Follow the IRS rules, or risk rejection of an installment agreement
While many non-accountants (and some accountants as well) fear the IRS, we know it’s easier to work with the IRS when you and your clients comply with agency requests. That means helping your clients keep financial records for their businesses, using those records to file complete and accurate tax returns on time, and making sure those taxes are paid.
Indus Group owed almost $5 million in payroll taxes
While the IRS is willing to work with delinquent taxpayers, there’s a limit to how far that cooperation will go, particularly if the other party doesn’t seem to be trying to do their part. As Indus Group, Inc. discovered when they went to tax court, their history of noncompliance meant that their installment agreement was rejected.
Indus Group was an IT consulting company based in Virginia. Between 2008 and 2015, they didn’t file their payroll tax returns consistently, and also didn’t deposit all of their payroll taxes. This drew the attention of the IRS, who contacted Indus Group multiple times to try to remedy the situation.
In 2015, the IRS assessed payroll taxes due of $4,757,745. This amount was based on the few payroll tax returns that Indus Group filed, combined with returns prepared by the IRS. Indus Group never disputed the amount of the liability.
When the IRS sent a notice in 2016 with the intent to levy, Indus Group finally responded with a request to make alternative payment arrangements, as paying the entire $4.8 million plus penalties would “cause undue economic hardship.” On the form they sent to the IRS, Indus Group checked the boxes for “Installment Agreement,” “Offer in Compromise,” and “I Cannot Pay Balance.”
IRS payment options
Installment agreements and offers in compromise are two methods your clients can use if they can’t pay their tax bill. Both options come with conditions your clients must meet – or the IRS won’t accept their proposal. In addition to filing specific forms and submitting supporting documentation, your clients need to be current with tax filings and payments. Requests to settle a tax debt for less than face value also need to be reasonable.
For installment agreements, there’s an online application if your client owes less than $50,000. Otherwise, Form 9565, Installment Agreement Request, and Form 433-F, Collection Information Statement, must be filled out completely. To apply for an Offer in Compromise (OIC), the forms in Form 656 Booklet, Offer in Compromise, must be filled out.
Most tax pros know that complying with IRS requests is always in your clients’ best interest. It’s also just common courtesy. However, Indus Group and their attorneys apparently thought otherwise.
Indus Group gets into hot water
On the day of a scheduled phone hearing, the settlement officer received a flurry of faxes, three weeks after the information was supposed to be provided. These last-minute faxes included several delinquent payroll tax returns and financials that showed average net monthly income of $5,624.
The settlement officer noted that almost $83,000 out of $322,000 average monthly expenses had no explanation. A second conference call was scheduled to review the financials, but the Indus Group attorney was too busy to call in.
Ultimately, the Indus Group attorney submitted an offer to pay off the nearly $4.8 million tax debt with monthly installments of $5,500. Assuming no interest, it would take 72 years to pay off the debt. Since an OIC must be paid off within 24 months, and an installment agreement can only be stretched out for 72 months, it’s not surprising that the settlement officer turned down this request, saying that the offer “lacked credibility.”
The Internal Revenue Manual that IRS officers have to follow states “taxpayers identified as repeaters may not immediately be granted installment agreements.”
On denial of this request, Indus Group petitioned the tax court, claiming that the settlement officer had abused her discretion.
As the settlement officer explained in her report, the IRS had contacted Indus Group repeatedly for more than eight years to resolve the delinquent payroll tax returns and non-payment of taxes. For eight years, the IRS “’received excuses and promises but no tax returns,’ with petitioner ‘return[ing] calls only when action was imminent.’”
The tax court judge agreed with the decision of the settlement officer, so the offer to pay off a $4.8 million tax debt in installments of $5,500 was rejected.
It’s not clear how – or if – Indus Group will manage to pay off that debt, plus the related penalties. The sole shareholder, Ravi Ramanulla, pleaded guilty to federal tax crimes in 2015 and spent four months in prison, in addition to being ordered to pay $90,000 in restitution. He also has a collections due process case pending before the tax court, so things do not look good for Mr. Ramanulla.
Installment agreements and offers in compromise are powerful tools to help your clients pay off their debts. Tax pros who also demonstrate professionalism and courtesy when working with the IRS can help their clients the most.