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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Stephan Dorsey

Stephan is the sports journalist for the Maple Grove Report.

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You Can’t Raise What You Didn’t Know: The Variance Doctrine – Houston Tax Attorneys

Our income tax system uses a self-reporting process. Taxpayers, in most cases, voluntarily file income tax returns. The IRS can then evaluate the filings to determine whether they appear to be correct or warrant further investigation.

The IRS has developed a whole regime of forms to be used for this very purpose. Taxpayers who fill those out are, in theory, providing all of the information the IRS needs to evaluate whether the information reporte is correct.

The exception to this is for refund claims. Refund claims have a small box, consisting of a few lines, where taxpayers can write out an explanation for the basis of their refund claim. Despite only having a small box to write, the IRS takes the position that any theory not put forth in the small box means that the theory cannot be raised–at least that is the case when it comes to tax litigation.

So imagine that you filed a refund claim as you overpaid your taxes for a particular year and you want your money back. You do your best to fill out the small box that is provided for the “explanation.” Then after that, you discover additional facts that would have changed the text you put in the small box for the explanation. After bringing suit in tax court, the IRS moves to dismiss because the information that you did not know at the time you filled in this small box on the amended return was not listed in the small box.

This is the situation in the Salta v

This is the situation in the Salta v. United States, No. 24-254 (2d Cir. Oct. 6, 2025) case. The appeals court was tasked with deciding whether the information in the small box that was not known at the time had to be there for the litigation to proceed.

Facts & Procedural History

This case involves a common scenario–a foreclosure. In January 2015, the taxpayer-husband’s property in was in foreclosure. Rather than proceed through a lengthy foreclosure process, the taxpayer signed a deed-in-lieu-of-foreclosure arrangement. He transferred the deed to the mortgagee. In exchange, the mortgagee and loan servicer agreed to waive their rights to pursue a deficiency judgment against him.

On their 2015 joint tax return, the couple reported $113,087 in cancellation-of-indebtedness income from the discharge of the husband’s mortgage debt. They paid the tax on this income. Years later, they filed a refund claim to request a refund from the IRS because they believed the cancellation-of-indebtedness income should have been taxable in 2017 rather than 2015.

The IRS denied their refund request. Romeo and Phyllis then filed a refund suit in federal district court. The government moved for summary judgment. The taxpayers cross-moved for summary judgment. At this point in the tax litigation, they raised a new argument. The January 2015 Relocation Agreement was never enforceable because the mortgagee never signed the documents. Furthermore, the loan servicer lacked power of attorney to act on the mortgagee’s behalf.

The district court granted summary judgment for the government. The court found that the variance doctrine barred the taxpayers from raising their unenforceability argument because they had not presented this theory in their administrative refund claims. That resulted in the current court opinion.

When Debt Forgiveness Creates Taxable Income

The tax code treats income from discharge of indebtedness as taxable income under Section 61(a)(11). This provision makes sense as a matter of tax policy. When a lender forgives debt, the borrower experiences an increase in wealth. The borrower no longer has an obligation to repay money that was previously owed.

The timing of when this income must be recognized matters for income tax purposes given that our income tax system follows a strict year by year measurement process. Recognizing income in the wrong year can affect the applicable tax rates, impact the availability of deductions and credits, etc. It can also affect the statute of limitations for assessment. Getting the year wrong means paying tax when you shouldn’t have to. Then you face the burden of fighting to get that money back.

The court have explained that debt discharge creates taxable income in the year the discharge occurs. But determining exactly when a debt is “discharged” for tax purposes isn’t always straightforward.

The general rule is that debt is viewed as having been discharged the moment it becomes clear that tbe debt will never have to be paid. Any identifiable event which fixes the certainty of the discharge may be taken into consideration. This standard focuses on certainty and identifiable events. A vague possibility that debt might not be collected often isn’t enough. The taxpayer has to show a specific moment when it became definite that the debt would not have to be repaid.

The appeals court in this case found that the January 201…

The appeals court in this case found that the January 2015 deed-in-lieu arrangement constituted an identifiable event discharging his mortgage debt. The Relocation Agreement and related documents showed that the mortgagee accepted the property “as full satisfaction for the amount owed on the mortgage loan.” The documents explicitly stated that the taxpayer’s consideration for the deed transfer included “the full cancellation of all debts . . . [and] obligations . . . secured by” the mortgage.

This seemed like a straightforward application of the rules. An identifiable event occurred in January 2015 that made it clear the taxpayer’s mortgage debt would never have to be paid. Therefore, it seemed like 2015 was the proper tax year for recognizing the cancellation-of-indebtedness income.

The Variance Doctrine: You Must Raise Every Argument Administratively

This brings us to the variance doctrine. This applies to refund claims that are litigated as tax refund claims.

Before bringing a refund suit in court, taxpayers have to first file an administrative claim for refund with the IRS. This requirement is in Section 7422(a) of the tax code. This is intended to give the IRS an opportunity to correct errors administratively, create a record of the claim, and, ultimately, define the scope of any later litigation.

The variance doctrine builds on this administrative exhaustion requirement. Under this doctrine, taxpayers may not raise different grounds in their refund suit than those they brought to the IRS in their administrative claim. The courts have explained this as thge taxpayer having to advance in the administrative proceeding any contention it wishes to pursue in court.

The courts have articulated several rationales for the variance doctrine. The Sixth Circuit explained in McDonnell v. United States, 180 F.3d 721 (6th Cir. 1999), that the purpose is “to prevent surprise, and to give the IRS adequate notice of the claim and its underlying facts so that it can make an administrative investigation and determination regarding the claim.”

This makes sense in most cases

This makes sense in most cases. The IRS shouldn’t have to defend against entirely new theories that appear for the first time in litigation that would change the outcome of the litigation. The IRS should have an opportunity to investigate and resolve claims administratively. But what about when the facts are not known to the taxpayer or the IRS? That is what this court case and this article is about.

The “Should Have Known” Trap

The taxpayer argued they couldn’t have raised the unenforceability theory in their administrative refund claims because they only discovered years later that the mortgagee never signed the documentation. They argued that this created an exception to the variance doctrine.

The appeals court rejected this argument on two grounds. First, the court noted that the taxpayers cited no legal authority establishing an exception to the variance doctrine where a taxpayer learns after filing a refund request that a private contract may have been unenforceable. The court stated it was “aware of none.”

Second, the court held that the taxpayers “knew or reasonably should have known the facts underlying their unenforceability theory back in January 2015.” The court based this conclusion on the face of the documents themselves. The Relocation Agreement had no place for the mortgagee to sign. When the husband signed the Agreement in Lieu of Foreclosure and the Terms of Release of Premises, it was allegedly “clear from the face of the documents that the mortgagee had not signed them.”

Moreover, the court opinion notes that the taxpayer-husband asserted that he didn’t learn until discovery in the refund action about the loan servicer’s “lack of a power of attorney” to act on the mortgagee’s behalf. This is not information that would be apparent from the face of the documents.

The court created an impossibly high standard

The court created an impossibly high standard, partciularly for unsophisticated taxpayers. The majority of homeowners dealing with mortgage servicers during a foreclosure would naturally assume the servicer has authority to act on behalf of the mortgagee. Homeowners don’t typically scrutinize signature blocks to determine whether their lender signed or only the servicer signed.

More fundamentally

More fundamentally, the absence of a signature line for the mortgagee doesn’t necessarily signal anything unusual. Many contracts are structured to be signed only by certain parties. The loan servicer’s signature might well have been sufficient if the servicer actually possessed proper authority.

Filing Kitchen-Sink Refund Claims

Consider a taxpayer who files a refund claim based on one good-faith theory supported by known facts. Later, during discovery or further investigation, new facts emerge that support a completely different and stronger argument. That taxpayer is stuck with the original theory. The better argument is barred by the variance doctrine because the taxpayer “should have known” the facts supporting it.

Given this case, to preserve all possible arguments, taxpayers have to consider filing administrative claims that raise every conceivable theory. This includes theories that seem speculative or unsupported by facts known at the time.

This forces taxpayers to recommend the filing of protective claims that read like litigation complaints. A refund claim might need to argue simultaneously that a contract was valid and enforceable (supporting one theory) while also arguing that the same contract was void and unenforceable (supporting another theory). These contradictory positions must both be asserted simply because the facts might develop either way.

Importantly, this approach negates the practical reasons for the variance doctrine. This approach wastes IRS resources and would not give the IRS easy to access information to decide whether to investigate the claim. The IRS has to evaluate and maybe investigate and respond to kitchen-sink claims rather than focusing on the taxpayer’s actual good-faith basis for the refund. This makes the identification of claims worthy of investigation even more difficult for the IRS, not less difficult.

The Takeaway

This case points out a trap for those filing refund claims when the facts are unknown. It shows that procedural doctrines can defeat substantive tax claims even when the taxpayer may be right on the merits. The court’s strict application of the variance doctrine combined with its “should have known” standard creates a nearly impossible burden for taxpayers who discover new facts after filing administrative refund claims.

The decision fundamentally changes how taxpayers have to approach refund claims and amended tax returns when dealing with IRS audits and adjustments. Filing a focused refund claim based on a single well-supported theory is no necessarily the route to go. Instead, one may need to consider filing comprehensive claims raising every conceivable argument regardless of how speculative those arguments may be. This prevents being barred from raising theories later if new facts emerge, even though this approach benefits neither taxpayers nor the IRS.