What is a Collection Due Process Hearing (CDP) with IRS?

What is a Collection Due Process Hearing (CDP) with IRS?

The Collection Due Process Hearing

When US Taxpayers are assessed additional taxes or penalties (especially international information reporting penalties) by the Internal Revenue Service, there are various options available to dispute the penalty and taxes due. One of the best options for some taxpayers is to pursue a Collection Due Process Hearing Request on Form 12153. With a Collection Due Process Hearing, the taxpayer has an opportunity to bring the matter before a Settlement Officer instead of an Appeals Officer, present their facts in an attempt to prove their noncompliance was due to reasonable cause and not willful neglect, and have their penalties waived or taxes reduced. There are some potential pitfalls to be aware of with a Collection Due Process Hearing, so let’s go through five important facts about a Collection Due Process hearing.

International Reporting Penalty Opportunity

When a person has international information reporting penalties such as Form 8938 or 3520 penalties, these are referred to as assessable penalties. The biggest problem with this type of penalty is that the taxpayer does not have an opportunity to dispute the penalty until after the penalty notice has been issued –– usually on a CP15 notice. Before making a CDP request, the first line of defense is usually to submit a protest letter, but the collection due process hearing may be a good tool for the Taxpayer to use thereafter if the protest was not successful.

IRS Administrative Appeal May Limit Opportunity

After the taxpayer submits a protest letter (and before they have an opportunity to submit a CDP request), the taxpayer will be presented with the opportunity to appeal the rejected protest letter. Taxpayers may want to consider the appeal because it provides a taxpayer with a quicker opportunity to resolve the matter – but there are two main issues to consider:

    • If the taxpayer loses the appeal, there are only limited opportunities to go to Tax Court (as opposed to a collection due process hearing); and

    • The Appeals Conference may limit the opportunity to do a collection due process hearing.

CDP is an End-Game Opportunity

Unlike the opportunity to pursue an IRS appeal (which comes earlier in the process), the opportunity to pursue a Collection Due Process Hearing does not come until much later in the process. By the time the taxpayer has the opportunity to pursue a Collection Due Process Hearing, they would have received several notices from the IRS, including a 503/504 intent to pursue a Notice of Lien or Intent to Levy. These notices can be very scary and unsettling to the taxpayers – even though oftentimes the IRS does not actually have the ability at that stage to pursue the lien or the levy.

The Risk of a Notice of Federal Tax Lien

One of the biggest risks with waiting for the Collection Due Process Hearing opportunity to present itself is that the IRS may place a Notice of Federal Tax Lien against the taxpayer before they had the opportunity to pursue the CDP hearing. In other words, when it comes to a Notice of Proposed Levy — even after the final notice is given to the taxpayer, the taxpayer still has 30-days to file the collection due process hearing and if they do it timely, then the IRS cannot issue the levy at that time. Conversely, the IRS can issue a Notice of Federal Tax Lien before the taxpayer has an opportunity to pursue the Collection Due Process Hearing. Depending on whether the taxpayer is considering applying for a line of credit; mortgage (or even in the process of a home sale), having a Notice of Federal Tax Lien attached to them may be severely detrimental to their financial health.

Collection Due Process Hearing Is Informal But Can Be Effective

For taxpayers seeking to pursue a Collection Due Process Hearing, it is often calming for them to learn that the hearing is an informal yet effective opportunity to reduce or eliminate a penalty. Unlike the Appeals Conference process, with a Collection Due Process Hearing, taxpayers are usually assigned a Settlement Officer (SO) and have an opportunity to present their Reasonable Cause position to the SO in hopes of abating the penalty. In addition, the taxpayer has an additional opportunity to pursue the matter in Tax Court if it is not resolved at the CDP hearing.

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