If you do not want to file for bankruptcy, consider working with your accounting professional to set up an Installment Agreement. This is an agreement between the taxpayer and the IRS to allow you to pay your back-tax liabilities in monthly payments, over an extended timeframe. The IRS usually utilizes financial guidelines to maximize the monthly payments.
According to the IRS, you should request this type of payment plan if you believe you will be able to pay your taxes in full within the extended time frame.
About those fees, penalties and interest
Something you should know about all of these installment payment programs: Because you are late paying off your tax debt, even though you are paying it off, you still accrue interest on the unpaid balance. You may still owe penalties for not getting things taken care of on time and in full. In addition, if you use a credit card to pay your installments, you will be paying a separate credit card fee.
The IRS charges a fee for setting up installment agreements. The current fee is $225 if requested by phone or paper filed. It is reduced to $107 if you agree to set up the agreement using direct-debit from your bank account. Moreover, if you meet the low-income threshold, you’ll pay a reduced fee of $43.
Installment Agreement Options
Automatic Installment Agreement
An automatic installment agreement is available if you owe $10,000 or less to the IRS. It’s easy to qualify for the plan. You just need to meet a few criteria:
- File all past tax returns.
- Your previous five years’ returns may not have been filed or paid late.
- You can’t have used an installment agreement plan within the previous five years.
- You can pay the entire amount within three years or less.
Request this installment program by filing IRS Form 9465. No taxpayer financial statements are required.
Streamlined Installment Agreement
A streamlined installment agreement can be used for tax debts up to $50,000. The criteria here is similar to the automatic guaranteed installment agreement:
- File all past tax returns.
- Your previous five years’ returns may not have been filed or paid late.
- You can’t have used an installment agreement plan within the previous five years.
- You can pay the entire amount within 72 months (6 years) or before the expiration of the Statute of Limitations, whichever occurs first.
The IRS Fresh Start Program made this type of agreement possible. File IRS Form 9465 to get started on this program. No taxpayer financial statements are required.
Installment Agreement for Tax Debt over $50,000
Now you owe some serious money. When your tax debt hits $50,000, you are in for a difficult time qualifying for a payment program. The IRS thoroughly reviews your financial situation so you can pay the debt off as early as possible. And this time, you will need to furnish a financial statement.
You will be required to complete a Collection Information statement (IRS Form 433). The IRS will review your gross monthly household income and reduce it by the allowable expenses. The IRS will set-up an installment agreement for the monthly available cash remaining.
If this monthly amount will result in the IRS debt being repaid within the 10-year collection Statute of Limitation, then the agreement will be considered a “regular installment agreement.”
If you own a business, additional financial disclosure is required.
As long as you remain in compliance, you will not have to revisit your payment plan again. If there is a change in circumstances, you or your representative, can contact the IRS and provide the information necessary to modify the agreement. Failure to make current payments or contact the IRS when circumstances warrant will result in a default of the agreement. This will make it difficult to renegotiate another installment agreement.
Partial Payment Installment Agreement
If for some reason, your tax debt is just not affordable for you, you may potentially qualify for a partial payment installment agreement. It’s hard to qualify for this type of agreement, although there is no set tax debt.
The IRS may allow you to pay part of your debt if you show you can’t afford the minimum payment for a guaranteed or streamlined installment payment plan. A partial payment agreement allows you to take longer to repay, and the IRS will evaluate your financial position approximately every 18 months to two years to see if your financial situation has improved. They will include your equity in assets in their calculations.
Unfortunately, the IRS will also file a federal tax lien to guarantee debt collection and protect their interests. It’s possible you may have to sell property in order to pay off your tax debt.
Get Assistance with Installment Agreements
If you would like to discuss any or all of these Installment Agreement options, you are most welcome to contact us. Our goals are to work with you in setting up the agreement best for your situation, as well as getting all the right forms and information to the IRS.