Owe the IRS but Can’t Tap Home Equity to Pay? – Houston Tax Attorneys

A taxpayer falls behind on his taxes. Life happens. A spouse gets sick, a house goes into foreclosure, and the bills pile up. When the IRS sends a notice threatening to seize assets, the taxpayer says what feels obvious. I cannot pay this.

That sounds like it should be the end of the matter. If there is no money, the IRS cannot collect. But the tax law does not work that way. Saying you cannot pay and proving you cannot pay are two very different things. And the difference often comes down to one word: equity.

So when does the IRS have to back off because a taxpayer truly cannot pay? And what happens when the taxpayer owns real estate he says he cannot touch? This is a very common situation. The recent case of Whigham v. Commissioner, T.C. Memo. 2026-55, gives us a chance to consider this situation.

The Facts and How It Got to Court

The taxpayer lived in Missouri. He did not file returns for several years. The IRS prepared its own returns for him. These are called substitutes for return. They almost never work in the taxpayer’s favor. The IRS uses the income it knows about, from third party reporting, such as Forms W-2. It allows basically no deductions beyond the standard deduction. By the time interest and additions to tax were added, the taxpayer owed about $158,000 across four tax years.

The taxpayer’s situation was genuinely hard. His wife had suffered a brain aneurysm. Her care consumed her Social Security. His home had been foreclosed on. He had to move out of his home. He told the IRS all of this. Then his wife passed away. And it turned out she had handled the couple’s financial records.

The IRS issued a notice of intent to levy. The taxpayer requested a collection due process hearing. On the form, he checked one box. I cannot pay balance. He did not dispute the amount he owed. He just wanted relief from collection. So naturally, this leads to the question of what a taxpayer has to show to get that relief.

What the IRS Can Do to Collect

The IRS has a number of ways to collect back taxes. The foundation of its collection powers is the levy. When a taxpayer owes and does not pay, the IRS can issue a levy. A levy is a legal seizure of property to satisfy a tax debt. It can reach bank accounts, wages, Social Security, and other assets. It is one of the strongest tools the government has. It is an administrative process of issuing letters. It does not require a court order first.

But the levy is not unlimited. Before the IRS can proceed with certain levies, it has to issue a warning letter that offers the taxpayer a hearing. At that hearing, the taxpayer can raise defenses, propose alternatives, and argue that collection should be handled differently. This is the collection due process system, and it exists to put a check on the IRS’s collection power. That is what the taxpayer did in this case.

This is not a new provision. Congress built it into the law to give taxpayers a real chance to be heard before the IRS takes their property. The Appeals officer who runs the hearing has to do three things. Verify that the IRS followed the rules, consider the issues the taxpayer raises, and weigh the government’s need to collect against the taxpayer’s interest in not being subjected to collection that is more intrusive than necessary.

What Is Currently Not Collectible Status?

When a taxpayer says he cannot pay, he is usually asking for one of a few things. He might want an installment agreement to pay over time. He might want an offer in compromise to settle for less than the full amount. Or he might ask to be placed in currently not collectible status.

Currently not collectible status, often called CNC, is a hold on collection. The IRS agrees to stop trying to collect because doing so would cause a hardship. The debt does not go away. Interest keeps running. But the IRS stops the levies and leaves the taxpayer alone for a while. It can be a lifeline.

The IRS has internal guidance on when CNC status applies. A taxpayer qualifies if, based on his assets, equity, income, and expenses, he has no apparent ability to make payments. Hardship exists when a taxpayer cannot meet reasonable basic living expenses. That last phrase matters. The test is not whether paying the IRS is painful. The test is whether paying the IRS leaves the taxpayer unable to cover the basics.

Why Equity in Property Sinks a “Can’t Pay” Claim

Here is where the taxpayer’s case ran into trouble. He owned four pieces of real property. He reported their combined value at more than $250,000. He claimed there were liens on them. However, he only documented about $32,000 in mortgage balances. His numbers showed that he had well over $190,000 in equity in real estate.

You can start to see the problem here. A taxpayer who owns property worth far more than his tax debt is not, in the eyes of the IRS, a taxpayer who cannot pay. He is a taxpayer who could sell the property, or borrow against it, and pay. The fact that selling would be inconvenient, or that the properties needed repairs, does not change the analysis. Unfortunately, IRS employees often do not care that tapping the equity would be disruptive to the taxpayer’s life.

The U.S. Tax Court agreed with the IRS. The court pointed to its prior cases holding that the IRS does not abuse its discretion when it rejects a collection alternative because the taxpayer failed to show he could not access equity in real estate. The taxpayer offered no evidence that he had tried to borrow against or sell the properties and could not. Without that evidence, the equity defeated the claim.

Documentation is Key

There is a second lesson buried in this case. It is the more important one.

The Appeals officer asked the taxpayer repeatedly for financial documentation. She wanted a completed collection information statement, bank statements, and proof of his income. She gave him months to produce it.

The taxpayer came up short. He submitted the wrong form at first. He listed one bank account but received rental income that was deposited somewhere else, and he never disclosed the other account. His own tax returns showed tens of thousands of dollars in rental income he had not put on his financial statement. When the IRS asked for verification, he did not provide it. And when he finally asked to submit more evidence, the officer said she had already made her decision.

What the taxpayer did not submit was proof that he could not borrow against his real estate. And naturally, with his debt and the existing mortgages on the real estate, he probably could not borrow against them. What bank would make a loan in this case? The IRS has a lien on file, no doubt. Even if it didn’t, the ability to recover from the taxpayer is not clear given that the IRS is given preference over most creditors for unpaid taxes.

Had the taxpayer simply provided proof that he could not borrow against the real estate, that may have resolved this case. The facts are extreme here. One would hope that the IRS explained this to the taxpayer. That simply providing bank loan disallowance letters would resolve the case in his favor. The IRS could then place the account on non-collectible status and wait for the taxpayer to either sell the properties, if he was of advanced age, for him to pass away so that it could collect from the properties at that time.

Whether the IRS appeals officer did not mention this or if they did and the taxpayer didn’t comply, is not noted in the case. But the lesson is clear. Documentation of the inability to borrow against assets is required and critical when the equity in those assets genuinlely cannot be used to pay back taxes.

In this case, the court found no abuse of discretion by appeals. When the IRS gives a taxpayer a fair amount of time to provide information and the taxpayer does not, the IRS can move ahead.

The Takeaway

The IRS has various powers to collect back taxes. It is not supposed to squeeze a taxpayer who genuinely cannot pay. Currently not collectible status exists for exactly that situation. The catch is that the taxpayer carries the burden of proof, and equity in property is often fatal to a hardship claim. If you own real estate worth more than you owe, the IRS will expect you to sell it or borrow against it before it grants relief. The way to address this iswith evidence, not assertions. You have to prove it.