There are several approved IRS Payment Plans. This blog will go over the 4 plans the IRS allows and the commonly asked questions associated with IRS Payment plans which are also called Installment Agreements.
Here are the 4 different IRS Payment Plans:
- Regular, and
#1 – IRS Payment Plan: Automatic Installment Agreement
To qualify for automatic installment agreement need to:
- Have not had an installment agreement with the IRS before.
- Owe $10,000 or less in the last 5 years.
- Do not owe the IRS back taxes.
You don’t need a lawyer to setup an automatic installment plan. You have 36 months to pay, and the IRS doesn’t file a tax lien.
If you owe $10,000 or less in assessed taxes, penalties, and interest, you have a guaranteed payment plan (or Installment Agreement). There is a small fee to set this up, and you don’t need to provide any financial information. Just go to the IRS website to get started or contact the tax professionals at TaxNetworkUSA today!
#2 – IRS Payment Plan: Streamlined Installment Agreement
The streamlined installment agreement is for taxpayers who owe $50,000 or less in the last 5 years.
To be eligible you cannot owe back taxes and you cannot have had an installment agreement set up with them ever before.
The meaning of the term streamlined is that you don’t have to give them any financial information.
If you’ve got money saved up in a 401k or an IRA or if you have an extra house; the IRS doesn’t care about that as long as you can fully pay your debt in 6 years (72 months).
As long as you can fully pay your debt in 6 years (72 months), you either have a payroll deduction or automatic (what’s called a direct debit) installment agreement they take the money right at your bank account.
The good news is: they won’t file a federal tax lien against you.
If you don’t agree to a payroll-deduction or a direct debit installment agreement, you will have a federal tax lien filed.
Now, this other plan, also consider streamlined – you can owe $50,000 or less, and you have 7 years(84 months) as opposed to just 6 years to pay.
The problem is that when you owe between $50,000-$100,000, you will have a federal tax lien filed against you. But, again, you don’t have to disclose any financial information to get this.
#3 – IRS Payment Plan: Regular Installment Agreement
This is a regular installment agreement meaning it’s not streamlined so you will need to provide financial information and it is not guaranteed.
The IRS want to know about your assets or liabilities, your income & your expenses. The IRS wants this information to determine your ability to pay. This is a lot more work because you have to fill out the form, disclose all your assets, liabilities, income and expenses.
If you have assets that the IRS considers you can sell (or finance/borrow against), they’re going to want you to do that. You are also going to have to have proof like bank statements, receipts, contracts.
It involves a lot more work, but if there’s anything good about dealing with the IRS, it’s this:
It’s based on your ability to pay, not on how much you owe.
When it comes to determining how much you owe, the IRS has something called National and Local standards.
Those standards are a little bit difficult to live up to, (in other words it’s not easy and may be difficult for you to live with what they say).
But once you go through this process, you have to pay over a period of time before 10-year collection the collection statute expiration date.
Normally the IRS has 10 years to collect, but there are some exceptions:
- if you file bankruptcy
- if you leave the country for 6 months or more
- you file for collection due process hearing
A general rule is that you can get a regular installment agreement based on your ability to pay so long as it fully pays off before the expiration in 10 years.
Regular installment agreements require 100% full-pay. The IRS will file a lien against you. Once you get it under $25,000 there’s a way to get the lien removed.
#4 IRS Payment Plan: Partial-Pay Installment Agreement
The reason this plan is called partial pay is because you’re not going to pay it completely. The reason is because the 10 year statute of limitations runs out before that is possible.
This plan also requires full financial disclosures. You end up paying less than enough to pay off all of your taxes.
Once the taxes have been assessed, the accruals are not the amount that the IRS looks at. So, let’s assume you have $49,000 in penalties and interest and then the IRS assesses you that liability; and then, over time you go way beyond $50,000.
You would still qualify for the 6 year installment agreement (streamlined), and likewise with the IRS, if the assessed amount is $100,000 or less, you still qualify.
With partial pay The IRS won’t allow you to pay a lesser amount forever.
They will look at your tax returns every year or two to see if you can afford to pay more. If you can afford to pay more, they will ask you to pay more.
By the same token, if your financial situation worsens and you can’t even pay that, you can go back and renegotiate down.
IRS National Standards for Living Expenses
The IRS is prevented from collecting assets that a person needs to survive and meet their basic living requirements.
The IRS calls these “Allowable Living Expenses” and they are excluded from the calculation that collection agents use to determine a taxpayer’s reasonable collection potential. Keep in mind that regardless of the size of the liability, whether $1,000 or $1,000,000, the IRS will always allow the taxpayer to keep enough cash to pay for their allowable living expenses.
The 1 Year Rule
The one year rule is when your actual expenses exceed the IRS standards for allowable living expenses. In this case they give you up to one year to adjust.
For example: let’s say you have a car payment that is $600 a month and the IRS only allows $507
The IRS will only give you credit for $507. But with the one-year rule, they’ll let you have credit for the $600, and then after a year they’ll knock you down to $507. You don’t necessarily have to sell the car, but that’s all they’re going to allow.
You have to demonstrate that you’re going to fully pay your liability to the IRS completely to qualify for the “one-year rule”.
The 6 Year Rule
And then there is something called the 6 year rule.
If you don’t qualify for the streamlined installment agreement and then you go to the regular, you provide financial information and your living expenses can exceed the IRS allowed standards.
So long as you FULL pay within 6 years and remain compliant (in other words in the future you don’t fall behind on taxes i.e. you file your returns on time)
If you would like assistance from the Qualified Tax Professionals at TaxNetworkUSA call us today!
Frequently Asked Questions
IRS Fresh Start Program Qualifications
The IRS Fresh Start tax initiative is generous and inclusive. However, there are some basic requirements to know about. Here’s what it takes to qualify:
- Self-employed individuals must prove a drop of 25 percent in net income.
- Joint filers can’t earn more than $200,000 annually.
- Single filers can’t earn more than $100,000 annually.
- Your tax balance must fall under $50,000 before the year’s end.
The underlying requirement is that you must apply for the option you think is appropriate for your situation. The IRS won’t automatically apply the Fresh Start program to your tax debt just because you qualify. The IRS charges interest on tax, penalties, and interest until the balance is paid in full, so it’s crucial to apply or get help as soon as you can.
Why Would the IRS Reject My New Installment Agreement Request?
The IRS can reject your Installment Agreement request for the following reasons:
- Collection Information was inaccurate or incomplete
- You previously defaulted on an IA
- You failed to file current tax returns
- Your necessary living expenses on Form 433 are unreasonable
What Is the Deadline to Appeal an Installment Agreement Rejection?
Normally you have 30 days (postmarked) from the date of your rejection to submit a new Installment Agreement request.
Do I Have to File All Missing Tax Returns First Before Requesting an Installment Agreement?
Yes, you must file all required returns or extensions (IRS considers you compliant).
If you have outstanding paperwork, you will not qualify for an Installment Agreement. Before applying, Tax Network USA will make sure that you have filed all requested tax returns and extensions with the IRS.