Installment Agreements for Tax Repayment
Installment agreements allow taxpayers to pay tax debts to the IRS or state taxing authorities over a scheduled period. With the IRS, there multiple types of installment agreements:
- Partial Pay
- In Business
There are several factors necessary for the acceptance of an installment agreement
- An installment agreement request must
identify what the you can afford on a monthly basis (and)
- Demonstrate that the liability will be paid off in a timely fashion.
- Different types and amounts of documentation are required depending upon the amount owed and to whom.
For example, the IRS will set up installment agreements over the phone and with no financial forms if the amount owed is under $10,000. If the amount owed is greater, or if there are complex financials associated with a business, expect more documentation and scrutiny. State revenue departments tend to be less flexible and offer fewer options for installment agreements than the IRS.
The IRS and states vary widely in how long they will allow for the payback period and what actions or inactions can result in an rejection of an installment agreement request, or the default of an existing agreement.
Guaranteed Installment Agreements
You have the right to an agreement without submitting a financial statement if:
- The amount of tax you owe (not counting interest and penalties) is less than $10,000
- You (and your spouse, if you filed a joint tax return) have filed and paid all taxes due for the last five years.
- Neither you (nor your spouse, if you filed joint) have had an installment agreement with the IRS in the previous five years.
- You can pay the full amount you owe within three years.
- You agree to pay the liability before the period for collecting the tax expires.
- You comply with the tax laws during agreement.
Streamlined Installment Agreements
There are two types of Streamlined Installment Agreements, depending on how much and what type of tax you owe. For both types, you must pay the debt in full within 72 months (six years), and within the time limit for the IRS to collect the tax, but you won’t need to submit a financial statement.
Assessed tax liability under $25,000 (include all assessed tax, penalty and interest in computing the balance due).
This is available to individuals, businesses that are still operating, and businesses that have gone out of business.
Tax liability from $25,001 to $50,000 (include all assessed tax, penalty and interest in computing the balance due).
This is available to individuals and out-of-business sole proprietors.
Note: To get this type of agreement, you must pay through either a direct debit or payroll deduction agreement.
Partial Pay Installment Agreement
The IRS has a repayment option called Partial Payment Installment Agreement (PPIA). In essence this allows for a partial payment of a back tax liability, without going through the arduous Offer in Compromise process.
Not everyone will qualify for a PPIA, and even if you do, it may or may not be the best tax resolution strategy for your situation.
Like all agreements with the IRS, a PPIA requires that you complete financial information that will be reviewed and verified. You will also be required to address equity in assets that can be utilized to reduce or fully pay the amount of the outstanding liability.
If you are accepted, you will be subject to a subsequent financial review every two years, which makes it different from an Offer in Compromise. As a result of this review, the amount of the installment payments could increase or the agreement could be terminated, if your financial condition improves.
In-Business Trust Fund Express Agreement
An In-Business Trust Fund Express agreement may be available for businesses that owe up to $25,000. You must pay the debt in full in 24 months or before the collection period expires, whichever is earlier. You can also pay down the liability to $25,000 or less and then apply.
Routine Installment Agreements
If you don’t meet criteria for guaranteed, streamlined, or in-business trust fund express installment agreements, you can still request an installment agreement from the IRS.
You can request a routine installment agreement by mail, but not online.
Documentation: The IRS may ask you for supporting documents for your income, expenses, and other amounts you owe (For example: Home and car loan payments, other obligations.) The IRS publishes and uses national and local standards to determine allowable monthly expenses and arrive at the appropriate monthly payment. If you feel you should be allowed more than the standard amount, provide reasoning with your application.
The Six Year Rule: Generally, if you only owe individual income tax, you may qualify for the Six (6) Year Rule. You’d need to provide financial information but not proof of reasonable expenses. You must stay current with all filing and payment requirements, including projected penalties and interest on the tax debt, and fully pay the installment in six years (72 months) and within the collection statute – the time the IRS has to collect the amount you owe.
The One Year Rule: If you can’t pay your debt in full within six years, you may be given up to one year to modify or eliminate excessive necessary expenses. By modifying or eliminating these expenses, you may be able to pay the liability, plus accrued interest and penalties, within the six-year limit.
If none of these options seems to fit your circumstances, you can call the IRS and discuss your situation.
Because of the complexity of the different payment options with the IRS and state taxing authorities, you will benefit from discussing your situation with a tax resolution professional.