If you owe federal taxes to the IRS, but the full amount exceeds what you are able to pay, the IRS fortunately offers alternative options. One of these options is a payment plan, also called an installment agreement.
You may find yourself needing to negotiate with the IRS about a payment plan or worried about filing your taxes late. If so, it’s a good idea to consult with an experienced federal tax attorney about your financial situation.
IRS installment agreements
Guaranteed Installment Agreement
For a taxpayer to qualify under an IRS guaranteed installment agreement, they must:
- Owe a tax balance of less than $10,000 (not including interest and penalties)
- Have filed all required tax returns making them fully compliant
- Must have not entered into another installment agreement in the previous five years
- Not have the ability to pay the tax balance due or within 120 days
- Not be able to pay off the tax balance due within three years
- Be able to pay the minimum monthly payment (tax liability, interest, and penalties divided by 30)
Streamlined Installment Agreement
To qualify for a streamlined installment agreement, a taxpayer has the following requirements:
- The tax liability, interest, and penalties do not exceed $50,000
- The tax liability can be paid off within 72 months
There are fees to set up an installment agreement, depending on whether you call in or apply online. The IRS offers a reduced fee for a direct debit installment agreement. Additionally, the IRS charges a different fee to restructure or reinstate a previous installment agreement.
Partial Payment Installment Agreement
A partial payment agreement allows the taxpayer to pay part of a tax liability. The taxpayer must complete a financial statement called a Collection Information Statement or Form 433-F,. This form is used to submit to the IRS, a taxpayer’s income and living expenses to prove that they can or cannot pay only a certain monthly amount.
The IRS will review and verify the information, depending on whether over the phone or mailed in. If the taxpayer has assets that they can sell to pay off the tax liability, the IRS will require the taxpayer to provide additional information as to whether they can sell or have limitations to selling.
The taxpayer generally must go through an IRS financial review every two years if approved. This review could result in increased installment payments or the termination of the agreement.
Nonstreamlined Installment Agreement
If a taxpayer owes over $50,000, a nonstreamlined agreement with monthly payments is an option. The IRS does not automatically approve this agreement and a Form 433-F is required to be filled out. This form provides information about income, debts, living expenses, assets, and bank accounts. From there, a taxpayer proposes a monthly payment amount that they can afford.
If mailed in, the IRS usually takes a few months to review. If done on a phone call to the IRS, it can be evaluated right then and there, and granted or rejected. The IRS may refuse a proposed agreement if:
- Any of the taxpayer’s claimed living expenses are deemed unnecessary
- False information is reported
- The taxpayer defaulted on an earlier installment agreement
If a taxpayer can’t pay their tax balance due through a nonstreamlined agreement, they should consider filing an offer in compromise or settlement of their IRS tax debt.
Short-Term Payment Plans
The IRS additionally offers a short-term payment plan if none of the installment agreements are a viable option. This type of plan only allows you an extra 180 days to fully satisfy your debt balance.
One advantage to this payment agreement is that no fees are included, but interest and penalties will be due.
If You Can’t Afford a Monthly Installment
If your installment agreement is accepted and later cannot afford to make a payment one month, you may request a “temporary delay of collection.” However, if you don’t catch up or continue to miss payments (or incur additional tax debt on other years not in this same payment plan), it will result in a Notice of Intent to Terminate Your Installment Agreement. You may file an appeal within 60 days.
What to Do if an IRS Payment Plan Is Not an Option
In the event that after considering all other payment methods, you find that you are still unable to settle your tax debt in full: the IRS may consider another approach to help you.
The IRS may approve your request for an Offer in Compromise. This would allow you to resolve your debt for less than the full balance amount that you owe. An Offer in Compromise is not for everyone and it can be difficult to qualify which is why you need a tax attorney to provide the evaluation and submit it on your behalf.
It’s generally reserved for individuals who cannot pay their full tax liability, at least not by the mandated deadline, or when doing so would put the taxpayer through financial hardship.
Requirements to Be Eligible for an Offer in Compromise
The IRS will consider your unique situation according to your: ability to pay, income, expenses, and asset equity. They will generally accept an offer in compromise when the amount you propose accurately represents the maximum balance the IRS can expect to collect within a reasonable period of time.
However, if you apply for an Offer in Compromise when you are not eligible, the IRS won’t be able to process your offer. They will return your application along with the offer application fee and any offer payment you included will be applied to your debt balance.
In order to be found eligible to apply for an Offer in Compromise, you must:
- Have filed all mandatory tax returns and satisfied all required estimated payments;
- Not be in an open bankruptcy proceeding;
- If you haven’t filed yet for the current tax filing year, you must have a valid extension, and
- If an employer, you must have made tax deposits for the current year and past two quarters prior to applying.
After completing all relevant paperwork, you can submit your offer along with the required $205 application fee and initial payments for your individual and business tax debts. The fee and initial payments are non-refundable should your offer be denied. Only if you were ineligible to apply will your fee be returned and payments go toward your balance.
If you happen to meet the low income certification guidelines, you are not required to submit the application fee or an initial payment when you apply. You are also exempt from paying monthly installments while the IRS reviews your offer.
How the Process of Submitting an Offer of Compromise Works
When you are sending in your offer application, you can choose to provide your initial payment by one of two ways.
If you choose to pay with lump sum cash, the initial payment amount is to be 20% of the total balance you offered within your application. If your offer is accepted, you will receive written confirmation. The remaining balance of your offered debt amount must be paid in five or fewer payments.
The other option is periodic payment. This consists of you submitting an initial payment with your offer application. You are to continue paying monthly installments on the remaining balance while the IRS considers your offer. If they approve your application, continue to pay in monthly payments until the debt is settled.
During the period when the IRS is considering your offer, they may file a Notice of Federal Tax Lien and any other collection activities will be suspended. Your legal assessment and collection period is also extended.
Your non-refundable fees and payments will go towards your debt balance and you are to maintain all required payments as stated in your offer. You are not required to make any payments from an existing installment agreement.
If your offer is accepted, you must meet all outlined offer terms, including filing any required tax returns and making all payments. The IRS will release federal tax liens only once your offer terms are fully satisfied. If your offer is rejected, you may appeal this determination within 30 days.
Speak with an Experienced and Trusted Tax Attorney
The IRS offers several payment plan options to individuals who cannot pay their taxes in full. This may cause some to feel unsure about what’s ideal for their situation. Qualified tax attorneys at Delia Law can go over all available options with you while providing educated legal counsel. Schedule a consultation with us today.
