There is something about the human condition where we expect reason to prevail. We expect that if given the opportunity to explain, reasonable parties who take contrary positions will agree. This is not always the case, and it is often not the case when it comes to the IRS.
For example, many businesses that owe back taxes work under the assumption that the IRS would rather see them succeed so that they can pay off their tax balances. Part of this is because business owners spend so much time building their businesses, and they know the struggle it took to get the business where it is. They know the sacrifices they made to get the business where it is. This is the “my child” mindset. Who would want to harm my child?
However, the IRS does not share this mindset. After all, the IRS does not have to compete for clients or work or live with the ever-present reality that a bad month or two will result in not being able to pay and retain staff. These are all foreign concepts to the IRS. From its privileged vantage point, the IRS and its employees often have no concern about whether the business remains viable or even whether the IRS ends up collecting anything from the taxpayer.
The Johnson Home Care Services, Inc. v. U.S., No. CV-04-0129(FB)(JMA) (E.D.N.Y. 2005) is an example of this disconnect.
Facts & Procedural History
The case involves a dispute between the taxpayer, Johnson Home Care Services, Inc., and the IRS. The taxpayer owed payroll taxes to the IRS.
The taxpayer initially attempted to negotiate a payment plan with an IRS Revenue Officer, proposing to make monthly payments of $3,000 per month to the IRS, but the IRS Revenue Officer rejected the plan.
The taxpayer exercised its right to a collection due process (“CDP”) hearing under I.R.C. § 6330(c), where it proposed a second installment agreement, which was rejected by the IRS Appeals Officer.
The taxpayer filed a suit seeking review of the IRS’s decision. Both parties filed for summary judgment.
The IRS Balancing Analysis in Collections
The taxpayer challenged the IRS’s final determination upholding the levy, claiming that the IRS Appeals Officer did not adequately conduct the balancing test required by I.R.C. § 6330(c)(3)(C). The primary argument was that the balancing analysis was improper as the installment agreement would result in the business having to close.
This requirement is set out in the IRS’s IRM as follows: “Consider whether the action taken or proposed balances the government’s need for the efficient collection of taxes with the taxpayer’s legitimate concern that any collection action be no more intrusive than necessary.”
The court did not accept the taxpayer’s argument. The court stated that:
the IRS is not required to consider in its balancing analysis whether it will receive any revenue from a levy and sale, or whether the taxpayer’s business will have to close down due to the levy and sale. See id. at 628 (noting that the case law “supports the proposition that the government is not required to continue subsidizing failing businesses by foregoing tax collection,” and that “[a]ny other conclusion would create a bizarre tax system with perverse incentives for businesses to maintain themselves on the edge of insolvency in order to enjoy immunity from tax enforcement”). See also Medlock v. United States, 325 F. Supp. 2d 1064, 1080 (C.D. Cal. 2003) (holding that the Appeals Officer was not required to consider the impact of a levy on the customers of the taxpayer’s day care center and stating that “the Service need not accept a collection proposal in lieu of a levy whenever there is an indication that a levy may lead to the demise of the taxpayer’s business”); Kitchen Cabinets, Inc. v. United States, 2001 WL 237384 at *2 (N.D. Tex. Mar. 6, 2001) (holding that the IRS was not obligated to accept a proposed installment agreement in lieu of a levy although a levy might lead to the demise of the plaintiff’s business).
As such, there was no abuse of discretion even if the effect of a levy on a taxpayer’s business or to accept a payment alternative because a levy will lead to the demise of that business. The court noted that this was supported by the taxpayer’s financial situation and tax compliance history.
Rejection of Proposed Installment Agreement
The taxpayer also argued that the IRS abused its discretion in rejecting the proposed installment plan, imposed more onerous requirements on the taxpayer than the IRS revenue officer, and confused the taxpayer with its principal.
According to the court, the rejection of the taxpayer’s proposed installment plans by the IRS Appeals Officer was not an abuse of discretion. According to the court, the Appeals Officer considered the taxpayer’s financial information, tax history, and level of indebtedness, and determined that it was not a good candidate for a payment plan. The court noted that the Appeals Officer also found that the taxpayer had little cash and equity in assets, and that its belief that administrative expenses would decrease in the future was insufficient to establish its ability to make the proposed installment payments.
The court went further and said that the IRS did not abuse its discretion by refusing to accept a mortgage on the business owner’s residence as security for payment at some future date. While the Appeals Officer considered this alternative, he concluded that it was not in the government’s interest to delay collection for an unspecified period of time pending the completion of the business owner’s divorce proceedings. The Court noted that the Appeals Officer determined that a payment plan that did not involve a substantial first payment was not in the interest of the government.
The IRS has wide discretion to accept or reject installment agreements. If the IRS rejects the installment agreement, the courts typically cannot and will not overturn the decision. This is true even if the evidence shows that the IRS’s proposal will result in the business closing and the likelihood that the IRS will collect nothing. The taxpayer’s next step may be to simply discharge the taxes in bankruptcy.