Installment Agreements
What is an Installment Agreement?
An installment agreement is where both the taxpayer and IRS agree that the taxpayer will pay the full amount of tax due, but instead of being required to pay it all immediately, the taxpayer can pay it over time in increments (installments) extending past the due date. So for example, a taxpayer who owes the IRS $15,000 can enter into an installment agreement to pay the $15,000 over a period of say 3 years, instead of paying it all immediately. The time period can be negotiated and therefore varies, but it is often between two and five years.
What Benefits do Installment Agreements Provide Taxpayers?
The IRS is not allowed to issue a levy while an installment agreement is pending. See Treas. Reg. §301.6159-1. If a levy is outstanding when the IRS accepts a taxpayer’s installment agreement, it is required to release the levy and allow the taxpayer to pay in accordance with the terms of the agreement. As such, at the time of releasing a levy the IRS is also required to promptly notify all third parties who received the levy notice that the levy has been released. See IRC §6343(a)(1)(3). The IRS is not obligated by law to release a tax lien when an installment agreement is accepted, although the Service is authorized to exercise its discretion in deciding whether to release a lien or not. See IRC §6323(j)(1)(B).
Is the IRS Required to Approve Installment Agreements?
The IRS is required by law to approve installment agreements where the total amount of tax debt (excluding interest and penalties) is less than $10,000 and during the past five years the taxpayer has filed all tax returns, paid all taxes, and did not previously entered into an installment agreement with the IRS.
How to setup an Installment Agreement
If a taxpayer owes $25,000 or less the taxpayer can use an online payment agreement, or file Form 9465 with the Internal Revenue Service to setup an installment agreement. If the taxpayer owes more than $25,000 the IRS will often require that the taxpayer file Form 433F along with Form 9465. Form 433F provides the IRS with the taxpayer’s financial information, such as a list of the taxpayer’s bank accounts, loans, and insurance policies; assets are also expected to be listed such as real estate, vehicles, stocks, and bonds; lastly the taxpayer’s income and expenses are also required to be provided.
Requirements of an Installment Agreement
Once the IRS accepts an installment agreement the taxpayer is required to do all of the following or they run the risk of the IRS cancelling the agreement. The taxpayer must timely make all agreed installment payments, must file all required tax returns, and must timely make all required tax payments, including estimated tax and deposit payments during the life of the agreement. See IRC §6159(b)(4).
Failure to Pay Penalty Cut in Half
The failure to pay tax penalty under IRC §6651(a)(2) and (3) is cut in half from the normal rate (0.25% instead of 0.5%) when an installment agreement is in effect. See IRC §6651(h).
Appeal Rights if an Installment Agreement is Denied
The IRS should inform a taxpayer of the reason(s) why his or her installment agreement request is denied. The IRS is not to take any collection action without first giving the taxpayer an opportunity to discuss the matter with the employee who made the negative decision and his or her supervisor. The taxpayer will also be advised of their right to request an appeal, but failure to first take the matter up with the employee and his or her direct manager could result in a denial at the IRS office of appeals.
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