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:
- 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.
- 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.
- 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
- 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.
- 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.
- 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
- 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.
- 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.
- 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
- 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. - 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
- 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.
- 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.
- 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.
- 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.