In Part 1 of this article, we discussed the case of American Limousines, Inc. v. Commissioner of Internal Revenue[1], where the IRS and Tax Court rejected the taxpayer’s installment agreement wherein the taxpayer had offered a higher payment than it could afford. In a curious twist, while the IRS rejected the taxpayer’s offer of $2,000 per month as beyond the Taxpayer’s ability to pay, the IRS countered for a monthly installment agreement payment of $20,000 as reflecting the taxpayer’s reasonable collection potential.
Method to the IRS’ Madness? Only in the world of tax and the IRS would the IRS reject the taxpayer’s $2,000 offer because the taxpayer could not afford it but demand $20,000 instead. What gives? It turns out that instead of the taxpayer paying its employment taxes, it instead expanded its business by buying a bunch of additional limos, which included an increase to taxpayer’s monthly bank loan payments. The IRS did not take kindly to the taxpayer fueling its business expansion on the back the United States Treasury by purchasing additional limos and insuring higher bank loan payments rather than paying its tax liability.
So in calculating the taxpayer’s reasonable collection potential, the IRS denied the monthly payments to the bank for the extra limos and instead diverted those payments to the taxpayer’s ability to pay the IRS. In essence, the IRS demanded that the government be paid first before the taxpayer expanded its business, using funds that should have gone to pay taxes.
Practice Point. The taxpayer must be careful to show that expenses paid for while taxes are owed are going to ultimately help pay the IRS back. If the taxpayer could have shown that expansion of its limo fleet improved the IRS’ chances to get paid, perhaps the IRS would have accepted the taxpayer’s installment agreement. Installment agreements with large tax balances can be a delicate negotiation.
Business taxpayers with delinquent employment taxes are urged to contact Jared Le Fevre to discuss options for resolving the taxes.
About the Author. Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal, state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] American Limousines, Inc. v. Commissioner of Internal Revenue, 2021 WL 1156571 (T.C. Mar. 25, 2021).