In a recent case, the Tax Court ruled that the IRS did not violate the Religious Freedom and Restoration Act by denying a reduction of a taxpayer's monthly installment payments for back taxes based upon a tithing obligation to his church.
The court also upheld the IRS's denial of a reduction for payment of college tuition as being within the IRS's discretion.
George Thompson owed $888,000 in income taxes and employment taxes, some dating as far back as 1992. He did not dispute his tax liabilities. Thompson provided a statement of monthly income and expenses to the IRS and offered to pay $3,000 per month.
The IRS asked for an additional $5,000 per month, denying Thompson his claimed monthly expenditures of $2,100 for tithing and $2,900 for college expenses. Thompson appealed to the Tax Court.
The IRS, in its discretion, can enter into an installment agreement to facilitate full or partial collection of back taxes. In determining a reasonable payment amount, the IRS allows only necessary expenses.
The Internal Revenue Manual provides guidelines for necessary expenses. To be necessary, an expense must provide for either the taxpayer's health and welfare or the taxpayer's production of income.
Thompson regularly contributed 10 percent of his monthly income and held several voluntary positions in his church, for which he received no compensation. Tithing was a condition for him to hold these positions.
Although the Internal Revenue Manual provides that a minister's tithe is an allowable expense if it is a condition of employment, the court found that the IRS did not abuse its discretion by interpreting the phrase "condition of employment" to be limited to compensated employment.
Thompson also claimed that tithing provided for his family's health and welfare. He said that not being able to tithe would affect his spiritual welfare.
The court concluded that it would be inappropriate for the IRS or a court to determine what is or is not necessary for a person's spiritual welfare and that it was reasonable for the IRS to interpret "health and welfare" not to include spiritual health (George Thompson v. Commissioner, 140 TC No. 4, March 4, 2013). The court further found that denying treatment of tithing as a necessary expense did not violate Thompson's freedom of religion or the religious freedom act.
The Internal Revenue Manual recognizes educational expenses necessary for a disabled child if public education providing similar services is not available. The manual also allows college expenses, but only if the tax liability will be paid within five years.
Neither of these conditions applied in this case. Denying the college expenses was not an abuse of discretion, the Tax Court held.