In many occasions when you owe money to the IRS for unpaid tax, you may be unable to settle your debt at once. Having in mind that the total sums sometimes can exceed tens of thousands of dollars it’s understandable that most people won’t have that kind of extra cash to pay the owed amount in one go. In fact, statistics show that only 5% – 10% of tax debt cases are paid in full. What happens with the remaining? The most common scenario sees taxpayers applying for Installment Agreements.
The IRS offers payment alternatives if you can’t pay in full. A short-term payment plan may be an option. You can ask for a short-term payment plan for up to 120 days. A user fee doesn’t apply to short-term payment plans.
Why Should you Apply for an Installment Agreement?
Many people who can’t afford to pay their tax debt try to get an Offer in Compromise.However, as we’ve written before, this process is complex and you must cover specific requirements to be granted an OIC. In reality, the figure, which shows the number of cases resolved through an Offer in Compromise is very low, only 0.37%. In some other cases (15%) the tax debtors will be deemed Currently Non-Collectible (CNC) for your particular case. CNC is only awarded to taxpayers who are broke, living under the poverty line. After 10 years, their tax debt is extinguished.
Types of Installment Agreements
There are four types of Installment Agreements (IA), which you may be able to qualify based on specific Internal Revenue Manual guidelines:
1. Guaranteed Installment Agreement
For you to qualify for this type of IA, you need to be owing money on your income tax only and the amount must not exceed $10,000, excluding penalties and interest (P&I). You are not required to file any liens or asset disposition and you will have a period of 36 months to settle your debt by regular payments or direct debit.
2. Streamlined Installment Agreement
This type of IA is for any kind of individual tax up to $50,000. If in business as sole proprietor, the limit is $25,000 income tax, including P&I and if the business is defunct it can be applied to any tax over $25,000 for a sole proprietorship only. The debt must be settled over the period of 72 months.
3. Partial Payment Installment Agreement
This is the type of IA that is suitable for any kind of debt of any amount. However, it will require you to give full disclosure of your financials, asset disposition in all cases, file liens and undergo investigation and 2-year reviews. The payment period is in collection statute expiration date (CSED) + 5 years + 1 year.
4. Installment Agreements for Business
In Business Trust Funds (IBTF) in the classification used for business IA. Express IA for up to $25,000 tax debts for payroll taxes for example. Business financial statements disclosure is not required but an automatic debit IA is required. The payment period is 24 months. For any debt over $25,000, full business financials disclosure is required, the IRS will file a lien and collection period may extend up to 10 years.
Individual taxpayers who owe more than $50,000 and businesses that owe more than $25,000 must submit a financial statement with their request for a payment plan.
How to Apply for an Installment Agreement?
- First, you need to know exactly how much you owe in total. That figure is formed by your due tax, in addition to any penalties and interest charges. You can find out the total amount by calling IRS and requesting copies of your tax returns.Make sure you are current and compliant.
- Your next step would be to file Form 9465. Click for more info about form 9465.
- You can also use the online payment agreement application, which can be found on the IRS website. Another option would be to request an IA over the phone by calling 800-829-1040 or the number shown on your tax bill.
- Indicate the type of Installment Agreement you want to apply for and prepare all the necessary documentation for all included periods and tax types.
- Set up a payment plan by choosing how, when and how much you want to pay every month. Keep in mind that if you decide to set up a direct debit you will be charged an one-off fee of $31 and if you opt for a payment plan without a direct debit it will cost you $149. You must also remember to make the payment on the same date as indicated in your application every month. You are required to pay the minimum amount as agreed on your plan, but you can top it up at any point. There are various methods of payments, such as money order, automated Withdrawals from your account, credit card, check and federal online payment system EFTPS.gov.
You may also be able to qualify for online payments if:
- You are an individual who owes $50,000 or less in total and are current on all your returns.
- You are a business that owes $25,000 or less in payroll taxes and are current on all returns.
IRS Debt Resolution
Some Helpful Tips
There are a few things you need to know that may come in handy when dealing with the IRS and trying to get an Installment Agreement for settling your debt.
- File all your tax returns – your application will be rejected if you have not filed your back taxes before you apply for an Installment Agreement.
- If you are paying by check or money order you need to allow 7-10 days for the IRS to receive your payment, so make sure you send it well in advance before the due date. Failure to do so may result in penalty charges or even cancellation of the agreed payment plan.
- If you owe more than $50,000 as an individual you won’t be able to use the online payment options, so in addition to the paper Form 9465-FS, you need to file also Form 433–F, Collection Information Statement. If your application is approved you will have to pay additional admin fee between $43 and $105 depending on your income.
- Try to maximize cost and minimize income and handle all tax accounts at the same time. In some cases getting 3 bank loan denials (intended to pay your debt) prior to your IA application can make its acceptance more likely.
Contact an experienced CPA or tax advisor who will be able to help you with crafting the best payment plan according to your personal circumstances and will stand a firmer ground on your behalf in the negotiations with the IRS. Also, you would certainly need the assistance of a professional if you don’t meet the IRS criteria for automatic acceptance of an installment agreement
Fulton Abraham Sanchez, the founder of FAS CPA & Consultants of Miami, FL, is a Certified Public Accountant. You can email him to firstname.lastname@example.org.
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