“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 agency also agreed to increase the IRS installment agreement length beyond 60 months.