If you are having trouble paying your taxes, it often helps to take a proactive approach and agree on a payment plan with the IRS. As we all know, tax problems do not resolve themselves and will not get better with time. The IRS recently expanded its payment plans to help taxpayers who owe taxes. In this article, we describe the new relief options available to help you address your tax troubles.
Pre-COVID, Old Installment Plans
Before the IRS announced the new plans, if you owed taxes but were unable to make the payment in full, you could set up a payment plan or monthly installment agreement with the IRS. If you qualified for an installment agreement, you could pay off your tax balance by making monthly payments over a period up to 72 months. Later, that period was extended to 84 months for taxpayers who owed less than $100,000.
To apply for the installment agreements, you generally had to provide a financial statement to the IRS to negotiate the payment terms. However, if your unpaid tax due was less than $50,000, you could potentially qualify for a Streamlined Installment Agreement. These agreements involved an online application and did not require you to disclose your financial statements.
If you did not qualify for a monthly installment plan, the IRS might grant you 120 days to resolve your tax liability in another way.
2020 New Installment Plans
In the midst of COVID-19 interruptions, the IRS announced new, easier payment plans for taxpayers who owe taxes and are struggling to pay the full amount all at once. (See IRS Taxpayer Relief Initiative, IR-2020-248, issued on November 2, 2020.) Some of the modifications create new relief for taxpayers with high unpaid taxes, while some provide more assistance for the taxpayers covered under the existing payment plans.
Easier Process for Taxpayers with High Tax Amounts Due
For taxpayers who owe up to $250,000 in taxes, the IRS modified the installment plan application process. Previously, if you owed more than $50,000, you were required to provide rigorous financial disclosures as part of your application for an installment agreement. Under the new process, if you owe up to $250,000 in taxes, you are no longer required to provide these financial disclosures, provided that you can pay the amount owed before the collection statute of limitations expires. (The statute of limitations for collections is typically 10 years. Scroll down for more information.) So, if your monthly payment proposal is sufficient, you can skip the financial disclosures and work with the IRS Automated Collection System (ACS) to reach an installment agreement.
These new processes are currently available for taxpayers who have not yet been assigned to a revenue officer (or the Collection Unit). As far as we know, the new processes are temporary. So, those in need of relief should take advantage of them as soon as possible.
Additional Time To Pay Taxes
Not all taxpayers qualify for installment agreements. Instead, you may enter into a short-term arrangement with the IRS. Short-term payment plans generally apply to individuals who owe $50,000 or less or businesses that owe $25,000 or less in combined income tax, penalties, and interest.
Under the new changes announced by the IRS, taxpayers who qualify for a short-term payment plan option now have up to 180 days to resolve their tax liabilities instead of 120 days.
More Options To Help You Pay
In addition to payment plans, the IRS offers a variety of other relief options, some of which have been further expanded to assist taxpayers in the midst of the COVID-19 epidemic.
Delayed Collections. If you do not qualify for any of the IRS’s payment plans, you can contact the IRS to request a temporary delay of the collection process. If the IRS determines that you are unable to pay, it may delay collection until your financial condition improves.
Expanded Options for “Offers in Compromise” (OIC). An Offer in Compromise, or OIC, is an agreement with the IRS that allows you to settle your tax debt for less than the full value. The IRS accepts these agreements when it is unlikely you can ever pay the full amount or when doing so would create financial hardship. The IRS considers your facts and circumstances before accepting an OIC.
In November 2020, the IRS announced more flexibility for OICs. Under the new approach, existing OICs can be modified to take into account new tax debts. Also, the IRS is being more flexible in accepting OIC proposals.
First-Time Penalty Abatement. If you were assessed penalties for failure to file, failure to pay, or other issues but you had valid reasons (“reasonable cause”), you may be eligible for penalty relief or first-time penalty abatement. Typical situations that constitute “reasonable cause” include fire, casualty, natural disaster or other disturbances, inability to obtain records, death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family, and other reasons. If you meet these conditions or it was your first time to incur the penalties, you may request that the penalties be waived.
The IRS’s Time Limit for Collection
The IRS generally has 10 years to collect any amounts due from taxpayers. After that point, the statute of limitations for collection expires, and the IRS can no longer pursue amounts owed, unless special arrangements are made with the Secretary of Treasury. This means that the IRS is highly motivated to ensure collection within the 10-year timeframe.
As a simple example, if you incurred a debt of $100,000 today, the Collection Statue Expiration Date (CSED) is 10 years. A typical payment plan would be $100,000 divided by 120 (12 months X 10 years) = $833.33 per month.
If for some reason you miss the first payment, the number of months you have to pay the taxes generally will not change. Instead, you would need to increase your remaining monthly payments. So, $100,000 divided by 119 (12 months X 9 years + 11 months) = $840.34 per month.
When the 10-year statute expires, the IRS can no longer collect the assessed tax. As you can imagine, some taxpayers have missed monthly payments, did not finish making their payments within 10 years, and have avoided paying the full amount of taxes. To mitigate this problem, the IRS prefers direct debit for installment plans. If you miss a payment, the IRS can increase the rest of your monthly payments.
Tax Forms You May Need
Below are several common tax forms you may encounter when setting up payment plans and other agreements.
Form 433-A, “Collection Information Statement for Wage Earners and Self-employed Individuals”
To show how much you can reasonably pay toward your taxes owed and to reach an agreement with the IRS, you will need to provide certain information to substantiate your financial situation.
Form 433-A is six pages long and requires extensive details, such as your employment information, personal assets, monthly income and living expenses, paycheck stubs, bank statements, credit card statements, and so forth. This form is typically required if your case is assigned to a revenue officer.
If you are applying for an Offer in Compromise, you will need to complete the Form 433-A(OIC), a variation of the Form 433-A.
Form 433-B, “Collection Information Statement for Businesses”
This form is used for businesses that owe taxes to the IRS. Similar to Form 433-A, it is six pages long and requires detailed accounts of your business’s finances. You will need to provide information about the key individuals in the business, impending lawsuits, debts owed, bank accounts, credits, and monthly income and expenses.
Form 433-F, “Collection Information Statement”
This is another form that the IRS uses to determine your eligibility for payment plans. Form 433-F is typically required when you are dealing with the IRS Automated Collection Service (ACS). This form asks for detailed information about you, but it is only two pages long, which means fewer questions to answer compared to Form 433-A.
Form 9465, “Installment Agreement Request”
As the name of this form implies, you file Form 9465 to request a monthly installment plan if you need more time to pay your taxes. In certain circumstances, you can set up a payment plan without filing Form 9465.
Form 433-D, “Installment Agreement”
This form is required after submitting Form 9465 to request an installment agreement. Form 433-D finalizes the payment plan that is approved by the IRS and agreed by the taxpayer. You can set up automatic payments on Form 433-D, as well.
Form 2848, “Power of Attorney and Declaration of Representative”
In many situations, such as old debts or complicated cases, you may want to designate a tax practitioner to communicate with the IRS on your behalf. Form 2848 grants your CPA, tax preparer, and/or designated tax adviser this authority. The practitioner typically will confirm the Collection Statue Expiration Date (CSED, described above) with the IRS for each tax year that tax is owed. Based on the CSEDs, proper calculations can be made for the payment plan request.
If you are unable to pay your taxes in full, then working with the IRS to create a realistic plan can often provide you with a clear path forward. Proactively contacting the IRS to make a plan can help reduce both penalties and stress in the long run. The IRS offers helpful information and frequently asked questions directly on its website.
If you would prefer to work with a tax professional who is well-versed in payment options, The Wolf Group can help! The Wolf Group has been providing US tax services related to IRS installment plans, penalty abatement, and other tax controversies for US citizens, nonresidents, and foreign nationals since 1983. We understand that dealing with the IRS can be intimidating. Please reach out if you need assistance with this or similar tax matters.