What is an IRS Installment Agreement?

Maryland residents who owe federal income tax that they cannot pay at one time should learn about the IRS installment agreement.

Many taxpayers struggle when the amount of federal income tax they owe is more than what they are able to pay. This can understandably be a stressful experience. However, an Internal Revenue Service installment agreement may be an option.

IRS installment agreement basics

As the name implies, an installment agreement is basically a promise on the part of a taxpayer to make monthly payments to the IRS to satisfy a personal tax debt. However, before a person rushes in to set up such an agreement, it is important to understand the eligibility criteria as well as the installment agreement terms.

To qualify, a person must have filed all federal income tax returns for all the previous tax years, even if he or she cannot pay all of the taxes due on them. It is important to mention that the IRS also charges user fees for installment agreement applications. The installment agreement fees depend on a few things, such as whether the taxpayer chooses to set up a direct deposit payment, whether the taxpayer qualifies for a low income taxpayer installment agreement etc. For example, if a person sets up a direct deposit for their payments, fees may be lower than those for a person who physically mails in a check every month.

An applicant who owes the IRS $50,000 or less in tax, penalties and interest generally qualifies for an installment agreement. For taxpayers who owe more than $50,000, but less than $100,000, qualification is possible, but not automatic.

IRS

The IRS urges taxpayers (or their legal representatives) to apply online for installment agreements using the IRS website. The online application is usually faster than the telephone, in-person or written application. To be eligible for an online installment agreement, individuals must owe $50,000 or less in combined individual income tax, penalties, and interest, and have filed all required returns. The IRS reports that around 90 percent of individual taxpayers qualify to use the online application. However, if a taxpayer is not eligible for an online installment agreement, he or she may complete and mail Form 9465, Installment Agreement Request and Form 433-F, Collection Information Statement. An experienced tax attorney could guide the taxpayer on how to best fill out the forms to avoid possible denial or rejection of the installment agreement application.

The amount of monthly payment as well as the length of the agreement vary depending on a number of factors, including the size of the tax debt and the taxpayer's current financial situation. During the installment period, penalties and interest continue to amass until the debt is completely satisfied.

Once an installment agreement has been approved, the taxpayer must meet certain conditions to avoid default:

  • Make required payments or request an exception or modification.
  • File future returns on time and with full payment of taxes due, unless arrangement is made with the IRS to add the new liability to the existing agreement.
  • Be aware that future tax refunds are automatically applied as payments toward the installment agreement, reducing the balance due.
  • Ensure the IRS statements are sent to the correct address. The taxpayer must inform the IRS right away if the mailing address has changed by calling the IRS or mailing Form 8822, Change of Address.
  • Continue to make the scheduled payments even if the IRS has applied a refund to the taxpayer's liability.

If a taxpayer is in danger of defaulting, he or she needs to contact the IRS or an attorney right away. The IRS usually will not take collection actions while an installment agreement is being considered, an installment agreement is in effect, 30 days after a request is rejected, and during the period the IRS evaluates an appeal of a rejection or terminated agreement. In case of default however, a reinstatement fee may be charged, and penalties and interest start to accrue until the balance is paid in full.

Streamlined Processing

A "streamlined" installment agreement allows IRS officials to process installment agreements faster without analyzing a taxpayer's financials or obtaining managerial approval. Streamlined processing requires less taxpayer verification of ability to pay and will normally not trigger a federal tax lien. Streamlined agreements are currently available for tax liability up to $50,000, including penalties and interest, and are usually set up for a maximum term of 72 months. There are two types of streamlined agreements; one for liabilities up to $25,000 and one for liabilities between $25,000-$50,000.

To qualify for a streamlined installment agreement for liability up to $25,000, a Collection Information Statement that is used to verify ability to pay is usually not required.

For liability greater than $25,000 and up to $50,000, a Collection Information Statement is required only if the taxpayer had an earlier default. A federal tax lien is normally not required if the taxpayer agrees to payroll deduction or direct debit payments.

Then IRS is currently conducting a test of expanded criteria to qualify more individual taxpayers for streamlined processing that is intended to last through September, 2017. If the results of the test support it, the criteria will be permanently adopted and more people will be able to apply for streamlined installment agreement processing.

Legal help is always wise

Taxpayers who believe they may qualify for an installment agreement should contact an attorney before applying. This will allow them to consider the best options available, make informed decisions, and avoid any possible costly mistakes.