What Is An Installment Agreement?
An installment agreement, which allows you to pay down your tax debt over a period of time, stops the IRS from pursuing its powerful collection methods – including the filing of a tax lien – against you.
An installment agreement (IA) is a payment plan that helps taxpayers who meet certain requirements get back on track so they can start paying down their debt. If you owe less than $10,000, the IRS will allow you to pay the back taxes over a period of 36 months. If you owe less than $50,000, the IRS will give you up to 72 months to pay.
A partial payment installment agreement allows you to pay less than the total amount owed by making monthly payments. Because the IRS is reducing the amount owed, you must fill out more detailed financial forms so the IRS can calculate the “reasonable collection potential” of the back taxes. Basically, the IRS looks at your assets, your income, and the statute of limitations on the taxes, and decides how much you can pay. If you make all the payments, any remaining balance is forgiven.
The biggest benefit of an IA is that the IRS will not file a tax lien against you. As previously mentioned, a tax lien can negatively affect your credit and prevent you from selling or refinancing your home.
I owe $10,000 or less…
The IRS will accept your proposed payment plan (or guaranteed installment agreement) if your outstanding balance is $10,000 or less, and, in the past five tax years, you:
- Filed your tax returns on time.
- Paid income tax due.
- Have not previously requested an IA.
In addition, you must not have the current ability to pay the tax in full, which is a determination the IRS makes based on the information you submit.
Guaranteed installment agreements don’t require you to fill out any extensive financial disclosures. When you enter into a guaranteed installment agreement, you agree to pay your tax debt in full within three years.
I owe between $10,000 and $50,000…
There are two types of streamlined installment agreements. The first is the classic version, which requires the IRS debt to be less than $25,000, and repaid within five years. The IRS Fresh Start Initiative increases the debt limit to $50,000, with a repayment term of six years.
I owe more than $50,000 in IRS taxes…
While you may still be eligible for a repayment plan, there are a few more hoops you’ll have to go through, including a thorough financial disclosure to prove the plan is necessary in order for you to pay your tax debt.
You’ll need to complete Form 9465-FS, and attach a Collection Information Statement on Form 433-F. The IRS will conduct a more thorough investigation of your assets and liabilities to determine whether you qualify for the IA, and may also refuse your request if it deems you can pay your debt or are living a lavish lifestyle.
Another distinction if you owe $50,000 or more, is that the IRS will file tax liens against you until the tax debt has been paid in full.
How Do I Enter Into An IA?
You or your tax representative will have to request it from the IRS. If you owe $50,000 or less in combined taxes, penalties, and interest, and have filed all required returns, you or your representative can either call the IRS, or use their Online Payment Agreement (OPA) tool. The OPA allows you near immediate notification of acceptance, which can take as little as 30 minutes.
If you owe more than $50,000, you’ll have to mail in your Form 9465 with the accompanying documentation and have it approved by the IRS. The IRS typically responds within one month.
Do I Need To Hire Someone To Help Me Resolve My Tax Debt?
Maybe not. If you owe less than $10,000, the IRS will accept any amount for your payment plan as long as you pay it off in three years. Most of the tax resolution firms out there will charge you thousands of dollars, which may be more than the penalties and interest you pay the IRS.
On the other hand, the more you owe, the more important it is to seek expert advice. An attorney with expertise in tax law can help you evaluate the options you have available to you to resolve your IRS debt, as well as any beneficial provisions applicable to your case, such as first-time tax abatements or a reasonable cause defense to penalties imposed – both of which can reduce the amount you owe.
It’s essential before you enter into any agreement with the IRS that you are fully aware of the terms and conditions you’re agreeing to. For example, when you enter into an IA, you agree to comply with all tax laws and make future filings and payments in a timely manner. Failure to do so results in default under the agreement.
Interest and penalties will continue to accrue on your unpaid tax balance, no matter which type of IA you enter into. A discussion with your lawyer may even help you determine what monthly payment will strike the balance between both protecting you from default, and paying down the most you can afford so you save big on accumulating interest.