Month: August 2023

A Partial Pay Installment Agreement can be your way out of Tax Hell!

Owing huge sums of taxes to the IRS can be a challenging time in life, especially when this huge tax burden seems insurmountable. Using a Partial Pay Installment Agreement can reduce that burden.

The IRS offers several options intended to assist taxpayers with their tax liabilities.  In all cases, taxpayers will find themselves looking for the option that allows them to pay off their debts while managing their everyday expenses.

The Internal Revenue Service (IRS) recognizes this struggle and offers a potential lifeline in the form of Partial Pay Installment Agreements (PPIA). This is one of my favorite options, but isn’t available to everyone.  Let’s find out who qualifies!

I. What the Heck Is a Partial Pay Installment Agreement (PPIA)?

A. Definition and Purpose

Partial Pay Installment Agreements are structured arrangements between the taxpayer and the IRS that allow the taxpayer to pay off their tax debt in smaller increments over a specified period.

The big difference between a regular Installment Agreement and a Partial Pay Installment Agreement is the IRS takes the taxpayer’s financial situation into consideration.

B. What Makes Partial Pay Installment Agreements AWESOME!

The beauty of a Partial Pay Installment Agreement is the IRS taking your financial situation into consideration.  This is the key.  You know the old adage; you can’t get blood from a turnip?  The IRS understands this.

Partial Pay Installment Agreements are kind of like a light version of an Offer in Compromise.  Without all the paperwork.

A regular Installment Agreement calculates the monthly payment amount based on the tax due and the repayment period (72 months max for a regular Installment Agreement).

A Partial Pay Installment Agreement takes the taxpayer’s financial situation into consideration.  If the taxpayer can only afford a $250 monthly payment, then that’s what they pay.

C. Other Things to Know About PPIA’s

The biggest negative of PPIA’s is the repayment term can be extended.

The IRS has 10 years from the date they assessed the tax (fancy speak for the IRS acknowledging you owe tax of a certain amount).  Regular Installment Agreements have a max term of 72 months (6 years).  You see the problem here.

Another issue is that the IRS can increase your monthly payment amount if your financial situation improves.  You can end up paying much less than the initial assessment, but if your finances improve, you may be asked to pay the full amount.

Finally, if you own real estate and have equity in your property, chances are slim that you will qualify for a PPIA.  Equity is available funds in the eyes of the IRS.

II. Eligibility and Application Process

A. Qualifying Criteria for PPIA**

The first qualification is a DEMONSTRATED inability to fully pay your debt without it creating a hardship in your life. If making the payment will leave you homeless, the IRS won’t insist on that amount.

B. Application Methods

You will be expected to prove your financial situation.  Along with form 9465, Installment Agreement Request, you will need to prepare form 433-A, 433-B and/or 433-F. The 433-A is for W2 employees (not the business owner).  Form 433-B is if you are the business owner.  Form 433-F is what the IRS use to determine what you are capable of paying each month.

C. What Kinds of Documents are Needed?

The key to proving your side will be good third-party documentation.  Bank statements showing money coming into your account (all bank accounts associated with your SSN are required, including your kids accounts if they have them)

You will need to prove your monthly living expenses and show that they are real and have been paid.  This is essential in proving what’s available to the IRS after paying your living expenses.

III. The IRS Will Calculate Your “Reasonable Collection Potential” (RCP)

A. What’s RCP?

The Reasonable Collection Potential is a calculation the IRS makes which takes your financial situation and the tax owed into consideration.

This calculation takes the taxpayer’s financial life into consideration.  It will look at money coming in and money going out, plus what amount is realizable from the sale of your assets.

B. What is Your Monthly Income?

For a W2 employee this is pretty straight forward.  Money received on a set schedule is your income.

Being self-employed makes qualifying a little harder.  In this case, showing trends in your industry (or your business) goes a long way in proving income. 

C. Let’s Take All the Allowable Expenses

Your allowable expenses are things like rent, utilities, food, medical care….  Normal living expenses.

The IRS does limit the amount you can claim on various expenses.  These National Standards are available on the IRS website.  If you are paying more than allowed, there are certain expenses we can appeal to the IRS to allow us to use the actual amount paid.

D. Do You Have Any Assets You Can Sell?

Any assets you own, such as property and vehicles, can play a role in determining your RCP.  In this case, equity is your enemy.  Rest assured there are things we can do to help.  I’ll show you something in the case study.

You can exclude assets used in your business from your equity calculation.  Don’t consider hiding personal assets here.  It won’t work and you’ll lose your chance to qualify for a PPIA.

IV. Negotiating Terms:  Let’s Look at the Nuts and Bolts

A. How Much Can You Pay Every Month?

You calculate your amount.  The IRS will calculate theirs.  Their amount will be closer to what you will agree to pay.  When calculating your offer amount, be realistic.  The IRS isn’t going to let you pay less just because you are leasing a Porsche 911 for $1,200 a month.  You’ll have to get rid of the car to free up some cash.  If your new car costs $500 a month, the extra $700 will be considered as available cash to the IRS.

B. How Many Months Will You Be Paying?

This will take some strategy.  Since the IRS has 10 years (or 120 months) to collect, that’s the longest term you can expect.  The reality is it won’t be anything close to the full 10 years.

From my experience, a taxpayer who owes will avoid dealing with their tax debt for as long as possible.  2, 3, even 4 years after having the tax assessed is the norm.

An important point is you must file a tax return to have the IRS assess the tax to you.  The 10-year collection term doesn’t start until you have filed the return.  It usually takes the IRS around 30 days to formally assess the tax.

The term of your agreement will be how many months are left for the IRS to collect.

C. Interest and Penalties?

Just like every other tax debt, late payment penalties and interest will continue to accrue until the debt is fully paid, or the term expires.  The charging of interest and penalty by the IRS is statutory.  This means it’s the law.  There are ways to get out fo penalty and interest, but for purposes of this article there are none.

D. The IRS Will Revisit Your Finances If Your Finances Change

Win the lotto?  They will adjust your agreement and you’ll end up paying everything.

Get a new job that pays double what you were earning?  Yep.  You’ll have to renegotiate your monthly payment.  You still may be paying less than the initial total due, but they want their money.

Keep in mind, however, that the end goals are:

1. Paying your debt to the IRS
2. Make sure you aren’t experiencing financial hardship due to these payments.

If your financial situation gets better, they will work with you by calculating a payment that works.

E. Don’t Expect a Tax Refund for a While

Your tax refunds will be applied to your outstanding debt.  An innocent spouse may be shielded from their share going against this old debt, but only if they live in non-community property states.

Don’t expect any state tax refund either.  Most states work with the IRS and will remit your refund to the IRS to be applied against your outstanding debt.

V. The Good, Bad and Ugly of Partial Pay Installment Agreements

A. The Good

The biggest plus is the possibility to pay less than the full amount, without having to go through the Offer in Compromise ordeal.

You will also pay a lot less than the full amount as long as you qualify.

B. The Bad

A PPIA usually has a longer term than a regular Installment Agreement would.  The IRS is limited by the 10-year collection statute, so they will take advantage of the longer terms for a PPIA.

If your financial situation gets a lot better, the IRS can come up with a higher payment amount.

C. The Ugly

If your financial situation were to get a lot better, you could be on the hook for the entire balance.  You won’t pay more than the initial assessment, but the penalties and interest accrued will be more since you were making smaller payments against the principal.

VIII. PPIA Compared with Other Options

A. Pay in Full

Obviously, the option the IRS wants you to take.  Payment if full renders all other options moot.

B. Installment Agreement (normal)

If you owe money, setting up an Installment Agreement is nothing more than dividing your tax due by 72 and rounding low.  Penalties and interest will continue to accrue meaning your calculated payment amount will be low.  That’s why I round low.

C. Offer in Compromise

An Offer in Compromise is much more involved.  You are still collecting a lot of the same info, but since an OIC commits both parties to a specific amount, the IRS puts more effort into reviewing OIC’s.

Once accepted, the taxpayer must abide by the terms agreed upon.  File your taxes on time.  Pay on time.  Properly withhold if you’re an employee.

An important point is that the IRS does not release any liens until all offer terms have been satisfied.  If you have been approved for an OIC and the original tax was for more than $50k, you most likely have a lien on your credit report.

D. Currently Not Collectible (CNC)

If paying ANYTHING on this assessment could be a hardship, I recommend asking for CNC status.  This is a temporary hold on collection activity and usually lasts 12 months (although I’ve had a few 6-month terms).

I only use this as a means to allow the taxpayer to regroup.  The tax doesn’t go away.  Penalty and interest charges keep accruing.  A positive of CNC status is the 10-year collection window keeps running.

IX. Tips for A Successful Partial Pay Agreement Application

A. Don’t try to hide anything

The IRS knows all the tricks.  They know about your kid’s bank accounts.  So, hiding money in their names won’t work.

Trying to hide assets will get you charged with fraud.

Recharacterizing personal assets as business assets will be looked at.  If purchased prior to the current year, it must be on your depreciation schedule.  If purchased in the current year, they will want to see it on your depreciation schedule and may want to see a bill of sale or purchase invoice.

Be honest and forthcoming.  You’re not going to fool them.

B. Don’t deviate from the terms if accepted.

Set up an auto payment and make sure there’s money in the account at all times.  I’ve actually instructed clients to open a bank account just for this and make sure its always properly funded.

Make all estimate payments (if required) and file your returns on time.

C. Don’t Avoid Communications

If everything remained the same over the term of your agreement, you’d never hear from the IRS regarding your agreement.

If something changes, they could reach out to you asking for an update.  Don’t ignore this.  Ignoring it could invalidate your PPIA putting you back where you began.

If your financial situation gets worse, contact the IRS immediately.  Don’t run the risk of missing payments without notifying them.  Depending on the particulars, you may be able to adjust your payment amount down.

D. Don’t Avoid the Ugly Truth

I know it’s hard, but you need to watch over your money better.  Most of the population stinks at managing their own finances.  But this avoidance is what got you here in the first place.

Make a point of checking on your finances every weekend.  It’ll take 20 minutes, but you’ll be free to worry about other things once you know the health of your finances.

Do you have enough to pay bills?  Do you have enough to get to your next payday?  How about reserves?  Financial struggles usually eliminate any attempt to save, but it’s a good idea to save something.  Even if it’s just $10.

X. Let’s Go Through a Typical Case Study

Ricky Bobby was the Chief Financial Officer for a NASCAR race team and had a TFRP of $200,000 assessed against him.  He was a signer on the account and only reported to the team CEO.

The team went out of business with no assets available to cover the delinquent payroll tax liability.  Everyone vanished.  Except good, ol’ Ricky Bobby.

Ricky came to me and his situation was as follows:

• Married in a non-community property state.  His wife works full time at Walgreen’s making $40,000 a year.
• Currently working.  Making $50,000 a year.
• Renting an apartment with his wife for $2,500 a month.
• All other qualified expenses total $1,500 each month.
• No saleable assets.
• The TFRP was assessed against Ricky 40 months ago.

1. Let’s calculate a payment amount:

$200,000/72 = 2,777.78.  To include penalties and interest I’d suggest a payment amount of $2,900 – 3,000.

2. Let’s look at their financial situation:

$50,000 + 40,000 = $90,000.  Divided by 12 and we have $7,500 of monthly income.  After deducting withheld taxes, we would have available around $5,000 a month.

With monthly living expenses of $4,000, we are left with $1,000 to service the debt.  This is a lot less than the $3,000 I suggested above, but will pay some of the debt while allowing the taxpayer to continue with their life.

Since the IRS has 120 months after assessment to collect, the collection term will be 80 months (the TFRP was assessed against Ricky 40 months ago).

This tack, if accepted by the IRS, will allow Ricky to get out from under a $200,000 tax debt for a total of $80,000 paid over a little less than 7 years.

XI. Conclusion: Using an OIC for your TFRP

A Partial Pay Installment Agreement can provide taxpayers with another tool to resolve their tax issues.

The biggest selling point of a PPIA is the ability to address your tax issue with the IRS without compromising your ongoing financial stability.

By carefully considering eligibility criteria, accurately disclosing financial information, and communicating effectively with the IRS, taxpayers can navigate the complexities of PPIAs successfully. These agreements offer a balanced approach to settling tax debts, aligning payment terms with the taxpayer’s ability to pay, and ultimately enabling individuals and businesses to regain control of their financial future. However, seeking professional advice is essential to ensure a favorable outcome and a fresh start toward financial recovery.

You owe the IRS money.  A lot relative to your life.  You need an out, but have a good job.  The only hardship would be you’d have less money in the bank, or at the end of the month.  So what’s your option?  An IRS Installment Agreement.

In many cases, the IRS offers a way out in the form of an Installment Agreement.  Enter into an Installment Agreement with the IRS, and you will have up to 72 months to pay the balance off.

Let’s take a look at the various details of IRS Installment Agreements.  Let’s see how a few imaginary taxpayers can use the Installment Agreement process.

I. What’s an IRS Installment Agreement and Why Do I Care?

• A. Definition and Purpose

Think of an IRS Installment Agreement as a loan from the government.  They loaned you the money to pay your taxes and you are paying them back, with interest.  This can be especially helpful if your credit is bad and you can’t borrow the funds.

Having the ability to pay your delinquent taxes over time can be helpful when you and/or your business are experiencing cash flow issues.

If you owe income taxes and can’t pay them right away, committing to an IRS Installment Agreement will stop them from enacting harsher collection techniques and stops the collection process all together.

• B. Importance of Installment Agreements

The IRS is very open to setting up an Installment Agreement with you.  The IRS wants to get paid.  Installment Agreements are an easy avenue (well, setting them up is easy.  Making the payments is another story) to resolving your tax problem.

Their importance actually resides as much with the IRS as with the taxpayer in my mind.  An Installment Agreement will allow the taxpayer to resolve their tax issues while allowing the federal government to collect money used to run the government.  A win all around.

• C. What Kinds of Taxes are Eligible for an Installment Agreement?

Most IRS tax debts qualify for Installment Agreements, including income taxes, self-employment taxes, and payroll taxes.

Penalties and interest continue to accrue on the above taxes.

Your corporate income taxes can be paid back on an installment basis, but they have different rules and qualifications.  I’ll discuss corporate installment agreements in a later article.

II. Are You Eligible and How Do You Apply?

• A. Installment Agreement Qualifications

To qualify for an Installment Agreement, taxpayers must meet the following criteria:

– How much do you owe?  If less than $50,000 you qualify for The Fresh Start initiative.  Over $50k Installment Agreements are still available, but there is a little more involved.  If you owe more than $50k you’ll need to submit financial information to prove your current financial condition.  I’d call a tax professional at this point.

– Are all of your required tax filings done?  You must be current before they will consider you for any kind of relief.

– You may be required to prove you can’t pay your full debt now.  This is generally for tax debts over $50,000.

• B. How Can You Apply?

There are several ways to apply for an Installment Agreement:

1. Online Payment Agreement (OPA): www.IRS.gov has a link which will allow you to prepare and submit form 9465 – Installment Agreement Request if you owe less than $50k.
2. Form 9465: Taxpayers can complete this form and submit to the IRS via FAX, in person or over the phone.  If you owe more than $50k you will also need to prepare and submit form 433-A, and if self-employed 433-B.
3. In-Person or Phone Application: You can call the IRS at 800-829-1040 and someone will assist you with your application.

• C. Required Documentation

If you owe less than $50,000 you can utilize the Fresh Start initiative to set up an Installment Agreement online.  There is very little documentation needed if you go this route.

Taxpayers who owe more than $50,000 will need to prove their financial position when requesting an Installment Agreement.

Form 433-A is a personal financial statement and form 433-B is financial information from the taxpayer’s business.

III. Is there More Than One Type of Installment Agreement?

Yes.  There are several types of Installment Plans available based on your specific financial situation:

– The Fresh Start Initiative is for taxpayers who owe less an $50k.  You may also see the term “Streamlined Installment Agreement” thrown out there since this is almost a no doc application.  Prepare and submit form 9465.  That’s it.

– Partial Payment Installment Agreements can be used for taxpayers that are unable to pay their full tax debt within the 10-year statute of limitations.

– Regular (non-Streamlined) Installment Agreement. For taxpayers who owe more than $50K there is the regular Installment Agreement.  This is referred to as the non-streamlined plan since you must submit third party documentation to corroborate your finances.  Usually forms 9465, 433-A and 433-B are involved.

– In-Business Trust Fund Express Installment Agreement. This is used if you are the responsible party for payroll taxes that should have been remitted from your business or employer.  Trust Fund penalties are assessed against the person responsible for making the payroll tax deposits.  

You can be an employee and still have the trust fund recovery penalty assessed against you, simply because you were the person doing the payroll.  Check later for an article on this fun aspect of tax law.

Depending on the circumstances, an In-Business TFE Installment Agreement being filed by the responsible party in conjunction with a regular Installment Agreement being filed by the individual business, the IRS will suspend collection activity against the responsible party since the business is making payments on the same tax debt.

IV. Terms You Must Abide by and Other Conditions

A. How Much Is My Monthly Payment?

In simplest terms, take your total tax debt and divide it by 72.  Interest and penalty ill continue to accrue so your monthly payment amount will be a little more than this.  If you owe for multiple years, use the total due for all years.

B. You Pick the Day of the Month to Pay

Just like any other note, your payment will be due on the same day each month.  You pick the date you wish to pay each month on the application.

C. Interest and Penalties Will Continue to Accrue

Penalties cost 6% each year.  Interest is currently 7%.  Your balance will go up 1.083% each month until the balance is fully paid.

D. How Long Do You Have to Pay?

The duration is generally determined by the type of Installment Agreement.  You have between 6 months, in the case of short term plan, to 72 months with a regular Installment Agreement.

E. Tax Refunds Will Be Applied to Past Debts

You won’t be seeing a tax refund until you pay your balance in full.  This may include state income tax refunds if the IRS notifies your state taxing agency.

Some see this as a negative, but from my perspective you shouldn’t have a refund.  We aim to get the amount due on taxpayers’ subsequent tax returns to less than $1,000.  You’ll stay in compliance, and not give the IRS an interest free loan.

F. What if Your Financial Situation Changes?

If your situation changes, for better OR worse the IRS will adjust your payment.  If your income goes up or down materially, contact the IRS and you can adjust your payment up or down.

Typically, I would have the client make larger payments each month in lieu of adjusting your payment amount with the IRS.  I do this in case the receipts jump is temporary.

If your income goes down, and you anticipate this to remain constant, contact the IRS to reduce your payment amount.

V. The Good, Bad and Ugly of IRS Installment Agreements

A. The Good of Installment Agreements

1. It gets you closer to all caught up.  Enter into an IRS Installment Agreement and the IRS will leave you alone.  No nasty letters, no enforced collection, no scary meetings with IRS auditors.
   
   Continue making payments and filing your returns and you become invisible to the IRS.

2. One thing less on your mind.  You can manage your tax debt based on your ability to pay.  As mentioned above, if your financial situation changes for the worse, the IRS will work with you to reduce your payment.

3. Forced compliance can be a good thing for some.  You will be required to file your returns on a timely basis.  A lot of people with tax debts are also behind on filing their returns.  If you don’t keep up, the IRS can take away your installment agreement and request payment in full.

B. The Bad of Installment Agreements

1. Interest and Penalties will continue to accumulate.  Charging interest and penalties is statutory, which means legally the IRS MUST charge you.  Currently, the late payment penalty is .5% a month.  Interest is currently 7% per year.

2. Depending on the amount due, your credit score can be detrimentally affected.  If you owe over $25,000 the IRS may put a lien on your property.
   
   While setting up an Installment Agreement doesn’t affect your score (nothing reported by the IRS), missing payments will create a problem.

3. Additional fees charged.  While not a deal breaker, the IRS charges up to $131 to set up an Installment Agreement.  Low-income taxpayers (those with income less than 250% of the Federal Poverty Rate can apply for an exemption.  For 2023 the poverty line is $13,590.
   
   There is also a fee of $10 every time you need to adjust your payment due to income fluctuations.

C. The Ugly of Installment Agreements

1. You are paying the entire tax.  While not really an “Ugly”, with so many people thinking we can call the IRS and arrange to have their taxes forgiven, this is a legit beef I have heard from many taxpayers.  Sorry people.  You have to pay your taxes.
   
   Unfortunately, the IRS is in the business of collecting taxes.  They do and will continue to forgive taxes under certain circumstances, but as a general rule they want their money.
   
2. Another “Ugly” is the amount of documentation you need to come up with if you owe more than $50,000.
   
   Above $50k, the IRS wants proof of how much you can pay.  They already know about all your, your business and your family accounts (kids).  They won’t let you park money in your kids accounts in an attempt to reduce your payment amount.  Be truthful and you’ll have no problems.
   
   If your debt is particularly large, the IRS can also request you update your 433-A and 433-B every year in an attempt to increase your monthly payment amount.  Big Brother is definitely watching in this case.

VI. What Do I Do If I Need to Make a Change?

A. Your Income Level Changed.  Now What?

If your income went down, making it difficult to make your monthly payment, don’t ignore this.  Call the IRS and they will modify your payment amount.

If your income goes up, make a bigger payment.  You’ll pay your debt off faster and incur less in penalty and interest charges.  I don’t advise you to reach out to the IRS to calculate a larger payment since this locks you in to the new amount.

B. What if you owe over $50k?

Any modification made to accounts owing more than $50k will have to include current documentation to prove your claims.

You will also need to explain why your income has dropped so much that you need to modify your agreement.

C. What if I Default?

You still owe the tax.  Interest and penalty will continue to accrue, increasing your liability.

It ain’t going away.  And now the IRS will start harsher collection activity, including forced asset sales, liens, levies and garnishment orders sent to your employer or clients.

Don’t default.  If you can’t pay, call the IRS.  You may qualify for Currently Not Collectible status.

VII. How to Prepare a Successful Installment Agreement Request

1. Be honest: The financial information you submit must be accurate, timely and current.  The goal is to NOT have to answer additional questions.  Give them exactly what they ask for.  Nothing more, nothing less.
2. Make your payments ON TIME: If you stink at this, set up a Bill Pay transaction on your bank website.  You can’t miss a payment.  Only bad things will happen.
3. If there are any changes, reach out to the IRS.  Like most things in life, the better you communicate with them, the easier time you will have.
4. Go online to irs.gov every month to check your account.  Make sure payments have been applied properly.  You especially need to do this if you have set up a Bill Pay item on your bank website.  Sometimes these types of payments don’t get properly applied to your account.

VIII. Mini Case Studies – Getting Approved for an Installment Agreement

1. Full Pay Option

Obviously not an Installment Agreement option, but it needs to be noted.  If you have the ability to full pay, do so.  If the IRS sees you have the funds and paying would not be a hardship, they will insist on full pay.  There is no approval process.

2. Short Term Payment Plan – 180 days or less

Michael is self-employed and owes $90,000 in taxes.  He could set up a Short-Term Payment Plan if he can pay his debt in full within 180 days.  He must demonstrate he has the ability and cash flow to make large monthly payments for those 6 months.

There is no setup fee and you can make this agreement over the phone, in person or via the US Mail.

3. Long Term Payment Plan – up to 72 months

Honey is a small business owner who owes $50,000 in taxes.  She qualifies for the Fresh Start initiative and needs only submit form 9465 (mail, online or in person).

She has two payment options.  If she allows the IRS to auto debit her bank each month, her setup fee is $31.  Monthly payment via check would have a $130 application fee.

If she owes more than $50k she must also prepare forms 433-A (her personal financial statement) and 433-B (her business financial statement).

She must give the IRS all banking and investment info.  They will analyze her cash flow and come up with a monthly payment amount they feel is fair.  You can negotiate this amount down if it’s more than you can handle.

Don’t think that giving the IRS incomplete info (like missing bank or retirement accounts) will help you.  They already have a list of all accounts under your, or any of your household family members social security numbers.  It’s tough to hide money from the IRS.

X. Conclusion

An IRS Installment Agreement is the most used tool to assist taxpayers out of their tax problems.  We’d all love to have the IRS accept our Offer in Compromise for 5% of the total, but the majority of tax issues are resolved with an Installment Agreement.

Applying for an Installment Agreement is as easy as filing in the application form online at the IRS website.  There is an application fee ($31 for auto debit at this writing) with a low-income exemption.  Once accepted, you have up to 72 months to pay off your taxes.

Once you are on an Installment Agreement, you must remain in compliance with your taxes.  File on time, have sufficient withholding or estimate payments made, and don’t miss a payment.

If you default on your Installment Agreement your bill becomes due immediately.  Don’t default and the IRS won’t resort to nastier collection techniques.

Generally, most taxpayers can handle applying for an Installment Agreement on their own.  If you owe more than $50k or owe for multiple years, I would advise reaching out to a tax specialist.

If you have income tax returns that need to be filed, you must file them before the IRS will allow you to set up an Installment Agreement.

That’s it for now.  Thanks, and let me know if you have any questions.  Until later, stay cool.