Installment Agreements and Tax Liens

I.R.C. Section 6320

Federal Tax liens may remain in place where a taxpayer’s liability during her installment agreement period is above the amount the IRS requires in the Internal Revenue Manual (IRM), the U.S. Tax Court ruled in Jill Beth Savedoff v. Comm’r of Internal Revenue, filed August 31, 2020 at Docket No. 4346-18L. The taxpayer created liabilities from self-employment on two different tax periods. She established a payment agreement, but defaulted. The IRS filed a Notice of Federal Tax Lien (NFTL). The taxpayer filed a Collection Due Process (CDP) hearing request on the basis that her installment agreement was wrongfully terminated and the lien notice was not properly served. Apparently, the taxpayer moved and did not receive a notice of the filing of the lien. The Court ruled that the taxpayer did not provide the IRS with a clear and concise notification of a different address. As for the lien withdrawal, the Court reviewed the guidelines allowing for the withdrawal of a NFTL. The taxpayer essentially argues that the lien should have been withdrawn if a second installment agreement was established. Both the Tax Court and Treasury Regulations provide that nothing requires the IRS to withdraw the NFTL because of the establishment of an installment agreement. While there are provisions to withdraw the NFTL if the balance is less than $25,000 and the taxpayer establishes a direct debit installment agreement, the taxpayer in this situation simply owed more and when offered to establish a direct debit installment agreement, passed on that option. 

Civil Contempt and Employment Taxes

I.R.C. Section 3111

The United States District Court for the Southern District of New York ruled in USA v. Jiffy Cleaners of Hartsdale, Inc. and Wilton Calderon at case number 16 CV 2428 (VB) filed July 27, 2020, that civil contempt requested by the Government was appropriate since a prior judgment for $110,853.48 was clear and unambiguous setting forth the taxpayer’s responsibilities regarding making employment tax payments and the government sufficiently detailed taxpayer’s noncompliance. The taxpayer operated a dry cleaning business. The government alleged that the taxpayer failed to pay over employment taxes and opened a court case to collect. One of the owners of the business was present in court when a judgment was entered ordering them to pay the government for monies owed, timely file and pay current returns. Further, the judgment enjoined the taxpayer from assigning or transferring money or assets to any other person or entity. Monthly affidavits were to be delivered to the IRS to substantiate compliance.  A short time later, the spouse of the owner incorporated a business to operated as a dry cleaners one mile away. The original business was closed. The IRS learned that certain equipment had been transferred from the old business to the new one. The government contended that the taxpayer had not complied in many ways, one of which was transferring property. Additionally, they failed to pay current taxes and file returns from the time of judgment to shut down of operations. The taxpayer made what the Court deemed to be a handful of frivolous arguments. Ultimately, the Court deemed the taxpayers to be in contempt. The Court entered an order prohibiting the owner from occupying any position within any business for which he would be responsible for collecting, truthfully accounting for, paying, withholding, or filing any taxes pursuant to the IRC, including employment taxes. 

Federal Tax Lien Valid in Collection Due Process

I.R.C. Section 6320

The United States Tax Court handed down an opinion on July 30, 2020 at Docket No. 15274-17L, Carol Joy Biggs-Owen v. Comm’r of Internal Revenue, in which it ruled that a Notice of Federal Tax Lien (NFTL) was properly upheld where underlying tax liabilities were not properly challenged and the IRS Settlement Officer (SO) didn’t abuse her discretion in sustaining the NFTL filing. The Taxpayer owned two home healthcare businesses during the years at issue – 2013 and 2014. In both years the tax withholdings were not enough to cover the liabilities. The taxpayer established an installment agreement that defaulted. The IRS then issued a NFTL, which triggers appeal rights in the form of a Collection Due Process (CDP) hearing. When setting the CDP hearing, the SO requested copies of the 2015 and 2016 returns and proof of estimated tax payments, among other things. After reviewing financial information and documentation submitted by the taxpayer, the SO said she would sustain the NFTL filing because the taxpayer was not in compliance with her estimated tax obligations and her withholdings were insufficient. Further, the taxpayer did not accept the SO’s calculation of ability to pay. With no collection alternative deemed acceptable by the taxpayer, the SO closed her case. The Court ruled that it was not an abuse of discretion for the SO to reject a proposal for a collection alternative where a taxpayer fails to comply with current estimated tax obligations. The taxpayer argued she did not have enough time to fix her estimated tax issues and propose actual terms of a collection alternative. The Court disagreed. The Court said that the SO provided an opportunity in both her initial letter and call, along with two extensions of time to address the issue. This was a two-month time period. The Court ruled that the SO had not abused her discretion in upholding the NFTL and returning the case to IRS collections. 

Offer in Compromise

I.R.C. Section 7122

The United States Tax Court in Swanberg v. Comm’r of Internal Revenue handed down an opinion on August 25, 2020, as docket No. 10266-19L, in which it ruled that the IRS had properly included taxpayer’s Veterans Affairs benefit and excluded his life insurance premium in calculating an ability to pay for Offer in Compromise purposes. This matter was started in a Collection Due Process hearing filed as a result of the issuance of a Final Notice of Intent to Levy. The taxpayer submitted a collection information statement reflecting monthly income of $6,352 and expenses of $6,854. On review, the Settlement Officer noted that the taxpayer’s bank statements reflected a disability benefit from the VA. The Officer increased his income by the amount of this benefit. Further, she disallowed a $600 per month expense for whole life insurance. The Taxpayer argued that his VA benefit should not be included since it was not taxable. The Court ruled that the Settlement Officer had abided by the provisions of the Internal Revenue Manual (IRM) regarding these issues. The IRM provides that all household income will be used to determine taxpayer’s ability to pay. Income is included even if not subjected to taxation. Furthermore, the IRM supports disallowance of the whole life insurance expense. No abuse of discretion was found by the Court. 

Tax Lien Attachment

I.R.C. Section 6321

The Federal District Court for the Western District of Washington in USA v. Elmer Buckardt, Case No. 2:19-cv-00052-RAJ, entered an order on September 18, 2020 that a tax liability cannot be avoided with frivolous arguments and the IRS may foreclose property for tax liens when the entity owning the property is a taxpayer’s alter ego. Though a W-2 earner until retirement, the taxpayer created a religious society for the purpose of transferring property to his family. It was meant to be a trust, of sorts. The taxpayer and his wife transferred properties they purchased to the entity without consideration. They personally paid the mortgage on these properties. Around the same time, the taxpayer ceased filing tax returns because of the belief that the tax system was not valid. The taxpayer began reporting his tax liability as zero. After a variety of litigation in the Tax Court, the taxpayer ultimately ended up owing around $739,000.  The government then filed the instant action seeking to foreclose the tax liens and set aside the transfers to the religious society that the taxpayer executed years before. The Court ruled that it was clear Mr. Buckardt owed the taxes. The taxpayer offered no argument other than his belief that he was not required to pay federal income taxes, along with a variety of well-known arguments the Courts have deemed frivolous over the years. The Court ruled those arguments were without merit. The Court concluded that the religious society the taxpayer created and transferred property to was his alter ego. It based its decision on Washington law recognizing the nominee or alter-ego doctrine where one individual so dominates and controls a corporation that such corporation is the individual’s alter ego, and therefore, one in the same. The fact that the taxpayer had complete control over the entity, that he and his wife were the only ones making decisions for the entity, that the taxpayer and his wife live in a home owned by the entity, but do not pay rent, were all determining factors. They maintained the properties with personal funds. The taxpayer allowed his children to reside in the properties rent free. The Court deemed the lien to be a valid lien against the properties of the entity and authorized the Government to foreclose. 

Sale of property owned by Third Parties where tax lien attached

I.R.C. 7403(c)

The United States District Court for the Western District of Michigan, Southern Division, in Case No.: 1:00-CV-885, Decided December 20, 2019 ruled that the government could sell a property that was sold to buyers other than the taxpayer, if the federal tax lien was attached at the time of the lien, unless the third party had a prior lien or comes within one of the exceptions of section 6323.  The taxpayer in this case put forth a handful of futile arguments regarding improper assessment of tax and invalidity of the federal tax lien.  The Court ruled on the plain language of the statutes and found that the assessment was proper, and that the lien arises at the time of assessment and continues until the liability is satisfied or becomes unenforceable due to the statute of limitations.  Therefore, the government had an interest in the property at issue before it was transferred, and the government’s interest remained intact.  The Court ordered the property sold.

Innocent Spouse Relief

I.R.C. 6015

The United States Tax Court in Jane M. Lassek, Petitioner, and Michael E. Smith, Intervenor v. Comm’r, Docket No. 25395-16, Filed October 28, 2019 provided the Petitioner (wife) with partial innocent spouse relief for one year and denied relief for another.  The liabilities at issue begin with the 2011 year in which Intervenor (husband) prepared a return and improperly characterized his 401(k) distribution in the amount of $46,477 as nontaxable.  The Service determined a deficiency of $14,996 and penalties of $3,026.  The petitioner never reviewed the return as it was electronically filed by the Intervenor. In 2012, both took distributions from their retirement and both signed the return.  They had no plan for how they intended to pay the balance.  The parties ultimately divorced and their divorce decree was silent in regards to the tax liabilities. In reviewing the years at issue, the Court ruled that the Petitioner should be granted relief for the 2011 year under I.R.C. 6015 (c) – a section that limits a spouse’s liability to the portion of the deficiency properly allocable to that spouse under 6015(d).  This is available because the tax due did not appear on the face of the return. The Court granted relief because it did not believe that the Petitioner had actual knowledge of Intervenor’s 2011 401(k) distribution.  As for tax year 2012, the Petitioner failed to qualify for relief. She admitted at trial that she would not suffer economic harm if relief was not granted.  Further, Petitioner failed because she could not reasonably believe that Intervenor would or could pay the tax liability.  This case is a good review of the multi-level and multi-factor analysis of equitable relief under 6015(f).

Preliminary Injunction instituted to enforce Internal Revenue Employment Tax Laws

I.R.C. 7402(a)

The United States District Court for the Middle District of Florida, Tampa Division, ruled in United States of America v. Askins & Miller Orthopaedics, P.A., et al. Case No: 8:17-cv-02-T-27AAS, Decided December 23, 2019, that the Defendant and all other persons and entities acting in concert or participation with them were enjoined from violating the Internal Revenue employment tax reporting and payment requirements.  More specifically, Defendant was ordered to file or cause to be filed all required employment tax returns and pay all income and FICA taxes withheld from the employees.  Further, Defendant shall segregate said funds on a semiweekly schedule in a federal deposit bank.  The order was a result of Defendant’s failure to take said action when he practiced with another entity. The Government argued there was a high likelihood of repeat activity in the future. Taxpayer’s prior business, Askins & Miller Orthopaedics, P.A. failed to deposit or made late deposits over a seven-year period.  The IRS worked with taxpayer through meetings, calls and installment agreements.  There was only sporadic compliance.  The Court indicated that where the United States demonstrates that the taxpayer has a proclivity for unlawful conduct, injunctive relief may be appropriate. Under IRC 7402(a), the United States must demonstrate: (1) a substantial likelihood of success on the merits; (2) irreparable injury will be suffered absent the injunction; (3) the threatened injury outweighs the potential damage of the proposed injunction; and (4) the injunction would not be adverse to the public interest.  The Court reviewed whether the government could be made whole through monetary relief at some point in the future. The Taxpayer’s financial status suggests that would be very unlikely.  As such, the Court ordered the injunction.

Lien Withdrawal and Collection Due Process Hearing

I.R.C. 6323(j)

The United States Tax Court in Martin Washington Brown v. Comm’r, Docket No. 8999-17L, filed December 9, 2019, held that the IRS Appeals Settlement Officers had not abused their discretion in declining to withdraw a Notice of Federal Tax Lien (NFTL), and sustained the collection action in this matter.  Taxpayer owed multiple years of 1040 income tax liabilities that totaled $35,436.  In September 2016, the IRS established a Partial Payment Installment Agreement (PPIA) for the sum of $300 per month. The IRS determined that the filing of an NFTL was necessary because the unpaid balances exceeded $10,000. Taxpayer timely sought a Collection Due Process (CDP) hearing after the filing of the NFTL.  He alleged that he would lose his job if the NFTL was not withdrawn.  The settlement officer advised that the taxpayer could meet the standards for lien withdrawal if he converted the PPIA to a Direct Debit Installment Agreement (DDIA) paying the debt in less than 60 months.  He would then have to apply for lien withdrawal on Form 12277 after three months of successful auto debits.  The taxpayer would not alter the terms of his PPIA to comply and so Appeals sustained the NFTL filing.  The taxpayer filed a Petition in Tax Court for review. The Tax Court remanded to a new Settlement Officer to address whether a lump sum payment made to bring down the balance had been accounted for in the initial conference. The Settlement Officer found that the payments calculated by the first Settlement Officer were correct and requested documentation that his employment was in jeopardy.  The taxpayer declined and decided to continue in Court.  Ultimately, the Taxpayer failed to substantiate any information regarding possible loss of employment.  The Court ruled that the Settlement Officer had not abused his discretion in sustaining the lien.  Furthermore, even if the taxpayer had established the DDIA, the Officer would not have abused his discretion by refusing to withdraw the lien as there is no requirement under the law to withdraw the lien because of an installment agreement.  This is a voluntary procedure of the Service, not a mandatory one.  Taxpayer again presented no evidence in Court regarding possibly loss of employment. The Court entered judgment for the government.