The most common way to resolve tax debt issues by entering into a payment plan with the IRS. There are several types of payment plans.
Do you qualify for a payment plan?
The IRS will consider an installment agreement only if a taxpayer is current on his tax liabilities, which means that the taxpayer:
- has filed all tax returns
- and is current with tax payments for the current period, such as estimated tax payments
Guaranteed and Streamlined Installment Agreements
You may qualify for a guaranteed or streamlined installment agreement depending on how much you owe.
- Guaranteed Installment Agreements (GIA): 36-month payment terms for balances of $10,000 or less.
- Streamlined Installment Agreements (SLIA): 72-month payment terms for balances of $50,000 or less.
- Streamlined Processing: 84-month payment terms for balances between $50,000 and $100,000.
So take your total tax debt and divide it by the number of months for the program you qualify for. If you’re not able to make those monthly payments. then you should consider one of the other alternatives below.
Non-streamlined and partial payment installment agreements
A non-streamlined installment agreement is for balances over $100,000 or for taxpayers who owe less than $100,000 and are not able to make the monthly streamlined payments but have some ability to pay.
A partial payment installment agreement (PPIA) is available to taxpayers that cannot fully pay their tax debt before the 10 year collections statute expires.
In both cases, the IRS will request a collections information statement (Form 433-A or 433-F). On this form, you’re required to completely disclose all assets, income, and expenses, so the IRS can complete a financial analysis (more on that below).
In addition, if you have assets that equity (such as an IRA, home, or vehicles). the IRS will request that you borrow against them before they agree to place you on a non-streamlined or partial payment installment agreement.
The IRS will then review your collections information statement to determine your ability to pay. They may request documentation to substantiate the financial information that you provided on the collections information statement.
How does the IRS complete a financial analysis?
Example, Bob has $259,000 of tax debt. His gross income is $12,500 a month, but due to his lifestyle, his expenses leave him an average of $300 a month in savings.
Bob believes that his remaining monthly income is $300 and that is what he wants to pay the IRS every month.
Well, the IRS has something to say about that. They don’t care what Bob actually spends every month. The IRS will allow him a standard amount of expenses, and allow him actual expenses for health insurance, child support, and tax withholding.
Here’s a financial analysis based on the above example:
- Bob has $12,500 gross monthly income ($150,000 business income/12)
Based on Bob’s location and family size (1 individual), the IRS applies the following standards:
- Federal standards:
- Food – $307
- Housekeeping supplies – $30
- Apparel & Services – $80
- Personal care products and services – $34
- Miscellaneous $119
- Vehicle ownership (lease or monthly payment) – $471
- Local standards:
- Housing – $1,457
- Vehicle operating cost – $281
- Additionally, the IRS allows actual expenses for the following:
- Health insurance
- Court ordered payments (e.g., child support)
- Child/dependent care
- Term life insurance
- Tax withholding (Federal, FICA)
- Secured debts
- The above actual expenses total $3,521
- Federal standards:
After applying the above standard and actual expenses, the IRS determines that Bob actually has $6,200 discretionary income, not $300.
The IRS will expect Bob to adjust his living standards in order to make the $6,200 monthly payment. It’s a very rude awakening for Bob.
In some cases, it is possible to get 1 year of actual expenses allowed for car payments, private school/university education, and housing to give the taxpayer time to modify their current spending habits.
If the monthly installment payments will not result in full payment of debt before the expiration of the collections statute, the IRS will likely the taxpayer to borrow against any assets with equity, such as a primary residence or retirement account.