Timothy L. Fisher and Roseann Fisher v. Commissioner

Million-Dollar Home Equity Blocks Installment Agreement

A couple sitting on $2.6 million of real estate, boasting over $1.6 million in home equity, sought a six-year installment agreement to resolve a tax debt of approximately $215,000. The Tax Court affirmed the IRS's rejection of their proposed payment plan, emphasizing a critical prerequisite for such agreements: the taxpayers' demonstrated effort to explore borrowing against their considerable assets. This decision highlights the tension between a taxpayer's right to explore collection alternatives and the IRS's duty to efficiently collect revenue, particularly when substantial assets are readily available.

The Paper Trail: From Missing Returns to Ghosting the IRS

The case began on December 2, 2022, when the IRS issued a levy notice to the taxpayers. Shortly thereafter, on December 20, 2022, the IRS filed a Notice of Federal Tax Lien (NFTL). Two days later, the IRS sent the taxpayers a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (lien notice), informing them of the NFTL filing and their right to a Collection Due Process (CDP) hearing under Section 6320. Section 6320 of the Internal Revenue Code (IRC) grants taxpayers the right to a hearing with the IRS when a notice of lien is filed. Both the levy and lien notices stated that unpaid income tax liabilities of $146,725.76 (excluding penalties and interest) for tax years 2016, 2018, 2019, and 2021, as reported on their Forms 1040, formed the basis of the collection actions.

On December 22, 2022, the taxpayers timely submitted Form 12153, Request for a Collection Due Process or Equivalent Hearing, requesting a CDP hearing for both the levy and the NFTL. They indicated their desired collection alternative was an installment agreement. Their hearing was assigned to Appeals Officer (AO) Sarah Valdez, who had no prior involvement with their case. AO Valdez confirmed the validity of the assessment, the proper sending of the notice and demand for payment, the outstanding balance when the levy notice was sent and the NFTL filed, and the proper issuance of the notice of a right to a CDP hearing. On April 26, 2023, AO Valdez scheduled a CDP hearing for May 23, 2023, requesting financial information and a signed income tax return for 2020, which IRS records indicated was missing.

At the request of the taxpayers' representative, the hearing was rescheduled for June 16, 2023. On June 15, 2023, the taxpayers faxed a completed Form 433–A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and supporting financial documentation to AO Valdez, seeking to pay their tax liabilities over six years. During the June 16, 2023, hearing, the taxpayers confirmed their request for an installment agreement. AO Valdez informed them that they were ineligible due to the missing 2020 Form 1040.

On June 29, 2023, the taxpayers faxed AO Valdez an updated Form 433–A, a copy of their signed 2020 Form 1040 with verification of mailing, and additional financial information and account statements. The Form 433–A reported a primary residence valued at $2.6 million with a mortgage of $925,393, resulting in equity of $1,674,607. They also reported a checking account balance of $115,998. On July 10, 2023, AO Valdez submitted their case for review by Revenue Officer (RO) Carlos Pinto.

RO Pinto provided his evaluation to AO Valdez on September 7, 2023, noting a monthly income of approximately $24,400 and allowing $10,392 per month for living expenses. He concluded a minimum of $14,008 of disposable monthly income was available, reflected as their minimum monthly payment amount. Citing Internal Revenue Manual (IRM) 5.14.2.1.1, RO Pinto recommended against an installment agreement, stating the taxpayers could pay from their assets. At the time, the balance due, including interest and penalties, was $215,613.63. RO Pinto's evaluation assumed a principal residence value of $2.5 million and a mortgage balance of $77,035, resulting in equity of $2,422,965. The court noted that this mortgage calculation was erroneous, as the actual mortgage exceeded $900,000, bringing the residual equity close to the $1,674,607 reported on Form 433-A.

On September 11, 2023, AO Valdez mailed a copy of RO Pinto’s review, including the recommendation to deny the installment agreement due to the taxpayers' ability to pay from assets. AO Valdez explained that asset equity must be considered and instructed the taxpayers to explore liquidating or borrowing against their assets unless it posed an economic hardship as defined in IRM 5.15.1.2(16). AO Valdez gave the taxpayers four weeks to respond and provide verification of actions taken to explore their property equity. The taxpayers never responded.

The Kirkley Defense: Petitioners Claim Forced Liquidation

As the IRS moved to collect, the taxpayers argued that the IRS abused its discretion by effectively requiring them to liquidate assets to secure an installment agreement. They heavily relied on Kirkley v. Commissioner, T.C. Memo. 2020-57. In Kirkley, the Tax Court found an abuse of discretion where an IRS Appeals Officer (AO) refused to consider an installment agreement unless the taxpayers first liquidated their assets. According to the taxpayers in Kirkley, the AO maintained that the Internal Revenue Manual (IRM) offered no flexibility other than asset liquidation, with proceeds turned over to the IRS, before an installment agreement could even be considered.

The IRS countered by pointing to its own guidelines in the Internal Revenue Manual (IRM). Specifically, the IRS noted that IRM 5.14.2.1.1 requires equity in assets to be addressed before a partial payment installment agreement (PPIA) can be granted. The IRM states that taxpayers are generally expected to fully pay delinquent tax liabilities immediately. However, when that's not possible, equity in assets must be addressed and, if appropriate, be used to make a payment before a PPIA is granted. The IRS argued that it was merely following its own procedures.

Court Distinguishes Kirkley: Exploration vs. Demand

The court addressed the taxpayers' reliance on Kirkley v. Commissioner, T.C. Memo. 2020-57. In Kirkley, the Tax Court found an abuse of discretion where the IRS required the taxpayers to liquidate their principal residence and business property as a condition for an installment agreement. The Kirkley court reasoned that the Internal Revenue Manual (IRM) does not mandate the liquidation of a principal residence in all cases, and the settlement officer failed to consider whether the home was necessary for the family's welfare or if the business property was needed to generate the income proposed for installment payments.

Here, the court found the taxpayers' reliance on Kirkley to be misplaced. The court emphasized that Appeals Officer (AO) Valdez did not require the taxpayers to liquidate any assets. Instead, she merely requested that they explore the possibility of liquidating or borrowing against their assets. The court noted that both the Tax Court and the IRM require taxpayers to attempt to tap into the equity of their assets, including a personal residence, to satisfy tax obligations. The court cited Tillery v. Commissioner, T.C. Memo. 2015-170, where the court held it was not an abuse of discretion for a settlement officer to require a taxpayer to use their equity in assets to pay down a liability before an installment agreement is granted.

The judge highlighted that AO Valdez informed the taxpayers of the hardship exception, which applies if such actions would cause the taxpayer undue hardship, as outlined in Kirkley and Tillery, and also in IRM 5.15.1.2(16). The AO gave them a reasonable amount of time—one month—to respond. Despite the taxpayers acknowledging on Form 433-A the existence of over $1.6 million in home equity (more than seven times their tax debt of $215,613) and a checking account balance of $115,998 (which would have reduced the amount they needed to borrow), they failed to respond. This failure to communicate and provide the requested information was fatal to their claim. Based on the record and the arguments presented, the court concluded that AO Valdez properly considered the issues the taxpayers raised.

Equity Matters: The Limits of Installment Agreements

The Tax Court's decision underscores the balancing act inherent in Collection Due Process (CDP) cases. The court referenced Sections 6320(c) and 6330(c)(3)(C), which require the IRS Appeals officer to balance the need for efficient tax collection with the taxpayer’s legitimate concern that any collection action be no more intrusive than necessary. In this case, Appeals Officer (AO) Valdez sought documentation to support a collection alternative, specifically exploring whether the taxpayers could leverage their home equity to fully satisfy their tax debt. The AO also informed the taxpayers of the exception for undue hardship if borrowing against assets proved too burdensome.

The court found these efforts sufficient, particularly given the taxpayers' complete lack of response. The court's determination highlights a critical aspect of CDP hearings: while the IRS must consider collection alternatives, such as installment agreements under Section 6159—which allows taxpayers to satisfy liabilities through periodic payments—the taxpayer must actively participate in the process.

The practical takeaway for taxpayers is this: possessing significant equity, especially liquid cash and home equity far exceeding the debt, makes obtaining an installment agreement difficult without first attempting to leverage those assets. As the taxpayers acknowledged on Form 433-A the existence of over $1.6 million in home equity (more than seven times their tax debt of $215,613) and a checking account balance of $115,998 (which would have reduced the amount they needed to borrow), they failed to respond. This failure to communicate and provide the requested information was fatal to their claim. Based on the record and the arguments presented, the court concluded that AO Valdez properly considered the issues the taxpayers raised. Furthermore, ignoring an AO's request for information is a surefire way to lose a CDP appeal.