If I Owe Back Taxes, Can I Get an IRS Installment Agreement?

Do I need help to set up an IRS Installment Agreement, aka IRS Pay Plan?  

You can set up your own IRS Installment Agreement, but be careful! 

This is a review of IRS Installment Agreements, aka IRS Payment Plans.  What types are available, how you can get them, and things to think about prior to committing to an IRS Installment Agreement.  If you have questions about this review, please reference:  BP84.  irs back tax help comments are in blue, irs.gov original text is in black.  

• If you know you need to take action, read my article “IF” you should hire IRS back tax help.  (You should not automatically.) Titled “Owe IRS back taxes? When, who, and how do I hire IRS back tax help?” before you do anything else.

As usual, If you like the tone of this writing, I would like to compete for your business.  I can be reached at irsbacktaxhelp@gmail.com.  Before you email me, please click on and read “About irs back tax help.”

The goal of the IRS for an Installment Agreement: 

• Pay the IRS back taxes owed as fast as possible in full.
• Leave no “wiggle room” for unplanned expenses in your budget.
• Collect all penalty and interest.

The goal of the taxpayer for an Installment Agreement: 

• Pay the IRS back taxes owed in a way that makes sense.
• Make voluntary payments on top of the formal payment. 
• To use those voluntary payments to eliminate the penalties that can be eliminated.  (This also mitigates other IRS Penalty & Interest growth)
• To win an abatement of penalty.  (Remove IRS penalty that has already accrued on past due taxes.)

If you have an IRS Installment Agreement that does not make sense:

When it comes to installment agreements, literally, the majority of our work is re-work of installment agreements that people set up on their own and defaulted, or worse, did not default the IRS pay plan, but defaulted a mortgage, or cancelled insurance, or cashed their 401k, etc…  Do not agree to an installment agreement that does not pass the common sense test.  Substituting different problems for your IRS tax problem is not a solution.   Examples:

• From the outset you know you cannot afford the payments.
• If you know that you will eventually not be able to afford it, whether it is 6 months down the road or two years.  Draw the line now. 
• Agreeing to plan causes you to somehow damages your future

If any of these examples of bad IRS problems, there are other alternatives.  See below. 

IRS Installment Agreements for overdue tax (full text) from irs.gov.

“You can make monthly payments through an installment agreement if you’re not financially able to pay your tax debt immediately. However, you will reduce or eliminate the amount of penalties and interest you pay and avoid the fee associated with setting up an installment agreement if you pay your tax bill in full.”  

If you allow the IRS to dictate Installment Agreement terms, here are some general rules of thumb for IRS penalty and interest growth rate:

• 1 year over due tax:  ~20-25% growth rate.  
• 2 years over due tax:  ~40% growth rate.
• 3+ years over due tax:  double the original liability.

“Before you apply:

• File all required tax returns;” File as soon as possible no matter what.  File even if you can’t pay anything.  The IRS Failure to File penalty grows to 22% over the course of the first year.  
• “Consider other sources (loan or credit card) to pay your tax debt in full to save money;” Only pursue this if you can pay the tax debt in full.  If you do this and partially pay your past due IRS tax, you’ll end having to pay the loan and deal with ongoing IRS collection efforts for the rest further damaging your cash flow.  
• “Determine the largest monthly payment you can make ($25 minimum); and” The longest regular IRS Installment Agreement can go is 60 months.  If you need more time, it’s time to consider an IRS Partial Payment Installment Agreement, or an IRS Offer in Compromise (IRS Form 656).  
• “Know that your future refunds will be applied to your tax debt until it is paid in full.”  They may take state tax refunds as well. 

There are three different versions of installment agreements that can be had

1. Regular Installment Agreement:  Monthly installment payments that are the same amount every month up to 5 years long.
2. Seasonal Installment Agreement:  If your business or income is seasonal, you can arrange to have your payments reflect your income.  During your off-season payments can stop or decrease, and during your busy season you make regular payments. 
3. Tiered Installment Agreement:  For people trying to recover from a significant drop in revenue or income, but expect to ramp cash flow back up over time.  So in year one, you have one regular payment, in year two, the monthly payment jumps up, year three it goes up again, etc… 

If you would like irs back tax help to be your first or second opinion, I can be reached at irsbacktaxhelp@gmail.com.  Please read “About irs back tax help” first.  

How do I get a Partial Payment Installment Agreement (PPIA) if I owe IRS back taxes?

All IRS Back Tax Help comments are in blue.  This post is about the IRS Partial Payment Installment Agreement.  It is one of three solutions if you owe 1040 back taxes, and one of four solutions if you owe 941 payroll back taxes.  

If you know you need to take action, read my thread about whether or not you should hire someone (You should not automatically.) titled “Owe the IRS Back Taxes?  When, Who, and How to Hire IRS Back Tax Help”  

As usual,  If you like the tone of these posts, contact me for consultation.  I can be reached at irsbacktaxhelp@gmail.com.  Before you email me, please click on and read “About IRS  BACK  TAX  HELP”.

Here is the irs.gov link and full text:

Legislation Allows Partial Payment Option

http://www.irs.gov/businesses/small/article/0,,id=136207,00.html

“The IRS implemented an additional payment option, on January 17, 2005,  known as the Partial Payment Installment Agreement (PPIA) for taxpayers who have outstanding federal tax liabilities…The new legislation includes language amending Internal Revenue Code 6159 to allow the IRS to enter into installment agreements that result in full or partial payment of the tax liability.”   This has been a great tool for solving back tax problems!  Much more so than the Offer in Compromise has been lately.  

What is an IRS Partial Payment Installment Agreement?  

The IRS Partial Payment Installment Agreement is very different from the standard IRS Installment Agreement.  Instead of paying off the full tax liability in five years or less, you have up through the full length of the Collection Statute Expiration Date (CSED) to pay the overdue taxes which may be up to ten years.  This is helpful for one of two reasons:

1.  It reduces the strain on cash flow.  

2.  In many cases, as the name implies, it’s a partial payment of the past due tax problem, not a full payment of the taxes, penalty, and interest owed.  Once the monthly amount is agreed upon that is all you have to pay until the statute runs out.  If there is any tax liability when the statute expires, the IRS forfeits their right to collect the remaining amount.  

“In addition, taxpayers granted PPIAs will be subject to a subsequent financial review every two years.  As a result of this review, the amount of the installment payments could increase or the agreement could be terminated, if the taxpayer’s financial condition improves.”  Even though it says “will be” it’s up to the IRS to elect to review or not.  We have not been seeing those reviews with any regularity.  It is a possibility.  

If you think this is worth pursuing and you owe IRS back taxes, contact me so you can put this tax problem behind you for good.