In a recent decision, the Court of Appeals for the Third Circuit ruled that a taxpayer’s Collection Due Process (CDP) case is not rendered moot if the taxpayer challenges the existence or amount of the tax liability, even if the tax debts are later eliminated by IRS offsets. This case, known as Zuch v. Comm’r, highlights the importance of properly challenging tax liabilities in CDP cases to ensure that disputes are not dismissed as moot. This ruling contrasts with the Tax Court’s previous decision in Greene-Thapedi, where a similar case was dismissed as moot after the IRS had applied overpayments to satisfy the tax debts.
The CDP provisions, enacted in 1998, require the IRS to issue a CDP notice to taxpayers before moving forward with a levy against their property. This notice gives taxpayers the opportunity to challenge the proposed levy through an administrative hearing with the IRS Independent Office of Appeals. Taxpayers can raise relevant issues relating to the unpaid tax or challenge the existence or amount of the tax liability during the CDP hearing. If IRS Appeals upholds the levy action, taxpayers can challenge this determination in Tax Court.
In Greene-Thapedi, the taxpayer challenged the tax liability during a CDP hearing, but the IRS applied an overpayment to the outstanding tax debts, resulting in the case being dismissed as moot. The Tax Court found that it did not have jurisdiction to issue a refund or overpayment to the taxpayer, leading to the dismissal of the case. This decision has been cited in subsequent cases by the Tax Court to dismiss CDP cases where tax liabilities have been paid later in the litigation.
In the Zuch case, the Tax Court dismissed the taxpayer’s case as moot after the IRS applied overpayments to satisfy the tax debts. However, the Third Circuit disagreed with this decision, finding that the taxpayer’s challenge to the tax liability was valid under the CDP provisions. The court determined that the Tax Court had the authority to review disputes over tax liabilities, even if the tax debts were later paid by the IRS with no intention to proceed with levy action.
The Third Circuit’s decision in Zuch highlights the importance of properly challenging tax liabilities in CDP cases to ensure that disputes are not dismissed as moot. This decision may have implications for taxpayers in the Third Circuit and potentially for taxpayers in other circuits, as it is likely that the Tax Court will revisit its decision in Greene-Thapedi in light of the Third Circuit’s ruling. Taxpayers should be aware of their rights in CDP cases and seek legal advice to ensure that their challenges are properly addressed to avoid having their cases dismissed as moot.
