December 10, 2022 | Payment Plans
Settle Tax Debt With an IRS Partial Payment Installment Agreement
If a taxpayer cannot afford to pay their full tax bill, the IRS will sometimes agree to settle some of the taxes owed. This can happen in a few different ways, including offers in compromise, currently not collectible status, and partial payment installment agreements.
This guide looks at the IRS Partial Payment Installment Agreement. This is when you make monthly payments until the tax liability expires, without paying the whole balance, and this results in the IRS settles the remaining balance for less than what was owed.
Want to get help now? Then, contact us at the Timothy S. Hart Law Group, P.C. today. We have extensive experience helping clients with IRS and New York State tax debt, and we would love to help you.
What Is a Partial Pay Installment Agreement?
A partial payment installment agreement is when the IRS agrees to let you pay monthly payments until the debt expires if your financial situation does not improve. Then, the IRS writes off the rest of the debt due to the expiration of the statute of limitations Collection Statute Expiration Date (known as the CSED).
To give you an example, say that you owe $30,000 on a tax debt that expires in five years and you can only afford to pay $300 per month. If the IRS approves a partial payment plan, you pay $300 per month for five years (which adds up to $18,000), and then, the IRS writes off the remaining $12,000 of your tax bill. This is very helpful since even the added interest on the $30,000 while you are making payments is also written off.
What Is the Collection Statute Expiration Date?
The Collection Statute Expiration Date (CSED) comes into play when you apply for a Partial Payment Installment Agreement. The CSED refers to the last date the IRS can legally collect your tax liability. It is 10 years from the date that the taxes were initially assessed or the date you filed your return. In some cases, if you haven’t filed a return, the IRS may file a substitute tax return for you, and this starts the 10-year clock.
There are several things that can trigger an automatic extension of this date. Additionally, if you apply for a PPIA, the IRS may request that you agree to extend the CSED. Typically, this happens if you are going to come into possession of an asset, or actually own as asset, that could help to pay your tax bill after the collection expiration date. To protect yourself, consult with a tax attorney before agreeing to this to review your situation.
Who Should Apply for a Partial Pay Installment Agreement?
You might want to consider a PPIA if any of the following describes your situation:
- You owe a lot of money to the IRS, and you can’t afford to pay the tax bill even if you sell your assets.
- You can’t afford to pay the minimum monthly payment on a traditional installment agreement (typically about 72 months).
- You can’t pay off your tax debt with an installment agreement before it expires.
- You have recently been rejected for the offer-in-compromise program.
Only the IRS can tell you if you qualify for a PPIA, but when you contact us, our tax attorney can look at your situation and give you a good sense of whether or not you’ll qualify. If not, we can direct you to the best tax relief option for your situation.
How to Apply for a PPIA
To apply for a partial payment installment agreement, you need to contact the IRS and request this arrangement. Then, individual taxpayers need to complete Form 433A (Collection Information Statement for Wage-Earners and Self-Employed Individuals), while businesses need to submit Form 433-B (Collection Information Statement for Businesses). In some cases, you may need to submit both forms.
If these statements indicate that your income has decreased by 20% or more since your last tax return, the IRS will request income verification. Similarly, you will also need to provide real property records or more details about your personal property if your collection information statement doesn’t show assets that appeared on your last tax return.
Depending on how much you owe, the IRS may also look at your credit report and records from the Department of Motor Vehicles (DMV). If you are applying for a PPIA for a business that is still in operation, the IRS will want to look at your bank statements to verify income and expenses and do records checks to learn about the property you own. In all cases, the IRS may request additional information if any of the information on your forms looks questionable.
Partial Payment Agreement When You Have Assets
To get approved for a partial payment installment agreement, you may need to sell your assets (for example if you have multiple cars, but its only you in the house), or take out loans against them to cover the taxes owed. However, if you don’t have any equity in excess assets or if you have liquidated your assets to make the payments, the IRS will typically approve your application as long as you meet the other requirements.
In select cases, you can get a PPIA without selling or borrowing against your assets. That includes the following:
- Your assets don’t have enough equity to borrow against — Typically, lenders require you to have at least 20% equity to take out a loan against the asset.
- You can’t access the equity in your assets. For instance, this may happen if you own property jointly with your spouse, your spouse doesn’t agree to the loan, and you live in a state that doesn’t let you unilaterally borrow against jointly held property for your own debt. This rule could also apply if your asset has value but is currently unmarketable.
- You need the asset to earn income (i.e. it’s a business asset).
- Selling the asset would cause financial hardship.
- You can’t qualify to take out a loan against the property (most likely due to insufficient income to support the loan). Normally, you need to document that you applied for the loan before the IRS will approve your PPIA request.
If you can’t sell or borrow against your assets, the revenue officer will review each asset separately and decide if the IRS should levy it. Again, if you’re going to come into possession of an asset after the collection statute expiration date, the IRS may ask you to extend the statute.
To protect your assets and your rights, you should contact a tax attorney to help you through this process. They know how to negotiate with the IRS to reduce the risk of asset liquidation. They can also help you make an informed decision about whether or not you should extend the statute.
What to Expect When You Apply for a PPIA
If the IRS approves your partial payment installment agreement request, the following rules will apply:
- You must make the maximum monthly payment that you can afford.
- If you defaulted on an installment agreement in the past 24 months, you must pay the monthly payments through direct debit or payroll deduction. This doesn’t apply if you are unemployed or self-employed and have a large tax debt.
- The IRS may file a lien against your assets.
While you are waiting for the IRS to review your partial payment installment agreement, you may want to send in voluntary monthly payments. This shows the IRS that you can afford the proposed monthly payment and are serious about taking care of your tax bill.
Form 9465 — Installment Agreement Application
To apply for a traditional installment agreement, you should file Form 9465 (Installment Agreements). When you complete Form 9465, it will prompt you to enter the maximum monthly payments that you can afford to pay. It will also walk you through the calculations to determine your minimum monthly payment.
If the monthly payment you can afford is less than the IRS’s required minimum monthly payment, you will be prompted to complete Form Form 433-F (Collection Information Statement). This is similar to Forms 433-A and 433-B. You also need to complete this form if you owe more than $50,000 or if you owe over $25,000 and less than $50,000 and can’t set up direct debits or payroll deductions for your monthly payments.
In some cases, when you complete Forms 9465 and 433-F, it will become clear that you can’t afford to pay off the tax liability in monthly installments by the CSED. In this case, the IRS revenue officer may suggest that you apply for a partial payment installment agreement, and then, you will go through the application steps above.
To save time, consult with a tax attorney before filling out these forms. They can let you know if you should jump immediately to a partial payment request instead of filing these forms.
Partial Payment Plan Vs. Installment Agreement
Both the partial payment plan and the traditional installment agreement let you make monthly payments on your taxes owed, but there are significant differences between these tax relief programs:
- The PPIA generally lets you make lower monthly payments. If you were in a traditional installment agreement, your monthly payments would need to be higher so that you could pay the full liability by the expiration date.
- With a PPIA, you don’t have to pay the full tax debt and it has the practical effect as an offer in compromise. The total payments made over the lifetime of the plan are less than the total amount due, and once the CSED passes, you don’t have to pay the remaining balance. With a traditional installment plan, you pay the full tax debt over time before it expires.
- If you have a PPIA, the IRS reviews your situation every two years to see if you can afford to pay more. With an installment agreement, your payments are set until the end of the agreement.
- Applying for a PPIA takes longer than a traditional installment plan. You have to provide the IRS with a lot of financial details if you want the agency to write off your debt.
Partial Payment Vs. Offer in Compromise
With both programs, the IRS lets you pay off your taxes for less than you owe. In both cases, you also have to submit detailed financial information to convince the IRS to lower your tax debt. Beyond that, there are key differences between an offer in compromise and a partial payment agreement, including the following.
- The PPIA application process is easier than the OIC application process.
- The IRS processes PPIA applications faster than OIC applications. Usually, you get an answer on a PPIA in a month or two, but an offer in compromise can take five to nine months.
- A PPIA lets you pay the settlement in monthly payments instead of a lump sum. Note that with some offers in compromise, you can get up to 24 months to pay, but generally, the PPIA payments are even lower than these payments.
- The IRS reviews your situation every two years if you have a PPIA. This doesn’t happen with an offer in compromise. However, typically with an offer in compromise once the IRS writes off the tax debt, you need to file on time and pay on time for 5 years. While this seems like an easy requirement to fulfill, often taxpayers originally tried their best to pay on time and issues arouse that made that difficult, so this consideration should not be taken lightly.
The two-year review is one of the downsides of a PPIA compared to an offer in compromise. With an offer in compromise, once the IRS accepts your offer, you pay it, and as long as you stay compliant with tax filing and payment obligations for the next five years, you don’t have to pay anymore. In contrast, with the PPIA, if the IRS discovers that you earn a lot more money or own additional assets during the two-year review, you may be required to pay more.
Get Help Settling Your Tax Debt
Are you struggling to pay delinquent tax liabilities? Are you worried about the consequences of unpaid taxes such as federal tax liens or asset seizure? Are you looking for help? Then, contact us today.
We will start with a free consultation. Then, we’ll help you decide if a partial payment installment agreement or another tax resolution program is right for your situation.