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Posted by Pat Raskob

IRS Installment Payment Plans

IRS Installment Payment Plans

The most common method used to pay off old IRS debt is the Monthly Payment Agreement or Installment Agreement. If you owe the IRS $50,000 or less, you can only get a 72-month installment plan if you ask for it. If you owe Uncle Sam more than $50,000, you must negotiate with them to obtain one and provide financial information. As part of the IRS Fresh Start program, it recently passed new rules that make getting an installment agreement easier. The eligibility threshold for an installment agreement with no obligation to provide financial information was increased from $25,000 to the present value of $50,000, and the payment term was increased from 60 months to 72 months.


You should be aware of this year's tax returns.

If the IRS computers show that you haven't filed any late tax returns, you won't be eligible for an Installment Agreement. Also, if you are self-employed, you need to know the estimated quarterly tax payments for the current year. Lastly, you must be in good standing with your tax returns and Form 941 to obtain an Installment Agreement if you have employees.

But don't think that a payment plan is the best option; there are obvious drawbacks. Most importantly, interest and penalties continue to accrue while you are still in debt. Combined with the penalties, the interest rate is usually between 8% and 10% per annum. You can pay for years, and you can pay more than when you started.


Example:

John and Jane owe the IRS $40,000 in taxes. They enter a monthly payment plan of $300 at a time when interest and penalties add up to 10% per year, adding another $4,000 to the balance. Twelve months of $300 payments are only $3,600, so they owe $40,400 at the end of the fiscal year ($40,000 minus $3,600 paid plus $4,000 in interest).

Also, if you have no money left after living expenses, you will not be able to negotiate a payment plan. The best option is to make an Offer in Compromise, request a suspension of collection activities, or file for Chapter 7 bankruptcy.

If you owe the IRS $50,000 or less, you can request the installment agreement online on the IRS website.


Negotiate a monthly payment

If you owe more than $50,000 or cannot pay the amount owed in six years or less, your Installment Agreement claim begins with an IRS collector reviewing your statement of billing information on Form 433-A. The collector uses the information from the form to determine how much you can pay. Payment charges are at the discretion of the IRS. If you're dealing with eight different collectors, you might end up with eight different Installment Agreements.

However, here are some strategies for negotiating an installment plan:

  • Create a payment plan you can live with: To do this, give the collector the completed Form 433-A.

  • Make the first payment when proposing the agreement and continue to pay monthly even if the IRS has not yet approved your Installment Agreement: Making voluntary payments demonstrates good faith and creates a good record for you. For example, if you pay $200 per month for three months before your Installment Agreement is authorized, the collector may be inclined to believe this is an appropriate amount.

  • Offer to pay at least your income minus necessary expenses: It is the money left over each month after paying for everyday use. However, it does not promise that you will pay more than you can afford just to be approved. Promising the taxman more than you can afford is a big mistake; once an IA is approved, the IRS makes it difficult to renegotiate it.


If the IRS gives you an installment plan, it may take several months to inform you in writing.

Make Monthly Payments

Until you receive written approval, please send your payments to your local service center using the proof of payment and the bar-coded envelopes provided. If you don't want the Internal Revenue Service to know where you are filing, use a payment order or cashier's check from another bank.

There are two other options for making payments once the Installment Agreement is approved:

  • Use direct debit: Ask your bank to automatically debit your checking account monthly and send payment to the IRS. As long as you keep your account open, it's the safest way to ensure you don't lose a payment and risk having your contract revoked.

  • Use the direct payroll deduction: Ask for a Form 2159 (Payroll Deduction Agreement) payroll deduction. Your employer must agree to send the payments to the IRS each month using IRS payment slips.


If the IRS rejects the proposed installment Agreement

If the IRS disagrees with your Installment Agreement, it's for one of three reasons:

• Not all of your living expenses are considered necessary: The IRS may consider your expenses extravagant. For example, if you have large credit card payments, make charitable contributions, or send your children to private school, expect the IRS to say no. While reasonable people disagree on what is necessary and extravagant, the IRS is pretty stingy here.

• The information provided in the notice of collection, Form 433-A, is incomplete or false: The IRS may think you are hiding assets or income. For example, be ready to explain if public records show your name on real estate or vehicles you didn't list or if the IRS has received W-2 or 1099 forms that show more income than you reported.

• Defaulted on a previous Installment Agreement: While this doesn't automatically disqualify you from a new Installment Agreement, your new proposal might be met with skepticism.

If your Installment Agreement proposal is rejected first, you can continue to negotiate. Ask to speak to the collector's manager. Sometimes just making this request is enough to soften the collector. If you're not going anywhere with the manager, you can go over the individual – as everyone in the IRS has a boss. You can file a complaint with the collections branch boss and the district director. 

When can the IRS revoke an installment agreement?

Once you receive approval on your Installment Agreement, you and the IRS are obligated to abide by the terms of the agreement unless one of the following conditions is true:

  • Skip a payment: Under the terms of all Installment Agreements, payments not made in full and on time may result in the immediate revocation of the Installment Agreement. In practice, the IRS generally waits for 30 to 60 days before revoking, at least on the first late payment. You have the right to notice or the option to reinstate the contract.

  • The IRS discovers that you provided inaccurate or incomplete information as part of the agreement: For example, you may have overlooked some valuables.

  • You failed to file tax returns or pay taxes that appear after the Installment Agreement was entered into: Although IRS computers do not continue to review your finances, they do monitor you for future filings and promised payments.

  • Your financial situation changes significantly, for better or for worse: The IRS usually won't know unless you tell them. However, the IRS may review your status every one or two years and ask you to submit a new Form 433-A to continue your Installment Agreement.


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Pat Raskob
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