Let’s say you’ve been subject to an IRS tax audit and you’ve been assessed additional money. And let’s say you can’t pay the new tax bill.
The IRS believes strongly in getting paid. If you can’t pay all at once, the IRS likes to “pay as you go.” That’s when installment agreements come into play. The IRS is authorized to enter into a formal written installment agreement with any taxpayer when it determines that this will facilitate collection. The IRS favors installment agreements. An installment agreement to pay over time is sometimes the best way for taxpayers who owe money to take their medications in easy doses.
Since the installment agreement involves the inability to pay everything at once, the IRS requires a full financial disclosure before agreeing to take your taxes in installments. But the presentation of financial data can reveal sources of revenue that the taxpayer may be reluctant to part with. Keep in mind, therefore, that any financial data the taxpayer discloses can be (and sometimes is) used against them.
Bail:
The installment agreement does not forgive taxes, penalties or interest, and these can be substantial. For example, for most of 1999, the underpayment interest rate was 8 percent. The penalty for non-payment is 0.25 percent for any month in which an installment agreement is in effect (months after 1999 or later), with a maximum of 25 percent, totaling a 12 percent annual effective rate (including interest). The interest is compounded daily on top of the interest and penalty for failure to pay.
The IRS Restructuring and Reform Act of 1998 made significant amendments to the rules governing installment agreements to make them more equitable and more widely used. The reforms include:
– The taxpayer can appeal the IRS rejection or termination of an installment agreement.
– The IRS is prohibited from encumbering a taxpayer’s property during the period the taxpayer has an outstanding payment offer or during the period the agreement is in effect. If the IRS rejects the offer or terminates the agreement, no lien may be taken within 30 days of the rejection or termination. If the taxpayer appeals the dismissal or termination, the lien may not be made while the appeal is pending.
– Beginning in 1999, the penalty for failure to pay the tax is reduced from 0.5 percent per month to 0.25 percent per month during any month in which an installment agreement for unpaid tax is in effect.
– Taxpayers who owe no more than $10,000 and can pay in full within three years are guaranteed to get settlements if they have a good record of tax compliance.
The IRS will also grant installment agreements to taxpayers who agree to pay a balance due of $25,000 or less within a five-year period.
Well, you just finished your IRS tax audit and now you have a pretty big tax liability. A taxpayer requests an installment agreement on Form 9465, Request for Installment Agreement. The taxpayer may request an agreement under which the taxpayer makes monthly payments. Alternatively, the taxpayer can request that payments be automatically deducted each month from their bank account. To do this, the taxpayer must provide their account number and the type of account (checking or savings) and the routing number of the bank.
Bail:
Form 9465 advises that the IRS may file a tax lien to protect the government’s interests until the taxpayer pays in full.
How:
The IRS may withdraw a notice of lien or return the encumbered property if the taxpayer enters into an installment agreement to satisfy the tax obligation for which the lien or lien was imposed.
Anyone requesting an installment agreement must pay a $43 user fee if the agreement request is approved.
WHERE TO GET A DEAL
A taxpayer may obtain an installment agreement by filing Form 9465, Request for Installment Agreement, with the taxpayer’s return. Form 9465 may also be filed after the taxpayer submits her return at the Service Center indicated on the form. You can also get an installment agreement from many different IRS offices, including the Automated Collection System, IRS Taxpayer Branch (at IRS locations), and Field Collection. Experience shows that it is best for you to negotiate the installment agreement with a Revenue Officer (Field Collection). They can be difficult, but they are easier to manage than most other IRS branches where installment agreements can be negotiated. Revenue officers also have more discretion over amounts, although this discretion may be somewhat restricted by new national rules governing allowable payments for necessary living expenses.
A district director, a service center director, or a fulfillment center director has the discretion to accept or reject any proposed installment agreement. However, the IRS must accept settlements for tax liabilities of $10,000 or less if the full amount can be paid within three years and the taxpayer has a good record of compliance.
The IRS will also grant installment agreements to taxpayers who agree to pay a balance due of $25,000 or less within a five-year period. These agreements do not require the approval of a collections administrator and do not involve the submission of links. Taxpayers may make these agreements in person, by phone or by mail. This procedure can be used for individual and business income taxes and for any type of tax for a business that is no longer in operation.
REQUEST FOR AN AGREEMENT
You will need three documents: Form 433-A (Individual Collection Information Statement), Form 9465 (Installment Agreement Request), and, if requested by the Revenue Officer (they almost always do), Form 900 (Exemption Tax Collection). Form 433-B (Business Collection Information Statement) may also be required.
IS AN INSTALLMENT AGREEMENT A GOOD DEAL?
The installment agreement binds the taxpayer for a long time. In high liability cases, the taxpayer may never be able to dig. Also, since the taxpayer is paying at an effective annual interest rate of 12 percent or more for quite some time (due to penalties and interest), the installment agreement is not the best option if there are alternatives.
One strategy is to submit an offer in compromise before the IRS requests an installment agreement. The stated policy of the IRS is to withhold collection from offers submitted as long as there is no danger and the offer is not frivolous. You can make an offer even during the term of an installment agreement, but the collection of that agreement will continue.
How:
All in all, the installment agreement is a mixed blessing. He pays his taxes in digestible amounts, but he pays them all at high effective interest and prolongs the agony. Certainly, if there are better alternatives, they should be sought out. However, the installment agreement is better than its alternative, the forced collection.
