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.
Lien Withdrawal and Collection Due Process Hearing
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.
How do you decide if an Offer In Compromise is a good way to resolve your IRS debt?
In the past couple of years, the IRS has dramatically changed its formula for calculating the amount a taxpayer must pay to settle a tax debt. Fundamentally, the changes were favorable for the taxpayer and the IRS appears to better understand that acceptance of an Offer in Compromise likely results in collection of more tax dollars than simply continuing to enforce collection efforts through levies and lien filings. However, the movement towards a more favorable calculation by the IRS of the taxpayer’s ability to pay, and thus the taxpayer’s reasonable collection potential, has actually been further adjusted in a manner that removes some of the initial excitement about formula changes to Offer calculations.
The basis of acceptance of most Offers in Compromise is doubt as to collectability. Basically, the IRS performs an analysis of a taxpayer’s financial situation and if the taxpayer’s ability to pay is less than the amount they owe, then the taxpayer could theoretically qualify for an Offer in Compromise settlement. The ability to pay analysis consists of the calculation of both a taxpayer’s equity in assets and “future income potential.”
A taxpayer’s future income potential for a settlement is typically calculated by performing a monthly financial analysis in which the IRS compares gross earnings to allowable expenses to determine if there is any excess monthly income remaining from which the taxpayer could pay the IRS. If so, this excess income was historically multiplied by a factor – either 48 or 60, to determine the future income potential portion of a settlement Offer. The taxpayer would be allowed to multiply the excess monthly income by 48 if the Offer was for a lump sum settlement, and 60 if the payments were to be made over a couple of years.
Recently, a favorable adjustment was made to the multiplier. Rather than asking the taxpayer to multiply excess income over expenses by 48 for a lump sum Offer, the IRS dramatically adjusted this number down to 12! And, rather than multiplying by 60 for a short term payment Offer over up to a couple of years, the multiplier was altered to 24!
This seemed almost too good to be true. And in part, it was. The IRS clarified, through the adoption of guidance in its Internal Revenue Manual, that even if a taxpayer calculates that he or she qualifies under the new formula, the taxpayer will not qualify for a settlement Offer if the IRS could collect the entire debt through establishment of an Installment Agreement over the statutory period of collections, unless there are special circumstances.
What this means is that at the time of analyzing a taxpayer’s situation, it is important to be aware that even though the formula indicates a taxpayer would qualify for a settlement, if the monthly excess income over expenses would retire the debt under the statute of limitations, then the taxpayer is wasting time submitting an Offer. Furthermore, the taxpayer will be putting the statute of limitations for collection on hold while the defective Offer is under review, and for a period of time after rejection.
Here’s a simple example of how this would work. Assume a taxpayer owes $50,000 in tax debt. If the taxpayer just filed the return, the IRS will have 10 years, or 120 months to collect the debt, with exceptions for extensions of time – such as when an Offer is filed. If the taxpayer has no equity in assets, but a financial analysis shows an ability to pay $1,000 a month, the taxpayer might think a lump sum Offer would be a good way to put the debt to rest forever. Under the lump sum analysis, the future income potential would be $1,000 x 12 or $12,000. With no equity in assets, this is less than the tax debt and would make this look viable. Even the short term Offer looks good as the future income potential would be $1,000 x 24 or $24,000. The settlement would be paid over 24 months, or $1,000 per month.
The reality in the above example is that the Offer will be rejected, absent special circumstances, because the monthly future income potential of $1,000 multiplied by the life of the collection statute exceeds the tax debt as follows: $1,000 x 120 months (or 10 years as the return was just filed) = $120,000. The exception to this is if special circumstances exist as disclosed on submission of the Offer. Generally, special circumstances would include creation of economic hardship, or alternatively, compelling public policy or equity factors, such as health concerns or age, could tip the analysis in favor of settlement, in spite of the above.
Fundamentally, and especially because of the fact that the statute of limitations is placed on hold during a lengthy analysis period (several months), a taxpayer has to be careful to review their particular situation so that submission of an Offer in Compromise doesn’t do more harm than good. If you would like assistance with your tax matter, or the tax situation of a client, please don’t hesitate to contact us.
Why do I have to owe over $10,000 to get help with my IRS tax debt?
Everyone has seen on television, or heard on the radio, advertisments for assistance with owing the IRS back taxes. Turn on the TV late at night to watch reruns of your favorite show and you’re bound to see at least one. But they all have that caveat, saying that you must owe the IRS over $10,000 for them to help you, but why?
The fact of the matter is that you don’t need to owe a certain amount to have representation to assist with your tax debt – at least not from our firm. If you listen to the television or radio you would think that there is no way to help someone who owes less than this amount. Most of the businesses that advertise in this way are looking to submit a settlement proposal, known as an Offer in Compromise, to the IRS on your behalf. This may or may not be possible, but generally that is the only service these businesses provide. What they know is that due to the manner in which the IRS settles debt, it is nearly impossible to settle a small tax debt. However, here are several situations that our office sees frequently where taxpayers have a small tax debt, but still need help sorting through their options to come into compliance:
- Sometimes a client may owe the government a small amount, but has unfiled returns and is preparing to file bankruptcy to discharge health care debt or other obligations. The bankruptcy code requires the taxpayer to file their last three returns in order to qualify for the bankruptcy. After filing, the client anticipates owing more. Perhaps that is a small amount or a large amount. Regardless, this client needs help with those taxes because they will not be discharged in the bankruptcy.
- A client may owe a small amount based on a return filed by the government – known as a Substitute for Return (SFR). However, the client will owe much more later when a proper return is filed. This can happen when a client is self-employed and receives a few 1099’s that comprise a small amount of the taxpayer’s overall revenue. Once the return is properly completed, there may be a different picture.
- Sometimes a client owes tax debt that their spouse created and it is simply unfair for them to be held responsible for the debt. That client may want to be relieved from the obligation – no matter how small – through the Innocent Spouse Relief process. Alternatively, a spouse may be harmed because his or her refund was offset to their spouses tax debt. In this instance, this client may need assistance filing an Injured Spouse claim.
- A client may have a few thousand dollar tax debt created by automated Exam at the IRS, but if the client merely pays it or sets up a payment agreement to resolve the balance, the taxpayer may be setting himself or herself up for problems with future tax return positions. If your expense or other deduction is valid and the IRS disallowed it, it may be worth fighting to substantiate it so you do not create a record showing you agreed with the claim or deduction being disallowed. Therefore, your representative could make arguments to assist in your exam and protect your position for later.
- Some clients owe less than $10,000 and are interested in relieving themselves from the burdens of a tax lien. It is now possible to establish a Direct Debit Installment Agreement and apply for a withdrawal of the tax lien. There are specific procedures for this doing this must be met to qualify, but it is possible. As a matter of fact, it is now possible to accomplish this if you owe up to $25,000.
- A client may owe a small tax debt which was originally much larger and triggered the filing of a tax lien. Though the debt is paid down, it is preventing the sale of a piece of real estate because there is not enough equity to retire the tax debt at closing. These clients need assistance with a request to Discharge Property from Federal Tax Lien. This will clear title to the property and allow for the closing, even though the entire tax debt is not being paid off in full.
- Some of our clients only owe a couple of thousand dollars, but have many years of unfiled tax returns and anticipate owing much more. A settlement proposal, Offer in Compromise, may be appropriate. However, it is impossible to know if that is the case until the taxpayer knows the total owed and a financial analysis is performed which includes a review of income, expenses and equity in assets.
- A client may need assistance when a wage levy is in place, but the balance on their total tax debt is not larger than $10,000. In those instance, it is very likely that the taxpayer can be moved to a voluntary payment agreement if all returns are filed. Even if all returns are not filed, substantiation to the IRS of income and expenses could likely result in a partial levy release to relieve the client of some, or all of the wage levy.
- If any of the above is similar to your situation, or you have some other tax problem, we will be happy to help you, regardless of the size of your debt. Just give us a call.
Just filed a tax return and have a balance due you can’t pay?
You have many opportunities to deal with this situation – but the most important thing to remember is that taking action sooner is better than waiting. Your timely response can provide you with an opportunity to review your financial situation and determine if it is best to use other resources to retire your tax debt. Tax liens are not filed right away and as such, it may be in your best interest to borrow against the equity in your real estate. Once a tax lien is filed, which happens in many cases, your likelihood of getting a loan is greatly reduced.
Should you not have the ability to borrow money to pay off the tax debt, the time immediately after filing your return is the best time to analyze your financial situation to determine what options you have. Once the IRS begins to send you notices, they will ultimately issue a Final Notice of Intent to Levy and then they have the right to seize assets and levy income.
If a professional is assisting you with your financial analysis, they are working to put together a Collection Information Statement. This document will allow the person assisting you to determine if you are a candidate to submit a settlement proposal to the IRS – known as an Offer in Compromise. Nobody can tell you that you are a good candidate for a settlement unless they complete a full financial analysis and know how much you owe in taxes, interest and penalties.
The Collection Information Statement is not only utilized to determine if you are a candidate for an Offer in Compromise settlement, but this document is also used to determine what you can pay on an Installment Agreement, a Partial Payment Installment Agreement, or if you are a candidate for the Currently Not Collectible Status.
An Installment Agreement is an agreement to full pay your outstanding balance plus interest and penalties over a period of time. There are instances where you do not have to disclose all of your financials in order to set up an Installment Agreement. This is typically based on the amount you owe the IRS and the amount of time remaining for the IRS to collect the debt – the statute of limitations on collections.
A Partial Payment Installment Agreement is an agreement where you will pay the IRS a monthly payment, but that payment amount would not pay off the entire debt before the IRS statute of limitations to collect runs out. Because there is a possibility that the IRS will not collect all of the tax liability from you, they reserve the right to review your financial situation every couple of years.
In addition to the above, many taxpayers qualify for placement in Currently Not Collectible status. This status is given when you substantiate to the IRS through financial disclosure on a Collection Information Statement that you do not have any equity in assets, nor do you have the ability to make a monthly payment. When placed in this status your debt continues to grow from accrual of interest and penalties. The IRS will review your financial situation from time to time to determine if you can begin paying something toward the tax debt.
Given the fact that the IRS has the power to levy your wages or seize assets if they issue a Final Notice of Intent to Levy, it is important to be aware of the status of collections of your tax debt. When the Final Notice of Intent to Levy is issued, the taxpayer has the right to have the matter reviewed by Appeals Division of the IRS. This review is independent of the Collection Division and the reviewing officer has the ability to establish one of the plans above. Sometimes this is advantageous as the taxpayer’s matter is assigned to a single caseworker rather than a service center where the taxpayer has less of an opportunity to work directly with an IRS employee.
As can be seen from the above, there are many options to deal with your tax obligations. The situation can only get better by dealing with it sooner. If you have tax liabilities you can’t pay, please contact us. We would be happy to provide you with guidance to determine how best to proceed.
Partial Payment Installment Agreements
Since its inception in 2005, this collection resolution has become a common way to resolve IRS problems in our office. Given the fact that the Offer in Compromise program only solves a relatively few taxpayers’ problems (offer acceptance has been fewer than 15,000 Offers accepted a year in the past few years), it is necessary to explore other resolutions when assisting a taxpayer with a delinquent balance.
In 2005 Congress allowed the IRS to enter into installment agreements that only partially pay a tax liability. This was accomplished by amending Internal Revenue Code section 6159. It is Congress’ reference to “partial collection” of the tax debt that caused the IRS to label this type of agreement Partial Payment Installment Agreement (PPIA).
The statute requires that in order to enter into one of these agreements, the IRS must “review the agreement at least once every 2 years.” Congress was balancing the need to collect revenue now by entering into a payment agreement with a taxpayer that would not fully pay the debt, against the possibility that the taxpayer may have more means to pay later. As such, the IRS will review the taxpayer’s status at a later date to determine if he or she can pay more.
A few things have to happen in order to establish a PPIA. The taxpayer must complete a full financial analysis to determine an ability to pay. During the course of this financial analysis, the IRS will review the taxpayer’s equity in assets. Because the PPIA will not pay the entire debt based on the payment amount at establishment, the IRS will expect the taxpayer to either liquidate or borrow against equity in assets before establishing a PPIA. It is not an absolute requirement that the equity be borrowed against or liquidated; however, the taxpayer must seek to take these actions before the PPIA will be established.
In order to understand the concern of the government when establishing a PPIA, it is important to understand the statute of limitations for collection of a tax debt. An important date in the analysis of any delinquent taxpayer’s tax debt is the Collection Statute Expiration Date
(CSED). This is the date on which the IRS loses the ability to collect a tax debt, or the collection statute of limitations. This date is generally 10 years from the date of assessment, which is when the tax return is processed or the IRS creates a balance for the taxpayer. Some actions stop the running of this statute, such as the filing of a bankruptcy, a submission of an Offer in Compromise, or a variety of appeal actions before the IRS. Therefore, you can’t assume that you know the exact date of the CSED based on a return filing date.
After equity in assets is addressed, the IRS will review the taxpayer’s future income potential. This number is generally the taxpayer’s gross monthly income less allowable expenses. If equity is addressed and the taxpayer has some ability to pay, but not enough to fully pay the tax debt before the CSED, then the taxpayer would generally qualify for a PPIA.
A simple example would be a taxpayer that owes the IRS $50,000. If that taxpayer had $20,000 of equity in her home, she would be expected to try to establish she can’t borrow against it. If this is the case, then the IRS would look at her future income potential. If the CSED is 60 months and the taxpayer can pay $300 per month, the IRS would establish a PPIA knowing that at the time of establishment of the PPIA, the taxpayer would only pay $300×60 = $18,000. The IRS would review the agreement at least every two years to determine if the taxpayer could pay more.
In the above example, and all PPIAs, once the CSED expires, all remaining tax debt is closed out and not collected by the IRS. In other words, the taxpayer effectively pays less than the total tax debt, though there is no technical settlement.
The PPIA is a good option that removes many taxpayers from risk of enforcement actions like levy and seizure. A tax lien is typically filed at the time of establishment of the PPIA if one has not already been filed. Further, like many other resolutions, if the taxpayer fails to remain compliant with his return filings and current year tax payments, he will default the PPIA even if he is making payments.
Should you have questions about Partial Payment Installment Agreements or any other resolution options for delinquent IRS matters, feel free to contact our office.