The IRS allows taxpayers to resolve their outstanding tax debt via a payment plan, which they call an “Installment Agreement”. Most of these plans have a set monthly payment, but they can also be adjusted based on your seasonal cash flow, and they also permit tiered agreements that call for occasional increases in the monthly payment amounts.
Some taxpayers may qualify for special installment agreements that require little or no financial documentation, similar to a no-doc or low-doc mortgage.
In rare circumstances, based entirely on your financial situation, you may even qualify for an Installment Agreement in which you never fully pay off the back tax liability, called a “Partial Pay Installment Agreement” (PPIA).
As part of negotiating your installment agreement, a comprehensive financial analysis of your business or personal finances will be required. The kind of information we will need to review, as mentioned above, is very similar to what would be required for a loan application. For businesses, this information includes all of the standard business accounting information, such as:
- balance sheets
- bank statements
- profit and loss statements
- accounts receivable aging reports
- asset lists & depreciation schedules
At first, many clients are apprehensive about providing this detailed financial information to a tax consultant. However, this information is necessary to perform a proper financial analysis and properly negotiate your tax resolution.
If your financial situation is such that you can legitimately only pay a a minimal amount, the IRS will likely grant the Installment Agreement, even if the payments will not fully satisfy the tax debt. For example, if you owe the IRS $60,000, and a payment plan of $200 per month is negotiated, and you have 3 years remaining until the statute of limitations runs out on collection, you will have paid in only $7,200, and then the statute of limitations runs out and you’re off the hook for the remaining balance. This is called a Partial Pay Installment Agreement (PPIA), and is nearly identical to an Offer in Compromise being paid under the Deferred Periodic Payment option. It is important to weigh the merits of the PPIA option versus the Offer in Compromise option when considering your tax resolution options. Be sure to ask your tax professional about the pros and cons of each of these options.
There are two special types of Installment Agreements that you may be eligible for based on how much you owe. If you owe less than $25,000 in income taxes (including corporate income tax), then you may be eligible for a Streamline Installment Agreement, which has less stringent qualification requirements. This is similar to a “low doc” mortgage. If you owe less than $10,000 in income taxes (including business), then you may be eligible for a Guaranteed Installment Agreement, which the IRS cannot deny and requires no financial information to be provided. This could be considered parallel to a “no doc” mortgage, and can be simple to obtain. The real beauty of these two plans is that the minimum payment can be as little as $25 per month, as long as it pays off the balance within a prescribed amount of time.
For most taxpayers, the Installment Agreement will be the resolution option you end up with. Understanding the different types of Installment Agreements and the requirements for obtaining one and staying on it are important. Discuss these requirements with your tax professional to make sure you are eligible for the payment plan and are going be be able remain on the plan once it is set up.