Sam Brotman, JD, LLM, MBA July 2, 2020 55 min read

All About IRS Installment Agreements

What is an IRS Installment Agreement?

Taxpayers who are responsible for an outstanding tax liability with the government are responsible for ensuring they meet this obligation. Overdue tax balances are subject to interest and monthly late payment penalties. The IRS advises taxpayers to pay their balances in full to minimize additional charges. “Penalties are also assessed for failure to file a tax return so you should file immediately even if you cannot pay your balance in full” (IRS.gov, “Topic 202 – Tax Payment Options,” 8/19/2013).

For taxpayers who are unable to pay their tax debt immediately, the IRS allows them to make monthly payments through an installment agreement, which is defined as an option for taxpayers who must resolve their federal tax liability. Although this option is available, taxpayers increase their tax liabilities (i.e., penalty and interest) when they choose the installment option. 

The IRS advises taxpayers in Topic 202 – Tax Payment Options, to consider financing their tax liability through loans because the interest rate charged on a credit card or home equity loan is usually lower “than the combination of interest and penalties imposed by the Internal Revenue Code” (“Topic 202”).

The IRS offers various options for taxpayers making payments. These options include the following:

  • Direct debit from bank account
  • Payroll deduction from employer
  • Payment via check or money order
  • Payment by Electronic Federal Tax Payment System (EFTPS)
  • Payment by credit card
  • Payment by Online Payment Agreement (OPA)

The IRS charges an installment agreement user fee of $105 when you enter into a standard installment agreement or a payroll deduction installment agreement (“Topic 202”). Taxpayers may apply using Form 13844, Application For Reduced User Fee For Installment Agreements to request consideration for a reduced fee.

More About IRS Installment Agreements

Partial Payment IRS Installment Agreement

Taxpayers are encouraged to pay in full and immediately all delinquent tax liabilities. However, “if full payment cannot be achieved by the Collection Statute Expiration Date (CSED), and taxpayers have some ability to pay, the Service can enter into Partial Payment Installment Agreements (PPIAs)” (IRS.gov, “Part 5. Collecting Process, Chapter 14. Installment Agreements, Section 2. Partial Payment Installment Agreements and the Collection Statute Expiration Date (CSED),” 8/21/2013). 

Before the PPIA can be granted, the equity in the taxpayer’s assets will have to be evaluated to determine if it can be used to pay down the tax liability.

Although utilization of equity is not required, taxpayers will be expected to use the equity they have in assets to pay liabilities. If there is significant equity in assets, the IRS will consider seizing and/or levying in accordance with sections 5.10 and 5.11.1.1.2 of the Internal Revenue Manual.

Regular IRS Installment Agreement (More than $50,000)

When taxpayers owe more than $50,000, they are subject to a different set of rules, specifically, those required by the Automated Collection System (ACS). The ACS is a three-tiered CICS application. The CICS acronym stands for Customer Information Control System. The CICS is a computerized inventory system that maintains taxpayer information with regard to balance due and non-filer cases. 

This system particularly maintains the Integrated Data Retrieval System (IDRS) which houses this information. Customer service representatives use the system to “contact taxpayers, review their case histories, and issue notices, liens, or levies to resolve the cases” (IRS.gov, “Automated Collection System,” 8/21/2013).

Taxpayers are required to complete Form 433-F, Collection Information Statement or Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. The IRS encourages voluntary payments. However, voluntary payments will not guarantee that the IRS will not pursue levy options.

IRS Installment Agreement and Set-up Fees

Installment agreement set-up fees are based upon the type of agreement. For example, the IRS assesses a charge of $52 for a direct debit agreement; $105 for a standard agreement or payroll deduction agreement; and $43 to taxpayers with income below a certain level. If your agreement goes into default, then the IRS may assess a reinstatement fee. Penalties and interest will continue to accrue until your balance is paid in full.

IRS Financial Analysis

IRS financial analysis is conducted by the IRS in order to both analyze and verify financial information. When conducting an IRS financial analysis, the IRS evaluates the income and expenses of the taxpayer to calculate for disposable income. 

Disposable income is defined as gross income less all allowable expenses. During their IRS financial analysis, the IRS also analyzes assets to resolve balance due accounts. To do this, the IRS will request that the taxpayer makes full, immediate payment if their cash on hand is equal to the total liability. 

In addition, the IRS will identify key sources of funds, “liquid assets which can be pledged as security or readily converted to cash” (IRS.gov, “Part 5. Collecting Process, Chapter 15. Financial Analysis, Section 1. Financial Analysis Handbook,” 8/24/2013). Identification of key sources of funds is also extended to considering unencumbered assets, interests in estates and trusts, and lines of credit (“Section 1. Financial Analysis Handbook”). When analyzing assets to resolve balance due accounts, the IRS will also determine the priority of the Notice of Federal Tax Lien.

Under this category, the taxpayer may qualify for the six-year rule. This rule is most applicable to taxpayers unable to pay in full their federal tax liability. It also applies to those taxpayers who do not qualify for a streamlined installment agreement. 

Within this context, taxpayers must provide financial information but do not have to substantiate reasonable expenses. “All expenses may be allowed if the taxpayer establishes that he or she can stay current with all paying and filing requirements, the tax liability . . . can be fully paid within six years and within the CSED, and expense amounts are reasonable” (“Section1. Financial Analysis Handbook”). The six-year rule is not applicable to corporations, partnerships, LLCs, and business expenses.

As [art of the IRS financial analysis process, the IRS will also verify financial information by conducting interviews, asking pertinent questions and documenting the results. The IRS will ask questions with regard to the generation of income, the nature of the business process, the main products and services, major suppliers, assets held in the name of the taxpayer, and type of internet presence. 

The IRS will also “observe and document the physical layout of the business, the number of employees, the type and location of equipment, machinery, vehicles and inventory” (“Section 1. Financial Analysis Handbook”). The IRS will also verify previous collection issues addressed by field personnel to determine if reinvestigation is absolutely necessary.

Net Realizable Equity in Assets

The net realizable equity in assets is defined as a calculation of the fair market value of the property multiplied by the quick sale discount factor, or 80 percent, subtracted by the balance of any loans secured by the property. The net realizable value of your assets is specific to cars, real estate, and personal property.

The Asset/Equity Table

The asset/equity table (AET) is defined as a table that lists all of the taxpayer’s assets, encumbrances, and exemptions. The table calculates “the equity which is included in the reasonable collection potential (RCP) calculation” (IRS.gov, “Part 5. Collecting Process, Chapter 8. Offer in Compromise, Section 4. Investigation,” 8/24/2013). 

The major headings of the asset/equity table include the following: assets, fair market value, quick sale reduction percentage, quick sale value, encumbrances or exemptions, and net realizable equity.

Under each major category, the taxpayer lists information concerning different types of assets. References to assets include cash/bank accounts, offer deposit, loan value life insurance, pensions/IRA/401k, real estate, furniture/personal effects, vehicles, accounts receivables and tools/equipment. 

On the table, the taxpayer calculates the amounts and lists the future income value. The IRS allows exemptions based upon the total dollar amount of the assets. With regard to cash/bank accounts, net equity should not be less than zero.

 

Payment Plans: Partial Pay Installment Agreements

Introduction to Partial Payment Plans

The IRS expects that the taxpayer will pay any back taxes that are owed in full at the time that they are due or will enter into a payment plan for the amount in question. However, the IRS does not like to wait long for funds, and payment plans are generally granted only in circumstances where the taxpayer can set up a payment plan to pay the balance owed, plus applicable penalties and interest within five years or prior to the expiration of the Collection Statute Expiration Date (CSED), whichever is first. 

However, there are some instances where this is not possible and the IRS is forced to consider the alternative. In these instances, the IRS will sometimes consider a partial payment plan for the taxpayer.

Partial payment plans and the IRS’s authority to consider them is a fairly recent development. The IRS was not previously able to consider partial payment plans and instead would just resort to adverse collection measures. However, The American Jobs Creation Act of 2004 amended IRC § 6159 to provide this authority.[1] 

Partial payment plans essentially recognize that it is sometimes not economically feasible for a taxpayer to pay their full balance owed and instead creates a method for them to pay as much of their back tax liability as possible without putting them in economic hardship and without the IRS resorting to adverse collection activity.

Partial Payment Plans and IRS Procedure

Partial payment plans are difficult to come by because the IRS is essentially giving up on collecting the full balance owed. In circumstances where a partial payment plan may be warranted, the IRS will receive all available collection sources in order to determine their collectability. 

This includes any equity in assets, the taxpayer’s current monthly income and expenses, and projected future income and expenses. Undergoing this detailed financial analysis is a necessary part of the process before the IRS will consider a partial payment plan. This is not to say that taxpayers have to be fully drained of any equity before being set up on partial payment plans. 

The IRS examines a taxpayer’s situation on a case-by-case basis and in some cases, may allow the taxpayer to retain some of the equity in their assets and to be set up on a partial payment plan. 

However, this normally only occurs in situations where a levy, seizure or garnishment would not substantially impact the satisfaction of the outstanding tax obligation or is not appropriate. Only after this review is conducted are partial payment plans considered.

Applying for Partial Payment Plans: Conclusion

In order for partial payment plans to be set up, the taxpayer will need to contact the IRS to request one. Any application for a partial payment plan will require a collection information statement (IRS Form 433-A[2]) and a written request on how much the taxpayer intends to pay monthly based on their financial circumstances and their ability to pay. 

Generally, the IRS will want the maximum monthly amount that the taxpayer can afford without resulting in financial hardship.

In conclusion, IRS partial payment plans are sometimes difficult to negotiate because of the hesitancy by the IRS to grant them or even consider them as an option. Some of the more junior collection agents will not even offer them as a solution to the taxpayer. 

However, partial payment plans can be a viable avenue for reaching a tax resolution with the IRS and getting a much needed fresh start. If you have any further questions regarding payment plans, please get in touch with me through the contact information on this website.

[1] See IRM 5.14.2.1: http://www.irs.gov/irm/part5/irm_05-014-002.html

[2] The IRS Form 433-A can be found here: http://www.irs.gov/pub/irs-pdf/f433a.pdf

Installment Agreement Default: What to Do 

The IRS defines default of an installment agreement as the taxpayer providing inaccurate information or the taxpayer not meeting the terms of their agreement. In this case, the agreement may be terminated. A taxpayer may appeal a proposed termination.

The IRS may propose termination in the event that the taxpayer fails to make an installment payment when it comes due; fails to pay another tax liability; fails to provide an updated financial statement, provides inaccurate information and fails to pay a modified payment based upon submitted updated information.

Taxpayers who do not meet the terms of the installment agreement “will be notified in writing and given 30 days to comply with the terms of the agreement before the agreement is terminated” (IRS.gov, “Part 5. Collecting Process, Chapter 14. Installment Agreements, Section 11. Defaulted Installment Agreements, Terminated Agreements and Appeals of: Proposed Terminations (Defaults), and Terminated Installment Agreements,” 8/21/2013).

A taxpayer whose installment agreement is monitored by the IDRS[1] will receive Notice CP 523, Defaulted Installment Agreement – Notice of Intent to Levy. A defaulted installment agreement may be reinstated without manager approval if it is determined that the agreement was terminated “because of an additional liability and if addition of that new liability will result in no more than two additional monthly payments and the agreement will not extend beyond the Collection Statute Expiration Date (CSED)” (“Section 11. Defaulted Installment Agreements, Terminated Agreements and Appeals of: Proposed Terminations (Defaults), and Terminated Installment Agreements”).

The IRS will first make a lien determination before considering the request for reinstatement. Default and reinstatement terminations due to the taxpayer missing and/or skipping payments will require manager approval.

The taxpayer may request a Collection Appeals Program (CAP) hearing to discuss the proposed terminations and actual terminations of installment agreements. The law provides for the taxpayer to appeal a termination of an installment agreement.

[1] See the Regular Installment Agreement (Over $50,000) section. The IDRS stands for Integrated Data Retrieval System, “a mission critical system consisting of databases and operating programs that support IRS employees working active tax cases within each business function across the entire IRS” (IRS.gov, “Integrated Data Retrieval System (IDRS) – Privacy Impact Assessment,” 8/21/2013).

Tax Payment Plan Criteria: How to Get Approved

Introduction to Tax Payment Plans

When an individual cannot pay the full balance owed to the IRS, one of the most common solutions is to get that taxpayer set up on a tax payment plan. However, payment plans are not a matter of right, and taxpayers must meet several requirements in order to get their tax payment plan approved. It is important to be aware of these criteria, such as making sure you have met all of the requirements in advance will help expedite the approval of your IRS payment plan.

Requirements for a Tax Payment Plan

First, the IRS prefers that taxpayers do not finance their tax obligations. When calling the IRS to establish a tax payment plan or when filling out a tax payment plan request form, they will ask you a series of questions designed to determine whether or not you have the ability to pay the liability in full. 

If you have the means to pay the liability in full, then the IRS will not accept a payment arrangement (unless you can document a hardship) and will insist on the full payment of the liability. Also, the IRS will want the liability paid off in its entirety (including all applicable penalties and interest) within a six-year (72 month) time frame.[1] If a taxpayer cannot pay off their liability within 72 months, they will likely have to fill out a financial statement in order to document their hardship. 

The IRS may request that the liability be paid off sooner, depending on when the Collection Statute Expiration Date (CESD) is. Generally, if you calculate 10 years from the date the tax was first assessed (not the year of the return), you can get a sense of when the CESD is.[2]

These timeframes can also vary based on the size of your liability. Taxpayers who owe more than $50,000 may not be eligible for this streamlined treatment of their installment agreements and will need to present a financial statement so that the IRS can accurately gauge their ability to pay. 

One way to get around this requirement would be to pay down your liability to the under $50,000 mark and try to streamline your tax payment plan from there. Doing so will save you the time and aggravation of having to prepare an IRS financial statement.

Furthermore, the IRS will require that the taxpayer is up to date on all current year payments and has filed all outstanding returns. The IRS does not like unknown liabilities, so they will insist on determining the full scope of what the taxpayer owes before they agree to finance the taxpayer’s balance due.

It should also be noted that the taxpayer can set up a payment plan while a year is under review or in audit. However, if that year creates an additional liability down the road and the taxpayer’s balance increases, they will have to pay that additional balance in full or will risk default on their current tax payment plan. 

The IRS charges a fee for setting up tax payment plans, which it adds into the amount of the liability.[3] Finally, it is advisable in most situations that the taxpayer set up a direct debit method for making payments. This method is preferred by the IRS and will ensure that payments come directly out of the taxpayer’s bank account, rather than the taxpayer having to worry about manually submitting payments to the IRS.[4] 

As a warning ... if the taxpayer ends up defaulting on their installment plan and becomes subject to collection activity, this is probably one of the first places that the IRS will hit with a levy action.

In conclusion, tax payment plans are fairly easy to navigate if you follow all of the IRS’s requirements. Generally, it is better that taxpayers try to meet all of these requirements before trying to set up a tax payment plan with the IRS because it will minimize the time that they may be exposed to active IRS collections and adverse collection activity. 

Doing so will also expedite the process and will minimize the headache involved in dealing with the IRS. I have coached many taxpayers through setting up their own tax payment plans using these very steps. However, if you have any questions regarding these criteria or if I can assist you further, please get in touch with me using the contact information contained on this website.

[1] See IRM 4.20.4: http://www.irs.gov/irm/part4/irm_04-020-004.html.

[2] Here is more information on the CESD and How Long Does the IRS Have to Collect on a Balance Due?

[3] The fee schedule for setting up a tax payment plan can be found here: http://www.irs.gov/Individuals/Payment-Plans,-Installment-Agreements

[4] Form 433-D for setting up direct debit can be found here: http://www.irs.gov/pub/irs-pdf/f433d.pdf

IRS Payment Plan Requests: Form 9465-FS

Introduction to IRS Payment Plans and Form 9465-FS

There are numerous options available to a taxpayer trying to resolve a balance due with the IRS.[1] One of the more prevalent options is to work out an IRS payment plan to pay down the liability in installment payments. When a taxpayer sets up a payment plan, they agree to make a specified monthly payment over a set period of time based on their ability to pay (as calculated by the IRS). In exchange for the taxpayer entering into their IRS payment plan, the IRS agrees to hold off on any adverse collection activity, including wage garnishments or bank levies, for the life of the installment agreement. Taxpayers can make a request for a IRS payment plan by filing IRS Form 9465-FS with the IRS.

Guidelines for Setting up an IRS Payment Plan Using Form 9465-FS

Form 9465-FS is only appropriate in certain circumstances and I have some practical advice for you in filling out the form that will maximize success in obtaining a successful IRS payment plan. First, Form 9465-FS is only suitable for tax liabilities of $50,000 or less for all years in question. Therefore, it is a good idea to obtain an updated balance of your account before attempting to set up an IRS payment plan. 

However, if you discover that your liability exceeds this threshold by only a little bit, it might be a smart idea to pay down your liability to below $50,000 and then set up an IRS payment plan using Form 9465-FS. The alternative is providing detailed financial information to the IRS and potentially paying more than you would have by going the 9465-FS route.

Second, for your own planning purposes, it is a good idea to have an idea of what an acceptable IRS payment plan proposal is. One of the disadvantages of going the paper route in setting up an payment plan is that if your payment plan proposal is rejected and, if the proper pre-levy steps have already been taken,[2] you can immediately be subject to collection activity including bank levies and wage garnishments.

It should go without saying then that your payment plan proposal should build in a high likelihood that it is going to be accepted. Generally, the hard and fast rule is that the IRS is going to ask that your IRS payment plan be completed in less than five years (60 months). Although the IRS sometimes will accept payment plans outside of this timeframe (Form 9465 is not appropriate for requesting those types of plans), you maximize your chances of streamlining your payment plan if you follow this guideline.[3] 

It is also important after submitting your payment plan request to call the IRS and follow up on its status. This will ensure that you know when your payment plan has been finished processing and you can either receive the terms as quickly as possible or submit another payment plan request to avoid being subjected to a bank levy or garnishment.[4]

What to Do if the IRS Rejects Your Installment Agreement

The IRS typically rejects an installment agreement for one of three reasons. If the IRS determines that your living expenses do not fall under the category of “necessary,” your agreement will more than likely be rejected. The IRS considers extravagant expenses as those that include charitable contributions, private school funding and hefty credit card payments. 

In addition, if you fail to provide accurate information on Form 433-A, Collection Information Statement, you can expect your agreement to be rejected. Lastly, if you defaulted on a previous installment agreement, your new proposal may receive skepticism and be subsequently rejected.

To resolve this hurdle, contact the collections manager and speak with him or her directly. “Just making this request is sometimes enough to soften the collector up. If you get nowhere with the manager, you can go over his or her head – everyone at the IRS has a boss. You can complain to [his or] her immediate boss, then the collections branch chief, and then the district director” (Avvo.com, “What to do if the IRS Rejects Your Installment Agreement Plan Proposal,” 8/21/2013).

CDPS/CAPS – Collection Appeal Rights

Taxpayers can appeal most collection actions. The main options for appealing collection actions include: Collection Due Process (CDP) and Collection Appeals Program (CAP).

A Collection Due Process (CDP) is a type of hearing available to taxpayers if they have received a notice from the IRS outlining their federal tax liability. Taxpayers can request a Collection Due Process hearing if they have received any of the following notices:

  • Notice of Federal Tax Lien Filing and Your Right to a Hearing
  • Final Notice – Notice of Intent to Levy and Notice of Your Right to a Hearing
  • Notice of Jeopardy Levy and Right of Appeal
  • Notice of Levy on Your State Tax Refund – Notice of Your Right to a Hearing
  • Notice of Levy and Your Right to a Hearing

Taxpayers who need to request a hearing must complete Form 12153, Request for a Collection Due Process or Equivalent Hearing. Taxpayers have 30 days from the date of the notice to request a Collection Due Process hearing.

An appeals process is available to taxpayers who disagree with an IRS decision concerning their federal tax liability. The Collection Appeals Program (CAP) is a type of hearing where taxpayers can challenge a decision made against them. Essentially, the program is available to taxpayers who disagree with the Collection Due Process hearing determination.

 “Under the Collections Appeals Program, if you disagree with an IRS employee’s decision and want to appeal it, you can ask their manager to review your case. If you then disagree with the manager’s decision, you may continue with the Collection Appeals Program as outlined in Publication 1660” (IRS.gov, “Publication 594, The IRS Collection Process,” 8/21/2013). Taxpayers may pursue the Collection Appeals Program under three major options:

  • Before or after the Notice of Federal Tax Lien
  • Before or after seizure of property
  • After rejection, termination, or proposal to terminate an Installment Agreement

More information about both the Collection Due Process and the Collection Appeals Program can be obtained by reviewing Publication 1660, Collection Appeal Rights.

More About IRS Installment Agreements

Partial Payment IRS Installment Agreement

Taxpayers are encouraged to pay in full and immediately all delinquent tax liabilities. However, “if full payment cannot be achieved by the Collection Statute Expiration Date (CSED), and taxpayers have some ability to pay, the IRS can enter into Partial Payment Installment Agreements (PPIAs)” (IRS.gov, “Part 5. Collecting Process, Chapter 14. Installment Agreements, Section 2. Partial Payment Installment Agreements and the Collection Statute Expiration Date (CSED),” 8/21/2013). 

Before the PPIA can be granted, the equity in the taxpayer’s assets will have to be evaluated to determine if it can be used to pay down the tax liability.

Although utilization of equity is not required, taxpayers will be expected to use the equity they have in assets to pay liabilities. If there is significant equity in assets, the IRS will consider seizing and/or levying in accordance with sections 5.10 and 5.11.1.1.2 of the Internal Revenue Manual.

Regular IRS Installment Agreement (Over $50,000)

When taxpayers owe more than $50,000, they are subject to a different set of rules specifically those required by the Automated Collection System (ACS). The ACS is a three-tiered CICS application. The CICS acronym stands for Customer Information Control System and is a computerized inventory system that maintains taxpayer information with regard to balance due and non-filer cases. 

The system particularly maintains the Integrated Data Retrieval System (IDRS) which houses this information. Customer service representatives use the system to “contact taxpayers, review their case histories, and issue notices, liens, or levies to resolve the cases” (IRS.gov, “Automated Collection System,” 8/21/2013).

Taxpayers are required to complete Form 433-F, Collection Information Statement or Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. The IRS encourages voluntary payments. However, voluntary payments will not guarantee that the IRS will not pursue levy options.

IRS Installment Agreement and Set-up Fees

Installment agreement set-up fees are based upon the type of agreement. For example, the IRS assesses a charge of $52 for a direct debit agreement; $105 for a standard agreement or payroll deduction agreement; and $43 to taxpayers with income below a certain level. 

If your agreement goes into default, then the IRS may assess a reinstatement fee. Penalties and interest will continue to accrue until your balance is paid in full.

 Conclusion

In conclusion, setting up a payment plan is a decision that should be considered carefully by the taxpayer. You want to make sure that you are setting up the tax resolution that is going to help you best achieve your short-term and long-term financial goals. 

Just keep in mind that there are multiple tax resolution options to consider before setting up an IRS payment plan (currently non collectible status[5], offer in compromise, etc.) However, if you are interested in going forward with it, here is a copy of IRS Form 9645-FS. Also, the IRS Form 9645-FS instructions can be found on the IRS website in the link attached.

I hope this article was helpful in explaining a little more about IRS payment plans. If you have any questions, or if I can assist you further, please contact me through the contact information contained on this site.

Automatic IRS Installment Agreement

An automatic IRS installment agreement is an agreement by which taxpayers can make monthly payments utilizing one of three online payment options as well as self-certifying through an online payment agreement application, which allows taxpayers to work out their payments online rather than face-to-face with a representative.

The IRS offers an online payment agreement tool that requires information specific to the taxpayer such as balance due notices from the IRS, Social Security or Taxpayer Identification Number, and a personal identification number generated online.

The online payment agreement provides the taxpayer with three payment options: pay in full, short-term extension and monthly payment plan. When a taxpayer pays in full, specifically within 10 days, they save on interest and penalties. When a taxpayer requests a short-term extension, no fee is charged, but they can expect to pay additional penalties and interest will continue to accrue. 

Lastly, when a taxpayer chooses the monthly payment plan option, they will be charged a user fee, which is $43 and added to the amount owed. The interest and the penalty will continue to accrue on the unpaid balance.

The automatic installment agreement is also specific to two other types of agreements: Payroll Deduction Agreement (PDA) and Direct Debit Installment Agreement (DDIA). With the former, if the taxpayer is a wage earner, the IRS strongly urges the taxpayer to submit Form 2159, Payroll Deduction Agreement.

It is the responsibility of the taxpayer to “determine whether their employers will accept and process executed agreements before agreements are submitted for approval and finalized” (IRS.gov, “Part 5. Collecting Process, Chapter 14. Installment Agreements, Section 10. Payroll Deduction Agreements and Direct Debit Installment Agreements,” 8/21/2013). Taxpayers are encouraged to hand deliver the agreement to their employers, who are also allotted enough time to prepare their bookkeeping.

A Direct Debit Installment Agreement is used when the payroll deduction agreement is not practical. This agreement is also used when taxpayers have defaulted on a previous agreement. “The Direct Debit Installment Agreement (DDIA) system is a means by which funds are automatically debited from a taxpayer’s checking account for the agreed upon installment amount” (“Section 10. Payroll Deduction Agreements and Direct Debit Installment Agreements”). 

There is a user fee charged with use of this type of agreement. The great benefit of using the DDIA is there is less of a chance of the taxpayer forgetting to make a payment or missing a payment altogether. 

The Electronic Federal Tax Payment System (EFTPS) is used for processing the DDIA. It is a free federal tax payment processing tool initiated by the U.S. Department of the Treasury. Federal taxes can be paid using the system (EFTPS.gov, “About EFTPS,” 8/21/2013).[1]

[1] For more information about the EFTPS, visit the website or review the guide. The link is available here: http://www.irs.gov/pub/irs-pdf/p966.pdf.

Streamlined IRS Payment Plans

Streamlined Installment Agreements: An Overview

The streamlined installment agreement, which is part of the Fresh Start Initiative, helps taxpayers catch up on their back taxes. The initiative offers benefits to the taxpayer. These benefits are specific to the maximum dollar criteria and the maximum term for the agreement. For example, “the maximum dollar criteria for streamlined installment agreements has been raised from $25,000 to $50,000 and the maximum term has been raised from 60 months to 72 months” (IRS.gov, “Fresh Start Installment Agreements,” 8/20/2013).

In addition, the streamlined installment agreement is divided into two categories[1] and both are based upon the balance due. To qualify under either category, you must meet the minimum requirements. Otherwise, it will be difficult to enter into an agreement that aligns with IRS standards. 

For example, to qualify for the first category, you must not owe more than the $25,000. “If you owe more than $25,000, you may pay down the liability before entering into the agreement in order to qualify” (IRS.gov, “Fresh Start Installment Agreements,” 8/20/2013). Under the first category, the debt must be paid within 72 months and prior to the Collection Statute Expiration Date (CSED). Individuals owing tax will be able to use the streamlined agreement under this category. Exceptions apply.

To qualify under the second category, the balance due must be within a range of $25,001 and $50,000. Similar to the first category, if you owe more than $50,000, then you will need to pay down the balance before initiating the agreement. The debt under this category must also be paid within 72 hours. All taxpayers must be compliant with both filing and payment requirements.

Under each category, taxpayers must file Form 1040 and may be subject to the Trust Fund Recovery penalty. Defunct businesses under each category must also submit one or more of the following forms: 940, 941, or 943. An operating business with income tax liabilities must file Form 1120 under the first category. Lastly, under category two, taxpayers must enroll in a Direct Debit Installment Agreement.[2]

 

Introduction to Streamlined IRS Payment Plans

One of the ways that you can resolve a liability is with an IRS payment plan. The IRS generally accepts payment plans when the taxpayer does not have sufficient assets available to pay their liability in full. Payment plans are seen as a method of compromise by the IRS so that the taxpayer can avoid any adverse collection activity (assuming they remain true to the conditions of the payment plan) while paying down their liability to the government. 

However, IRS payment plans can be difficult to negotiate, in part because the IRS usually requires a complicated financial statement on the part of the taxpayer. A little- known trick to taxpayers though, is that you are sometimes able to set up a payment plan and it is virtually guaranteed to be accepted without having to undergo much of the financial disclosures generally required by the IRS. These are known as streamlined IRS installment agreements or streamlined IRS payment plans.

IRS Requirements and Benefits of a Streamlined IRS Payment Plan

There are a few basic requirements to qualify for this type of tax relief. First, as is a requirement with any of the IRS payment plans, the taxpayer must be current on all tax filings and be up-to-date on all estimated tax payments over the course of the year. Part of the incentive for the IRS in setting up payment plans is that the taxpayer abides by the terms of this agreement. The IRS will not set up a payment plan in an instance where they feel that the amount owed to the government could actually increase. 

Second, the taxpayer must be able to satisfy their liability in full including all applicable penalties and interest[1] before the expiration of the collection expiration statute date (CESD)[2] or a five-year time period (72 months or less), whichever is shorter. 

Third, a taxpayer must have a balance due (including interest and penalties) of $50,000 or less to qualify for a streamlined payment plan. Finally, the taxpayer must agree to have the installment payments set up on a direct debit system so that it is automatically deducted from their checking account.

However, as I mentioned previously, setting up a streamlined payment plan will alleviate the necessity of having to fill out a collection information statement to qualify, although the IRS still may request limited financial information to ensure that you cannot pay the balance in full. In addition, if the IRS has not filed a lien against the taxpayer, they will generally agree not to file one and no independent lien determination will be made. 

The IRS will also charge you a small fee to complete the setup of your payment plan ($105 for new agreements, $45 for reinstated agreement, and $52 for direct debit agreements). [3]

In closing, if you meet the requirements for one of the streamlined IRS payment plans then they are a great way to alleviate your balance due without too much effort expended. They can be set up quickly and easily by calling Automated Collections Systems[4] or by visiting your local IRS service center. If you have any further questions or if I can do anything else to assist you, please feel free to get in touch with me by using the contact information on my website. However, I hope by using the information contained in this article that you will be able to resolve your IRS liability without resorting to professional representation.

 

 

 

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Sam Brotman, JD, LLM, MBA

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