A new Supreme Court decision creates potential traps for the unwary and gives the Internal Revenue Service (“IRS”) nationwide power to leave a taxpayer without a remedy to contest certain collection actions. Importantly, while a Collection Due Process (“CDP”) action is pending, taxpayers should ensure to the extent possible that no refunds are generated for other tax years as the IRS may seize these amounts to satisfy the liability at issue in the CDP, eliminating the taxpayer’s right to contest that liability. In Commissioner v. Zuch, with Justice Barrett delivering the majority opinion, the Supreme Court held that the United States Tax Court (the “Tax Court”) lacked jurisdiction under Internal Revenue Code (“IRC”) Section 6330 to resolve disputes between the taxpayer and the IRS when the IRS is no longer pursuing a levy. Instead, the taxpayer’s remedy in such cases is to file a suit for a refund against the IRS in federal district court. Taxpayers with similar ongoing collections issues should immediately identify refund deadlines and file refund claims with the IRS (on a protective basis or otherwise) before the statute of limitations runs out and they are potentially left with no recourse.

In Zuch, for the 2010 tax year, Jennifer Zuch (“Taxpayer”) and her then-spouse separately filed tax returns. After receiving notice that the IRS intended to levy on her property to collect an unpaid tax liability, Taxpayer requested a CDP hearing under IRC Section 6330. At the CDP hearing, Taxpayer argued that her account should have been credited with estimated taxes that were already paid to the IRS. The IRS Appeals Officer disagreed and sustained the levy action because the estimated tax payments had already been credited to her then-spouse. Taxpayer then appealed to the Tax Court, however, while this process was occurring over several years, Taxpayer filed multiple tax returns with overpayments that entitled Taxpayer to a refund. Each time, instead of issuing a refund, the IRS offset said amounts against Taxpayer’s outstanding tax liability for the 2010 tax year. Eventually, Taxpayer’s balance was zero, so the IRS moved to dismiss the Tax Court proceeding as moot. The Tax Court held that it lacked jurisdiction over the appeal because there was no longer a justification for the IRS to pursue a levy. Taxpayer appealed the Tax Court decision, and the Third Circuit Court of Appeals agreed with Taxpayer, holding that the IRS’s decision not to pursue a levy did not moot the Tax Court proceeding. The Third Circuit’s decision created a split with the Fourth and the D.C. Circuits.

The Supreme Court reversed the decision of the Third Circuit and remanded the case for further proceedings consistent with the opinion, holding that a “determination” within the meaning of IRC Section 6330(d)(1) “refers to the binary decision whether a levy may proceed.” The Court reasoned that IRC Section 6330(c)(3), which sets forth the basis for the Appeals Officer’s “determination,” states that IRS Appeals “shall take into consideration” three factors, including the existence or amount of the underlying tax liability—in this case, whether the estimated tax payments were properly applied. Thus, those “considerations” are only inputs which result in the “determination” of the IRS Appeals Officer sustaining the levy, i.e., the output. The Supreme Court further reasoned that IRC Section 6330(e) only goes so far as to confer on the Tax Court the authority to issue an order enjoining a levy but no authority to order a refund or issue a declaratory judgment to resolve a tax liability dispute. The Tax Court, therefore, only has jurisdiction to review the “determination” and has no authority to resolve tax disputes that no longer have a connection to an ongoing levy. Finally, the Supreme Court reminds the Taxpayer that she does not lack recourse against the IRS and should “[r]ecall the default rule: Taxpayers cannot challenge disputes about tax liability without first paying the disputed taxes.” Taxpayer may file a post-deprivation suit for a refund (citing 28 U.S.C. §§ 1346(a)(1), 1491(a)(1)).

In light of the Supreme Court’s decision, Taxpayers should be aware that there first must be a levy action for the Tax Court to exercise jurisdiction under IRC Section 6330. That is, there will need to be an unpaid tax because otherwise there cannot be justification for a levy. According to the majority opinion, the Taxpayer in Zuch had a few options. Because the Taxpayer in Zuch had overpayments in subsequent years, she ended up in the same place—filing a refund suit—as she would have had she initially paid the tax when due. Had Taxpayer not had overpayments in subsequent years, the unpaid tax liability and the levy would have remained, and the Tax Court would have retained jurisdiction to decide whether the levy could move forward or whether to enjoin the levy. Importantly, while the Supreme Court did not cut off a taxpayer’s recourse under either circumstance, it explicitly sent the message that “[t]he Tax Court is a court of limited jurisdiction.” (citing Commissioner v. McCoy, 484 U. S. 3, 7 (1987); I.R.C. § 7442).

In addition, although the decision is rendered in the context of the Tax Court’s jurisdiction, its rationale may also be relied upon by IRS Appeals Officers looking to deny CDP hearings where the IRS has been able to collect the allegedly outstanding liabilities by offset.

In the aftermath of the ruling, similarly-placed taxpayers may find themselves in the difficult position of deciding whether to pursue a CDP proceeding knowing that the IRS could collect the liabilities at issue by offset and thereby defeat the Tax Court’s jurisdiction (as in Zuch). Or, as the dissenting opinion by Justice Gorsuch points out, the IRS could potentially drop the proposed levy at any point in the proceedings and strip the taxpayer of their Tax Court remedy.

The alternative that the majority opinion provides is for a taxpayer to pay the liabilities at issue and then file a timely administrative claim with the IRS, followed by a timely suit for refund in federal district court. However, when a pre-payment litigation option such as IRS Section 6330 exists, the decision to use a post-deprivation remedy will not be made lightly, particularly because a refund suit requires full payment of all taxes, interest, and penalties for a tax period.

If taxpayers do choose to pursue (or continue to pursue) CDP proceedings in similar matters, it will be important to calendar any deadlines for filing an administrative refund claim, as well as a refund suit, in relation to any amounts that the IRS collects by offset. As the dissent also points out, the Taxpayer in Zuch did not timely file all her administrative refund claims while she was pursuing the CDP proceedings, leaving her potentially remediless to recoup some of her overpayments from the IRS. Hence, at a minimum, taxpayers should ensure to the extent possible that taxes for other periods are not overpaid, and even if CDP proceedings are ongoing, taxpayers should consider at least filing protective refund claims for any overpayments to preserve their rights before the statute of limitations runs out and leaves them without recourse.