                              T.C. Memo. 2012-53



                        UNITED STATES TAX COURT



MATTHEW L. KARAKAEDOS AND DIANE D. KARAKAEDOS, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 11011-10L.                   Filed February 27, 2012.



      Matthew L. Karakaedos and Diane D. Karakaedos, pro se.

      Carol-Lynn E. Moran, Gloria M. Juncadella, Thomas M. Rath, and Jason M.

Kuratnick, for respondent.
                                           -2-

             MEMORANDUM FINDINGS OF FACT AND OPINION


      MORRISON, Judge: The petitioners, Matthew L. Karakaedos and Diane L.

Karakaedos, challenge the determination of the IRS Appeals Office sustaining the

July 21, 2009, filing of a notice of federal tax lien relating to the petitioners’ unpaid

income-tax liabilities for tax years 2004, 2005, and 2006. Our jurisdiction over the

dispute is established by sections 6320(c) and 6330(d) of the Internal Revenue Code

(Code). Unless otherwise indicated, all references to sections are to the Code, as

amended. The issue for decision is whether the Appeals Office abused its discretion

by sustaining the filing of the notice of federal tax lien. We hold that the Appeals

Office did not abuse its discretion, except that, as the respondent essentially

concedes, the Appeals Office should have abated the fees that had been charged to

the petitioners to reinstate installment agreements as to which they were repeatedly

declared by the IRS to be in default.

                                 FINDINGS OF FACT

      The petitioners resided in Pennsylvania at the time they filed the petition.

      The petitioners were, and are, married. They filed joint income-tax returns

for the 2004, 2005, and 2006 tax years. As shown on the table below, they filed
                                           -3-

the returns late, and they did not pay the full amounts of the liabilities reported on

the returns.

                  Joint income tax returns for 2004, 2005, and 2006
                                          Tax liability      Income-tax withholding
    Year             Date filed            reported                reported
    2004          Apr. 10, 2007           $12,390                      $5,179
    2005           June 4, 2007             12,749                      5,630
    2006           May 7, 2007              12,218                      5,928

The IRS assessed the tax liabilities, additions to tax, and interest for the 2004 tax

year on May 28, 2007, for the 2005 tax year on July 16, 2007, and for the 2006 tax

year on May 28, 2007. On the same dates, the IRS issued statutory notices of

balance due for each of the three respective years.

      The IRS negotiated various installment agreements with the petitioners that

required them to make monthly payments towards their tax liabilities for the 2004,

2005, and 2006 tax years. The table below summarizes these installment

agreements:
                                         -4-

               Installment agreements between the IRS and petitioners
                                                                 Provisions in
                                                              agreement regarding
  Date of          Tax     Date of default or date of IRS’s   ability of IRS to file
 agreement        years           notice of default                 lien notice
Unknown          Un-       The IRS issued a Nov. 10,          Unknown
                 known     2008 notice of default for
                           failure to pay additional taxes.
Jan. 8, 2009     2001      The IRS issued an Apr. 6, 2009 Allowed IRS to file
                 2003      notice of default for failure to notice of lien
                 2004      pay additional taxes.
                 2005
                 2006
Apr. 10,         2003      The IRS issued a June 15, 2009 Allowed IRS to file
 2009            2004      notice of default for failure to notice of lien
                 2005      provide an updated financial
                 2006      statement.
July 14,         2001      No notice of default is in the     Allowed IRS to file
 2009            2002      record, but the parties            notice of lien if
                 2003      stipulated that petitioners were   petitioners do not
                 2004      in default on the July 14, 2009    meet all conditions of
                 2005      agreement sometime after the       agreement
                 2006      notice of lien was filed on July
                           21, 2009.
Oct. 20,         2003      No notice of default is in the     Allowed IRS to file
 2009            2004      record. On Apr. 1, 2010, the       notice of lien
                 2005      IRS Appeals Office agreed to
                 2006      allow petitioners to enter into
                           an installment agreement,
                           which suggests that by then the
                           IRS considered petitioners in
                           default on the Oct. 20, 2009
                           installment agreement.
                                            -5-

       In July 2008, the petitioners apparently had an installment agreement with the

IRS, because on July 2, 2008, the IRS sent them a monthly statement informing

them that their next installment payment of $500 was due July 10, 2008. The

statement indicated that installment-agreement payments would be applied to the

“oldest tax owed, then penalties, then interest.” The statement showed that the most

recent payment, $500, was applied to the balance of a tax liability for the 2001 tax

year. Apparently this tax liability, and all liabilities referred to in the notices

described in this opinion, were joint income-tax liabilities of the petitioners. The

$500 payment was presumably made pursuant to the same installment agreement

that required the payment on July 10, 2008. The statement showed that the unpaid

balance was $616.97 for the 2001 year (including a penalty of $75.07 and interest of

$541.90), $1,910.11 for the 2002 year (including a penalty of $69.59 and interest of

$350.67), and $7,493.67 for the 2003 year (including a penalty of $769.33 and

interest of $1,605.15). The statement indicated that “Liabilities not shown:” were

$31,303.15, including a penalty of $1,031.85 and interest of $2,251.15. The terms

of the installment agreement to which the statement referred are not in the record.

       On July 10, 2008, the petitioners paid the IRS $500. The IRS applied the

payment to their 2001 tax liability.
                                           -6-

      On August 13, 2008, the petitioners paid the IRS $500. The IRS applied the

payment to their 2001 tax liability. The record does not explain how the petitioners’

unpaid 2001 tax liability could have absorbed this entire $500 payment. As we note

below, the respondent (whom we refer to as the IRS) concedes there were “some

problems” with respect to the 2001 tax liability, which presumably means problems

with the IRS’s ongoing calculations of the unpaid amount of the liability.

      On September 10, 2008, the petitioners paid the IRS $500. The IRS applied

the payment to their 2002 tax liability.

      On October 14, 2008, the petitioners paid the IRS $500. The IRS applied the

payment to their 2001 tax liability. The record does not explain how the petitioners

still had an unpaid 2001 tax liability after application of their prior payments.

      On November 10, 2008, the IRS notified the petitioners that they had

defaulted on an installment agreement. The notice said:

      This is a formal notice of our intent to terminate our installment
      agreement 30 days from the date of this notice. You defaulted on your
      agreement because you didn’t pay the additional federal tax you owe.
      The agreement states that we may terminate your agreement and
      collect the entire amount of your liability if you don’t meet all the
      conditions.
                                           -7-

The notice stated: “To prevent collection action you must pay in full any additional

federal taxes you owe. We will charge a reinstatement fee that we will take from

your first payment.” The notice informed the petitioners that they had an unpaid

balance of $472.40 for the 2002 year, including a penalty of $69.59 and interest of

$370.87. As explained later, the IRS does not ultimately take the position in this

litigation that the petitioners defaulted on the installment agreement about which the

IRS issued a November 10, 2008 notice of default.

      On November 14, 2008, the petitioners paid the IRS $500. The IRS applied

the payment to their 2001 tax liability. The record does not explain how the

petitioners had an unpaid 2001 tax liability at this time.

      On November 26, 2008, the petitioners received a bill from their accountant,

Michael Horn. The bill sought fees for the following services: “Appeared before

the Internal Revenue Service to petition successfully for reinstatement of a lapsed

payment agreement with automatic debit from taxpayer’s checking account.”

      On December 3, 2008, the petitioners’ accountant submitted to the IRS a

Form 433-D, Installment Agreement. Apparently, the proposal reflected on the

Form 433-D was the result of the negotiations for which the petitioners’ accountant

billed them on November 26, 2008. The Form 433-D requested a direct debit

installment agreement for the tax years 2003, 2004, 2005, and 2006.
                                           -8-

(It is unclear from the record exactly what years were covered by the installment

agreement or agreements that governed the monthly payments made by petitioners

up to this point.) The Form 433-D contains a section entitled “Terms of this

agreement”. One of the terms was: “We [the IRS] may file a Federal Tax lien if

one has not been filed previously.” Another term was: “You must pay a $43 user

fee, which we have authority to deduct from your first payment(s).” Another term

was: “If you default on your installment agreement, you must pay a $24

reinstatement fee if we reinstate the agreement.” As noted below, the IRS accepted

the installment agreement on January 8, 2009.

      On December 8, 2008, the petitioners paid the IRS $1,045. The IRS applied

this payment to their 2003 tax liability. The payment represented a $500 payment

for January, a $500 payment for February, and a $45 “fee”, according to a later

letter from the petitioners to the IRS.

      On December 8, 2008, the IRS notified Diane Karakaedos that $500 of tax

had been overpaid for the 2001 tax year and that the IRS applied the overpayment to

the 2002 liability (to the extent of $472.67) and to the 2003 liability (to the extent of

$27.33). Neither party suggests that it is significant that this notice and some other

subsequent notices were sent to one petitioner rather than both. The way in which

the IRS applied the $500 payment suggests that an IRS employee believed that as of
                                         -9-

December 8, 2008, the petitioners had an outstanding balance of $472.67 for 2002.

The record does not reveal why this $472.67 amount is slightly different from the

$472.40 balance noted on the November 10, 2008 notice.

      On December 31, 2008, the IRS sent the petitioners a monthly statement

reminding them that their next payment of $500 was due on January 10, 2009. The

statement indicated that installment payments would be applied to the “oldest tax

owed, then penalties, then interest.” The statement showed that the petitioners’ last

payment of $500 had been applied to their 2001 tax liability. In addition, the

monthly statement showed that the current balance was $75.08 for 2001 (including a

penalty of $75.07 and interest of $0.01), $6,674.57 for 2003 (including a penalty of

$839.65 and interest of $1,788.06), and $13,257.94 for 2004 (including a penalty of

$685.04 and interest of $1,297.21). The statement reflected that “Liabilities not

shown:” were $19,417.44, including a penalty of $870.31 and interest of $1,802.67.

(This monthly statement was attached to the Form 433-D that we discussed earlier.

The parties do not explain how a monthly statement with a date of December 31,

2008, came to be attached to the Form 433-D, which was submitted to the IRS on

December 3, 2008.)
                                         -10-

       On January 8, 2009, the IRS issued to the petitioners a letter accepting their

December 3, 2008 request for a direct debit installment agreement. The letter stated

that the agreement covered the tax years 2001, 2003, 2004, 2005, and 2006, even

though the petitioners’ Form 433-D did not refer to the year 2001. The letter stated

that the IRS would deduct a payment of $500 from the petitioners’ bank

account on the 10th day of every month.

       On March 10, 2009, the petitioners paid the IRS $500. The IRS applied the

$500 payment to their 2001 tax liability (to the extent of $75.08) and their 2003 tax

liability (to the extent of $424.92).

       On March 30, 2009, the IRS sent Matthew Karakaedos a notice that the 2001

tax account was overpaid by $75.08 and that the $75.08 was applied to the 2003 tax

liability.

       On March 30, 2009, the IRS sent the petitioners a letter stating that it had no

record that they had responded to “our [the IRS’s] previous notices.” The letter

went on to say: “As a result, your account has been assigned to this office for

enforcement action, which could include seizing your wages or property.”

       On April 6, 2009, the IRS sent the petitioners a notice informing them that

they had defaulted on their installment agreement (presumably the January 8, 2009,

agreement). The letter stated:
                                          -11-

      This is a formal notice of our intent to terminate your installment
      agreement 30 days from the date of this notice. You defaulted on your
      agreement because you didn’t pay the additional federal tax you owe.
      The agreement states that we may terminate your agreement and
      collect the entire amount of your tax liability if you don’t meet all the
      conditions.

The notice stated: “To prevent collection action you must pay in full any additional

federal taxes you owe. We will charge a reinstatement fee that we will take from

your first payment.” The notice contained an “Account Summary” showing a

current balance of $6,268.20 on the 2003 tax account (including a penalty of

$866.89 and interest of $1,854.45). The notice does not contain information about

tax years other than 2003. As explained later, the IRS does not ultimately take the

position in this litigation that the petitioners defaulted on the installment agreement.

      On April 10, 2009, the IRS wrote the petitioners a letter accepting their offer

to enter into another installment agreement. The date of the petitioners’ offer is not

revealed by the record, and no written offer is in the record. The heading of the

letter reflected that the letter, and therefore the installment agreement, concerned the

tax years 2003, 2004, 2005, and 2006. The letter did not indicate what arrangement

was made, if any, for payment of the 2001 or 2002 balance, or whether balances

still existed for these years. The letter stated: “Thank you for making arrangements

to resolve your account. We’ve accepted your offer to have your monthly
                                          -12-

installment payments automatically taken from your checking account.” The IRS

stated that it would deduct a $500 payment on the 10th day of each month. It also

stated that it would charge a $52 user fee to cover the cost of providing the

installment agreement. The letter warned the petitioners that

      You need to meet all of the conditions of the Installment Agreement.
      When someone doesn’t meet the terms of their Installment Agreement,
      we cancel it. We then begin to act to collect the full amount of the tax
      liability. In addition, canceled Installment Agreements that we later
      reinstate require the payment of a $45 reinstatement fee.

The letter listed 10 conditions of “this agreement”. The 10th condition was: “We

may file a federal tax lien to protect the interest of the federal government.”

      On April 13, 2009, the IRS wrote Matthew Karakaedos a letter informing him

that “We have no record that you responded to our previous notices. As a result,

your account has been assigned to this office for enforcement action, which could

include seizing your wages or property.” The letter asked him to pay $75.08 for the

2001 tax liability. The letter stated that the $75.08 amount comprised accrued

interest of $.01 and a late payment penalty of $75.07. A similar letter was sent to

Diane Karakaedos.

      On April 15, 2009, the petitioners paid the IRS $500. The IRS applied the

payment to their 2003 tax liability.
                                          -13-

      On May 13, 2009, the petitioners paid the IRS $455. The IRS applied the

payment to their 2001 tax liability.

      On June 11, 2009, the petitioners paid the IRS $500. The IRS applied the

payment to their 2003 tax liability.

      On June 15, 2009, the IRS sent the petitioners a notice informing them that

they had defaulted on their installment agreement (presumably the April 10, 2009,

installment agreement). The letter stated:

      This is a formal notice of our intent to terminate your installment
      agreement 30 days from the date of this notice. You defaulted on your
      agreement because you didn’t provide an updated financial statement
      as we requested. The agreement states that we may terminate your
      agreement and collect the entire amount of your tax liability if you
      don’t meet all the conditions.

The letter continued: “To prevent collection action, you must provide us with your

updated financial statement. We will charge a reinstatement fee that we will take

from your first payment.” The notice contained an account summary showing

$13,683.06 as the unpaid balance for the 2004 year, including a penalty of $865.32

and interest of $1,542.05. The notice did not contain information regarding tax

years other than 2004. As explained later, the IRS does not ultimately take the

position in this litigation that the petitioners defaulted on the April 10, 2009,

installment agreement.
                                          -14-

      On July 14, 2009, the IRS issued the petitioners a letter informing them that

their installment agreement had been reinstated for the six tax years 2001 through

2006. The letter stated:

      This is in response to our telephone conversation on July 2, 2009,
      requesting a payment arrangement to resolve your account with the
      IRS.

      Based on your payment proposal, we have established an installment
      plan for you on the tax periods shown above. Your payment is
      $500.00, due on the 10TH of each month, beginning on Aug. 10, 2009.

The letter also stated:

      We charge a $45.00 user fee to cover the cost of providing installment
      agreements. The fee will be deducted from your first payment. YOUR
      FIRST PAYMENT MUST BE AT LEAST $500.00 TO COVER THE
      FEE, EVEN THOUGH YOUR REMAINING PAYMENTS MAY BE
      FOR LESS. Please write “User Fee” on the first payment so that the
      payment will be properly credited.

The letter listed seven conditions of the installment agreement. There was no

condition that allowed the IRS to file a notice of tax lien without the petitioners

having defaulted on the installment agreement, as there was with the January 8 and

April 10, 2009 installment agreements. The letter stated that if the petitioners did

not meet all the conditions of the installment agreement, the IRS could cancel the

agreement and could take enforcement actions to collect the full amount of the

liability, including “filing a lien against your property”. The letter stated that “If we
                                          -15-

cancel your installment agreement and you later apply for and receive reinstatement,

you will have to pay a reinstatement fee.”

      On July 21, 2009, the IRS filed a notice of lien with Philadelphia County,

Pennsylvania, to secure the collection of the petitioners’ federal income-tax

liabilities for tax years 2004, 2005, and 2006. On the same day the IRS mailed a

letter to the petitioners notifying them that it had filed a notice of lien and informing

them that they had the right to request an administrative hearing to appeal the filing

of the notice of lien. Although the notice of lien was filed on July 21, 2009, it was

prepared and signed on July 8, 2009, in Detroit, Michigan.1

      The parties have stipulated that “Subsequent to the filing of the notice of

federal tax lien, petitioners’ installment agreement defaulted.”

      On July 29, 2009, the IRS sent the petitioners a monthly statement reminding

them that their next payment of $500 was due on August 10, 2009. The statement

indicated that installment payments would be applied to “the oldest tax owed, then

penalties, then interest.” The statement showed that the current balance was $75.08

for 2001 (including a penalty of $75.07 and interest of $.01), $4,894.17 for 2003

(including a penalty of $888.97 and interest of $1,915.34), and $13,834.66 for 2004

      1
       Here and in some other parts of the opinion, we use the term “notice of lien”
instead of the lengthier “notice of federal tax lien”.
                                          -16-

(including a penalty of $865.32 and interest of $1,621.21). It reflected that

“Liabilities not shown:” were $20,253.38 (including a penalty of $1,228.68 and

interest of $2,280.24).

       On August 18, 2009, the petitioners sent the IRS a request for an

administrative hearing. In the request, they stated they wished the IRS to consider

an installment agreement. They also challenged the filing of the notice of lien. The

request did not contest the underlying liabilities.

       On August 31, 2009, the IRS notified Matthew Karakaedos that the 2001 tax

account was overpaid by $455 and that the IRS had applied the $455 payment to the

2003 tax liability.

       On October 5, 2009, the IRS notified Matthew Karakaedos that the 2001 tax

account was overpaid by $500 and that the IRS had applied the $500 payment to the

2003 tax liability.

       On October 20, 2009, the IRS sent the petitioners a letter accepting their offer

to enter into another installment agreement. The date of the offer is not reflected in

the record, and no written offer is in the record. The IRS letter identified the tax

periods in question as 2003, 2004, 2005, and 2006. It stated:

       Thank you for making arrangements to resolve your account. We’ve
       accepted your offer for an Installment Agreement. The agreement
                                         -17-

      covers the tax period(s) shown above. Please make your first payment
      of $500.00 by November 10, 2009. Thereafter, send us that amount by
      the 10th of each month, until you’ve paid the full amount you owe.

The letter stated further:

      We charge a $105 User Fee to cover the cost of providing an
      Installment Agreement regardless of the amount of your agreed to
      payment. Although your approved Installment Agreement payment
      may be for less than $105, your first payment should be for at least
      $105 to cover the fee.

The letter warned the petitioners that

      You need to meet all the conditions of the Installment Agreement.
      When someone doesn’t meet the terms of their Installment Agreement,
      we cancel it. We then begin to act to collect the full amount of the tax
      liability. In addition, canceled Installment Agreements that we later
      reinstate require the payment of a $45 reinstatement fee.

The letter listed 10 conditions of the agreement. The 10th condition was: “We [the

IRS] may file a federal tax lien to protect the interest of the federal government.”

There is no offer letter or other document in the record describing the offer that was

accepted.

      On November 30, 2009, the IRS notified Matthew Karakaedos that “We have

no record that you responded to our previous notices. As a result, your account has

been assigned to this office for enforcement action, which could include seizing your
                                         -18-

wages or property.” The IRS asked him to pay the $75.08 balance on the 2001 tax

account by December 16, 2009. The notice stated that the $75.08 amount

comprised accrued interest of $.01 and a late payment penalty of $75.07. The IRS

sent a similar notice to Diane Karakaedos.

       On December 28, 2009, the IRS notified Diane Karakaedos that “We have no

record that you responded to our previous notices. As a result, your account has

been assigned to this office for enforcement action, which could include seizing your

wages or property.” The notice asked her to pay the $75.08 tax liability for 2001 by

January 13, 2010. The notice stated that the $75.08 amount comprised accrued

interest of $.01 and a late payment penalty of $75.07.

       On February 8, 2010, the IRS notified Diane Karakaedos that the 2001 tax

account was overpaid by $500 and that the IRS had applied the $500 overpayment

to the 2003 tax liability.

       The IRS Appeals Office assigned a settlement officer to handle the

administrative hearing that the petitioners had requested on August 18, 2009. The

Appeals Office wrote a letter to the petitioners on February 16, 2010, informing

them that it had received their request for an administrative hearing. It scheduled a

telephone conference call for March 23, 2010.
                                         -19-

      On March 23, 2010, the Appeals Office conducted a teleconference with the

petitioners. The parties have stipulated that during the teleconference the petitioners

“requested an installment agreement, withdrawal of the tax lien, and abatement of

penalties and interest.” The Appeals Office contacted the petitioners again by

telephone on April 1, 2010. The parties have stipulated that the Appeals Office

“agreed to allow petitioners to enter into an installment agreement” but that

“Petitioners did not agree with sustaining the lien.”

      On April 16, 2010, the IRS Appeals Office issued a determination to the

petitioners. The Appeals Office stated: “You did not present any information that

would qualify you for a withdrawal of the NFTL. It is therefore Appeals [sic]

determination that you be denied relief from the filing of the Notice of Federal Tax

Lien (NFTL).” The Appeals Office also stated:

      It appears that your previous IA defaulted due to a balance on another
      module that you say was fully paid. The IRS had the right to file a lien
      because you received a CP 523 letter informing you that a tax lien
      could be filed.

      The Settlement Officer reviewed your financial information and at this
      point if an IA was granted, a federal tax lien would be filed if one was
      not already in place (due to the amount you owe and the type of IA).

      According to your account transcripts; [sic] the previous IA was a
      Partial Payment IA, which means that the time the IRS has to collect
                                          -20-

      from you will expire before you have fully paid your balance. A lien
      determination is required for this type of IA.

(A CP 523 letter is a notice from the IRS to a taxpayer that the taxpayer had

defaulted on an installment agreement. The letters of November 10, 2008, April 6,

2009, and June 15, 2009 were CP 523 letters.) The Appeals Office also stated:

“The Settlement Officer did not consider the abatement of penalties and interest due

to your IA defaulting because you had the right to appeal your defaulted IA with the

CP 523 letter.”

                                        OPINION

1.    Collection-Review Hearings

      The IRS is authorized to assess federal tax liabilities. Sec. 6201(a); 26

C.F.R. sec. 301.6201-1(a) (Apr. 1, 2011). Assessment occurs when the liability is

recorded on the books of the IRS. Sec. 6203; 26 C.F.R. sec. 301.6203-1 (Apr. 1,

2011). The IRS is required by statute to notify the taxpayer within 60 days of

assessing the tax and to demand payment. Sec. 6303(a). If the taxpayer refuses to

pay after payment is demanded, a lien arises on the property of the taxpayer in favor

of the federal government. Sec. 6321. The lien relates back to the time of

assessment. Sec. 6322; William D. Elliott, Federal Tax Collections, Liens, and

Levies, para. 9.03[1], at 9-6 (2008).
                                           -21-

       Until it files a notice of lien, the federal government’s claim against the

taxpayer is not valid against four classes of other creditors: purchasers, holders of

security interests, mechanic’s lienors, and judgment-lien creditors. See sec.

6323(a). An unfiled federal tax lien is not valid against someone who purchases

property from the taxpayer. Sec. 6323(a); see also sec. 6323(h)(6) (defining

“purchaser”). Thus, if a taxpayer who owns property burdened by an unfiled

federal tax lien sells all the interests in the property to a third party, the government

will generally have no interest in the property. See Newnham v. United States, 813

F.2d 1384, 1385 (9th Cir. 1987). Once the notice of lien is filed in the appropriate

state or local government office, the federal tax lien is valid against any purchaser,

holder of a security interest, mechanic’s lienor, or judgment-lien creditor. See sec.

6323(a); Lindsay v. Commissioner, T.C. Memo. 2001-285, slip op. at 3, aff’d, 56

Fed. Appx. 800 (9th Cir. 2003); T. Keith Fogg, “Systemic Problems With Low-

Dollar Lien Filing”, 133 Tax Notes 88 (Oct. 3, 2011) (“The NFTL prevents sales

and borrowings from defeating the IRS’s claims to equity in property to which its

lien attaches.”).
                                         -22-

      Not more than five business days after filing the notice of lien, the IRS must

provide the taxpayer written notice of the filing and must advise the taxpayer of the

right to a hearing with the IRS Appeals Office. Sec. 6320(a)(1), (2), and (3).

At the hearing, the Appeals Office must “obtain verification * * * that the

requirements of any applicable law or administrative procedure have been met”,

consider any relevant issues raised by the taxpayer (including installment

agreements and challenges to the appropriateness of collection actions), and

consider whether any proposed collection action balances the need for efficient

collection of taxes with the legitimate concern that any collection action be no more

intrusive than necessary. Sec. 6330(c)(1), (2)(A)(iii), (3). The Tax Court is

authorized by section 6330(d)(1) to review the determination of the Appeals Office.

Where the underlying tax liability is not at issue, the Tax Court reviews the

determination of the Appeals Office for abuse of discretion. See Sego v.

Commissioner, 114 T.C. 604, 610 (2000). The petitioners do not dispute their

underlying liabilities. Consequently, we review the determination of the Appeals

Office for abuse of discretion.
                                         -23-

2.    Contentions of the Parties

      The petitioners contend that the IRS filed the notice of lien because the IRS

concluded--erroneously--that they had defaulted on the April 10, 2009, installment

agreement. They argue in their brief: “the Respondent’s representative that

initiated the Federal Tax Lien in July 2009 abused his discretion as the installment

agreement defaulted without any fault of the Petitioners.” Similarly, they argue:

“Petitioners never had a federal tax lien filed for tax years 2004, 2005 and 2006

until their installment agreement defaulted for the fourth time due to IRS clerical

errors in July 2009”. Petitioners also contend that the July 14, 2009, installment

agreement did not provide for a notice of lien to be filed. See Tr. 10.

      The petitioners ask for three items of relief. First, they seek “the

reimbursement of all fees associated with the reinstatement of 4 installments caused

by IRS clerical errors”. Second, they ask for reinstatement of an installment

agreement for the 2004, 2005, and 2006 tax years. Third, they want the notice of

lien to be withdrawn.

      The IRS argues that the notice of lien was filed because the installment

agreements were partial payment installment agreements, not because the IRS had

declared the petitioners in default on several of the installment agreements. A
                                          -24-

partial payment installment agreement, according to the IRS, is an installment

agreement that allows a taxpayer to make payments in amounts less than the

amounts that would be required to pay the outstanding liability before the collection

period of limitations expires. The IRS contends that the Appeals Office had

concluded that the notice of lien was filed because the installment agreement was a

partial payment installment agreement. The IRS contends that it has a policy of

filing a lien notice when it enters into a partial payment installment agreement. As

to the petitioners’ argument that the July 2009 installment agreement did not provide

for a notice of lien to be filed, the IRS responds that “As a condition of reinstating

the petitioners’ prior installment agreement dated April 10, 2009, in a letter dated

July 14, 2009, respondent reserved the right to file a federal tax lien to protect the

interest of the government.” The IRS makes the more general argument that an

installment agreement does not preclude the filing of a tax lien. The IRS concedes

that “there are unanswered questions surrounding the defaulting of the installment

agreements”. It states that some documents in the record indicate that there “were

some problems with respect to petitioners’ 2001 tax liability that may have affected

the installment agreements for the years at issue” although it also asserts that “the

notices advising petitioners that they had defaulted on their installment agreements
                                          -25-

indicated that the problem was for a year other than the 2001 tax year.” Its brief

continues:

      In any event, due to the issues with respect to petitioners’ 2001 tax
      year, respondent will abate the fees charged to petitioners for the
      reinstatement of the installment agreements for the years in issue.
      Respondent will also ensure that the issues involving petitioners’
      account for the taxable year 2001 are resolved.

In its briefs the IRS does not take the position that the petitioners defaulted on (1)

the installment agreement that was declared in default on November 10, 2008, (2)

the installment agreement established January 8, 2009, or (3) the installment

agreement established April 10, 2009.

3.    Analysis

      a.     The July 14, 2009, Installment Agreement Did Not Require the IRS
             To Withdraw the July 21, 2009 Notice of Lien.

      The first question disputed by the parties is whether the July 14, 2009,

installment agreement required the IRS to withdraw the notice of tax lien that it filed

on July 21, 2009. In evaluating the significance of the July 14, 2009, installment

agreement, we must consider section 6159, a provision related to installment

agreements that was originally added to the Code in 1988, and section 6323(j), a

provision related to withdrawals of notices of tax lien that was originally added to

the Code in 1996. Technical and Miscellaneous Revenue Act of 1988, Pub. L. No.
                                         -26-

100-647, sec. 6234(a), 102 Stat. at 3735; Taxpayer Bill of Rights #2, Pub. L. No.

104-168, sec. 501(a), 110 Stat. at 1460. Section 6159(a) authorizes the IRS to enter

into installment agreements, and section 6159(b)(1) provides that “Except as

otherwise provided in this subsection, any agreement entered into * * * under

subsection (a) shall remain in effect for the term of the agreement.” Section

6159(b)(2) allows the IRS to terminate an installment agreement if the taxpayer had

provided inaccurate or incomplete information to the IRS before the execution of the

installment agreement or if the IRS believes that collection of the tax is in jeopardy.

Section 6159(b)(3) provides that the IRS may alter, modify, or terminate an

installment agreement if the IRS determines that the financial condition of the

taxpayer has significantly changed. Section 6159(b)(4) provides that the IRS may

alter, modify, or terminate an installment agreement if the taxpayer fails to make an

installment payment, pay any other tax liability when due, or provide a financial

condition update requested by the IRS. Section 6159(b)(5) provides that the IRS

cannot take any actions under section 6159(b)(2), (3), or (4) unless the IRS gives

the taxpayer 30 days of advance notification. 26 C.F.R. sec. 301.6159-1(d) (Apr. 1,

2009) provided that

      Except as otherwise provided by the installment agreement, during the
      term of the agreement the director may take actions to protect the
                                          -27-

      interests of the government with regard to the unpaid balance of the tax
      liability to which the installment agreement applies * * *, including any
      actions enumerated in the agreement. The actions include, for
      example--* * * (3) Filing or refiling notices of federal tax lien.[2]

      The July 14, 2009 installment agreement stated that the IRS could file a

notice of lien if the petitioners defaulted on that installment agreement. The legal

effect of such a provision is found in the regulations interpreting section 6323(j), to

which we turn next. Section 6323(j)(1) provides:

      In general--The Secretary [of the Treasury] may withdraw a notice of a
      lien filed under this section * * * if the Secretary determines that--

                   (A) the filing of such notice was premature or
             otherwise not in accordance with administrative
             procedures of the Secretary,

                   (B) the taxpayer has entered into an agreement
             under section 6159 to satisfy the tax liability for which the

      2
        This regulation was later amended on November 25, 2009. T.D. 9473,
2009-52 I.R.B. 945. Because the amendment was “applicable on November 25,
2009”, id., 2009-52 I.R.B. at 951, it does not govern the notice of lien at issue in
this case, which was filed against the petitioners’ property on July 21, 2009. As
amended, the regulation now reads:

      The IRS may take actions other than levy to protect the interests of the
      Government with regard to the liability identified in an installment
      agreement or proposed installment agreement. Those actions
      include, for example-- * * * (B) Filing or refiling notices of Federal tax
      lien; * * *.

26 C.F.R. sec. 301.6159-1(f)(3)(i) (Apr. 1, 2011).
                                         -28-

              lien was imposed by means of installment payments, unless such
              agreement provides otherwise,

                    (C) the withdrawal of such notice will facilitate the
             collection of the tax liability, or

                    (D) with the consent of the taxpayer or the National
             Taxpayer Advocate, the withdrawal of such notice would
             be in the best interests of the taxpayer (as determined by
             the National Taxpayer Advocate) and the United States.


Interpreting section 6323(j)(1), 26 C.F.R. sec. 301.6323(j)-1(c) (Apr. 1, 2011)

(effective June 22, 2001), provides:

      The Commissioner must determine whether any of the conditions
      authorizing the withdrawal of a notice of federal tax lien exist if a
      taxpayer submits a request for withdrawal in accordance with
      paragraph (d) of this section. The Commissioner may also make this
      determination independent of a request from the taxpayer based on
      information received from a source other than the taxpayer. If the
      Commissioner determines that conditions authorizing the withdrawal
      are not present, the Commissioner may not authorize the withdrawal.
      If the Commissioner determines conditions for withdrawal are present,
      the Commissioner may (but is not required to) authorize the
      withdrawal.[3]

26 C.F.R. sec. 301.6323(j)-1(b)(5), Example 2 (Apr. 1, 2011) (effective June 22,

2001) provides:


      3
         “[P]aragraph (d) of this section”, referred to in the regulation quoted above,
provides that a request for a withdrawal of a notice of lien must be made in writing
in accordance with procedures prescribed by the Commissioner of Internal Revenue
and it sets forth the information that must be included in the request. 26 C.F.R. sec.
301.6323(j)-1(d) (Apr. 1, 2011) (effective June 22, 2001).
                                          -29-

      A owes $1,000 in federal income taxes. A enters into an agreement to
      pay the outstanding federal income tax liability in installments. The
      agreement provides that a notice of federal tax lien may be filed if the
      taxpayer defaults. A timely pays the installments each month and has
      not defaulted in any way. Eleven months after entering into the
      installment agreement, the Internal Revenue Service files a notice of
      federal tax lien. Noting that there has been no default, the taxpayer
      asks the Internal Revenue Service to withdraw the notice of federal tax
      lien. In this situation, the Commissioner may withdraw the notice of
      federal tax lien because the taxpayer has entered into an installment
      agreement. [Emphasis added.]

Example 2 evinces an interpretation that if (1) the IRS enters into an installment

agreement that provides that a notice of lien may be filed if the taxpayer defaults, (2)

the taxpayer does not default, and (3) the IRS files a notice of lien, then the IRS

“may” later withdraw the notice of lien. That the IRS “may” withdraw the notice

suggests that the IRS is not required to withdraw the notice. Like the installment

agreement described in Example 2, the July 14, 2009 installment agreement

provided that a notice of lien could be filed if the petitioners defaulted, and the IRS

filed a notice of lien. We conclude that the effect of this installment agreement is

that the IRS may withdraw the notice of lien it filed against the petitioners, but it is

not required to do so.
                                         -30-

      b.     None of the Other Installment Agreements Required the IRS To
             Withdraw the July 21, 2009 Notice of Lien.

      Thus far our analysis has been limited to the July 14, 2009 installment

agreement. In determining whether the IRS was required to withdraw the notice of

lien, we also consider the potential relevance of the provisions of the prior

installment agreements. The petitioners contend that they did not default on prior

installment agreements, and the IRS does not ultimately contend otherwise. If the

petitioners did not default on one of the prior installment agreements (or they were

not otherwise terminated), then that prior installment agreement, and not the July

14, 2009 agreement, would arguably govern whether the IRS was required to

withdraw the notice of lien it filed on July 21, 2009. The petitioners allege that the

IRS erroneously declared them to have defaulted on four installment agreements. In

their count they include the July 14, 2009 installment agreement. However, they

stipulated that they were in default on this agreement, a stipulation that we construe

to mean that the petitioners were in default on the agreement. Setting aside the July

14, 2009 installment agreement leaves three installment agreements: the agreement

on which they were declared in default in November 2008, the agreement

established January 8, 2009, and the agreement established April 10, 2009. There is

no information in the record about the terms of the installment agreement on which
                                          -31-

they were declared in default in November 2008. Therefore we cannot determine

that its provisions were relevant to the Appeals Office’s decision not to withdraw

the notice of lien. The January 8 and April 10, 2009, installment agreements were

more permissive than the July 14, 2009 installment agreement regarding the filing of

notice of tax lien. The January 8, 2009, installment agreement had the following

term (which is found in the Form 433-D that petitioners submitted on December 3,

2008): “We may file a Federal Tax lien if one has not been filed previously.” The

April 10, 2009, installment agreement contained the following condition: “We may

file a federal tax lien to protect the interest of the federal government.” In providing

that a notice could be filed without regard to the petitioners’ being in default on the

agreement, these two agreements gave more latitude to the IRS than the July 14,

2009 installment agreement, which had provided that a notice could be filed in the

event of default. Thus, these last two installment agreements do not serve as a basis

for mandatory withdrawal of the notice of lien filed against the petitioners.

      c.     The Timing of the Filing of the Notice of Lien--Seven Days After the
             Establishment of the New Installment Agreement--Does Not Suggest
             That the IRS Erred in Failing To Withdraw the Notice.

      We also consider the petitioners’ suggestion that the notice of lien should

have been withdrawn because its filing was an indirect result of the IRS’s erroneous

determination that they had defaulted on the April 10, 2009 installment agreement.
                                             -32-

As discussed before, the IRS declared them in default on the April 10, 2009

installment agreement on June 15, 2009; it entered into a new installment agreement

on July 14, 2009; and on July 21, 2009, it filed a notice of lien. The fact that the

notice of lien was filed seven days after the establishment of the new installment

agreement suggests that the notice of lien was filed because the IRS had entered into

a new installment agreement. If the new installment agreement caused the IRS to

file the notice of lien, then one could also surmise that the filing of the notice of lien

would not have occurred but for the supposed default on the April 10, 2009,

installment agreement. However, even if this chain of causality is correct, the

Appeals Office did not err in its refusal to withdraw the lien filing. Its decision

comported with the duties imposed on it by statute. The first set of duties is set

forth in section 6330(c)(1), which requires the Appeals Office to consider whether

the “requirements of any applicable law or administrative procedure have been

met.” Sec. 6330(c)(1). The Appeals Office determined that the requirements for

filing a notice of lien had been met. It determined that a notice and demand for

payment had been made, see sec. 6303, that a notice of federal tax lien filing had

been issued,4 that a notice of a right to a collection-review hearing had been issued,


       4
           The petitioners argue that they did not receive notice of the filing of the
                                                                              (continued...)
                                          -33-

see sec. 6320(a)(3)(B), that a timely assessment had been made, see secs.

6201(a)(1), 6501(a), and that the tax had not been paid, see sec. 6321.

      The second relevant set of duties is set forth in section 6330(c)(2)(ii) and

(3)(C). The Appeals Office was required by section 6330(c)(2)(ii) to consider

challenges to the appropriateness of the filing of the notice of lien; and it was

required by section 6330(c)(3)(C) to consider whether the filing of the notice of lien

balanced the need for the IRS to collect taxes with the legitimate concern of the

petitioners that collection actions be no more intrusive than necessary. The Appeals

Office determined that the filing of the notice of lien was appropriate and that the

need to collect taxes was appropriately balanced with the concern of the petitioners.

This determination was not an abuse of discretion. The notice of lien protected the

government’s right to receive full payment of the tax liabilities. The petitioners had

entered into installment agreements to pay only $500 per month, and the Appeals




        (...continued)
notice of lien within five business days after it was filed. Sec. 6320(a) provides that
if the IRS chooses to file a notice of lien, it must provide the taxpayer with written
notice of the filing not more than five business days after the filing. The IRS filed
the notice of lien on July 21, 2009. On the same day, the IRS notified the
petitioners that it had filed the notice of lien. Therefore, the IRS provided timely
notification. The petitioners claim that the notice of lien was filed on July 8, 2009.
But that was the date the notice was prepared, not the date the notice was filed.
                                           -34-

Office concluded that these monthly payments would not have resulted in the full

payment of the petitioners’ tax liabilities.

      In considering the appropriateness of filing the notice of tax lien and the

petitioners’ concern that the collection action be no more intrusive than necessary, it

is conceivably appropriate to consider whether the terms of one of their installment

agreements might have led the petitioners to reasonably believe that their

compliance with an installment agreement would prevent the filing of a notice of lien

and whether they took actions in reliance on such a belief. The January 8 and April

10, 2009, installment agreements both provided that the IRS could file a notice of

lien. It was not until July 14, 2009, that the IRS entered into an installment

agreement that contained the seemingly less permissive provision that a notice of

lien could be filed in the event of default. This provision could have led the

petitioners to believe that a notice of lien could be filed only in the event of default.

But the notice of lien was filed only seven days after the July 14, 2009 agreement

was accepted. The record does not suggest that during this short seven-day period

the petitioners took any action in reliance on the IRS’s leaving its lien unfiled.

Because the January 8 and April 10, 2009, installment agreements warned the

petitioners that the IRS could file a notice of tax lien at any time, and because the
                                          -35-

July 14, 2009 installment agreement was in place only seven days before the lien

was filed, it does not appear that the provision in the July 14, 2009 installment

agreement that a lien could be filed in the event of default affects the issues of

whether the filing of the lien notice was appropriate and whether the filing of the

lien notice appropriately balanced the need to collect taxes against the petitioners’

legitimate concern that collection actions be no more instrusive than necessary.

      d.     The Appeals Office Did Not Err in Considering Whether To Reinstate
             the Installment Agreement.

      The next point to consider is the petitioners’ request that the Court order the

IRS to reinstate an installment agreement. The petitioners claim that reinstatement

is justified because they did not default on their prior installment agreements.

Even if the petitioners did not default on one or more of their installment

agreements, there was no error in the Appeals Office’s handling of the matter of

reinstating the installment agreement. The Appeals Office agreed to allow the

petitioners to enter into a new installment agreement.

      e.     The Appeals Office Did Not Err in Not Offering a Full Payment
             Installment Agreement.

      The petitioners also argue that the Appeals Office erred by not offering to

replace their partial payment installment agreement with a full payment installment

agreement. They argue that a full payment installment agreement would have
                                         -36-

obviated the need for the IRS to file a notice of lien. We do not believe the Appeals

Office erred in not offering a full payment installment agreement. A full payment

installment agreement would have required an increase in the monthly payments

from the $500 monthly amount that the petitioners had negotiated with the IRS. If

the petitioners wanted to renegotiate the $500 amount to a higher amount, they

should have attempted to do so. They did not.

      f.     The Appeals Office Erred by Not Abating Fees Imposed for
             Reinstating Installment Agreements.

      The petitioners also seek reimbursement of all fees associated with the

reinstatement of four installment agreements. The petitioners were declared in

default on the first installment agreement on November 10, 2008. On December 3,

2008, the petitioners offered to enter into a new installment agreement. Their offer

form said that a $43 user fee would be paid. The offer was accepted on January 8,

2009. After the petitioners were declared to be in default on April 6, 2009, the IRS

issued a letter on April 10, 2009 reinstating the agreement and stating that the

reinstatement fee was $52. After they were declared in default on this agreement on

June 15, 2009, the IRS issued a letter on July 14, 2009, reinstating the agreement

and stating that the fee for reinstatement was $45. After the petitioners defaulted on

this agreement, the IRS issued a letter on October 20, 2009 reinstating the

agreement and stating that the reinstatement fee was $105. The IRS’s position on
                                         -37-

whether these fees should have been abated is tantamount to a concession.5

Although on brief the IRS implies that the petitioners may have defaulted on the first

three installment agreements, the IRS does not actually take the position that they

did default. Furthermore, the Appeals Office, whose action we are reviewing, made

no determination of whether the petitioners defaulted on the installment agreements.

The Appeals Office acknowledged that the petitioners contended that the April 10,

2009 agreement--the third agreement referred to in the record--was wrongfully

terminated by the IRS: “It appears that your previous IA defaulted due to a balance

on another module that you say was fully paid.” Having acknowledged that this

contention was made, the Appeals Office did not disagree with it. Nor does the IRS

explain why the Appeals Office’s failure to abate the installment-agreement fees

was not an abuse of discretion. The only real position taken by the IRS in its brief

regarding whether the Appeals Office should have abated the fees is the promise

that the fees will be abated in the future. Because (1) the Appeals Office did not

determine that the petitioners defaulted on the prior installment agreements, (2) the

IRS does not ultimately contest that the petitioners complied with the prior

installment agreements, and (3) the IRS does not explain why the Appeals Office’s

failure to abate the installment-agreement fees did not constitute an abuse of

      5
      Although the petitioners seek reimbursement of the fees rather than
abatement, it is more appropriate for the fees to be abated.
                                         -38-

discretion, we hold that the Appeals Office erred in failing to abate the fees charged

for establishing the following installment agreements: (1) the installment agreement

established January 8, 2009, (2) the installment agreement established April 10,

2009, (3) the installment agreement established July 14, 2009, and (4) the

installment agreement established October 20, 2009. Although the petitioners in

their pretrial memorandum state that the fees they were charged for these

agreements were $247, the correspondence from the IRS refers to only $245 in user

fees and reinstatement fees (that is, $43 + $52 + $45 + $105). Therefore we

consider the Appeals Office to have erred in failing to abate fees of $245. If the IRS

had an argument that the petitioners were not entitled to abatement of the $105 fee

for the October 20, 2009 installment agreement (on the grounds that the petitioners

have stipulated that they genuinely defaulted on the prior agreement of July 14,

2009, and therefore the fee for reinstating the agreement should not be abated), the

IRS did not articulate the argument in its brief, and we need not consider it.

      To reflect the foregoing,


                                                            An appropriate order and

                                                     decision will be entered.
