Harras Bloom & Archer LLP Blog

Friday, March 25, 2016

Dealing With IRS Debt: Installment Agreements

By: Lynn Cosma Wenkert

Being in debt to the IRS can feel like you are being swallowed whole by a whale.  Leaving you  helpless in escaping the clutches of your gigantic opponent, and embarrassed about finding your self in this position to begin with. 

The IRS has extraordinary authority in collecting upon debts due them, and have far more power than the average debt collector.  Unlike other creditors, they have the ability to garnish your social security income, they can levy your assets without first obtaining a judgment, and some tax debt, such as withholding taxes, can not be discharged in bankruptcy.  Like other creditors, interest and penalties on your IRS debt keep accruing until it has been paid off.  Given the loss of sleep, and inevitability of the fact that once your ship finally comes in the IRS will seize it, it makes sense to face issue and try to negotiate a resolution.

There are numerous strategies for resolving IRS debt.  The most common are Installment Agreements, Offers in Compromise, Penalty Abatements, Responsible Party Disputes and Bankruptcy.  We will focus here on the  Installment Agreement. Installment Agreements are an option available to tax payers, who have filed their returns for the past five years and have no current ability to pay the tax in full.

Guaranteed Installment Agreements are are payment plans which the IRS must agree to, provided the amount of the IRS debt is under ten thousand dollars ($10,000.00), and will be paid in full within three years. To qualify the taxpayer will need to have made timely filing and payment of tax returns and taxes for the past five years, and have had no previous agreement within the past five years.  The main advantages to this plan are that no tax lien will be filed against the taxpayer and no onerous financial disclosure will be required.

The IRS also offers two versions of its Streamlined Installment Agreement. The classic version requires that the IRS debt not exceed twenty five thousand dollars ($25,000.00) and be repaid within five years or less.  Under the IRS Fresh Start Initiative, an expanded version has been authorized which increases the debt limit to $50,000.00, and the payment term to six years.  A tax payer can apply for either of the streamlined agreements on line.  To qualify the tax payer must also have all of their returns for the past five years filed. 

Individuals whose IRS debt exceeds fifty thousand dollars ($50,000.00), and have filed their returns, are still eligible for a payment plan, but will need to come forward with proof that the plan is necessary to pay the debt.  The Installment Agreement must be submitted along with financial disclosure forms which detail the tax payers, assets, liabilities, income and expenses. The IRS may refuse a request if they believe that the tax payer is able to pay more or living an extravagant life style. In making their determination the IRS disallows private school and college tuition, as well as charge card and other unsecured debt.  A standardized national chart is used to determine the proprietary of  the tax payer's house hold expenses such as food, housing, auto expenses and out of pocket medical costs.  Amounts above the national standard are generally permitted where both the necessity and amount of the actual expense can be demonstrated.  Thus, while a house hold of two may not be able to demonstrate a need for four automobiles, a household of ten with six drivers may be able to do so.

The IRS may also reject this type of Installment Agreement if they believe that there are assets which can be sold or mortgaged in order to pay the debt.  While the IRS may seek to have a tax payer dip into their home equity in order to pay their debt, unfortunately, the tax liens filed by the IRS will act to damage the tax payer's credit and may make them ineligible to refinance their home. Also, unlike other creditors, the IRS can force a tax payer to  use  retirement funds in order to pay their debt.

Although, this type of Installment Agreement is more difficult to apply for and obtain, it offers an option for tax payers who do not qualify for a guaranteed or streamlined agreement.  In addition to the disclosure, the IRS will also file tax liens against the tax payer until the tax debt has been paid in full.

With all Installment Agreements, the tax payer must agree to make all future filings and payments in a timely manner.  A failure to file and pay future returns and taxes on time will result in a default under the Installment Agreement.  Additionally, all tax refunds which may be due the Taxpayer during the term of the Agreement will be retained by the IRS and applied to the tax debt.

The tax payer should be cautioned to be sure that any monthly payment negotiated is a realistic sum which they can afford pay. Also, the sooner the debt is paid off the less interest and penalties a tax payer will pay in the long run. A shorter payment plan can result in a big savings. 

Being in debt to the IRS can be a stressful experience.  Negotiating an Installment Agreement can be the first step toward getting your fresh start.




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