This article addresses the memorandum opinion in Avalon Home Health, Inc. v. Commissioner, T.C. Memo. 2025-107, a Collection Due Process (CDP) case that provides essential insights into the Internal Revenue Service (IRS) Independent Office of Appeals’ (Appeals) requirement to properly verify statutory requirements and consider collection alternatives under section 6330(c)(3) of the Internal Revenue Code. This case resulted in a partial denial of the Commissioner’s Motion for Summary Judgment and a remand to Appeals due to significant deficiencies in the administrative process.

Factual Overview of the Collection Action

Petitioner, Avalon Home Health, Inc., challenged an NOD issued by Appeals sustaining a proposed levy related to an unpaid income tax liability for its 2014 tax year.

The liability originated from the 2014 tax year return filed on February 26, 2016, leading to an initial assessment on March 21, 2016, which included tax ($5,880) and additions to tax under sections 6651(a)(1) and (2) and 6654. Subsequently, a Notice of Deficiency (NOD) concerning the 2014 tax year was sent via certified mail on June 11, 2018. Although this NOD was sent to petitioner’s last known address, it was returned stamped “Return to sender / Attempted – Not Known / Unable to Forward”. Based on the NOD, the IRS assessed additional tax of $400,828 on November 26, 2018, along with an additional amount under section 6651(a)(1) ($100,207) and an accuracy-related penalty under section 6662 ($80,166).

On April 16, 2019, the IRS issued Letter 3172, Notice of Federal Tax Lien and Your Right to a Hearing, covering 2014 and other tax years. The letter reflected a lien amount of $590,906 for the 2014 tax year, consistent with all assessments up to that date. Although petitioner stated it had no recollection of receiving Letter 3172 and did not request a hearing, the address used aligned with petitioner’s last known address reflected on IRS transcripts and subsequent tax filings. The Notice of Intent to Levy (Letter 11) was issued on August 16, 2021, reflecting a 2014 liability of $908,872.

Taxpayer’s Request for Relief and Disputed Liability

In response to the Levy Notice, petitioner filed Form 12153, Request for a Collection Due Process or Equivalent Hearing, on August 25, 2021. Petitioner sought an installment agreement (IA) as a collection alternative.

Petitioner also articulated a dispute regarding the underlying 2014 tax liability, claiming they were not provided the opportunity to challenge the removal of expenses on the return. Petitioner alleged that the IRS had “erred in treating the removal of an expense from the return as being a math error letter CP210 and not requesting information or providing information to the taxpayer”. Furthermore, petitioner stated that they were in the process of submitting an audit reconsideration request. Notably, petitioner began making payments toward the 2014 liability, totaling $10,000 in August 2021, and generally $5,000 per month through July 2025.

Petitioner subsequently argued that they believed they were operating under an installment agreement due to their continued monthly payments and discussions with Appeals, and they specifically asked the Fourth Settlement Officer (SO) if the payment agreement could be formalized.

Judicial Standards for CDP Review

In a CDP case, the Tax Court reviews Appeals’ determination based on two standards, depending on whether the underlying liability is properly at issue.

Review of Underlying Liability

A taxpayer may raise challenges to the existence or amount of an underlying liability only if the taxpayer did not receive a statutory Notice of Deficiency for the tax liability or did not otherwise have an opportunity to dispute it (I.R.C. § 6330(c)(2)(B); Treas. Reg. § 301.6330-1(e)(1)). The term “underlying liability” encompasses tax deficiency, additions to tax or penalties, and statutory interest (Montgomery v. Commissioner, 122 T.C. 1, 7–8 (2004)). An opportunity to dispute includes a prior Appeals conference offered before or after assessment (Lewis v. Commissioner, 128 T.C. 48, 61–62 (2007); Treas. Reg. § 301.6330-1(e)(3), Q&A-E2).

Standard for Review of Collection Determination

If the underlying liability is not at issue, the court reviews Appeals’ determination for abuse of discretion (Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000)). The court limits its review to determining whether Appeals’ decision was arbitrary, capricious, or lacked sound basis in fact or law (Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006)).

The court must assess whether Appeals satisfied the requirements of I.R.C. § 6330(c)(3):

Appeals properly verified that the requirements of any applicable law or administrative procedure were met.
Appeals considered any relevant issues petitioner raised.
Appeals considered whether the proposed collection actions balance the need for efficient collection with the taxpayer’s legitimate concern that the action be no more intrusive than necessary.

Application of Law to the Facts

Underlying Liability Preclusion

The court found that petitioner was precluded from challenging the underlying tax liability for 2014. Although the Notice of Deficiency was returned as undeliverable, Letter 3172, issued subsequently on April 16, 2019, provided petitioner with a prior opportunity for an Appeals conference and CDP hearing regarding the tax lien.

The court relied on the following evidence: Letter 3172 was sent via certified mail to petitioner’s last known address, and it was not returned. While the corresponding USPS Form 3877 lacked confirmation of items received by the postal service, precluding the presumption of regularity (Coleman v. Commissioner, 94 T.C. 82, 88–91 (1990)), the form still served as probative evidence of mailing (Portwine v. Commissioner, T.C. Memo. 2015-29, at *11–12, aff’d, 668 F. App’x 838 (10th Cir. 2016)). Crucially, petitioner continued to use the address reflected on Letter 3172 for return filing after the letter was mailed, casting doubt on the assertion of non-receipt. Thus, the court concluded petitioner received Letter 3172 and had a prior opportunity to dispute the underlying liability.

Despite the underlying liability being precluded from review, the Fourth SO discovered a deficiency regarding the section 6662 accuracy-related penalty. Since Appeals determined that proper managerial approval required by section 6751(b) was not obtained in advance of the assessment, the section 6662 penalty was abated in full.

Denial of Installment Agreement: Abuse of Discretion

The court reviewed the denial of the requested installment agreement (IA) for abuse of discretion.

The NOD sustained the levy based on the claim that petitioner rejected the collection alternative because they did not agree with the balance owed. However, the court found substantial procedural failure and a lack of support in the administrative record for this denial.

Written Agreement Requirement: The court dismissed petitioner’s argument that an informal IA existed, noting that I.R.C. § 6159(a) requires IAs to be in the form of written agreements. Furthermore, petitioner began making payments before the CDP request was under Appeals’ consideration, undermining the claim that payments were made pursuant to an agreement.
Procedural Failure by Appeals: The administrative record showed that the First SO had indicated that sufficient financial information had eventually been submitted, placing the case in suspense pending audit reconsideration. However, there was no indication that subsequent SOs reviewed petitioner’s eligibility for the IA.
Post Hoc Rationalization: The court was skeptical of the NOD’s claim that petitioner rejected the IA. Respondent’s Motion attempted to rationalize the denial by asserting petitioner failed to timely provide documentation to the First SO. The court rejected this argument as a post hoc rationalization for agency action, which is impermissible (Kasper v. Commissioner, 150 T.C. 8, 24–25 (2018)). The court noted that the denial lacked any supporting reason in the record other than the questionable assertion of petitioner’s disinterest.
Balancing Analysis Flawed: Since the denial of the IA was unsupported by the record, the court could not conclude that Appeals’ balancing analysis under section 6330(c)(3)(C)—sustaining the levy over the IA—was not an abuse of discretion.

Conclusion of the Court

The Tax Court determined that the IRS’s actions concerning the CDP request were "far from a model of good government".

The court granted the Commissioner’s Motion for Summary Judgment only in part, sustaining the levy determinations for the 2015, 2016, and 2018 tax years, as there were no outstanding balances for those periods.

Crucially, the court denied the remainder of the Motion and remanded the case to Appeals for a supplemental hearing. The court instructed that the supplemental hearing must focus on the consideration of petitioner’s request for an installment agreement with respect to the 2014 tax year liability and on the scope of the administrative record (Kelby v. Commissioner, 130 T.C. 79, 86 n.4 (2008)). The failure of Appeals to properly review the requested collection alternative led to the finding that the determination to sustain the levy was a potential abuse of discretion.

Prepared with assistance from NotebookLM.