Procedure & Administration
The IRS CP 89, Annual Installment Agreement Statement , is not a "bill." If the taxpayer has entered into an installment agreement to make monthly payments for past due tax liabilities or has paid off the liability in the last 12 months, he or she will receive this notice.
Regs. Sec. 301.6159-1(i) requires the IRS to send every taxpayer on an installment agreement an annual statement that identifies the balance owed at the beginning of the year, the payments made during the year, and the remaining balance at the end of the year. Congress believed that taxpayers who entered into an installment agreement should be kept informed of amounts applied to the outstanding tax liability and amounts remaining due (S. Rep't No. 105-174, 105th Cong., 2d Sess., p. 98 (April 22, 1998)).
The notice was first mailed to taxpayers in 2001. The IRS sent CP 89 notices to more than 5 million taxpayers in 2001 and more than 7 million taxpayers in 2012. The Wage and Investment business operating division produces and mails the notice. The cost to send the notice to the taxpayer is less than 45 cents.
Tax practitioners listed on the taxpayer's signed Form 2848, Power of Attorney and Declaration of Representative , will also receive the CP 89 notice for the periods they are authorized to represent the taxpayer. All taxpayers, both individuals and businesses, receive the annual statement. The law does not state when they have to be mailed; it simply requires an annual statement. The taxpayer and the holder of the power of attorney usually receive the notice between August and October.
The rest of this item explains the notice, the different parts of the mailing, and the benefits and concerns for the tax professional.
The headlines of the notice are in large bold print:
THIS IS NOT A BILL
Annual Installment Agreement Statement
THIS IS FOR YOUR INFORMATION
The IRS wants to alert recipients who have completed or are current with payments on their existing installment agreement that this is not another bill but that it is important and should be retained with other tax documents. In the upper-right corner of the notice is the notice number, notice date, taxpayer identification number, and a phone number to contact the IRS if there are any questions. The opening paragraph states the fiscal year for each tax period included in the taxpayer's installment agreement plan that will be recapped in the statement (e.g., July 1, 2013, to June 30, 2014).
The first part of the statement is the "Payment Detail." It recaps the payments received and how they were applied. They are listed by date received and are totaled at the end of the column. The column headings on this part of the statement are: "Payment Date," "Applied Amount" (totaled at the end of the column), "Applied to Tax Form," and "Tax Period." The notice explains how the payments are applied according to the terms of the taxpayer's agreement and the law. For each tax year, the payments are applied first to tax, then penalty, then interest and other charges.
The second part of the statement is the "Installment Agreement Activity." It recaps each tax period for which the taxpayer owes tax. The column headings for this statement are:
- Tax Period;
- Form Number;
- Beginning Balance;
- Total Payments Received (the total of which should equal the amount on the "Payment Detail" statement column "Applied Amount");
- Total Penalty Added;
- Total Interest Added;
- Other Charges Added; and
- Ending Balance.
The "Beginning Balance" is calculated as of the statement's beginning date or, if later, the date the taxpayer entered into the installment agreement. The beginning balance of each tax period includes the unpaid tax, penalty, and interest as of the calculation date. The "Total Penalty," "Total Interest," and "Other Charges" are the amounts added onto the balance during the period of the statement. "Other Charges" are items such as fees, refunds, or adjustments. Maintaining these reports in the taxpayer's permanent file will allow a quick overview and comparison to prior years when the report arrives.
Another page of the notice is labeled "Penalty and Interest." It explains the late payment penalty under Sec. 6651(a)(2) and interest charges under Sec. 6601. If the taxpayer wants a more detailed explanation of penalties and interest, he or she should call the telephone number listed on the front of the notice.
The benefits of the annual statement to the tax professional and the taxpayer are in the details. The tax professional should analyze the report for missing and misapplied payments, then contact the taxpayer/client if he or she observes that there are missing payments or that amounts less than the agreement amount were paid. The representative should review the taxpayer's financial condition (e.g., is the client unemployed or underemployed) to determine whether to request a modification of the installment agreement. The taxpayer/client may welcome the tax professional's support in renegotiating the payment plan or analyzing other options (e.g., applying for uncollectible status or pursuing an offer in compromise). Each case is different, but a proactive contact from a tax professional with an offer to help is usually better than no contact.
The tax professional can use the information for business tax return preparation to calculate the tax paid, tax liability outstanding, interest paid, and penalty paid. The information can be correctly accounted for on the tax return.
The taxpayer may also be able to make additional payments or pay the amount in full, saving interest and penalties. The taxpayer may specify to which year additional payments should apply. This payment should be sent to the IRS separate from the regular installment payment and clearly state that it is an additional payment, along with the taxpayer identification number, form, and year to which the payment should be applied. If the taxpayer wants to pay the balance in full, the notice lists a phone number to call to obtain a current payoff amount.
Someti mes, the taxpayer misunderstands the form statements. For example, one taxpayer was renegotiating the agreement after having missed payments and assumed that when he received the statement his previous payment plan had been reinstated. Consequently, the taxpayer did not follow up on the scheduled phone call and received levy notices. At that point, he contacted the tax professional.
The IRS states that only taxpayers in approved installment agreements receive the annual statement, but tax professionals have experienced situations where taxpayers in pending agreements erroneously receive the form with zero payments. Normally, the IRS has stated,
Zero activity (no payments made) would cause an installment agreement to default and be terminated. While the default and termination process can take time, it's difficult to envision a situation where no payments are made in the July-June period, and the installment agreement remains in force. Conceivably, an account could update to an installment agreement status just prior to the [notice] creation, but prior to any payments being made, and would not reflect any payments made in the July-June period. [IRS response to author's FOIA request for information on the CP 89.]
Tax professionals have experienced receiving the annual notice when payment plans are set up in May or June before any payments are made.
The CP 89 letter is an excellent tool for the tax professional and taxpayer to review and keep on file. The July 2013-June 2014 statements will be arriving soon. In keeping with IRS tradition, the final message on the notice is "As always, we appreciate your timely payments."
|Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, Texas. Ruth Ann Michnay is the owner of Ruth Ann Michnay PA in Oakdale, Minn. Ms. Michnay is a member of the AICPA IRS Advocacy & Relations Committee. For more information about this column, contact Prof. Chambers at email@example.com.|