What is an Installment Agreement?

Posted on: March 13th, 2014 by sashworth No Comments

 

Written by Peter McFarland, Esq. on 10/3/2013

 

As a practitioner, I often meet with clients who have received notices from the IRS stating that they owe several thousands of dollars and must pay it by a certain date.  These clients feel overwhelmed, stressed, and feel like they are out of options because they can’t possibly pay the full amount due.

The great news is that the IRS knows taxpayers often cannot come up with the funds to simply pay their unpaid taxes right away.  There are several options available to address this reality such as installment agreements, offers in compromise, and a special currently not collectible status.  This article will focus on a monthly payment plan, which the IRS calls an Installment Agreement.

A quick note: there are several types of installment agreements.  To figure out which one is best for your situation, I highly recommend you contact Estill & Long, LLC to discuss your case with an experienced attorney.  This article will focus on the use of a Form 433-A to request an installment agreement, but other methods are available.

 

Installment Agreement Defined

An installment agreement is exactly like it sounds.  The taxpayer agrees with the IRS to pay either all or some of his or her unpaid taxes over a series of installments.  The advantage of this type of agreement is that the IRS will work with taxpayers toward some semblance of an affordable monthly payment.  The disadvantage, however, is that penalties and interest will continue to accrue while the outstanding balance remains unpaid.

 

Before Requesting an Installment Agreement

Before the IRS will work with a taxpayer toward any collection alternative such as an installment agreement, the taxpayer must first have filed all tax returns.

 

How to Request an Installment Agreement

When negotiating nearly any collection alternative, the IRS will first ask to see a collection information statement.  This statement often takes the form of a Form 433-A for an individual taxpayer or a Form 433-B for a business.

These forms generally will ask a taxpayer to list all of their assets, including bank accounts, investment accounts, 401(k)s, IRAs, safe deposit boxes, credit cards, life insurance, real property owned, vehicles owned, and a breakdown of monthly income and expenses.  In the end, whatever income is not outpaced by “necessary expenses” will generally be the amount of the monthly payment.  Sometimes equity in assets needs to be addressed, but often the IRS will accept the leftover monthly income in lieu of forcing the sale of an asset.

Here’s an example of the monthly income and expense breakdown taxpayers must provide: Monthly income and expense breakdown

 

“Necessary Expenses”

Regardless of your actual financial situation, the IRS will only allow “necessary expenses” when determining the payment amount.  That means that even though you may live paycheck to paycheck in reality, the IRS may still try to collect much more of your paycheck than you believe you can afford because it will decide that not all of the expenses you pay are “necessary.”  It is crucial, therefore, to discuss a potential installment agreement with an attorney to ensure you are maximizing your allowable “necessary expenses” and agreeing to a monthly payment you can really afford.

 

Conclusion

Installment agreements can be a handy tool to prevent more aggressive collections by the IRS such as levies.  It also allows a taxpayer to satisfy the outstanding unpaid taxes through more affordable payments.

In the end, however, the IRS will only allow monthly income to be offset by “necessary expenses.”  Often the IRS’ proposed payment amount is not what you can afford.  It is important to speak to someone experienced with IRS collections to ensure you negotiate an agreement that you can live with.  The attorneys at Estill & Long, LLC have negotiated hundreds of these agreements and can help you with yours.

 

About Peter McFarland, Esq.

Peter earned his Juris Doctor (J.D.) degree at the University of Denver. After becoming licensed to practice law in the State of Colorado, he earned his Master of Laws (LL.M.) in Taxation at the University of Denver. In his current role, Peter represents taxpayers before the IRS and in the United States Tax Court. He gained valuable experience as an attorney with the University of Denver’s Low Income Tax Clinic during his graduate school studies and has been representing clients at Estill & Long, LLC since his arrival in early 2013.

 

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