If you owe money to the IRS and can’t pay it in full or within 180 days, then you may qualify for an Installment Agreement. There are several different types of payment arrangements, and they all depend upon how much you owe, and how long it will take to pay back the tax debt. This article will be an overview of those payment options and the best way to go about making payment arrangements with the IRS.
You Owe Less Than $10k to The IRS
If you owe under $10k your installment agreement proposal will generally be accepted, if the tax debt is repaid within 3 years. The best way to set up is online at the IRS website. This is much easier than calling. You can also apply for an installment agreement by filling out our form 9465 request for an installment agreement and submitting it with your tax return. No tax lien will be filed by the IRS.
You Owe Less Than $50k to The IRS
If you owe over $10k but less than $50k, generally the IRS will accept your installment agreement proposal no questions asked, as long the total tax debt is repaid within 6 years, and no financial information is required, so you don’t have to disclose your assets or borrow against home equity. However, the installment agreement must be a direct debit payment arrangement from your bank account. This is setup by submitting IRS Form 433D. Also, the IRS is not required to file a tax lien against you, however they may, it is at their discretion. Pro tip, ask them not to file a tax lien. Tell them filing a tax lien will harm your credit, and that “may cause you” to lose your employment, which means you cannot pay the installment agreement. Usually this works.
You Owe Less Than $250k to The IRS
If you owe less than $250k but more than $50k, you can still setup an installment agreement. The IRS will require that the entire tax debt be paid within the shorter or 10 years or the remaining Collection Statute of Limitations (CSED). Generally, the CSED is 10 years from the date of assessment of the tax. Under this type of payment agreement, no financial information is required to be disclosed to the IRS, however the IRS will file a tax lien against you. The only exception to the filing of a tax lien is if you can prove that a tax lien would cause you to lose your job. This is very tough to do, however there are certain professions such as SEC licensed professionals, stockbroker, financial advisor, insurance salesman, federal government jobs, attorneys, etc. whereby a tax lien would cause loss of job.
You Owe Over $250k to The IRS
If you owe over $250k to the IRS it gets much tougher to setup an installment agreement. First, you can only negotiate with a Revenue Officer (RO). The IRS will assign a local RO to investigate you. You will be required to disclose all your sources of income and your assets. This disclosure is made on form 433A. The IRS will determine what your ability to pay is based income and assets on the 433A. The allowable expenses will be based on the IRS National Standards, which are very inflexible. You may be required to liquidate retirement assets and/or borrow against equity in your home for the IRS to approve the payment agreement. The IRS will file a tax lien immediately to protect the Governments interest. The monthly payment amount is negotiated with the Agent, however if the payment arrangement pays the tax debt in full within 6 years, then the IRS can be flexible. The IRS also has a 1-year rule, which means you can request a lower monthly for one year to allow you time to make lifestyle changes and decrease your monthly expenses.
Partial Payment Installment Agreement (PPIA)
In some cases, the IRS will accept a payment arrangement that doesn’t pay the full amount of the tax debt. So, if you can prove that payment of the full amount of the tax debt will cause a “financial hardship” the IRS will accept a lower monthly payment. As an example, say you owe $120k to the IRS and the remaining collection statute of limitations is 10 years. In this case the IRS will usually demand a monthly payment of at least $1,000 per month ($120,000/120 months=$ 1,000 per month). However, if your monthly income is $8,000 and you are married with two children, using the IRS national standards you monthly living expenses would be about $7,600/month, leaving you with only $400/month to pay the IRS for an installment agreement. Over 10 years you would pay $48,000 (120 months x $400), which is a savings of $72,000. Note, if you qualify for a PPIA you may want to consider an Offer in Compromise.
The IRS is willing to work with individual taxpayers to resolve their back taxes, especially since the pandemic. It’s not always best to try to do so on your own. Most times an experienced professional representative will obtain better results for you by just having the knowledge of all the available options and intricacies of the collection system. So, whether you choose to go it alone or to get help, the worst option is to ignore the problem. Tax problems never, ever cure themselves.