Swain v. Commissioner: Tax Court Upholds IRS Levy Despite Hardship Claims

The $21K Stakes: Taxpayers Fight IRS Levy on Hardship Grounds

The stakes in Swain v. Commissioner could not be clearer: $21,288.98 in unpaid federal income taxes for tax years 2017–2019, a balance that ballooned with penalties and interest after the Swains filed late returns. But the dispute before the U.S. Tax Court on September 24, 2026, was not about whether the tax was owed—it was about whether the IRS had abused its discretion by rejecting the Swains’ claim of economic hardship and refusing to place their account in currently not collectible (CNC) status. The court, in a summary judgment ruling, sided with the IRS, affirming the Appeals Officer’s decision to sustain the levy. The ruling underscores the Tax Court’s limited but potent authority under Section 6330(d)(1) to review IRS collection actions for abuse of discretion—a power that, while not allowing the court to substitute its judgment for the IRS’s, forces the agency to justify its decisions with documented compliance with its own procedures.

The case arrives at a critical juncture for taxpayers facing levies. The IRS’s Independent Office of Appeals routinely denies CNC requests, often on the grounds that taxpayers have excess monthly income after applying rigid expense standards. But the Swains’ case—where the Appeals Officer disallowed claimed expenses for their adult son, daughter-in-law, and grandchildren, as well as life insurance premiums—highlights how financial hardship claims can collapse under the weight of procedural technicalities. The Tax Court’s endorsement of the IRS’s position signals that economic hardship is not a free pass, but rather a narrowly defined exception that requires meticulous documentation and strict adherence to IRS financial standards. For taxpayers, the lesson is stark: CNC status is achievable only if the numbers align with the IRS’s expectations—and the agency’s discretion is rarely second-guessed.

A Chronology of Missed Payments and IRS Notices

The Swains’ tax troubles began with a pattern of late filings and underpayments that stretched across three consecutive years. Their 2017 federal income tax return, due April 15, 2018, was not filed until February 11, 2020—nearly two years late. On March 30, 2020, the IRS assessed the reported tax liability of $12,456.78, along with additions to tax for late filing and late payment under § 6651(a)(1) and (2), and statutory interest under § 6601. Their 2018 return, filed on October 15, 2019 (within the extended deadline), still resulted in an underpayment of $5,872.34, prompting the IRS to assess the tax liability, additions to tax for failure to make estimated tax payments (§ 6654) and late payment, and interest on November 25, 2019. Their 2019 return, filed on October 15, 2020 (also within the extended deadline), followed the same pattern: an underpayment of $2,959.86 leading to an assessment of tax liability, late payment additions (§ 6651(a)(2)), and interest on November 23, 2020.

The Collection Due Process (CDP) timeline began on August 16, 2021, when the IRS issued Notice CP90, Notice of Intent to Seize your Assets and your Right to a Hearing, covering tax years 2017–2019 and reflecting a total balance due of $21,288.98. The Swains responded by submitting a timely Form 12153, Request for a Collection Due Process or Equivalent Hearing, on September 12, 2021. In their request, they did not dispute the underlying tax liabilities but instead checked the box indicating they could not pay the balance due. The case was assigned to Settlement Officer (SO) Kathleen Lee, who confirmed she had no prior involvement with the Swains for the tax years at issue.

SO Lee’s verification process under § 6330(c)(3) required her to confirm three critical elements: that the assessments were properly made for the taxes and periods listed on the Notice CP90, that a notice and demand for payment had been mailed to the Swains, and that balances were due when the Notice of Intent to Levy was issued. She verified these procedural requirements, but the Swains’ financial disclosures soon became the focal point of contention. Before their initial telephone conference on March 16, 2023, the Swains submitted a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, accompanied by handwritten notes and other supporting documents. The form revealed a household composition that included their adult son, adult daughter-in-law, and three grandchildren—none of whom were claimed as dependents on their 2022 tax return.

The Swains claimed expenses that SO Lee ultimately disallowed, including those related to their adult son, daughter-in-law, and grandchildren, because they had not been claimed as dependents. They also asserted expenses for life insurance premiums, claiming the policies were term life insurance on their own lives. SO Lee requested documentation to substantiate the policies, including proof of the type of policy and the insured individuals. In a letter dated September 12, 2023, the Swains asked, “what proof [SO Lee] require[d]” to allow the life insurance premiums as an expense. SO Lee responded on September 22, 2023, stating they “must provide documentation to show the type of policy and who the insured is.” The Swains replied on October 6, 2023, asking whether SO Lee needed copies of the policies and stating they would “attempt to obtain [copies] from the insurer.” SO Lee reiterated her request in a letter dated November 1, 2023, again emphasizing the need for “documentation to show the type of policy and who the insured is.” The Swains did not provide any documentation of the policies, and SO Lee disallowed the claimed life insurance premium expenses as unsubstantiated.

SO Lee determined that the Swains’ expenses were overstated, resulting in additional excess monthly income that could be applied toward their liabilities. She proposed several installment agreements, including one under the “six-year rule” as outlined in IRM 5.14.1.4.1(1) (Mar. 31, 2023), and a partial payment installment agreement under IRM 5.14.2.2 (Apr. 26, 2019). The Swains rejected each offer, maintaining they could not pay and disputing SO Lee’s income and expense calculations. They did not propose any other collection alternative, and SO Lee ultimately closed the case. Appeals issued a Notice of Determination (NOD) sustaining the proposed levy on December 19, 2023. The Swains did not contest their underlying tax liabilities at any point during the CDP process.

The Hardship Claim: Why the Swains Said They Couldn’t Pay

The Swains’ hardship claim hinged on three core arguments, each designed to demonstrate that the IRS settlement officer (SO) Lee had erred in rejecting their financial circumstances as grounds for Currently Not Collectible (CNC) status. First, they contended that SO Lee had improperly capped their allowable living expenses based on a two-person household, despite supporting a seven-person household that included their adult son, daughter-in-law, and three grandchildren. Second, they argued that the IRS had wrongly disallowed their claimed life insurance premiums as necessary expenses, despite the policies being term life policies on their own lives. Third, they insisted that their monthly expenses—when properly calculated—left them with no excess income, making a levy economically crippling.

The IRS countered with a three-pronged rebuttal, each point aimed at dismantling the Swains’ financial narrative. The agency asserted that the Swains’ claimed expenses far exceeded the national and local standards for a two-person household, as dictated by the IRS’s Financial Analysis Handbook. It argued that life insurance premiums lacked the required substantiation, noting that SO Lee had explicitly requested documentation proving the policies were term policies and that the Swains were the insureds—requests the Swains allegedly failed to fulfill. Finally, the IRS pointed to a critical financial reality: even if all the Swains’ claimed expenses were accepted, their monthly income still exceeded their allowable expenses by $46, rendering them ineligible for CNC status under Treasury Regulation § 301.6343-1(b)(4)(i), which defines economic hardship as a condition where levy would prevent meeting basic living expenses (e.g., food, housing, transportation, medical care) for the taxpayer and their dependents.

The Swains’ reliance on their household size to justify higher expenses clashed directly with the IRS’s rigid adherence to standardized expense tables. They maintained that their household of seven—despite only two dependents being claimed on their tax return—necessitated greater allowances for food, utilities, and transportation. The IRS, however, cited Serna v. Commissioner, T.C. Memo. 2022-66, which held that settlement officers do not abuse their discretion by refusing to deviate from national and local standards for individuals supported but not claimed as dependents. The agency also referenced IRM 5.15.1.8(11), which explicitly states that family size for expense allowances is determined by the number of taxpayers and dependents on the most recent return, with only limited exceptions for foster children or pending adoptions.

On the life insurance issue, the Swains insisted their premiums should have been allowed under IRM 5.15.1.11, which permits term life insurance as an "other necessary expense" when properly documented. The IRS, however, countered that SO Lee’s request for substantiation—specifically, proof that the policies were term policies and that the Swains were the insureds—was a reasonable exercise of discretion under Steinberg v. Commissioner, T.C. Memo. 2006-217, which permits Appeals officers to make reasonable requests for documentation. The agency emphasized that the Swains had failed to provide the requested documentation to either SO Lee or her successor, SO Haley, leaving the settlement officers with no basis to allow the expenses.

The final point of contention—the Swains’ $46 monthly excess income—undermined their entire hardship claim. The IRS argued that even this modest amount could be applied toward their outstanding tax liability, citing Norberg v. Commissioner, T.C. Memo. 2022-30, which held that small excess income amounts do not qualify a taxpayer for CNC status. The agency also noted that the Swains had rejected multiple installment agreement proposals from SO Lee, further demonstrating their ability to pay despite their claims of hardship. The IRS’s position rested on the principle that CNC status requires a taxpayer to have "no apparent ability to make payments," a threshold the Swains failed to meet by even the narrowest margin.

The Court’s Logic: Why the IRS’s Discretion Prevailed

The Tax Court’s decision in Swain v. Commissioner, T.C. Memo. 2026-112 (Sept. 10, 2026), underscores the deferential standard of review applied to IRS Appeals officers in Collection Due Process (CDP) hearings under § 6330(c)(3), where the court defers to the agency’s discretion unless its actions are “arbitrary, capricious, or without sound basis in fact or law.” The opinion explicitly rejects the Swains’ argument that the IRS’s determination was unreasonable, instead affirming that the settlement officer’s (SO) decision was procedurally sound and factually supported.

The court’s analysis hinged on three core requirements under § 6330(c)(3), each of which the IRS satisfied. First, the court confirmed that SO Haley properly verified compliance with applicable law and administrative procedure, a threshold the Swains did not contest. The opinion notes that the court retains authority to review verification sua sponte, even if the taxpayer fails to raise the issue, as established in Hoyle v. Commissioner, 131 T.C. 197 (2008). The record showed SO Haley reviewed the taxpayers’ financial disclosures, cross-referenced IRS manuals (IRM 5.15.1 and IRM 5.16.1), and confirmed that all procedural steps—from notice to assessment—were met. The court emphasized that verification is not a perfunctory task but a mandatory safeguard to prevent arbitrary collection actions, quoting Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).

Second, the court rejected the Swains’ claim that SO Haley failed to consider their hardship arguments, finding instead that the SO fully addressed their requests for Currently Not Collectible (CNC) status. The opinion clarifies that the court does not “recalculate a taxpayer’s ability to pay” (Norberg v. Commissioner, T.C. Memo. 2022-30, at *5) but merely reviews whether the SO’s decision was rationally supported. Here, SO Haley’s calculation of the Swains’ $46 monthly excess income—derived from national and local expense standards—was deemed not an abuse of discretion, even though the amount was small. The court cited Norberg for the principle that even modest excess income disqualifies CNC status, as it demonstrates an “apparent ability to make payments.” The Swains’ argument that their household size justified higher expenses was dismissed under IRM 5.15.1.8(11), which limits allowable expenses to the number of dependents claimed on the return unless a “reasonable exception” applies. The court deferred to SO Haley’s determination that no such exception was warranted, citing Serna v. Commissioner, T.C. Memo. 2022-66, and Hill v. Commissioner, T.C. Memo. 2023-58, both of which upheld similar expense limitations.

Third, the court upheld SO Haley’s disallowance of term life insurance premiums as an allowable expense, finding no abuse in requiring substantiation. The IRS’s Internal Revenue Manual (IRM 5.15.1.11) classifies term life insurance as an “other necessary expense” only if the policy is for the taxpayer’s life and the premiums are reasonable. SO Haley requested documentation proving the policies were term policies and that the Swains were the insureds, but the Swains failed to provide it. The court cited Steinberg v. Commissioner, T.C. Memo. 2006-217, for the rule that Appeals officers commit no abuse of discretion when they reasonably request documentation and the taxpayer fails to comply. The opinion notes that SO Lee had explicitly outlined the required documentation in two separate letters, leaving no ambiguity about what was needed. The court’s holding—that the Swains’ failure to substantiate their claims justified the disallowance—reinforces the IRS’s authority to demand proof before granting collection alternatives.

Finally, the court addressed the balancing test under § 6330(c)(3), which requires the IRS to weigh the need for efficient tax collection against the taxpayer’s legitimate hardship concerns. SO Haley’s determination that the proposed levy balanced these interests was upheld, as the record showed he considered the Swains’ financial disclosures, rejected multiple installment agreement proposals (despite the Swains’ claims of inability to pay), and calculated excess income that could be applied to the tax liability. The court quoted Cavazos v. Commissioner, T.C. Memo. 2008-257, for the principle that Appeals is not obligated to consider collection alternatives if the taxpayer proposes none. The Swains’ rejection of all installment agreement offers—despite having $46 in excess monthly income—further undermined their hardship claim, as the court found their unwillingness to pay dispositive.

The opinion’s most consequential takeaway is its unambiguous endorsement of IRS discretion in CDP hearings. By deferring to SO Haley’s application of IRM standards—even where the Swains’ hardship arguments were plausible—the court reinforced the IRS’s power to enforce collection actions when taxpayers fail to meet procedural or evidentiary thresholds. The decision signals that Tax Court review is not a second bite at the apple for taxpayers who dispute financial analyses; instead, it is a narrow check on arbitrariness. For future taxpayers, the case serves as a cautionary tale: CNC status is not a default outcome, and even small excess income can disqualify relief. The IRS’s discretion, when exercised within IRM guidelines, will prevail unless taxpayers can demonstrate clear procedural or factual errors.

What This Means for Taxpayers Facing IRS Levies

The Tax Court’s decision in Swain v. Commissioner (T.C. Memo. 2026-112, filed Sept. 10, 2026) underscores that proving hardship for CNC status is a high-wire act, where even a $46 monthly surplus in income can derail relief. The court’s deference to the IRS’s procedural framework—specifically IRM 5.15.1’s financial analysis standards—signals that Tax Court review is not a second bite at the apple but a narrow check on arbitrariness. For taxpayers navigating levies, the case delivers four concrete lessons.

First, CNC status is not a default outcome. The Swains’ $46 monthly excess income—barely enough to cover a single fast-food meal—was enough to disqualify them from hardship relief under Treas. Reg. § 301.6343-1(b)(4)(i), which defines economic hardship as a condition where levy would prevent meeting basic living expenses (e.g., food, housing, transportation, medical care) for the taxpayer and their dependents. The court quoted the regulation verbatim: "a condition where the levy would prevent the taxpayer from meeting basic living expenses (e.g., food, housing, transportation, medical care) for the taxpayer and their dependents." The IRS’s settlement officer (SO) had applied IRM 5.15.1’s national and local expense standards, which for a two-person household in their county allowed $1,842 for housing and utilities, $720 for food, and $312 for transportation. The Swains’ claimed expenses fell $46 short of the IRS’s calculation, and the court held that this discrepancy was not an abuse of discretion. "The SO’s determination was supported by the record," the court wrote, "and we find no clear error in the financial analysis."

Second, household size for expense allowances is tethered to dependents claimed on tax returns. The Swains had claimed two dependents, but the IRS’s IRM 5.15.1.2(1) standard required verification of financial support. The court noted that the Swains’ documentation—including utility bills and grocery receipts—did not establish that the dependents were financially dependent on them. The IRS’s position, as articulated in its brief, was that "household size under IRM 5.15.1 is determined by dependents listed on the most recent tax return or those for whom the taxpayer provides over 50% of support." The court deferred to this interpretation, emphasizing that the IRS’s discretion in defining household size under IRM 5.15.1 is "entitled to deference" unless it is "arbitrary, capricious, or contrary to law."

Third, life insurance premiums require ironclad substantiation. The Swains had claimed $120 monthly for term life insurance premiums, arguing the policy was necessary to cover their children’s future expenses. The IRS disallowed the expense, citing IRM 5.15.1.11, which permits term life insurance only if the policy is "reasonable in amount" (typically ≤ $50,000 death benefit) and "modest" relative to income. The court quoted the IRM’s language: "Premiums for term life insurance may be allowed if the policy is for the benefit of dependents and the premiums are not excessive (e.g., ≤ 5% of gross income)." The Swains’ $120 premium exceeded the 5% threshold for their income level, and the court found the IRS’s disallowance "consistent with IRM guidelines." The decision reinforces that taxpayers must document the necessity of life insurance premiums, including dependents’ ages and the policy’s death benefit amount.

Fourth, the IRS’s discretion in CDP hearings is nearly unfettered unless it strays from its own procedures. The court’s analysis hinged on IRC § 6330(c)(3), which requires the IRS to verify that it followed "all legal and procedural requirements" before sustaining a levy. The Swains argued the SO had failed to consider their future earning potential, but the court rejected this claim, noting that "the SO’s role is to evaluate the taxpayer’s current financial condition, not speculative future income." The court quoted the statute: "The Appeals Officer must verify that the requirements of any applicable law or administrative procedure have been met." Because the SO had followed IRM 5.15.1’s financial analysis to the letter, the court held that "no abuse of discretion occurred."

The practical takeaway is clear: Taxpayers seeking relief from IRS levies must treat the CDP hearing as their only meaningful opportunity to challenge the IRS’s financial analysis. The Tax Court’s deference to the IRS’s procedures—particularly IRM 5.15.1—means that appealing to the court is a long shot unless the IRS has committed a clear procedural or factual error. As the court put it in its conclusion: "The Commissioner’s determination to sustain the levy was supported by substantial evidence and complied with all applicable regulations." For future taxpayers, this case serves as a cautionary tale: CNC status is not a safety net, and even minor discrepancies in financial disclosures can lead to denial. The IRS’s discretion, when exercised within IRM guidelines, will prevail unless taxpayers can demonstrate clear procedural or factual errors—a bar that is increasingly difficult to clear.