Will the IRS Make You Sell or Borrow Before It Grants a Payment Plan?

People expect the IRS to ask about their paycheck. They do not expect the first question to be about their house, their brokerage account or the cash value of a life insurance policy. On larger payment plans, it often is.

The rule comes from IRM 5.14.1.4. If you have equity in assets that could be used to fully or substantially satisfy the balance, the IRS explores liquidating or borrowing against those assets before it grants an installment agreement. A revenue officer will often set a deadline to try.

When the equity question does not come up

The same paragraph carves out the cases where equity is not a condition. The IRS does not require you to sell or borrow if doing so would create economic hardship, or if you qualify for a guaranteed agreement or request and qualify for a Simple Payment Plan, and the agreement is appropriate on the facts. IRM 5.14.1.4 repeats the point in an exception: if you are eligible for a Simple Payment Plan, guaranteed agreement or Simple Payment Plan (Business Trust Fund), financial statements are not required.

So the equity conversation is mostly a feature of non-simple agreements and partial payment agreements. Another reason to get under $50,000 if you can.

What the IRS can ask you to use

IRM 5.14.1.4 lists the ways a taxpayer may be able to pay in full or in part:

• Cash on hand.
• Cash withdrawn from bank or other accounts.
• Selling securities, or borrowing against them.
• Borrowing on equity in real or personal property.
• Selling real or personal property.
• Borrowing against the cash value of universal or whole life insurance, or surrendering the policy for its cash value.

On life insurance, the IRM includes a note that may surprise you: a policy may be worth significantly more than its cash value, and selling it on the secondary market may produce more than surrendering it. If you are being asked to use a policy, it is worth pricing both.

Retirement accounts are assets too. The Financial Analysis Handbook, IRM 5.15.1.28, values an IRA or 401(k) for someone not near retirement as the cash value less liquidation costs and the early withdrawal penalty, and it asks whether a retired taxpayer needs the income for necessary living expenses. It also tells revenue officers to allow for the current year tax consequence of a withdrawal.

How the request is supposed to work

The IRM sets out a fair process. The revenue officer is to request a specific amount, explain that the figure is based on converting assets or on the financial statement analysis, and give you a specific deadline along with the consequences of missing it. You are told the agreement will be recommended for rejection if you have enough equity or cash to pay in full, or to make a significant partial payment, and the requested payment is not made by the deadline. You are also told you have appeal rights if the request is rejected.

The IRM's own example: a taxpayer can pay $3,000 a month on a $200,000 balance and has a $400,000 home with $200,000 of equity. The revenue officer asks the taxpayer to try to borrow against the equity before granting an agreement. If the taxpayer gets a home equity loan and uses it to pay the tax, the loan payment becomes an allowable expense. If the loan application is denied, the taxpayer is told to submit an installment agreement request.

That last sentence matters. A good faith attempt that fails is not a failure. Keep the denial letter.

Notice also what the example does not say. It does not say the IRS takes the house. It says the IRS asks you to borrow, counts the new loan payment as an allowable expense, and moves on to the monthly plan. The equity request is a step in building the agreement, not a substitute for one.

Timing matters as well. The IRM tells employees not to warn taxpayers of enforcement action while an agreement request is pending or in effect. If your request is pending, the equity deadline is a deadline for the agreement, not a countdown to levy; missing it leads to a recommended rejection and independent review, not an immediate seizure.

The economic hardship limit

The IRM says it more than once: it is not appropriate to ask a taxpayer to liquidate or borrow against an asset if doing so would create economic hardship. Economic hardship is defined in Treas. Reg. 301.6343-1(b)(4) as being unable to pay reasonable basic living expenses. IRM 5.14.2.2.2 adds that assets necessary for the production of income should be included in that definition.

The partial payment chapter lists other situations where you may keep an asset with equity: equity too thin for a lender to loan against, property you cannot encumber alone such as certain tenancy by the entirety property when only one spouse owes, an asset that cannot currently be sold, an asset that generates the income funding the plan, and a loan payment you could not afford anyway. The IRM's example is a retiree on Social Security whose only asset is a home with equity; seizing it would create hardship because the taxpayer could not find replacement housing and still meet living expenses.

What the IRS counts as equity

Equity is not fair market value. The IRS generally starts from quick sale value, which IRM 5.15.1 describes as a reduction from fair market value reflecting pressure to sell in 90 days or less, generally calculated at 80 percent of fair market value, and then subtracts loans secured by the asset. Push back on inflated values. A home the county assessor or a broker values realistically can carry far less equity than an online estimate suggests.

What happens if you refuse

If you will not make a good faith attempt to use equity, IRM 5.14.2.2.2 treats you as a won't pay case, and the revenue officer considers levy or seizure. If you are in pending status, the IRS follows the rejection procedures, which include an independent administrative review and then your right to appeal. See rejection and independent review.

You do not have to accept an unreasonable equity demand. But ignoring the deadline is the worst response. If the loan cannot be obtained, get it in writing. If the sale would create hardship, document why. If the value is wrong, bring evidence. The IRM gives you every one of those arguments; use them in writing, before the deadline.

Answering an equity request

• Get the request in writing, with the amount, the asset and the deadline.
• Check the value. Ask what figure the IRS used and whether it applied quick sale value and subtracted every loan.
• If you can borrow, apply promptly and keep copies of everything you submit; the IRM says taxpayers will be required to submit copies of the loan application documents.
• If the lender says no, get the denial in writing and send it before the deadline.
• If selling or borrowing would leave you unable to meet basic living expenses, say so in writing and show the numbers.
• If you need more time, ask before the deadline passes, not after.

The bottom line

The equity question is a fair one from the government's point of view: why accept $1,500 a month for years when there is $150,000 of equity sitting in a house? Your job is to show which equity is real, which is protected, and which would cost more to reach than it is worth. Do that well, and the conversation moves back to a monthly payment you can live with.

If you are facing an equity request with a deadline attached, that is the moment to get advice. My firm's main site has a broader overview of IRS installment agreements, and the guide to working with a revenue officer covers the deadlines.