Many taxpayers find themselves unable to pay their full tax balances when they file their income tax returns. Some common reasons that people might have for being unable to pay their taxes to the IRS include increased investment returns, more self-employment income, bonuses, and salary increases. When a taxpayer is unable to immediately pay his or her tax debt, making payment arrangements will likely be necessary.
The most common type of payment arrangement taxpayers can make to take care of their tax balances is an installment agreement. With this type of arrangement, taxpayers will make monthly payments to the IRS. In most cases, the payments are made by payroll deductions or direct debits. The set-up fee for a direct debit agreement made online is $31. If the direct debit installment agreement is created over the phone, in-person, or by mail, the set-up fee is $107. Fees can be waived for low-income taxpayers.
If the taxpayer enters into an agreement to pay by other methods, the online set-up fee is $149. If the application is made in-person, over the phone, or by mail, the set-up fee is $225. Low-income taxpayers will be charged a set-up fee of $43.
During the installment agreement, late-payment penalties and interest will continue to accrue. However, the late-payment penalties will be halved during the months during which an installment agreement is effective. Installment agreements can be set up by calling the IRS, using the online payment agreement or OPA tool, or filing form 9465. Here is a guide to what you need to know about IRS installment agreements.
Understanding IRS installment agreements
Taxpayers are responsible for meeting their obligations when they owe outstanding tax liabilities to the government. When a tax liability is overdue, the taxpayer will incur monthly late-payment penalties and added interest. To avoid added charges, taxpayers are advised to pay their balances in full. However, some taxpayers are not able to do so. When taxpayers cannot pay what they owe in full, the IRS allows them to enter installment agreements to make monthly payments.
Taxpayers have the following options when they make payments:
- Payroll deductions
- Direct debits
- Payments through the Electronic Federal Tax Payment System
- Credit card payments
- Check or money order payments
- Payment by the OPA
Streamlined IRS Installment Agreements
Streamlined installment agreements are available to individual taxpayers who owe less than $50,000 under IRM 126.96.36.199. This includes all unpaid assessments but does not include accrued penalties and interest. To enter into a streamlined IRS installment agreement, the taxpayer must make payments in a high enough amount to pay the balance in full within 72 months. The IRS calculates the monthly payment amount by dividing the total amount owed by 72.
An individual taxpayer can apply for a streamlined installment agreement online by using the OPA tool. This takes around 30 minutes, and the taxpayer can receive immediate notice of the approval. Alternatively, the taxpayer can submit Form 9465 to the IRS to request an installment agreement. This form can be attached to the taxpayer’s income tax return, and the taxpayer should receive a response within about 30 days.
Partial Payment Installment Agreements
Taxpayers who are unable to pay their full assessments within 72 months might be eligible for a partial payment installment agreement under IRM 188.8.131.52.1. A PPIA is appropriate when a taxpayer has the ability to pay a portion of the owed tax debt but cannot pay the full amount within the statutory time period. Before the IRS will grant a PPIA request, the agency will evaluate the taxpayer’s equity in assets to see if it can be accessed to pay towards the tax liability. While using equity to pay down the tax debt is not required, taxpayers are expected to use the resources they have to pay what they owe. If a taxpayer has substantial equity, the IRS might consider seizing or levying it under the provisions of IRM 5.10 and 5.11.
IRS procedures and partial payment installment agreements
It can be difficult to gain the approval of a partial payment installment plan request. When the IRS approves a PPIA, it gives up its ability to collect the full amount owed. Because of this, the IRS will analyze all sources of collection to determine whether they can be used, including the taxpayer’s expenses, monthly income, equity, projected future income, and others. Taxpayers’ situations are evaluated on a case-by-case basis. Some taxpayers may be approved for partial payment plans without having to give up the equity they have in their assets. However, the IRS will generally only allow a taxpayer to retain the equity when a garnishment, seizure, or levy would not substantially satisfy the outstanding debt or is otherwise inappropriate. Once this review is completed, the IRS will then consider a partial payment plan.
Applying for a partial payment plan
Taxpayers who want to establish PPIAs will need to contact the IRS. They will have to submit IRS FORM 433-A and a written request detailing the monthly payment amount given their ability to pay and financial circumstances. The IRS will want the taxpayer to pay the maximum amount he or she can afford without undergoing undue financial hardship.
Standard IRS installment agreements when more than $50,000 is owed
Taxpayers who owe more than $50,000 have to go through a separate process to get their installment plan requests approved. This process involves an application through the Customer Information Control System, which is a computerized system that maintains information about balances owed by taxpayers and establishes the automatic collection system or ACS under IRM 5.19.6.
To apply for a standard installment agreement with the IRS when a taxpayer owes more than $50,000, the taxpayer must complete Form 433-F. This form requires taxpayers to input significant data about their assets, living expenses, income sources, debts, and other financial information. It is critical for this form to be completed fully and accurately. The IRS will analyze the information provided to determine how much disposable income a taxpayer has to dedicate towards repaying their tax liabilities. The taxpayer may also have to submit additional documents to support the information he or she provides. While the taxpayer is waiting for the IRS to respond, he or she should make voluntary payments. However, doing so will not guarantee that the IRS will not levy assets.
A taxpayer’s disposable income includes his or her gross income minus all of his or her allowable expenses. If the IRS determines that the taxpayer has sufficient assets and disposable income to resolve their past-due balances, the IRS will ask the taxpayer to make an immediate, full payment of the total tax liability.
The six-year rule might apply to certain taxpayers who do not qualify for streamlined agreements. Under this rule, the taxpayers are required to provide financial information but will not be required to provide substantiation of their expenses. To qualify, the taxpayer will have to establish that he or she can remain current with all of the filing and payment requirements and can repay the amount owed within six years.
Net realizable equity in assets
For the taxpayer’s equity in assets, the IRS will calculate the fair market value times 80%. Any loans that are secured by the property will be subtracted to arrive at the net realizable value. This is calculated for real estate, cars, and personal property.
The taxpayer will list information about all of the different types of assets that he or she has, including bank accounts, savings accounts, life insurance loan values, IRAs, 401(k)s, pensions, accounts receivable, equipment, tools, real property, vehicles, and personal property. The taxpayer will then input the values of future income. Exemptions are allowed based on the total amount. For bank accounts, the equity listed cannot be less than zero.
When taxpayers enter into installment plans with the IRS, the government will continue to charge late-payment penalties while they are making payments. However, the rate will be reduced. In some cases, it may be possible for a taxpayer to obtain a first-time abatement of the penalties or provide other reasonable cause grounds to reduce or eliminate the penalties. First-time abatements are only available when taxpayers have a history of paying and filing their tax returns on time. Reasonable cause grounds are based on the taxpayer’s specific circumstances and facts and whether he or she exercised ordinary care and prudence to pay his or her taxes.
Taxpayers that appear to qualify for a first-time abatement or have reasonable cause grounds for their tax liabilities should ask for an abatement of the penalties at the start of the installment agreement. If the penalties are removed by the IRS at the beginning of the installment plan, it can make the balance easier to pay.
Other payment arrangements with the IRS
While most taxpayers are able to resolve their tax liabilities with the IRS through installment agreements, there are several other options available. A taxpayer who can pay his or her tax debt in full within 120 days can ask for a short-term extension. In Nov. 2020, the IRS announced an easing of the rules for setting up payment plans, including short-term extensions. Currently, taxpayers who can pay their tax liabilities in full within 180 days can request a short-term extension. To ask for an extension, taxpayers can call the IRS or use the OPA tool. A short-term extension does not require a setup fee, and taxpayers will normally be charged less in interest and penalties.
Taxpayers can also make an offer in compromise, which allows taxpayers to settle tax debts for less than the full amount. However, OICs are not easy for taxpayers to receive and will only be granted if the offers made are equal to the amounts that the IRS can reasonably expect to recover within a reasonable time. This process is lengthy, and the IRS rarely grants OICs.
A final alternative is a currently-not-collectible status. If the IRS determines that a taxpayer is currently unable to pay his or her tax debts, the taxpayer’s account can be placed in CNC status. A tax lien might be filed when the debt amounts to more than $10,000, but other collection activity will stop. However, the IRS will continue to evaluate the taxpayer’s financial situation to see if anything has changed so that the taxpayer can meet his or her tax obligations.
Handling rejection of a proposed installment plan
The IRS can reject a proposed installment plan. In most cases, the IRS will do so for three reasons. If a taxpayer’s expenses are not considered necessary, the application for an installment agreement will likely be rejected. Extravagant expenses are considered to include large credit card payments, private school tuition, and charitable contributions.
If the taxpayer fails to provide accurate information to the IRS on Form 433-A, the IRS will likely reject the taxpayer’s application. Finally, taxpayers that have defaulted on prior installment agreements may have their new proposals rejected.
Taxpayers who are notified that their installment agreements have been rejected should contact the IRS directly to speak to the collections manager. This can sometimes help to get the manager to change his or her mind. Taxpayers can also talk to people up the chain of command to try to secure an agreement.
If the plan is still rejected, the taxpayers can explore appeal options. Otherwise, the IRS will likely move forward with garnishments or levies.
Defaulting on installment agreements
Taxpayers can default on their installment agreements when they provide inaccurate information or fail to meet the terms of their payment plans. Taxpayers have the right to appeal proposed terminations. The IRS will send a notice in the mail of its intent to terminate an installment agreement.
A termination may be proposed by the IRS when the taxpayer misses a scheduled installment payment, does not have sufficient funds in his or her bank account for a direct debit, fails to pay a new tax liability, fails to submit an updated financial statement, submits inaccurate information, or fails to make a modified payment after the information has been submitted.
The IRS notifies taxpayers who fail to meet the terms of their installment agreements in writing. The taxpayers will then have 30 days to comply before the agreements will be terminated.
Some taxpayers have installment agreements that are monitored by the integrated data retrieval system or IDRS. When those taxpayers fail to meet the terms of their agreements, the IRS will send a notice of intent to levy based on a defaulted installment agreement. If the agreement was terminated because of a new tax liability that will not cause more than two extra monthly payments and will not extend the plan beyond the collection statute-of-limitations expiration, the agreement can be reinstated without the approval of a manager.
If the termination is due to skipped or missed payments, the IRS will start by analyzing the taxpayer’s financial information to determine whether a lien can satisfy the liability before it will consider a reinstatement request. This type of reinstatement will also require the approval of a manager.
Taxpayers can also ask for a hearing through the collection appeals program. This hearing allows the taxpayer to talk about the proposed or actual termination of the installment agreement with the IRS, and taxpayers have the right to appeal an installment agreement termination.
Collection Appeals Program
Taxpayers have a right to appeal the rejection or termination of an Installment Agreement and request a hearing. To do so, they must complete Form 9423. This form is a request for a Collection Appeal. Once taxpayers receive a notice of the IRS’s rejection or termination of a payment plan, they must submit an Appeal request within 30 days.
The collection appeals program is also available to taxpayers when they receive notices of federal tax liens, before or after their property is seized, and in other situations, according to IRS Pub. 1660.
In practice, taxpayers who want to appeal terminations of their installment agreements might do well by working with experienced tax professionals or attorneys for help with negotiating agreements with the IRS. This might help them to resolve their tax matters and outstanding liabilities more favorably.
IRS installment agreements provide a way for many taxpayers to resolve their outstanding tax liabilities. In most cases, they are easy to get. As long as the taxpayers adhere to the terms of their agreements, they should be able to pay what they owe without further problems. However, taxpayers should be aware that they will continue to accrue late-payment penalties and interest during the repayment period, which will increase the total amounts owed.
Installment Agreement Deep Dive
When they start learning about tax resolution, many tax professionals erroneously believe that they should focus their continuing education efforts on the Offer in Compromise (OIC) program. Unfortunately, this is least important resolution tool in your toolbox. Why? Because the number of cases resolved through a payment plan simply dwarf the number of accepted Offers in Compromise. For example, in FY19, the number of payment plans established by the IRS exceeded 2.8 million, while accepted Offers were under 18,000. In other words, you are 157 times more likely to set up an IA for a client than an OIC.
Within our Certified Taxpayer Representative™ curriculum, we go deep on the technical components of IRS installment agreements. Starting in CTR-132: Individual Installment Agreements (2 CPE hours), continuing into CTR-203: 941 Resolution Options covering business installment agreements (2 CPE hours), and even a dedicated class on Partial Payment Installment Agreements in CTR-241, you will learn all the ins and out of this important resolution option. With detailed, practical application points — not just theory and code — combined with hands-on exercises, you’ll learn to apply this common resolution pathway to help your clients.