Alphonsus E. Okoli and Margaret E. Okoli v. Commissioner

The $282,000 Standoff: Court Backs IRS on Asset Liquidation

The Okolis face a $282,154 tax debt stemming from unpaid liabilities between 2011 and 2022. At the heart of the dispute was their proposed repayment plan: a mere $250 per month. However, Judge Guider granted summary judgment for the IRS, rejecting the taxpayers' plea of hardship. The core conflict: the Okolis argued they were unable to borrow against their real estate, but the Court ruled their inability to borrow did not excuse their refusal to sell assets to satisfy their outstanding tax obligations.

From Unreported Income to a Failed Negotiation

Following the initial assessment, the Okolis' tax troubles escalated into a formal collection process. The root of their $282,154 tax debt lay in unreported income from 2011, 2012, and 2015, as well as underpayment issues in subsequent years. The IRS issued Notices of Deficiency for the unreported income years.

On November 28, 2023, the IRS sent the Okolis a Letter 3172, formally notifying them of a Notice of Federal Tax Lien (NFTL) filing under Section 6320, which requires the IRS to notify a taxpayer of a lien filing and their right to a Collection Due Process (CDP) hearing. The notice covered tax years 2011-2013, 2015-2018, and 2022. A second Letter 3172 was sent the same day, pertaining to tax years 2019 and 2020. Both NFTLs were filed on November 29, 2023.

The Okolis responded by submitting Form 12153, requesting a CDP hearing. On this form, they contested their liability, sought withdrawal of the NFTLs, and claimed an inability to pay due to financial hardship. Settlement Officer (SO) Elanda M. Leguillow scheduled a telephone conference, eventually held on February 28, 2024, after a rescheduling.

During the conference, the Okolis' representative proposed an installment agreement (IA) of $250 per month, submitting Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and supporting financial documents. SO Leguillow indicated that an ability-to-pay analysis would be completed by April 15, 2024, and set a March 13 deadline for documentation supporting lien withdrawal. The SO also informed the Okolis that they did not meet the criteria for penalty abatement.

Revenue Officer Sara Arya reviewed the Okolis’ financial information and determined they could pay their liability in full by selling available assets, specifically their real estate. Alternatively, Arya calculated that a Streamlined IA would require minimum monthly payments of $2,262. SO Leguillow communicated this analysis to the Okolis' representative on March 11, requesting a response by March 26 to dispute the findings.

On March 25, the Okolis' representative requested reconsideration of the denial of a collection alternative, submitting a revised Form 433-A and documentation related to denied home equity loan applications. SO Leguillow allowed some additional monthly expenses from the revised form but disallowed others due to lack of substantiation. This adjustment lowered the potential monthly payment to $1,892, still significantly above the Okolis' proposed $250. The SO disallowed the inclusion of five dependents (parents and adult children) due to ineligibility. The SO also determined that the Okolis did not meet the requirements for lien withdrawal. The critical point of contention was the Okolis' real estate: While they provided loan denial letters, they did not attempt to sell the property to satisfy the tax debt.

The Procedural Hail Mary: Managerial Approval

Having been unable to secure a favorable installment agreement and facing the prospect of asset liquidation, the Okolis turned to procedural arguments, claiming the Notice of Federal Tax Lien (NFTL) was invalid.

The Okolis argued that Settlement Officer (SO) Leguillow did not properly verify that all administrative procedures were met, specifically, that the NFTL should be withdrawn for lack of managerial approval as described under Section 6323(j)(1)(A). Section 6323(j)(1)(A) generally provides for discretionary NFTL withdrawal if the notice was filed prematurely or not in accordance with administrative procedures.

The IRS countered that managerial approval was not required for the Okolis' NFTL. The court sided with the IRS, pointing to the Internal Revenue Manual (IRM). The court explained that the IRM distinguishes between standard NFTLs and "special condition" NFTLs. While IRM 5.12.7.6.5 (Apr. 22, 2019) requires managerial approval for “special condition” NFTLs (such as those involving nominees or alter egos), the court stated that no such approval is required for standard NFTLs. See IRS Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3421, 112 Stat. 685, 758; IRM 5.19.4.5.3.4 (Jan. 1, 2015). Because the Okolis’ NFTL did not fall within the “special condition” category, the Tax Court concluded that administrative procedures were properly followed. Therefore, SO Leguillow acted within her discretion when she denied the Okolis’ request for NFTL withdrawal. The court further noted that the Okolis had not otherwise challenged the verification requirement at any other point in the case.

Why 'Loan Denied' Is Not a Defense Against Liquidation

The Tax Court then addressed the Okolis’ claim of financial hardship stemming from their inability to access equity to pay the tax liability. The Okolis argued that they should have been granted Currently Not Collectible (CNC) status or allowed an Installment Agreement (IA). To be entitled to CNC status, a taxpayer must demonstrate that, based on their assets, equity, income, and expenses, they have no apparent ability to make payments on their outstanding tax liabilities. Hardship exists if the taxpayer is unable to pay reasonable, basic living expenses.

The court noted that Settlement Officer (SO) Leguillow considered the Okolis’ revised Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) but disallowed certain expenses where the Okolis did not provide supporting documentation. The Tax Court emphasized that it would not substitute its judgment for that of the SO regarding these expenses, explaining that its review is limited to whether the SO abused her discretion. The Court cited Boulware v. Commissioner, T.C. Memo. 2014-80, aff’d, 816 F.3d 133 (D.C. Cir. 2016), stating that it does not recalculate a taxpayer's ability to pay nor substitute its judgment for that of the settlement officer.

The court highlighted that it has "routinely held" that an Appeals officer does not abuse their discretion when they reject an installment agreement because a taxpayer refuses to liquidate assets to satisfy their tax liabilities. The Okolis contended that SO Leguillow did not adequately balance the need for efficient tax collection against their legitimate concern that any collection action be no more intrusive than necessary, as required by Section 6330(c)(3). Section 6330 governs Collection Due Process (CDP) hearings and requires the IRS to consider the intrusiveness of collection actions.

The court rejected this argument. It found the Okolis presented no specific facts demonstrating that requiring an actual sale would result in their inability to pay reasonable, basic living expenses. While the Okolis argued they were unable to access equity in their home through a loan, the court implicitly found they were unwilling to access that equity through a sale. This unwillingness to liquidate assets, even when a loan is denied, undermined their claim of hardship. The court reinforced the principle that taxpayers cannot claim hardship or CNC status while holding sufficient equity in assets they refuse to liquidate. Moreover, SO Leguillow did make certain changes based on the revised Form 433-A but disallowed others where petitioners did not offer supporting documents or other evidence.

Impact: The Liquidation Ultimatum

For taxpayers and practitioners, this case underscores the Tax Court's consistent stance: the IRS has considerable latitude in pursuing collection actions, and the court will generally defer to the IRS's judgment unless there is a clear abuse of discretion. The case reinforces that the Tax Court will support the IRS in forcing asset liquidation over penny-on-the-dollar installment agreements, even if the taxpayer cannot secure a loan against the property. Taxpayers must demonstrate a willingness to explore all available options for satisfying their tax liabilities, including liquidating assets with available equity, to have a credible claim for a less intrusive collection alternative like an installment agreement or Currently Not Collectible (CNC) status. Moreover, as defined by Collection Due Process under Section 6330, the IRS must "balance the need for efficient tax collection against the taxpayer's concern that collection be no more intrusive than necessary." In this case, the court evidently believed that the IRS satisfied its mandate.

Ultimately, finding no abuse of discretion, the Tax Court granted the IRS's motion and sustained the Appeals Office's determination regarding the proposed collection action.