When you receive a Notice of Intent to Levy from the IRS it will come with a form to Request a Collection Due Process Hearing ("CDP") or Equivalent Hearing. What exactly is this and what should you do with it? A CDP is a hearing with an Appeals Officer at the IRS that must be requested within 30 days of the date of the Notice of Intent to Levy that you received. If you file for a CDP in a timely manner (within the 30 days) it will cease all collection activities until you have your hearing. If you miss the 30 day requirement you can still have a hearing, it is deemed an equivalent hearing. The downside with an equivalent hearing is that it does not stop collection activities.
At the CDP or equivalent hearing you can explain to the Appeals Office why the lien or levy should not be issued. You can also submit an offer in compromise or a payment plan for consideration at the hearing. What you cannot do is argue the underlying tax liabliity. This has already been assessed and is not the subject of conversation at these hearings. You can still file an offer in compromise doubt as to liability if you want to question your underlying liability.
The decision made by the Appeals Officer in a CDP or equivalent hearing is not the final word -- their decision is reviewable by the U.S. Tax Court.