Can the IRS Deny Your Installment Agreement Because of Home Equity? – Houston Tax Attorneys

A taxpayer owes the IRS more than he can pay in a lump sum. He owns a home. He owns a business property. He has some equity in both. He asks the IRS for an installment agreement so he can pay the debt over time. The IRS says no. The reason? He has too much equity in his real estate. He should sell his properties and pay up.

That logic sounds harsh but not unreasonable. The IRS has a right to collect what is owed. But the IRS also has its own internal guidelines that tell its officers how to evaluate a taxpayer’s assets before denying a payment plan. Those guidelines do not say “deny the installment agreement if the taxpayer has home equity.” They say something more nuanced. They say to explore whether the taxpayer can borrow against the equity first. Selling and borrowing are not the same thing.

When an IRS Appeals officer skips that step and treats home equity as an automatic disqualifier, has the officer abused his discretion? That was one of the questions in Joseph v. Commissioner, T.C. Memo. 2026-38. The case provides an opportunity to consider what happens when the IRS ignores its own playbook in a collection due process hearing.

Facts & Procedural History

Joseph ran a sole proprietorship in Georgia. The IRS audited his income tax returns for 2011 through 2016 and assessed deficiencies, additions to tax, penalties, and interest. The liabilities were large. According to the taxpayer, the IRS auditor had rejected all of his business expenses and inflated his income. He described receiving a letter stating he owed over $2 million in taxes.

After the assessments, the IRS sent the taxpayer a notice of intent to levy and later filed federal tax liens against his property. The taxpayer’s representative requested a collection due process hearing. The taxpayer also submitted an offer in compromise, proposing to settle the liabilities for about $5,000. The IRS rejected the offer because it determined the taxpayer’s reasonable collection potential far exceeded the amount he offered.

The taxpayer owned several pieces of real property. His primary residence was jointly owned with another person. And his business operated out of a property titled to his LLC. He also owned an out-of-state property. The IRS looked at all of these properties, computed the equity, and determined that the taxpayer had hundreds of thousands of dollars in assets that could be used to pay down the debt.

During the CDP hearing, the taxpayer’s representative asked the Appeals officer about entering into an installment agreement. The Appeals Officer refused. His reasoning was simple. The taxpayer had enough equity in assets. Therefore, he did not qualify for an installment agreement. The taxpayer petitioned the U.S. Tax Court to contest this determination.

What Happens at a Collection Due Process Hearing?

When the IRS proposes to levy a taxpayer’s property or files a federal tax lien, the taxpayer has the right to a CDP hearing before the IRS Office of Appeals. The hearing is governed by Sections 6320 and 6330 of the tax code. During the hearing, the taxpayer can raise issues about the proposed collection action, challenge the underlying liability in certain circumstances, and propose collection alternatives.

Collection alternatives are the heart of many CDP hearings. A taxpayer might propose an offer in compromise, an installment agreement, or argue that the account should be placed in currently not collectible status. The Appeals Officer is required to consider whether the proposed collection action balances the government’s need to collect the tax against the taxpayer’s concern that the collection be no more intrusive than necessary. That balancing test is not a formality. It requires Appeals to genuinely evaluate the alternatives the taxpayer proposes.

When the tax court reviews an Appeals Officer determination in a CDP case for collection issue, it applies an abuse of discretion standard. The court does not substitute its own judgment. It asks whether the Appeals Officer’s decision was arbitrary, capricious, or without sound basis in fact or law. That is a high bar for the taxpayer. But it is not an impossible one. And when an Appeals officer misreads the IRS’s own guidelines, the court will step in.

Can the IRS Reject an Installment Agreement Because of Home Equity?

The Internal Revenue Manual provides detailed instructions on how IRS employees should evaluate a taxpayer’s request for an installment agreement. The general rule is that an installment agreement should not be approved in lieu of full or partial payment when the taxpayer has the ability to pay from income or equity in assets. That much is straightforward.

But the IRM does not stop there. When a taxpayer has equity in real property, the IRM instructs the IRS to explore with the taxpayer the possibility of borrowing against those assets or liquidating them. The word “explore” matters. It is not the same as “reject.” The IRM envisions a conversation. Can the taxpayer take out a home equity loan? Can the taxpayer refinance? Is there a way to use the equity without forcing a sale?

This is worth pausing on. Many taxpayers who owe the IRS also own homes. Some of those homes have equity. But having equity in a home and being able to liquidate that equity are two very different things. A taxpayer might be unable to refinance because of credit issues caused by the tax debt itself—and for many taxpayers with IRS liens, that is exactly what happens, by the way. A taxpayer might have a co-owner who will not consent to a sale. A taxpayer might live in the home and have no realistic alternative housing. The IRM recognizes these realities. It tells IRS agents to ask whether borrowing is feasible before concluding that the taxpayer can pay.

The tax court has addressed this distinction before. In prior cases, the court has found that appeals officers abused their discretion when they refused to consider an installment agreement after taxpayers tried and failed to borrow against real property. The appeals officers in those cases believed liquidation was required. The court disagreed. The failure to consider borrowing as a separate step from liquidation was the error.

What Did the Appeals Officer Get Wrong?

In the present case, the Appeals Officer focused on a single sentence in the IRM. That sentence says the IRS should consider “all relevant facts including the taxpayer’s compliance history, ability to pay and equity in assets” when evaluating an installment agreement. The Appeals Officer in this case read this to mean that any taxpayer with equity in assets is automatically disqualified from an installment agreement.

That reading ignored everything else the IRM says on the subject. The more specific IRM provisions lay out a process. If a taxpayer has equity in real property, the IRS should explore whether the taxpayer can borrow against it. If the taxpayer cannot borrow, the IRS should consider whether a sale is appropriate. If the taxpayer will not sell, the IRS should consider filing a lien and allowing an installment agreement. Each step involves a judgment call. None of them is a blanket disqualification.

The Appeals Officer also apparently told the taxpayer’s representative that the taxpayer would need to sell his real property. The court noted that there is no indication in the record that the Appeals Officer ever asked whether the taxpayer could borrow against the properties instead. He did not suggest a home equity loan. He did not ask whether the taxpayer had explored refinancing. He went straight from “you have equity” to “you must sell” to “no installment agreement.” You can start to see the problem here. The Appeals Officer skipped the middle steps that the IRM requires.

The court found that this was not a reasonable exercise of discretion. The Appeals Officer had misread the IRM, ignored the more specific instructions that applied to the situation, and failed to follow the very guidelines the IRS requires its own officers to follow. The court cited its prior cases for the principle that IRS Appeals does not abuse its discretion when it follows IRM guidelines. The inverse is also true. When IRS Appeals ignores those guidelines, the determination is on shaky ground.

Does the IRS Have to Follow Its Own Manual?

This leads to the question about the status of the IRM. The IRM is not law. It does not have the force of a statute or a regulation. So naturally, there is an argument that the IRS has made in many cases that the IRM is merely internal guidance and that taxpayers cannot enforce its provisions. There is some truth to that. A taxpayer generally cannot sue the IRS for failing to follow the IRM.

But in a CDP case, the standard is different. The U.S. Tax Court reviews whether the Appeals Officer abused his or her discretion. And when the Appeals Officer’s entire reasoning rests on a misinterpretation of the IRM, the court will not defer to that reasoning. The IRM may not create enforceable rights, but it does establish a framework for what constitutes a reasonable exercise of discretion. An Appeals Officer who ignores that framework risks having the determination overturned. That is what happened in thishe case. The court remanded the case to IRS Appeals for a supplemental hearing. On remand, Appeals is ordered to consider whether an installment agreement is warranted, taking into account the relevant IRM provisions. That means Appeals has to go through the steps it skipped the first time. It must evaluate whether the taxpayer can borrow against his properties. It must consider whether the specific IRM guidelines for real property equity support or preclude an installment agreement. And it must document its reasoning.

The Takeaway

Owning a home with equity does not automatically disqualify a taxpayer from an installment agreement with the IRS. The IRM requires IRS agents to explore whether the taxpayer can borrow against the equity before rejecting an installment agreement. When an Appeals Officer skips that step and jumps straight to requiring a sale, the U.S. Tax Court may find that the officer abused his discretion. For taxpayers who are negotiating with the IRS over collection alternatives, the lesson from this case is to push back when an Appeals Officer treats home equity as an automatic bar. Ask whether the officer considered borrowing. Ask what specific IRM provisions support the denial. And if the officer cannot answer those questions, that may be the basis for a petition to the U.S. Tax Court.