IRS Installment Agreements
Tax Resolution Solutions for some, Tax Problem Creators for others …
Is it Right for You?
Partial Payment Installment Agreement
Even where your monthly payments will not be enough to full pay the amount owed before the 10-year statute of limitations on collections expires, another type of installment agreement exists. And yes, the IRS generally has 10 years to collect the tax debt [essentially, for 10 years after they assess the tax – that is record that you owe the tax]. Otherwise, it generally goes away after 10 years. This Part Pay Installment Agreement option exists due to an earlier change in the law. Also, in appropriate circumstances, a Part Pay Installment Agreement may be a better tax resolution tool than attempting an Offer in Compromise. In the case of a Partial Payment Installment Agreement. [The Internal Revenue Manual Resource Material is here] you are making payments which will not full pay the tax debt; and when the Collections Statute of limitations is up on a particular old tax debt, the tax debt goes away. However, a full financial statement is required for Part Pay Installment Agreements. Also, the IRS historically will “create” a greater ability to pay on the back-tax debt than really exists when they review your cash flow information. For you, this is of concern, because if you pay too much on old years for which the statute of limitations is about to run out, while you are not paying sufficient current taxes, you have paid the wrong tax debt! Why? Because you paid down on a debt that would otherwise have gone away, while you created a new tax debt which will live another 10 years. You basically took your hard-earned money and placed it in the paper shredder. Moreover, at the same time, the IRS may be creating an economic hardship on you and your family because necessary living expenses are being denied. The Taxpayer Advocate has published reports on this. Experienced tax counsel is recommended. The above situation exists because the IRS is failing to Properly Evaluate Taxpayers’ Living Expenses and Is Placing Taxpayers in Installment Agreements they cannot afford. Also, in April, 2017, the IRS will start using Private Debt Collection Companies. The prior use of such programs has been very negative. As to the current “program”, the Taxpayer Advocate has also reported that this program is being implemented in a manner arguably inconsistent with the law and that will unnecessarily burden taxpayers, especially those experiencing economic hardship. This may be another indicator for you to seek professional guidance and planning to get your tax problems behind you. The overall published default rates on I/As mask the economic hardship for taxpayers who do not have enough income to support payment of an IRS proposed installment agreement. The default rate on Partial Pay Installment Agreements is close to 28 percent, while the rate of default on Installment Agreements worked by IRS field representatives is 26%, and the rate for Automated Collection Services is a little over 20%. [See Taxpayer Advocate 2016 Annual Report to Congress – here]. The Taxpayer Advocate Report advises that nearly 300,000 taxpayers “who should have qualified for currently not collectible (CNC) status had entered into installment agreements in calendar year 2014 despite their income being below the IRS allowable living expense (ALE) standards”. The point is that that the IRS is not conducting proper financial analysis. This results in taxpayers entering into Installment Agreements they cannot afford while the taxpayer suffers from not being able to pay necessary living expenses. What is the cost to the taxpayer of setting up an installment agreement which is merely going to default? The default consequences to the taxpayer include:
- Not being able to obtain another guaranteed IA (there are specific requirements to qualify) in the subsequent five-year period;
- Not being able to pay for necessary living expenses;
- An additional user fee for the taxpayer if the taxpayer requests a reinstatement of a defaulted Installment Agreement;
- Taxpayers may improperly lower current period withholding in order to make payments on the older tax debt, and end up owing more taxes and penalties, resulting in default of the Installment Agreement; and
- the mounting pressure cooker effect that the ever “looming IRS cloud” isn’t going away, and that the taxpayer has merely shifted an “old” IRS debt for a “new” one, and has given the IRS an additional 10 years to collect on the “new” debt. Essentially, the taxpayer has paid the “wrong” taxes due to pressure by the IRS.
Many Taxpayers agree to an installment agreement they can’t afford because of outright fear of the IRS. Historically, I have had taxpayers concerned about suicide, and situations where children were under suicide watch because of IRS tactics, intimidation and abuse. The Taxpayer Advocate Report advises that “Nearly 300,000 taxpayer accounts that should have qualified for currently not collectible (CNC) status had entered into installment agreements in calendar year 2014 despite their income being below the IRS [Allowable Living Expenses].” By definition taxpayers who cannot meet their necessary living expenses are experiencing economic hardship. Release of levy should be made, but the IRS will put these Taxpayers into an installment agreement even though such payments cause economic hardship. The goal of a payment plan should be a plan that is “realistic for the taxpayer given the taxpayer’s individual circumstances”. The IRS many times ignores this requirement. If an Installment Agreement is not the best solution, then other alternatives should be explored, including an Offer in Compromise, Currently Not Collectible, etc… The plan should provide for strategies to ensure that taxpayers come into compliance and remain compliant.
The Taxpayer Advocate report concludes, in part, by stating:
“Taxpayers who enter into IAs they cannot afford risk defaulting on the agreement and being subject to further collection efforts. Alternatively, they may attempt to pay the IRS at the expense of meeting their basic living needs. Further compounding this problem are ALEs where the analysis leaves major Household expenses up to the individual discretion of an IRS employee and ALEs that are based on standard expenses that do not reflect the reality of today’s society. Setting taxpayers up to fail at compliance does not comport with taxpayers’ rights, specifically the right to finality and the right to a fair and just tax system. …” [See Taxpayer Advocate 2016 Annual Report to Congress – here] The above are among the many reasons why you should have a tax professional represent you before the IRS.