Installment Agreement

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Installment Agreements or monthly payments are a payment plan if you can’t pay the full amount you owe the IRS or if you don’t qualify for an Offer in Compromise. The IRS prefers taxpayers to pay what they owe in a short period of time or at one time, but for many, this is not an option. Usually, an Installment Agreement will allow you to pay your outstanding taxes in smaller, more manageable payments.

Installment Agreements require equal monthly payments to the IRS. Then, the IRS will consider your ability to pay before considering how much you owe when determining your monthly payment amount. Sometimes, borrowing money from other sources with smaller interest, like a line of credit from the bank or credit card cash advances is more beneficial in the long run since the Installment Agreements can be levied with IRS interest and penalties. Interest from a second mortgage or home equity lines of credit may be also tax deductible.

To be granted an installment agreement, you can not have a substantial amount of cash in checking, savings, money market, brokerage accounts, or IRA/pension accounts that would be adequate to pay the debt.

 

How Do Installment Agreements Work?

Our experienced team helps resolves your IRS tax problems. Whether you are an individual who accumulated penalties and interest or a business owner who is faced with payroll tax or other tax problems, we can help.

 

Installment Agreement in California

Installment Agreements are a common solution for taxpayers facing difficulties in paying their federal tax bill in full. These agreements allow individuals to make monthly payments to the IRS over six years. However, it’s important to be cautious of tax relief companies that advertise on radio and TV, promising to settle with the IRS for a significantly reduced amount, often referred to as “pennies-on-the-dollar.” In reality, the IRS rarely reduces or forgives the final tax bills.

It is crucial to understand that if you are reading this, you can no longer dispute the amount due. This typically happens when you have ignored IRS notices, and the IRS has completed its audit, issuing the final amount owed. Alternatively, you may have taken your case to Tax Court, and the judge has made a final determination of the tax owed. Congress has mandated that the IRS Collections division aggressively pursue the full amount owed, utilizing all the resources and power of the federal government. Even if you disagree with the amount, the IRS will continue its collection efforts.

Given this situation, you may be wondering about the next steps you should take and the best course of action.

 

How to Reduce or Eliminate Back Taxes

Installment Agreements provide a means to repay your entire tax debt over a specific period. However, it’s important to note that the only way to fully avoid paying your taxes is by filing for Chapter 7 bankruptcy. In this process, most of your tax debt can be eliminated, except payroll tax, which is generally not forgivable under specific technical circumstances.

For taxpayers with significant expenses compared to their income, Installment Agreements can be a viable option. Nevertheless, there are cases where the IRS may deem the agreement as “uncollectible,” allowing the taxpayer to make no monthly payments until they reassess their financial situation. We will delve into this topic further below. It’s worth noting that tax debt is typically reduced or eliminated more frequently through bankruptcy than via an Offer in Compromise.

The Streamlined Installment Agreement Process for Individual Tax Debts Less Than $100,000

If you owe more than $100,000, the process of applying for and qualifying for an Installment Agreement differs. However, if your tax debt is less than $100,000, including interest and penalties, you are eligible for the streamlined and faster Installment Agreement. If your tax debt is below $50,000, you qualify for the streamlined process. In the case of owing between $50,000 and $100,000, it falls into a gray area because the IRS has conducted tests on raising the streamlined application limit in recent years. However, no official ruling has been made regarding the new limit. As of now, the IRS generally accepts streamlined applications for tax debts up to $100,000.

The maximum term for a streamlined installment agreement is six years. The IRS approves approximately 90 percent of applications for streamlined Installment Agreements. Typically, the IRS will decide within one month, although it can take up to three months in some cases. If you qualify for the streamlined plan, you can usually choose the monthly payment amount you wish to make.

 

Fees

The payment plan is not without cost. Installment Agreements are free if you pay off your balance within 120 days. However, if you are unable to pay off your balance within that timeframe, there are fees associated with setting up a payment plan.

Setting up an online direct debit payment will incur a fee of $31. If you choose to set up the plan via phone, mail, or in person, the fee is $107. Opting to pay by credit card or check (with a 2 percent surcharge per payment), the cost of setting up the plan online is $149. Setting up the plan through phone, mail, or in-person methods will cost $225. It’s important to note that these fees can be waived or reduced for low-income taxpayers.

It’s crucial to remember that interest and penalties will continue to accrue on the outstanding balance until it is fully repaid. This is because the IRS charges interest and penalties on unpaid amounts that were not settled within the specified timeframe.

Staying in Compliance

If an Installment Agreement is approved, the taxpayer must fulfill specific conditions to prevent default. These conditions include:

1. Making timely payments or requesting a modification of the Installment Agreement.
2. Filing future tax returns on time and in full payment, unless the IRS agrees to include the additional liability in the Installment Agreement.
3. Promptly informing the IRS of any changes to your mailing address.
4. Continuing to make scheduled payments, even if an IRS tax refund is applied to the outstanding liability.

Uncollectible Status

The IRS also accepts streamlined Installment Agreements with a repayment amount of $0 per month, which is referred to as Uncollectible Status. To qualify for this status, your living expenses must exceed your monthly take-home salary. This means that you have minimal or no disposable income, making it impossible for you to repay the IRS. However, it’s important to note that this designation is temporary. If the IRS deems you uncollectible, they will provide you with a future date, typically between 18 months and two years, to submit your earnings and expenses information. The IRS expects repayment if your financial situation improves.

Before submitting your application, I recommend contacting me or another professional tax advisor if you believe you may be eligible for an accelerated Installment Agreement. This will help you avoid costly mistakes. As experts who handle Installment Agreements regularly, we can provide the guidance you need through a brief ten-minute conversation.

The Streamlined Installment Payment Agreement Process for Business Tax Debts Less Than $25,000

If your business owes less than $25,000.00 in taxes, interest, and penalties, it may be eligible for an Installment Agreement. Generally, the rules that govern streamlined installment agreements for individuals with a tax debt of less than $100,000 also apply to businesses with a tax debt of less than $25,000.

Individual Tax Debts More Than $100,000 Can Be Repaid Through an Installment Agreement

The application process for Installment Agreements that involve tax debts exceeding $100,000 is considerably more complex and invasive compared to the simplified Installment Agreement. These complex agreements often face a higher likelihood of being rejected by the IRS, requiring approval from a manager. When applying for such an Installment Agreement, you will need to complete Form 9460 (Installment Agreement request) along with the daunting Form 433-F (Collection Information Statement).

The Collection Information Statement can be challenging because it necessitates a comprehensive breakdown of your debts, assets, income, and expenses. The purpose of this thorough examination is to determine the appropriate payment amount based on your financial situation. For instance, you may wonder how the IRS defines “allowable” housing expenses in Southern California. According to the IRS Collection Standards Guide, the agency sets the estimate for housing expenses, including utilities, for a four-person family in Los Angeles at $3,222. However, it is worth noting that IRS agents in Southern California often acknowledge the impracticality of these official living expense figures and may display more flexibility. I have regular clients who pay $5,000 per month for mortgages and still qualify for an Installment Agreement based on their actual housing payments.

Asset Scrutiny

The IRS will also evaluate your assets during the Installment Agreement process. They may request the sale of “non-essential assets” such as expensive cars, second homes, and recreational vehicles. While this may seem strict, the IRS (and Congress) believe that individuals should not be rewarded with the ability to purchase luxury items while underpaying their taxes. However, if you propose a repayment plan that is two years or shorter, your IRS revenue agent will likely allow you to retain your assets.

If your repayment timeline extends beyond two years, the IRS may insist on the sale of your assets. After all, the funds tied up in these assets belong to the government. Failure to comply with the IRS’s requests can result in the seizure of your assets. The IRS typically takes a few weeks to review your application.

Fees and Compliance Requirements

The fees associated with setting up a payment plan are the same as those outlined for the streamlined Installment Agreement (refer to the “Fees” section above). Interest and penalties will continue to accrue on the outstanding amount until it is fully repaid. From the IRS’s perspective, this amount is considered a debt resulting from untimely payments, and they may charge you for the unauthorized use of these funds. To qualify for an Installment Agreement, you must also ensure compliance with your tax obligations. This entails filing previous tax returns and staying current on this year’s taxes, including withholdings and estimated tax payments.

If an Installment Agreement is approved, the taxpayer must adhere to the following requirements to avoid default: Make timely payments or request modifications to the Installment Agreement. File future tax returns on time and in full payment, unless the IRS agrees to include the additional liability in the agreement. Notify the IRS promptly of any changes to your mailing address. Continue making scheduled payments, even if an IRS tax refund is applied to the outstanding liability.

It’s important to note that Installment Agreements for tax debts exceeding $100,000 can be intricate, involving extensive communication with the IRS revenue officer regarding the monthly repayment amount (due to discretionary considerations of basic living expenses). If you plan to submit your application, you can still reach out to me for assistance beforehand.

 

Installment Agreement Process for Business Tax Debtof  MORE Than $25,000

This particular Installment Agreement requires the submission of two forms: Form 9465 (Installment Request) and Form 433-B (Collection Information Statement for Businesses). It combines Form 9465, which is the Installment Agreement Request form, with Form 433-B, which is the Collection Information Statement for Businesses form. The same rules that apply to streamlined Installment Agreements with a tax debt of less than $100,000 also extend to businesses with a tax debt of less than $25,000.

If you find yourself owing more to the IRS than you can afford to pay, let’s discuss your situation. We can work together to devise a strategy to help you navigate your dealings with the IRS. This may involve reviewing the Installment Agreement you have filled out, providing guidance on interacting with the IRS revenue agent assigned to your case, or even handling communication with the IRS on your behalf.