One thing that is different about working for the IRS is that you are tasked with making decisions. It is about making decisions and processing cases or forms.
This is true for just about every taxpayer-facing job function within the IRS. IRS personnel make decisions based on their narrow job function. They do so over and over.
But what happens if you come across a decision maker who makes a bad decision? The recent Lowery v. Commissioner, T.C. Memo. 2019-151 case provides an example involving an IRS settlement officer whose function is to decide how much a taxpayer can pay the IRS.
Facts & Procedural History
The facts and procedural history for the case are as follows.
The taxpayer filed their tax returns. So this isn’t a case involving problem tax returns. This is a case involving unpaid taxes.
The IRS collection function issued levies and lien notices for the taxpayer. The taxpayer responded by timely filing collection due process hearing requests. The requests asked that the IRS consider either an offer in compromise (a proposal to settle the debt) or an installment agreement (a proposal to pay the taxes over time).
The IRS Office of Appeals worked the case. The taxpayer proposed to refinance their home and use the loan proceeds to make a lump-sum payment to the IRS.
The IRS settlement officer computed the taxpayer’s “reasonable collection potential.” This is the amount the taxpayer should be able to pay given their income and assets.
As we’ll consider later in this article, the settlement officer concluded that the taxpayer could full pay the tax liability. Suffice it to say that the IRS settlement officer sustained the IRS collection function’s levy and liens. The taxpayer brought suit.
What is Reasonable Collection Potential?
The IRS’s policy manual includes a section that explains how the IRS views the taxpayer when trying to collect unpaid taxes. This section of the manual is referred to as the “financial analysis handbook.”
The handbook includes several rules for determining the taxpayer’s “reasonable collection potential.” It factors in the taxpayer’s assets and disposable income.
These rules are used by the IRS to fill out the Form 14561, Income and Expense/Asset Equity Calculation. This form computes the reasonable collection potential.
But what if the IRS doesn’t follow the rules in filling out the Form 14561? That brings us back to the Lowery case.
What is Reasonable According to the IRS Settlement Officer
In Lowery, the taxpayer-husband had mandatory deductions from his pay. These deductions were required by his employer. They included retirement contributions, political action committee fund contributions, and a loan repayment. The IRS settlement officer did not allow these amounts in her analysis.
The taxpayer-husband also incurred significant unreimbursed business expenses. This included local travel, overnight travel, specialized gear, a home office, etc. The IRS settlement officer did not allow these amounts in her analysis.
On the asset side, the IRS included a trust the taxpayer-wife’s father had set up for her and her sister. The trust held a house in Arizona. The law generally does not allow the IRS to reach third party trusts. The IRS settlement officer also included a small pension the taxpayer-wife received, as she was retired. The IRS’s policy manual includes several rules that prohibit the IRS from including retirement assets if it is likely that the taxpayer will need the income to support themselves in the near future.
What is Reasonable According to the U.S. Tax Court
With collection cases, the court generally does not say that the IRS violated the law. Instead, it makes suggestions and remands the case back to the IRS. In doing so, it notifies the IRS that the work was not performed correctly.
That is what the court did in Lowrey. The court noted that each of the items above should be reconsidered. The expenses should be re-evaluated and the law excluding trust assets and the IRS’s policies on retirement account distributions should be considered. The court remanded the case back to the IRS Office of Appeals for this reconsideration.
Challenging the IRS’s Determination
Unfortunately, this type of case is common. Most taxpayers do not challenge the IRS’s findings. This may be due to apprehension about starting a process in court. Tax litigation isn’t something most people want to be involved with.
This may also be due to the fact that the taxpayer is experiencing a financial downturn and cannot allocate the time or funds to mount the challenge. This is likely given that the taxpayer couldn’t pay their taxes.
But this case shows how taxpayers should respond when the IRS does not follow the rules. They should ask the court to review the IRS determination. Even if that means working the case pro se (without a tax attorney) or enlisting the help of a pro bono attorney.
In Houston, the Volunteer Lawyer Association put on by the Houston Bar Association serves this purpose. Those in need of free or low-cost tax assistance should reach out to the Volunteer Lawyer Association to see if they qualify.