IRC 6330 and Tax Collection Rights

Transcription

1 THE STATE BAR OF CALIFORNIA TAXATION SECTION TAX PROCEDURE AND LITIGATION COMMITTEE LACK OF COLLECTION DUE PROCESS RIGHTS FOR CO-OWNERS OF PROPERTY: A CALIFORNIA COMMUNITY PROPERTY PERSPECTIVE This paper was prepared by Patrick Crawford, a member of the Tax Procedure and Litigation Committee of the State Bar of California s Taxation Section. 1 The author wishes to thank Robert Horwitz for his helpful comments. 2 Contact Person: Patrick Crawford Law Office of Patrick Crawford 1801 Century Park East 24 th Floor, Suite 2400 Los Angeles, CA The comments contained in this paper are the individual views of the author(s) who prepared them and do not represent the position of the State Bar of California. 2 Although the participants on the project might have clients affected by the rules applicable to the subject matter of this paper and have advised such clients on applicable law, no such participant has been engaged by a client to participate in this project v2 Patrick Crawford

2 EXECUTIVE SUMMARY The Internal Revenue Service s ( IRS ) power to levy plays a crucial role in the effective enforcement of the U.S. tax laws. Congress has, however, established substantial due process protections before this power can be exercised. Paramount among these is the right to a Collection Due Process ( CDP ) hearing before a levy and the related right to be notified of such right within a specified time and in a particular manner. Responding to widespread and widely publicized public concern about IRS overeaching, Congress passed Internal Revenue Code ( IRC ) 6330 to harmonize IRS and private party debtor protections, minimize unreasonable intrusion, and help ensure the fairness of tax collection activity. IRC 6330(a)(1) provides, in pertinent part, 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. (emphasis added). Despite this language, the United States Department of Treasury ( Treasury ) and the IRS do not afford CDP rights to all such persons. Instead, Treasury and the IRS interpret such person as meaning exclusively the person liable for the tax (or the taxpayer ). Under Treasury regulations and IRS guidance, co-owners of taxpayer property, including the many spouses and registered domestic partners ( RDPs ) in community property jurisdictions such as California, are currently afforded no CDP protection by way of notice or hearing before their property may be seized. This leads to the absurd result that the party least deserving of levy the spouse or RDP innocent of the other spouse s or RDP s tax liability gets no CDP protection while the party actually responsible for the tax debt gets the full protection of IRC Section 6330 was intended to minimize, rather than to encourage, such results. Based on the plain language and the legislative history, this paper urges reconsideration of Treasury s narrow interpretation of the notice and hearing requirements of IRC Specifically, it proposes that the regulations be amended to provide CDP rights to co-owners of property, particularly those within the family unit such as spouses and RDPs, facing IRS levy actions. 3 In the alternative, it proposes a ministerial fix whereby a 3 This paper focuses on RDPs and spouses in community property states not only because this is a very prevalent category of joint ownership but also because it is one created from the organic family unit. Levy v2 2 Patrick Crawford

3 spouse or an RDP could authorize that tax notices (including CDP notices) be sent to the other spouse or RDP. actions hit family units hard. As such, they are particularly appropriate for full CDP protection. The basic analysis herein applies to all co-owners of taxpayer property, however v2 3 Patrick Crawford

4 DISCUSSION I. BACKGROUND Section 3401 of the Internal Revenue Service Restructuring and Reform Act of 1998 ( RRA ) added section 6330 to the IRC. Section 6330 provides that no non-jeopardy levy may be made unless the IRS notifies the owner of the property subject to levy in writing of a right to a hearing before the IRS Office of Appeals ( Appeals ) with respect to the unpaid tax for the tax period. RRA s addition of section 6330 to the IRC significantly expanded due process protections under section 6331 by providing property owners with a notice of their right to a CDP hearing with Appeals before their property is levied. Specifically, IRC 6330(a)(1) provides, in part, 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. (emphasis added). Treasury and the IRS take the position that only the person actually liable for the tax itself is entitled to a CDP notice under the statute. 4 Under the current regulations, as discussed below, a CDP notice does not have to be issued to any person other than the taxpayer liable for the tax. This presents a significant problem, specifically, for spouses and RDPs in community property states such as California. 5 In California, spouses and RDPs are currently afforded no CDP protection by way of notice or hearing before their property is seized. Under the current regulations, the party least deserving of levy the spouse or RDP innocent of the other spouse s or RDP s tax liability gets no CDP protection while the party actually responsible for the tax debt gets the full protection of IRC The problem is particularly acute in community property states such as California where 100% of community property may be seized. 6 4 TD 8980, FR , C.B. 477, I.R.B. 477, 2002 WL (F.R.); see also, I.R.M C ( The nonliable spouse would not be entitled to collection due process rights under IRC 6330 before the issuance of the levy. These rights are given only to the taxpayer (i.e., the liable spouse). ). 5 Lack of CDP notice to non-liable joint holders of property in non-community property states is a problem as well, of course. See, U.S. v. Smith, 109 A.F.T.R.2d , 2012 WL (2012 W.D.Ky.) (permiting foreclosure of property held by liable and non-liable partners). 6 See IRM ( Some states (California, Idaho and Louisiana) allow creditors to collect all debts of either spouse from 100% of community property. ) v2 4 Patrick Crawford

5 As explained below, nothing in the language or legislative history of section 6330 makes this inevitable. In fact, the plain language of the statute, supported by its legislative history, rather compels a broader interpretation of the applicability of CDP rights under section The proposal in this paper urges Treasury to amend the regulations to, at least, require CDP rights be provided to community property co-owners in community property states such as California. In the alternative, the IRS should allow the Allocation Worksheet for RDPs - and a similar mechanism for separately filing spouses - to have a box that a spouse or RDP can check requiring the IRS to send to the other spouse or RDP all notices of tax due and any CDP notices. II. THE TRUE SCOPE OF SECTION 6330 s NOTICE REQUIREMENT A. The Plain Meaning of IRC 6330 As noted, IRC 6330(a)(1) provides, in part, 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. (emphasis added). On its face, section 6330 requires CDP notification to the owner of any property being levied, whomever that may be. The wisdom of this facial reading is supported by contrasting the plain language of section 6330 with the plain language of section 6320, also passed by the RRA. In contrast to section 6330, the text of section 6320 makes clear that only the person liable for the tax is afforded CDP notification after a notice of federal tax lien is filed. IRC 6320(a)(1), provides, in part, In general.--the Secretary shall notify in writing the person described in section 6321 of the filing of a notice of lien under section The person described in IRC 6321 is unambiguously and exclusively the person liable for the tax. IRC 6321 provides, If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs v2 5 Patrick Crawford

6 that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. (emphasis added). It is an established principle of statutory interpretation that where Congress uses particular language in one section of a statute but omits it in another, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion. 7 Section 6320 and 6330 were passed at the same time. Section 6320 clearly refers, by explicit reference to section 6321, to the taxpayer alone the person liable to pay any tax. Section 6330, by contrast, does not refer to section 6321 but instead states plainly that it applies to such person where such person refers to the owner of the property to be levied. Where different or contradictory phrasings occur in sections of a statute passed simultaneously, the presumption that Congress meant for the different meanings to apply is strongest. 8 Another established principle of statutory interpretation is that Congress knows how to say 9 Section 6330 specifically states that property owners such persons are entitled to CDP notification. Congress knew, as is clear from section 6320, how to refer to the taxpayer alone but choose not to and instead referred to the wider category of affected property owners. Under the Congress knows how to say principle, the negative implication is that Congress did not intend section 6330 to be limited to taxpayers. The legislative history, 10 as well, supports the plain reading of the statute. Significantly, the legislative history reemphasizes the statutory mandate that the purpose of the section 6330 hearing is to address whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary. 11 Certainly, seizing the assets of a 7 Keene Corp. v. United States, 508 U.S. 200, 208 (1993) (quoting Russello v. United States, 464 U.S. 15, 23 (1983)). 8 See, Lindh v. Murphy, 521 U.S. 320, 330 (1997) ( [N]egative implications raised by disparate provisions are strongest when the portions of a statute treated differently had already been joined together and were being considered simultaneously when the language raising the implication was inserted. ) 9 See, Congressional Research Service, Statutory Interpretation: General Principles and Recent Trends, at 15 (2008) (order Code ). 10 Treasury s reliance on legislative history for its interpretation is discussed below at IRC 6330(c)(3)(C); H.R. Rep. No , at 263 (1998) (Conf. Rep.); see also, Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 1998, at 83 (Comm. Print 1998) v2 6 Patrick Crawford

7 non-liable spouse or RDP is more intrusive to the family unit than an action against the liable taxpayer which is buffered by due process. A stealth levy action against such a family unit would be the most intrusive available means for the collection of taxes, though arguably efficient from a collections standpoint. Failure to provide CDP notice to the non-liable spouse or RDP creates a perverse incentive for the IRS to silently go after the property of the non-liable party, systemically increasing the intrusiveness of the action. Section 6330 should be read to mitigate such results. Finally, the legislative history of section 6330 explicitly states that [t]he Committee believes that taxpayers are entitled to protections in dealing with the IRS that are similar to those they would have in dealing with any other creditor. 12 In California, a money judgment creditor may not levy any property, generally, without a Writ of Execution and service of a Notice of Levy and the Writ of Execution on the judgment debtor. Cal. Civ. Proc. Code (b)(1) (West 2009) further provides: [A]ny provision of this division [dealing with enforcement of money judgments] that applies to the property of the judgment debtor or to obligations owed to the judgment debtor also applies to the community property interest of the spouse of the judgment debtor and to obligations owed to the other spouse that are community property. California, in the private creditor context, treats members of the family unit as one. Section 6330 should preserve this treatment. Treating non-liable spouses and RDPs worse than the liable spouse and RDP frustrates rather than furthers the Congressional intent to create symmetry between private and IRS enforcements of debts through levies in California. 12 S. Rep. No , at 67 (1998) (Conf. Rep.) v2 7 Patrick Crawford

8 B. IRS and Treasury Interpretation of Section Despite the apparently plain meaning of IRC 6330, as supported by the legislative history, the Secretary has issued regulations providing that only the person actually liable for the tax giving rise to the levy is entitled to a CDP notice. Treasury s reasoning is as follows, [C]ommentators urged that final regulations under section 6330 provide that potentially affected third-parties (i.e., persons not liable for the tax at issue) are entitled to notice and a hearing before the IRS Office of Appeals (Appeals) before the IRS levies on any property or right to property. Treasury and the IRS have concluded that the person liable for the tax set out in the collection due process notice (CDP Notice), whether issued under section 6320 or section 6330, is the person entitled to a CDP Notice and a CDP hearing under those sections. Section 6320(a)(1) provides that a CDP Notice provided under section 6320 will be sent to the person described in section The person described in section 6321 is the person liable to pay the tax i.e., the taxpayer. Accordingly, the final regulations under both section 6320 and section 6330 provide that the person entitled to a CDP Notice under those sections is the person liable for the tax set out in the CDP Notice, or the taxpayer. Generally, when a third party's rights are affected by lien or levy, those rights can be protected through other administrative and judicial remedies, such as an administrative hearing before Appeals under its Collection Appeals Program or a wrongful levy or quiet title action. TD 8980, FR , C.B. 477, I.R.B. 477, 2002 WL (F.R.). Treasury s rationale uses section 6320 s cross-reference to the unambiguously narrow language of section 6321 to bootstrap a limitation to the facially broader language of section But section 6320(a) has no v2 8 Patrick Crawford

9 independent reference to person at all and instead directly incorporates section 6321 s definition. Furthermore, the text of section 6330 fails to reference section 6321 at all. In addition, a quiet title action or a wrongful levy action could only provide expensive and burdensome post hoc relief, if any. That is to say, a party who owns property against which the IRS claims a tax lien can indeed file a quiet title action under 28 U.S.C Such relief in the levy context, however is too little too late. By contrast, a person whose property is levied upon and sold to collect another person s tax has to file a wrongful levy action following the filing of an administrative proceeding. 13 Again, such relief amounts to no relief at all for RDPs and spouses who s property has already been seized. Furthermore, it is not only conceivable, but virtually assured, that Congress would afford greater protections under section 6330 than under section A levy is a harsher remedy than a lien filing and it is entirely conceivable that Congress saw fit to provide broader CDP protection to the family unit before a levy occurs than after a notice of federal tax lien has already been filed. Treasury also supports its reading by referring to the legislative history of section 6330 itself. As Treasury explained in issuing the final regulations under IRC 6330, [w]ith respect to section 6330 the legislative history to section 6330 indicates that Congress intended to supplement the existing notice requirement under section Under section 6331, the IRS generally must provide a person liable for any tax (and who refuses to pay the tax after notice and demand) notice before levying on the property or rights to property of that person. Section 6330, in addition to the notice required under section 6331, provides for notice of the right to an Appeals hearing before levy. TD 8980, 67 FR , C.B. 477, I.R.B. 477, 2002 WL (F.R.) See IRC 7426 & 7433(d) 14 Before RRA, the IRS generally complied with the requirements of section 6331(d) by giving the taxpayer a Final Notice of Intent to Levy, and enclosing certain IRS publications which explain the law, IRS levy and redemption procedures, administrative appeal processes and procedures, and various collection alternatives. TD 8809, 64 FR , C.B. 478, I.R.B. 27, 1999 WL (F.R.). The legislative history states that the conferees intend that the Secretary have the discretion to provide the Notice of Intent to Levy in combination with the notice required by present law under section 6331(d). H.R. Rep. No , at 263 (1998) (Conf. Rep.). However, this seems to give the option to provide more notice is expansive and should not be read to limit section 6330 s remedies to that of the v2 9 Patrick Crawford

10 Thus, Treasury relies on the old statute and regime to argue that the express language of section 6330 has to be read against the grain. Given that Congress wanted to improve pre-levy notification procedures, and that it did not incorporate by reference in 6330 the narrow scope of persons listed in 6331(a) and (d) (as it did in section 6320) it makes more sense to interpret section 6330 as broadening the notice requirement vis a vis all co-owners, rather than limiting it to the historical regime. There appears nothing in the legislative history to support the idea that section 6330 should be read as limiting CDP rights to the section 6331 parameters. If anything, the legislative history supports the opposite conclusion. Certainly, it provides no reason to impose on co-owners a strained reading of the statute. III. THE CURRENT REGULATIONS AND THE PROPOSED CHANGE As indicated, the current regulations under 6330 provide that the only person entitled to notice is the person actually liable for the tax. Specifically, Treas. Reg (a)(3)(Q-A1) provides: Q-A1. Who is the person to be notified under section 6330? A-A1. Under section 6330(a)(1), a pre-levy or post-levy CDP Notice is required to be given only to the person whose property or right to property is intended to be levied upon, or, in the case of a levy made on a state tax refund or a jeopardy levy, the person whose property or right to property was levied upon. The person described in section 6330(a)(1) is the same person old regime. Admittedly, the legislative history of section 6330 does refer repeatedly and exclusively to the taxpayer, but this appears to be just shorthand. In any event, it is perfectly consistent with the plain language of the actual statute, which itself refers explicitly to the owner of the property. See, e.g., H.R. Rep. No , at 263 (1998) (Conf. Rep). There is support in the legislative history, as well, for the idea that the use of the term taxpayer in the legislative history is a shorthand and should not give any indication of a limiting of section 6330 s express language. This is because, if one were to take literally the legislative history s use of the term taxpayer for these purposes, one would also have to conclude from certain passages in the legislative history that only taxpayers property and not co-owners could be levied in the first instance. See e.g. H.R. Rep. No , at 266 ( If a return receipt is not returned, the Secretary may proceed to levy on the taxpayer s property or rights to property 30 days after the Notice of Intent to Levy was mailed. ) v2 10 Patrick Crawford

11 described in section 6331(a) i.e., the person liable to pay the tax due after notice and demand who refuses or neglects to pay (referred to here as the taxpayer). A pre-levy or post-levy CDP Notice therefore will be given only to the taxpayer. Again, the regulation harkens back to the previous regime of section 6331 to limit section 6330 to permit seizure of non-liable spouse or RDP property without any CDP notice. The regulations do reach out to third party nominees, however arguably a less sympathetic group than those within the family. Treas. Reg (b)(2)(Q-B5) indicates that at least nominees have opportunities for Appeals review through the Collection Appeals Program ( CAP ): Q-B5. Will the IRS give pre-levy or post-levy CDP Notices to known nominees of, persons holding property of, or persons holding property subject to a lien with respect to the taxpayer? A-B5. No. Such person is not the person described in section 6331(a) and is, therefore, not entitled to a CDP hearing or an equivalent hearing (as discussed in paragraph (i) of this section). Such person, however, may seek reconsideration by the IRS office collecting the tax, assistance from the National Taxpayer Advocate, or an administrative hearing before Appeals under its Collection Appeals Program. However, any such administrative hearing would not be a CDP hearing under section 6330 and any determination or decision resulting from the hearing would not be subject to judicial review. By contrast, Treasury has not even seen fit to provide in the regulations that CAP would be available to spouses or RDPs of liable taxpayers, though it may think that such availability goes without saying, given the analysis of TD 8980 quoted above (suggesting that all affected parties may have CAP rights before levy) and given that the IRM provides: Notices of levy can also be appealed under the Collection Appeals Program (CAP), regardless of whether the taxpayer can appeal under IRC CAP was created to give taxpayers a chance for administrative review that is independent from the Collection function v2 11 Patrick Crawford

12 This paper urges Treasury to reach out to RDPs and spouses as well by following the plain text of the statute. Accordingly, this paper urges Treasury to amend the regulations to provide for CDP rights for co-owners of property, including specifically spouses and RDPs in community property states. Such an amendment is the only way to fulfill the Congressional purpose in equalizing the treatment of co-owners in the private and IRScreditor context, better ensure minimal intrusion into the family unit, and help ensure the fairness of collection actions. In the alternative to affording CDP rights, the IRS should at least allow the Allocation Worksheet for RDPs - and a similar mechanism for separately filing spouses - to have a box that a spouse or RDP can check authorizing the IRS to send to the other spouse or RDP any notices, including CDP notices. This would at least afford the non-liable spouse or RDP the opportunity to negotiate a resolution of the liable spouse's tax liability or determine whether the RDP/non-liable spouse's assets should be used to pay the liable RDP/spouse's liability before their assets are seized. It would go some way to fulfill the intent of the statute. IV. CONCLUSION Amending the regulations to require CDP rights be afforded the spouse or RDP of the liable taxpayer is compelled by the plain language of section 6330 and its legislative history. Affording the spouse or RDP CDP notice would appropriately give the non-liable spouse or RDP at least as much due process protection as the person actually responsible for the tax. Such a treatment would prevent the absurd result of a fully tax-compliant family member having fewer rights than the tax-deficient partner. Such a treatment would fully effectuate the intent of section 6330 by improving upon the due process allowed in the old regime under section 6331 by harmonizing private and IRS-creditor actions, minimizing invasion into the family unit and better ensuring collection fairness. In the alternative, the IRS should at least provide a clear mechanism to have the IRS send to nonliable co-owning partners all notices, including CDP notices v2 12 Patrick Crawford