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Recent case explores the IRS’ ability to take retirement assets as part of installment agreement

On Behalf of | Mar 1, 2024 | Blog |

Installment agreements offer an alternative for taxpayers to pay off their tax debt. Instead of paying in a lump sum, those who qualify for an installment agreement can make smaller, more manageable monthly payments. There are different types which can include a streamlined installment agreement and partial payment installment agreement.

The right installment agreement and payment amount will vary depending on the taxpayer’s assets and debts.

What happens if the taxpayer and IRS disagree on the right amount for an installment agreement?

Not surprisingly, taxpayers and the IRS do not always agree. In a recent case, a taxpayer and the IRS disagreed over the right amount for monthly payments proposed in an installment agreement. The case, Kosmides v. Commissioner of Internal Revenue, involves a taxpayer who offered to enter a partial payment installment agreement (PPIA) with the IRS, making $400 payments to repay the debt until the installment payment period ended. He stipulated that he would not liquidate his retirement accounts to make the payments. The IRS Appeals Officer (AO) disagreed with the proposed payment and argued the taxpayer could afford to pay thousands more. The AO countered with a plan that included payments of $3,375.

One of the key disagreements in this case involves allowable expenses when calculating the appropriate payment for an installment agreement. The AO argued that installment agreements only allow “necessary expenses.” In this case, the AO argued the taxpayer’s use of other expenses like additional costs associated with vehicle payments, secondary health insurance coverage, and credit card payments did not qualify. The AO also argued that it was reasonable for the taxpayer in this situation to cash out a portion of his retirement savings to help settle the bill.

Are retirement accounts off limits when proposing an installment agreement?

In certain cases, the IRS can consider retirement accounts as an asset when making its calculations. In this case, the AO followed instructions provided by IRM 5.15.1, stating that the AO consider the income from the taxpayer’s retirement plan and whether it will meet the taxpayer and taxpayer’s needs upon retirement. If the account has funds in excess of those needed for retirement, the excess funds in the retirement account may be subject to liquidation.

What are allowable expenses?

IRM 5.15.1 further clarifies allowable expenses for those who request a PPIA. These expenses must generally meet the necessary expense test. The test takes into account expenses that are needed for the taxpayer and the taxpayer’s family’s health, welfare, and production of income. Examples can include:

  • Housing. The agency will allow for a standard amount adjusted for the state, county, and family size to cover the cost of utilities and housing.
  • Vehicle ownership. The IRS also allows a standard amount for the cost of a vehicle. The amount varies and can include car payment as well as operation.
  • Health insurance. The cost of maintaining health insurance coverage is generally allowed.

The installment agreement can budget for these necessary expenses. In theory, the proposed payment should be the taxpayer’s assets minus these necessary expenses. There are rules for when a taxpayer wishes to deviate from them. It is wise to discuss this with an experienced tax attorney to make sure your plan is in line with these and other applicable rules.

What if I disagree with the IRS’ findings?

You can appeal their findings. The taxpayer in the case above was not able to provide sufficient evidence to establish that the proposed expenses were necessary and lost their appeal.

It is important to gather appropriate evidence and act promptly as there are time limits that guide these matters. A failure to abide by the rules can result in the agency moving forward with a levy against the taxpayer’s assets.