PAYMENT PLANS WITH THE INTERNAL REVENUE SERVICE

The IRS grants thousands of monthly payment agreements each month.  Generally, to qualify for an installment agreement arrangement, the taxpayer must have filed all delinquent returns as well as demonstrate an inability of the taxpayer’s assets and cash flow to fully pay existing tax liabilities over the short term.  It is generally more difficult to secure business installment agreements (e.g., unpaid employment tax liabilities (Form 941) than installment agreement for individual income tax liabilities (Form 1040).  This is particularly true for payroll tax liabilities if the taxpayer intends to remain in business.

The IRS has stated two objectives in deciding whether to allow an installment arrangement:

  1. The agreement should provide for the satisfaction of the past due tax liabilities in the shortest possible time; and
  2. It must be geared to the taxpayer’s ability to pay – using their formula.

PPIA’s or partial pay installment agreements are granted when the monthly payment plan will not fully liquidate the remaining tax debt.  With a PPIA, the IRS will reopen a collection case every several years to re-examine taxpayer’s assets and monthly cash flow.

This office has noticed an inconsistency among IRS personnel, whether it be an IRS Revenue Officer or an IRS phone collection representative, in determining the appropriate amount of the monthly payment.  The Internal Revenue Manual has a “facts and circumstances” test which has resulted in a wide variation in results.  Despite Congressional “friendlier IRS” legislation and the Fresh Start program, there has not been a noticeable change in the historical lack of uniform treatment of taxpayers.  Luck may play into whether an IRS collection representative proposes an installment agreement which is realistic or whether the proposed agreement is so high as to invite taxpayer failure to live up to monthly obligations within a year or even months.

Having trouble arranging an installment payment arrangement with your local Revenue Officer?  Try the IRS Collection Appeals procedures (CAP request).  A recommendation by a field Revenue Officer can be appealed through his manager and on to an independent Appeals Officer.  This office has often used collection appeals procedures which resulted in agreements which taxpayers can live with.

Generally, the IRS has the authority to default an installment agreement for a variety of reasons.  Usually, levies are not far behind.

  1. The taxpayer provides inaccurate or incomplete information in the negotiations.
  2. The taxpayer fails to pay an installment when due.
  3. The taxpayer fails to file or full pay any post agreement income or payroll tax return.
  4. The IRS determines that the collection of any tax is in jeopardy – this is rarely utilized.  The result is usually immediate levy.
  5. Automatic breach a PPIA every two years to re-examine if a taxpayer’s ability to pay has changed.

TAX LEGISLATION ON IRS COLLECTION RESTRAINTS:

The tax legislation known as the “IRS Restructuring and Reform Act” has been in effect for some years now.  This legislation went a long way to guaranteeing taxpayers the right to an installment payment arrangement.  Moreover, in enacting the legislation, the United States Congress chastised the Internal Revenue Service for using arbitrary national and local standards.  The IRS, nevertheless, appears to have minimally changed policies and agreements other than for short term, full pay agreements.

Helpful information is as follows:

  1. The IRS must give taxpayers the opportunity for a hearing before any levy seizure of assets. This is known as a Due Process Hearing under IRC Section 6330.  The law goes even further in that if a taxpayer is not satisfied with the results of the Due Process Hearing conducted by an IRS Settlement Office, taxpayers have the right to judicial review in Unites States Tax Court prior to any levy.  Caveat, however, extending the ten year collection statute of limitations.  Due Process rights are also applicable with regard to Due Process notices associated with IRS tax liens but unlike levy notices, the hearing is issued post filing of the Notice of Federal Tax Lien.  In due process matters relating to the filing of a Notice of Federal Tax Lien the IRS, in the usual case, will refrain from levies during the pendency of the IRS administrative D/P lien hearing and review.
  1. Unfortunately, there has been taxpayer abuse of Due Process Hearing rights which have been used as delay tactics rather than as genuine attempts at resolution of tax controversies. Care is indicated.  The due process administrative hearing approach is also an excellent administrative vehicle in which to present Offer in Compromise paperwork for a settlement of outstanding tax liabilities.  Due Process Settlement Officers have greater discretion in accepting offers than current Offer in Compromise units.  Face to face meetings, unavailable in regular Offer in Compromise proceedings, in some cases, are available in Due Process hearings.
  1. The usual employment tax (Form 941) installment payment agreement will not last more than 24 months. The IRS will reopen a collection case even if there has been current tax compliance.
  1. Before negotiating an installment payment arrangement, a client should give serious thought to alternatives such as an Offer in Compromise or even a bankruptcy proceeding. Quite often, the monthly payment amount does not even pay for accruing penalties and interest.  This result means an ever-increasing tax balance with no hope of being free of the IRS assessments.  The IRS collection units will re-examine taxpayer assets and cash flow every 18 to 24 months.  Taxpayers are not told that when a PPIA goes into effect.
  1. An Installment agreement arrangement requires current compliance. All returns must be filed and paid, payroll tax deposits timely made and current year estimated tax payments (Form 1040-ES) timely made.
  1. If you are seriously considering an installment agreement arrangement, I direct you to the IRS website (irs.gov) and print copies of Form 433-A or Form 433-F (Financial Statement for Individuals) and/or Form 433-B (Financial statement for Businesses). This will provide information which will be required by the Internal Revenue Service prior to entering into the installment agreement.  Form 433-F is utilized by the IRS Automated Collection phone services unit and walk-in locations to gather financial information from taxpayers.
  1. Generally speaking, if a client has equity in his house, that client is better off obtaining an equity loan to pay off tax liabilities. An installment agreement will not stop penalties and interest from accruing nor will it stop the filing of a federal tax lien.  Tax accrual rates for penalties and interest far exceed commercial loan interest rates.  However, if a tax lien is in place it is difficult to obtain bank refinancing.  Certificate of Lien Discharge or Federal Tax Lien Subordination procedures are available but require administrative proceedings for refinancing.

THE FRESH START PROGRAM

 

References: IR-2012-31, 3/7/2012
  IR-2011-20, 2/24/2011
  IRS Topic 202 – Tax Payment Options
  IRS Tax Tip 2013-57, 4/17/2013
  IR-2016-108, 8/19/2016

 

In 2012, the IRS announced a “Fresh Start” initiation to help struggling taxpayers.  This office has not seen this program help the majority of non-compliant taxpayers.  The program, on occasion, does can help taxpayers owing $50,000 or less but is still burdensome.

For example, let’s take a taxpayer owing $50,000 who receives a “fresh start”, no documents required, automatic approval of a payment plan in the program.  What are the real facts?

The $50,000 must be paid back with a maximum term of 72 monthly payments.  With a lower penalty structure but continuing penalties and interest – the result is still not attractive/or doable for many taxpayers.  $50,000 divided by 72 months equals $694 per month – but the real number to liquidate the debt (with penalties and interest) in six years will be closer to $800 per month.  Taxpayers do not qualify for Fresh Start if their income exceeds $100,000 annually.

A full payment request by the taxpayer to full pay all taxes within 120 days will stop collection during the period and usually results in the IRS not filing a Federal Tax Lien during the period under the short term installment agreement.

This office has not experienced a kinder IRS when submitting a “Fresh Start” offer in compromise.

The Fresh Start initiative, however generally does allow for expanded category expenses in the following areas.  It impacts (lowers) the expected amount of the Fresh Start monthly payment arrangement:

  • Allowing taxpayers to repay their student loans.
  • Allowing the computation to include payment plan for state and local delinquent taxes.
  • A greater IRS sensitivity in IRS historical “allowable living expense” strict formula computations, e.g., residence expenses and credit card payments.