The Internal Revenue Service (IRS) has examined your tax return. After four bills and threats to collect, you receive a Final Notice of Intention to Levy (or Notice of Lien Filing) and Your Right to a Collection Due process (CDP) hearing. Included with your Final Notice will be a form to request a CDP hearing. This notice is your opportunity to freeze collection activities and resolve your dispute with the IRS.
The CDP hearing is usually an informal telephone conference with the IRS Office of Appeals. You may raise any issue relevant to the unpaid tax including challenges to the appropriateness of the lien or proposed levy action. You may also offer collection alternatives, including installment payment agreements and offers in compromise, and challenge the existence or amount of the tax liability if you did not have an opportunity to dispute the tax.
After the CDP hearing, the IRS issues a determination. You then have 30 days to appeal the determination to the United States Tax Court. If the Tax Court decision is adverse, you may appeal to the United States Court of Appeals. During the entire CDP and court proceedings collection activity will generally remain suspended.
The CDP hearing affords the taxpayer an opportunity to resolve the collection of taxes. An installment payment agreement applies when the taxpayer cannot pay his or her tax liability in a lump sum payment. If the liability cannot be paid in full in, usually, six years, the IRS may accept a balloon payment.
If the taxpayer has no ability to pay the tax in full, the taxpayer should consider requesting an offer-in-compromise (OIC). An OIC resolves the tax liability for a reduced amount. The offer amount is, generally, equal to the taxpayer’s reasonable collection potential (RCP). The RCP is the amount that the IRS could arguably collect from the taxpayer using enforced collection tools such as a levy.
An installment payment agreement and an OIC require the taxpayer to complete and submit a collection information statement known as Form 433-A or 433-A (OIC) for an individual taxpayer, and Form 433-B or 433-B (OIC) for a business taxpayer.
When you cannot afford to pay your tax liability, a CDP hearing presents an opportunity to resolve your taxes and stop the collection officer from beating down your door.