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.
Types of 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 220.127.116.11.2 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.
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.
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).
 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.
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.