A taxpayer’s failure to provide additional requested financial information and proof of compliance with other tax-filing obligations was found to justify the IRS’s denial of relief in a collection due process hearing, despite significant IRS procedural errors in an order issued in the case of Nelson v. Commissioner.

Initial Procedural Errors and Remand

The case began with significant procedural errors by the IRS. As noted in the order, "The IRS botched the hearing, however, by sending some important correspondence—including the notice scheduling the CDP hearing—to the wrong address". This initial mistake led to a "last chance letter" also being sent to the wrong address. The Tax Court acknowledged these errors stating "When humans finally looked at the case as our trial calendar approached, all agreed that it made sense to remand the matter to the IRS for another hearing".

Second Hearing and the Request for Information

The second hearing, while intended to be more reasonable, also had issues. The settlement officer (SO) requested additional information from the Nelsons including their 2019 tax return. The court pointed out that “A failure to be in compliance with tax-filing obligations is, by itself, reason enough for the IRS to deny a proposed compromise”, citing Giamelli v. Comm’r, 129 T.C. 107, 111-12 (2007). However, the SO did not provide a deadline for the information, nor an explanation of why it was needed. As the court explains, the SO’s manager “noted in the case activity report that ...SO Fernando did not explain why he needed these documents (which are presumably for a collection alternative) . . . did not specify what months of bank statements are needed . . . did not specify which estimated tax payments are needed . . . did not provide a deadline for the filing of the 2019 Form 1040 tax return . . . did not provide a deadline for the other documents . . . did not explain what would happen if the requested documents were not submitted by the deadline”. The manager also noted that she did not consider the SO’s vague request for documents “a reasonable opportunity to submit documents”. The SO then provided a new request with a two week deadline.

The Nelsons’ Refusal and its Consequences

Despite the IRS attempting to rectify the situation and provide a clear request with a deadline, the Nelsons refused to cooperate. The court stated, “But by now the Nelsons were behaving unreasonably...Bruce Stephenson[^1] called and informed SO that he has spoken to TP and TP stated that he is not going to provide any documents”. Stephenson further admitted "I asked Mr. Nelson if he wanted to provide more information to the IRS but based on the prior experience Mr. Nelson decided to not waste the time and effort". This refusal proved fatal to their case. After the Nelsons’ refusal to provide the additional documents and the missing 2019 return, the IRS issued a supplemental notice of determination.

Analysis of the Decision

The Tax Court’s analysis focused on whether the IRS abused its discretion. The court noted that “Because we remanded this case to Appeals, we review only the Commissioner’s position taken in the supplemental determination”, citing Kelby v. Comm’r, 130 T.C. 79, 86 (2008). The court also observed that because the Nelsons resided in California, their review is subject to Keller v. Comm’r, 568 F.3d 710, 718 (9th Cir. 2009), meaning it was “confined to the administrative record in deciding whether the IRS officer abused his discretion in upholding the lien”.

The court emphasized that there is no abuse of discretion when a taxpayer fails to provide complete financial information and is not in compliance with their filing obligations for later years. The court stated “There is no genuine dispute that this is just what happened here”. The court also explained that, “The lien on the Nelsons’ property is imposed by the Code itself and arises when a taxpayer doesn’t pay his tax after receiving notice and demand”. The court further explained the IRS is not allowed to wait until the disposition of a CDP case to impose a lien. The court dismissed the Nelsons’ arguments that the IRS had abused its discretion. The court concluded that “the deliberate refusal of a taxpayer to comply with reasonable demands for documents and proof of compliance with filing obligations for later years means there was no abuse of discretion in denying the Nelsons an offer in compromise and issuing the supplemental notice of determination”.

Key Takeaways for Tax Professionals

Compliance is Crucial: The Nelson case reinforces the importance of tax compliance. A taxpayer’s failure to file returns or provide necessary information is grounds for the IRS to deny a compromise. This aligns with the precedent set in Giamelli v. Comm’r.
Cooperation is Essential: Taxpayers must cooperate with the IRS and provide requested information. Refusing to do so will likely result in an unfavorable outcome.
Procedural Errors Can Be Overcome: While the IRS made significant procedural errors initially, the court focused on the taxpayer’s actions during the second CDP hearing and subsequent requests for information.
Limited Scope of Review: The court’s review was limited to the supplemental notice of determination and the administrative record because the Nelsons did not challenge their underlying tax liability. This is consistent with the standard of review for collection due process cases where the underlying liability is not at issue.

In conclusion, Nelson v. Commissioner serves as a reminder that while procedural fairness is important in tax collection cases, taxpayers must comply with their filing obligations and cooperate with the IRS to be successful in a CDP case. The failure to do so, even in the face of initial IRS errors, can lead to the denial of a compromise and the enforcement of collection actions.

[^1]: Mr. Stephenson was representing the Nelsons in this case.