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IRS
Installment Payment Plans
The most widely
used method for paying an old IRS debt is the monthly Installment
Agreement, or IA. If you owe $10,000 or less and have a clean record
with the IRS, you have an automatic right to an IA. One condition is
that your monthly payments must be sufficient to pay the balance in
full within 36 months. If you owe less than $25,000, you may qualify
for a streamlined installment agreement. This is an installment
agreement plan that you must complete within 60 months, and can get
without managerial approval (as long as you're current on your other
tax payments). If you owe more than $25,000, the IRS must negotiate
with you in good faith. (Internal Revenue Manual 5331.1.) But if you
have money or assets that the IRS deems unnecessary for you to live
on, the IRS might not grant an IA when the balance exceeds $25,000.
Don't assume
that a payment plan is your best option -- there are definite
drawbacks. The biggest is that interest and penalties continue to
accrue while you still owe. Interest is adjusted quarterly. Combined
with penalties, the rate is often 13% - 15% per year. It's possible to
pay for years and owe more than when you started.
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Example: |
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Rodney
and Rebecca owe the IRS $30,000 in back taxes at the
beginning of 2000. They enter into a $300 monthly
payment plan at a time when interest and penalties
total 12% a year, adding an additional $3,600 to their
balance. But they pay only $3,600, and so they will
owe $30,900 (plus interest and penalties on the $900)
at the end of the year. |
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WARNING:
If IRS computers show that you haven't filed all past due tax returns,
you will not be eligible for an IA. Likewise, if you are
self-employed, you must be current on your quarterly estimated tax
payments for the current year if you want an IA. Finally, if you have
employees, you must be current on payroll tax deposits and Form 941
filings before you will get an IA.
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How
Long the IRS Has to Collect from You |
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The
Tax Code imposes a ten-year time limit on the IRS to
collect taxes after they are assessed. (Internal
Revenue Code § 6502.) If you were billed after filing
your return, this period starts on the date you filed.
If you were audited, the ten years runs from the date
the IRS assessed additional taxes. |
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Negotiating a
Monthly Payment
If you owe more than $25,000 or can't pay the amount you owe in five
years or shorter, your request for an IA begins with an IRS collector
analyzing Form 433-A
or 433-B.
The collector
uses the information on the forms to determine the amount you can pay.
Beyond that, however, there are no hard and fast rules. Payment
amounts are at the discretion of the IRS. If you deal with eight
different collectors, you might end up with eight different IAs!
Nevertheless,
here are some strategies for negotiating an installment plan.
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When you hand
the completed Form 433-A or 433-B to the collector, immediately
propose a payment plan you can live with.
You must
offer to pay at least the amount on line 53 of Form 433-A --
income less necessary living expenses. This is the cash you have
left over every month after paying for the necessities of life. If
possible, offer slightly more than the amount on line 53. Tell the
collector that you will cut back on expenses to make up the
difference. For example, if line 53 is $189, offer $200. Don't,
however, promise to pay more than you can afford just to get your
plan approved. Promising the IRS more than you can deliver is a
serious mistake. Once an IA is approved, the IRS makes it
difficult for you to renegotiate it.
If your line 53 shows $0 or a negative number, you're not in a
position to negotiate a payment plan. At this point, your best
bets are either submitting an Offer in Compromise, asking for a
suspension of collection activities or filing for Chapter 7
bankruptcy.
Give a first
payment when you propose the agreement -- and keep making monthly
payments even if the IRS hasn't yet approved your IA. If you don't
have the funds, postdate a check or a series of checks and give
them to the collector to hold. Making voluntary payments
demonstrates your good faith and creates a track record. For
example, if you pay $200 a month for three months before your IA
is approved, the collector may be inclined to believe that this is
the right amount.
A collector doesn't
have sole authority to grant a payment plan for amounts over $25,000.
He can only recommend it to his manager for approval. Most of the time
approval is given, but not always.
If the IRS
grants an installment plan, it may take several months to notify you
in writing.
Making
Payments
Until you receive written notice of approval, send payments to your
local service center using the payment slips and bar-coded envelopes
provided. Write your name and Social Security number in the left-hand
corner of your check and make a photocopy for your records. If you
don't want the IRS to know where you bank, use a money order or
cashier's check from another bank.
You have two
other options for making payments once your IA is approved:
Request a
direct payroll deduction on Form 2159, Payroll Deduction
Agreement. Your employer must agree to send payments to the IRS
each month using the IRS' payment slips.
Use a direct
debit, where your bank automatically debits your checking account
each month and sends a payment to the IRS. You specifically
request this IRS by filling out the back of Form 433-D,
Installment Agreement, and returning it to the IRS with a blank
voided check from your account. As long as you keep the account
open, this is the most foolproof way to make sure you don't miss a
payment and risk having the agreement revoked.
If the IRS
Refuses Your Installment Agreement Proposal
Before a collector will accept an IA for more than $25,000, he must
believe that the information on your 433 forms is truthful, your
living expenses are necessary and the IRS is getting the maximum
amount you can pay. As stated above, many IA proposals are accepted by
the IRS. When the IRS won't agree to installment payments, it is for
one of three reasons.
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Your living
expenses are not all considered necessary. The IRS may deem your
expenses extravagant. For example, if you have hefty credit card
payments, make any charitable contributions or send your kids to
private school, expect the IRS to balk. Although reasonable people
would disagree on what is necessary and what is extravagant, the
IRS is rather stingy here.
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Information
you provided on Form 433-A or 433-B is incomplete or untruthful.
The IRS may think you are hiding property or income. For example,
if public records show your name on real estate or motor vehicles
that you didn't list, or the IRS received the W-2 or 1099 forms
showing more income than you listed, be prepared to explain.
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You defaulted
on a prior IA. While this doesn't automatically disqualify you
from a new IA, it can cause your new proposal to be met with
skepticism.
If your IA
proposal is first rejected, you can keep negotiating. Ask to speak to
the collector's manager. Just making this request is sometimes enough
to soften the collector up. But, if you talk to the manager, don't
criticize her employee or start yelling. Keep your cool and if the
manager believes you are trying to be reasonable, she may take over
the case or ask the collector to reconsider.
If you get
nowhere with the manager, you can go over her head -- everyone at the
IRS has a boss. You can complain to her immediate boss, the
collections branch chief, and then to the district director. Squeaky
wheels sometimes do get greased. Again, just talking about going up
the ladder may cause a change in the attitude at the lower rungs and
get you a fair payment plan.
Revoking an
Installment Agreement
Once you receive approval of your IA, supervision of your plan moves
from the collector to the Service Center. You and the IRS are bound by
the terms of the agreement, unless any of the following are true:
You fail to
file your tax returns or pay taxes that arose after the IA was
entered into. Although IRS computers do not continue to review
your finances, they do monitor you for filing future returns and
making promised payments.
You miss a
payment. Under the terms of all IAs, payments not made in full,
and on time, can cause the IA to be revoked immediately. In
practice, the IRS usually waits 30-60 days before revocation -- at
least on the first missed payment. You are entitled to a warning
or a chance to reinstate the agreement.
Your
financial condition changes significantly -- either for the better
or worse. The IRS usually won't find out about this unless you
tell. The IRS may review your situation every year or two,
however, and require you to submit a new Form 433-A or 433-B in
order to continue your IA.
The IRS
discovers that you provided inaccurate or incomplete information
as part of the negotiation, such as omitting certain valuable
assets.
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