An IRS installment agreement allows a delinquent taxpayer to negotiate an IRS payment plan for a tax liability based on the size of the tax debt and number of years needed to repay the debt. Whether it is called a repayment agreement, payment option or installment agreement, your commitment to the Internal Revenue Service remains the same. Pay your tax debt and be a responsible citizen in the future by avoiding back taxes from unfiled tax returns. An IRS installment agreement can be the most reasonable payment option for taxpayers who cannot resolve their tax debt immediately. However, you do want to repay the IRS debt in full as quickly as possible to minimize the amount of interest and penalties that are charged. Remember, in order for you to qualify for an installment agreement, you must have filed your returns and paid your taxes in consecutive years prior to your current tax liability. You cannot have had an installment agreement with the IRS in the previous five years. Call us at (415) 668-3130 today for more information and for a free consultation.
Based on the amount of your tax debt, the IRS has several plans for payment of the tax debt using an IRS installment agreement or other forms of IRS tax relief. Listed below are some basic categories you may qualify for:
- Guaranteed “Automatic” Installment Plan (Agreement) – If you owe less than $10,000 in back taxes, the IRS has an installment repayment plan that has relatively easy terms and conditions. Typically, the balance due for the tax debt is to be paid in full within 3 years.
- Streamlined Installment Plan (Agreement) – If you owe less than $50,000 in back taxes, the IRS has a streamlined plan that requires repayment of the entire tax with interest and penalties within 6 years / 72 months or the sooner of the CSED “Collection Statute Expiration Date”. An enrolled agent can explain the exact requirements for an IRS tax settlement agreement for tax liabilities above $50,000.
- Regular Installment Plan (Agreement) – If you owe more than $50,000 and/or cannot pay off the entire balance within 6 years / 72 months or the sooner of the CSED “Collection Statute Expiration Date”, then you may qualify for a Regular Installment Plan. After completing an IRS Form 433, the IRS will review the taxpayers assets and cash flow and the ability to service the debt. If the debt can be paid off within the CSED 10 year period, the IRS may allow a Regular Installment Plan with monthly payment the taxpayer can afford.
- IRS Verified Financials – If you owe more than $50,000 or will require more than 6 years / 72 months or the sooner of the CSED “Collection Statute Expiration to settle the tax debt, then you will likely need professional tax advice from an enrolled agent or other tax professional. The IRS will review your expense claims, tax deductions, source of income and other financial assets including the taxpayer’s personal property.
- Currently Non-Collectible Status (CNC) – If you are financially unable to repay your tax debt, the IRS can verify your financial status and deem the debt non-collectible. Reasonable collection potential (RCP) is a formula that helps the IRS measure a taxpayer’s potential to pay their tax debt. This means that if you can get classified as CNC then this status can prevent the IRS from taking enforced collection action. This may be exactly what would be helpful if IRS collection department is seizing bank accounts, wage levy, property liens, etc. One advantage or potential disadvantage depending on the situation is that the 10 year collection clock is paused until the taxpayer becomes able to start making payments. A yearly financial is required to be sent to the IRS to re-establish CNC status.
- Partial-Pay Installment (Agreement) – This type of IRS installment agreement, where the IRS accepts a partial repayment of the total tax debt, is seldom used by the Internal Revenue Service today. Typically, the tax liability is deemed non-collectible or the IRS will opt to collect the tax debt in full.
- One Year Rule – IRS allows Installment Plans to be based on actual taxpayer expenses for the first year. This allows the taxpayer to get living expense in line with IRS allowable expenses if they are over the allowable. Any Installment Plan payments the first year would be based on the actual expenses and then from month 13 onward based on IRS allowable living expenses.
- Six Year Rule- If the taxpayer are unable to pay in a lump sum or do not qualify for a Streamlined Installment Plan, then the taxpayer may qualify to pay the payments over 6 years / 72 months. Form 433 is required and IRS approval is required.
- Installment Plan Defaults – When any of the following occurs, the Installment is automatically void and the taxpayer must start all over again (If an Installment Plan is still available): 1. Incurring new tax debt by filing a tax return with a balance due. 2. Failing to file tax returns timely. 3. Failing to make installment payments as agreed (missing a payment(s).
When you cannot pay your tax debt right away, an IRS installment agreement is the most common method used for a tax settlement. If you know you cannot pay your current tax liability, you can start the negotiation process with IRS by having a qualified tax professional, such as an enrolled agent, help you complete a Form 9465 to be sent with your tax return. At Dana & Fullam, we can help you determine a suggested monthly payment amount for an installment agreement using your “necessary living expenses” and total amount of “discretionary income.” If the IRS does not accept your offer for a tax settlement agreement, you will receive a formal rejection letter. Sometimes, we can make a simple phone call to the responsible IRS agent and resolve the issues that led to the rejection. To better understand your options for an IRS installment agreement, call us today at (415) 668-3130 and speak directly with an enrolled agent. If you prefer email, please use our website’s convenient Contact Us form to submit your specific tax information for a prompt response.