This week, we are talking about owing the IRS money. In my book: Everything You Wanted to Know About the IRS – Audits, Appeals, and Collections, I discuss these topics in great detail. This week I will be providing condensed chapters from the book.
Yesterday we discussed the IRS’s Fresh Start Initiative. Today we discuss Installment Arrangements.
It is common for a taxpayer to file their income tax return and realize that they owe the IRS more money than you have. I have run into taxpayers that just don’t file their returns, and hope for the best. You have options when it comes to paying the IRS. You can do the following:
· Pay the tax in full
· Pay in monthly installments
· Reduce or eliminate the tax by filing for bankruptcy
· Reduce the amount that you owe by filing an Offer in Compromise (explained on Friday)
· Have the IRS determine that you currently are unable to pay and suspend collections
If you can’t pay what you owe the IRS, you can make monthly payments to them through an installment plan. You should do the following before you apply:
· File all required tax returns;
· Consider other sources (loan or credit card) to pay your tax debt;
· Determine the largest monthly payment you can make (minimum $25); and
· Know that your future refunds will be applied to your tax debt until it is paid in full
The fees for setting up the plan are as followed:
· $52.00 for a direct debit agreement
· $105.00 for a standard agreement or payroll deduction agreement; or
· $43.00 if your income is below a certain level.
Installment arrangements provide a way for a taxpayer to pay the IRS what they owe through monthly payments. These arrangements are for taxpayers that have large back tax bills, and paying what is owed is impossible. Paying what you owe through an installment arrangement can make things more manageable and can be a viable alternative if you do not qualify for other programs.
There are some important things to consider about installment arrangements:
· Penalties and interest continue to accrue even while you are paying off the amount that you owe. You may find that borrowing money against another source to pay your obligation may be a cheaper option for you.
· If you owe $10,000.00 or less, all of your returns have been filed, and you have not been in trouble with the IRS before, generally, you have a statutory right to an installment arrangement.
· Entering into an installment arrangement extends the Statute of Limitations (explained later) for the IRS to collect tax.
· When entering into an installment arrangement you are agreeing to stay current with filing your income tax returns and paying the tax when it is due.
· Your monthly payment plan will pay off your balance in 36 months or less
· You’ve had no installment agreement in the previous five years.
The IRS has ten years to collect taxes that are due. The ten year period starts the day that the tax is assessed. As I mentioned before, entering into an installment arrangement extends that period. Another consideration is that even though you are paying your tax, the IRS can file a tax lien against you for the amount that you owe. From time to time they do this to protect the government’s interest.
The IRS has changed some of the rules by issuing IR-2012-31 on March 7, 2012. The change was due to the IRS Fresh Start Initiative. Under the Fresh Start Program the IRS increased the Notice of Federal Lien filing threshold from $5,000.00 to $10,000.00, and made it easier to request a lien withdrawal. In bulletins IR-2011-20, IR-2012-31, and IR-2012-53, the IRS changed its Offer in Compromise program making the qualification for the program more flexible. We will discuss that on Friday.
In addition to the above, the IRS changed Installment Arrangements. Under the Fresh Start provisions, taxpayers have the ability to use streamlined installment agreements to catch up on back taxes. Under Fresh Start, the maximum dollar criteria for streamlined installment agreements have been raised from $25,000.00 to $50,000.00, and the maximum term was raised from 60 months to 72 months. The streamlined installment arrangements generally do not require a financial statement, but a limited amount of financial information may be required.
The criteria to qualify for streamlined installment arrangements with a balance due of $25,000.00 or less are:
· You owe $25,000.00 or less, at the time the agreement has been established
· The debt must be paid in full within 72 months
· You must be compliant with all filing and payment requirements
· Individuals who owe any type of tax (Form 1040, Trust Fund Recovery Penalty)
· Defunct businesses, including any type of entity and any type of tax (Form 940, 941, 943, etc.)
· Operating businesses are limited to income tax liability only (Form 1120)
The criteria to qualify for a streamlined installment agreement with a balance due of $25,001 to $50,000.00 are:
· You owe $25,001 to $50,000.00 at the time the agreement is established
· The debt must be paid in full within 72 months
· You are compliant with all filing and payment requirements
· Individuals who owe any type of tax (From 1040, Trust Fund Recovery Penalty, etc.)
· You must enroll in direct debit installment
· Limited amount of financial information may be required.
You ask for Fresh Start by filing Form 9465-FS
The benefit to the Fresh Start Program is the IRS will release a lien, or not file a lien once the installment arrangement is in place.
If you didn’t pay your taxes, or if the IRS rejected Form 9465, you can request an extension of time to pay the tax that is due. You can get either an extension of up to 120 days to pay the amount of your tax in full, or a monthly payment plan.
According to IRC §6502 there is a Statute of Limitations that the IRS has to collect the income tax that you owe. In general the IRS has ten years to collect. After ten years has passed the debt is wiped clean. However, there are a number of ways that you can extend the Statute of Limitations, asking for an installment arrangement is just one of them.
As you can see, there is light at the end of the tunnel with an Installment Agreement.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, and The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle