If you are an individual or business owner with significant tax debt that you are financially unable to pay, you may be eligible to enroll in an installment agreement with the Internal Revenue Service. An installment agreement is essentially a payment plan that enables you to pay off your taxes over time. To qualify, you must file all required tax returns and disclose all of your assets and cash to the IRS. This is because if you have enough cash, equity in your house or other assets, the ability to borrow the amount owed, or funds in a retirement account that covers your debts, then you are not eligible for an installment plan.
In addition to the above mentioned formality requirements, there are different types of agreements that place limits on who is eligible to enroll based on the amount of debt that they owe. For instance, in a Streamlined Installment Agreement, the IRS limits the amount of debt to those individuals who owe $50,000 or less in back taxes. This amount has been raised to $100,000 under an IRS test program that is set to expire on September 30, 2017. This limit is in contrast to Guaranteed Installment Agreements, which are automatically granted to individuals owing $10,000 or less, and Express Installment Agreements, which are for businesses that owe $25,000 or less in payroll taxes. These limits are imposed because those individuals are more likely to pay off their debt in full within the timeframe provided, which is usually three to five years. However, if you owe more than the limit for any of these plans, you may pay down the debt before applying for an agreement in order to qualify.
At Boeshaar Law, we are experienced in helping taxpayers navigate the complicated landscape of the IRS by informing you of your rights and options. Below we outline the major pros and cons associated with these payment plans.
An IRS installment plan offers many advantages for taxpayers.
- Set your amount – The installment plan allows taxpayers to set their own monthly payments to pay back their large debts over a period of time, eliminating the need to come up with large lump sums at once. This allows for the taxpayer to retain control over their finances, even while paying back a significant debt.
- Reduced penalties – IRS penalties are reduced for those enrolled in a plan. For example, the Failure to Pay penalty, which is generally 0.5% per month of your unpaid taxes, is cut in half.
- Pay off without further penalty – Even if you are enrolled in a plan, you may pay off your taxes in full at any time without incurring further, or additional, penalties. This way, you can wait until your debt is down to a manageable amount and pay it off in full when you are more comfortable and able to do so.
- The Collection statute will continue to run – The IRS generally has ten years to collect a tax once it has been assessed. The clock on this ten-year period is stopped when you request an installment agreement, but begins to run again while your agreement is in effect. If the clock runs out, you do not need to make any further payments.
Although clearly advantageous, IRS plans also have some disadvantages, such as:
- Interest and penalties – Like any debt, additional interest and penalties apply for each month the debt is not paid in full. This means that the taxpayer will ultimately pay more than the original debt by the time they complete their plan payments.
- The IRS may still file a Federal Tax Lien – A federal tax lien means that the IRS has the right to seize your property if you fail to pay your taxes. A lien is served by notice from the IRS that they will seize your property if you do not submit immediate payment. If you do not pay within the specified time after receiving a lien notice, then your property, including your house, can be sold off to satisfy your debt.
- Sign up fees – Unless you can pay off your debt within 120 days, IRS plans have their own fees associated with signing up. Although not very high, they still range from $43 for low income applicants all the way up to $225 for regular installment plan applicants.
Despite these disadvantages, it is typically far more advantageous to enroll in an IRS plan when you are unable to pay a large tax liability off in full.
Each plan has specifications and specific criteria that must be fulfilled in order to qualify. At Boeshaar Law, we are committed to helping you navigate the complicated framework of the IRS, while reducing the stress associated with debts owed.
Robert V. Boeshaar Attorney at Law, LL.M.,PLLC
Latest posts by Robert V. Boeshaar Attorney at Law, LL.M.,PLLC (see all)
- Why You Can’t Afford to Fall Behind on Payroll Taxes - 02/11/2023