This is the fifth post in the Collection Options series. This series is dedicated to presenting individuals and businesses with options for dealing with outstanding tax obligations.
Installment Agreement – IRS. The IRS has the option of accepting payments through an installment agreement if the installments will pay the tax in full, plus interest, within the remaining period of the statue of limitation on collections, plus, in unique circumstances, five years. If that cannot be done, the IRS has the options of classifying the taxpayer’s account as currently uncollectible.
Extensions of Time to Pay. This is not an installment agreement. Extensions may be granted for all taxpayers for up to 120 days. No forms are required and no lien needs to be filed.
Simplified Installment Agreements. While knowing the taxpayer’s financial situation is usually key to negotiating an installment agreement, the IRS has developed criteria for simplified payment agreements that do not require detailed financial information or a manager’s approval. These are the Streamlined, Guaranteed and In Business Trust Fund Express payment agreements. IRM 18.104.22.168 (9-26-2008)
Streamlined Installment Agreement.
The aggregate unpaid balance of assessments is $25,000 or less. This does not include accrued penalty and interest.
If pre-assessed taxes are included, the pre-assessed liability plus unpaid balance of assessments must be $25,000 or less.
The balance of assessments will be fully paid in 60 months, or prior to the expiration of the 10 year statutory period for collection, whichever comes first.
Who Qualifies? Individuals, operating Businesses (Income tax only) and closed Businesses (any type of tax).
Guaranteed Installment Agreement. The Internal Revenue Service must accept proposals to pay in installments if the taxpayer:
Owes income tax only of $10,000 or less (this does not include penalties and interest);
Has not failed to file any income tax returns or to pay any tax shown on such returns during any of the preceding five taxable years;
Cannot pay the tax immediately (as a matter of policy, the IRS appears to grant guaranteed agreements even if the taxpayer can immediately pay in full);
Agrees to fully pay the tax liability within 3 years;
Agrees to file and pay all tax returns during the agreement; and;
Has not entered an installment agreement during any of the preceding five taxable years.
In Business Trust Fund Express (Owing no more than $10,000).
To qualify, the entire liability including accruals must be equal to or less than total the amount in LEM 22.214.171.124(1) (recently $10,000)
The taxpayer may not reduce a liability that exceeds this amount just to qualify for the payment plan.
The Taxpayer must be in compliance with other filing and payment requirements.
Taxes must be fully paid in 24 months, or before the collection statute expires, whichever is earlier.
In Business Trust Fund (Owing more than $10,000). When an “in business” taxpayer who owes past trust fund taxes (the employee’s share of income tax and social security) cannot pay operating expenses and current taxes, deferring collection action on delinquent and accrued taxes may serve no useful purpose. The IRS will be inclined to take appropriate collection action such as levy, seizure, or a trust fund penalty, to protect the government’s interest. However, if a taxpayer stops accruing liabilities, makes Federal Tax Deposits (FTDs), and files all appropriate returns, they may qualify for an installment agreement. If the taxpayer can demonstrate that it is financially sound enough to pay current taxes, current operating expenses, and the delinquent taxes, an agreement may be possible.
Trust Fund Recovery Penalty. If the agreement will not fully pay all balances due at least a year before the earliest Assessment Statute Expiration Date (ASED) for assessing the Trust Fund Recovery Penalty against the responsible parties, the Revenue Officer will evaluate and most likely assess the Trust Fund Recovery Penalty against the appropriate individuals. This will usually involve:
Completing interviews for all potentially responsible persons, and any other interviews necessary to determine responsibility and willfulness;
Collecting Forms 433-A (Collection Information Statements) from all potentially responsible persons to determine whether the penalty, if assessed, would be collectible.
Additional Payments By Responsible Parties. If potentially responsible persons have the ability to pay from current assets or income, the Revenue Officer will request payments to reduce the trust fund portion of the liability.
Long Term Installment Agreement. If the taxpayer, needs more time to pay the liability, he should prepare and submit a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, if an individual or sole proprietor, Form 433-B, Collection Information Statement for Businesses if another form or business, or both if the individual who owes the liability controls a separate business.
Analysis of Financial Statement. The IRS will use this information to determine the taxpayer’s monthly income remaining after allowing for a taxpayer’s reasonable and necessary living expenses (this assumes the taxpayer does not have an asset with sufficient equity that could be sold to pay the obligations). For example, if the taxpayer earns net monthly income of $4,000.00 and can demonstrate that among mortgage or rent payments, utility bills, home maintenance, groceries, insurance, uninsured medical expenses, car expenses, court ordered payments, etc., he has $3,900.00 of expenses, his/her monthly payment to the Internal Revenue Service would be $100.00. If payments of $100 per month will pay off the tax liability in full within the statute of limitations for collections, plus five years, the Revenue Officer may enter an installment agreement with him of $100.00 per month and set the file into a “monitor”status. If payments of $100 per month cannot pay his liability in full within the statute of limitations for collections, the Revenue Officer will likely list the taxpayer’s account as currently uncollectible and discuss an Offer in Compromise.
Standard Allowances. The IRS uses National Standard Allowances to determine the taxpayer’s allowable household expenses for housekeeping supplies, clothing and clothing services, personal care products and services, food and miscellaneous. It uses local standards to determine the allowances for a taxpayer’s housing and utilities and ownership and operating costs of transportation. www.irs.gov/businesses/small/article/0,,id=104627,00.html The Minnesota Department of Revenue Compromise Fact Sheet, financial statements and other forms can be found at: www.taxes.state.mn.us/forms/comp_app.pdf
Income Averaging. The taxpayer may be at his or her lowest financial point when they are negotiating the installment agreement monthly payment amount. The IRS and the state will often examine the income from the previous two years and claim that the taxpayer can afford a higher payment based on their higher income in previous years. The taxpayer must demonstrate that the current year income most accurately reflects future income. Interestingly, when the taxpayer points out that current year income is abnormally high and the previous years are better indicators of future income, the IRS and the State will usually stick with the current year income.
Conditional Expenses The IRS and the state usually restricts the amount allowed for expenses to the reasonable and necessary living expenses as they have defined them. These amounts rarely equal the taxpayer’s actual expenses. If a taxpayer can pay the tax obligation within 5 years, the IRS may allow higher expense amounts and expenses for things not normally allowed, like private school tuition. These are know as conditional expenses. IRM 126.96.36.199
Time to Reorganize Expenses. The IRS will usually allow a taxpayer higher than normal expenses for one year to allow the taxpayer time to reorganize their financial affairs. IRM 188.8.131.52
Non Liable Spouse’s Income. Even though the tax liability may be the sole obligation of one spouse, the IRS and the state will include both spouse’s income to determine the liable spouse’s obligation for paying household expenses. For example, if the liable spouse earns 60% of the household income, she will be allowed only 60% of the reasonable and necessary living expenses. IRM 184.108.40.206
Other Household Income. The same calculations can be applied for others living in the house, including children, parents and unrelated parties. IRM 220.127.116.11
Dissipated Assets. The IRS will often look for recent transfers of property made by the taxpayer to put the assets out of the IRS’s reach.
Priority Creditors and Other Tax Obligations. The IRS and the state will often initially reject payments to the other as an allowable expense. The IRS is generally more willing to allow the payment. If there is an issue, the taxpayer must point out which tax obligation has priority. Between the IRS and the State of Minnesota, priority is established by comparing the IRS assessment date to the State of Minnesota’s ledger date.
Partial Payment Installment Agreement. In situations where the taxpayer cannot pay the liability in full within the statute of limitations on collections, even through installment payments, the IRS may establish a payment plan for less than the total amount owing. In limited situations they will require the taxpayer to voluntarily extend the statute of limitations on collections to provide more time to pay. IRM 18.104.22.168.3
Appeal of Denied Installment Agreement Request. If the taxpayer’s request for an installment agreement is denied, she may make an administrative appeal within 30 days after she is notified of the rejection. She must first discuss the case with the Collections manager. If she cannot resolve the disagreement with the Collections manager, she may ask that the matter be reviewed by an Appeals Officer by filing a Form 9423, Collection Appeal Request.