For taxpayers who owe a tax debt to the Internal Revenue Service, there are a number of options to resolve that debt. If you are unable to pay off your tax debt immediately, you may be a candidate for an IRS installment agreement, which will allow you to pay off your debt over time. Installment agreements are the most commonly used way to pay off overdue taxes. One significant advantage of this method is that while an installment agreement is in place, and regular payments are being made, the IRS will not typically pursue other avenues of collection against a taxpayer.

The IRS Fresh Start program has expanded eligibility for installment agreements, making them available to more taxpayers and increasing the timeline for payment to 72 months from the previous term of 60 months.

Who is Eligible for an IRS Installment Agreement?

The first requirement for eligibility is having filed all required tax returns. Self-employed individuals must be current on their quarterly estimated tax payments for the current year. Taxpayers who are up to date on their tax filings may then apply to establish an installment plan for payment of back taxes. Individuals who owe less than $50,000, and businesses that owe less than $25,000 in payroll taxes are generally eligible for installment agreements.

Owing more than those amounts does not necessarily render an individual or business ineligible for an installment agreement, but the taxpayer must complete and mail IRS Form 9465 (Installment Agreement Request) and Form 433-F (Collection Information Statement). Taxpayers who owe back taxes in an amount lower than the thresholds referenced above may not need to provide financial information to qualify for an installment agreement.

How Do IRS Installment Agreements Work?

Although the payment timeline is 72 months, or six years, taxpayers are encouraged to make the largest monthly payments they are able to so that they can pay off tax debt more quickly and minimize interest and penalty charges. These continue to accrue until the tax is paid in full.

Individual taxpayers whose tax debt exceeds $50,000 or who believe that they will not have enough money after paying necessary living expenses to pay off their debt in 72 months will need to negotiate a proposed payment plan with an IRS collector who has analyzed their Collection Information Statement. The IRS carefully scrutinizes what taxpayers claim as living expenses and has a relatively strict definition of what is necessary.

Installment agreements are not approved instantly, but that doesn’t mean a taxpayer should sit idly by, waiting for approval. Making as large a down payment as possible on existing tax debt, and continuing to make regular monthly payments pending approval of the agreement, show the taxpayer’s good faith. Prior to an agreement’s approval, these monthly payments can be made using bar-coded envelopes and payment slips provided by the IRS. Following approval, you may continue to make payments by direct debit from your bank account or by direct payroll deduction. In addition, any future tax refunds you would ordinarily receive will be applied to your tax debt until it is paid off.

What if the IRS refuses to approve an installment agreement? Refusals typically occur because the IRS deems claimed living expenses extravagant or unnecessary; because an applicant was untruthful on the Collection Information Statement; or because the taxpayer has had an installment agreement in the past and defaulted. An attorney’s assistance is helpful in taking the rejected application up the chain of command at the IRS and is more likely to result in a subsequent approval.

Downsides to an IRS Installment Agreement

Installment agreements are a boon to many taxpayers, but there are a few things to think about before applying. As mentioned above, interest and penalty charges continue to accrue while you are making installment payments. If your debt is large enough, and your payments are small, you may end up paying all you can afford and still not make much of a dent in your tax debt.

An installment agreement may also not be the best choice if you are at risk of defaulting on your payments. Speak to an experienced tax attorney to get an honest analysis of whether an installment plan is the best choice for you. There are other options for reducing or eliminating your tax debt that may meet your needs better.

To learn more about whether an IRS installment agreement is the best choice for you, contact the tax controversy attorneys of Ortiz & Gosalia without delay. Our attorneys have post-JD degrees in tax law and offer a range of counsel and representation with regard to U.S. tax law. We can explore your options with you and help you take the necessary action in a timely fashion.