When the IRS Makes a Deal with You—the Installment Agreement
By Christian Reeves
“I owe the IRS $20,000 because I didn’t have enough withheld from my paycheck over the last few years. I’m working full-time, but I have no savings. Is there any way I can pay off my debt?”
Yes. In fact, almost every client I have worked with in the last 10 years, who has requested an installment, has been approved…eventually. The trick is always the same: getting to a number that both you and the IRS can live with.
If you owe taxes to the IRS, but can’t afford to pay it off all at once, and you don’t qualify for (or can’t afford) an Offer in Compromise, then you can usually set up a payment plan, called an “Installment Agreement” in IRS lingo. The amount you will need to pay each month is based on a number of factors, including:
- Your income;
- Your assets;
- The amount you owe;
- Your actual expenses;
- Your allowed expenses;
- The remaining collection statute of limitations; and
- Whether or not you can afford to pay off the debt in full over the collection statute.
The key to setting up an Installment Agreement is the analysis of these and other factors, and thereby proving to the IRS how much you can afford to pay each month.
Here are the basics of an IRS Installment Agreement.
The IRS will enter a written agreement with you which requires installment payments based on the amount you owe and your ability to pay it within the period of time the Service has to collect from you (the “statute of limitations,” as it is called). The IRS has 10 years to collect from you once you filed a return. When the 10 years are up, the debt is canceled and you get a fresh start. Depending on the amount of tax due, there are different options within the program (see below).
To apply for an Installment Agreement, you usually need to file Form 9465 and Form 433-A or Form 433-F (versions of the IRS Financial Statement, the key form when dealing with IRS collections at any level). If you are self-employed, or own a business, you may also need to file Form 433-B. A few people also need Form 433-D. If your Agreement is accepted, you will be charged a fee of $105 for a new agreement, or $45 for a reinstated agreement.
“What is a ‘reinstated agreement,’” you’d ask.
An Installment Agreement is binding. You must pay the amount agreed-upon on time, every month of the year. If you skip a payment, you usually have 30 days to catch up. If you are not able to get current with your payments, the Agreement is canceled. You may apply for a new Agreement, but your new proposal may be met with skepticism and can even be rejected. Worse, you must provide updated financial information, which may have very dire consequences if your income has increased or the person reviewing your data is less accommodating than the prior agent. If you’re lucky and it’s accepted again, then you’ll have a “reinstated agreement.”
There are two types of Installment Agreements, mandatory and discretionary.
A “mandatory” agreement means that the IRS is required to accept the Agreement you propose if:
- You owe less than $10,000 (exclusive of interest and penalties);
- You’ve filed your tax returns and paid your due taxes on time during the past five years;
- You haven’t entered another Installment Agreement during those past five years;
- You demonstrate that you can’t pay the tax in full;
- You agree to pay the full amount you owe within a period of three years;
- You guarantee that you’ll comply with the tax laws during the term of the Installment Agreement.
If you meet all these criteria, the IRS doesn’t have the right to reject your Installment Agreement. An additional advantage of this type of agreement is that it doesn’t require the same in-depth financial verification that a normal application does.
If you owe more than $10,000, you need a “discretionary” Installment Agreement, which means that the IRS can deny you a payment plan if it deems it unsatisfactory. The IRS has to consider your Installment Agreement and will request you to prepare a Financial Statement (Form 433-A or Form 433-F). If the IRS concludes that more information is needed to evaluate the proposal, then it can request you to provide supporting documents or other proof of income and expense. If not supplied, the IRS can reject your application.
During the processing of your Installment Agreement (until you receive the notice about the result of your application) your stress level will lower considerably as the IRS is not allowed to collect from you. If your IRS installment agreement request is rejected, your case will be on hold for 30 days, giving you time to appeal. If you file a timely appeal, then the IRS can’t touch your property or money during the pendency of the appeal.
How much of my debt will I pay through an Installment Agreement?
The answer is that it depends on your ability to pay, the assets you have available, and the collection statute of limitations. If you have sufficient means then the IRS will require a Full-pay Agreement. This is when you pay your tax debt in full, including interest and penalties, over a period of time.
A Full-pay Installment Agreement may be for a fixed monthly amount, or it may increase at predetermined intervals. In each case, it will pay off the debt during the collection statute of limitations.
An IRS Installment Agreement where you pay a fixed amount each month until the debt is paid in full is easy to understand. An Installment Agreement where your monthly payments increase over time takes a bit of explaining.
As you know, your ability to pay the IRS is based in part on your income vs. your allowed expenses. When your actual expenses exceed your allowed expenses, you are generally given time to modify your lifestyle.
For example, you may be given six months to find a lower-cost apartment. If your current apartment exceeds your allowed rental expense by US$400, the IRS may set up an Installment Agreement that will increase by US$400 in six months’ time.
Another example is where your allowed expenses go down. The most common situation is where your automobile will be paid off, thereby reducing your allowed expenses. If your auto payment is $550 and your car will be paid off in eight months, you might set up an Installment Agreement that will increase by $550 in eight months’ time.
|Warning: What if you have unexpected repair bills, or need to purchase another car when this one is paid? You might be forced to default on the IRS Installment Agreement and need to start the process over…something everyone dreads.Careful analysis of your current and future finances, along with a solid understanding of IRS practice and procedure, prior to applying for an Installment Agreement can prevent these and other problems.For example, as a result of planning ahead, you might decide to purchase a new car, with a longer payoff period, before submitting your request.|
What if I can’t afford to pay off the IRS in full?
In the case you (1) do not have sufficient income to support a Full-pay Agreement, and (2) have no significant equity in assets or cannot sell or borrow against assets due to the fact that selling them will cause an undue hardship, then the IRS will grant a Partial-pay Agreement and you’ll pay off only a portion of your debt within the statute of limitations, with the remaining debt being canceled.
However, if you are granted a Partial-pay Agreement, you must provide updated financial information every two years to prove your continuing financial hardship. If your income has increased, or your allowed expenses have decreased, you will be required to increase your monthly payment.
Still, there’s a third situation. You pay zero dollars. Is that possible? Sure. Basically, when you cannot afford an Offer in Compromise, you have no assets to use to pay the IRS, and your income equals your allowed expenses, you can’t afford to pay IRS anything.
A taxpayer in an Installment Agreement at zero dollars is referred to as being “temporarily uncollectable,” with temporarily being the operative word here. As with a Partial-pay Installment Agreement, the IRS will review your financial situation periodically to see if it can start collecting from you. If your financial situation doesn’t improve and the statute of limitations runs out, then your debt is eliminated. In other words, if you prove to the IRS that you are uncollectable over the entirety of the collection statute of limitations, you have paid nothing and your debt expires.
IMPORTANT NOTE: While you are making installment payments to the IRS, penalties and interest accrue on the unpaid balance. Essentially, you are locked into a late-payment penalty of one quarter of a percent a month plus interest on the unpaid amount. Taken together, the cost comes at around 10% a year. It’s still less than the interest you pay on your credit card, but you need to think before you commit.
What if my Installment Agreement is rejected?
This may happen in one of the following cases:
- The information included in Forms 433-A or 433-B is incomplete or untruthful. If the IRS discovers that you have property or income not recorded on the forms then it will reject your application.
- Your financial statement is signed under penalty of perjury, so it is very important to be truthful and very detailed in the information you provide to the government.
- The IRS deems some of your living expenses unnecessary. If you owe money to the government but nevertheless send your kids to private schools or drive expensive cars, then be prepared to get no deal at all. The IRS expects you to have quite a frugal life while paying off your debt.
- You defaulted on a prior Installment Agreement. It’s a matter of trust…if you’ve once defaulted on your payments then the IRS will think twice whether to grant you a second chance.
If your Installment Agreement is rejected, then you can appeal the decision. If the IRS sees your efforts to pay off your debt then your application may be reconsidered.
What if I need professional help with filing an Installment Agreement?
A reputable tax professional masters the art and science of analyzing your tax situation, as well as your income and expenses, preparing a plan of attack, and then filling out the forms necessary for an Installment Agreement. More importantly, he can determine your chances of obtaining the Agreement in the first place, and will help you plan, prepare, and document your application.
At Premier Tax & Corporate, Inc. we will work together with you in order to achieve the best available result for your particular situation. If you are ready, let’s get started
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For more information, contact us by phone at (800) 581-6716 or by e-mail at firstname.lastname@example.org. We are here to help.