A letter from the Internal Revenue Service (IRS) threatening to impose substantial (some would say draconian) penalties can be a harrowing experience for any taxpayer or their advisor. A natural reaction would be to send a letter or make a phone call to the IRS requesting that the penalty be either abated or not assessed. Although this letter (as all letters from the IRS) must be taken seriously, a trap for the unwary exists in challenging those penalties prior to receiving the final notice in relation to the information return penalty. Failure to wait may cost a taxpayer the opportunity to request a Collection Due Process (CDP) hearing, generally a very effective forum, and reviewable in a court of law.

What is a CDP Hearing?

A CDP hearing is generally offered by the IRS after the imposition of a tax lien or before the execution of a levy and is held with the IRS Office of Appeals (“Appeals”). If a hearing request is timely and proper, an Appeals Officer will be assigned and a hearing held.

Appeals is quasi-independent and separate from the IRS collection office that is threatening adverse action. As such, the value of presenting your case to this more neutral party cannot be overstated. Appeals will review your case from a new/fresh perspective and listen to your arguments for abatement and/or presentation of alternatives to the adverse collections activity. Although the manner in which a CDP hearing should be prepared for and conducted is beyond the scope of this article, preparation is of the utmost importance and should be much the same as preparing for a trial.

Key to the CDP process is that while the hearing is pending, and until the decision of Appeals in your case becomes final, the IRS should not take any adverse actions relating to the liability being protested. Further, if you disagree with Appeals’ decision you may file a petition to have your case heard in US Tax Court. Generally, these cases take a very long time to sort out and become final, such that adverse actions/enforced collections can begin.

CDP Hearing in the Context of Certain International Information Penalties

Amongst what many consider to be International Information Penalties (IIPs), the penalty that is the most widely known and gets the most attention is the penalty for failing to file a Foreign Bank Account Report (FBAR) aka FinCen Form 114. The FBAR penalty is NOT a penalty that will be afforded the opportunity to request a CDP hearing and, as a result, many are unaware that some of the other IIPs should be afforded the opportunity to request a CDP hearing.

The hearing should be offered prior to the imposition of penalties for failure to file required returns, reporting:

• The ownership of or transactions with a foreign corporation or partnership;
• Transactions with foreign trusts;
• Foreign owned entities engaged in a US trade or business; and
• Specified foreign assets owned by a US taxpayer.

The Opportunity to Request a CDP Hearing and Obtain Judicial Review may be Lost Forever

The proposed imposition of IIPs is frequently met with panic and an urge to “make them go away” as soon as possible. Where the above IIPs (again excluding the FBAR) are involved, that impulse should be resisted until the final notice that affords the opportunity to request a CDP hearing is received. Importantly, should a penalty abatement be requested prior to that final notice, the IRS will generally take the position that because you had a prior opportunity to contest that penalty, a CDP hearing in relation to that issue is waived forever.

Summary

Knee-jerk reactions when dealing with the IRS are frequently ill-advised but especially so where that reaction can cause one’s client or oneself to be unable to take advantage of an important opportunity to be heard. If the decision is made to wait in order to take advantage of a CDP hearing, it is of critical importance to be certain that: the penalty threatened is one that will indeed qualify for review in a CDP hearing; and that the request is properly and timely filed.

Footnotes

Throughout this article the reader will note that I use “should” as opposed to “will” when it comes to certain IRS actions. I do this because although IRS policy states that certain penalties will be afforded the opportunity to request a CDP hearing, too frequently the IRS (perhaps) mistakenly does not follow its own guidance.

There has been plenty of speculation as to what will happen in the 114th US Congress, with the House and Senate both under Republican control and President Barack Obama in his last two years in office. But before the new Congress arrives on Jan. 3, 2015, the old Congress is returning for a post-election, “lame-duck” session.

If one takes at face value all of the statements made by members of Congress and interested parties regarding what they expect (or at least hope) Congress will do in the lame-duck session, the lame-duck session will be a complete 180-degree turn in productivity, with Congress quickly settling disputes and finding common ground on issues and legislation where agreement has previously eluded them.

In this article, we do not seek to reconcile or evaluate all of those suggestions, threats and vows. Rather, this article observes that, rhetoric aside, lame-duck sessions dealing with expiring tax provisions have become the norm and describes how Congress is expected to deal with tax provisions in the lame-duck session, notwithstanding what may be said or hoped.

Three basic principles should be kept in mind. First, there is very little time in the lame-duck session to deal with the issues before Congress. “Must-do” items will necessarily take up most of Congress’ time and attention, leaving little opportunity for congressional leaders to focus on “discretionary” items.

Third, there will be strong resistance to doing exactly what was done in previous years. Particularly in light of the election results and a surly electorate that sees the country on the wrong track, there will be a need to demonstrate that this is not “business as usual.” So, in dealing with the extenders, members will need to show (or at least credibly say) that the results this time were different. Changes need not be big but they have to be symbolic.

A Lot to Do and a Short Time to Do It

Congress must pass a bill continuing to fund the federal government before Dec. 11 and must also deal in the lame-duck session with other expiring (or, in the case of most extenders, expired) provisions of law. Of course, Congress could, assuming the president agreed, pass short-term extensions simply to get them into the next Congress and deal in earnest with spending, taxing and regulatory decisions then. However, statements by Sen. Mitch McConnell and Speaker John Boehner have made clear that Republicans in Congress want to take advantage of their increased numbers in the next Congress to address their own issues and priorities.

If Republican members want to focus on issues of their choosing, they must clear the decks as much as possible in the lame-duck session because they will not be able to emphasize new matters and legislation while dealing with the distractions of, and mixed communications sent by, the postponed, must-do items. So, there will be a strong incentive for both Republicans and Democrats, albeit for different reasons, to deal substantively with the must-do items and not just punt them to the beginning of the next Congress.

Because there will be limited legislative days in November and December to deal with these must-do items, they will take up most of the time available for serious negotiating and legislating. That leaves little time for tax measures that require significant negotiation and technical drafting to reflect the results of those negotiations.

What Can Be Postponed and What Cannot

The extenders that expired at the end of last year must be dealt with in the lame-duck session. They cannot be postponed to the new Congress without seriously delaying the tax filing season. The expiring Internet tax moratorium does not have the same looming tax return preparation concerns, but Congress is unlikely to let it expire for any significant period of time. The handful of tax provisions that expire at the end of this year do not have the same urgency as those that have expired, but it would be strange for Congress to deal with the bulk of the extenders and not address them as well, at least if the expired provisions are extended for more than one year.

Moreover, whatever Congress decides regarding the extenders, the drafting changes to existing law to implement those decisions would be minimal. That makes it possible to include extenders in a final legislative package, even if the decisions are made very late in the lame-duck session.

On the other hand, tax items that proponents hope to have addressed in the lame-duck session, such as the Marketplace Fairness Act, “repatriation” legislation and anti-inversion legislation, do not fall within this cannot-be-postponed category. Further, even if Congress wanted to deal with these issues in the lame-duck session, in contrast to the extenders and Internet tax moratorium, these proposals would require significant technical work once conceptual agreement is obtained. Proponents of these measure should not give up, but they should be realistic in their expectations.

Doing the Same Thing, But Differently

For each expired or expiring tax provision, Congress must decide whether to extend it and for how long. Many of these tax provisions have been extended temporarily several times now, leading to their moniker of “extenders.” Of course, this shared label obscures the differences among the provisions. Some, like the research credit, have existed in a “temporary” state for decades and are otherwise thought of as part of our permanent tax law. Others, like “bonus depreciation” are newer and were initially intended to be only temporary, but appear to have since earned “extender” status.

No one thinks it is a good idea to treat all of these disparate provisions the same way, but each time they have come up for extension, the same-size-fits-all approach has been the path of least resistance. None of these provisions is considered important enough to move on its own (if it had, it would have already) and none has been considered to be clearly unworthy of extension (otherwise it would have been allowed to lapse earlier). Giving them all the same extension date is not ideal either; it is widely acknowledged that for those provisions intended to affect long-term behavior, short-term and retroactive extensions significantly diminish their effectiveness. Nonetheless, when the fate of the extenders is not addressed until the end of the legislative session, it is invariably easier to give them all the same extension date than it is to prioritize among them.

Seeking to break this cycle, the House Ways and Means Committee took a different approach this year, voting to extend only some of the provisions and for those so chosen to make the extensions permanent. The full House ratified this approach, at least for some of the extenders. Meanwhile, the Senate Finance Committee voted to follow the more traditional temporary extension approach. The Senate Finance Committee started with extension of only a subset of extenders, but by the time mark-up was finished, nearly all of the extenders were included.

This has led some to debate whether the approach taken by the House Ways and Means Committee (fewer items, permanent extensions) will prevail over the approach taken by the Senate Finance Committee (nearly all expired and expiring provisions extended for a temporary period). While there is pressure to handle the extenders differently this year, the House approach is not likely to be adopted.

First, the administration has threatened to veto permanent extensions that are not paid for. Second, it is not realistic to expect Congress to be able to reach agreement in December as to which extender goes into which category, even if there were agreement as a conceptual matter. At the same time, however, there will be opposition to the Senate approach, which could be pejoratively characterized as “business as usual.”

A compromise between approaches would seem to be the most logical way to address these conflicting pressures. That would mean making some — if only a few — provisions permanent and letting some — if only a few — provisions expire or remain expired. If permanent extension (even if only for a lucky few) is not possible, then a long-term extension (such as five years) could be touted as a victory, at least politically (although any long-term extension would not have the revenue “baseline” implications as a permanent extension).

Permanent (or sufficiently long-term) extension of even one or two sufficiently symbolic extenders, such as the research credit, could be the means of distinguishing this year from previous years. The hardest aspect of this compromise approach would be deciding which extenders get left on the cutting-room floor. All of the expired and expiring provisions have defenders, and allowing a provision to remain lapsed could be contentious if it is a high-profile one as well. Indeed, some of the provisions that generate the most opposition, such as the production tax credit, also have some of the strongest support.

So, proponents and opponents of extenders should not delay in making their views known. Most extenders will likely get the same temporary extension as in previous years. But a lucky few may get made permanent and an unlucky few may get left behind. Considering the stakes, it makes sense to weigh in if you feel strongly about a particular provision. The odds of any particular extender getting treated differently than its peers may not be great, but it looks very possible that a few will be singled out. You will want your provision to be singled out for the right reason.