An installment agreement is one of the options the IRS provides for those who encounter difficulties in paying taxes. Read on to learn more about it.
In this article:
- Guaranteed Installment Agreement
- Streamlined Installment Agreements
- Partial Payment Installment Agreements (PPIA)
- “Non-Streamlined” Installment Agreements
Everything You Need to Know About the IRS Installment Agreements
Guaranteed Installment Agreement
The first installment agreement plan the Internal Revenue Service (IRS) provides is the guaranteed installment agreement.
Under this monthly payment plan, the IRS will allow the taxpayer to pay off his existing tax liability in installments. For the taxpayer to be automatically approved, he must meet the following requirements:
- Excluding interests and penalties, the taxpayer owes less than $50,000.
- The taxpayer has filed all his tax returns, paid all taxes he has owed and has not entered into any installment agreements for the past five years.
- The taxpayer cannot pay any of his tax liabilities on the due date or within 120 days after that.
- He should also agree to pay the minimum monthly payment (this includes the tax liability, the interest, and any penalties it may have incurred) and to pay off the debt within three years or 36 months.
One of the best advantages this installment agreement plan provides is the IRS will not file a federal tax lien against you for your outstanding dues. A federal tax lien is basically the legal claim of the government against your assets when you fail to pay a tax debt. The IRS reports these instances to credit bureaus, which negatively affects your credit score.
Streamlined Installment Agreements
As part of the IRS’ so-called “Fresh Start Program,” they revised the streamlined installment agreement. Prior to the Fresh Start Program, the IRS only allows streamlined installment agreements if the tax owed is equal to or less than $25,000. The taxpayer should also be able to pay his debt in full within 60 months or five years.
The IRS has now revised the qualifications for this installment agreement plan to the following:
- Including tax liability, interests, and penalties, the taxpayer owes $50,000 or less.
- The taxpayer agrees to pay an amount greater than or equal to the minimum acceptable payment.
- The taxpayer agrees to pay the fee for setting up the installment agreement plan.
- He will pay off the debt within six years or 72 months.
Similar to the guaranteed installment agreement, this particular setup also helps you avoid a tax lien. It protects your credit score from damage, as the IRS will not file one against you.
Partial Payment Installment Agreements (PPIA)
PPIA is a type of monthly payment plan that takes into consideration your essential living expenses before coming up with a monthly payment amount you can afford. Afterward, the taxpayer enters an agreement with the IRS for a partial payment of their tax liabilities.
The IRS requires the taxpayer to submit IRS Form 433-F or the Collection Information Statement. This form reports their income as well as their living expenses for the past three months. The IRS might also instruct you to provide supporting documents such as bank statements and paystubs.
The IRS then reviews and verifies the submitted information. Depending on their evaluation, the IRS might need you to sell some or even all of your existing assets to pay the debt rather than entering into a PPIA.
While this payment plan can be set up to cover a far longer repayment term, it is also possible that the IRS will file a federal tax lien against you. This protects their interests in collecting the debt.
Upon approval, they will also conduct a financial review every two years. The results of their review determine whether you have to increase the monthly payment amount. In some cases, the IRS terminates the agreement altogether.
“Non-Streamlined” Installment Agreements
The final payment plan the IRS allows is the non-streamlined installment agreement. The IRS designed this plan for taxpayers who do not meet the standard requirements for either a guaranteed or a streamlined installment agreement. It is also for those whose tax debt is greater than $50,000, or might need a repayment term longer than five years.
The non-streamlined installment agreement requires direct negotiation with an IRS agent because it no longer falls within the agency’s standard guidelines for an automatic approval.
The IRS would need the taxpayer to submit Form 433-F to help them understand the taxpayer’s status in terms of assets, income, accounts, living expenses, and debts. It also allows the taxpayer to propose a monthly payment amount.
The proposal is routed to a manager for his review and approval. The process usually takes a few months before the IRS makes a final decision.
Depending on the results of the review, the IRS could decline the proposal if:
- It deems the living expenses of the taxpayer as unnecessary.
- It finds that the taxpayer provided erroneous or untruthful information.
- The taxpayer previously entered into an installment agreement and failed to complete it.
If the IRS deems it unnecessary, they might also need the taxpayer to sell some of his existing assets. In worse cases, they even instruct the taxpayer to take out bank loans to pay off the debt without entering into an agreement.
As a last resort, taxpayers declined of this plan could try to file for an Offer In Compromise.
Do keep in mind, however, that the IRS can revoke any of these arrangements for several reasons. These include missing a payment, failing to file a tax return or to pay taxes after an established agreement, and providing erroneous information on Form 433-F.
Filing taxes late and failing to pay them can be a very tedious endeavor to deal with. While these installment agreements could help you deal with a lot of potential tax problems, it is still best to simply prepare your taxes early. Know when your taxes are due, come up with a plan, and avoid a lot of hassle in the future.
Do you have some questions about installment agreements? Ask us in the comments section below!