US tax policy: The IRS installment agreement
The Internal Revenue Service gives the taxpayers an option to settle tax debt through an installment agreement. Since interest and penalties will apply, the IRS encourages taxpayers to pay taxes promptly. Interest and penalties can go up by 8 to 10 percent per year.
An installment agreement is an alternative allowed by the IRS for people unable to fully pay off their tax debt via a single transaction. Notably, the IRS has four different types of installment agreements: guaranteed, streamlined, partial and non-streamlined.
Streamlined installment agreement
A taxpayer that qualifies for the guaranteed agreement will also be eligible for the streamlined installment agreement. The streamlined installment agreement is bound to the following conditions:
The tax liability, interest and penalties do not exceed $50,000.
The balance can be settled within 72 months.
The proposed payment is equal to or more than the minimum acceptable payment. Notably, it has a minimum monthly payment requirement of $25.
The taxpayer must pay a fee to start the installment agreement or a reduced cost for a direct debit installment agreement. To restructure or reinstate a previous installment agreement, the IRS charges a separate fee.
Like a guaranteed installment agreement, the IRS does not file a federal tax lien.
Guaranteed installment agreement
To qualify for the installment agreement with the IRS, a taxpayer must meet the following conditions:
Owe less than $50,000 excluding interest and penalties
In the last five years, the taxpayer must have filed tax returns and must have paid taxes owed
The tax liability is not able to be cleared when due or within 120 days
The taxpayer will settle the liability within three years
If the taxpayer must pay the minimum monthly payment including tax liability, interest and penalties
Under the installment payment plan, the IRS will not file a federal tax lien against the taxpayer.
Partial payment installment agreement
A partial payment agreement enables the IRS to go into negotiations with taxpayers for a fraction of the costs of the tax liability. A taxpayer should complete a financial statement to qualify for the partial installment arrangement. The form enables taxpayers to report income and living expenses. After submission, the IRS reviews and verifies the information. In case the taxpayer has actionable assets to pay some of the tax debt, the IRS will require the taxpayer to give more details on the possessions.
Once approved, the IRS requires the taxpayer to participate in a financial review, which happens every two years. Most notably, this review may increase installment payments or result in the total termination of the agreement.
Non-streamlined installment agreement
A non-streamlined agreement is an option for taxpayers who owe $50,000 or more to the IRS. This allows them to set up monthly payments. However, the IRS will not automatically approve this agreement. Instead, the taxpayer must negotiate. The taxpayer must file a Collection Information Statement with the IRS that collects all the information about income, debts, living expenses, assets and accounts of the interested taxpayer and allows the taxpayer to suggest an installment payment amount.
Typically, it takes the IRS a few months to review a proposed payment plan. The IRS may decline a proposed agreement if it considers some of the taxpayer’s living expenses unnecessary. Additionally, they may refuse to get into the agreement if the information provided is false or if the taxpayer failed to honor a prior installment arrangement.
If you were not able to clear a tax liability through a non-streamlined agreement, it would be wise to consider filing an Offer in Compromise. An OIC is an agreement between the taxpayer and the IRS that settles any tax liabilities for an amount less than the full payment owed.
Methods of payments
The payment options available to the taxpayers for installment payments are as follows:
Payroll Deduction
Check or money order
Online Payment Agreement (OPA)
Direct debit
Credit card
When might the IRS revoke an installment agreement
Before getting into the installment arrangement, it is important to note that the IRS can revoke the agreement under the following circumstances:
If the taxpayer is missing a payment
If the taxpayer provided inaccurate information
When the taxpayer is paying under a partial payment installment agreement and a review indicates a variation in their financial position.
When the taxpayer fails to file their tax return
Striving to settle a huge tax bill can be extremely stressful. Sometimes, it may even be a shock if you are not well versed in the tax code. Get in touch with Mount Bonnell Advisors if you have questions about IRS payment agreements. Our specialists in U.S. tax policy will get you all the answers. Remember, here at Mount Bonnell Advisors, we give measurable information that will help you make the right decision concerning your payment options.
