If the taxpayer submits an installment agreement request that full pays the liability, can the IRS reject the request as the payment amount is too high? The court addresses this in Lites v. Commissioner, T.C. Memo. 2005-206.
Facts & Procedural History
The taxpayers were a husband and wife. The taxpayer-husband was a financial products salesman and the primary breadwinner for the family of four.
The husband underwent a number of employment changes, due to a downturn in the financial markets and due to a heart condition.
The taxpayers filed their federal income tax returns late (1999 and 2000 federal income tax returns were eight days late and 2001 federal income tax return twenty nine days late),
They failed to make the ~$66,000 tax payment and failed to comply with an installment agreement (after making ~$3,000 in payments).
The taxpayer received the notice of levy, requested a hearing (a collections due process hearing), and proposed an installment agreement.
The Proposed Installment Agreements
Over the course of a year the taxpayers ended up making three such proposals: one for $750 per month, one for $1,000 per month, and one for $1,200 per month.
In support of these offers the taxpayers asserted that they had $888 of monthly excess income.
The IRS collection function and the IRS Appeals Office rejected the taxpayers’ offers, arguing that the taxpayers had $2,732 of monthly excess income and that that amount should be paid to the IRS on a monthly basis.
Because the taxpayers had filed a collection due process hearing request, they were able to have the U.S. Tax Court consider the case.
The IRS Changes Course at Trial
At court, the taxpayers argued that the IRS erred in rejecting their installment agreement request. They requested an installment agreement whereby they would pay $1,200 per month in full discharge of their tax liabilities
The law at the time provided that “except in instances when a reasonable extension of the statutory period for collection will allow an agreement to be accepted.” The collection statute was 10 years. Extensions were limited to no more than 5 years, plus up to 1 year to account for changes in the agreement (such as payment skips, interest rate changes, etc.).
The IRS Cannot Reject High Payment Plans
At trial, the IRS conceded that the taxpayers had $888 of excess income each month. But instead of conceding the case, the IRS took the position that it was correct in denying the taxpayers offers because the offers exceeded what the taxpayers could afford to pay.
Note that the IRS had originally rejected the taxpayers offers because they were too low. Now at trial, the IRS argued that it was entitled to reject the taxpayers offers because the offers were too high.
The court correctly noted that there is no such law that permits the IRS to reject offers because they were too high. The court even cited the IRS policy manual saying that it “does not appear to contemplate rejecting an installment agreement merely because the taxpayer has offered more than the Commissioner believes the taxpayer can afford.”
The court stated that it was confused and perplexed by the IRS’s position. The court went on to say that the IRS could not have it both ways, i.e., reject the installment agreement for being to low and then prevail at trial based on the installment agreement being too high. So the court remanded the case back to the IRS for reconsideration.