Taxpayer offers more than it could afford. Taxpayers may enter into installment agreements to pay outstanding taxes. Depending on the balance of tax, the IRS calculates the taxpayer’s reasonable collection potential in determining how much the taxpayer should be required to pay. But what happens if the taxpayer by the books can’t afford to pay anything, but still offers at least a certain payment as a sign of good faith and in hopes of better financial things to come?
Denial of offer. The answer: Rejection by the IRS, IRS Independent Office of Appeals, and the US Tax Court.
In American Limousines, Inc. v. Commissioner of Internal Revenue, the taxpayer was more than one million dollars behind on payroll taxes. Taxpayer proposed an installment agreement of $2,000 per month, though based on the taxpayer’s own business financials, the taxpayer could not afford the payments and in fact ran nearly $900 per month in the negative in cash flow. Despite this negative financial condition, the taxpayer proposed the installment payment on grounds that taxpayer was “optimistic about its prospects, and has offered as a collection alternative an installment agreement of $2,000 per month as a sign of good faith.”
Law permits rejection of installment agreement that taxpayer cannot afford. However, the IRS is not compelled to accept an installment agreement that the taxpayer can’t afford to pay. The Court recited applicable law:[Internal Revenue Manual] pt. 22.214.171.124(4) (Sept. 19, 2014) states that, generally, installment agreements “should reflect the taxpayers’ ability to pay on a monthly basis throughout the duration of agreements”. Moreover, we have held: “[I]t is not an abuse of discretion for a [Settlement Officer from the IRS Office of Independent Appeals] to reject a proposed installment agreement when a taxpayer’s monthly income does not support the proposed payment.”
Thus, the Court ruled that the Settlement Officer did not abuse its discretion in denying a proposed installment agreement that the taxpayer could not afford by its own calculations.
Practice Point. Question: Why doesn’t the IRS just let the taxpayer try to pay and if it fails, it fails. Possible Answer: The IRS believed that it could achieve more via tax levy than the $2,000 monthly payment due to taxpayer’s assets. One cannot help but wonder if the IRS would have allowed the taxpayer to give the installment agreement a try if there had been no other significant source of funds. Also, if the taxpayer had done a better job of showing a business plan for increasing income to cover the $2,000 installment agreement within a reasonable time, perhaps the taxpayer could have convinced the IRS or court to accept.
Taxpayers in need of installment payment agreements are encouraged to contact Jared Le Fevre to discuss payment options.
Next article. Part 2 of this article will discuss the IRS’s counter proposal for paying the tax.
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.
 American Limousines, Inc. v. Commissioner of Internal Revenue, 2021 WL 1156571 (T.C. Mar. 25, 2021).