The IRS expects income taxes to be paid in a timely manner, but a taxpayer may be unable to make full payment of a tax liability when it is due. While offers in compromise are extremely complex and are often rejected by the Service, Sec. 6159 provides taxpayers that cannot pay their prior tax liabilities in full an option to enter into an installment agreement and pay off those liabilities over a period of time. The IRS is authorized to enter into a written agreement with the taxpayer that will require installment payments based on the amount the taxpayer owes and his or her ability to pay that amount within the time the Service can legally collect payment. While the program provides a taxpayer with additional time to pay the tax, interest and penalties continue to accrue while the payments are being made. The IRS may also file tax liens on the taxpayer’s assets until the taxes are paid. Depending on the amount of tax due, there are different options available under the program.
To apply for an installment agreement, the taxpayer must file Form 9465, Installment Agreement Request. If the total amount owed is more than $25,000 (including amounts owed for prior years), the taxpayer must complete Form 433-F, Collection Information Statement, and attach it to Form 9465. On acceptance of the agreement, the taxpayer will be charged a fee of $105 ($52 if the taxpayer agrees to make the payments by electronic funds withdrawal) for a new agreement or $45 for a reinstated agreement. Low-income taxpayers may qualify for a reduced fee of $43 for new agreements but must pay the full amount for a reinstated agreement. Based on the information provided to the Service in these forms, an installment amount will be calculated, and the taxpayer will make monthly payments.
If the IRS accepts the agreement but the installment payments will not result in full payment of the tax due, the Service is required to review the agreement at least once every two years. If the taxpayer’s financial situation changes, the amount of each monthly installment is subject to change as well. Unlike an offer in compromise, the installment agreement gives the Service the option of increasing the monthly payments if the taxpayer’s financial status improves. As a result, it is more likely to approve an installment agreement than an offer in compromise.
Streamlined and Guaranteed Installment Agreements
For taxpayers who owe less than $25,000 (including interest and penalties), the IRS has created the streamlined installment agreement (SIA). To qualify, the installment agreement must provide for the full payment of all taxes, penalties, and interest due within five years of the date of the application for the agreement, or the expiration of the statute of limitation, whichever is earlier. The taxpayer must have filed all prior years’ tax returns before the agreement will be accepted. The advantage of an SIA for the taxpayer is that it does not require the same in-depth financial verification that a normal installment agreement requires.
While the general provisions of the installment agreement rules provide the Service with discretion as to the terms of the agreement, the Code also provides a scenario in which the IRS is required to accept a guaranteed installment agreement offered by a taxpayer. Under Sec. 6159(c), if a taxpayer owes less than $10,000 (exclusive of interest and penalties), the Service must accept the agreement if the taxpayer meets the following requirements:
1. During the previous five years,
the taxpayer (and spouse, if filing a joint return) has timely
filed all income tax returns and paid any tax due and has not
entered into another installment agreement;
2. The taxpayer demonstrates an inability to pay the tax in full;
3. The agreement provides for the full payment of the liability within three years; and
4. The taxpayer agrees to remain in full compliance with the tax laws and the terms of the agreement for the duration of the agreement.
As with any other agreement that binds a taxpayer for the near future, an agreement that resolves current problems should not create future disasters. There is no point in entering into an installment agreement with the Service to pay this year’s tax liability if the agreement will guarantee an inability to pay next year’s liability. The goal is to resolve all issues with the IRS, not just postpone them to a later date.
John L. Miller, CPA is a Faculty Instructor at the Metropolitan Community College of Omaha, NE.
Mr. Miller is a member of the AICPA Tax Division’s IRS Practice and Procedures Committee. Messrs. Carlton, Starkman, and Zwick are also members of that committee.
For further information about this column, contact Mr. Miller at email@example.com.