If you cannot fully pay your tax debt and do not qualify for an offer in compromise, you may want to consider requesting an IRS installment agreement or IRS payment plan. (You can also request a payment plan from the Virginia Department of Taxation.) An installment agreement allows you to pay your tax debt over time in equal monthly payments. However, requesting a payment plan is not in every individual’s best interests.
An experienced tax attorney can help you understand all your options. Sodowsky Law Firm, PC has worked with countless clients who have IRS debts. We will listen to your situation and help you develop a strategic plan, which may include IRS installment agreements.
Am I Eligible for an IRS Payment Plan?
In 2012, the federal government liberalized its installment plan processing as part of the Fresh Start Program. In order to be eligible for an installment agreement (IA), you must be up-to-date on your tax return filings. Other eligibility requirements may apply if you are self-employed or have employees. However, if you owe less than $50,000, have filed and paid your taxes for the past five years, and meet other criteria, you may have guaranteed eligibility for a payment plan. And, if you owe the IRS $50,000 or less (including taxes, interest, and penalties), you may able to use a streamlined application. This simplified process can be completed online.
In September, 2016, the IRS instituted a year-long pilot program to test expanded criteria for streamlined installment agreement processing. Under this new program, some taxpayers with balances between $50,001 and $100,000 may be able to obtain an installment agreement of up to 84 months without providing detailed financial information.
If you cannot use the streamlined application, you must submit detailed financial information and a series of forms (including a Collection Information Statement). This is a more complicated and time intensive process. Once you file your paperwork, the IRS will assess your ability to pay your tax debt. They will then either approve or deny your request.
However, many people opt not to request an IRS payment plan because:
- Interest and penalties continue to accrue during repayment,
- The interest rates may be higher than bank rates, and
- You also must pay a user fee.
Instead, they use bank loans, mortgages, and home equity loans to pay off their tax debt. A tax lawyer can evaluate your claim, educate you about your options, and formulate a personalized solution that meets your needs.
You Must Be Current on Your Tax Returns for IRS Installment Agreements
In order to take advantage of IRS installment agreements, you must be completely up to date on filing your tax returns. If you haven’t filed all past due tax returns, then you may be ineligible for an IA. Similarly, if you are self-employed, you must be up to date on quarterly estimated tax payments. If you have a business and have employees, then you must also be up to date on payroll tax deposits as well as Form 941 filings. If you or your business aren’t completely up to date on your tax returns or filings, then you may be ineligible for IRS installment agreements.
Requesting an IRS Installment Agreement
If you have a large tax debt, the IRS payment plan process involves a detailed financial and legal analysis. You must convince the government that your financial statements are accurate, your living expenses are reasonable, and that your proposal meets IRS standards. It may be in your best interest to consult with an experienced tax lawyer before you file a proposed payment plan. An IRS lawyer can help you understand your legal rights and responsibilities and formulate a realistic plan. And, if the IRS rejects your installment agreement, a lawyer can help you with an appeal.
Paying Off an IRS Installment Agreement
If your IRS installment agreement is approved, you must meet certain duties. This includes paying each monthly installment on time, filing future tax returns, and promptly paying future taxes. While you are paying off your IRS payment plan, your tax refunds will be applied to your debt.
If you default on an IRS installment agreement, there are serious ramifications. The IRS can revoke your plan, initiate collections actions, and assess additional fees and penalties. If your payment plan is revoked, you may have the right to appeal. An experienced tax lawyer can help you understand your claim, file the appropriate forms, and negotiate on your behalf.
Unfortunately, if you owe the IRS over $50,000, an installment plan will not prevent it from filing a tax lien against you (potentially damaging your credit). However, the IRS may be unable to levy your property under certain circumstances.
Negotiating Monthly Payments With the IRS
If you owe the IRS more than $50,000 or the standard amount of time provided in IRS installment agreements is not enough for you, you may be able to negotiate a monthly payment plan. A skilled tax attorney can help you obtain IRS installment agreements that are acceptable to you and that you can afford.
When you request IRS installment agreements, an IRS collector will review your Collection Information Statement Form 433-A. This will provide them with information about your finances. The IRS collector may use that information to determine how much you can pay monthly. Unfortunately, each IRS collector may make a different determination. They have significant leeway in their determination of what you can pay. You should work with a tax attorney who can negotiate this amount with the IRS collector and find an amount you can afford.
An attorney can help you:
- Evaluate your finances to understand how much you can pay the IRS.
- Obtain IRS installment agreements that you can afford.
- Negotiate an acceptable monthly payment with a tax collector.
- Make an offer to pay the least amount possible to the IRS.
The IRS will allow your attorney to discuss acceptable IRS installment agreements with them. You don’t have to accept the first offer from the IRS collector. Instead, you can allow your tax lawyer to determine what is affordable for you and request a specific payment plan.
How to Make Monthly Payments to the IRS
Once you are in IRS installment agreements, you must send regular agreed upon payments to the IRS. This may be done through your bank, your employer, a money order, or a cashier’s check. You may set up payroll deductions through your employer by submitting a Payroll Deduction Agreement Form 2159. However, you may not want your employer to know that you are making payments to the IRS. In such a situation, you may allow the IRS to directly debit your bank account. If you don’t want the IRS to have your bank account number, you may use a money order or cashier’s check instead.
What If the IRS Does Not Approve Your Installment Agreement Proposal?
If your attorney submits IRS installment agreements proposals and they are denied, you may have to select a payment plan option presented by the IRS instead or submit a new proposal.
The IRS does not consider all your living expenses to be necessary. If you submitted an IRS installment agreement proposal, you also submitted information about your income and expenses. Your payment plan would have been based on your extra income. However, if the IRS does not feel your living expenses are necessary, such as private school for your children or scheduled charitable contributions, they may deny your plan proposal.
If you had a prior IA and defaulted, then the IRS may deny your IRS installment agreement proposal. They may be concerned that you will not comply with the payment plan and deny your ability to take part in an IA entirely. In this situation, you may have to negotiate a full settlement of your debt.
When IRS Installment Agreements May Not Work for You
IRS installment agreements do not work for everyone. You should consult a tax attorney before seeking an agreement. An attorney can help you understand all of your legal options and determine what is the best course of action for you.
One of the primary reasons that IRS installment agreements can be negative for some individuals is that interest and penalties continue to accrue on tax accounts while in the IA. This can amount to up an 8 to 10 percent interest rate per year. This can add thousands of dollars to what you owe over the course of IRS installment agreements.
Do You Need Help Negotiating an IRS Payment Plan or IRS Installment Agreement?
We provide personalized attention and advice that will help you create a manageable payment plan with the IRS. Since nonpayment can result in severe consequences, we will work with you and the IRS to build the best solution possible. Contact the Sodowsky Law Firm, PC today for help with IRS installment agreements.