6 Things You Should Know About IRS Installment Agreements
Often taxpayers who owe back taxes to the IRS cannot afford to pay their debt all at once. That’s where an IRS Installment Agreement (IA) may help. IAs allow a taxpayer to pay off his/her full liability to the IRS via monthly payments. In 2018, the IRS approved almost 3 million IAs, of which over 400,000 were entered into online. While they may be a good option in some cases, taxpayers should be aware of certain issues that may affect whether to enter into an installment agreement and what kind of IA is appropriate.
Type of IAs. There are various types of installment agreements. including guaranteed, streamlined, partial pay, in-business trust fund, and routine IAs. Each one has its own requirements. For instance, with guaranteed and streamlined IAs, taxpayers do not have to provide a financial statement to qualify. Financial statements are required for partial pay IAs and may be needed for routine IAs. Some types of IAs are also limited to those who owe less than a certain amount of money, can pay within a specific period of time, or will pay with a direct debit agreement. Taxpayers should take care in choosing which one is best for their circumstances.
Partial Payment. Generally, taxpayers with any of the IAs above must pay their tax debt in full. The exception is the partial pay installment agreement (PPIA). These are available for taxpayers who cannot afford to pay their debt in full but do have the resources to pay a portion of them. To qualify, taxpayers must meet certain requirements as well as provide a financial statement and supporting documentation. Unlike a regular IA, a PPIA is subject to IRS review every two years. As a result of this review, the amount of the installment payments could increase, or the agreement could be terminated if the taxpayer’s financial condition improves. In addition, the IRS has the option to file a federal tax lien to protect its interest.
Interest and penalties. Even with an approved IA, interest and penalties will continue to accrue on unpaid tax balances. As a result, installment agreements are often best for taxpayers who have adequate income, but who cannot obtain a loan to pay the bill at once. If you can get a loan, consider whether it may be less expensive to pay the loan interest as opposed to the IRS interest and penalties.
Applying for an IA. Taxpayers can apply for certain types of IAs via the IRS website. Guaranteed and streamlined IAs can be made using the IRS online payment agreement application or by calling the IRS directly. In-Business Trust Fund Express IAs can be applied for either online or by mail. Routine IAs can be requested by mail but not online. Note that setup fees may be higher if taxpayers apply for a payment plan by phone, mail, or in-person rather than online.
Method of payment. Payments on an accepted installment agreement are made monthly. They can be made via payroll deductions, checks, money orders, or credit card. A filing fee is imposed unless the debt can be paid off in full within 120 days.
Termination of IAs. The IRS can revoke an installment agreement for the following reasons:
Payment is missed;
Tax return is not filed;
Current taxes due are not paid;
Erroneous information is provided in the financial statement (where required); or
Your financial position changes (for partial pay installment agreements).
Note that if you default and your installment agreement is subsequently terminated, the IRS may take collection enforcement action against you.
Taxpayers who owe money to the IRS should speak to a qualified attorney who can evaluate their financial information and negotiate a payment plan that the taxpayer can afford, and the IRS will accept. Contact us to discuss the feasibility of an Installment Agreement for your tax matter.