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:
- Paying your debt to the IRS
- 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.
- 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.
- 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.