If you’re financially unable to pay your tax debt immediately, you can make monthly payments through an installment agreement. Even if you don’t think you can afford an installment agreement, you may consider a payment plan to avoid enforced collection where the IRS will garnish your wages or take other assets such as a bank account or car and leave you little or nothing to live on. There are several types of installment agreements available.
Streamlined IRS Installment Agreement
A streamlined agreement is one where the IRS requires little or no asset, income and expense information. You can take up to 72 months to pay. To qualify:
- An individual must owe $50,000 or less in income tax, penalties and interest.
- If you owe more than $25,000, you will have to provide very basic income and expense information to show that you can afford the payments.
- Businesses must owe $25,000 or less in payroll taxes.
- You and/or the business must have filed all tax returns.
Traditional IRS Installment Agreement
We will gather all of your asset, income and expense information on a 433-F collection information statement. The IRS will review your information and based on various national and local standards. Based on your information the IRS will tell you how much you can afford to pay. However, expenses related to the production of income are allowed. In a traditional installment agreement, you must pay the entire amount of tax due within the shorter of the statute of limitations, six years, or your ability to pay (as determined by the IRS).
There are several options under a traditional installment agreement.
1) Six-Year Rule
If you do not qualify for a streamlined installment agreement, you may still qualify for the six-year rule. In this type of agreement, you are required to provide financial information but you are not required to provide proof of reasonable expenses. The IRS may allow all of your expenses as long as you can show that you can stay current with all paying and filing requirements, the tax liability, including projected accruals. You must be able to pay off the tax debt within six years and within the statute of limitations.
2) One-Year Rule.
If you cannot fully pay your back taxes within six years the IRS may allow up to one year for you to modify or eliminate some of your expenses that are normally not allowed, such as moving to a less expensive apartment or selling your car. In some cases, by modifying or eliminating some expenses, you may be able to pay your tax debt fully within the six-year limit. This would enable you to retain some other expenses under the Six-Year rule. You do not have to qualify for the Six-Year rule to apply the One-Year rule.
What happens if the IRS terminates your installment agreement?
If the IRS terminates your installment agreement, you can have it reinstated. There may be a reinstatement fee if your agreement goes into default. Penalties and interest continue to accrue until your balance is paid in full. If you are in danger of defaulting on your payment agreement for any reason, contact us immediately.
Need help with an IRS installment agreement?
An IRS installment agreement is the most common way of dealing with back taxes owed. It can be confusing to know which type of installment agreement you qualify for or how to negotiate the best payment amount. To find out what is the best option for you, it makes sense to work with a tax resolution specialist.