Installment Agreement – I.R.S. Debt Collection Alternatives
If you cannot afford to pay the full amount of your tax debt owed to the Internal Revenue Service (“I.R.S.”) at once, there may be collection alternatives available to you. One of these alternatives is the Installment Agreement, also referred to as a Payment Plan.
How to Apply for an Installment Agreement
An Installment Agreement allows you to pay any debt you owe to the I.R.S. over time as opposed to a lump sum payment. To apply for an Installment Agreement, you must file a Form 9465 Installment Agreement Request. However, if you owe less than $50,000, you may apply for an Installment Agreement online instead. If you owe more than $50,000, you must also complete a Form 433-F Collection Information Statement providing detailed financial information. Any amount of tax liability may be considered for an Installment Agreement; there is no minimum or maximum amount that must be owed to qualify.
In determining whether to accept a Payment Plan, the I.R.S. is directed to consider actions that are least intrusive to you as the taxpayer while still meeting the needs of the I.R.S. In determining whether to accept an Installment Agreement, the I.R.S. looks at whether the agreement accurately reflects your ability to pay over the proposed term of the Installment Agreement. To make this determination, the I.R.S. will look at your disposable income and any assets available to you. If you have assets that could be liquidated or borrowed against in order to provide full payment of the amount owed, the I.R.S. will first look at these assets. However, the I.R.S. will take into consideration any special factors such as health, age, or use of the asset for income production or family welfare to determine whether it is possible to liquidate or borrow against any such assets.
How much does it cost to enter into an Installment Agreement?
Fees charged as a result of entering into an Installment Agreement will vary depending on the length of time of the agreement. A short-term Installment Agreement requires full payment within 120 days. Under the short-term option, no extra fees are incurred, but interest and penalties will continue to accrue until full payment is made. Under a long-term Installment Agreement, the debt owed will be paid in monthly increments extending beyond the 120 days allowed by the short-term option. There are two payment options for the long-term Installment Agreement and the fees vary with each. The first option requires you to pay through direct deposit and charges a $31 fee if you apply online and a $107 fee if you apply by phone, mail, or in person. The second option allows you to pay by making a monthly payment from your bank account, online through the Electronic Federal Tax Payment System, or by monthly check, money order or debit or credit card. Additional fees will be incurred when paying with a debit or credit card. Appling online under this option will result in fees of $149 while applying by phone, mail, or in person under this option will result in a fee of $225. Once again, no matter which option you choose, penalties and interest will continue to accrue until payment is made in full. However, you may apply for a reduced fee based on your status as a low-income taxpayer by filing I.R.S. Form 13844. A low-income taxpayer is an individual whose gross income is at or below 250% of the U.S. Department of Health and Human Services poverty guidelines.
Notice of Federal Tax Lien
However, it must be remembered that during the term of the Installment Agreement, penalties and interest will continue to accrue. Further, a Notice of Federal Tax Lien may still be filed as well as the possibility of a levy if the agreement is later terminated. A Notice of Federal Tax Lien informs other creditors that the government has a right to the property contained within the notice. A tax lien is just a claim against the property by the government; it does not mean that this property is being taken at that time. A levy, on the other hand, is when the I.R.S takes the property to satisfy the tax debt. For instance, if the I.R.S. levied your wages, the amount of the levy would be directly taken out of your wages every paycheck and delivered to the I.R.S.
What is the Penalty Reduction from an Installment Agreement?
There may be additional benefits to entering into an Installment Agreement besides the ability to pay your tax debt over an extended period of time. For instance, entering into an agreement may allow for your failure to pay penalty to be reduced if certain conditions are met. To qualify for such a penalty reduction, you must timely file your tax returns, enter into the Installment Agreement on or after January 1, 2000, be an individual taxpayer, and previously not had the failure to pay penalty increased to 1%.
Once approved for an Installment Agreement, the I.R.S. will send you an Annual Installment Agreement Statement each year providing the beginning balance, an itemized list of payments, penalties, and interest, and the ending account balance for the year.