Score One for the Taxpayer

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January 3, 2010

It's not often that the Tax Court hands the taxpayer a victory, and it's always nice to see it happen. After all, taxpayers are somewhat disadvantaged -- the IRS is typically presumed to be correct and taxpayers have to prove that the IRS is wrong.

In Vinatieri vs. Commissioner there was such a victory.

The basic facts are as follows: the taxpayer had a terminal health condition, and was only able to work part-time. Her income roughly equaled her expenses, she had no extra cash and her only significant asset was a vehicle worth approximately $300.

The taxpayer had an outstanding liability for tax year 2002. The IRS decided to pursue a levy on her wages and property to satisfy the liability. She submitted required financial information forms and convinced the IRS that she was eligible to have her account placed in "Currently Not Collectible" status, as the levy would place an undue hardship on her.

However, there's a catch: typically the IRS can only allow collection alternatives (such as an installment agreement, offer-in-compromise or placing the account in currently not collectible status) if the taxpayer is current on filing obligations. The IRS' records indicated that she had not filed her 2005 and 2007 taxes. The taxpayer believed she had, but didn't have records to substantiate her claim.

As a result, the IRS continued to pursue the levy. The taxpayer petitioned the Tax Court regarding the levy. In past cases, the Tax Court has upheld the IRS' determination that a taxpayer must be current on filing obligations to consider a collection alternative, but that taxpayers in those cases were able to meet basic living expenses.

In this case, however, the Court ruled that a levy on the taxpayer's wages would create a situation where the taxpayer would be unable to pay even basic living expenses and that a levy on her vehicle would render her unable to work. The Court ruled that the IRS' determination to proceed with a levy was an abuse of discretion and ruled in favor of the taxpayer, essentially quashing the levy.

Situations such as these are uncommon, but it does show that there are remedies available to taxpayers facing tough times. If you find yourself in a difficult tax situation, it benefits you to explore all of your alternatives, including legal action if necessary. Should you have any questions on your tax situation, please let us know.