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  He alleged that he would lose his job if the NFTL was not withdrawn.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.

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.