When paying tax debts, installment offers are not guaranteed


A few months ago, I was negotiating payment with the Internal Revenue Service for a client who owed a considerable sum when the client texted. She had received good news about her tax bill.

What she had actually received was one of those “dimes on a dollar” type flyers, sent by a collection company that saw the client’s tax lien (tax liens are public records). While it is certainly true that some customers can benefit from reductions in the amount due, this was not the case for this customer.

But confusion surrounding the collection process means taxpayers are often left with unrealistic expectations about their options for reducing tax or how long they might have to pay. This is what happened in a recent case before the Tax Court.

In this case, the taxpayers filed their 2017 federal income tax return on time, but did not pay the tax. A little later, on June 4, 2018, the IRS sent taxpayers a bill for the tax and a penalty for default.

A month later, the taxpayers responded with Form 9465, Request for disbursement agreement, proposing to pay their tax in installments over six years. They also included a Form 433-A, Declaration of information on collection for employees and self-employed workers.

Taxpayers owed more than $1.1 million at the time the IRS issued a CP90 notice, Intention to seize your property and notice of your right to a hearing. The taxpayers responded by requesting a timely Collections Due Process (CDP) hearing.

A CDP hearing allows taxpayers to discuss outstanding amounts with the IRS Independent Office of Appeals before a levy action (sometimes called a seizure) is taken. During the hearing, a taxpayer can discuss collection alternatives and, if necessary, dispute the amount owed.

You can use a form or write a letter to request the hearing. Either way, you should identify the alternatives you suggest or the reasons for your disagreement with the proposed lien or levy. In this case, when the taxpayers submitted their request for a hearing to the CDP, they did not contest liability or indicate that they could not pay the balance owing.

The case was assigned to a Settlement Officer (SO) who confirmed that the 2017 liability had been correctly assessed and that the correct procedures had been followed. The SO organized a conference to discuss the matter.

Prior to the meeting, the ER reviewed the taxpayers Form 433-A and most recent tax return (2018). These financial statements revealed that taxpayers were reporting over $200,000 in income and withdrawing $19,000 per month from cryptocurrency accounts valued at over $7 million. The ER indicated that taxpayers would not be eligible for an installment arrangement since they could pay the amount owing in full. The ER also advised that no drawdown action would be taken until the installment agreement was formally rejected, but that drawdown action would be appropriate 30 days after rejection.

When the SA spoke with the ratepayer representative a second time, the story had not changed. The taxpayers’ representative, however, insisted that the taxpayers were entitled to an installment arrangement—only that’s not true. The representative confirmed this with the ER supervisor.

The taxpayers provided no evidence that they could not simply withdraw the funds from their cryptocurrency account to pay their debt. As a result, the IRS issued a notice of decision denying the request for an installment agreement and proposing that the levy action proceed.

The taxpayers took the matter to the Tax Court, where they sought summary judgment. The IRS also sought summary judgment.

According to the court’s rules, summary judgment is appropriate when “there is no real dispute as to a material fact and a decision can be made as a matter of law”. (Rule 121(b)).

This was the case here. The parties have agreed on the basic facts and the taxpayers have not disputed the underlying tax liability.

What was in dispute was whether the IRS abused its discretion in denying their request for an installment agreement. Below Chapter 6159, the IRS may enter into an installment agreement if it will facilitate full or partial collection of a taxpayer’s outstanding debt. This determination is subject to the discretion of the SO.

The Tax Court noted that it would not substitute its judgment for standing offers, nor would it independently determine what would be an acceptable offer. Instead, the Court noted that the ER followed the guidelines of the Internal Revenue Manual which notes to 5.14.1.4(5) that “if taxpayers have equity in assets that could be used to satisfy all or substantially all of the balances owing, explore the possibility of liquidating or borrowing against those assets”, unless certain factors apply .

The taxpayers did not invoke any exceptional circumstances such as old age, poor health or economic hardship. And, there was no evidence that taxpayers would struggle to convert their cryptocurrency to cash to pay their balance owing. In fact, it was quite the opposite: taxpayers were declaring a healthy income and withdrawing – seemingly without any difficulty – $228,000 per year from their cryptocurrency account. The conclusion of the SO was therefore appropriate.

The Tax Court also found that requesting the installment agreement in July 2018 did not preclude the IRS from issuing Notice CP90 in December 2018. The Notice stated, pursuant to Section 6331(k)(2), this “[l]Any action is permitted 30 days after the rejection of the proposed installment agreement. Similar language can be found in the IBD at 5.14.1.1.1.

With that, the Tax Court entered summary judgment in favor of the IRS, clearing the way for a levy.

Taxpayers and tax practitioners can each learn from this case. One of the most important takeaways? Not all payment and settlement options apply to all taxpayers: there is no one-size-fits-all approach to tax settlement. Tax liability cases should always be considered on an individual basis, taking into account not only the rules of procedure, but also the amount and type of tax liability, the resources available and the particular circumstances. to the taxpayer.

The deal is Strashny and Strashny v. Commissioner, Memo TC. 2020-82.

This is a weekly column from Kelly Phillips Erb, the TaxGirl. Erb offers commentary on the latest tax news, tax law and tax policy. Look for Erb’s column each week in Bloomberg Tax and follow her on Twitter at @taxgirl.

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