In Charnas v. Commissioner, T.C. Memo. 2015-153, the U.S. Tax Court addressed whether a lawyer who had variable income from year to year was able to pay his outstanding tax debt. The court concluded that the IRS erred in not considering the variable nature of the taxpayer’s income in determining whether he could pay his tax debt.

Facts & Procedural History

Mr. Charnas was a personal injury attorney. He worked on contingency fee basis. As such, his income was highly variable from year to year. For 2009 through 2012 Mr. Charnas reported adjusted gross income of $806,639, $364,096, $32,071, and $438,973, respectively.

Mr. Charnas filed his Federal income tax returns for 2009 and 2010, but he did not fully pay the income tax liabilities reported on these returns.

The IRS issued a Notice of Intent to Levy to collect these unpaid taxes and he filed a collection due process hearing request.

The IRS settlement officer assigned to the case requested financial information, including a Form 433-A. Mr. Charnas provided the Form 433-A and attempted to meet with the settlement officer to go over his records.

The settlement officer was not in the office on the day Mr. Charnas tried to meet with her and she did not schedule another meeting with him. Instead, she concluded that he had the ability to pay his income tax liability and did not qualify for a collection alternative given that he was not current with his estimated taxes.

The issue in the court case was whether the settlement officer abused her discretion in refusing to consider Mr. Charnas variable income. The court concluded that the settlement officer did abuse her discretion in not considering Mr. Charnas variable income, especially given that she did not meet with him in person.

Unsteady Income? How Will This Affect Any Collections Alternative? 

As a practical matter, the lack of steady income can make it difficult to get the IRS to agree to a collection alternative, such as an installment agreement or offer in compromise. Many IRS employees simply will not agree to a collection alternative when there is any indication that the taxpayer will earn or receive more income in the future.

One can understand why the IRS might not accept an offer in compromise in these situations, as the IRS might not collect the full amount of tax if the taxpayer was to receive more income in the future. But the IRS should be accepting of installment agreements. The standard installment agreement specifies that the IRS has the ability to terminate the agreement if the taxpayer’s ability to pay changes.

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