Settling Unpaid Taxes With Sporadic or Seasonal Income

Published Categorized as Currently Not Collectible, Installment Agreement, Offer in Compromise, Tax Debt
Uneven income settlement, Austin Tax Attorney

Sporadic or seasonal income can make it difficult to settle back taxes with the IRS.  For example, if you have a large one-time payment that is not likely to continue, can the IRS consider this in evaluating how much you can pay the IRS?  The court addresses this in Margolis-Sellers v. Commissioner, T.C. Memo. 2019-165 in the context of alimony payments that would no longer be received.

Facts  Procedural History

The taxpayer is self-employed as a movie producer.  Her ex-husband is also a movie producer.  He paid her alimony of $11,000 per month from 2012 until June 30, 2015.  The ex-husband’s obligation ended in June 2015.

The taxpayer had unpaid taxes from 2009 and 2012.  She filed a collection due process hearing request to forestall IRS collections.  The IRS Appeals Officer reached a decision in the case in July of 2015–one month prior to the ex-husband’s alimony obligation stopped.

The IRS Appeals Office concluded that the $11,000 alimony payment had to be factored into the taxpayer’s ability to pay.  Thus, the IRS determined that the taxpayer could afford to pay $11,732 to the IRS monthly.

The taxpayer filed suit in tax court to dispute the inclusion of her $11,000 alimony payment, as the payment obligation had ended and she wasn’t likely to continue to receive these payments.

About the IRS’s Collection Standards

The IRS has broad authority to collect unpaid taxes.  The IRS policy manual sets out the rules the IRS is to follow in collecting unpaid taxes.  These policies include evaluating the taxpayer’s “reasonable collection potential.”

The taxpayer’s reasonable collection potential is then used to determine how much the taxpayer should be paying to the IRS.  This is the basis of computing monthly installment payments or the amount the IRS will settle the tax debt for.

The IRS policies direct IRS employees to consider all of the taxpayer’s income.  The alimony was income for the taxpayer in this case.  But what if the income is uncertain and not likely to continue?

Factoring in Uncertain Income

The IRS policy manual says that where a taxpayer’s wage income is sporadic or seasonal, the IRS should use the taxpayer’s Form W-2 income and divide that by 12, for 12 months.  This means that sporadic or seasonal income is counted.  But should this rule apply to an alimony obligation that had just ended?

The court says that the taxpayer: “fails to provide any legal basis for why SO August should have disregarded the aforementioned payments she received from Mr. Sellers in determining her ability to pay; to the contrary, the IRM counseled him to do so and he properly followed the IRM.”

While the taxpayer may not have raised the argument, the IRS policy cited by the court does not really address income that has ended.  Income such as terminated alimony are not the same as sporadic or seasonal wages.  Presumably one can go back to work and earn additional wages, even if they are seasonal or sporadic.  One generally cannot go back and force someone who completes their alimony oblation to continue to pay alimony.

Those with unpaid tax debts have to pay particular attention to cases like this.  The holding may result in the IRS collecting less in taxes.  The holding suggests that taxpayers wait until the year after the income, such as alimony obligation in this case, ended before they take steps to work with the IRS to pay their unpaid taxes.