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Avoiding IRS installment agreement denials

A recent Ninth Circuit Court of Appeals case offers some lessons on what not to do if you need more time to pay a large tax bill. An interesting side note is that the case involves a famous actor, Forest Whitaker.

Why did the IRS deny Whitaker’s request for an installment agreement? We’ll explain the requirements for an installment agreement and discuss several tips that can be gleaned from the case.

Filing Tax Returns

Before applying for an installment agreement, it is necessary to file all required tax returns. Streamlined agreements are available if you owe less than $50,000 and allow repayment terms out to 72 months.

For larger amounts, you need to file a formal request via Form 9465 along with financial disclosures. Negotiations then determine a monthly payment amount. Working with a skill tax attorney is one way to ensure that you enter a workable payment plan that still allows you to keep your home and pay other essential bills.

Withholdings or the lack thereof

In the Whitaker case, the problem started in 2013 when the actor and his wife reported almost $1.5 million in adjusted gross income. The tax bill was about $426,000, but his withholdings were about $10,000 and estimated tax payments were only $4,500.

After several IRS notices of intent to levy, Whitaker’s representative asked for a Collection Due Process hearing and installment agreement. Before agreeing to an installment agreement, the IRS requested that he file a 2014 tax return and provide clear financials.

Neither of those things happened and the situation actually got worse in 2014. The IRS checked on his tax withholdings and income. His withholdings had declined as income was increasing. The tax liability grew to over $1 million. When he proposed paying $20,000 a month for 72 months the IRS was skeptical and countered with $20,000 a month for the first year increasing to $40,000 per month.

Once the 2014 return was finally filed it showed another larger deficiency and the IRS officer considering the installment agreement wasn’t informed of the filing. The IRS rejected the installment plan. The Tax Court found no error and that failure to make estimated tax payments was enough to deny an installment plan. The Ninth Circuit upheld the Tax Court.

The lesson from this case is to seek experienced tax advice right away and not let the problem compound over several years. The IRS has powerful collection tools at its disposal that include placing a lien against property or seizing your assets. Do not let it get to that point.

 

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