Offer in Compromise
Houston Tax Attorney
Retirement accounts can present a number of challenges when trying to resolve an IRS debt. The IRS considers a retirement account as an asset in its collection analysis. The recent Scanlon v. Commissioner, T.C. Memo. 2018-51, court case provides an opportunity to consider the impact of retirement assets on IRS collection matters.
The Facts & Procedural History
The Scanlon court case presents a common fact pattern. The taxpayers got behind in their estimated tax payments. The balance was sufficiently large that they did not have easy options for paying the liability. The IRS issued a lien notice, which the taxpayers contested by filing a collection due process hearing request.
The taxpayers proposed by pay $3,000 per month as part of an installment agreement. The IRS Appeals Office evaluated the taxpayer’s ability to pay and determined that they could full pay the balance. Specifically, the IRS noted that the taxpayers retirement account could be liquidated to pay the unpaid tax in full.
The taxpayers did not want to liquidate the account as this would trigger an additional tax liability in the current year and they alleged that they could not do so given that they already had a $30,000 loan from the retirement account. The IRS asked for more information about whether the taxpayers could access the retirement account, but the taxpayers did not provide this information to the IRS.
The Impact of Retirement Account Assets
The IRS is authorized to consider retirement accounts in evaluating whether a taxpayer can pay their tax liabilities. This is specifically set out in the IRS’s policy manual. It should be noted that there is a difference between levying or taking retirement account assets and sustaining a lien filing because the taxpayer has a retirement account.
Let’s consider the levy rules first. The IRS’s policy manual provides this guidance for levying on retirement account assets:
1. The IRS’s policy manual instructs IRS employees to only consider the taxpayer’s retirement accounts if there are no other assets that can be taken to satisfy the tax liability or if the taxpayer will agree to an acceptable installment agreement.
2. The IRS’s policy manual also cautions the IRS not to levy on retirement assets unless the taxpayer’s conduct is flagrant.
3. The IRS’s policy manual instructs IRS not to levy on the retirement account asset if the taxpayer is reliant on the account for his financial support or he will be in a short period of time.
4. Last, the IRS’s policy manual reminds IRS employees that the IRS can only levy on vested rights the taxpayer has in the retirement account assets. The IRS levy cannot accelerate access or entitlement to benefits the taxpayer is not already able to access or entitled to.
While the IRS may not levy on the retirement account assets, it may factor the assets into its analysis to sustain a lien filing if the taxpayer does not voluntarily liquidate the retirement account to pay the taxes.
This was the very issue in the Scanalon court case. The IRS was requesting the taxpayers to liquidate their retirement accounts. Since the taxpayers were not successful in the court case, presumably after the court case, the IRS may try to levy on the account. It would then apply the above limitations in determining whether it would do so.
Exceptions for Requiring Liquidation
The IRS is not to request the taxpayer liquidate retirement account assets in some circumstances. Specifically, the IRS’s policy manual says that the IRS is not to make this request if the taxpayer is of an advanced age, in ill health or has other special circumstances, such as the need for the account to provide for the taxpayer or his family’s health and welfare.
As a practical matter, the IRS will also consider evidence that the taxpayer cannot access the funds. This often comes up when the taxpayer already has an existing loan from the retirement account. Most retirement accounts will not let the participant take more than one loan out at a time. Providing the IRS with a letter indicating that this is how the plan operates can help dissuade the IRS from requiring the retirement account be liquidated.
Liquidation Isn’t Always a Bad Option
There are some limited instances where liquidating retirement accounts is an acceptable resolution for an unpaid tax liability.
This option may be acceptable when the tax liabilities cannot be discharged in bankruptcy and the taxpayer has other current assets they do not want to liquidate to pay the tax.
The early withdrawal tax is not imposed if the IRS levies on the account as opposed to the taxpayer taking the funds out of the account. This is one of the primary benefits of working with the IRS in these cases.
The IRS will generally withhold 20-25 percent of the funds for current year taxes. This helps defray the current year income tax hit from taking the funds out of the account.
While not ideal, it may provide an avenue for resolving a difficult case with a sizeable retirement account asset.
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