The IRS allows taxpayers to make monthly payments through an installment agreement if they cannot pay their tax liability in full by the deadline – but they have to comply with certain requirements.
Andrew and Vickie Hull, a married couple with a sizeable tax liability, recently took their case involving a requested installment agreement to the Tax Court. The Hulls charged that an IRS settlement officer had abused her discretion in denying their request.
As background information, the husband, a successful self-employed attorney, liked to pay himself with a draw check instead of a payroll check. A draw check has no income taxes withheld from it. A paycheck does.
Because strict rules apply to payroll tax withholding, it is very difficult for taxpayers to under-withhold income taxes when they are issuing themselves paychecks.
Hull issued himself a draw check during the various years at issue in this case and paid federal income taxes through quarterly estimated payments. The problem was that he never paid enough during these years to avoid having a large tax liability when he filed his Form 1040 returns.
As a consequence, the Hulls ended up with a tax liability for years 2007 through 2011. This tax liability with interest and penalties amounted to close to $1 million.
Despite the fact that they were underpaying their income taxes to the IRS, the Hulls had substantial assets. These assets included a lavish personal residence, an expensive vacation home, a 401(k) account, various bank accounts and a couple of nice vehicles.
The Hulls and their representative, William J. Curosh, had a number of conferences and discussions with IRS Settlement Officer Irma Okubena. During these discussions, the importance of keeping current with 2013 income taxes was stressed to the taxpayers so that they could enter into an installment agreement.
The negotiations between the Hulls and the IRS took place over the course of a couple of years. During this time, the 2012 return was filed. A balance was due on that return as well.
Okubena had Hull and Curosh estimate the amount of taxes the Hulls would owe on the 2013 return. Curosh sent a letter to Okubena in which he estimated the Hulls’ 2013 tax liability at $47,820.
Okubena on behalf of the IRS requested that the Hulls cash in part of their 401(k) account to pay the balance of the estimated 2013 income tax in full. They were to do this by Dec. 31, 2013, or she would deny the taxpayers’ request for an installment agreement and issue a levy.
Curosh informed Okubena on Jan. 3, 2014, that the taxpayers had refused to cash in their 401(k) and would not be paying the 2013 estimated liability balance in full.
On Feb. 27, 2014, the IRS issued a notice of determination sustaining the proposed tax levy with respect to the 2007 through 2011 tax years. In the notice, the IRS stated that the taxpayers were not in compliance with required estimated tax payments for the year ending Dec. 31, 2013, and had a long history of noncompliance dating back six years.
A section in the Internal Revenue Code states that taxpayers are allowed to present collection alternatives to the IRS, including an installment agreement. And the Hulls cited that section in their suit against the IRS.
But there’s a problem with this argument: Extensive case law establishes that a settlement officer may refuse the taxpayers’ collection alternative if the taxpayers have a history of noncompliance and are not in compliance with their current tax obligation.
Okubena relied on this case law, and the IRS prevailed in the case. By refusing to make the requested payment, the taxpayers were not compliant with the current-year obligations. And they had a long six-year history of noncompliance (Andrew M. Hull and Vickie J. Hull v. Commissioner, TC Memo 2015-86, May 5, 2015).