The IRS generally allows payment plan/installment agreement arrangements for taxpayers who’ve fallen behind on tax payments and are making a good faith effort to get things “square.” As long as the negotiations are made in good faith and terms are reasonable (the taxpayer remains in contact with the agency during negotiations, the proposed payment is proportional to the amount due, etc.), chances are good that the request will be granted. The IRS fairly leniently authorizes these plans because, at the end of the day, installment agreements make it possible for taxes to be paid.
There are some instances, however, when the IRS won’t agree to a payment plan. One recent tax court case (and subsequent appeal to the Ninth Circuit Court of Appeals) dealt with a denied payment plan request from a very high-profile taxpayer, actor and director Forest Whitaker.
Whitaker, along with his wife Keisha, filed a tax return for tax year 2013 reporting a withholding discrepancy (and underpayment) of taxes of about $410,000. Representatives subsequently requested a payment plan. While that request was pending, the couple’s tax year 2014 return was filed. This time the discrepancy and underpayment was much larger, totaling almost $800,000. The payment plan request was modified to add in the 2014 tax liability as well.
The IRS had, at several points during this process, requested subsequent documentation from Whitaker regarding tax payments and assessments. Representatives failed to respond. Since there did not appear to be a “good faith effort” at tax compliance, the IRS denied the installment agreement request, demanding full payment of the entire 2013 and 2014 taxes due.
- Whitaker’s legal team took the case to the tax court, arguing an abuse of discretion on the part of the IRS in denying the request. The tax court disagreed, finding that the facts supported denial of the installment agreement.
- The tax court’s decision was then appealed to the Ninth Circuit Court of Appeals, with Whitaker’s representatives still arguing an abuse of discretion. The appellate court also disagreed that any abuse of discretion had occurred.
Both courts pointed out that Whitaker made several missteps throughout the process that justified the IRS’ refusal. For example, the 2014 tax year returns showed an even greater tax compliance disparity than the previous year. In addition, Whitaker (or his representatives) failed to provide requested documentation to the agency throughout the process.
If you are dealing with a tax arrearage and are trying to establish an installment agreement, you should work with an experienced tax attorney. An attorney will help you understand the proper steps to take to increase your chances of a successful negotiation, and can help you minimize the consequences you face (such as penalties, interest, fines or even criminal charges).