Installment Agreements and Uncollectible Status

Here are two collection alternatives that are available and will provide some breathing room and relieve stress. We will cover the various installment agreements and the IRS currently not collectible status when experiencing IRS financial hardship.

A previous blog discussed the offer-in-compromise, and we will discuss bankruptcy in the future.

Not being able to fully pay your income tax liability can bring about great concern and worry. But the IRS offers ways to solve tax issues by letting you pay gradually without facing financial difficulties. This might require a lifestyle change and an adapted mindset, but it is doable.

Installment Agreements

Installment agreements are not one size fits all. There are various forms of installment agreements, and each has special rules. One may work better than another for the individual taxpayer.

The IRS allows payment plans, but they do not like extending them for the entire collection period unless necessary. The reason behind this is that taxpayers will default on making payments within 48 months. So, the IRS will base that payment plan on the taxpayer’s financials.

For example: The taxpayer owes $80,000 and the financials show that $1,200 is available for monthly payments based on actual expenses. The IRS will base the financials on income less IRS allowable expenses. The taxpayer can also liquidate their retirement account and add this amount to the monthly payment.

Now, the IRS proposes installment agreement of $2,500 per month. This amount is reasonable according to the financials and it is what the IRS will expect. The IRS won’t accept the $1,200/month plan, even if you achieve payment in full before the collection statute expires. It would not be in the best interest of the federal government to extend the length of the payment plan.

Five Variations of Installment Agreements

  • Automatic is when the taxpayer owes less than $10,000.
  • Short-Term is where the taxpayer has 180 day to full pay the liability without providing financials. The IRS will not file the Notice of Federal Tax Lien.
  • Streamlined is when the taxpayer owes less than $50,000 when assigned to the Field Collection Force (i.e., assigned to a Revenue Officer). This is a 72-month payment plan.
  • Regular is where the taxpayer doesn’t qualify for an IRS Streamlined Installment Agreement.
  • Partial Pay is where the taxpayer does not have the ability to full pay before collection statute expires.

Automatic Installment Agreement

Taxpayer can get an automatic installment agreement when they owe less than $10,000 in tax and:

  • Over the past 5-year period, taxpayer has not owed any tax or been in an installment agreement, and
  • The taxpayer agrees to full pay the liability within three years.

You can create the agreement online or by completing Form 9465 Installment Agreement Request and sending it to the IRS. There are no financials required for this plan.

Short-Term Installment Agreement

  • Is simply making full payment in 180 days or less and is available only to individuals.
  • Apply online or by phone, mail, or in person.
  • Use IRS Direct Pay for direct payment from checking or savings account, Or
  • Use Electronic Federal Tax Payment System (EFTPS) (enrollment required), Or
  • Pay by check, money order, or debit/credit cards. Card fees do apply.
  • No setup fees.

Streamlined Installment Agreement

Like the automatic installment agreement, there is no requirement for financials. You can set up the agreement online or by contacting the IRS, provided you meet the following criteria.

  • The taxpayer owes less than $50,000 in taxes.
  • The taxpayer has not had back-tax debt or been in an installment agreement over the past five years.
  • The taxpayer agrees to make payment in full within 72 months of equal payments.

Regular Installment Agreement

Taxpayers who owe more than $50,000 or cannot pay within 72 months must provide detailed financial information. This requirement applies to those who do not meet the criteria for the streamlined agreement.

Cases held by a Revenue Officer will require a Form 433-A, Collection Information Statement. If Automated Collection Services, ACS, handles the case, they will request a Form 433-F Collection Information Statement. If the taxpayer owns a business, they will need to submit a 433-B.

There is also a new Form 433-H, introduced in 2019. Use this form if you do not qualify for a streamlined payment plan. This installment agreement bases its monthly payment calculations on the taxpayer’s income minus the IRS allowable expenses. The payment plan will run until the collection stature expires.

If the expiration of the statute allows for full payment, then this qualifies as a regular installment agreement. Form 433-H is for requesting an installment agreement and providing bank details for a direct debit installment agreement. It combines Form 433-F and Form 433-D.

The regular installment agreement has two options that the taxpayer could find beneficial for their tax situation. These are the one-year rule and six-year rule.

One-Year Rule

Under this rule, the IRS will allow the taxpayer to make a monthly payment based on actual expenses for one year. Then the payment amount would increase to the monthly amount calculated with IRS allowable expenses. Monthly payment for the first year cannot be zero.

For instance, the taxpayer is currently unable to make the $800 monthly payments because his housing expenses are too high. He could make a minimum monthly payment of $25 for the first year, then increase to $800. During that time, the taxpayer can look to relocate into cheaper housing. The taxpayer still needs to make full payment by expiration of statute.

Six-Year Rule

The six-year rule applies to people who cannot pay taxes right away and don’t qualify for a streamlined agreement. The taxpayer would need to provide financial information but would not need to substantiate the reasonable expenses. If the taxpayer can full pay within six years and remains in compliance, the IRS usually agrees to accept reasonable expenses.

Partial Pay

Unlike the regular agreement, the taxpayer does not have the ability to full pay the liability. The IRS cannot collect more than is available. The amount paid by the end of the collection statute is all the IRS will get. The IRS will ask for updated financial information in 18-24 months to check their ability to pay.

Uncollectible Status

Taxpayers struggling to pay can qualify for the Currently Not Collectible status if they cannot make payments without hardship. Financials will need to support that the taxpayer does not have the funds to cover the IRS allowable expenses.

Being in the uncollectible status does not indicate that the tax issue has been resolved. The taxpayer still has the tax liability, and the IRS will keep an eye on it. But there is some good that comes from the uncollectible status.

  • The 10-year collection statute continues to run.
  • The IRS cannot take levy action against the taxpayer, which would put them in hardship.

Interest will continue to accrue since the taxpayer still owes the tax. The IRS can still file a Notice of Federal Tax Lien to secure their interest in any asset the taxpayer has or will secure in the future.

The IRS will make request for updated financials usually within 18-24 months to see if taxpayer can afford to pay. If nothing has changed, then the statute continues to run with the uncollectible status still in place.

For more information regarding Installment Agreements and Uncollectible Status, contact Dan Ohara at (408) 684-8505 or e-mail at dan@oharataxresolution.com.