If you cannot pay your tax obligation right away, but have the assets and/or income to pay all or part of the amount over time, your best option mbe an installment agreement (IA). It is the most common and perhaps the least painful way to arrange payment of back taxes.
IA’s are rather easy to obtain when the tax amount owed is $50,000 or less, but somewhat more difficult for amounts over that. While an IA will release a tax levy, you may still qualify for an Offer in Compromise, a penalty abatement, currently not collectible (CNC) status, or bankruptcy as perhaps a better alternative to resolve your debt. Each of these will be discussed in the coming months. The operative word is “qualify”. Moreover, the IRS will generally not file a tax lien if you set up an IA which requires that monthly payments be withdrawn directly from your bank account. The IA processing fee is also reduced (from $105 to $52) if there is a direct withdrawal agreement.
Types of IRS Installment Agreements
Guaranteed IA – The IRS is required to agree to an installment plan if the balance due is $10,000 or less; you haven’t filed or paid late in the past five years; all tax returns have been filed; your monthly installments will pay off your balance in no more than 36 months; you do not have a prior IA outstanding; and you remain current in filing and paying for future tax years. This is the simplest type of IA.
Streamlined IA – The IRS will approve your plan if your balance due is $50,000 or less, and you agree to pay off the balance in no more than 72 months. However, if your balance will expire within the 72-month period due to the ten-year statute of limitations on collections, the IRS will require full payment within the remaining statutory collection period. The minimum payment the IRS will accept is the sum total of your balance due (including interest and penalties) divided by 60. Note that the divisor is 60, not 72. The reason is that penalties and interest continue to accrued during the installment payment period. Also, if the amount owing is between 25,001 and 50,000 the IRS will require that payments be made via a Direct Debit or Payroll Deduction agreement. As with the guaranteed IA, all returns must be filed and you agree to file your returns and pay your taxes on time in the future. Two big benefits in streamlined IA’s are that a tax lien is not required and you will not need to complete a financial statement.
Financially Verified IA – Sometimes referred to as non-streamed IA. This agreement is for taxpayers who owe more than $50,000 (including interest and penalties) and the taxes owed are no more than five years old; have filed all returns; have no other outstanding IA’s; are not in bankruptcy or filed for it; have had no installment agreements in the past 5 years; don’t have sufficient money in liquid assets to pay the taxes off; and are unable to borrow the money from a financial institution. This type of IA will require a financial statement to fully verify financial condition. IRS may require you to liquidate some assets to bring the tax balance down to $50,000.
IA over $100,000 – With this type of agreement, you will generally be obligated to sell off any assets you own and apply the proceeds to the tax balance before the IRS will accept the agreement.
Partial Payment Installment Agreement (PPIA) – This IA began life in 2005. It is a more difficult IA to obtain with the IRS because it allows you to pay less than the full amount you owe. In a PPIA the monthly payment is based on what you can actually afford after taking into consideration your essential living expenses. Unlike guaranteed and streamlined IA’s, a PPIA can be set up to cover a longer repayment term, and the IRS may file a federal tax lien. You will be asked to provide complete and accurate financial information that will be reviewed and verified. You may also be required to address your equity in assets that can be utilized to reduce or fully pay your tax liability. A PPIA will include only those tax years that can be fully paid prior to the expiration of the ten-year statutory collection period plus 5 years. Any periods not included in the PPIA are closed to currently not collectible status. One downside with PPIA’s is that, unlike other types of IA’s, the IRS can re-evaluate the terms of the agreement every two years to see if you might be able to pay more.
Which type of agreement would be best for you depends an analysis of the facts and circumstances of your particular situation. A qualified tax professional experienced in the collection area should be consulted. I happen to know of one!
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