When you owe money to the IRS, it is not just the tax liability you are paying, but the interest and penalties as well. Simply stated, the IRS does not like it when people do not pay their taxes in full and on time. So, they will punish you for your delinquency — regardless of your circumstances. It is not a good feeling or good place to be in.
However, there are solutions. The IRS would rather collect something rather than nothing, so that is why they offer installment payment plans. An installment plan is a great option for you to repay your tax debt over time and not go broke. Think of it in the same terms like a car loan or credit card bill. Granted, the interest you pay to the IRS is going to be a lot higher, but if it can help you pay down your debt and get IRS collections off your back, it sounds pretty appealing
In this chapter, I will discuss the different types of installment payment agreements available through the IRS, their terms, how to apply and set-up costs. After you have read all of this and the idea of an installment agreement sounds good to you, give me a call. I have helped many other taxpayers just like you break their debt to the IRS down into manageable monthly payments.
Background of IRS Installment Agreements
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 22.214.171.124.2 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.