IRS Collections: Can Taxpayers Rely on IRS Statements? – Houston Tax Attorneys

Taxpayers who enter into payment arrangements with the IRS often believe they are safe from IRS collection actions. Many assume that agreeing to monthly payments will prevent the government from filing tax liens.

This assumption seems reasonable given the IRS’s own published guidelines. These guidelines suggest liens won’t be filed in certain circumstances. But can taxpayers rely on this guidance? What happens when one IRS unit tells a taxpayer no lien will be filed while another unit within the IRS has already decided otherwise?

Shouldn’t taxpayers be able to rely on the policies when representations are made by IRS employees about IRS policy? What about when the IRS policy is widely known and confirmed by the IRS employee working the case?

The case of Horsham v. Commissioner, T.C. Memo. 2025-56, gets into this. It involves a case where the taxpayer upheld their end of the bargain when it came to IRS collections and expected the IRS to do the same.

Facts & Procedural History

The taxpayer in this case owed the IRS approximately $42,000 in back taxes for 2017 through 2019. For the 2017 year, she had filed her tax return late. She also failed to pay the full amounts due for all three years. This led to assessed tax liabilities plus additions to tax (i.e., penalties) and interest.

In February 2022, the taxpayer tried to resolve her tax debts. She submitted an offer-in-compromise (“OIC”) to settle her liabilities for less than the full amount owed. By December 2022, the OIC specialist reviewing her case indicated he would recommend rejection. This was based on the taxpayer’s financial information, which showed she could fully pay the taxes owed. The specialist explicitly told the taxpayer she could “withdraw her offer, waiving her appeal rights, and apply for an installment agreement.” He warned that “liens would be filed on all offer year[s]” if she chose this path.

Despite this warning, the taxpayer decided to withdraw her OIC in February 2023. She chose to pursue an IRS installment agreement instead. On March 23, 2023, she submitted her installment agreement proposal for $737 monthly payments. The IRS accepted this proposal. They established it as a direct debit installment agreement (“DDIA”).

On March 30, 2023, the IRS mailed the taxpayer a standard letter confirming acceptance of her installment agreement. This letter stated that if she defaulted, the IRS “could take enforcement action [which] could include filing a Notice of Federal Tax Lien.” The employee who issued this letter was unaware that the OIC unit had already decided to file liens.

The taxpayer spoke with the IRS employee handling her installment agreement on March 23, 2023. She was told that because her debt was below $50,000 and she had arranged for direct debit payments, she “would not have a lien” filed against her. This directly contradicted what the OIC specialist had told her months earlier.

Unknown to the installment agreement employee, the OIC unit had already prepared Form 668(Y)(c), Notice of Federal Tax Lien, on the same day the taxpayer submitted her payment plan. The IRS tax lien was filed on April 4, 2023. The taxpayer received notice of the filing along with information about her right to request a Collection Due Process hearing.

The taxpayer timely requested a Collection Due Process hearing. She argued for withdrawal of the lien based on her installment agreement and the representations made by IRS personnel. The IRS Settlement Officer sustained the lien filing. She explained that the offer specialist had properly informed the taxpayer that liens would be filed. The installment agreement employee had been unaware of this prior decision.

The taxpayer petitioned U.S. Tax Court to review the CDP results, which was the subject of this court opinion.

Federal Tax Lien Authority and Discretion

The authority for the IRS to file liens is found in Section 6321 of the tax code. This section creates an automatic lien in favor of the United States. The lien arises when any person liable to pay federal tax “neglects or refuses to pay the same after demand.” This statutory lien arises by operation of law. It attaches to all property and rights to property belonging to the taxpayer, both current and future.

However, the existence of this statutory lien differs significantly from the filing of a Notice of Federal Tax Lien (“NFTL”). The underlying lien exists automatically upon assessment and demand. The NFTL serves as public notice of the government’s claim. It determines priority against certain competing creditors under Section 6323.

IRS employees have discretion in deciding whether to file an NFTL. Even when filed, Section 6323(j) provides several grounds under which the IRS may withdraw a filed lien. These grounds include situations where the taxpayer has entered into an installment agreement that renders the lien unnecessary. They also include situations where withdrawal would facilitate collection of the tax liability. This statutory framework uses permissive language. It states that the Secretary “may” withdraw liens when certain conditions are met. It does not create mandatory withdrawal requirements.

How IRS Policies Create Taxpayer Expectations

Given the rules noted above, the IRS has developed policies that suggest liens generally won’t be filed in certain circumstances. This particularly applies to taxpayers who qualify for streamlined installment agreements. These policies recognize that filing liens can sometimes hinder rather than help tax collection. Liens can damage taxpayers’ ability to maintain income or secure financing needed to pay their debts.

According to the IRS’s website and internal policy manual, for taxpayers owing $50,000 or less who qualify for streamlined processing, IRS guidelines typically discourage lien filing. The IRS website notes that this applies when the taxpayer agrees to direct debit payments. IRM 5.12.2.3.1 indicates that “An NFTL filing determination is not required on Guaranteed/Streamlined Installment Agreements or In-Business Trust Fund Express Agreements.”

The theory behind this approach makes practical sense. Taxpayers who demonstrate good faith by entering into secured payment arrangements pose less collection risk. They may be harmed more than helped by public lien filings. These internal guidelines reflect sound collection policy. Taxpayers making regular payments through automatic bank drafts provide the IRS with a reliable payment stream. This approach avoids the administrative costs and potential backlash associated with lien filing and subsequent appealing IRS collection actions.

However, these policies create reasonable expectations among taxpayers. They expect that compliance with payment agreements will protect them from lien filing. When IRS employees reference these policies in conversations with taxpayers, they reinforce this belief. Taxpayers believe that following agency guidelines will result in predictable treatment. The disconnect arises when different IRS units operate under different priorities. It also occurs when units lack access to complete information about taxpayer cases.

Reliance on IRS Employee Statements

The Tax Court in Horsham addressed the question of whether taxpayers can enforce internal IRS policies when agency employees provide conflicting information about their application? The taxpayer received specific assurances from an IRS employee that directly contradicted earlier warnings from a different IRS unit.

The installment agreement employee told the taxpayer that because her debt was below $50,000 and she had arranged for direct debit payments, she “would not have a lien” filed against her. This statement appeared to be grounded in actual IRS policy. As noted above, the IRS’s IRM indicates that NFTL filing determinations are generally not required for streamlined installment agreements. The IRS website also suggests that taxpayers owing $50,000 or less can qualify for streamlined processing that typically avoids lien filing.

The IRS employee making this representation was unaware that the OIC unit had already decided to file liens and had clearly communicated this decision to the taxpayer months earlier. The court noted this communication breakdown. It observed that “the call site employee with whom petitioner spoke ‘could not see [the NFTL request] at that time’ because that employee ‘does not have access to the system that the offer examiner works on.’”

Considering these facts, the tax court’s analysis focused on the discretionary nature of lien withdrawal authority under Section 6323(j)(1). The court emphasized that this provision “by its terms is discretionary.” It noted that “nothing in it requires [the Commissioner] to withdraw the NFTL because of [an] installment agreement.” Even when IRS employees reference legitimate agency policies, those policies remain subject to override when other IRS units make different determinations.

The court distinguished between the taxpayer’s understandable reliance on employee statements and her legal right to enforce those statements. The court acknowledged that the taxpayer had received conflicting information from different IRS personnel. The installment agreement employee’s statement about the $50,000 threshold wasn’t incorrect as a matter of general policy. However, it didn’t account for the specific decision already made in her case. The court found this communication failure insufficient to require lien withdrawal.

The Takeaway

The message from this case is clear: taxpayers cannot rely on the IRS or its statements regarding collection actions. This remains true even when those policies seem reasonable and are supported by statements on the IRS’s own website. Unlike private parties, the IRS is not held to any standard in its course of dealing with taxpayers. The IRS can induce taxpayers to enter into agreements while giving up and modifying their rights. It can even make contradictory statements without any recourse available to affected taxpayers.

While the IRS often does follow its own policies and public statements, those facing unpaid tax debts must understand that there is no legal remedy when the agency chooses to act differently. Taxpayers should approach IRS collection matters with the understanding that only statutory rights provide reliable protection, not agency policies or employee representations that may change based on internal coordination failures or shifting enforcement priorities.

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Stephan Dorsey

Stephan is the sports journalist for the Maple Grove Report.

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Can Limited Partners be Subject to Self-Employment Tax? – Houston Tax Attorneys

Investment funds are often structured as limited partnerships. These partnerships allow professional managers to pool investor funds while maintaining operational flexibility.

These structures typically have a general partner (“GP”) who manages day-to-day operations. Limited partners (“LP”) provide the capital and earn passive returns. The active manager and passive investor roles have different tax implications.

Self-employment tax treatment of the LPs has resulted in a number of disputes between taxpayers and the IRS. The tax code generally excludes LP income from self-employment taxes. However, the boundaries of this exclusion remain contentious when LPs take active roles in partnership operations.

The recent tax court decision in Soroban Capital Partners LP v. Commissioner, T.C. Memo. 2025-52, gets into this issue. The case addresses whether a state law LP designation shield partnership income from self-employment taxes.

Facts & Procedural History

The taxpayer is a Delaware limited partnership. It provided investment management services to various funds in 2016 and 2017.

The partnership structure included a GP entity with three LPs. The LPs were two single-member limited liability companies and one individual.

There were three individuals controlling these entities. One served as managing partner and chief investment officer. Another worked as comanaging partner. The third served as head of trading and risk management. Together, they managed investment funds generating approximately $247 million in fees during the years in question.

The partnership allocated substantial ordinary income to its partners. The three principals received the vast majority. For 2016 and 2017 combined, the managing partner received over $80 million. The comanaging partner received over $52 million. The head of trading received nearly $9 million.

WThe partnership characterized only the guaranteed payments to LPs as subject to self-employment taxes. It excluded their much larger distributive shares.

The IIRS audited the tax returns and challenged this treatment. The IRS recharacterized the LPs’ distributive shares as self-employment income. This increased the partnership’s reported net earnings from self-employment by over $77 million for 2016 and over $63 million for 2017. The partnership petitioned the U.S. Tax Court to challenge these adjustments.

Self-Employment Tax & the Limited Partner Exception

The self-employment tax system imposes Social Security and Medicare taxes on individuals who work for themselves. Section 1401 of the tax code imposes this tax on every individual’s self-employment income. Section 1402(b) defines this as “net earnings from self-employment.”

The calculation of net earnings from self-employment generally includes an individual’s distributive share of partnership income when that person is a member of a partnership carrying on a trade or business. In theory, this broad inclusion requires active business participants to contribute to Social Security and Medicare regardless of their business structure.

Congress carved out a specific exception for passive investors in partnerships. Section 1402(a)(13) excludes certain income from self-employment tax. The exclusion covers “the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments.” This exclusion recognizes that LPs typically function as passive investors rather than active business participants.

The Challenge of Defining LP Status

The LP exception creates immediate interpretive challenges. The tax code does not define what constitutes a “limited partner, as such.” State partnership laws vary in their treatment of LPs. Business entities can easily adopt labels that may not reflect economic reality.

The phrase “as such” in Section 1402(a)(13) provides a key interpretive clue. Courts have recognized that this language requires more than simply holding a LP interest under state law. Instead, the exception applies only when the partner functions as a LP in substance.

Early court decisions established that federal tax law controls the determination of partnership status for tax purposes. State law classifications do not govern. The Supreme Court’s decision in Commissioner v. Tower emphasized that tax consequences should follow economic reality rather than legal formalities.

The Courts Apply Functional Analysis to LPs

The courts have developed a functional analysis test to determine whether partners qualify as LPs for self-employment tax purposes. The approach examines the totality of circumstances surrounding each partner’s relationship with the partnership. The focus is supposed to be on economic substance rather than legal labels.

The functional analysis considers multiple factors that indicate whether a partner operates more like an active business participant than a passive investor. For example, courts examine the partner’s role in generating partnership income, they look at involvement in management decisions, they look at the time devoted to partnership activities matters, and they also consider the capital contributions relative to income distributions for this analysis.

The Tax Court’s decision in Renkemeyer, Campbell & Weaver, LLP v. Commissioner is the seminal case on point. We have covered this case and cases that build in it previously. These cases stand for the idea that partners must be “generally akin to passive investors” to qualify for the limited partner exception. This standard requires examining whether the partner’s economic relationship with the partnership resembles that of a traditional LP who contributes capital and receives returns without active involvement in business operations.

The Role the Partners Played in Generating Income

The tax court’s analysis in this case considered the principals’ activities. According to the court, they functioned as active business participants rather than passive LPs. The court examined five key areas that demonstrated the principals’ active involvement in generating partnership income and managing business operations.

The partners played essential roles in generating the taxpayer’s income from investment management fees. The managing partner had final authority over all investment decisions. The comanaging partner shared responsibility for portfolio management and research. The head of trading executed trading decisions and managed risk oversight. Their expertise and daily involvement directly contributed to the partnership’s ability to earn substantial management fees from client funds.

The court found that the partners exercised significant management control over business operations. All three served on multiple committees that governed brokerage activities, trade allocation, valuation, and general management decisions. They maintained hiring and firing authority over other employees. They could bind the partnership through various agreements and contracts.

The Time Did the Partners Devote to the Business

The time commitment analysis for the principals’ involvement was also considered by the court. They court noted that they devoted full-time efforts to the partnership’s business.

The taxpayer itself estimated that each principal worked 2,300 to 2,500 hours annually. Partnership documents represented to investors that the principals devoted 100% of their time to managing the business and its client funds. This level of involvement far exceeded what would be expected from passive LPs.

The partnership’s marketing materials further undermined any claim to passive LP status. The business actively promoted the principals’ unique skills and experience to attract investor capital. Marketing documents emphasized their professional backgrounds and described the principals’ essential roles in investment success. The materials warned that the departure of key principals could trigger investor withdrawal rights.

The Partners’ Capital Contributions

The court’s examination of capital contributions provided additional evidence that the principals’ income represented compensation for services rather than returns on investment.

Only the managing partner contributed any capital to the partnership. His contributions totaled approximately $4.4 million over several years. The other two partners contributed no capital yet received substantial distributive shares based entirely on their active participation in the business.

Even the managing partner’s capital contributions were disproportionately small compared to his income distributions. He contributed roughly $4 million but received over $80 million in distributive shares during the two years in question. This dramatic disproportion indicated that his income stemmed from his services as an active business participant rather than returns on his capital investment.

Given these factors, the court concluded that the LPs did not qualify for the LP exception. The court sustained the IRS’s audit determination.

The Takeaway

This decision confirms that the business structures may not protect against self-employment tax. When individuals function as active business participants generating partnership income through their personal efforts and expertise, formal titles or state law classifications may not help. Investment management firms and other service businesses using partnership structures should evaluate whether their principals truly function as passive LPs or active business participants. Partners who work full-time, exercise management authority, and receive distributions disproportionate to capital contributions will likely face self-employment tax obligations on their partnership income if audited by the IRS.