June 2, 2015

The IRS allows taxpayers to make monthly payments through an installment agreement if they cannot pay their tax liability in full by the deadline – but they have to comply with certain requirements, primarily making timely, agreed-upon monthly payments and staying current on all taxes.

Andrew and Vickie Hull, a married couple with a sizeable tax liability, recently took their case involving a requested installment agreement to the Tax Court. The Hulls charged that an IRS settlement officer had abused her discretion in denying their request.

As background information, the husband, a successful self-employed attorney, was paid with draw checks instead of payroll checks. A draw check has no income taxes withheld from it. A paycheck does.

Hull’s law firm issued him draw checks during the various years at issue in this case, and Hull paid federal income taxes through quarterly estimated payments. The problem was that he never paid enough during these years to avoid having a large unpaid tax liability when he filed his Form 1040 returns.

As a consequence, the Hulls had a significant tax liability for years 2007 through 2011. Their tax liability with interest and penalties amounted to close to $1 million.

Despite the fact that they were underpaying their income taxes to the IRS, the Hulls had considerable assets. These assets included substantial equity in a lavish personal residence and an expensive vacation home, a 401(k) account, various bank accounts, and a couple of nice vehicles.

The Hulls and their representative, William J. Curosh, had a number of conferences and discussions with IRS Settlement Officer Irma Okubena. During these discussions, the importance of keeping current with 2013 income taxes was stressed to the taxpayers so that they could enter into an installment agreement.

The negotiations between the Hulls and the IRS took place over the course of a couple of years. During this time, the 2012 return was filed. A balance was due on that return as well.

During 2013, Hull estimated the amount of unpaid taxes owed on his 2013 return – after making his estimated tax payments – to be $47,820. Okubena strongly recommended that this unpaid liability be paid with Hull’s last estimated tax payment due no later than Jan. 15, 2014.

Okubena on behalf of the IRS requested that the Hulls cash in part of their 401(k) account to pay the balance of the estimated 2013 income tax in full. They were to do this by Dec. 31, 2013, or she would deny the taxpayers’ request for an installment agreement and issue a levy.

Curosh informed Okubena on Jan. 3, 2014, that the taxpayers had refused to cash in their 401(k) and would not be paying the 2013 estimated liability balance in full.

On Feb. 27, 2014, the IRS issued a notice of determination sustaining the proposed tax levy with respect to the 2007 through 2011 tax years. In the notice, the IRS stated that the taxpayers were not in compliance with required estimated tax payments for the year ending Dec. 31, 2013, and had a long history of noncompliance dating back six years.

The Hulls countered the denial based on a section in the Internal Revenue Code that states that taxpayers are allowed to present collection alternatives to the IRS, including an installment agreement.

But there’s a problem with this argument: Extensive case law establishes that a settlement officer may refuse the taxpayers’ collection alternative if the taxpayers have a history of noncompliance and are not in compliance with their current tax obligation.

Okubena relied on this case law, and the IRS prevailed in the case. By refusing to make the requested payment, the taxpayers were not compliant with the current-year obligations. And they had a long six-year history of noncompliance (Andrew M. Hull and Vickie J. Hull v. Commissioner, TC Memo 2015-86, May 5, 2015).

This article was originally posted on June 2, 2015 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.