Like millions of Americans, you owe back taxes. You don’t have enough money to pay what the IRS claims you owe, and you’re looking for a solution to pay off your back taxes that won’t get you into further debt. If that describes your tax situation, an IRS installment agreement may be the best move for you. Although not as popular as other tax relief programs, such as the Offer in Compromise Program, an installment agreement is the only realistic tax relief option for many taxpayers.
In 2015, the IRS approved 2.99 million installment agreements but it only accepted 66,600 offers in compromise. Only 40.3% of offers in compromise are accepted while some installment agreements are usually approved automatically. (Source)
It’s no surprise the IRS prefers installment agreements to offers in compromise. IRS installment agreements don’t reduce your tax debt. On the contrary, the IRS continues to charge interest on your tax debt balance until you completely pay it off. With an offer in compromise, the IRS forgives a big chunk of your debt. As you would expect, the IRS is in no hurry to forgive taxes and will only approve an offer in compromise when you can prove you can’t afford an IRS installment agreement. If you don’t owe all that much in back taxes and you have plenty of disposable income and assets you could sell, such as a home and a new car, it’s not going to be easy to convince the IRS you can’t afford an installment agreement.
Does this mean you shouldn’t even try to apply for more aggressive tax relief strategies, such as an offer in compromise?
Not at all. For some taxpayers, an offer in compromise is the only strategy that makes sense. Don’t assume an IRS installment agreement is your best option just because they are easier to get. The combined interest and penalty fees attached to an IRS installment agreement are often the equivalent of an 8% to 10% APR.
If you owe $10,000 or more in back taxes, consider hiring a tax relief company that has tax attorneys on staff. It’s common for professional tax relief firms to have an acceptance rate of 90% for offers in compromise.
What Is an IRS Installment Agreement?
An installment agreement is a payment plan that allows you to pay your tax debt over a time you agree with the IRS. Just like a car loan or mortgage, an installment agreement gives you the option to pay large debts over time.
There are five main types:
- Streamlined Installment Agreements
- Guaranteed Installment Agreements
- In-Business Trust Fund Express Agreement
- Partial Pay Agreement
- Routine Installment Agreement
Guaranteed IRS Installment Agreement
If you owe $10,000 or less in back taxes (not including interest and penalties), you have the right to 3-year IRS installment agreement without even having to file a financial statement. This allows you to pay your taxes in small increments over a period of up to 3 years. The big advantage is the IRS will stop its collection efforts as long as you’re current with your payments. In other words, you won’t have to worry about the IRS filing a federal tax lien against your property.
To qualify for a guaranteed IRS installment agreement, you must:
- Have filed and paid your taxes on time for the previous five years
- Be up-to-date on filing your current taxes
- Pay off your taxes within 36 months
- Have had no installment agreement within the previous five years
- Agree to file and pay on time in the future
Although installment agreements are easy to obtain they have significant drawbacks.
- Interest rate and penalty fees amount to 8% to 10% APR (Source)
- Installment agreements generally have a negative impact on your credit score.
If you have good credit, you may be better off paying your tax debt with a personal loan.
Streamlined IRS Installment Agreement
If you don’t qualify for a guaranteed installment plan AND the balance you owe is $50,000 or less, you may be eligible for a streamlined installment agreement. With this type of agreement, you must fulfill the same obligations as with the guaranteed IRS installment agreement except you can pay off the balance in 72 months or less. Just like with the guaranteed plan, as long as you are current with your payments the IRS will not file a federal tax lien against your property.
To qualify for a streamlined installment agreement you must pay by direct debit or through a payroll deduction agreement.
There are two types of streamlined installment agreements, which one you can apply for will depend on how much owe and whether you’re a business or an individual taxpayer.
Streamlined Installment Agreements for less than $25,000
This option is available to individuals, businesses, and businesses that have gone out of business.
Streamlined Installment Agreements for $25,000 to $50,000
This option is only available to individuals and out-of-business sole proprietors.
Partial Pay Installment Agreement (PPIA)
Not eligible for the first two agreements? Perhaps a partial payment installment agreement is right for you. This option is for taxpayers who can’t afford to pay their tax debt in full but do have the resources to pay a portion of them.
To qualify you must:
- Owe over $10,000 combined IRS tax debt, penalties, and interest
- Have filed and paid all taxes for previous years
- Have no marketable assets
- Not be in bankruptcy or have an active Offer of Compromise
With a PPIA, your monthly payment takes into account your living expenses. Your monthly payment is based on what you can actually afford. Additionally, it may offer a longer repayment term.
However, the IRS:
- Has the option to file a federal tax lien to protect its interests
- Will request you fill out a financial statement
- Requires you to provide financial information as supporting documents
- Re-evaluates the terms every two years to see if you can pay more
If you’re considering a partial pay agreement, check whether you qualify for an offer in compromise. Offers in compromise often provide taxpayers with a better deal than partial pay installment agreements
In-Business Trust Fund Express Agreement
In-business Trust Fund Express agreements are an option for businesses that owe $25,000 or less. To qualify you must pay the entire tax balance within in 2 years or before the statute of limitations expires, whichever is sooner. If you owe more than $25,000, consider paying your tax liability down to $25,000 and then applying.
Routine IRS Installment Agreements
If you owe more than $25,000, need a repayment term longer than five years, or you don’t meet the criteria of the guaranteed or streamlined installment plans, you may be eligible for a routine installment agreement.
This type of agreement falls outside normal IRS guidelines. Approval, therefore, is not automatic. You may need to provide financial information to help the IRS determine your monthly payment. They may encourage you to sell off assets or apply for a loan to pay your back taxes without an installment agreement. Additionally, they may file a federal tax lien under this agreement.
Few Final Words about IRS Installment Agreements
Once you arrange your installment agreement, you will need to determine how you will pay. You have several options including payroll deduction, check, money order, and credit card. Additionally, you must pay a filing fee. Pay the full amount you owe within 120 days to avoid the fee.
The IRS can revoke your installment agreement at any time if you:
- Miss a payment
- Don’t file a tax return
- Don’t pay current taxes
- Provide erroneous information in your financial statement
- Your financial position changes under a PPIA
It is your responsibility to meet your tax obligation. If you find yourself in a difficult situation and need advice, you may want to seek the assistance of an enrolled agent, certified public accountant, tax attorney, or a taxpayer advocate. These individuals can look at your current financial situation and tax issues, and negotiate with the IRS on your behalf or help you determine which plan is best for your needs.