Author: Dodger

Communicating with the Internal Revenue Service (IRS) is not for the faint of heart.  They don’t negotiate in the sense you normally think of negotiating and dealing with them can be daunting, especially as penalties and interest accrue.  This keeps adding stress to an already difficult situation.

However, for individuals and businesses grappling with tax debt and penalties, the IRS Fresh Start program offers a way out. This quiver of 4 different IRS programs is a pathway toward resolving IRS tax issues of all kinds, with one specific to relieving you from the burden of penalties, providing a REAL solution for those looking for a fresh start (pun intended).

Explaining the IRS Fresh Start Program

The IRS Fresh Start program is an initiative designed to help taxpayers settle their tax liabilities as simply as possible.  To qualify for the Fresh Start program, the taxpayers tax liability must be below the magic threshold of $50,000, although there are ways to get under that magic number.

The Fresh Start program has tools to do the following:

• If your goal is to reduce your tax liability, then you would apply for an Offer in Compromise.  Applications received are accepted at about a 1 in 3 rate.  This one is tough to qualify for if you own your own home and have equity.  Otherwise it could be a good option for you.
  
• Pay your tax debt over time.  You can pay your debt off over a max of 72 months.  There are also ways, under certain circumstances, to pay less using a partial pay installment agreement.
  
• You can apply for Currently Not Collectible status.  This would stop IRS collection activity for usually a 12 month period.  The IRS has leeway to give as little as 6 months, and I have personally helped a client receive 36 months.  Use your time wisely to get your financial life in order.
  
• This one.  In this article we’ll talk about applying for penalty (and the associated interest) abatement.  When you apply for abatement (removal) of penalties, you also get the added benefit of the interest charged on that penalty will also be removed.   It’s a double savings.

How To Qualify for Relief

To qualify for the IRS Fresh Start program, certain criteria must be met. Individuals and businesses who owe $50,000 or less in taxes can apply for relief through streamlined installment agreements. Those who owe more than $50,000 may still qualify but will need to provide more detailed financial information to the IRS for their review.

Eligibility for penalty relief primarily focuses on:

• Financial Status:  You need to demonstrate your financial hardship and show that paying any of your tax down would cause an undue hardship.  A significant financial burden.
  
• All Tax Returns Filed:  They IRS won’t really talk with you about past tax debts if you haven’t filed all tax returns.  This is generally my first line of inquiry.
  
• Commitment to Resolution:  You have to show the IRS that you want to resolve your tax issues.  I know.  Who would want to walk around with this stress every day.  I’ve had past clients walk in without having filed a tax return in 20 years.  If they don’t have a commitment to filing their returns, it’s going to be hard to convince them you will commit to resolving the problem.  But they are convinced of this by others daily.

What Do I Do to Remove Penalties Using the IRS Fresh Start Program

• 1: Assess Your Tax Situation

We need to collect all tax agency notices because if we don’t know what we’re dealing with, we can’t determine the appropriate tack. We also need to make sure all required tax returns have been file, or the IRS won’t even talk to us about your delinquent tax situation.

• 2: Determine Eligibility

There are several ways to get some or all of your penalties abated.

Reasonable Cause – This reason would be on a case by case basis.  Your records burned up in a fire would be reasonable cause.  I forgot because the new Star Wars movie came out, isn’t.

FTA – This stands for First Time Abatement.  Basically, if you have filed your taxes and paid at the time of filing for the prior three years, you can qualify for abatement

Statutory Exceptions – Statutory exceptions are exceptions but in place as law. Examples are things like you lived in a federal disaster. or you were involved in a military operation would be statutory exceptions.  Statutory exceptions are dictated by the type of penalty.  We would list your penalties in a spreadsheet and put each exception allowed for the penalty.  This makes it easier to find the best combinations to yield the greatest savings.

• 3: Apply for Relief

We would write a letter (or file for 843) explaining which penalty or penalties you are requesting abatebent on.  You would be painting a picture explaining in detail why you deserve an abatement.

You may need to supply the IRS with substantiating third-party documentation.  An example would be getting a receipt from the post office showing you mailed your return on time.  We always advise clients to send taxing agency correspondence registered with return receipt for times like these.

Now It’s Time to Negotiate a Payment Plan

Once the IRS accepts your explanation and abates some (or all) of your penalty, and the associated interest, it’s time to set up an Installment Agreement or apply for an Offer in Compromise.  This is that “commitment” part we talked about earlier.  If you are unable to resolve your tax liability with an Installment Agreement, or able to apply for an Offer in Compromise we should have started out getting you on Currently Not Collectible status.

You Must Remain in Compliance

Once the IRS has accepted your offer, be it an installment plan, offer in compromise or change in status, you must remain in compliance.This means file returns and pay your current taxes on time.  If you are self employed and pay estimates, make sure to pay them on time.

Falling out of compliance could result in the IRS reversing everything and your tax debt becoming due an payable immediately.  Don’t risk it.

Why the Fresh Start Program Rocks!

The IRS Fresh Start program offers three main benefits:

• Penalty Reduction – Under the program, penalties might be reduced or waived, lightening the overall tax burden.
• 72 month Installment Agreement – Tailored payment plans make it easier to settle tax debt without severe financial strain.
• A Pause in Time – If your financial life is in trouble and paying your taxes would cause serious financial hardship, the Fresh Start program has what’s called Currently Not Collectible status.  If approved, you will get between 6-12 months of collectio free time to get your financial life in order.

Conclusion:  Fresh Start Penalty Abatement

The penalty abatement portion of the IRS Fresh Start program is the first step in your tax resolution.  Tax penalties (and the associated interest.  Don’t forget, interest is charged on your balance.  Penalties and interest increase the balance.  Abate a penalty and the interest that has been charged on that penalty also goes away) quickly increase your balance to the point of out of control.

Reducing the balance goes a long way in resolving your problem, whether by setting up an Installment Agreement or applying for an Offer in Compromise.

By following the steps detailed by the program, taxpayers, both individual and business, can request their penalties removed, tax debt balance reduced, and set a tack toward a financially secure future.

I also suggest you seek professional help from a tax resolution expert.  They will help you navigate the process with as little pain as possible. Ultimately, this initiative allows taxpayers to face their tax issues, get control of their financial situations, and end up in a place with no tax debt.

It’s all possible.  That’s it for tonight.  Stay cool people.

JKC

Dealing with a large tax debt is a terrible thing.  You lose sleep.  You struggle to find motivation.  As cheesy as it sounds, food even loses its flavor (hmmm  bad pun  sorry).  Enter the IRS Fresh Start programs Currently Not Collectible status.

Nothing about dealing with IRS complexities is fun.  Nor easy.  But what do you do if you absolutely cannot pay anything?  This is a legit question.  You didn’t pay these taxes for a reason.  If you had the money, and no real reason to save it on something else, you no doubt would have paid your debt. The answer is to somehow stop the IRS collection process.

Sometimes you find yourself in a situation where you are unable to pay your tax debt due to financial hardship and the IRS offers a lifeline in the form of the Fresh Start Program. One of the best tools in the quiver of this program is the Currently Not Collectible (CNC) status, which can provide temporary relief from aggressive IRS collection actions. In this article, we will explore what the IRS Fresh Start Program is and how the Currently Not Collectible status can help you regain your financial footing.

First:  The IRS Fresh Start Program

The IRS Fresh Start Program is a quiver of tools designed to help taxpayers negotiate their tax debts and once again become compliant with the tax laws. In 2011, when the IRS created the Fresh Start program, they aimed for a program that was able to assist individuals and businesses dealing with tax problems. Its goal is to provide relief to those who genuinely can’t meet their tax obligations due to financial hardship. One of the best tools is Currently Not Collectible status.

The Fresh Start Currently Not Collectible (CNC) Status

The Currently Not Collectible (CNC) status is one of the best tools of the IRS Fresh Start Program. When the IRS assigns a taxpayer Currently Not Collectible status, it means that the IRS acknowledges the taxpayers financial situation as being so bad that they are temporarily unable to pay their tax debt.

Under CNC status, the IRS will cease all active collection efforts, such as levies and garnishments, and will not require immediate payment.  The default period is 12 months, but I’ve been given as little as 6 and as many as 24.

Some Benefits of CNC Status

• Collection Activity STOPS: The most significant benefit of CNC status is that the taxpayer receives immediate relief from IRS collection activity. What this means is that the IRS will stop wage garnishments, bank levies, or type of property seizures while you are under CNC status.  The most significant benefit because they will leave you alone!

• Time: Time to get your financial world in order.  I recommend maintaining a sense of urgency.  12 months goes by fast and you shouldn’t waste this time.  While in CNC status, you get a breather from collection activity, but you still owe the money.  Plus interest and penalty.

• No Levies or Liens: Once granted CNC status, this protects your assets from being seized by the IRS. If you or a family member are having medical problems, you don’t want to worry about the IRS swooping in and grabbing the money from you bank accounts.  CNC stops all levies, liens and garnishments.

• Time.  Again?: This is a little secret that’s not a secret.  As you may or may not know, the IRS has 10 years from the time of assessing the tax to collect.  Certain activities, such as negotiating an Offer in Compromise or bankruptcy,  “tolls” (stops) the 10 year clock from running.  I’ve had clients legitimately receive 36 months of CNC status.  That’s 30% of the statute period!

How To Qualify for CNC Status

To stop the IRS collection process, you need to demonstrate to the IRS that your financial situation is genuine and paying your tax bill would create a serious financial burden. Generally, the IRS will consider items such as income, expenses, assets, and liabilities when determining your eligibility for CNC status. It’s important to provide the IRS a clear picture of your paid through third party documentation.

If you’re self-employed, you should prepare financial statements and show hwo bad business has been.  If you lost a big client or a primary supplier went out of business, you can show how this had a detrimental effect on business through documenting the issue(s).  An there’s an embezzlement or some kind of disaster or casualty, document this to show how it has affected you.

Don’t try and hide anything.  I had a client move money to kids accounts, even after I told him not to.  The IRS knows who your kids are (you claim them on your tax return) and will ask for ALL bank statements, not just yours.  Don’t lie. If you do they’ll know.

Working with a Tax Professional

No question about it.  Yes.

Most tax resolution specialists know the IRS code, but more importantly, they also know the IRS Procedures Manual (IRM).  Specifically chapter 5.  Chapter 5 deals with how the IRS goes about collecting tax, and what they are allowed to do. At times I’ve dealt with Revenue Officers who know the IRM better than the tax code, so it’s important to call them out if they try do enforce something from the IRM that isn’t in the IRS Tax Code. If they don’t all this, go elsewhere.

This isn’t a swipe at anyone’s intelligence.  It is a challenge to understand what you don’t know.  It’s the wrong place to try and save money.

How I Have Used CNC Status

Now that we understand what CNC status is and how to get it, let’s look at how we can use it.

• For the primary purpose intended.  It was created to stop the IRS collection process. To take the time given and facilitate a plan to improve your finances.  At which time you would be able to set up an installment plan to repay the debt.

• Take the time and formulate a complex plan for an Offer in Compromise.  Except for the worst cases, most taxpayers don’t come close to qualifying.  We can make adjustments to your finances which may get you qualified.  The self-employed use this benefit the most.
  
• To eat up some statute.  In a lot of cases, the taxpayer has already gotten through several years of the statute.

A Mini Example:

• Hannah is experiencing some medical issues which is preventing her from working like she used to.  She qualified for CNC status and was granted 12 months.  Time left to collect is now reduced by a year. She stopped the IRS collection process.

• Her medical issues, although improving, still require a lot of rest. We ask for more time and are given another 12 months.
  
• Her health improves to he point she is able to go back to work full time.  We work with the IRS to set up an installment plan.
  
• We will set up a partial pay installment agreement on her behalf.  Since the larger amounts were so far back, she will get out of paying much of those balances.
  
• For purposes of this article I haven’t calculated the amount saved, but it would be at least 50%.

Fresh Start CNC Status Conclusion

The IRS Fresh Start Program’s Currently Not Collectible status can save you.  I think this can be the most important tool a tax resolution specialist can utilize.  You can stop the IRS collection process.

The IRS gives you an opportunity to get your finances back in order, once granted CNC status.  Take a few days to decompress, but get back to work devising a plan to get you out of this mess.

If business is bad, find out why or close your doors and get a job.

If there are medical issues, you can only do the best you can.  Medical problems have their own agenda, but what you can do is diligently maintain a file with information showing what you’re going through.  What the Dr’s recommend, or what their prognosis is.

CNC status gives you a gift of time.  Don’t waste it.  If things don’t turn around, maintain a record of what you’ve done and the results.  This will make it a lot easier if we have to go back to the IRS Revenue Officer and ask for another 12 months.

So there you have it.  Let me know if you have any questions.  I’ll do my best to get back to you.

Stay cool.

JKC

Tax debt sucks.  This is an irrefutable truth.  If you have a lot of tax debt, this program may be your savior!

If you have the ability to pay your tax debt back over time, then the 72 month installment agreement will be exactly what you need.  How do you qualify?  How do you apply?  Is this the best option available?

We’d all love that “Pennies on the Dollar” settlement, but most won’t qualify.  (take a look at this article to see if you do) And no one wants to pay more than they have to.

Let’s take a look at the IRS Fresh Start 72 Month Installment Agreement and how it can help you. As always, I explain to myself like I’m a 7-Year-Old.

Why does the 72 Month Installment Agreement exist?

The IRS Fresh Start 72 Month Installment Agreement is a repayment plan that allows you to repay your tax debt over an extended period.  Another benefit is interest and penalty will NOT continue to accrue to your account (add to your balance)

The duration (6 years as opposed to a more typical 5 year plan) has been extended 12 months in an attempt to assist small business owners and other taxpayers with their cash flow.

By extending the term by 12 months, your payments are reduced.  Because of the Fresh Start program, your payment would be $833, instead of $1,000 under a 60 month plan.

Your interest and penalty charges will also be less. This is a nice gift.

With these savings, you can put the money back into marketing and make more money.

Ok.  Sounds Good.  How Do I Qualify?

You can’t owe more than $50,000 in federal tax debt.  This is the biggie.  If you are close (for argument, you owe $55k), borrow the money to pay your balance down to the $50k limit.

You must be sure you have filed all required tax returns and if you’re a business with employees, this includes all payroll tax returns.  This needs to be done before you can apply with the IRS.

What Taxes are Eligible?

In my career I haven’t found any tax assessed by the IRS that doesn’t qualify.  For this reason, we’ll assume this includes Income Tax, Payroll Taxes, Self-Employment Taxes and Excise Taxes.

What’s The Big Deal About the Fresh Start 72 Month Installment Agreement?

• The biggie is the extended payback period of 72 months.  By taking advantage of the additional 12 months, you will be reducing your monthly payment.
• This in turn helps alleviate your financial hardship, if only a little.  At this point you should do as many “small things” as possible.  They add up.
• By enrolling you also avoid harsher collection activity.  The IRS can farm out collections to private firms who only collect money.  Those collections horror stories aren’t all urban legends.

How Do I Apply?

• Fill out and submit form 9465 – Installment Agreement Request.  This is the first step.
• If the IRS needs more info, they will request form 433-A.
• Self-Employed taxpayers will need to prepare form 433-B.
• In some cases (like a partial pay installment agreement) the IRS may ask for further documentation.  They will ask for form 433-D.

What would cause a rejection or default?

• The IRS may not agree with your ability to pay a certain amount, so they will ask for additional information.
• You must agree to ongoing tax compliance, so don’t miss filling your returns.  Pay your taxes when required.  Make estimated tax payments if required.  Non-compliance will default you

What’s The Approval Process Like?

For the most part, approval is automatic.  If the IRS feels you may have trouble with your payment, the max would be $694.44, they will request additional information so that they can further evaluate your case.

Can The 72 Month Installment Agreement automatically Take the Money from My Account?

You have the choice to send them a check, or have them auto deduct from your account.  By selecting auto deduct you also receive a reduced application fee.

Should You Seek Professional Help?

I’m a fan of DIY projects.  Generally, though, when someone has a tax problem, I advise them to let a pro handle it.

I think you can handle this option without professional help. If you owe the IRS $25-35,000 or more and have an income that can support an almost $700 payment, you can do the 72 month installment agreement online.  I think the online fee with debit payments is $35.

The IRS may start asking for additional documents, or has questions about your application that you’re not sure how to answer. So at that point you should consider calling a pro.

A Quick and Easy 72 Month Installment Agreement Case Study

Let’s go through a case.  A new client walked through the door today.

Her name is Dianna Banana.  She’s self-employed selling carbonated Lemon Drops at farmer’s markets up and down the west coast. Because of her travels, she’s also late filing her tax returns.

Dianna owes payroll taxes, self-employment taxes and income taxes.  Her total owed is $35,000.  She has not filled her 2022 or 2023 returns so that’s first.

Backwork done

We prepare the 2022 return and her total due is $6,000 ( additionally including late filing penalty).

We prepare the 2023 return and her total due is $7,500 (also including late filing penalty).

Her total due is now $48,500.  After discussing options with Dianna we find her finances are doing well (she kicked her loser boyfriend out) and business is doing great.

She doesn’t have the full amount to pay, but could afford about $1,000 per month.  We recommend the IRS Fresh Start 72 Month Installment Agreement as a solution.

Let’s File The Forms

We prepare and file form 9465 for her and wait for the IRS response.  When filing a 9465 you must be prepared to make your first payment within a month.  It usually takes about 60 days to process and review an application.

After 30 days (and Dianna making her first payment) the IRS comes back asking for more info regarding her business.  So we will prepare form 433-B and financial statements in response to their request.

After receiving the additional documents (including bank statements, credit card statements and any other financial information needed to corroborate her income), the IRS will again take up to 60 days to review her info.  This step very rarely takes 60 days.  I’ve heard back within a week.

2 weeks later the IRS approves the installment agreement.  Dianna has elected to have the IRS auto debit the monthly payment from her bank account.

Dianna is happy and brings me a 6 pack of her Lemon Drops.  After 2 of her awesome Lemon Drops, I’m happy.

Conclusion

The IRS Fresh Start 72 Month Installment Agreement is my favorite option.

People get so caught up in the advertising for “pennies on the dollar” results from those tax resolution firms.  They’re pushing Offers in Compromise if that wasn’t clear.

The reality is very few people are accepted.  About 30% of those that apply are accepted.  Sounds like a big number, right?  It’s not.  That’s of the people who have APPLIED.  I’ve done 2 in 30 years.  To an ethical tax resolution expert, very few would qualify, so there’s no point in applying.  Stealing money from folks with little to spare is just bad juju.

The Fresh Start 72-month Installment Agreement is easy to apply for and they give you an extra year to pay your debt back so you can avoid the crazy aggressive collection activity.

It’s Not Absolutely Automatic

There are qualifications to meet, the most important is the tax debt must be less than $50,000.  If your debt is close but over, find a way to get it below the $50k threshold.

Another requirement is the filing of all returns.  This includes all payroll and excise tax returns if usually done in the course of running a business.

If you qualify this is the best option for you.  I know this disappoints a lot of you hoping to get out of paying anything if possible, but it’s the reality.

Think of it this way.  If you qualify for an Offer in Compromise, you are very close to destitute.  This is why the IRS Fresh Start 72 Month Installment Agreement is the best solution. You must make sure the money will be available.  We always hope for money to be available.

That’s it for today.  If you have questions let me know in the comment.  I’m back after having to take a few months off, but will be posting weekly again.

Stay cool and we’ll talk soon.

JKC

Believe it or not, if you owe the IRS less than $50,000, they consider this a “Small Tax Debt”.

I know.  That’s freaking crazy!  I don’t know about you, but $50k is a lot of money. This is where the IRS Fresh Start program, and specifically their Offer In Compromise option come into play.

When faced with any tax debt, most individuals and businesses become overwhelmed (who wouldn’t?) and find themselves in financial dire straits (They Rock).

Back to the IRS Fresh Start Offer in Compromise.  Uncle Sam understands (the IRS) that not everyone can pay their taxes on time and in full.  This is why they created the Fresh Start programs, with the Offer in Compromise (OIC) available for those with serious financial issues.

The IRS Fresh Start OIC aims to provide an easier (relative to tax debts over $50k) methodology for resolving tax debts, giving taxpayers an opportunity to regain their financial footing.

Explaining the IRS Fresh Start Offer in Compromise

Defined

The Offer in Compromise is a program option that allows taxpayers to settle their tax debt for less than the amount due.  The amount to be paid is a statutory calculation (i.e., not something that is truly “negotiated”)

Do I Qualify?

To qualify you must first owe less than $50,000.  This will allow you to apply using the Fresh Start initiative.  You must also be able to demonstrate financial distress that currently does not allow you to pay towards your taxes.  The duration of this distress also has no foreseeable end point.

What Kind of Taxes Qualifies?

Most taxes charged by the IRS are eligible.  This includes Income Taxes, Payroll Taxes and Self-Employment Taxes.

 Why Apply for an OIC?

Obviously, the biggest benefit of an Offer in Compromise is the reduced tax debt.  The next biggest benefit has to be resolving the tax issue.  This is the kind of thing that can keep you up a lot of nights.  Putting a plan into motion will do a lot for your emotional well being.

What Else?

An Offer in Compromise has three options.  Doubt as to Collectibility, Doubt as to Liability and Effective Tax Management.  For purposes of this paper, we will focus on Doubt as to Collectibility.

What is The IRS Fresh Start Tax Relief Program?

Introduction

The IRS Fresh Start Tax Relief Program is designed to help individuals and businesses who are struggling with tax debt. The Fresh Start program has different options available to you depending on your current tax situation.

The beauty of the Fresh Start program is the simplicity of applying and collecting supporting documentation.  If you owe more than $50k the application process asks for a lot more information.

These are the four payment options available:

• IRS Fresh Start Installment Agreement – This option allows you to pay back all or most of your tax debt over time.  The maximum term is 72 months.
• IRS Fresh Start Offer in Compromise – An Offer in Compromise is the one those Tax Debt companies advertise.  Pay Pennies on the Dollar!!  Yeah.  Maybe.
• Currently Not Collectible (CNC) – While technically not a payback option, if your financial hardship is truly overwhelming, you can ask the IRS to leave you alone.  This status lasts between 6-12 months.  This is a great tools for a tax pro’s quiver.
• Penalty Abatement –  Also not a payback option but a way to reduce penalty and interest charges.

How Can You Qualify for an IRS Fresh Start?

This parts easy.  There are very specific criteria that must be met.  Qualifications are:

• Your tax debt must be LESS than $50k.  If it’s over $50k you can pay it down so it’s less than $50k.  I know.  Easier said than done.
• You must be current with all tax filings. All required tax returns must be filed.  This includes any payroll or excise tax returns.
• If you’re self employed, you must make all required estimated tax payments.  If you are a W2 employee, your withholding must be sufficient.
• You agree to pay your tax debt within the next six years in monthly installments, or within the determined period of your OIC.

There are a few other items:

• If you’re self employed and had an income drop of at least 25%
• You file Single and have income of less than $100,000
• You file married and have income of less than $200,000

Why You Should Strive for the IRS Fresh Start Program

The simplicity.

Look.  This whole process sucks.  You owe the government a lot of money that you don’t have.  You’re feeling overwhelmed and lost.  Asking for help is hard enough, but when you see everything the IRS needs, your head will explode.

That’s where the Fresh Start program comes into play.  The Fresh Start program was design with small tax debts in mind.  The Fresh Start process is a lot less invasive and has a lot of ways to help.  As long as you owe less than $50k.

Applying for an IRS Offer in Compromise

I’m not going to go into the step by step.  I will go over the process and point out items of importance

• Get your documents ready.  For your situation it would be all bank statements, credit card statements, paystubs, leases, notes…anything to prove your situation.
• PrepareIRS form 656.  Self employed individuals will need to fill out forms 433A and 433B.
• You will be asked to verify your monthly income and expenses.  The IRS has limits to the amount you can claim.  These National Standards limits aren’t set in stone, so if you have an expense higher than the standards allow, you may argue the necessity on your application.
• After verifying your income and allowable expenses, what’s left over (your discretionary funds) is used to calculate your offer.
• If you are self employed, there are things you may be able to do to reduce this amount.  Business expenses aren’t limited as much as your personal expenses.
• Add the value of any non business assets to this number.  This last part is why most folks won’t qualify for an OIC.  For example, if you have $50k of equity in your house you won’t qualify.
• For this example, your available discretionary are $500 and your net asset value is $2,500.

Now we decide the method of calculation.

There are 2 methods.  12 month calc, 5 month payback and 24 month calc, 24 month payback..

12 Month Calculation – If you select this option, you must be able to pay the debt off within 5 months of acceptance.

Using the above amounts, your offer would be $8,500 (($500×12)+$2,500).  You would send 20% with the initial application (plus an application fee which amount seems to change daily.  Expect around $200), and upon acceptance you would have 5 months to pay the remaining $6,800.

24 Month Calculation – If you select this option, you must be able to pay the debt off within 24 months of acceptance.

If you need 24 months to pay your debt off, your offer will be $14,500.  The IRS wants your application fee and the first monthly payment (in this case $614.17) with the application (no need to send the 20%).  Once accepted you wold have 24 months to pay the remaining $12,885.83 balance.

Basically, the OIC process involves completing a Collection Information Statement, paying an application fee, and providing at least the initial payment.

The IRS will then review your OIC application.  This usually takes 5-6 months before they get back to you.  I also advis clients to keep collecting your documents proving hardship.  There is a very real possibility the IRS wants to make sure you’re still having financial hardship.

What To Do If You’re Rejected?

You will have 30 days to request an appeal.  The IRS will also provide you with a letter of points they disagree.  This is your map to appeal.  You must address each point individually and collectively.

This is why you should continue collecting your hardship info.  Right around 30% of applications are accepted so it’s just basic math that you will also be rejected.

Prior to submitting the application I go over the weak points with the client.  These are the areas we expect the IRS to take issue with, but we’ve prepared and have an answer waiting for them.

How To Document Financial Hardship

This is the heart of your argument.  As mentioned earlier in the post, your hardship can look like many things.

Bank statements or paystubs show reduced income.  Past due notices and statements show probable negative cash flow.  Rejection letters from lenders show an inability to borrow.

If health is an issue, letters from your doctor and bills showing treatments must be saved.

You aren’t making the same amount of income.  Why?  What happened?  A law change can affect your business.  A natural disaster can happen.  Your biggest client can evaporate.

There are a lot of reasons you finances took a hit.  Dig deep and find out what really happened.

Make Sure You Have Filed all Required Tax Returns.

This is the number 1 reason for delays.  In my experience, its usually a payroll tax return that slows you down.  They won’t review your application if they see a return hasn’t been filed.

Should you Hire a Professional?

I’m a big DIY guy.  This is not a place to be a DIY guy.  Sure, you can get lucky and get an approval, but your chances go way down if you do it yourself, plus I’m confident you will be paying more than you should.

Conclusion

The biggest takeaway is that the Fresh Start program, and specifically the Offer in Compromise are valuable tools for any taxpayer who is struggling with their finances and specifically their tax debt.

While an OIC is a first step towards regaining your financial footing, it’s important to understand the circumstances in which an OIC is the best course of action.

To be able to walk away from the majority of your tax debt, your situation must be really, historically bad (from your perspective.)

For a successful OIC application, your situation must be:

• You must be in the midst of a period of financial distress.
• You must owe LESS THAN $50,000, or can pay your debt down to less than $50k.
• Your personal asset value must be low.  If you have equity in your house you may not be able to qualify.
• If you do have equity, but are unable to get a loan the lending institution is required to give you a letter outlining the rejection.  If you apply for 2-3 loans and are rejected, save the letters for your application.  The IRS takes into consideration your inability to procur funding elsewhere.
• If you choose the 12 month calculation method, you must be ready to pay the debt off within 5 months of approval.
• If you choose the 24 month calculation method, you must be able to pay the debt off within 24 months.

If it looks like you won’t qualify, there are other options available.  And using several options in concert with each other many times will render a good result.

If you have questions, post a comment and I’ll get back to you as soon as I can.

Until then, stay cool.

JKC

The IRS Fresh Start program is a great way to deal with your tax problems.

The IRS Fresh Start program was created because it has become “normal” for people all over the United States finding themselves overwhelmed with the burden of big tax debts.

The Fresh Start Program was created to provide relief to individuals and small business owners facing tax debts of less than $50,000.

If you’re facing a gigantic pile of unpaid taxes, the Fresh Start program will have an option available to lighten your financial load.

Introduction

The IRS Fresh Start Program exists to help struggling taxpayers get out in front of their tax obligations.

The IRS Fresh Start program has 4 available “options” that can assist with resolving a myriad of typical tax problems.  The program’s objective is to simplify payment plans, reduce or eliminate penalties (and the interest related to the penalty), and even settle tax debts for less than the full amount owed.

How Do I Qualify for the IRS Fresh Start Program?

To qualify for the Fresh Start Program you need to meet one of these initial requirements:

• You’re self-employed and had a drop in income of at least 25%
• You’re single and have an income of less than $100,000
• You’re married and have an income of less than $200,000
• Your tax debt balance is less than $50,000

Individuals with tax debt below $50,000 and small business owners facing financial hardships are the primary beneficiaries

Meeting the above criteria is just the first step. You must be current with all tax return filings (income tax and payroll tax if a small business).

If you meet one of the above qualifications AND are current with your tax return filings, you then go on to the application process.

Depending on the option you are pursuing, you would now prepare the appropriate form and submit with all corroborating documentation.  We’ll talk a little about the application process in a bit.

All The Good Things About the IRS Fresh Start Program!

1. Installment Agreement: This is the most popular option.  This option allows you to make payments over a set period (up to 72 months). The Fresh Start program simplifies the process, allowing for more individuals and small businesses to take advantage of the simplified application process and manage their tax debts.
2. Offer in Compromise (OIC): This is the option almost everyone wants to use.  If you qualify, you could conceivably eliminate thousands in tax debt!
   
   Here’s the rub though.  Most of you won’t qualify.  This option is only available to those in the most financial distress.
   
   If you do qualify, this is the way to go.
   
3. Penalty Abatement (Relief): Penalties are statutory.  The IRS is required by law to charge you a penalty when you file or pay late. However, there are a few arrows in the quiver which allow for penalty abatement.

The Fresh Start program has a few ways to either reduce or completely eliminate penalties, and the associated interest.  Generally speaking, removing some of the penalty and interest will happen as long as you always apply for a First Time Abatement.

Application Process

Applying for the IRS Fresh Start Program involves specific steps:

1. Installment Agreement: Prepare Form 9465 to request a monthly payment agreement. Since your debt is less than $50,000 the streamlined process helps you set up a payment plan you can stay on.
2. Offer in Compromise: Prepare Form 656 to apply for an Offer in Compromise. Since you’re now asking the IRS to forgive some fo your tax debt, the documentation needed to apply is more in depth than that needed for the installment agreement.
   
   Your Offer in Compromise application will include your current income and expenses, plus a personal financial statement showing your current assets and liabilities.

The Good, Bad and Ugly of the IRS Fresh Start Program.

The Fresh Start Program is an invaluable tool you can use to resolve or reduce your tax problems, but there are a few things you need to keep in mind.

1. Credit Impact: Your credit will be negatively affected.  To what extent it is really up to you.  Make sure to address your tax problems BEFORE the IRS has to resort to liens and levies.
2. Compliance: You MUST stay current with your tax filings.  Even if you think you owe, file your returns.
   
   People don’t realize that filing and owing is a lot cheaper than filing late and owing.  File late and you can’t pay?  Add an additional 25% to your tax bill for late filing.  File on time and no 25% penalty, just late payment penalties (which you would have anyway since you couldn’t pay).
   
   I just saved you 25%.  I’ll send you a bill. :^)
   
3. Application Rejection: In my career I haven’t seen many IRS Fresh Start applications rejected.  Under the Fresh Start program, the only rejections would be because of inconsistent, missing or unverifiable info.
   
   I stress honesty in all my other articles, and honesty is paramount.  The IRS already has a lot of your information.  Don’t lie or withhold info. This will almost guarantee a rejection and renewed IRS collection activity.
   
4. Professional Advice: Although self-serving, I recommend you engage a professional.  Not a tax preparer, but a tax resolution specialist.  If you hire your tax preparer, make sure they are capable of handling your specific case.
   
   You can probably handle a straight Installment Agreement, but an Offer in Compromise, penalty abatement or requesting Currently Not Collectible status would probably be better served hiring someone to handle this who has done it before.
   
5. Tax Limit: $50,000. If you owe more than $50,000 you don’t qualify.
   
   Don’t let this stop you.  If you are able to borrow, or have some cash available, paying the tax debt down to under $50,000 is in many ways worth it.
   
   Maintaining the Fresh Start qualifications reduces the amount of paperwork, and simplifies the actual application process.  Once your tax debt rises above the $50,000 threshold, the documentation needed for approval at least doubles.

2023 Updates and Changes

The IRS constantly makes changes to their programs.  The biggest change they’ve made in the 2023 program is loosening the RCP (reasonable collection potential) calculation.

There was also some loosening of the Offer in Compromise limits.  I’ve seen cases where the IRS has forgiven up to 90% of back taxes.

Every year they make changes to improve the application process, while also allowing for a higher dollar value of collections.

Conclusion To the IRS Fresh Start program

The IRS Fresh Start Program is not a specific program to get you out of paying your taxes.  The Fresh Start program is a collection of options you can use and combine to assist with getting you out of tax Hell.

Choose between an Installment Agreement, Offer in Compromise, Penalty abatement and/or Currently not Collectible status to resolve your problems.

You can use one or more options depending on your situation.  As an example:

Anya owed $51,000 on her 2014 income tax return.  This tax was from the sale of some stock her dad gave her.  We will assume the tax return was properly prepared, but I always redo the returns of the tax years in question.  Amending an improperly prepared return is a lot easier than negotiating with an IRS agent.  So here’s what I’d do:

1. How much of the total debt is penalty?  Apply for a First Time Abatement to remove the first penalty assessed.  This will also reduce the interest charged on that specific penalty.
2. How much time is left on the IRS collection clock?  The IRS has 120 months to collect a tax debt from the assessment date.  The IRS has 36 months left to collect Anya’s tax debt.
3. What is Anya’s financial situation?  This is used to determine what tack is best for Anya under these specifics.  In this case, Anya has $100,000 of equity in her house.  This would eliminate the Offer in compromise option since her equity exceeds the tax debt.
4. Since there are 36 months remaining on the statute of limitations a quick calculation renders a $695 payment if calculated over 72 months (a normal Installment Agreement) and $1,389 if calculated over 36 months.
5. Anya could afford a $700 monthly payment.
6. I would negotiate a Partial Pay Installment Agreement for Anya.  The IRS only as 36 more months to collect and Anya can only afford $700 a month.
7. As long as Anya remains compliant with her tax filings and payments, when the term has expired, she will have paid $25,200 instead of $51,000.

There you have it.  The IRS Fresh Start program will be used in the majority of cases.  The biggest qualifier in my experience is the $50k tax limit.  With the ease in which the Fresh Start program allows taxpayers to resolve their outstanding tax issues, this is the easiest way to go.

Give it a try.  If it becomes overwhelming, you can always reach out to a tax resolution specialist.

So, there you go. I hope you can gleam some knowledge from my words. If not, shoot a comment my way and I’ll get back to you.

Thanks and stay cool!

JKC

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.