The Basics of Installment Agreements or Payment Plans.
IRS installment agreements, also called IRS payment plans, are offered to taxpayers looking for a way to pay their tax to the government in monthly amounts. Installment agreements are among the most popular programs requested by clients at our Atlanta CPA firm.
There are several variations of installment agreements:
CPA Note to Georgia Taxpayers: It is important to know that installment agreements 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 is for situations when the tax debt is less than $10,000.
To qualify, the taxpayer must not have owed back taxes or had an installment 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 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 financial information is not required to be submitted.
To qualify, the taxpayer must not have owed back taxes or had an installment agreement in the last five years. The full amount of the tax must be paid in monthly installments within 72 months (six years).
In 2018, the automated collection system (“ACS”) branch of the IRS started to approve streamlined installment agreements up to $100,000, with payment times of 84 months. This does not apply to all branches of the IRS.
Regular Installment Agreements
The regular installment agreement is for those who do not qualify for the automatic or the streamlined installment agreement.
The application process is more complicated, including detailed financial disclosures.
The IRS will review the taxpayer’s gross monthly income, less “allowable expenses.” The installment agreement will be based on the monthly available cash remaining after allowable expenses are deducted.
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 collection statute of limitations.
Partial-Pay Installment Agreements
The partial-pay installment agreement is for those who are unable to pay off their tax debt in full within the time remaining on the 10-year collection statute of limitations.
The application process also requires a detailed financial disclosure.
The monthly payment amount will be based on the taxpayer’s ability to pay. However, the monthly amount will be reviewed by the IRS, usually every two years, to see see if the taxpayer can afford to increase their monthly payments.
Defaulting on IRS Payment Plans
Three actions will trigger a default of an installment 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 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.
We strongly recommend that taxpayers use an automated direct debit arrangement for their installment agreements in order to avoid an inadvertent default.
Tax Planning Idea
Normally, an installment agreement is calculated as gross monthly income, less “allowable expenses” as defined by the IRS.
However, the IRS will allow taxpayers to use actual expenses, rather than allowable expenses, for one year. The rationale for the one-year rule is to give the taxpayer time to reduce their cost of living.
Under the one-year rule, the taxpayer will pay a lower amount for 12 months, followed by increased payments based on IRS allowable expenses for the remainder of the agreement.
This exception is for regular installment agreements only. Partial-pay installment agreements are not eligible.
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.
Feel free to reach out to my accounting firm to discuss issues relating to back taxes, tax preparation, tax planning and accounting for small businesses. Our office is in the Buckhead – Sandy Springs area of Atlanta, which is an advantage to those looking for a local firm to handle their tax matters.
Founded by Gary Massey, CPA, Massey and Company is a boutique CPA firm located in Atlanta, GA, serving the needs of small businesses, business owners and individual taxpayers. Our services include tax preparation, tax planning, taxpayer representation, IRS audits, monthly bookkeeping and accounting.