equity | Caraker Law Firm, P.C.

IRC 7122

The Tax Court held in Estate of Ralph W. Baumgardner, Jr v. Comm’r of Internal Revenue, Docket No. 11343-19L, filed August 22, 2024, that the IRS Office of Appeals had not abused its discretion by rejecting an Offer in Compromise submitted by the taxpayer given the Reasonable Collection Potential (RCP) exceeded their tax debt. Taxpayers owed approximately $114,504 in tax debt. Collection efforts from the IRS resulted in the taxpayers filing an Offer in Compromise based on Effective Tax Administration (ETA). Taxpayers offered $1,825 to settle the debt. Through much procedure, the IRS adjusted its calculation of equity downwards, but continued to believe that taxpayers RCP was higher than the debt. Frankly, the taxpayers were asking for too much. This case is heavy on detail, but the primary issue relates to a couple of rental houses the taxpayers owned. In this instance, an income production issue becomes relevant as it relates to equity in the houses. In other words, should the taxpayer be expected to liquidate or otherwise account for the equity in an asset that produces income, or simply calculate the income into the financial analysis? In argument, counsel for taxpayers attempted to support their argument for negating the RCP by proposing that they would have foreseeable economic consequences relating to their future increased out of pocket health care expenses, vehicle replacement expenses and real estate considerations…including property maintenance items for their rentals that encompassed everything from plumbing and boiler repairs and maintenance to storm door replacement, vinyl siding and trim replacement, and downspout repairs. The taxpayers’ counsel made good progress with the IRS on health care expenses, as the IRS is generally sympathetic to provable expenditures. The IRS even gave up some ground on the transportation expenses. As for future expenditures associated with the rentals, the IRS deemed them too speculative and the Tax Court agreed. This was a fairly predictable outcome.

The Tax Court ruled in Warren Keith Jackson and Barbara Ann Jackson v. Comm’r of Internal Revenue, T.C. Memo 2022-50, filed May 12, 2022 that it is not an abuse of discretion for IRS Appeals to sustain a proposed levy and deny a proposal of an installment agreement for a taxpayer that has failed to make required estimated tax payments. Taxpayers timely filed and failed to pay multiple years of 1040 income tax liabilities that totaled $128,095 as of 2018. Taxpayers submitted a proposal for an installment agreement. A field Revenue Officer rejected the proposal of $556 per month for the installment agreement and cited that the taxpayers had “sufficient cash or equity in assets to fully or partially pay the balance owed.” Further, that rejection stated that taxpayers needed to make estimated tax payments to qualify for an installment agreement. Given the amount of the debt and monthly proposal, this was a Partial Payment Installment Agreement which requires the IRS to address equity prior to establishment of the payment agreement. After the IRS rejected the agreement, a levy notice with appeal rights was issued. On Appeal, the IRS noted that the taxpayers did not appear to be current on estimates and that they had equity equal to $98,000 in real property. Ultimately Appeals sustained the levy because of non-response. The Tax Court in its review made clear that it has consistently held that an Appeals officer does not abuse their discretion by declining a collection alternative for taxpayers that fail to remain compliant with current taxes. The fundamental take away is that the taxpayer must fix the problem by showing they are capable of paying their current taxes, prior to seeking a collection alternative.