Grabbing milk money: IRS seizes tax refunds during installment agreement status.

As part of the Technical and Miscellaneous Revenue Act of 1988, Congress passed Sec. 6159, which permits the IRS, through a district director, to enter into installment agreements for accepting "scheduled payments" of delinquent taxes, if an "agreement will facilitate the collection of such liability" (Sec. 6159(a)).

Because the statute fails to provide the requisite terms for an installment agreement, the Service issued regulations purporting to clarify Sec. 6159(a). A director can "accept or reject any proposed installment agreement"c (Regs. Sec. 301.6159-1(b)(1)(i)). Further, a director may require that "the agreement contain terms and conditions that protect the interests of the government," such as direct debit bank transfers (Regs. Sec. 301.6159-1(b)(1)(i)(B)). An agreement need not be signed by a taxpayer to be effective. For example, in many instances, an oral agreement will occur over the phone with the Automated Collection Service, when the tax liability is under $10,000 and the liability will be fully paid within three years. The oral agreement becomes finalized on written confirmation from a district director (Regs. Sec. 301.6159-1 (b)(2)). In any case, an agreement is effective from the date of signature by a district director until termination (Regs. Sec. 301.6159-10(b)(3)).

Often, to enter into an installment agreement, a taxpayer is required to provide financial information on Form 433-A, Collection Information Statement for Individuals, particularly when dealing with a Revenue Officer. An installment payment amount is based on a taxpayer's ability to pay, after consideration of necessary living expenses (as provided in the Internal Revenue Manual). (Form 433-A, line 46, allows a deduction for taxes, as a necessary expense.)

Generally, under Regs. Sec. 301.6159-1(c), once an agreement is in place, the IRS can only terminate it and take collection action against a taxpayer for any of the following reasons:

1. Taxpayer provided inaccurate or incomplete information;

2. Jeopardy collection;

3. Significant improvement in the taxpayer's financial condition;

4. Failure to pay per the agreement;

5. Failure to stay current on other tax liabilities; and

6. Failure to provide updated financial information.

Under Regs. Sec. 301.6159-1(d), "except as otherwise provided by the agreement... during the term of the agreement," a director may "protect the interests of the government... other than [by] actions pursuant to subchapter D of Chapter 64 of subtitle F" of the Code, such as levies and seizures, including "actions enumerated in the agreement." The actions enumerated in the regulations for protecting the government's interest include requesting financial information, filing notices of liens, and acting against nonparties to the agreement (Regs. Sec. 301.6159-1(d)(1)-(4)).

Form 433-D, Installment Agreement, states that a "condition of this agreement" is that the IRS "will apply all federal or state refunds to the amount you owe until it is paid."

Apparently, the Service, indirectly through its regulations, has the power to continue the offset of both Federal and state tax refunds during an installment agreement's term.

Interestingly, Sec. 6159, which permits installment agreements, fails to indicate if Federal tax offset of a refund is allowed when an installment agreement is in place, although Sec. 6402(a) gives the IRS the authority to credit a tax overpayment against any outstanding tax liability. As Sec. 6402 does not relate to levy and seizure, the offset provision does not directly conflict with the Sec. 6159 regulations.

Further, as of Jan. 1, 1997, under Sec. 6159(c), a taxpayer may seek an administrative review of the Service's decision to "terminate" an installment agreement. The new provision requiring the IRS to notify a taxpayer prior to termination of an agreement and provide for an administrative appeal process is intended to stop collection action until it is determined whether the agreement is appropriate and the information is accurate, thereby preventing the Service from arbitrarily terminating installment agreements entered into in good faith. The IRS position is that the offset of state and Federal refunds against delinquent Federal taxes is not a "termination" of an agreement (which is prohibited by statute).

A taxpayer may seek to challenge the Service's procedure to offset Federal and state tax refunds during the effective period of an installment agreement, either by way of an administrative appeal or court litigation, particularly when Form 433-A was filed, accurately calculating monthly tax expenses. There is nothing in Sec. 6159 that allows tax refund offset. The Code specifically limits the reasons for "terminating" an agreement. An installment agreement, by its very nature, generally considers tax expense in evaluating a person's ability to pay delinquent taxes. As such, a regular tax refund should not be considered a change in circumstance warranting collection action.

Even assuming the offset of a Federal tax refund is permitted, nothing in the law or regulations indicates that the IRS should be permitted to offset a state tax refund against a Federal tax liability, following the Service's acceptance of an installment agreement.

For a CPA dealing with delinquencies, there are several items that must be handled:

* Providing the IRS with relevant information that may be needed to enter into an installment agreement, following review of the allowed expenses (It will be necessary to retain this information for a possible appeal.);

* Ensuring that all tax returns are filed on time and estimated taxes are paid as required;

* Reviewing relevant tax information during the year to avoid the potential of a large offset of a tax refund from the state or Federal government; and

* Preparing for an administrative appeal, if the Service notifies a client of a termination of an installment agreement.