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May, 2007 Tax Tip

Can’t Pay Your Tax?  Use an Installment Agreement

 

When April 17th arrived, were you unable to pay the tax that was due with your return?  If so, you had plenty of company.  Fortunately, there are strategies that may enable you to defer the payment without it becoming an ongoing harrowing experience with the IRS Collection Division.  The obvious downside is that interest and penalties on the unpaid balance will apply until your account is paid up.

 

Statutory Installment Agreement

 

One method is to enter into an agreement with the IRS to make installment payments.  If the taxpayer requests, it is incumbent upon the IRS to enter into an installment agreement if the liability is $10,000 or less, excluding penalties and interest and the following conditions are satisfied:

 

1.  In the last five years, the taxpayer (and spouse, if joint return) has filed all required income tax returns, paid all taxes required to be shown on the returns, and not entered into a prior installment agreement.

 

2.  The taxpayer demonstrates to the IRS’ satisfaction that he cannot pay the amount owed in full

 

3.  The taxpayer agrees to pay the amount in full within three years, and

 

4.  The taxpayer agrees to be in compliance with tax laws while the agreement is in effect.

 

The statutory agreement does not require the taxpayer to submit a financial statement.

 

Streamlined Installment Agreement

 

If a taxpayer cannot qualify for a statutory installment agreement, he may be able to qualify for a “streamlined” installment agreement.  At the taxpayer’s request the IRS may enter into such an agreement if the taxpayer owes no more than $25,000 and agrees to pay the amount owed within five years.  The streamlined agreement is available for the payment of individual and business income taxes and for any type of tax for a business that is no longer operating.  It does not require either a collection manager’s approval or a financial statement.  Nor does it involve the filing of a lien.

 

Partial Payment Installment Agreements

These typically apply to taxpayers who owe more than $25,000.  The IRS is authorized to enter into these agreements with any taxpayer to satisfy the liability if the IRS determines that such an agreement will facilitate collection of the amount owed and it is in the government’s best interest to do so.  A detailed financial statement is required.  Depending on the taxpayer’s ability to pay, the amount of the payments can be adjusted up or down over time.  Generally these agreements remain in effect until the tax balance, including interest and penalties, is paid off or the taxpayer dies.  Due to the potential long term nature of this type of agreement, very careful consideration should be given before entering into one.  Consultation with a tax professional is highly recommended.

 

Procedures

An installment agreement may be entered into in person, by correspondence, or by phone.  An agreement can be requested at the time the return is filed by attaching Form 9465, Installment Agreement Request, to the return and indicating the proposed monthly payment amount and date.  If the request is accepted (normally, response can be expected in around 30 days), the taxpayer may opt to have the monthly payment taken automatically from his account.  I highly recommend this in order to ensure that all payments are timely made.  The IRS can, at its discretion, invalidate an agreement that is in default.  

 

The fee for entering into an installment agreement is $52 for a direct debit installment agreement, whereas it is $105 for other installment agreements.  This is another reason to use automatic withdrawal.

 

 



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