The United States Tax Court, in James D. Sullivan v. Commissioner of Internal Revenue, T.C. Memo. 2025-92, recently outlined procedural requirements for taxpayers seeking relief from IRS collection actions. This memorandum opinion highlights the importance of timely response to a Notice of Deficiency and the necessity of presenting concrete collection alternatives during a Collection Due Process (CDP) hearing. This case serves as a crucial reminder of the procedural hurdles and the specific legal standards applied by the Court in collection cases.

Factual Background

The petitioner, a retired U.S. Air Force officer, filed his 2016 federal income tax return reporting a refund due but omitted a substantial amount of income. This omitted income included the bulk of a $244,695 lump-sum military retirement distribution from the Defense Finance and Accounting Service (DFAS payment) and a $2,891 payment from State Street Retiree Services (State Street payment).

The Internal Revenue Service (IRS) subsequently sent several letters, including a Notice CP2501 and a Notice CP2000, indicating discrepancies between the taxpayer’s reported income and third-party information, proposing adjustments that would result in a tax due of $93,191, rather than a refund.

On June 10, 2019, respondent issued a Notice of Deficiency to the petitioner, determining a deficiency of $71,042, a failure to timely pay penalty of $96, and an accuracy-related penalty of $14,208, all stemming from the omission of retirement income. Crucially, the petitioner received this Notice of Deficiency but did not file a petition in response to the Tax Court. Instead, he wrote to the IRS reiterating his view that the State Street payment was not taxable and that not all the DFAS payment should be attributed to 2016. He also acknowledged receiving a refund for 2016 after filing his original return.

When the IRS assessed the liability and the petitioner failed to pay, the IRS issued a Notice of Intent to Levy. The petitioner then filed Form 12153, Request for a Collection Due Process or Equivalent Hearing, checking the box "I Cannot Pay Balance". In an attached letter, he reiterated claims about the non-taxability of the State Street payment, the allocation of the DFAS payment, his entitlement to a refund, and concerns about the IRS’s "good faith".

A settlement officer (SO) in the Independent Office of Appeals was assigned to the case. During the process, the SO discovered that the accuracy-related penalty had not been properly approved and abated it. The SO’s request for additional information led the petitioner to submit Form 433-A, Collection Information Statement, which demonstrated he had sufficient assets to fully pay the outstanding liability, despite his claim of inability to pay. The petitioner also attempted to submit amended tax returns for 2009-2016 to retroactively spread the DFAS payment, but these were withdrawn under threat of sanctions under section 6702 for frivolous submissions and were not processed.

The SO ultimately issued a Notice of Determination sustaining the proposed levy because the petitioner was precluded from challenging his underlying liability and did not qualify for a collection alternative.

Taxpayer’s Request for Relief and Court Petition

On February 13, 2024, the petitioner commenced the instant case by filing a Petition with the Tax Court. In his Petition, he assigned error to the respondent’s assessment of tax on the entire DFAS payment for 2016, claimed that the failure to pay a refund "skewed the calculation of liability," and expressed concerns about the IRS’s "good faith," suggesting the Court’s action was premature. Notably, he did not discuss any collection alternative in his Petition.

Court’s Analysis of Law and Application to Facts

The case came before the Court on the respondent’s Motion for Summary Judgment. Summary judgment is granted when the movant demonstrates there is no genuine dispute as to any material fact and that they are entitled to judgment as a matter of law [Rule 121(a)(2); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992); Naftel v. Commissioner, 85 T.C. 527, 529 (1985)]. The nonmoving party, however, cannot rest on mere allegations but must set forth specific facts demonstrating a genuine dispute for trial [Rule 121(d); Sundstrand Corp., 98 T.C. at 520].

Preclusion from Challenging Underlying Liability

A cornerstone of the Court’s decision was the petitioner’s inability to challenge his underlying tax liability. A taxpayer may contest the existence or amount of their underlying tax liability at a collection hearing only if they did not receive a Notice of Deficiency for the tax year in question or otherwise have a prior opportunity to dispute it [IRC § 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604, 609 (2000); Treas. Reg. § 301.6330-1(e)(3), Q&A-E2]. Because the petitioner received a Notice of Deficiency for 2016 but failed to file a petition with the Tax Court in response, he was precluded from contesting his 2016 liability before the Appeals Office or the Tax Court [Goza v. Commissioner, 114 T.C. 176, 182–83 (2000); Giamelli v. Commissioner, 129 T.C. 107, 113–14 (2007)].

Abuse of Discretion Standard of Review

Where the underlying liability is not properly at issue, the Court reviews the SO’s determination for an abuse of discretion [Sego, 114 T.C. at 610; Goza, 114 T.C. at 182]. An abuse of discretion occurs if a determination is arbitrary, capricious, or lacks a sound basis in fact or law [Murphy v. Commissioner, 125 T.C. 301, 320 (2005); Woodral v. Commissioner, 112 T.C. 19, 23 (1999)].

To determine if the SO abused their discretion, the Court considers three factors under Section 6330(c)(1)–(3):

Whether the SO properly verified that all requirements of applicable law and administrative procedure were satisfied [IRC § 6330(c)(1)].
Whether the SO considered any relevant issues raised by the petitioner [IRC § 6330(c)(2)].
Whether the SO considered whether the proposed collection action balances the need for efficient collection of taxes with any legitimate concern that the collection action be no more intrusive than necessary [IRC § 6330(c)(3)].

The Court found that the SO met all three criteria. The SO properly verified administrative procedures, as evidenced by the abatement of the accuracy-related penalty because approval requirements had not been satisfied [IRC § 6751(b)]. Regarding relevant issues, the petitioner’s contentions about the DFAS payment being taxable in years other than the year of receipt were barred by section 6330(c)(2)(B). The Court also dismissed the petitioner’s meritless claims that the Notice of Deficiency was "null and void" and that his State Street payment was not taxable, stating that the IRS is not required to consider such rhetoric, nor is the Court [Leyshon v. Commissioner, T.C. Memo. 2015-104, at *13–14; Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984)].

Failure to Propose Collection Alternatives

A significant aspect of the Court’s ruling focused on the petitioner’s failure to propose any collection alternatives. While the petitioner claimed inability to pay, the Form 433-A he submitted demonstrated he had sufficient assets. The petitioner did not submit any proposal for an installment agreement or other collection alternative. The Court consistently holds that it is not an abuse of discretion for an SO to reject collection alternatives and sustain a proposed collection action where the taxpayer has failed to put a specific offer on the table [Huntress v. Commissioner, T.C. Memo. 2009-161; Prater v. Commissioner, T.C. Memo. 2007-241; Roman v. Commissioner, T.C. Memo. 2004-20].

Furthermore, the petitioner failed to properly challenge the SO’s consideration of whether the collection action balanced the need for efficient tax collection with intrusiveness, leading the Court to deem this issue conceded [Rules 331(b)(4), 121(d)]. The SO had expressly concluded that sustaining the levy met this balancing requirement.

Regarding the petitioner’s claim of not receiving a refund or being due a further refund, the record showed he had acknowledged receipt of a refund. The Court reiterated that the time for revisiting his 2016 liability had passed, and no evidence suggested he was due an additional credit.

Warning Regarding Section 6673 Penalty

Although the Court declined to impose a penalty under section 6673 at that time, it took the opportunity to warn the petitioner. Section 6673(a)(1) authorizes the Tax Court to impose a penalty of up to $25,000 if proceedings are instituted or maintained primarily for delay, or if the taxpayer’s position is frivolous or groundless [IRC § 6673(a)(1)]. The Court explicitly stated that continuing to make arguments, such as those regarding the State Street payment, could subject him to a section 6673 penalty in future Tax Court proceedings [Crain, 737 F.2d at 1417; Wnuck v. Commissioner, 136 T.C. 498, 501–13 (2011); Leyshon, T.C. Memo. 2015-104].

Conclusion

Based on the foregoing, the Tax Court granted the respondent’s Motion for Summary Judgment, sustaining the proposed levy to collect the petitioner’s unpaid 2016 tax. This case serves as a critical reminder for tax professionals: meticulous adherence to procedural timelines, particularly in response to a Notice of Deficiency, is paramount to preserving a client’s right to challenge an underlying tax liability. Furthermore, during Collection Due Process hearings, taxpayers must provide substantiated financial information and present concrete, viable collection alternatives rather than merely asserting an inability to pay or advancing frivolous arguments. Failure to do so will likely result in the proposed collection action being sustained under an abuse of discretion review.

Prepared with assistance from NotebookLM.