Does the IRS offer payment plans, and if so, how do they work?
The IRS has several approved payment plans. The following blog is adapted from a transcript of our podcast, Tax Relief Academy. Let's go over the plans the IRS allows.
This information is for entertainment purposes. Do not consider it legal advice.
IRS Approved Payment Plan #1: Automatic Installment Agreement (Basic)
This is pretty simple. You can get the automatic installment agreement if you:
- Owe $10,000 or less in the last 5 years
- Do not owe the IRS back taxes, and
- Have not had an installment agreement with the IRS before.
You don’t need a lawyer, you have 36 months to pay, and they don’t file a tax lien, so it’s pretty simple to do.
So, if you owe $10,000 or less, 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.
IRS Approved Payment Plan #2: Streamlined Installment Agreement
This is for taxpayers who owe $50,000 or less. As of right now, the IRS has a pilot program - you can even owe up to $100,000 or less.
Also, in the last 5 years: if you do not owe taxes and you have not had an installment agreement set up with them.
This is streamlined (meaning 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.
IRS Approved Payment Plan #3: Regular Installment Agreement
This is a regular installment agreement. It’s not streamlined or guaranteed. The IRS requires financial information. They have forms, collection information statements.
They want to know all about your assets or liabilities your income & your expenses - this is to determine your ability to pay.
If you don't qualify, then you're going to have to go with the regular installment agreement, and this is a lot more work because you have to fill out the form, disclose all your assets, liabilities, income and expenses.
Now, if you have assets that the IRS considers you can sell (or finance/borrow against), they're going to want you to do that.
Also, you're going to have to have proof like bank statements, receipts, contracts and that sort of thing.
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.
But 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(what they call a 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
The 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.
IRS Approved Payment Plan #4: Partial-Pay Installment Agreement
The reason it’s called partial pay is because you're not going to pay it completely. The 10 year statute of limitations runs out before that is possible.
It also requires full financial disclosures. You end up paying less than enough to pay off all of your taxes.
Before I forget: going back to the streamlined installment agreements ($50,000 & $100,000).That is based on the assessed taxes, penalties, and interest.
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.
Going back the partial pay: IRS won't allow you to just pay a lesser amounts 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
A couple more comments about the IRS standards which allow for living expenses what they call national standards in certain category.
There is something called the one year rule - when your actual expenses exceed the IRS standards for allowable living expenses forgive you up to one year to adjust.
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
They'll 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.
For a standard amount non purchasing the car now what kind of installment agreement you would pay a lesser amount and then here and then you would raise it to fit the IRS allowed living expenses.
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)
Finally, a comment on default.
All of these installment agreements require that you don't fall behind any more.
Example: if you have an installment agreement made today and next year when he found 2019 taxes be filed your tax return on time.
But you owe money you just defaulted on your, they will send you a notice of intent to terminate and it'll give you a little bit of time to catch up but if you don't catch up you're back to square one you have to renegotiate or be subject to IRS collection efforts.