The most widely used method for paying an old IRS debt is the monthly installment agreement, or IA. If you owe $50,000 or less, you should be able to get an installment payment plan for 72 months just by asking for it. If you owe more than $50,000, you will have to negotiate with the IRS to get one and provide financial information. As part of its Fresh Start program, the IRS recently adopted new rules making it easier to obtain an installment agreement. The threshold for qualifying for an installment agreement without having to provide financial information was increased from $25,000 to the current $50,000 amount and the timeline for paying was increased to 72 months from 60 months.
You must be current on this year's tax returns. If IRS computers show that you haven't filed all past due tax returns, you will not be eligible for an IA. Likewise, if you are self-employed, you must be current on your quarterly estimated tax payments for the current year. Finally, if you have employees, you must be current on payroll tax deposits and Form 941 filings to get an IA.
But don't assume that a payment plan is your best option -- there are definite drawbacks. The biggest is that interest and penalties continue to accrue while you still owe. Combined with penalties, the interest rate is often 8% to 10% per year. It's possible to pay for years and owe more than when you started.
Rodney and Rebecca owe the IRS $40,000 in back taxes. They enter into a $300 monthly payment plan at a time when interest and penalties total 10% a year, adding an additional $4,000 to their balance. Twelve months' worth of $300 payments add up to only $3,600, so they will owe $40,400 at the end of the year ($40,000 minus $3,600 paid plus $4,000 in interest).
In addition, if you have no leftover cash after living expenses, you're not in a position to negotiate a payment plan. At this point, your best bet is either submitting an offer in compromise, asking for a suspension of collection activities, or filing for Chapter 7 bankruptcy.
If you owe $50,000 or less, you can apply for your installment agreement online at the IRS website.
Negotiating a Monthly Payment
If you owe more than $50,000 or can't pay the amount you owe in six years or less, your request for an IA begins with an IRS collector's analyzing your Collection Information Statement on Form 433-A. The collector uses the information on the form to determine the amount you can pay. Payment amounts are at the discretion of the IRS. If you deal with eight different collectors, you might end up with eight different IAs!
Nevertheless, here are some strategies for negotiating an installment plan:
- Propose a payment plan you can live with. Do this when you hand the completed Form 433-A to the collector.
- Offer to pay at least the amount of your income minus your necessary living expenses. This is the cash you have left over every month after paying for the necessities of life. Don't, however, promise to pay more than you can afford just to get your plan approved. Promising the IRS more than you can deliver is a serious mistake; once an IA is approved, the IRS makes it difficult for you to renegotiate it.
- Give a first payment when you propose the agreement -- and keep making monthly payments even if the IRS hasn't yet approved your IA. Making voluntary payments demonstrates your good faith and creates a track record. For example, if you pay $200 a month for three months before your IA is approved, the collector may be inclined to believe that this is an appropriate amount.
If the IRS grants an installment plan, it may take several months to notify you in writing.
Making Monthly Payments
Until you receive written notice of approval, send payments to your local service center using the payment slips and bar-coded envelopes provided. If you don't want the IRS to know where you bank, use a money order or cashier's check from another bank.
You have two other options for making payments once your IA is approved:
- Use a direct payroll deduction. Request a payroll deduction on Form 2159, Payroll Deduction Agreement. Your employer must agree to send payments to the IRS each month using the IRS's payment slips.
- Use a direct debit. Have your bank automatically debit your checking account each month and send a payment to the IRS. As long as you keep the account open, this is the most foolproof way to make sure you don't miss a payment and risk having the agreement revoked.
If the IRS Refuses Your Installment Agreement Proposal
If the IRS won't agree to installment payments, it is for one of three reasons:
- Your living expenses are not all considered necessary. The IRS may deem your expenses extravagant. For example, if you have hefty credit card payments, make any charitable contributions, or send your kids to private school, expect the IRS to balk. Although reasonable people would disagree on what is necessary and what is extravagant, the IRS is rather stingy here.
- Information you provided on your Collection Information Statement, Form 433-A, is incomplete or untruthful. The IRS may think you are hiding property or income. For example, if public records show your name on real estate or motor vehicles that you didn't list, or the IRS received W-2 or 1099 forms showing more income than you listed, be prepared to explain.
- You defaulted on a prior IA. While this doesn't automatically disqualify you from a new IA, it can cause your new proposal to be met with skepticism.
If your IA proposal is first rejected, you can keep negotiating. Ask to speak to the collector's manager. Just making this request is sometimes enough to soften the collector up. If you get nowhere with the manager, you can go over her head -- everyone at the IRS has a boss. You can complain to her immediate boss, then the collections branch chief, and then the district director. Squeaky wheels sometimes do get greased. Again, just talking about going up the ladder may cause a change in attitude at the lower rungs and get you a fair payment plan.
When the IRS Can Revoke an Installment Agreement
Once you receive approval of your IA, you and the IRS are bound by the terms of the agreement, unless any of the following are true:
- You fail to file your tax returns or pay taxes that arose after the IA was entered into. Although IRS computers do not continue to review your finances, they do monitor you for filing future returns and making promised payments.
- You miss a payment. Under the terms of all IAs, payments not made in full, and on time, can cause the IA to be revoked immediately. In practice, the IRS usually waits 30 to 60 days before revocation -- at least on the first missed payment. You are entitled to a warning or a chance to reinstate the agreement.
- Your financial condition changes significantly -- either for the better or worse. The IRS usually won't find out about this unless you tell. The IRS may review your situation every year or two, however, and require you to submit a new Form 433-A in order to continue your IA.
- The IRS discovers that you provided inaccurate or incomplete information as part of the negotiation. For example, you may have omitted to mention certain valuable assets.
For more information on how to deal with the IRS to work out a payment plan, see Stand Up to the IRS, by Frederick W. Daily (Nolo).