Denial of Audit Reconsideration Alone Not Found to Have Granted Taxpayer Right to Contest Tax Prior to CDP Hearing

The Tax Court decided that a taxpayer who had voluntarily filed an amended return in response to an IRS examination of her claim of a refundable first time homebuyer credit had not had a previous chance to challenge the tax due in the case of Canaday v. Commissioner, TC Summary Opinion 2015-57.

The issue goes back to the return Ms. Canaday filed for 2008 on April 15, 2009 in which she claimed a first time homebuyer credit.  In 2011 the IRS opened an audit of her return in 2011 and in May of that year she filed an amended return on which she no longer claimed the refundable credit.  On the basis of the return the IRS issued a notice and demand for additional tax.  In 2013 the taxpayer filed a request for audit reconsideration, now apparently believing she really should have qualified for the credit.  The IRS denied that request.

When the IRS issued a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, dated July 7, 2014, Ms. Canaday exercised her right to request a collection due process hearing. 

The Court described what happened next:

On October 16, 2014, Appeals mailed petitioner a letter acknowledging receipt of her Form 12153 and scheduling a telephone hearing for November 4, 2014. Appeals' letter noted that only payment arrangements would be discussed during the hearing because petitioner's request for audit reconsideration constituted a prior opportunity to dispute the underlying liability.

A telephone hearing was held with respondent's settlement officer on November 4, 2014, as had been scheduled. Petitioner attempted to dispute the underlying liability during the telephone hearing, but was advised that her request for audit reconsideration had been fully disallowed and that if she was not interested in collection alternatives, the settlement officer would have no alternative but to sustain the proposed levy. On November 26, 2014, Appeals issued the notice of determination sustaining respondent's notice of intent to levy.

The Tax Court found that Appeals erred in holding that Ms. Canaday had a right to contest the tax due previously.  As the Court held:

Although petitioner did contest the merits of the underlying liability before the collection hearing, she was not allowed a prior opportunity to contest the liability before Appeals. In Lewis v. Commissioner, 128 T.C. 48, 61 n.9 (2007), this Court considered section 6330(c)(2)(B) and noted that we read section 6330(c)(2)(B) to allow "a taxpayer who has had neither a conference with Appeals nor an opportunity for a conference with Appeals to raise the underlying liability in a collection review proceeding before Appeals and this Court."

Petitioner has not had a prior opportunity to challenge her underlying liability within the meaning of section 6330(c)(2)(B) and, therefore, respondent's motion must be denied.

We accordingly hold that the determination to proceed with collection was an abuse of the settlement officer's discretion and remand this proceeding so that petitioner can be afforded the opportunity to contest the merits of her underlying 2008 tax liability.