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PAYMENT PLANS WITH THE INTERNAL REVENUE SERVICE

Even prior to the 1998 IRS restructuring legislation, the IRS granted tens of thousands of payment agreements each year. Generally, to qualify for an installment agreement arrangement, the taxpayer must have filed all prior delinquent returns as well as have an inability to make full payment of prior tax liabilities. As a tax practitioner, I have noticed that it is generally more difficult to secure business installment agreements (e.g. unpaid employment tax liabilities) than installment agreements for individual income tax liabilities.

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

1. The agreement should provide for the satisfaction of the past due tax liability in the shortest possible time; and
2. It must be geared to the taxpayer's ability to pay.

This tax practitioner has noticed an inconsistency among IRS personnel, usually IRS Revenue Officers, in determining the amount of the monthly payments. The Internal Revenue Manual has a "facts and circumstances" test which has resulted in a wide variation in final results. Despite the new legislation, there has not been a noticeable change in the historical lack of uniform treatment of taxpayers. Blind luck often plays into whether an IRS representative proposes an installment agreement which is realistic and allows a client to meet all of his financial obligations or whether the agreement is so onerous as to make it impossible to live up the terms of the agreement.

Having trouble arranging an installment payment arrangement with your local Revenue Officer? Try the IRS Collection Appeals procedures. A recommendation by a field Revenue Officer can be appealed through his manager and on to an independent Appeals Officer. This tax practitioner has noticed the collection appeals procedure often results in agreements which a taxpayer can live with.

Generally the IRS has the authority to default an installment if the taxpayer does any of the following:

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 pay any other tax liability when due.
4. The taxpayer fails to respond to any reasonable request by the IRS to supply updated financial information.
5. The IRS determines that the collection of any tax is in jeopardy - this is rarely utilized.

NEW TAX LEGISLATION:

The 1998 tax legislation know as the "IRS Restructuring and Reform Act" was signed into law on July 22, 1998. This new legislation goes 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. Mandated changes however, are not yet fully in place at the IRS with regard to installment agreements. Helpful information is as follows:

1. Beginning on July 1, 2000, the IRS must provide any taxpayer having an installment payment arrangement, with an annual statement setting forth the taxpayer's beginning balance, all payments made during the year and the remaining balance at the end of the year.
2. The act guarantees an installment agreement for a taxpayer if the liability (excluding penalties and interest) is under $10,000.00 and the installment agreement provides for full payment of the liability within 3 years. But caution is advised. Even this type of agreement can be defaulted by taxpayer non-compliance.
3. The usual employment tax installment agreement will not last more than six months (Internal Revenue Manual 5331.32). Employment tax installment agreements expected to be paid over longer periods of time are extremely difficult to negotiate.
4. Before negotiating an installment payment arrangement, a client should give serious thought to the alternatives of an Offer in Compromise and even a bankruptcy proceeding. Often times, 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 ever being free of the IRS assessments.
5. The installment agreement approach requires current compliance. All delinquent returns must be filed, payroll tax deposits timely made, estimated tax payments (Form 1040-ES) timely made and there must be sufficient W-2 withholdings.
6. If you are seriously considering an installment agreement arrangement, go to the IRS website and print copies of Form 433-A (Financial Statement for Individuals) and/or Form 433-B (Financial Statement for Businesses). This will provide you with information which will be required by the Internal Revenue Service prior to entering into the installment agreement. Form 433-F is utilized by Automated Collection Service, Cleveland, Ohio to gather financial information from individuals with smaller tax liabilities.
7. Generally speaking, if a client has equity in his house, that client is better off obtaining a loan to pay off the tax liabilities. An installment agreement will not stop penalties and interest from accruing. These accruals far exceed most commercial loan interest rates.