Avoid Late IRS Installment Agreements

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The concept of “judicial activism” refers to situations where judges do more than simply interpret existing laws. They venture into creating new laws or policies through their rulings. This encroaches on the legislative power of Congress, which creates the laws, and the executive agencies, which create policies to implement the law.

This type of discretion allows the courts to sidestep strict adherence to the letter of the law. The results of these court opinions can create some odd policies, as the policies are not vetted through the legislative or executive rulemaking process. While these court cases may provide a quick fix for the particular case at hand, they can lead to other, bigger policy problems.

For instance, the case of United States v. Schiller, No. 22-1566-cv (2nd Cir. 2023), is a potential illustration of such judicial discretion and policies that miss the mark. This case involves a taxpayer who owed back taxes and the IRS’s 10-year collection statue was about to expire. The taxpayer filed an installment agreement, which was largely ignored by the IRS.

This late installment agreement brougth in the tax regulation that prohibits the IRS from referring a case for litigation while a taxpayer’s request for an installment agreement is pending review by the IRS. Although the IRS conceded its violation of this rule in this case, the court chose not to recognize this admission, concluding that the IRS did not violate the rule.

This case seems to advance the well-intended preference for the IRS in collection cases, allowing the IRS to start the litigation process before the time allowed in the regulations. However, the message to taxpayers, the policy that is being advanced, unfortunately, is that taxpayers should not come forward to voluntarily pay older tax debts.

Facts & Procedural History

The taxpayers were a married couple who owed back taxes for 2007. The IRS assessed $112,324.18 in taxes, penalties, and interest in 2008. Nearly a decade passed without any activity on this debt.

In December 2017, the taxpayers proposed a monthly installment plan of $361 to the IRS, which was formally rejected by the IRS in October 2018. Unbeknownst to the taxpayers, the IRS had already referred the case to the Department of Justice (“DOJ”) for legal action.

After the IRS rejected the installment plan, the DOJ initiated court proceedings against the taxpayers in November 2018. Both parties filed for summary judgment, disputing the timing of the IRS’s referral to the DOJ.

The district court sided with the government in June 2022, ruling that the premature referral did not bar the court action. While acknowledging that the IRS violated regulations by prematurely referring the case to the DOJ, the district court concluded that this technical error did not warrant dismissing the case. The taxpayers appealed the decision.

IRS Installment Agreements

An IRS Installment Agreement is a formal arrangement between a taxpayer and the IRS, authorized under I.R.C. § 6159, that allows for the payment of federal tax liabilities in installments. Instead of requiring the full payment of a tax debt immediately, the IRS allows taxpayers to make periodic payments.

The IRS is authorized to create such agreements, particularly when doing so will aid in the full or partial collection of tax debts. There are different types of installment agreements tailored to the needs and financial situations of taxpayers, including the following:

  • Regular Installment Agreement: Generally for those who owe less than $50,000 in combined taxes, penalties, and interest.
  • Partial Payment Installment Agreement: Allows you to make smaller payments if you can’t meet the standard terms.
  • Streamlined Installment Agreement: Usually for debts under $25,000, requiring minimum paperwork and granting quick approvals.
  • Payroll Deduction Agreement: Allows employers to deduct agreed-upon payments directly from an employee’s paycheck.

Once agreed upon and the IRS’s agreement fee, these installment plans generally remain in effect for their set term. The IRS will also usually file a lient notice to protect its interests and proceed to certify the debt for passport purposes. However, there are conditions under which the IRS can modify or terminate the agreement, such as if there’s a significant change in the taxpayer’s financial situation or if the taxpayer fails to meet the agreed-upon terms. Prior to such actions, the IRS is typically required to provide 30 days’ notice and an explanation to the taxpayer.

Limits on the IRS’s Collection Powers

The Revenue Restructuring Act of 1998 added a number of provisions that limit the IRS’s ability to collect taxes. These provisions were added due to perceived collection abuses by the IRS.

One of these provisions is the limitation in I.R.C. 6331. Section 6331(k) provides that the IRS cannot initiate a levy on a taxpayer’s property or rights to property when there is a pending offer-in-compromise or an installment agreement:

  1. Offer-in-Compromise Pending: When a taxpayer has submitted an offer-in-compromise under Section 7122, no levy can be initiated as long as the offer is pending. Furthermore, a 30-day cooling-off period exists if the offer is rejected by the IRS. This period extends during the pendency of any appeal against such rejection.
  2. Installment Agreements: Section 6331(k)(2) parallels the limitation on levies during the offer-in-compromise period by also prohibiting levies while an offer for an installment agreement under Section 6159 is pending. Similar to offers-in-compromise, if such an offer is rejected, a 30-day buffer period applies. Moreover, no levy may be executed while an installment agreement is in effect, or for 30 days after the termination of such an agreement if an appeal is pending.

The regulations that implement these rules go further than this.

The regulations say that: “the IRS will not refer a case to the Department of Justice for the commencement of a proceeding in court, against a person named in an installment agreement or proposed installment agreement, if levy to collect the liability is prohibited by” the rules described above. This is set out in Treas. Reg. § 301.6331-4(b)(2).

This is the same set of rulesl that says that the IRS statute for collections is held open indefinately, so the IRS can simply not do its job and hold open the collection statute by being inefficient.

The IRS Violated the Rule

In the present case, the parties agree that taxpayers’ installment agreement was pending from December 7, 2017, when it was processed by the IRS, until October 30, 2018, when the taxpayers received notice that their proposal was rejected. The taxpayers did not appeal the rejection.

The IRS had referred the case to the DOJ prior to the time the installment agreement was rejected. The government then commenced this legal collection action on November 30, 2018, the day after the 30-day period for the taxpayers to appeal had expired. This early referral to the DOJ allowed the DOJ to make this filing one day after the 30-day period. The parties agreed that the IRS violated the rules by referring the unpaid taxes to the DOJ before formally rejecting their proposed installment agreement.

This was the subject of the appeal. The appeals court noted the IRS’s admission, but the court reasoned that the referral was not for the commencement of a collection action by the IRS: “In no way can an IRS referral—that is, a request that the DOJ begin litigation—be considered tantamount to beginning a collection proceeding in court.” The express language of the rule does not require that the case actually be commenced. It just prohibits the referral.

One could view this as an example of judicial activism, where a court might be seen as going beyond mere interpretation of the law to effectively create new law or policy. Judicial activism is a contentious issue and different judges, legal scholars, and observers have various views on how much latitude judges should have in their interpretations.

This case stands for the proposition that the IRS can wait until the 10-year statute expries to try to collect, it can ignore the taxpayer’s request to pay for more than a year, and then it can start litigation by making a referral to the DOJ before the time allowed in the regulation. The IRS can probably do the same for pending offer-in-compromises submitted by taxpayers, as there is a mirror provision for offers as there is for installment agreements.

The Takeaway

In the Schiller case, the IRS violated the regulations by referring the case to the DOJ before the taxpayer’s installment agreement request was rejected. However, the court ruled in favor of the IRS, effectively allowing the IRS to circumvent the regulations. This could have a negative impact on taxpayers who are trying to work with the IRS to resolve their tax debts.

If you owe taxes and are thinking about making a payment plan with the IRS, be careful about timing. Given this court case, it may be best to wait until the time limit for the IRS to collect the taxes has passed before requesting a payment plan. The government will be shortchanged taxes it would have collected, prehaps losing out entirely, but you will not have tipped the IRS off to file a lawsuit against you to collect before the time allowed in the regulations.

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