“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.

IRS Advisory Committee Recommends Big Change to Installment Agreement Guidelines

The IRSAC (Internal Revenue Service Advisory Committee) released its annual report today. IRSAC is composed of 28 non-IRS members divided into four subgroups. Two of the subgroups (Wage & Investment and Small Business / Self-Employed) recommended changes to the Streamlined Installment Agreement Program.

An installment agreement is normally available to taxpayers who are unable to pay their tax debt in full. A Streamlined Installment Agreement (SIA) is available to taxpayers with aggregate unpaid balances of $25,000 or less, so long as the monthly installment will pay off the entire balance within 60 months. The SIA is granted without managerial approval, without the need to divulge financial information to the IRS, and in many cases, without the need to file a Federal Tax Lien. The $25,000 threshold has been in place since 1998.

The IRSAC Wage & Investment and Small Business / Self-Employed subgroups identified “repeater” balance due taxpayers as a major problem. To alleviate this problem, they recommended increasing the SIA dollar threshold to $50,000 and pushing more taxpayers to set up their installment payments through direct debit arrangements with their bank.

I think it is wise to increase the SIA dollar threshold because it will open up additional options to taxpayers who cannot pay their back taxes in full. However, I’m not sure this will have any meaningful impact on the “repeater” problem. Taxpayers unintentionally stack liabilities year after year when they do not have the means to pay their current-year taxes and their prior-year taxes simultaneously. According to IRS installment agreement guidelines, a $50,000 debt would require a payment of $1,000/month (for 60 months), taking into account the daily accruals of interest on the account. Increasing the SIA threshold to $50,000 would do more to alleviate this problem if the IRS also agreed to increase the length of these agreements beyond 60 months.

IRS is no Help with Avoiding Fees

Usually the 16-year-old behind the counter at your favorite fast food establishment isn’t trying to up-sell you and get you to order the more expensive burger on the menu. They don’t care; they’re getting paid by the hour. In fact, they will often go out of their way to help you if there is a cheaper way to order what you want. Well, according to the latest TIGTA report, the 16-year-old at the burger joint may be better with customer service, in some respects, than the IRS.

The latest TIGTA report delves into the Streamlined Installment Agreement (SIA) program. The IRS is not being consistent in their approach to SIAs and are failing in three key areas. One of the failures that TIGTA identified was that IRS representatives are not apprising taxpayers of a less expensive alternative: the “extension to pay.”

It costs $150 to set up an installment agreement — this is a non-refundable user fee. But if the balance is low enough to be paid off in 120 days or less, then an installment agreement is not necessary.  If the balance can be paid in 120 days, the IRS will normally agree to an “extension to pay” and the taxpayer can avoid the $150 fee. If an IRS representative knows that the balance can be paid off in 120 days, then the representative should steer the taxpayer towards the extension to pay rather than the SIA, or at least notify them of the option. As part of their audit, TIGTA found over $1 million in fees that could have been avoided by the extension to pay alternative.

Unfortunately the old adage, “They don’t care; they’re getting paid by the hour” correctly describes some IRS reps too.