IA Set-Up Fees

The IRS charges a one-time processing fee for setting up an installment agreement (IA). The fee is $105 for most people. However, if you agree to a “direct debit” IA — meaning that you allow the IRS to automatically debit your bank account each month — then the IRS charges only $52. This option is attractive, but some taxpayers are reluctant to give the IRS their bank information and would rather just send them a check. The IA set-up fee is even lower ($43) if your income is below the IRS’ poverty threshhold.

The IRS is usually willing to take the set-up fee out of your first payment as long as the payment amount is sufficient to cover the fee. For example, if your set-up fee is $105 and your monthly payment is $200, then the IRS will take $105 out of your first month’s payment and apply $95 to your back tax debt.

If you can afford to pay your entire tax debt in 3 months or sooner, then the best option is to obtain a “120 day extension to full pay.” You only have 3 months to pay, but you completely avoid having to pay any kind of set-up fee.

Another Fresh Start Gem: State Tax Installment Payments

Filing an Offer in Compromise (OIC) can be quite an ordeal if you’re not prepared.  If the IRS decides your offer is worth considering, then they will look very carefully at every aspect of your finances, including assets, income, and expenses.   The result of this analysis is your “reasonable collection potential” (RCP) — the single most important factor in determining whether or not your offer is accepted.

When the IRS looks at expenses, they determine which ones can be allowed, and of the expenses that can be allowed, how much can be allowed.  Generally speaking, more/greater expenses result in a lower RCP and a lower offer. 

Formerly:  The IRS did not allow payments made pursuant to a state or local tax installment agreement (IA) in the RCP analysis.  The underlying reasoning for this was that the laws of the federal government trump the laws of state and local governments when it comes to collection of revenue.  The IRS simply ignored the practical realities of the situation.

Currently:  Under the Fresh Start program, the IRS will allow state or local tax installment agreement payments — not all of them all of the time, but compared to the way the IRS used to treat them, this is a step in the right direction and very good news for those in need of tax relief.

“Fresh Start”: Installment Agreements

Those with a tax debt are often reluctant to disclose their individual financial information to the IRS, and rightly so. The financial information that is normally required includes details about one’s income, expenses, assets, and accounts. The IRS often uses employment and bank information as levy sources; it’s the first place they go when taking enforced collection actions.

The IRS allows taxpayers to enter into installment agreements without disclosure of financial information as long as the balance due to the IRS is below a certain threshold. Previously that threshold was $25,000, excluding accrued interest and penalties. But the IRS announced yesterday that the threshold has been doubled — now $50,000. Also, instead of a 60-month payoff period, the IRS will now allow payments to be spread over a maximum of 72 months. The only catch is that the taxpayer must agree to a direct debit payment arrangement whereby the IRS is automatically wired payments each month from the taxpayer’s bank account. Those who owe $25,000 or less may still make payments by other methods, including manually writing a check and sending it in each month.

Yesterday’s announcement shouldn’t have been a huge surprise given the new Form 9465-FS that was released in December 2011, although with little fanfare.

For additional information, visit the IRS Newsroom.

Fee Increase for California Installment Agreements

Starting October 26, the Franchise Tax Board will be raising the fees for installment agreements as follows:

Personal Income Tax Installment Agreements: $34 (previously $20)

Business Entity Installment Agreements: $50 (previously $35)

See the Installment Agreement information page for more information, but note that it has not been updated with the new amounts yet.

Fees are still subject to change (again) without notice.

Partial Payment Installment Agreements

Most IRS installment agreements are set up so that the payments will satisfy the total amount due before the Collection Statute Expiration Date (CSED), affording minimal tax relief to the cash-strapped taxpayer. However, in some situations this is not possible. Sometimes the taxpayer’s financial situation is such that the debt will not be satisfied before the CSED, even if minimum monthly payments are consistently made. This is called a Partial Payment Installment Agreement (PPIA).

For instance, suppose the taxpayer owes $10,000 for tax year 2001 and the financial statement reveals that the highest payment that can be made is $100 per month. If the 2001 liability expires in 36 months, then taxpayer will pay only $3,600 over the life of the statute. Obviously the IRS does not like to enter into these types of arrangements unless absolutely necessary. Here are some of the PPIA prerequisites:

  • All back tax returns filed
  • No equity in assets (or assets liquidated and paid to the IRS prior to PPIA approval)
  • Full Collection Information Statement (IRM 5.14.2)

Installment Agreements & Suspension of Collection Activity

Installment agreements provide some tax relief if a liability cannot be paid in full. As you may know, IRS procedures prohibit the filing of levies while an installment agreement (IA) is in effect. But did you know that, subject to certain exceptions, no levies may be filed in any of the following situations either?

1. While requests for installment agreements are pending

2. For 30 days after requests for installment agreements are rejected

3. For 30 days after  installment agreements are terminated

4. While an appeal of a default, termination, or rejection is pending or unresolved (See Internal Revenue Manual 5.14.1.5)

What are some of the exceptions, you ask? One is when the taxpayer waives the particular restriction in writing. Another exception is when collection of the tax is in jeopardy (i.e., taxpayer is preparing to leave the country with a suitcase full of cash). And a third exception is when a levy is filed in connection with a tax balance from one or more years not covered by the IA or appeal.

And what qualifies as a “pending” IA? Another good question. A taxpayer must at least provide his identifying information, such as name and social security number, identify the tax period(s) to be covered by the agreement, and propose an amount to be paid. However, an IA will not be deemed “pending” if all back tax returns are not filed or if it is evident that the IA request was submitted solely to delay collections. See Internal Revenue Manual 5.14.1.3.

Payroll Deduction Agreements

An individual seeking tax relief may be in a position to make installment payments to the IRS. There are three primary methods of making installment agreement payments: mail in a check, electronic debit, and payroll deduction. The taxpayer can initiate the electronic debit method directly on Form 9465 or Form 433-D. However, a payroll deduction agreement requires use of a separate form (Form 2159). There are three parts to this form: the Acknowledgement Copy (to be returned to the IRS), the Employer’s Copy, and the Taxpayer’s Copy. The front page of each copy is identical. However, there is an instructional second page to each copy, each containing different information. The second page of the IRS Copy contains a list of internal codes and number designations. The second page of the Taxpayer’s Copy contains some rather redundant instructions on how to fill out the form and what to do with it after it is completed. The second page of the Employer’s Copy is the most interesting. The employer is instructed to “continue to make payments unless the IRS notifies [the employer] that the liability has been satisfied.” This could be prejudicial to the taxpayer. First, the likelihood that the IRS will notify the employer in a timely manner is not very high. Second, if the taxpayer’s financial situation changes and he is unable to continue with the IA, it could be potentially very difficult to cancel the payroll deduction agreement.