What is an Installment Agreement?
An Installment Agreement is a payment arrangement in which the IRS allows you to pay your outstanding tax debt in equal monthly payments until the balance is paid in full.
Will I continue to incur penalties and interest while I pay the Installment agreement?
Yes, interest and penalties continue to accrue on the outstanding balance of the tax liability until the liability is paid in full.
Will the IRS continue collection action once an installment agreement is established?
Once an Installment Agreement is in place, the IRS will stop collection action, including bank levies and wage garnishments, as long as you remain current with all future tax filing and payment obligations.
We should point out that, even though the IRS will not levy your bank account, garnish your wages, or seize your property, the IRS may file a federal tax lien to ensure that you comply with the installment payment arrangement. The IRS sees a tax lien as a “passive” collection tool because; the lien will not cause immediate property seizure. In some cases, you can avoid lien filings.
There are 5 types of IRS Installment Agreements. The different types depend on the amount of taxes owed.
Types of Installment Agreements (IA)
Guaranteed Installment Agreements
As an individual taxpayer, 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 joint) have filed and paid all taxes due for the previous 5 years
- Neither you (nor your spouse, if you filed joint) have had an installment agreement with the IRS in the previous 5 years
- You can pay the full amount within 3 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 (6 years), and within the time limit for the IRS to collect the tax, but you won’t need to submit a financial statement.
Type 1- 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
Type 2- 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
Partial Pay Agreement
In this situation, you have some ability to pay your taxes but can’t pay in full within the remaining time the IRS has to collect. The IRS may allow you to make payments until this collection period expires.
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.
Documentation: The IRS may ask you for supporting documents for your income, expenses, and other amounts you owe (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 that reasoning with your application.
The Six Year Rule: Generally, if you only owe individual income tax, you may qualify for the 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 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.
What do I need in order to set up an installment agreement?
In order to submit an installment agreement, the IRS requires that you file all outstanding tax returns and remain current on future tax filings. Your installment agreement offer will not be considered or accepted until you have satisfied that requirement. If you have outstanding tax returns, we can prepare and file all returns necessary to bring you into compliance with your tax return filing obligations and enable you to qualify to submit an installment agreement proposal or other collection alternative.
How do I set up an installment agreement?
Negotiation of an Installment Agreement is often difficult and requires substantial knowledge about IRS guidelines and regulations. Figuring out the minimum monthly installment payment that the IRS will accept depends upon the correctly applying specific IRS income/ expense standards and to the specific facts of the case. These regulations and guidelines include IRS local and national standards for allowable expenses that IRS Revenue Officers will use to evaluate your installment offer and proposed payment amount.
What if I have a tax refund?
The IRS will take your future tax refunds. The IRS will apply your tax refunds to back taxes owed. This will reduce the number of monthly payments you make under the IRS Installment Agreement.
Are there alternatives to an installment agreement that I might qualify for?
If you can’t afford to make monthly payments through an installment agreement, there are other options available. Some options include reviewing the Offer in Compromise program and determining if you qualify. Our tax team can also help, by requesting that your account is placed in Currently Not Collectible status. Once the IRS classifies an account as “currently not collectible”, it will discontinue enforcement action and release any levies already in place.
Every tax case is different, but EVERY case has a solution. We can help you figure out the best program to settle your tax debt, click below for a free consultation with a professional that can guide you to the correct solution.
The IRS will not forget about you or your tax debt, it will only increase the pressure to collect! An installment agreement might be a lifesaving option for your tax debt, but you may also qualify for more desirable programs that could decrease the taxes owed: like Offer In Compromise, or penalty abatement.