on the IRS computers, but removes it from
active collection status until later information (such as a
tax return showing increase in income) shows that the
taxpayer now has assets with which to pay the liability.13
Being removed from active collection status means only
that the IRS will not file an NFTL or send out levies. It
does not affect the operation of the tax lien, and the
Service will still offset future overpayments against the
debt.14
COMMENTARY / CAMP’S COMPENDIUM
20
TIGTA, Trends Report, note 9 supra at 28, Figure 17. All
data in this paragraph comes from Appendix V of this report,
Figures 1-19.
21
FTE represents a single person working about 2080 hours.
These stats come from TIGTA Report 2003-30-186, note 9 supra at
6.
22
See id.
23
See IRM 5.19.4.3.4 (04-24-2001) (‘‘Pre-Levy Requirements
(I8 Processing)’’), at http://www.irs.gov/irm/part5/ch18s09.
html (last visited Aug. 13, 2004).
TAX NOTES, August 30, 2004
some taxpayers rather than reviewing levy screens and
pushing buttons to send out levies and file NFTLs on
other taxpayers.24 Processing CDP requests is a valuable
use of time if CDP hearings add any value to the
collection process for either taxpayers or the IRS. It is a
waste of time, however, if CDP hearings add little to the
process except delay. Either way, CDP adds time to the
ACS process and thus delays collection.
Accounts not resolved through the notice or ACS
processes are assigned to ROs in the CFf. Again, since
each RO can handle only so many accounts, accounts are
assigned priority using a predetermined algorithm, once
again representing an aggregate decision. So only some
get assigned and the others wait their turn in what is
called ‘‘the Queue.’’ Although ROs use computers to
generate levies and NFTLs, they may also generate them
manually, as they engage in the more traditional methods
of searching for delinquent taxpayers and their assets.25 It
is only here, in the CFf, that an individual IRS employee
works each case individually in the stereotypical way
most people think of when they think of the IRS doing
collection.
Accounts not resolved through the
notice or ACS processes are assigned
to ROs in the CFf.
CFf cases essentially represent the failure of bulk
processing to resolve an account and the need for more
human intervention. Those accounts involve either the
more recalcitrant or inarticulate taxpayers, that is, taxpayers who either will not pay (for ideological or other
reasons) or cannot fully pay and are functionally incapable of interacting with the bulk processing system. As
might be expected, there are more of the won’t-pays in
the CFf mix than in the ACS mix. The statistics show that
a larger percentage of taxpayers whose accounts end up
in the CFf have the resources but not the desire to pay
their taxes. One can infer this from comparing the ACS
ratio of accounts fully paid with the total number of
accounts resolved with the same CFf ratio. Thus, in fiscal
2003 the ACS resolved about 2,556,000 accounts, 724,000
being fully paid and the rest being resolved through one
or more of the collection alternatives mentioned above.
That means 28.3 percent of accounts resolved through
ACS were resolved by full payment. In contrast, of the
880,939 accounts closed by the CFf, 330,934 of them, or
37.6 percent, were resolved by full payment.26 But although a higher percentage of accounts are closed with
full payment by CFf, and although more dollars are
ultimately collected through CFf than ACS, CFf is far less
efficient. One sees that in the fact that many fewer
accounts are resolved by CFf and, more importantly,
fewer dollars are collected per FTE: In fiscal 2002, CFf
24
See National Taxpayer Advocate 2003 Annual Report to
Congress at 46 (Dec. 2003), Doc 2004-787, 2004 TNT 12-122.
25
See TIGTA Report 2004-30-094, note 15 supra.
26
The numbers come from TIGTA, Trends Report, note 9
supra at 26-7, Figures 14 and 15.
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taxpayers who do not respond to notices may well
respond if a levy hits, say, their paycheck, or goes to a
third party they would prefer not to know of their tax
troubles. Although the IRS is authorized to use summons
to collect information, it generally does not do so at this
stage, relying instead on whatever information it has
previously obtained from the taxpayer and relying on the
taxpayer to provide the rest.
To get a feel for the bulk nature of the ACS collection
process, one needs to look at the numbers. In fiscal 2003,
the last full year for which information is available, the
ACS system sent out just over 1.5 million levies.20 That’s
about 6,000 levies a day. As many as that seems, and as
much as that is by far the highest number for any full
fiscal year since RRA 98 went into effect, it is little more
than half as many levies as the ACS system sent out in
fiscal 1997, the last full year before RRA 98. That year, the
ACS sent out 2.9 million levies. Likewise, ACS closed 2.6
million accounts (tax modules) in fiscal 2003 (compared
with 3.1 million in fiscal 1997). The data for NFTLs is
similar, although it shows, interestingly enough, an increased use of NFTLs over even the pre-RRA 98 levels,
perhaps to balance the decreased use of levies. That
volume represents a bulk processing operation, not an
operation in which individual IRS employees receive
paper files and work individual accounts.
Six years after RRA 98, the ACS process is still much
slower than it was before RRA 98, as evidenced by the
reduced dollars collected per full-time equivalent (FTE).
In fiscal 2002, ACS collected almost $2.6 billion using
2,696 FTEs, which comes to $964,000 per FTE. In fiscal
1998, however, ACS collected $4.1 billion using almost
the same number of FTEs (2,661), which comes to $1.54
million per FTE.21 In a series of reports, the Treasury
Inspector General for Tax Administration concluded that
many factors contributed to the slowdown in collections
overall: budget constraints, diversion of existing resources to implement RRA 98, and IRS employee ‘‘hesitancy’’ in enforcing collection deadlines given to delinquent taxpayers.22 One factor is undoubtedly CDP. First,
whereas the CDP notice used to be issued during the
notice process, it is now issued during the ACS process
with the computer instructed to not send the CDP notice
unless at least one post-notice-process contact with the
taxpayer has been tried (even if for a different tax or a
different tax period).23 So some IRS employee (or computer) has to try and contact the taxpayer one more time.
That adds time without adding much individualized
decisionmaking. Second, a significant number of taxpayers request CDP hearings (over 98,000 in fiscal 2003) and
so CSRs find themselves processing CDP requests of
COMMENTARY / CAMP’S COMPENDIUM
The RRA 98 Changes
Before RRA 98, collection was inquisitorial. Once the
IRS had properly assessed a tax liability and asked for
payment, it could then act to collect that liability without
any recourse to the courts. The full payment rule of Flora
v. United States, 362 U.S. 145 (1960), and various prohibitions such as those in the Anti-Injunction Act (section
7421(a)) and the Declaratory Judgement Act (28 U.S.C.
section 2201(a)), prevented taxpayers from revisiting the
substance of their tax liabilities until all the money had
been collected. Section 7426 is a good example of that
policy. That section gives a cause of action against the
Service for wrongful levy. Notably, however, section
7426(a) provides that a levy cannot be contested by ‘‘the
person against whom is assessed the tax out of which
such levy arose.’’ In other words, the taxpayer being
collected against cannot sue. Moreover, section 7426(c)
prevents taxpayers from using a third party as a stalking
horse by providing that the assessment on which the levy
is based ‘‘shall be conclusively presumed to be valid.’’ It
was, and still is, simply impossible to argue the validity
of the Service’s tax determination in a wrongful levy
context.
Those procedural barriers to court review gave the
Service a huge advantage over regular creditors who had
to get court permission to collect via a judgment, then
docket the judgment to perfect liens on realty, and then
go through the sheriff to execute process and perfect liens
on personalty. To collect information, private creditors
27
The CFf number comes from the TIGTA, 2004 Trends
Report, note 9 supra at 23, Figure 8; the ACS number comes from
the TIGTA 2003 Automated Collection System Business Results
Report, note 9 supra. These two reports do not match up
completely. Although one can say with confidence that the CFf
collected more dollars than the ACS in fiscal 2002, it is not clear
what the ‘‘true’’ numbers are. The 2003 report says that the ACS
process collected $2.6 billion, see p. 3 of the report, but the 2004
report says that ACS collected only $1.25 million, see p. 24,
Figure 9. I cannot account for that difference. One possible
explanation for the different numbers is that the 2003 report
includes the dollars collected from both the notice process and
the ACS process while the 2004 report excludes dollars collected
from the notice process. That is unlikely, however, because the
IRS reports that the notice process collected just under $24
billion in fiscal 2002. See Table 16, ‘‘Delinquent Collection
Activities, Fiscal Years 2000-2003,’’ in 2003 IRS Data Book, March
2004,
at
http://www.irs.ustreas.gov/taxstats/article/
0,,id=97168,00.html (last visited Aug. 8, 2004).
974
had to obtain court approval to depose the debtor or to
engage in other discovery. In contrast, the Service enjoyed inquisitorial collection powers. It got to collect first
and litigate later.28 It alone decided how to collect and
what assets to collect from.29 It alone decided whether to
compromise the liability or to accept installment payments. It could summons the taxpayer or third parties for
information about assets and obtain summary enforcement of the summons. But for all of that it was slow. A
quick-moving taxpayer could forestall collection for
years and even decades by moving assets. I used to tell
my students that the IRS was like a slow-moving giant
chicken searching for food. A single peck could snap up
any tidbit of property or rights to property (especially
true after Craft), but the chicken was so slow that a
nimble and well-advised taxpayer could repeatedly —
well — dodge the pullet. And now the RRA 98 restraints
mean the chicken is no longer even free-range.
As enacted, the CDP provisions of section 6330 require
that before the Service may levy on property of a
taxpayer it must give the taxpayer a notice of his right to
a CDP hearing (‘‘CDP Notice’’).30 The taxpayer then has
30 days to request the hearing and may contest the
proposed collection action at the hearing and ask that the
account be resolved by one of the three main collection
alternatives I describe above. Taxpayers may also use the
CDP hearing to ask for spousal relief under section 6015.
Otherwise, the purpose of the hearing is to verify that the
liability to be collected was properly assessed and other
procedural requirements prerequisite to collection have
28
As the Supreme Court noted in Bull v. United States, 295
U.S. 247, 260 (1935), ‘‘the usual procedure for the recovery of
debts is reversed in the field of taxation. Payment precedes
defense, and the burden of proof, normally on the claimant, is
shifted to the taxpayer. The assessment supersedes the pleading,
proof and judgment necessary in an action at law, and has the
force of such a judgment. The ordinary defendant stands in
judgment only after a hearing. The taxpayer often is afforded his
hearing after judgment and after payment, and his only redress
for unjust administrative action is the right to claim restitution.’’
29
The only exception was if the IRS needed to enter private
property to seize personalty it needed to obtain, ex parte, a court
order permitting it. G.M. Leasing v. United States, 429 U.S. 338
(1977) (requiring warrant for entry onto private premises to
seize assets but allowing warrantless seizure of property in
public areas). Note that the G.M. Leasing decision itself reversed
the prior practice of warrantless entries onto premises solely on
the basis of administrative determination. Before G.M. Leasing,
the Court had viewed the matter solely as an issue of due
process. Phillips v. Commissioner, 283 U.S. 589 (1931). Indeed, it
was the limitless nature of the discretion given to the Service by
the levy statute, section 6331(a), that prompted the G.M. Leasing
court to impose a Fourth Amendment restriction on the Service.
429 U.S. at 357-358 (rejecting government’s argument that
section 6631 contained sufficient internal restraints on Service
employees’ discretion as to what property to seize, and concluding: ‘‘to give the statute that reading would call its constitutionality into serious question. We therefore decline to read it as
giving carte blanche for warrantless invasions of privacy’’).
30
Section 6320 makes similar provisions for when the IRS
files an NFTL. Section 6330 contains all the details of the hearing
and section 6320(c) makes most of the section 6330 provisions
applicable to section 6320 hearings.
TAX NOTES, August 30, 2004
(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
collected $362,224 per FTE, in contrast to the $964,000 per
FTE collected by ACS.27 In short, the more individualized
the collection process, the less money is collected over a
longer time requiring more resources. Again, that tradeoff may be worthwhile if compensated by achievement of
other values. As I showed last month, the values promoted by the 1997-1998 reformers were the adversarial
values of individual autonomy. As I hope to show next
month, a better value to aim at might be human dignity,
which is not necessarily the same. To finish this month’s
column, however, I will explain how RRA 98 affected the
above processes.
COMMENTARY / CAMP’S COMPENDIUM
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.31
If the taxpayer does not like the CDP hearing results,
the taxpayer can petition for court review in either the
Tax Court or, if the Tax Court does not have jurisdiction
over the underlying liability, in U.S. district court. Section
6320 requires the Service to give taxpayers a separate
CDP notice within five days after it files the first NFTL
against a taxpayer for a given tax liability. Although a
separate CDP hearing may be held, the statute itself
suggests that the levy CDP hearing be combined with the
NFTL CDP hearing ‘‘to the extent practicable.’’32
As I illustrated last month, the lawmakers in 1997 and
1998 used highly adversarial rhetoric to criticize IRS
collection activity. I won’t review the rhetoric here, but
suffice to say that the CDP provisions, proposed by the
Senate taxwriters and eventually codified in sections
6320 and 6330, promised a significant adversarial check
on the Service’s ability to administratively collect unpaid
tax liabilities.33 They were part of the overall effort in
RRA 98 to reduce the IRS to the status of an ordinary
creditor that must obtain court approval for collection
actions.34
The legislative history of CDP reflects not just the
taxwriters’ belief in adversarial process as a check on IRS
abuse, but also their misunderstanding of the deficiency
process, the collection process, and the function of an
assessment.35 As I discussed last month, the formal act of
assessment has historically functioned as a judgment,
31
This language is made relevant to section 6320 CDP
hearings by section 6320(c).
32
Section 6320(b)(4).
33
The CDP provisions were the creation of the Senate taxwriters; there was no such provision in the House version of
RRA 98.
34
See, e.g., the Senate Finance Committee Report, S. Rep.
105-174 (Apr. 22, 1998) at 67 explaining CDP provisions were
intended to put taxpayers at a position ‘‘similar’’ to what they
would have ‘‘in dealing with any other creditor.’’ That language
could presumably be read as evidence of congressional intent to
disapprove of the language in Bull, quoted above, and to favor
resolution of liability before payment rather than afterwards. Of
course, one would have to also presume that the taxwriters
knew what they were doing, a doubtful proposition, but this
goes to issues of inter-branch relationships, which I will touch
on in discussing Montgomery, next month.
35
See generally Bryan T. Camp, ‘‘Tax Administration as Inquisitorial Process and the Partial Paradigm Shift in the IRS
Restructuring and Reform Act of 1998,’’ 56 Fla. L. Rev. 1, 119-128
(2004); see also Judge Laro’s and Judge Gale’s concurring opinions in Montgomery, 122 T.Ct. No. 1, Doc 2004-1409, 2004 TNT
15-9, where they very nicely set out the history.
giving the Service the right to collect the liability assessed
without seeking the permission of external third parties.36 Some assessments come after the deficiency process, but most do not. The Senate taxwriters assumed,
however, that assessments are always preceded by notices of deficiency. They also assumed that most tax
delinquencies result from ‘‘extra’’ tax liabilities found by
the Service through the deficiency process.37
The prelevy CDP notice adds nothing
to the preexisting section 6331(d)
notice of intent to levy. There is
simply no individualized decision for
the taxpayer to protest about.
As a result of those assumptions, the CDP provisions
proposed by the Senate Finance Committee and passed
by the full Senate contained two critical features that
would have made CDP a full-blown shift to adversarial
process and would have severely restricted IRS collection
activity: (1) they allowed taxpayers to force court review
of each and every collection decision made by the IRS in
their individual case, thus completely confounding ACS,
as described above, and essentially forbidding the IRS
from making aggregate decisions about collection; and
(2) they allowed every taxpayer to contest the merits of
an assessment in all CDP hearings, thus effectively trashing the Flora full-pay rule, circumventing the amended
return process, and reducing the legal effect of an assessment from a judgment-equivalent to a nullity.38 The
Senate proposal was too much even for the otherwise
cowed Clinton administration. Treasury protested, both
formally and informally, that Congress should not allow
taxpayers to turn CDP hearings into contests over the
accuracy of the assessed tax liability and that giving
taxpayers repeated opportunities to invoke court review
of collection decisions would potentially kill collection.
The main thrust of Treasury’s formal and informal comments was that allowing taxpayers to contest their liability in a CDP hearing was giving them multiple bites at
the apple.39
36
See also the Bull quote above.
My example of this last month was the Senate Finance
Committee’s astounding proposal to suspend interest under
section 6404(g) on underpayments of tax if the IRS did not send
taxpayers a notice of deficiency within one year of the return
filing date. See Tax Notes, July 26, 2004, at 439, 442-3.
38
That is, to the extent that a taxpayer disagrees with a prior
self-determined tax liability (which the IRS has relied on to
make an assessment) the taxpayer can file an amended return.
But the IRS is the decisionmaker on tax liability; the Tax Court
has long held that a taxpayer cannot force the IRS to accept an
amended return. Goldstone v. Commissioner, 65 T.C. 113 (1975). If
the IRS refuses to accept the amended return, then the taxpayer
is left with no choice under Flora but to pay the liability as a
condition precedent to suing for a refund. More on this next
month.
39
See, e.g., the OMB Statement of Administration Policy on
IRS Reform, Doc 98-14262, 98 TNT 87-17 (May 6, 1998), which
37
(Footnote continued on next page.)
TAX NOTES, August 30, 2004
975
(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
been met. While CDP hearings are supposedly primarily
about collection (hence the name), section 6330 also
allows taxpayers to litigate the merits of the underlying
tax liability, but only in some circumstances. This is the
critical statutory language in section 6330(c)(2)(B):
COMMENTARY / CAMP’S COMPENDIUM
emphasized that ‘‘the bill would allow additional appeals and
court challenges before the IRS can collect tax from a taxpayer
who refuses to pay, even if the taxpayer has voluntarily selfassessed the amount due or a court has held that the taxpayer
owes the tax.’’
40
The Senate proposal would have required the IRS to tell
taxpayers of its intent to file an NFTL, thus allowing taxpayers
to hop quick-like-a-bunny over to the bank or real estate agent
and extract all the equity from their realty by sale or refinance to
avoid losing the equity to the tax lien. The conference committee
changed section 6320 to allow the Service to file the NFTL first
and then, within five days, send the NFTL CDP notice to the
taxpayer.
976
has not otherwise had an opportunity to dispute the
liability.’’41 As implied by this explanatory language, the
entire focus of the staff was still on the deficiency process.
For example, the phrase ‘‘not otherwise had an opportunity to dispute the liability’’ was not meant to address
situations in which the Service issued a 30-day letter and
the taxpayer agreed to it, in which case the taxpayer
would not receive ‘‘the statutory notice of deficiency’’ but
would otherwise have had the opportunity to force the
Service to issue one. In short, that language was added to
prevent taxpayers from agreeing to the revenue agent’s
report, then later challenging the liability in the CDP
hearing on the technicality that no notice of deficiency
was actually received.
In sum, the IRS has historically exercised its inquisitorial power to collect millions of unpaid accounts by
using bulk processing, in which it makes aggregate
decisions affecting all delinquent taxpayers. The thrust of
the decisions is to force taxpayers to come to the IRS with
sufficient information about their assets so the IRS can
collect the tax or else decide that it cannot collect the tax.
The adversarial rhetoric behind the Senate CDP proposals assumed that CDP could provide each individual
taxpayer independent third-party review of each individualized collection decision. That simply ignores how
collection works and so CDP was modified in conference
to essentially give taxpayers just one shot at court review
of the initial IRS decision to file an NFTL or issue a notice
of levy. As a result of those two changes, while the CDP
proposals as enacted became less ‘‘fowl’’ (for the IRS)
than the Senate proposals, they did not become ‘‘fish.’’
They were a hybrid, Frankensteinian creature, whose
clumsy operation I shall describe next month in Part II of
my exploration of why CDP is a failure.
41
H. Rep. 105-599 at 265 (emphasis supplied).
TAX NOTES, August 30, 2004
(C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
The conference committee modified the Senate’s CDP
proposal in two ways that left just enough oversight to
delay collection, but not enough to fulfill the rhetorical
promise of full adversarial review — just enough to do
damage; not enough to do taxpayers much good. First,
rather than allowing taxpayers to contest all collection
actions and the merits of liabilities in all situations, thus
forcing the Service to defend each decision at the individual account level, the conference committee revised
the language to allow for only two CDP hearings: one
after the first NFTL and one before the first levy.40 More
importantly, the Service did not have to specify to the
taxpayer what assets it proposed to levy. Thus, the
prelevy CDP notice adds nothing to the preexisting
section 6331(d) notice of intent to levy. There is simply no
individualized decision for the taxpayer to protest about.
Second, the conference committee restricted taxpayers’ ability to contest liability decisions to only those
times when taxpayers had not actually received a notice
of deficiency or ‘‘otherwise had an opportunity to dispute the liability.’’ The conference committee report explained the statutory language this way: ‘‘The validity of
the tax liability can be challenged only if the taxpayer did
not actually receive the statutory notice of deficiency or