Summary: Installment agreements may help with tax debt. There are streamlined options for those owing more and less than $50,000. For those that don’t fit the streamlined options as well.
An Installment Agreement is a tool that may provide multiple ways to resolve tax debt. The terms of the Installment Agreement can vary greatly depending on how much is owed and the taxpayer’s individual circumstances. In almost all circumstances, an Installment Agreement applies to those that are unable to pay the full balance in the next 120 days.
For the purposes of this information, all references to taxes due or owed are referring to individual income taxes. Many of these options apply also to corporate taxes, payroll taxes, and Trust Fund Tax Penalties; but there are some slight variances in some circumstances.
The IRS introduced the “Fresh Start Initiative” recently that provided some excellent changes to many areas of the tax code, especially dealing with collection processes and procedures.
Owing Less Than $50,000
As part of this initiative, the threshold for using an Installment Agreement without having to provide the IRS with a personal financial statement has been raised to $50,000. The maximum term for repayment is up to six years (72 months).
If a taxpayer owes less than $10k and otherwise has not had any tax issues in the past five years, the IRS guarantees acceptance of an Installment Agreement with a 36-month term. For taxpayers owing between $25-50k, they must agree to an automatic withdrawal from a bank account or paycheck. Again, this is for the “streamlined” option. The IRS will allow you to apply for an online payment agreement if you meet certain qualifications.
Owing More Than $50,000
Taxpayers whose debt exceeds $50,000 may still propose an Installment Agreement, but they must submit a financial statement. This financial statement provides financial information, including a calculation on what a taxpayer can “afford” to pay each month.
Even if the financial statements show that the tax debt can be paid more quickly than 72 months, the taxpayer may be able to elect to pay the taxes over a 72 month period, or by the collection statute expiration date, provided they are paid in full. (IRM 18.104.22.168(4))
Alternate Options (Partial Payment Installment Agreement)
There may be another option for those that do not fit the mold of one of the streamlined options. Whether a taxpayer utilizes a streamlined option or alternate approach is typically optional.
However, a taxpayer may be required to use an alternate option if they:
- Owe between $25-50k and cannot agree to automatic withdrawals from a bank account or paycheck, or
- Cannot pay the tax within 72 months (or the maximum allowed).
In the most common scenario where the tax cannot be affordably paid in 72 months or the amount owed is greater than $50k, a taxpayer may request a Partial Pay Installment Agreement (PPIA). For this agreement, a taxpayer submits his financial statement which discloses financial information including income and assets.
From income, “allowable expenses” are deducted to determine what the IRS considers an affordable payment. The IRS also reviews available equity in assets. In most cases, taxpayers will be required to use the equity to pay liabilities if a substantial amount of equity exists. At first glance, one may think that even if they have $100 in equity in their home, they have to sell it. This is not the case in all practicality.
There are a number of reasons the IRS will grant a PPIA even if equity in assets exists. The IRS does not want to take people’s home, furniture, or possessions. They only expect a taxpayer to utilize available equity, if at all possible. This could mean taking a home equity loan against a home or selling a non-essential item like an ATV or something of that nature. Among many exceptions, if a taxpayer does not have enough equity to borrow against, the IRS can approve the PPIA without any further action. (IRM 22.214.171.124.2)
Fixing the Problem
In general, making a payment of 20% of what was earned (wages or profits) is a good starting place. Also, making payments monthly is advisable rather than quarterly. At the beginning of each month, a taxpayer should look at his profits of last month (or wages, as the case may be), and they should mail a check to the IRS for 20% of that number.
Using a percentage rather than a dollar amount provides for the inevitable ebb and flow of income. Furthermore, the IRS allows estimated payments as a deduction in the financial statements that determine a Partial Payment Installment Agreement. This could go a long way provided that the estimated payments are adequate.
A common strategy for some taxpayers is to discharge taxes in bankruptcy. There are some complex rules as to how and when taxes become dischargeable, but nonetheless, the taxes have to “age.” Some taxes are never dischargeable in bankruptcy. If taxes are dischargeable after a certain point in time, a taxpayer may be able to enter into an Installment Agreement and allow such aging to take place.
Statute of limitations
Another common strategy is to enter into an Installment Agreement and allow the Collection Statute Expiration Date (CSED) to expire. Entering into an Installment Agreement may result in the statutory collection period to be extended (IRC 6502(a)(2)(A)). According to the IRS, their policy is that “CSED extensions are permitted only in conjunction with PPIAs and only in certain situations” (IRM 126.96.36.199).
In other words, entering into a streamlined installment agreement may not extend the CSED. Usually, only Partial Payment Installment Agreements extend the CSED in limited circumstances. Furthermore, in those limited circumstances where the CSED is extended, the extension is limited to 5 years, plus 1 year (IRM 188.8.131.52).
Disclaimer: This information is intended for informational or educational purposes only. It is not intended to supplement or replace legal representation and should not be construed as such. Further, this information below is subject to legislative or procedural change by the IRS at any time and without warning.
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