Do you owe the IRS and have no idea how you are going to pay your tax bill? You are not alone; we know the feeling. Many of the clients who contact us are in dire straits with no idea how to dig themselves out from under the mountain of debt. Relax. There is an option that is available to taxpayers who are unable to fully pay their taxes.
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.
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.
If you want to find out if you are eligible for a partial repayment plan and how to apply, keep reading.
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.
Requirements for a Tax Payment Plan
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. 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.
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.
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. 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.