Tax Problem FAQ: What is an IRS Installment Agreement?

INSTALLMENT AGREEMENTS AND IRS PAYMENT PLANS

The IRS will always accept some type of payment arrangement for past due taxes. In order to qualify for a payment plan with the IRS you must meet the following rules and provide the IRS with this information:

You must have filed all tax returns (It’s OK to owe money but you must file).

You will need to disclose all assets owned including all cash and bank accounts.

You must not have adequate cash available in a checking, savings, money market, or brokerage account to pay the IRS.

You must not have the capacity to borrow the amount owed to the IRS from other sources (i.e., a second mortgage on your home).

You must not have adequate equity in a retirement account from which you can borrow or liquidate; for example, IRA’s or 401K’s.

Assuming that you comply with the above list, then you can proceed to arrange a repayment of taxes with the IRS. The negotiation with the IRS will either take place over the phone with ACS (Automated Collection System), or in person with an IRS Revenue Officer.

The total dollar amount you owe usually dictates with whom the negotiations will be handled. Typically, IRS Revenue Officers are not involved in cases where the amounts owed are less than $25,000. The IRS will ask you to complete a personal financial statement and if a business is involved, then you will need a business financial statement. The IRS has determined allowable monthly expenses for individuals, which will be matched against your actual monthly expenses. The difference between your monthly income and your allowable monthly expenses will be the amount that the IRS will require you to pay on a monthly basis.

These monthly payments will continue until your outstanding tax liabilities are paid in full. WARNING! The IRS continues to add penalties and interest while you are making monthly payments.

This may cause you to be paying what you consider a large monthly payment to the IRS and your outstanding balance may in fact be increasing due to additional penalties and interest.

The IRS will not explain this to you! Be careful!

In most cases, the IRS will accept some type of payment arrangement for past due taxes. In order to qualify for a payment plan with the IRS you must meet the following rules and provide the IRS with this information:

  • You must have filed all tax returns (It’s OK to owe money but you must file).
  • You will need to disclose all assets owned including all cash and bank accounts.
  • You must not have adequate cash available in a checking, savings, money market, or brokerage account to pay the IRS.
  • You must not have the capacity to borrow the amount owed to the IRS from other sources (i.e., a second mortgage on your home).
  • You must not have adequate equity in a retirement account from which you can borrow or liquidate; for example, IRA’s or 401K’s.

The total dollar amount you owe usually dictates with whom the negotiations will be handled.

  • Typically, IRS Revenue Officers are not involved in cases where the amounts owed are less than $25,000.
  • The IRS will ask you to complete a personal financial statement and if a business is involved, you will also need a business financial statement.
  • The IRS has determined allowable monthly expenses for individuals, which will be matched against your actual monthly expenses.
  • The difference between your monthly income and your allowable monthly expenses will be the amount that the IRS will require you to pay on a monthly basis.

These monthly payments will continue until your outstanding tax liabilities are paid in full.

NOTE: The IRS continues to add penalties and interest while you are making monthly payments.

This may cause you to be paying what you consider a large monthly payment to the IRS and your outstanding balance may in fact be increasing due to additional penalties and interest.

Installment agreements are a widely used tool for tax collection. They are generally used when you are unable to pay the tax but you can pay enough each month to pay off the tax in a reasonable amount of time ─generally no more than five years. Unfortunately, There are many installment agreement cases where the amount paid monthly does not even cover the accruing interest. If this is true in your case, you should consider an Offer in Compromise.

IRS encourages taxpayers to pay what they owe as quickly as possible. For those individuals or businesses not able to resolve a tax debt immediately, an installment agreement can be a reasonable payment option. Installment agreements allow for the full payment of the tax debt in smaller, more manageable amounts.

To be eligible for an installment agreement, all returns that are due must first be filed.

Installment agreements generally require equal monthly payments. The amount of an installment payment will be based on the amount owed and on the taxpayer’s ability to pay that amount within the time legally available for the IRS to collect. By law, the IRS has the authority to collect outstanding federal taxes for ten years from the date of assessment. For taxpayers that enter into an installment agreement, the IRS may require a signed waiver to extend the time IRS can collect.

Taxpayers who already have an installment agreement from a previous amount owed may still find help. All of the amounts owed could be included in one installment agreement. Additionally, a Collection Information Statement may have to be completed to further illustrate their financial situation.

As a condition of an installment agreement, any refund due in a future year will be applied against the amount owed. Therefore, taxpayers may not get all of their refund if they owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. The IRS will automatically apply the refund to the taxes owed. If the refund does not take care of the tax debt; then the installment agreement continues until all of the terms are met.

Interest does not Stop with an Installment Agreement

An installment agreement is more costly than paying all the taxes owed now. Penalties and interest continue to be charged on the unpaid portion of the debt throughout the duration of an installment agreement.

NOTE: The interest rate on a loan or on a credit card may be lower than the combination of penalties and interest imposed by the Internal Revenue Code. It is best to pay as much as possible before entering into an agreement.

How Best to Make Timely Installment Payments

The IRS strongly recommends one of the following options for payment under an installment agreement:

  • Direct Debit – electronic transfers from a checking account, or
  • Payroll Deduction – deductions that an employer takes from wages or salary. Call toll free 1-800-829-1040 to set this option up.

These forms of payment help to reduce the burden of mailing the payments, save postage, help ensure timely payments, and decrease the likelihood that the agreement will default. If the agreement defaults, enforced collection action could be taken.

Installment agreement payments can also be made by electronic funds transfer (www.eftps.gov), credit card (www.officialpayments.com or www.pay1040.com), personal or business check, money order, cashier’s check, certified funds or cash (cash payments can only be made in person at a local IRS Office-do not send cash through the mail).

Fees to Set-up an Installment Agreement

The IRS charges a user fee of $43 to set up the installment agreement. It is possible for an installment agreement to be reinstated if the agreement defaults. Also, installment agreements may be restructured to include additional amounts owed in one agreement. Reinstating or restructuring an existing installment agreement will cost an additional $24 user fee.

How to Set-up an Installment Agreement

Taxpayers wishing to pay off a tax debt through an installment agreement, and owe:

  • $25,000 or less in tax, can call the number on the bill or notice (have the bill or notice available, along with the social security number). A fill-in Request for Installment Agreement, Form 9465, is available online that can be mailed to the address on the bill.
  • More than $25,000 in tax, may still qualify for an installment agreement, but a Collection Information Statement, Form 433F may need to be completed. Call the number on the bill or mail the Request for Installment Agreement, Form 9465 and Form 433F to the address on the bill.

A notification is sent to the taxpayer advising whether the terms of the installment agreement have been accepted or if they need to be modified.

The IRS generally may still file a Notice of Federal Tax Lien to secure the government’s interest in the taxpayer’s personal or real property until final payment is made. The notice filing could have a negative impact on the taxpayer’s credit rating.

Enforced Collection Actions

Generally, IRS enforced collection actions (i.e., levy against personal or real property) are not made while an installment agreement request is being considered, or:

  • While an agreement is in effect,
  • For 30 days after a request for an agreement has been rejected, and
  • For any period while a timely appeal of the rejection or termination is being evaluated by the IRS.

Payments Should be Made Timely

Throughout the term of an installment agreement, payments must be made on time. If payments cannot be made due to a change in financial condition, taxpayers should contact the IRS immediately. Failure to make timely payments could default the agreement. A defaulted installment agreement could subject a taxpayer’s account to enforced collection action and potentially have a negative effect on a taxpayer’s credit standing.

Annual Statements of Balance Due

In accordance with the law, installment agreement taxpayers receive an annual statement from the IRS. The statement provides the amount owed at the beginning of the statement period, the payments (credits) posted to account(s), any fees or assessments, and the ending balance. Currently, the annual statement is sent each year in July.

Meeting the Terms of an Installment Agreement

Besides making installment payments on time, the terms of an installment agreement require that all tax returns required to be filed and payments (including any Estimated Tax payments or Federal Tax Deposits) due during the life of the agreement be made timely.

Installment Agreements

  • The Internal Revenue Code allows taxpayers to pay their tax liabilities over time
  • The IRS is authorized to enter into a written installment agreement where “the agreement will facilitate collection” of the tax liability.
  • An installment agreement is often used where the taxpayer cannot pay his tax liability in a lump sum and has no equity in assets against which to borrow, but has sufficient income to pay the amount over time
  • A taxpayer should press for an installment agreement on the taxpayer’s terms whenever possible
  • While the IRS can directly influence the amount to be paid, because it is a negotiation process there is latitude for the practitioner to influence the payment terms (length of time and amount of the monthly payment)
  • Since every situation is different, different Revenue Officers take different approaches.
  • If the taxpayer owes $25,000 or less (Streamlined Installment Agreement), and the amount of tax owed can be paid in less than five years, the taxpayer is allowed to make monthly payments even if he or she has sufficient assets to pay the taxes.
  • Streamlined Installment Agreement are negotiated without the need for Collection Information Statements
  • Once the installment agreement is entered into, the taxpayer must remain current for the agreement to remain in force
  • If the taxpayer is unable to make a payment cannot be made on time, the practitioner or taxpayer should immediately notify the IRS to avoid enforced collection action e.g. levy or wage garnishment
  • Failure to make the required payments under the installment agreement will default the agreement
  • Once a taxpayer defaults on an installment agreement, it is very difficult to obtain another one
  • The taxpayer is entitled to receive a notice from the IRS that the installment agreement is being terminated.
  • At that point, the practitioner can file an appeal on behalf of the taxpayer to the IRS Appeals Office.

User Fees for Installment Agreements

The IRS is authorized to collect a $43 fee for allowing the taxpayer to enter into an installment agreement, and a $24 fee for modifying or reinstating an existing installment agreement

The fee must be paid for the installment agreement to be valid.

More Tax Help, IRS News and Tax Relief Tips:

  1. Tax Problem FAQ: What is an Offer in Compromise?
  2. Delinquent and Unfiled Tax Returns? 8 Steps to Resolving Them
  3. IRS Bankruptcy-Five Tax Relief Options for Back Taxes
  4. Tax Resolution Expert-Five Reasons to Hire One
  5. IRS Tax Relief: Seven Common Income Tax Relief Myths That Can Get You into IRS Trouble

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3 Responses to “Tax Problem FAQ: What is an IRS Installment Agreement?”

  1. Lisa Cook Says:

    If I have an installment agreement in place, can I still extend my tax return? Or, do I have to file by April 15th of each year the installment agreement is in place?

  2. Tax Attorney Resources and Tips to Help Resolve IRS Tax Problems Says:

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  3. Tax Resolution Tip: Consider an IRS Installment Agreement for Help with Payments | Tax Attorney and Tax Resolution Services: IRS Help Blog Says:

    [...] the Installment Agreement FAQ for more information on IRS Payment Plans and Installment Agreements and for more tax relief tips, [...]

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