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Installment Agreement Tax Debt

Is Homeless a Requirement for an IRS Payment Agreement?

Indifference. It is generally defined as “lack of interest, concern, or sympathy.”

Those who are unfortunate enough to work with the government employees to resolve a case or matter often have a profound understanding of this term. This is true of just about every government function–be it local, state, or federal.

When it comes to taxes and the IRS, indifference is found by the IRS employee who either (1) does not read or care what the rules say or (2) reads the rules, cites the rules, and is flat wrong about what the rules say.

When it comes to the IRS Office of Appeals, it is usually an appeals officer who just doesn’t care. They exploit the fact that there is virtually no oversight over appeals officers. They can do what they want. And what they want is the easy path, which is often just saying “no” without doing any real work to understand what the right answer is.

The Kirkley v. Commissioner, T.C. Memo. 2020-57 court case provides an example of indifference. It is a common scenario whereby an IRS employee tells a taxpayer that they have to do something. That this something is required by the rules, even though the rules do not support the IRS’s assertion.

The Kirkely case involves the question of whether a taxpayer has to sell their house or residence to secure an IRS installment agreement.

Facts & Procedural History

The IRS asserted that the taxpayers owed unpaid taxes for the 2012 and 2013 tax years. The IRS filed a lien notice in 2015 and, one month later, issued a notice of its intent to levy on the taxpayer’s assets.

The taxpayers responded by filing a timely collection due process hearing request. The request asked for an installment agreement and noted that they were attempting to raise funds by borrowing against their house.

The taxpayers offered to pay $50,000 a month when they were unable to obtain a loan against their house. The IRS appeals officer rejected the installment agreement request as he said the taxpayers were “expected to sell all assets, with the exception of two vehicles, and provide evidence that these assets have been placed up for sale.” The appeals officer explained that the IRS Internal Revenue Manual (“IRM”) required the assets to be sold prior to entering into an installment agreement.

The taxpayers filed a petition with the tax court to challenge this determination.

Evaluating Installment Agreements

The IRS appeals officer noted that IRM 5.14.1.4(5) and 5.14.2.1.2(3), (4), (5), and (6) (Sept. 19, 2014) requires that taxpayers sell all of their assets before respondent will enter into an installment agreement. 

The court reviewed these sections of the IRM and noted that “neither of those IRM provisions automatically mandates sale of all of a taxpayer’s property as a precondition of entering into an installment agreement.”

The court went on to note that the IRM says that appeals officers should “explore the possibility of liquidating or borrowing against assets” when considering an installment agreement “unless the asset is necessary for the production of income or the health and welfare of the family.”

The court also noted that the IRM requires taxpayers attempt to liquidate assets if they want a partial pay installment agreement. It does not require the sale of assets if the taxpayer proposes an installment agreement that will full pay the tax debt.

Drawing a Bad IRS Appeals Officer

In this case, the taxpayer’s residence was the asset to be sold. A residence is typically necessary for the health and welfare of the taxpayer’s family. Moreover, the taxpayers proposed a full pay installment agreement.

The IRS had little difficulty finding that the IRS appeals officer abused his discretion as the IRM did not require the actions the appeals officer said it did.

This is an example of an IRS employee who clearly did not follow IRS policies. Unfortunately, this is all too common. While the IRS’s appeals system often functions well, it provides no remedy when a taxpayer draws an appeals officer who simply does not follow IRS policies or the law.

The taxpayers in this case had the unfortunate luck to draw a bad appeals officer. At least they were only out the extra fees for the tax attorney for the litigation. Absent a timely collection due process hearing request, this taxpayer would have had no remedy.

One Does Not Have to Sell Their House

The case also highlights the rule that a taxpayer who is seeking an installment agreement that will fully pay their unpaid taxes does not have to liquidate their assets to secure the agreement. There are other ways to manage unpaid tax debts.

Even the partial pay installment agreement only requires the taxpayer to attempt to sell the assets. It does not require that the residence actually be sold.

If the assets cannot be sold or the equity realized on the sale is minimal, the IRS will usually not require the asset to be sold. The time and cost to the government would exceed the amount recovered.

Even if there is substantial equity, the IRS will often not require the asset to be sold if the asset is the taxpayer’s residence. As the court noted in this case, the IRM authorizes appeals officers to factor in the needs of the family and its welfare.

That is the result the IRS appeals office should have reached in this case. It should have accepted the taxpayer’s proposal for an installment agreement. The IRS should have done this without requiring the U.S. Tax Court to resolve this dispute.

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