IRS To Review Partial Pay Installment Agreements

I am looking at a TIGTA  (Treasury Inspector General for Tax Administration) report on partial pay installment agreements. Let’s talk about what these are, and how the report may matter to you.

If you pay the IRS over time, you are in an “installment agreement.” It may be that you do not have money to pay your 2012 tax in full, but you can pay it over 12 months. This is a vanilla payment plan, and you are paying all the tax – plus interest and penalties.

If you finances are truly pinched, the IRS may agree to a partial payment plan. The “partial” means that you will not – assuming the payments remain constant  – fully pay off your tax, interest and penalties. Say that you have 7 years left on a tax liability of $42,000. The most you can pay is $300 per month. Perhaps there has been a business reversal, a divorce, or a medical misfortune. The most you will repay at $300 per month is $25,200, which is far short of $42,000. The IRS knows going in that you will not be able to pay the liability in full.

How do you get the IRS to agree to this? You have to submit detailed personal financial information. Think bank statements, copies of W-2s, copies of household bills. Then there are tables, which the IRS will use. If your expenses exceed table amounts, the IRS will either disallow the excess or ask you for more detail. A common example is pet expenses. Little Bow-Wow may be your pride and joy, but good luck persuading the IRS for an additional allowance to feed Bow-Wow or take him/her to the veterinarian.

There is one more thing: the IRS is supposed to review your financial information every two years. There is a computerized first sweep against your tax information. If your financial situation shows improvement, then an IRS employee will physically review your file. If things have actually improved, you can expect a love letter asking for more.

TIGTA found that the IRS is not always performing these two-year reviews. It also found cases of insufficient financial information as well as missing manager sign-offs. The IRS agreed with TIGTA and stated its intention to beef-up its two-year review process, as well as its documentation and sign-off policies.

TIGTA also talked about the IRS “uncollectible” status, and recommended that the IRS try to bring some of those people into partial pay status. Also known as “CNC”, this status is supposedly reserved for the most broke of the broke. These are  individuals who cannot pay anything, so the IRS suspends all collection activity for a while. TIGTA recommended that the IRS review its CNC caseload to see if any of the CNC people could be transferred to partial pay. Interestingly, this was the one recommendation with which the IRS disagreed. The IRS felt that it had tried a comparable program, which failed to yield any significant results.

Can we expect more timely IRS reviews of partial-pays and CNC’s? I would normally say yes, but remember that Congress may yet decrease funding for the IRS pursuant to its 501(c)(4), Congressional obstruction and Fifth Amendment scandals. Consider also that the IRS will be hip-deep in ObamaCare starting next year - another explosive political issue. There may just be too many fires for the IRS to put out.

Terrance Clem Wright v Commissioner

I have a question for you: if you wanted to convince the IRS that you are unable to pay back taxes because of financial hardship, would you hesitate to send them copies of your bank statements?

Let’s take a look at another pro se case before the Tax Court: Terrance Clem Wright v Commissioner. This is also a good opportunity to review the sequence of possible IRS Collections actions against a taxpayer.

Terrance Wright (TCW) fell behind on his taxes for 1999, 2000, 2001, 2003, 2004, 2005, 2006, 2007, and 2008.

On March 18, 2010 the IRS sent him a notice advising him that a notice of federal tax lien (NFTL) had been filed because of his back taxes and that he could request a hearing with the Appeals Office.

On April 25, 2010 TCW filed a request for a Due Process Hearing. The intent of a CDP is to delay a hasty IRS collection action and allow the taxpayer to propose an alternative. He did not contest the tax liabilities but instead requested an installment agreement.

On November 19, 2010, the IRS sent TCW a letter scheduling a telephone conference on January 18, 2011.  The IRS requested TCW to provide financial information and a payment proposal. This would help the IRS Appeals Officer make a decision.

On January 18, 2011, TCW and the Appeals Officer had their telephone conference. TCW told the Appeals Officer that he could not currently afford to make any payments. The Appeals Officer told TCW that - while he had provided some financial information – he unfortunately had not provided bank statements. She needed the bank statements to review his situation and make her decision. Until then she did not have enough information to determine whether TCW should be placed in currently not collectible (CNC) status. She encouraged TCW to pursue CNC status when he obtained all of the necessary financial documents.

NOTE: CNC status means that the IRS will not pursue action for a period of time, very often a year. It does not mean that the tax debt is gone, only that the IRS is granting time for you to get your financial affairs back in order.

Once informed by the Appeals Officer of the alternative, TCW liked the idea of CNC. This does not appear to have occurred to him previously, which indicates – at least to me – that he was not represented by a tax professional.

On February 2, 2011, the IRS issued a notice telling TCW that he would not receive an installment agreement or CNC.

OBSERVATION: Notice the dates: January 18 and February 2. This is not a lot of time, especially by IRS standards. Remember that it took him seven months to get to Appeals. TCW needed to have burnished his case by or before the hearing, as time is short once you are in Appeals.

The Appeals Office, at least in Cincinnati and this part of the country, is undermanned and overworked. I was told recently, for example, that Chicago Appeals are being heard in Wisconsin. My general experience with Appeals has been satisfactory, but one has to be aware and sensitive that these people are pressed for time. I am certain that TCW’s Appeals Officer was frustrated with his lack of cooperation.  

TCW, in a pique, filed a petition with the Tax Court on March 1, 2011.  TCW did not contest the underlying tax debt or the denial of an installment agreement. Instead, TCW’s only argument was that he could not afford to pay. He wanted the IRS to suspend collection action on the basis of his economic hardship. He wanted a CNC, and he wanted the Tax Court to tell the IRS to let him have one.

Here is the Tax Court:

Suspension of collection activity is a “collection alternative” that the taxpayer may propose and that the Office of Appeals must take into consideration. The Internal Revenue Manual (IRM) makes provision for a taxpayer's account to be declared “currently not collectible” in cases of “hardship.” To justify suspension of collection on the ground that the account should be deemed CNC, petitioner must show that he cannot afford to pay the liabilities; and to do so he must show his financial circumstances, including the money that is available to him and the expenses that he bears.

The Appeals officer requested that petitioner submit bank statements and other financial information so that collection alternatives could be considered. Petitioner submitted some of the requested information but failed to submit bank statements. Because petitioner failed to submit the requested bank statement information, the Appeals officer was unable to accurately ascertain petitioner's financial circumstances and, consequently, determined that she could not calculate the appropriate installment agreement terms or grant petitioner CNC status. In the absence of the requested information, respondent's Appeals officer did not abuse her discretion in denying petitioner's request for collection alternatives.

My take? Send the bank statements. It really is that simple.