IRS installment agreements are offered to taxpayers looking for a way to pay their taxes to the government in monthly amounts. Installment agreements are among the most popular programs requested by clients at our CPA firm. It is important to use installment agreements to pay taxes over time to avoid penalties and ensure timely payments.
There are several variations of payment plans:
- Automatic Installment Agreement
- Streamlined Installment Agreement
- Regular Installment Agreement
- Partial-Pay Installment Agreement
- Direct Debit Installment Agreement
***CPA Tax Planning Tip:*** It is important to know that payment plans are available as a tax relief solution only if the taxpayer’s returns have been filed. The IRS will be looking for the last six years of returns. If returns are missing, then they need to be filed as soon as possible. At that point, we can propose an installment agreement to the IRS for the tax due.
Automatic Installment Agreements
The automatic installment agreement request is a type of tax payment plan for situations when the tax debt is less than $10,000.
To qualify, the taxpayer must not have owed back taxes or had an existing agreement in the last five years. The full amount of the tax must be paid in monthly installments within three years.
The application process is straightforward and financial information is not required to be submitted.
Streamlined Installment Agreements
The streamlined installment agreement is a type of tax payment plan for situations when the tax debt is less than $50,000. As with an automatic installment agreement, the application process for a streamlined agreement is straightforward and submission of financial information on Form 433 is not required.
To qualify, the taxpayer must not have owed back taxes or had an existing payment plan in the last five years. The full amount of the tax must be paid in monthly installments within 72 months (six years). To avoid default of your payment plan, make sure you understand and manage your checking account, or savings account. Pay at least your minimum monthly payment when it’s due.
Guaranteed Installment Agreement
A Guaranteed Installment Agreement is a straightforward and reliable tax payment plan for taxpayers who owe a relatively small amount of federal tax debt. This type of payment plan is designed to provide peace of mind by ensuring that the IRS will approve the payment plan as long as specific conditions are met.
To qualify for a Guaranteed Installment Agreement, the taxpayer’s total tax debt must be $10,000 or less, excluding penalties and interest. Additionally, the taxpayer must agree to pay the full amount owed within three years through monthly payments. This agreement is particularly beneficial for those who have a consistent income and can commit to regular payments without financial strain.
One of the key advantages of a Guaranteed Installment Agreement is that it does not require the submission of detailed financial information, making the application process simpler and faster. Taxpayers can apply online, by phone, or by submitting Form 9465. Once approved, the taxpayer must ensure timely monthly payments to avoid defaulting on the agreement.
IRS 84-Month Installment Agreement
In 2018, the automated collection system (“ACS”) branch of the IRS started to approve streamlined payment plans up to $100,000, with payment times of 84 months. This does not apply to all branches of the IRS.
***CPA Tax Planning Tip:*** Consider using assets to pay off part of the tax, so it is below the threshold for a streamlined agreement. This strategy means that the IRS will not require the taxpayer to disclose and liquidate all their assets to pay the tax in full.
IRS Installment Agreement Coronavirus
As a result of COVID, the limit for a streamlined tax payment plan was increased in 2020 to $250,000, payable over the months remaining on the collection statute of limitations.
Taxpayers can use the IRS’s online payment agreement tool to manage their installment agreements during the pandemic.
This only applies to IRS tax debts processed through the automated collection system of the IRS.
Regular Installment Agreement
Regular payment plans are for those who do not qualify for the automatic or the streamlined installment agreement. This is commonly for tax debts over $50,000.
The application process is far more complicated, including the preparation of Form 433, which requires detailed financial information. Failing to adhere to the terms of the regular installment agreement can result in a federal tax lien.
IRS Payment Plan Calculator
The monthly payment under a regular IRS installment agreement or tax payment plan is based on a formula called Reasonable Collection Potential, which helps determine the taxpayer’s ability to pay based on their tax liability. This formula is calculated on IRS Form 433. The intention of the formula is to determine what the taxpayer can afford to pay monthly.
First, the IRS looks at the taxpayer’s gross monthly income. All sources of income are considered, including wages, business income, child support, disability income and social security. It does not matter whether the income is taxable or not.
Then, “allowable expenses” are subtracted from gross monthly income. Only certain expenses, but not all, will be allowed. Depending on the type of expense, allowable expenses are based on national or local standards, rather than actual amounts.
Finally, the IRS will also look at the taxpayer’s net equity in assets. The IRS will discount the fair market value of the assets based on an 80% Quick Sale Value. The IRS may require the taxpayer to liquidate certain assets to pay off the tax before the monthly installment agreement amount is calculated.
The sum of these calculations (net income, plus net equity in assets) will determine what the taxpayer can afford as a monthly payment to the IRS to pay the tax bill.
The IRS will require that the monthly payments be sufficient to pay off the tax debt in full within the time remaining on the 10-year IRS statute of limitations for collections (also known as the CSED).
***CPA Tax Planning Tip:***The IRS will allow the taxpayer to pay a lower monthly installment amount for one year based on actual expenses, rather than the IRS allowable expenses, provided that the tax will be paid in full by the end of the 10-year IRS statute of limitations. This “one-year rule” gives the taxpayer a year to adjust their standard of living to afford a higher monthly payment after the first year.
***CPA Tax Planning Tip:***The IRS will also allow the taxpayer to pay a lower monthly installment amount for six years, based on actual expenses, if the tax will be paid in full within the six year period. This is called the “six-year rule.” It is very helpful for the taxpayer looking for a payment plan that is easier to live with.
Partial-Payment Installment Agreement
The partial-pay installment agreement (PPIA) or tax payment plan is for those who are unable to pay off their unpaid taxes in full within the time remaining on the 10-year IRS statute of limitations for collections (CSED). Taxpayers must not have had existing installment agreements in the last five years to qualify.
The application process for a partial-pay installment agreement also requires the submission of Form 433, with full financial information.
The monthly payment amount will be based on the taxpayer’s ability to pay.
The taxpayer may be asked to use the available equity in assets to pay down the tax before the amount of the monthly payment is computed. If the equity in assets is significant, the IRS may seize or levy the property. However, this can be avoided, and collection actions will stop, if the taxpayer can demonstrate a financial hardship.
The monthly amount will be reviewed by the IRS, usually every two years, to see if the taxpayer’s financial situation has changed and can afford to increase their monthly payments.
Direct Debit Installment Agreement
The Direct Debit Installment Agreement (DDIA) offers taxpayers a straightforward way to handle their tax debts through automatic monthly payments as part of a tax payment plan. Like other installment plans, the DDIA helps individuals gradually pay off what they owe.
To qualify for a DDIA, taxpayers must meet certain IRS criteria:
- Eligibility: Taxpayers need to owe a specific amount in taxes to be eligible for a DDIA, which can vary based on their situation.
- Direct Debit Setup: They authorize the IRS to withdraw monthly payments directly from their bank account, ensuring consistent payments.
- Application: Applying is easy, either online or by submitting forms through mail.
- Payment Determination: The monthly payment amount is based on what the taxpayer can afford and the total tax debt owed.
Taxpayers can set up and manage their direct debit installment agreements through the IRS’s online application tool, which allows them to revise monthly payments, change due dates, and manage other aspects of their payment plans conveniently.
Benefits of Paying Installment Payment Agreement on Time
Paying your tax payment plan on time offers several benefits:
- Avoiding Penalties: Timely payments help you steer clear of additional tax penalties and interest charges that accrue when payments are missed or delayed.
- Maintaining Compliance: By adhering to the agreed-upon payment schedule, you demonstrate your commitment to fulfilling your tax obligations, which can positively impact your compliance record with the IRS.
- Preserving Financial Stability: Consistent payments contribute to financial stability by preventing the accumulation of overdue tax debt and associated financial stress.
- Protecting Assets: Meeting your payment obligations helps safeguard your assets from potential IRS enforcement actions such as liens, levies, or wage garnishments. Failing to pay on time can result in a federal tax lien, which serves as a public notice that prioritizes the government’s claim over all creditors.
- Building Trust with the IRS: Fulfilling your Installment Agreement obligations on time can enhance your relationship with the IRS, potentially facilitating smoother interactions in the future if you encounter tax-related issues.
- Improving Creditworthiness: Avoiding delinquencies on your Installment Agreement payments can preserve your credit score and financial reputation, ensuring access to credit and financing options when needed.
Eligibility and Requirements
To be eligible for a Guaranteed Installment Agreement, taxpayers must meet specific criteria set by the Internal Revenue Service for this type of tax payment plan. These requirements are designed to ensure that the taxpayer can manage the monthly payments and pay off the federal tax debt within the agreed timeframe.
Firstly, the taxpayer’s total tax debt, excluding penalties and interest, must be $10,000 or less. This threshold ensures that the debt is manageable within the three-year payment period. Additionally, the taxpayer must have filed all required tax returns and paid any taxes due in the past five years. This demonstrates a history of compliance and responsibility.
The taxpayer must also agree to pay the full amount owed within three years through monthly payments. This commitment is crucial for the IRS to approve the installment agreement. Furthermore, the taxpayer must not have had an installment agreement in the past five years, ensuring that this option is available to those who have not previously relied on such arrangements.
By meeting these requirements, taxpayers can benefit from the simplicity and assurance of a Guaranteed Installment Agreement, allowing them to manage their tax debt effectively without the need for extensive financial disclosures.
Setting up an IRS Payment Plan for Your Tax Liability
The installment agreement is one of the most popular tools in our accounting firm to resolve income tax debts through a tax payment plan. The other solutions are offer-in-compromise, uncollectable status (hardship) and bankruptcy.
The first step in the process is a careful analysis of the taxpayer’s IRS tax transcripts. This is necessary in order to know what the IRS has in its records that could impact qualification under the various tax resolution provisions. At our CPA firm, we analyze IRS transcripts to double check the statute of limitations as calculated by the IRS. This has a direct bearing on installment agreement calculations. It is also crucial to understand one’s tax liability before setting up a payment plan to avoid complications with the IRS.
Also, we make sure that there are no unfiled tax returns for the prior six years, which could make it impossible to set up a payment plan. If returns are missing, we get them filed ASAP. If the return is tied to a business, we also get the QuickBooks caught up, so the returns can be fled.
Defaulting on an IRS Installment Agreement
Three actions will trigger a default of a tax payment plan under an existing agreement:
- Incurring a new tax debt or penalty
- Failing to file a tax return on time
- Failing to make installment payments
If a taxpayer defaults, the IRS will terminate the agreement. In such a case, the taxpayer will have to pay the balance of the tax in full. Alternatively, the taxpayer may request an Appeal or attempt to negotiate a new installment agreement with the government.
***CPA Tax Planning Tip:***We strongly recommend that taxpayers use an automated direct debit arrangement for their installment agreements to avoid an inadvertent default.
Short-Term Extension of Time to Pay
A short-term tax payment plan is a good option for those who can afford the monthly payments. The period of payment is between 10 days and 180 days (about 6 months). Since the payment term is shorter, combined tax penalties and interest will be less, although they do continue to accrue.
The IRS will usually not impose a tax lien or levy while a taxpayer is under a short-term extension of time to pay. It is important to use the short-term extension to pay taxes within the given period to avoid additional penalties and interest.
IRS Interest Rate on Installment Agreements
Interest will continue to accrue while the tax payment plan is in place. The interest rate is adjusted quarterly. As an example, the IRS increased the interest rate on underpayments for the fourth quarter of 2022 to 6%, for most taxpayers. Higher interest rates can significantly increase your overall tax liability, making it crucial to manage these rates effectively.
The IRS will not agree to forgive interest payments.
FAQs
What is an IRS installment agreement?
An IRS installment agreement is a tax payment plan that allows taxpayers to pay taxes over time in monthly installments.
How do I qualify for an IRS Installment Agreement?
To qualify for an IRS tax payment plan, taxpayers typically need to owe less than $50,000 in taxes and have filed all required tax returns. Additionally, taxpayers must not have had an existing installment agreement in the last five years.
How do I request a payment plan?
You can request a tax payment plan through the IRS’s online payment agreement tool by submitting Form 9465 (Installment Agreement Request). This can be done either online, by mail, or by phone.
Are there any associated costs with installment agreements?
There may be associated costs with a tax payment plan, such as a setup fee, which varies depending on the type of agreement and how you choose to set it up.
How long can I expect the process to take?
The process duration for a tax payment plan can vary, but the IRS usually takes a few weeks to review and approve your request.
What happens if I miss a payment on my IRS Payment Plan?
If you miss a payment on your tax payment plan, you may incur penalties and interest, and the IRS may take enforcement actions such as issuing a lien or levy. Missing a payment can also result in a federal tax lien, which serves as a public notice that prioritizes the government’s claim over all creditors, making it more difficult to obtain loans or financing. It’s important to communicate with the IRS and address missed payments promptly.
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