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.
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:
If the IRS grants an installment plan, it may take several months to notify you in writing.
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:
If the IRS won't agree to installment payments, it is for one of three reasons:
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.
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:
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).