The IRS is a debt collection machine. If there were an NFL Draft for debt collection outfits, the IRS would be the first player drafted every year.
Part of the reason why the IRS is so good at its job is because it has it's hands “untied”. Unlike normal creditors the IRS doesn't have to file a lawsuit and obtain a Judgment to begin the collection process. It just has to “assess” or place the debt into its books as an amount owed and issue some notices to the taxpayer by mail.
There are just a few ways to slow it down. One of the most important is the ability of the taxpayer to file a Collection Due Process Appeal.
If the IRS levy machine is the equivalent of Hall of Fame Running Back Jim Brown, the Collection Due Process Appeal is the equivalent of Dick Butkus.
The Collection Due Process Appeal, properly and timely filed, will stop the IRS collection activity cold, until a referee steps in to determine whether there is a better alternative than levy or garnishment. That referee is initially an Appeals Officer with the IRS, but it can be the US Tax Court. This type of Appeal levels the playing field.
So if the Collection Due Process Appeal is so great…why in the world would I tell you that there may be two occasions when you should file it late i.e. not on time.
Let me explain:
Filing the Collection Due Process Appeal late is called an “Equivalent Hearing” request. “Equivalent” to a Collection Due Process Hearing….
It isn't really equivalent though because when you file the appeal late, you will lose a few rights:
1. The right to have your case heard by the appeals officer
The IRS doesn't have to stop the levy activity and give you a chance to be heard by the appeals officer. These equivalent hearings are granted on a case-by-case basis and aren't absolute.
However, the Internal Revenue Manual guides tells the IRS to process the late appeal and give the taxpayer a hearing while placing a hold on collections. In most cases the IRS does this…even if the request if filed a year late (1 year is the deadline to file the late request)
2. You lose your ticket to US Tax Court
You will not be able to ask the Tax Court to rule on the reasonableness of the IRS collection activity. Most people don't anyway.
So again…why not just file the appeal on time?
1. When you don't want to stop the Statute of Limitations clock from ticking
As you probably know, the IRS has 10 years to collect the debt. The timely filed Collection Due Process Appeal stops this clock form running. If you are close to the 10 year period, and in your situation it would make sense overall, the equivalent hearing request will typically allow you to get your hearing and the benefit of a shorter collection clock.
2. When you don't want to stop the clock from running on the discharge of tax debt in bankruptcy
The Collection Due Process Appeal will stop 2 of the 3 time periods that must be met in order to treat income tax as dischargeable in a bankruptcy case.
a. The 3 year rule – the bankruptcy must be filed more than 3 years after the return was due to be filed
b. The 240 day rule – the bankruptcy must be filed more than 240 days after the debt is assessed or placed in the books by the IRS
Equivalent hearing requests don't stop either clock. If you are otherwise a good candidate for bankruptcy, and the timeframes to get you there are what is holding you back, you will not want to stop those time frames from running by requesting the wrong type of hearing.