May, 2008 Tax Newsletter

Tax Installment Payment Agreements

There are many reasons taxpayers can owe money to the IRS.  They may have difficulty paying taxes when due, receive bills from the IRS for taxes erroneously assessed,, or owe interest and penalties on amounts paid late. Also, if they haven’t filed a return for a particular year, the IRS can prepare a return based on information they have received from third parties and proceed to make an assessment on the basis of that Substitute for Return (SFR).

The IRS encourages you to pay what you owe as quickly as possible which, of course, will cut down on interest and penalties owed.  However, for those not able to resolve a tax debt immediately, a tax installment agreement can provide a reasonable payment option and, if you abide by the terms of the agreement, it will keep the wolves from your door.  Installment agreements allow for the payment of the tax debt in smaller, more manageable amounts over time.

To be eligible for an installment agreement, there must first be a tax assessment to determine the amount owed.  Therefore, there first must be a return filed (see the sentence regarding SFR’s in the opening paragraph).  In general, installment agreements require equal monthly payments.  The amount of the monthly payment will be based on the amount owed and on the ability of the taxpayer to pay that amount within the time legally available for the IRS to collect that amount, which is generally 10 years from the date the tax was assessed.

What types of installment agreements are available?

Less than $25,000 owed

If you cannot pay the tax due with the return, attach Form 9465, Installment Agreement Request,  to the return.  You can also use Form 9465 to request an installment agreement for amounts due from an IRS notice.  The IRS’ response to your request is based on the amount of tax you owe.  As long as you are not in default, the IRS does not report an installment agreement, so there is no harm to your credit rating.  The IRS will accept all requests for payments over a period of no more than 60 months if you owe less than $10,000.  If you owe more than $10,000 but less than $25,000, the IRS does not have to accept your proposed monthly payment. 

More than $25,000 owed

If you owe more than $25,000 you must also prepare and file Form 433-F, a two page Collection Information Statement, which includes substantial financial information..  File this with a Form 433-D, Installment Agreement indicating the amount you propose to pay.   If  the IRS determines that the amount you owe, including penalty and interest add-ons, would be discharged within 60 months, they will generally agree to your proposal.  If, however, they determine that the amount you owe would not be paid off within 60 months they will carefully review your financial information and likely propose a higher monthly amount.,

Partial Payment Installment Agreement (PPIA)

When all else fails and the IRS determines that there is presently no reasonable way that your liability could be paid off, they will usually agree to a PPIA.   Basically this type of agreement may allow a taxpayer to be relieved of part of their tax debt without the need to file an Offer in Compromise (a very difficult and lengthy procedure to get the IRS to accept but, if they do, all tax, interest, and penalties will be cancelled).  Full financial information is required on Form 433-A, Collection Information Statement.  Taxpayers qualifying for a PPIA will be able to make monthly payments even if the total payments will not pay off all delinquent periods by the end of the remaining collection statute expiration date for each period plus 5 years.  The IRS has the right to ask a taxpayer at any time to update their financial information, but this is not normally done more than every two years.

Installment agreement fee

The IRS charges $105 for all installment agreements ($52 if your payments are made by electronic funds withdrawal) or $3 if your income is below a certain level which is determined by various criteria.  I always encourage my clients to do the electronic funds withdrawal if no other reason than to ensure that a payment is not missed.

A significant portion of my practice is devoted to resolution of tax debts and I would be most happy to assist you if the need should arise.

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