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The IRS Collection System is Broken – Houston Tax Attorneys


Taxpayers sometimes owe the IRS and cannot currently pay. It happens. When it happens, taxpayers often reach out to the IRS for help. The IRS has processes in place to handle these requests. In fact, it has a while collection function that is set up to handle these requests. This collection function is a bureaucratic quagmire that the IRS could focus on improving.

Consider the example of a taxpayer trying to get the IRS to lift a lien filing so that its lender does not call its loan due. The taxpayer just needs the IRS to lift the lien and approve a payment plan so it can start paying the IRS back. This is in the IRS’s interest because absent the lien being lifted, the business cannot pay anything to the IRS. But the IRS will likely sit on the case for years. The taxpayer will usually end up having to find help outside of the IRS while waiting for the IRS to even process the initial paperwork filed years earlier.

The case of Horizon Health Services, Inc. v. Commissioner, T.C. Memo. 2025-104, provides an opportunity to consider the IRS’s broken collection system. It involves a tax balance resulting from an IRS audit for the 2018 year. The case finally closed with no resolution in 2025. This left the taxpayer still in the IRS collection system as it was all the way back in 2018 as if nothing had been done about the tax balance. Working with the IRS not only did nothing for the taxpayer but, with penalties and interest accruing, left them in a worse position.

Facts & Procedural History

Horizon Health Services operates a healthcare business. The company had unpaid income tax liability for the tax year ending December 31, 2018. It also had unpaid employment tax liabilities for the tax quarter ending June 30, 2022.

On July 28, 2022, the IRS issued the taxpayer a Notice of Deficiency relating to its 2018 corporate income tax. The IRS missed its three-year window that Congress set to assess tax. The agency no doubt asked the taxpayer to extend the deadline beyond what Congress thought was a reasonable time for an audit.

The company did not pay the deficiency. It also did not petition the U.S. Tax Court to challenge the deficiency.

The IRS then did not get around to collecting the tax balance for another year. On March 3, 2023, the IRS filed a Notice of Federal Tax Lien. Four days later, the IRS sent the taxpayer notice of the lien filing. This notice advised the company of its rights to a collection due process hearing.

On April 13, 2023, the company timely requested a collection due process hearing. It sought a collection alternative such as an installment agreement or offer in compromise. The company cited financial hardship and inability to pay as the basis for its request. The IRS assigned the case to an appeals officer who had no prior involvement with the taxpayer.

On July 26, 2023, the appeals officer sent the taxpayer a letter scheduling a hearing for August 17, 2023. The letter requested certain financial information. The letter also asked for a signed income tax return for 2021 and a signed unemployment tax return for 2022. These tax returns were apparently delinquent.

A telephone hearing occurred on the scheduled date. The taxpayer did not provide the requested documentation. During the hearing, the company’s counsel reiterated that the sole issue was consideration of a collection alternative. The appeals officer agreed to allow the company until September 7, 2023, to submit the requested financial information and evidence that it had filed the delinquent returns. The company provided neither.

Around February 6, 2024, the taxpayer submitted Form 656 for an IRS Offer in Compromise. The IRS received it on February 12, 2024. The taxpayer again did not provide the requested financial information or signed copies of its delinquent tax returns.

On May 21, 2024, the IRS sent the taxpayer the Notice of Determination. The determination sustained the lien filing because the taxpayer was not in compliance with filing requirements.

The company petitioned the U.S. Tax Court for review. A year later in 2025—seven years after the 2018 tax return was filed—the IRS filed a Motion for Summary Judgment. The government contended that the appeals officer did not abuse his discretion in sustaining the lien filing because the taxpayer had not filed its prior year tax returns.

About the IRS Collection Function

At least half of everything the IRS does involves collecting unpaid taxes. One would think this means the IRS is good, meaning effective and efficient, at collections. Those who know about the collection function know that this is not the case.

The IRS collection function operates through two primary channels. The Automated Collection System handles most routine collection cases through computerized notices and phone contact. Revenue Officers handle more complex cases through personal contact and field work.

The Automated Collection System sends a series of notices to taxpayers who owe balances. These notices escalate from initial balance due notices to final notices of intent to levy. When taxpayers do not respond or cannot resolve their debts through the automated system, the IRS may file a federal tax lien or issue a notice of intent to levy. These collection actions trigger the taxpayer’s right to request a collection due process hearing.

Revenue Officers work cases that require more individualized attention. They have authority to meet with taxpayers and examine their financial situations. They also file liens and issue levies when appropriate. When a Revenue Officer takes one of these collection actions, the taxpayer receives notice of their right to request a hearing.

Both the Automated Collection System and Revenue Officers are generally not responsive to taxpayers who reach out for help. Taxpayers often cannot work directly with collection personnel to resolve their debts through payment plans or other arrangements. When collection personnel are unresponsive or cannot help, taxpayers resort to requesting a collection due process hearing.

The transition from collection to appeals becomes a black hole where cases sit for months or years with no action. Collection personnel stop working the case once a hearing is requested. The appeals officer does not begin working the case until months later. During this gap, taxpayers receive no assistance. The debts continue to accrue interest and penalties.

Why the Collection Due Process System Makes Things Worse

The collection due process hearing itself adds to the problem. Congress created the system to provide taxpayers with meaningful review before the IRS takes certain collection actions. The process applies when the IRS files a Notice of Federal Tax Lien or issues a Notice of Intent to Levy. Taxpayers can request a hearing before an independent appeals officer.

The hearing provides an opportunity to challenge the proposed collection action. Taxpayers can raise issues about the underlying tax liability in certain circumstances. They can also propose collection alternatives. The appeals officer must verify that the IRS followed proper procedures. The officer must also consider relevant issues raised by the taxpayer. Finally, the officer must balance the need for efficient collection against the taxpayer’s concerns that collection actions be no more intrusive than necessary.

After the hearing, the appeals officer issues a Notice of Determination. This determination can uphold the collection action or require the IRS to take different steps. If a taxpayer disagrees with the determination, they can petition the U.S. Tax Court for review.

While this process is helpful in some cases, it is often unnecessary by the time the IRS actually gets to the case. If the IRS handled collection cases appropriately and timely at the outset, most hearings would be avoidable. But by the time the hearing is held, many of the disputes have been resolved outside of the IRS process or the taxpayer is no longer liable for the debt, as in the case of bankruptcy discharges, etc.

The Timeline Shows How the IRS Wastes Years

The timeline in this case shows the fundamental problem with how the IRS processes tax cases. This dilatory action starts with the audit function before the case even reaches collections, which is evident in this case.

Congress determined that three years was sufficient time for the IRS to conduct an audit. The IRS almost never meets this deadline. Instead, it strong-arms taxpayers into signing extensions under the threat of closing the audit with a full disallowance of deductions and credits. The alternative is a clearly overinflated tax liability. Taxpayers routinely extend the timeline as a result.

This case appears to follow this pattern. The tax year was 2018. The tax return would have been due in 2019. While not mentioned in the case, the taxpayer likely could not pay the balance due to COVID impacts on business operations.

The taxpayer likely requested a collection due process hearing due to financial constraints caused by the COVID pandemic. The taxpayer requested a hearing on April 13, 2023 for the 2018 tax liability. This timeline includes all the years that many businesses and even the IRS were shut down.

Instead of reviewing the case in April or May of 2023 when the hearing request was received, the IRS did not act until late 2023. Had the IRS reviewed the case for preliminary information—such as tax return filings—before issuing its lien notice, it could have given the taxpayer several months to comply. This information could have been included with the lien notice itself stating that if you want a collection due process hearing, you need to file certain returns for certain years.

As is routine in handling tax collection cases, the IRS did not do this. It waited until August of 2023 to act. Then it only gave the taxpayer about three weeks to fully come into compliance with all prior filings. Three weeks is insufficient time for a business to go back and correctly file two years of prior year returns.

The IRS still did not act timely on the three-week deadline. It continued doing nothing for months. The opinion says it took the IRS another eight months for appeals to close the hearing case. It took the IRS attorney another year to file its summary judgment motion making an argument about prior year tax returns that could have been made years earlier.

How Simple Screening Could Fix This Part of the Problem

This lengthy process seems unnecessary given the simple issue involved. The taxpayer filed a collection due process hearing request and requested a collection alternative.

The rules require taxpayers seeking collection alternatives to be in current compliance with filing obligations and to provide financial information. The taxpayer failed to meet these basic requirements. These facts could have been determined within days or weeks rather than years.

Most collection due process hearings respond to either an Automated Collection System notice or a Revenue Officer manual notice proposing a lien or levy. The IRS already has systems to track whether taxpayers have filed required returns. The IRS also knows what financial information is necessary to evaluate collection alternatives. There is no reason the IRS cannot screen hearing requests at intake rather than sending every case to appeals when the prerequisites are not met.

A simple form letter system could dramatically improve efficiency. Anyone who has interacted with the IRS knows the agency uses form letters extensively. When a taxpayer files a hearing request seeking a collection alternative, the IRS could immediately send a standardized letter. This letter would identify the specific returns that remain unfiled. It would list the financial documentation required to evaluate the requested collection alternative. It would set a deadline of sixty to ninety days for the taxpayer to provide this information. Otherwise, the hearing request would be returned to the taxpayer just as the IRS does for offers in compromise.

The letter would explain that failure to provide the information and file the delinquent returns by the deadline would result in the case being closed without referral to appeals. It would inform the taxpayer that the proposed collection action would proceed. The letter would note that this determination is based on the taxpayer’s failure to demonstrate eligibility for a collection alternative rather than on any merits-based review.

The IRS Already Has the Tools

The Automated Collection System handles most IRS collection cases. This computerized system already has access to taxpayer account information including which returns have been filed.

When a taxpayer requests a collection due process hearing, the system could automatically generate the screening letter. The letter would pull information from the taxpayer’s account about unfiled returns. It would reference the standard financial forms required for the type of collection alternative requested. No human intervention would be necessary.

Revenue Officers could similarly implement this screening process. When a Revenue Officer’s case generates a hearing request, the officer already knows the taxpayer’s filing status and whether financial information has been provided. The officer could send the screening letter within days of receiving the hearing request.

This front-end screening would reserve appeals resources for cases that actually require substantive review. Appeals officers have substantial expertise in evaluating collection alternatives and resolving disputes. Their time is better spent on cases where taxpayers have provided necessary information and raised legitimate questions. Screening out non-compliant cases at intake would allow appeals to focus on matters requiring their judgment and expertise.

Compliant taxpayers would move quickly through the system. Taxpayers who provide required information within the allowed time would have their cases referred to appeals with complete documentation. The appeals officer could then focus on substantive evaluation rather than chasing down basic compliance information.

Non-compliant taxpayers would receive faster determinations. Instead of waiting over a year for a hearing that ultimately concludes they are ineligible, these taxpayers would know within sixty to ninety days that they must come into compliance. They could then focus on filing delinquent returns and gathering financial information before renewing their request through normal collection channels.

The Takeaway

The fact pattern in this court case is one of many that shows the significant inefficiencies in how the IRS handles collections and the frustrations taxpayers experience. The multi-year timeline from the 2018 tax year to the 2025 court decision represents a waste of resources for both the IRS and the taxpayer. Most troubling is that the outcome was predictable from the outset. The taxpayer had unfiled returns and failed to provide financial information. These deficiencies could have been identified and communicated within weeks rather than years. Even a simple form letter system at the front end could have avoided the taxpayer and the IRS spending time on this matter. It could have also freed up resources for those who genuinely want to comply and want the IRS’s help, but cannot get it as the IRS is spending time and resources on cases that should not be worked.

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Can Jury Trial for IRS Penalty be Conditioned on Paying the Penalty First? – Houston Tax Attorneys


There have been a number of court cases that have considered whether various administrative agency determinations violate constitutional jury trial rights. These are often premised on the fundamental promise of American justice that courts should remain open to all.

The issue is presented when government agencies require substantial upfront payments before allowing judicial review. One can find themselves caught between accepting administrative determinations they believe are wrong or paying substantial sums just to be able to exercise their constitutional rights. At its extreme, one could argue that this situation could create a potential two-tiered system of justice where the wealthy can buy access to jury trials while others cannot.

The district court recently addressed this exact constitutional challenge in HDH Group, Inc. v. United States, No. 2:24-cv-00988 (W.D. Pa. Sept. 23, 2025). This court case involves an administrative determination by the IRS to impose penalties whether the action violates fundamental constitutional protections when the ability to get a jury trial requires a pre-payment of nearly $1 million.

Facts & Procedural History

The consultant in this case operated a captive insurance program between 2013 and 2018. In September 2015, the IRS began auditing the consultant. It ultimately made an administrative determination that the consultant had promoted an abusive tax shelter.

On November 13, 2023, the IRS assessed promoter penalties in excess of $7.5 million against the consultant. The penalties are intended for promoters of abusive tax shelters who make false or fraudulent statements about the tax benefits that participants will receive. The consultant paid approximately $989,000 of the penalties—representing at least 15 percent of the total assessed penalties as required by law—and filed a refund suit against the government to recover the payment to the IRS.

The IRS then began enforced collections, It issued notices in April 2024 indicating its intent to seize or levy the consultant’s property to collect the remaining unpaid penalties. The consultant filed an appeal from the notices of levy with the IRS.

The consultant’s legal strategy centered on the U.S. Supreme Court’s recent ruling in SEC v. Jarkesy. Specifically, the consultant argued that the IRS’s administrative assessment of fraud-based penalties violated the Seventh Amendment’s guarantee of a jury trial. The government countered with its own motion, seeking to reduce the unpaid penalties to judgment while defending the constitutionality of the tax code’s penalty assessment procedures.

About Section 6700 Promoter Penalties

Section 6700 of the tax code is one of the primary tools the government has for combating abusive tax shelter promotions. This penalty can be imposed on any person who organizes or assists in organizing partnerships, entities, investment plans, or other arrangements while making false or fraudulent statements about the tax benefits participants will receive.

The penalty can apply when someone both promotes a tax shelter and makes statements they know or have reason to know are false or fraudulent regarding the allowability of deductions, excludability of income, or securing of other tax benefits. Courts have interpreted this to require the government prove two elements: that the defendant was involved in an abusive tax shelter and that the defendant made statements about tax benefits that were false or fraudulent.

The financial impact can be substantial. For activities involving false statements about tax benefits, the penalty can be 50 percent of the gross income derived from the promotion. For gross valuation overstatements, the penalty is the lesser of $1,000 or 100 percent of the gross income per activity. This is in addition to other civil and criminal penalties, injunctions, and even being order to disgorge the fees earned for the work.

How Section 6700 Assessment Works

Section 6700 operates within the broader framework the IRS’s enforcement authority. Section 6201 authorizes and requires the Secretary of Treasury to make inquiries, determinations, and assessments of all taxes, including assessable penalties imposed by the tax code. This includes Section 6700 penalties.

The IRS can assess these penalties administratively without first obtaining court approval. Once assessed, the penalties become part of the individual’s account and are subject to standard collection procedures. Once the IRS sends the individual notice of the assessment and demand for payment, it can then generally move on to other collection actions if payment is not made. That is what happened in this case.

There are different procedures for challenging Section 6700 penalties. Unlike most other IRS penalties, the tax code provides a method for challenging Section 6700 penalties. This method includes meaningful judicial review. This is set out in Section 6703.

Under Section 6703(c)(1)

Under Section 6703(c)(1), if within 30 days after notice and demand of any Section 6700 penalty, the individual pays not less than 15 percent of the penalty amount, the individual may file a claim for refund of the amount paid. More specially, under Section 6703(c)(2), the individual may pay 15 percent of the penalty, file a claim for refund, and if the claim is denied, file an action in federal district court for refund within 30 days of the claim denial. This creates an administrative process within the IRS for reviewing the penalty assessment without requiring 100% of the penalty to be paid up front. Most other refund claims require 100% payment up front before suit can be filed.

These district court proceedings operate under different …

These district court proceedings operate under different rules than typical administrative penalty appeals. With these proceedings, the burden of proof shifts to the government under Section 6703(a). The government then has to establish liability for the penalty from scratch. The court conducts a de novo review, meaning it owes no deference whatsoever to the IRS’s administrative findings. Most importantly for this case, jury trials are available in these refund actions.

What Did the Supreme Court Decide in Jarkesy?

To understand the dispute in this case, we have to consider the Jarkesy case. The Supreme Court’s 2024 decision in SEC v. Jarkesy changed the administrative process for penalty assessments. The case involved the SEC’s practice of seeking civil penalties for securities fraud through internal administrative proceedings rather than federal court litigation and how this lines up with the Seventh Amendment. The Seventh Amendment ensures the right to a jury trial.

Jarkesy established a two-part test for determining when administrative penalties violate the Seventh Amendment. First, courts must determine whether the penalty implicates the Seventh Amendment by examining whether the underlying claim resembles common law causes of action or seeks legal rather than equitable remedies. Second, if the Seventh Amendment applies, courts must consider whether the penalty falls under the “public rights exception” that allows Congress to assign certain matters to administrative agencies.

The U.S. Supreme Court found that securities fraud penalties implicated the Seventh Amendment because they targeted the same conduct as common law fraud and sought civil penalties—a punitive remedy designed to deter wrongdoing rather than compensate victims. The Court emphasized that these penalties were “a type of remedy at common law that could only be enforced in courts of law.”

The Supreme Court then rejected the argument that securit…

The Supreme Court then rejected the argument that securities fraud penalties fell under the public rights exception. The Court explained that fraud claims involve private rights that “historically could have been determined exclusively by [the executive and legislative] branches” and must be adjudicated in Article III courts with jury trial protections.

Section 6700 and the Seventh Amendment

This brings us to the question in this case. Does Section 6700 penalty assessed administratively, which requires a substantial up front payment before one can get to court, implicates the Seventh Amendment?

The Court concluded that Section 6700 penalties do just that under Jarkesy‘s first prong. Like the securities fraud provisions in Jarkesy, Section 6700 targets conduct that closely mirrors common law fraud. Section 6700 requires proof that a defendant made statements “which the person knows or has reason to know is false or fraudulent as to any material matter.” This language deliberately incorporates common law fraud terminology and concepts. The essential elements—false statements about material matters made with knowledge or reason to know of their falsity—directly parallel traditional fraud claims that have been resolved by juries for centuries.

The remedy analysis also supports Jarkesy‘s application. Section 6700’s penalties are explicitly punitive, calculated as a percentage of the promoter’s gross income from the abusive activity. Like the SEC’s civil penalties, these sanctions are designed to punish and deter wrongdoing rather than compensate victims or restore the status quo. The court found that Section 6700’s close relationship with common law fraud and its punitive monetary penalties clearly implicated the Seventh Amendment under Jarkesy‘s framework. Congress deliberately used “fraud” and other common law terms of art in the statutory formulation of the Section 6700 penalty.

Why the Constitutional Challenge Failed

Despite finding that Section 6700 penalties implicate the Seventh Amendment, the court rejected the consultant’s constitutional challenge on a fundamental procedural ground. The court concluded that the consultant had not actually been deprived of its right to a jury trial because the tax code’s refund procedure provides that protection.

The Court emphasized the difference between Section 6700’s enforcement mechanism and the administrative penalty systems struck down in other post-Jarkesy cases. In securities fraud cases, OSHA violations, and similar regulatory penalty schemes, administrative law judges make liability determinations that receive only deferential appellate review. The penalized party never gets a true jury trial on the question of liability.

Section 6703’s refund procedure operates differently. Once the individual paid the required 15 percent and filed its refund action, it obtained a completely fresh proceeding in federal district court. The IRS must prove the individual’s liability de novo in that proceeding without any deference to the administrative assessment. And the individual can demand a jury trial on all factual issues relating to whether it actually violated Section 6700.

The Court stressed that this situation contrasted with the defendants in Atlas Roofing, Jarkesy, and recent Third Circuit decisions like Axalta and Sun Valley. In those cases, administrative agencies made final liability determinations that courts could only review for substantial evidence or similar deferential standards. The defendants never received the full Article III court adjudication with jury trial rights that the Seventh Amendment requires.

This presumes that the consultant can actually pay the he…

This presumes that the consultant can actually pay the hefty penalty, which he could and did in this case. The Court did not consider or address what happens if the person, like the consultant in this case, cannot afford to pay the hefty penalty up front.

The Takeaway

The court’s decision clarifies that administrative penalty assessments can survive Seventh Amendment challenges even after Jarkesy. To do so, they have to include adequate procedural protections for obtaining jury trials. The court concluded that the tax code’s refund procedure accomplishes this by allowing penalized parties to obtain complete de novo judicial review in federal district court where the government bears the burden of proving liability to a jury.

This distinction between administrative assessment and ultimate liability determination is the focus for this constitutional analysis. While agencies may continue assessing penalties administratively for efficiency purposes, constitutional violations occur only when parties cannot ultimately obtain jury trials on liability questions. The court here said that the tax code for 6700 penalties avoids this problem by treating administrative assessments as provisional determinations subject to full judicial review upon payment of a portion of the penalty.

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In 40 minutes, we’ll teach you how to survive an IRS audit.

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