Many practitioners are likely to have several clients that owe back taxes to the IRS. Increased salary and bonus, a better capital gain year, more self-employment income, and repercussions of the Patient Protection and Affordable Care Act, P.L. 111-148 (e.g., owing a portion of an advance premium tax credit), are some common reasons. Whatever the reason, clients often find themselves owing Uncle Sam and are unable to immediately pay the debt. They need help from their CPA to set up a payment arrangement—often turning to a monthly payment plan.
Installment agreements are the most commonly requested and received IRS payment arrangement. Taxpayers make monthly payments (usually by direct debit or payroll deduction). The IRS charges a setup fee of $120 ($52 if a client makes payments by direct debit and $43 for low-income taxpayers). Interest and late-payment penalties continue to accrue during the installment period, but the late-payment penalty is cut in half for any month an installment agreement is in effect (thus making the installment agreement a viable money-saving option for most clients).
To set up an installment agreement, taxpayers or their representatives may call the IRS, use the IRS's Online Payment Agreement (OPA) tool, or file Form 9465, Installment Agreement Request. (See Internal Revenue Manual (IRM) §5.14.1, Exhibit 5.14.1-5, for a table that lists the types of installment agreements and the conditions under which the IRS will generally approve each plan.)
This item outlines the pros and cons of each method as well as other tips for practitioners to navigate the often-murky waters of IRS payment agreements.
The OPA tool allows qualified taxpayers (and representatives) to request an installment agreement online and receive immediate notification if the agreement is accepted. The process takes about 30 minutes. Using this tool is often quicker than calling the IRS, especially as call-wait times to the Practitioner Priority Service line can vary from a few minutes to well over an hour.
Taxpayers must meet certain requirements to use the tool. An individual taxpayer must owe $50,000 or less in combined tax, interest, and penalties, and all required returns must be filed. A business taxpayer must owe $25,000 or less in combined tax, penalties, and interest for the current year or previous year's liabilities, and all required returns must be filed. When the OPA tool is not an option, the taxpayer or representative may still call the IRS or file Form 9465. (Businesses may file Form 433-D, Installment Agreement, instead.)
Form 9465, Installment Agreement Request, can be filed at any time to request an installment agreement for an individual taxpayer, but it is often best to file it simultaneously with a balance-due return. Clients should pay as much of the balance as possible when filing the return (to save on interest and late-payment penalties) and then request a monthly payment plan for the remaining balance. The form recommends that the monthly payments be as high as possible to save on interest and penalties. However, some advisers submit the minimum due while advising clients to pay the maximum that they can, thus protecting clients from defaulting in months when they suffer economic shocks. If the taxpayer does not put a payment amount on Form 9465, line 10, the IRS will determine the payment by dividing the balance due by 72 months.
Typically, the IRS responds to a Form 9465 installment agreement request within 30 days.Though a practitioner could use the OPA tool or call the IRS for a quicker response, attaching Form 9465 to a balance-due return can be the most efficient method. The form can be completed quickly (most tax preparation software will automatically fill out many of the form fields when a preparer instructs the system to generate it), and it is seamlessly submitted to the IRS with the return. Clients should continue to pay the IRS as much as they can while they wait for a response.
When Is Additional Financial Information Required?
Most installment agreements are straightforward—almost all are automatically approved with very little information and effort. However, in certain cases, such as if a client cannot pay the entire balance within the collection statute-of-limitation period (typically 10 years) or owes the IRS more than the streamlined amount ($50,000 for an individual taxpayer), the IRS will require more information before granting the agreement.
Form 433-F, Collection Information Statement, must be completed when an individual taxpayer, including a self-employed one, owes more than $50,000 or when he or she does not agree to make payments by direct debit or payroll deduction. Form 433-F asks detailed questions about the taxpayer's financial situation. The IRS factors in its collection financial standards (allowable living expenses and national standards for food, clothes, out-of-pocket health care, utilities, etc.) to determine how much a taxpayer can afford to pay. It can take many hours for a practitioner to complete, and the client may be required to provide several documents to verify the information.
Business taxpayers that owe more than $25,000 will likely need to complete Form 433-B, Collection Information Statement for Businesses,instead of Form 433-F.
The IRS still charges late-payment penalties for the duration of an installment agreement (though at a reduced rate). Practitioners should consider whether first-time abatement and/or reasonable-cause defenses could help the client decrease (or potentially eliminate) penalties.
A first-time abatement is available if the client has a history of filing and paying on time; reasonable cause is based on the facts and circumstances and whether the taxpayer exercised ordinary business care and prudence.
Tip: If a client meets the first-time abatement or reasonable-cause criteria, a practitioner should request penalty abatement at the beginning of the installment agreement and again at the very end (i.e., after the debt is paid in full). If the IRS removes penalties at the beginning of the agreement, and the taxpayer adheres to the terms of the agreement, the IRS can also remove the penalties that continued to accrue until the tax was paid in full.
Other Types of Payment Arrangements
Though most taxpayers who owe back taxes to the IRS set up an installment agreement, practitioners need to be aware of other possible options for clients.
- Short-term extensions of time to pay: The IRS will grant up to 120 days to pay the liability in full. To request the extension, use the OPA tool or call the IRS. In general, taxpayers will pay less in penalties and interest with this type of extension; unlike installment agreements, no setup fee is required.
- Hardship extension of time to pay: Qualifying individuals may request a longer extension of time to pay and have late-payment penalties waived as part of the IRS's Fresh Start initiative. If a practitioner believes a client meets the hardship criteria, he or she should file Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship.
- Offer in compromise (OIC): This arrangement allows a taxpayer to settle the debt for less than the amount owed. The IRS grants this relief only if the offer represents the most it can expect to collect from the taxpayer within a reasonable period of time. Review Form 656-B Booklet, Offer in Compromise, for more details on forms to fill out, the user fee, and other terms. Expect the process to take up to a year (or more), and know that OICs are rarely granted.
- Currently not collectible (CNC) status: The IRS can place a client's account in CNC status. Though the IRS will file a tax lien if the client owes more than $10,000, it will cease collection activity. CNC status is temporary, and the IRS will reevaluate (typically annually) whether the taxpayer's financial situation has changed.
Clients Cannot Afford to Delay Setting Up a Payment Arrangement
The IRS has an arsenal of enforcement actions it will use to encourage taxpayers to pay, including liens and levies. Additionally, in late 2015, Congress passed a law allowing the State Department to deny, revoke, or limit a taxpayer's passport if he or she owes more than $50,000 to the IRS and has not reached an agreement to pay the debt.
Because of the potentially high cost of failing to pay tax liabilities when they are due, CPAs should encourage clients to pay the full amount they owe on time. However, because in many cases clients will not be able do so, CPAs should be prepared to advise clients on the various payment arrangement options.
Valrie Chambers is an associate professor of accounting at Stetson University in Deland, Fla. Susan Allen is a senior technical manager with the AICPA Tax Division and is the staff liaison to the AICPA Tax Practice & Procedures Committee. For more information about this column, contact firstname.lastname@example.org.