Back Taxes: IRS abused its discretion - installment agreement

Lofgren Trucking Service, Inc. v. United States of America, U.S. District Court, Dist. Minn.; 06-CV-3100(JMR/FLN), September 10, 2007.


Once the IRS issues a Notice of Intent to Levy, a taxpayer is entitled to a fair hearing before an impartial officer. 26 U.S.C. § 6330(b). At the hearing, the taxpayer can challenge the propriety of the levy and offer alternative means of collection, including an installment agreement. Id. § 6330(c)(2). The hearing officer must determine "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." Id. § 6330(c)(3)(C).

The officer may, among other things, consider the following factors: (1) the taxpayer's ability to pay in accordance with its proposal; (2) the size of the taxpayer's liability; (3) the taxpayer's record of fulfilling its obligations under any previous collection alternative agreements; and (4) its compliance with current obligations. Fifty Below Sales & Marketing, Inc. v. United States, 2007 WL 2301924 *2-3 (8th Cir. August 14, 2007).

In deciding whether to permit a proposed collection alternative, the officer is obligated to follow all applicable statutes and regulations. Id. at *2.A district court reviews the appeals officer's decision for abuse of discretion. Robinette v. Commisioner, 439 F.3d 455, 458-59 (8th Cir. 2006). The Eighth Circuit has observed that "Congress likely contemplated review for a clear abuse of discretion in the sense of clear taxpayer abuse and unfairness by the IRS." Id. at 459 (quotations omitted). No clear taxpayer abuse occurs "where the IRS followed the statutes and regulations governing grants of relief, and the appeals officer took into account the taxpayer's proposed alternative and the statutory balancing test, followed the prescribed procedures, gave a reasoned decision, and did not rely on any improper criteria or facts that are contrary to the evidence." Fifty Below Sales, 2007 WL 2301924 *1 (citations omitted).III. AnalysisIt is undisputed that, at least in part, the Appeals Officer based his rejection of the plan on plaintiff having incurred a new tax debt due the first quarter of 2006. His summary notes from the June 5, 2006, CDP hearing reflect his belief that plaintiff's failure to make employment tax deposits during the first quarter of 2006 precluded the IRS from accepting its payment plan, unless plaintiff tendered those funds immediately.The parties dispute whether plaintiff was meeting its "current" tax obligations when the Appeals Officer rejected the proposal. Plaintiff acknowledges it made no deposits during 2006's first quarter, but claims the relevant time to measure its ability to meet its current obligations should have been the second quarter of 2006, rather than the first. Plaintiff makes this claim based on the fact that its payment plan was submitted on April 3, 2006; it requested a CDP hearing to review the Notices of Intent to Levy on April 17, 2006, and June 1, 2006; and the Appeals Officer did not conduct the hearing or make his final determination until June, 2006. Plaintiff accurately notes that each date falls in the second quarter of 2006.In reply, the government simply elides plaintiff's concerns regarding its "current" tax obligation date. In doing so, it merely repeats the Appeals Officer's opinion that plaintiff incurred a "new" tax debt while the proposal was pending. The government goes so far as to identify this "fact" as "important."A simple repetition of the government's contention that it should win, cannot - ipsa dixit - carry the day. There is no dispute that, while the payment plan was pending, plaintiff made timely deposits for the second quarter of 2006, and at the same time paid almost $6,000 on its back liability. The Court finds this persuasive evidence of plaintiff's ability to remain in good standing on its "current" obligations, while paying past due amounts. But this does not conclude the issue.The controlling question in this matter is whether the Appeals Officer abused his discretion in finding plaintiff's collection alternative unsuitable to meet the IRS's interest in collecting its taxes. That question hinges on whether the Appeals Officer gave actual and fair consideration to plaintiff's proposal. Cf. Fifty Below Sales, 2007 WL 2301924 *3. The Court finds he did not, and that he therefore abused his discretion.The Court's review of the Appeals Officer's notes and his Notice of Determination leads the Court to the inescapable conclusion that he summarily denied plaintiff's requested payment plan under the mistaken belief that the IRS Code forbade him from accepting it. The record clearly demonstrates the Appeals Officer's belief that the code and regulations made it impossible to approve plaintiff's proposed payment plan, because of the debt incurred relative to the first quarter of 2006. The Appeals Officer's Notice of Determination stated that administrative guidelines "required" plaintiff to pay current employment tax deposits in order to show it had the financial ability to meet current obligations while paying past due tax. Plaintiff's Exhibit 14.Using this erroneous standard, the Appeals Officer found plaintiff's failure to pay deposits for the first quarter of 2006 meant he was "not able" to approve plaintiff's plan. Id. The government's pleadings compound this error, when it avers that, given the circumstances of plaintiff's case, "[t]he guidelines do not permit the acceptance of an installment agreement." Memorandum in Support of United States' Motion for Summary Judgment, filed March 2, 2007, p. 7 [Docket No. 13] (emphasis in original) (citing I.R.M. 5.14.7.2(4)(c)).The Court finds the government's cited regulation is inapposite and fails to support its position. By its very terms, the regulation states only that a business classified as a "repeater" is not immediately entitled to acceptance of a proposed payment plan; the plan should be classified as pending. I.R.M. 5.14.7.2(4)(c). "Repeaters" is a defined term: it applies to business taxpayers which are currently pyramiding trust fund taxes, and have three or more trust fund balances due assigned to the collection field function. Id. The government has not shown - nor can it - that plaintiff met this definition when the Appeals Officer made his determination.The regulation goes further: "[i]f, however, after contact, taxpayers originally classified as repeaters do not continue to accrue liabilities and begin making FTDs and file all appropriate returns ... then, they are no longer considered repeaters and may qualify for installment agreements." I.R.M. 5.14.7.2(4)(d). Even if plaintiff were a "repeater," which it was not, its status would have been ameliorated because it falls into this category. Plaintiff was not accruing liabilities when the Appeals Officer made his determination and it made deposits (FTDs) throughout the second quarter, rendering it current in its filing requirements.While plaintiff's first quarter 2006 liabilities may be a factor to consider in assessing the proposed installment agreement, the Court finds they were not an absolute bar to the Appeals Office accepting plaintiff's proposal. The Internal Revenue Manual provides that, when reviewing a proposed installment agreement, "if the taxpayer cannot pay operating expenses and current taxes, then deferring action on delinquent and accrued taxes may serve no useful purpose." I.R.M. 5.14.7.2(4)(a) (emphasis added). The Manual directs the reviewing officer to consider the taxpayer's interests and review its financial statements to see "if there is a way to reduce expenses in order to make payment on the taxes and avoid enforced collection action." Id. This regulation makes it clear: even if the taxpayer is unable to pay current taxes, the officer is not prohibited from accepting an installment agreement. In fact, the regulation encourages the officer to work with the taxpayer to figure out a way to make such an option work. Id. The Court finds plaintiff was eligible to be considered for an installment agreement.The Manual also provides that "[a]mounts due on unassessed returns may be included in installment agreements." I.R.M. 5.14.7.2(6). This provision further supports the Court's conclusion that plaintiff was eligible for an installment agreement, even in the absence of deposits during the first quarter of 2006. In June, 2006, the IRS had not yet assessed plaintiff for any first quarter 2006 delinquency. The Manual clearly contemplates the grant of an installment agreement, despite an unassessed delinquency, and directs permitting those unassessed amounts to be incorporated into the payment plan.The Court finds the Appeals Officer clearly erred when interpreting these regulations. As such, it is highly implausible that the Appeals Officer could have engaged in the requisite balancing test to determine whether plaintiff's payment plan satisfied the government's interest in the efficient collection of taxes. The government may wish the Court to find that the Appeals Officer fulfilled his duty to carefully balance the taxpayer's and the IRS's interests, as he was required to do. But wishing does not make it so.The evidence overwhelmingly shows the Appeals Officer summarily rejected plaintiff's plan based on his erroneous belief that plaintiff's delinquencies for first quarter 2006 made it ineligible for an installment agreement. His view was very likely fostered by Revenue Officer Brellenthin's declaration to that effect. The Appeals Officer cites no "balancing" factors, and gives no other basis for his rejection. As a result, the Court concludes plaintiff was deprived of its right to a fair hearing under 26 U.S.C. § 6330(b).


The Court finds that the Appeals Officer failed to meet his obligation to adequately consider whether plaintiff's proposed installment agreement "balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary." 26 U.S.C. § 6330(c)(3)(C). In doing so, he clearly abused his discretion, rendering his decision improper. Accordingly, the Court remands the matter to the Office of Appeals for consideration of plaintiff's proposal.

Alvin S. Brown, Esq.
Tax Attorney
703 425-1400
www.irstaxattorney.com

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