When taxpayers are unable to pay their tax bill in full, they can enter into several types of agreements on their back tax bill. Getting into an agreement on a tax bill is crucial to avoiding IRS collection enforcement in the form of liens, levies, garnishments, and passport restrictions.
The IRS agreements for back taxes include:
- Extensions to pay: referred to by the IRS as a “short-term payment agreement.” Taxpayers can obtain a one-time extension to pay for up to 180 days.
- Payment plans: referred to be the IRS as “installment agreements.” These are monthly payment agreements over time with the IRS. There are two types of installment agreements: simple agreements and the complex ability to pay agreements.
- Hardship agreements: there are three types of hardship agreements:
- Partial pay installment agreements: a negotiated payment plan with the IRS based on the taxpayer’s ability to pay with assets and monthly disposable income. In PPIA cases, the taxpayer is given a payment plan that lasts 2 years based on their current financial situation. These installment agreements are called “partial pay” because, based on the current payment plan terms, the taxpayer is projected not to pay the total balance owed to the IRS before the collection statute of limitations expires. The collection statute is generally 10 years from the date the tax is assessed by the IRS, either through the filing of a return or from an additional assessment from an audit, amended return, or matching notice (CP2000).
- Currently not collectible: a temporary status in which the taxpayer does not have to pay based on their current financial condition. In these cases, the taxpayer has trouble meeting their basic living expenses with their current level of income.
- Offer in compromise: a settlement of a tax bill based on the taxpayer’s reasonable collection potential.
All IRS installment agreements require the taxpayer to file all required prior year returns. Normally, for individuals, filing the past 6 years’ returns will meet this requirement. Taxpayers must make payments monthly, not miss a payment, and not have additional balances owed for future years. Missed payments and additional balances will default the agreement and require the taxpayer to enter into a new agreement (or revise a current agreement) to stay in good standing and avoid enforcement.
In all IRS installment agreements, and with currently not collectible status, the IRS will keep any future refund until the balance is paid or the statute to collect expires.
Simple Installment Agreements
Simple installment agreements allow taxpayers fixed payment terms and do not require the taxpayer to negotiate payment terms based on their ability to pay. As a result, they are easier to obtain and can be used to avoid a Notice of Federal Tax Lien if completed timely. The IRS has 3 types of simple installment agreements:
Guaranteed Installment Agreements (GIA): the GIA allows a taxpayer with a balance of $10,000 or less to enter into a “guaranteed” approved IRS payment plan over 36 months. To qualify, the taxpayer must not have had an installment agreement in the past 5 years. The monthly payment amount can be computed by taking the balance owed and dividing it by 36.
Taxpayers with a confirmed GIA will not have a Notice of Federal Tax Lien filed by the IRS.
Example: taxpayer files 2023 tax return with a $7,200 balance owed. The taxpayer goes online using the IRS’ Online Payment Agreement application and obtains a $200 a month payment starting the 28th of next month. The taxpayer puts in their banking information so the IRS can draft the amount monthly.
Streamlined Installment Agreement (SLIA): taxpayers who owe an assessed balance of $50,000 or less can qualify for a SLIA. The assessed balance is the amount of tax, penalties, and interest at the time the tax is assessed (as opposed to the total balance which includes accrued penalties and interest after the initial assessment). The SLIA allows the taxpayer to pay within 72 months, or the IRS collection statute of limitations, whichever is shorter. A direct debit from a financial account is required if the taxpayer owes an assessed balance between $25,000 and $50,000. Taxpayers who enter into a SLIA before the IRS files a tax lien can avoid the lien filing. Assuming there is more than 72 months left on the collection statute of limitations, the taxpayer can compute their payment by taking the assessed balance and dividing it by 72.
Example: taxpayer owes $36,000 in assessed tax, penalties, and interest for 2018 and 2019 and a total balance of $51,000. The taxpayer also has more than 72 months remaining on the collection statute of limitations. The taxpayer goes online using the IRS’ Online Payment Agreement application and obtains a SLIA. They put in their banking information to have their payment directly debited from their account as required by the SLIA terms for those who owe more than $25,000. The taxpayer is able to obtain a $500 a month payment on the 28th of each month by direct debit. The IRS had not filed a Notice of Federal Tax Lien on those years. The SLIA will allow the taxpayer to avoid a tax lien filing.
Full-pay Non-streamlined Installment Agreement (FP NSIA): the FP NSIA allows a taxpayer who owes up to an assessed balance of $250,000 to pay for the length of the collection statute of limitations (up to 10 years). Taxpayers must call IRS Collection to obtain this agreement. IRS representatives will preliminarily set up the plan. An IRS manager must approve the plan. If the taxpayer owes more than $10,000, the IRS will file a Notice of Federal Tax Lien. In many cases, taxpayers pay down the balance under $50,000 and timely obtain a SLIA to avoid the tax lien.
Taxpayers must call the IRS to have them compute the monthly payment amount, which will consider future penalties and interest to be paid over the prescribed period.
Example: taxpayer owes $120,000 for 2019 and has 80 months left on the collection statute of limitations. The taxpayer wants a payment plan and is OK with a tax lien filing. The taxpayer calls IRS collection and obtains a payment plan of $2,100 a month to be paid by check on the 28th of each month. The payment amount is based on the IRS computation to full pay before the statute expiration date. The plan is approved by the IRS.
Simple installment agreements make up almost 90% of all IRS collection agreements.
Complex Ability to Pay Installment Agreements
Complex ability to pay installment agreements apply when the taxpayer cannot utilize one of the simple installment agreements and do not qualify for non-collectible status or an offer in compromise. Complex installment agreements require the taxpayer to prove their ability to pay first using their equity in assets and then with monthly payments. Taxpayers who cannot pay with asset equity will provide the IRS financial statements and information to support their financial status and proposed payment terms. The taxpayer can use the appropriate Form 433 (433A, F, or H) and supporting documentation (bank statements, paystubs, proof of expenses, etc.) to prove their ability to pay.
Individual taxpayers will be subject to expense limitations for food/clothing and miscellaneous expenses, transportation ownership and operating expenses, and housing and utilities. In complex ability to pay installment agreements, the IRS will only allow necessary expenses for the health and welfare of the family and for the production of income. All other expenses will not be allowed unless the taxpayer can pay within 6 years or the collection statute of limitations, whichever is shorter (called a “conditional installment agreement).
There are 2 types of complex ability to pay installment agreements:
Partial pay installment agreements (PPIA): in a PPIA, the taxpayer makes monthly payments based on their ability to pay. In PPIAs, the final payment terms are projected not to full pay the tax owed before the IRS collection statute expiration date. Once the statute expires, the IRS writes off the remaining debt. PPIA terms require that the IRS review the agreement every 2 years. If the IRS selects the renegotiate the agreement, the taxpayer will be required to provide new financial information and prove their ability to pay.
Example: the taxpayer owed $30,000 for 2017 and has 40 months remaining on the collection statute of limitations. The taxpayer has no assets to pay (cash, investments, retirement accounts, equity in property, recreational assets to sell, etc.). The taxpayer analyzes their finances and applies IRS expense limitations and computes their average monthly disposable income to be $100. The taxpayer files Form 433A with the IRS and provides 3 months of bank statements, paystubs, and supporting documentation for expenses to the IRS to prove his ability to pay. The IRS accepts the $100 a month PPIA payable by check on the 10th of each month. The IRS will follow up on the agreement in 24 months and decide if they wish to renegotiate terms. If the IRS does not and the payment plan remains in place for the entire 40 months, the IRS will write off the balance owed in 40 months. Once the balance is written off, the taxpayer no longer has to pay the IRS.
Routine ability to pay installment agreements: in a routine installment agreement, the taxpayer will full pay the liability, but the payment terms will be decided based on the taxpayer’s ability to pay. The taxpayer will have to provide financial information similar to the PPIA and prove their ability to pay through assets and monthly disposable income.
Since the creation of the FP NSIA in 2020, there are not many routine installment agreements. Taxpayers who owe less than $250,000 can obtain a FP NSIA and avoid the routine installment agreement financial disclosure. However, if the taxpayer owes more than $250,000, they will have to prove their ability to pay with the IRS as the FP NSIA is not available.
In routine installment agreements, the taxpayer can also request a lower first year payment and higher later year payments (called a “tiered installment agreement” or the “1-year lifestyle adjustment agreement). In these cases, the taxpayer generally must pay within 6 years or the collection statute, whichever is shorter. Conditional installment agreements in which the taxpayer is allowed actual expenses and can pay within 72 months or the collection statute, whichever is shorter, is also a form of routine installment agreement.
Example: taxpayer owes $300,000 for 2021 and has 100 months remaining on the collection statute of limitations. The taxpayer has no assets to pay the IRS. The taxpayer provides financial information to the IRS (Form 433A and supporting documentation) to show that they can pay $5,500 a month. The IRS approves a routine installment agreement of $5,500 a month on the 20th of each month until the balance is full paid.
Installment agreements, or IRS payment plans, are the most common form of IRS collection agreement. Taxpayers can complete extensions to pay up to $100,000, the GIA, and the SLIA online using the IRS’ Online Payment Agreement application. All other agreements must be completed directly with IRS Collection.