IRS Partial Pay Installment Arrangements An Overlooked IRS Resolution Alternative

When a tax liability exceeds what you can pay in full within the remaining collection period, but you can make some monthly payments, a partial-payment installment agreement (PPIA) may be an option. An offer in compromise is a separate alternative; inability to fund a lump-sum offer does not by itself establish PPIA eligibility, and offers may also provide for periodic payments.

A PPIA bases payments on the taxpayer’s ability to pay after the IRS reviews income, allowable expenses and asset equity. At approval, the projected payments will not fully satisfy the liability before the collection period expires. The agreement does not fix a guaranteed discount or immediately cancel the remaining balance.

A PPIA generally requires more financial analysis and documentation than an eligible Simple Payment Plan. Tax counsel can help with complex financial or collection issues, but hiring counsel is not an IRS eligibility requirement.

This article provides a background of the partial pay installment agreement as distinguished from a regular installment agreement with a discussion of benefits and disadvantages and explores eligibility requirements to establish a PPIA as well as the application process.

Understanding the PPIA: Full Pay vs. Partial Pay Agreements

An installment agreement is an agreement with the IRS to pay outstanding tax through scheduled payments. The terms depend on eligibility, the liability and the remaining collection period. Eligible Simple Payment Plans generally allow most taxpayers the remaining collection period, usually up to ten years. Interest and applicable penalties continue on unpaid amounts.

A full-pay installment agreement is designed to pay the liability, including applicable accruals, before the collection period ends. The IRS generally has 10 years from each assessment to collect, and a taxpayer can have multiple collection statute expiration dates (CSEDs). Statutory suspensions, extensions and limited written waivers may alter those dates. Do not assume a debt expires 10 years after the tax year or that an agreement guarantees cancellation of the balance.

The Internal Revenue Manual (IRM) section 5.14.2 Partial Pay Installment Agreements and the Collection Statute Expiration Date describes the circumstances where a taxpayer may establish a payment plan with the IRS based on the taxpayer’s ability to pay. The IRS reviews detailed information concerning the taxpayer’s current financial circumstances and makes a determination as to the monthly household disposable income (excess monthly income) on a case-by-case basis. Monthly payments on a PPIA are too low to fully pay the outstanding tax liability within the collection statute expiration date, hence the name partial pay installment agreement (PPIA).

The other ways that a PPIA differs from other IRS payment plans include:

• The application process requires detailed financial disclosure and can take longer than a qualifying Simple Payment Plan application;
• Taxpayers may have to sell assets, borrow against them, or demonstrate an inability to do so in order to qualify;
• A partial-payment installment agreement generally requires a financial review every two years. If your ability to pay improves, the IRS may increase the monthly payment under the applicable agreement and procedures.
• The IRS makes a notice-of-lien filing determination under the applicable installment-agreement policy. A partial-payment arrangement does not invariably require filing, and the rules differ for eligible Simple Payment Plans and other agreements. Related guidance: tax lien.

The IRM explains that a PPIA may be granted if the taxpayer does not sell or borrow against his or her assets because:

• The assets have minimal equity;
• The taxpayer cannot access or borrow against the equity, including a documented inability to sell an asset after a good-faith attempt;
• The asset generates income for the PPIA and retaining it is expected to produce more for collection than selling it;
• Selling or borrowing against the asset would create a financial hardship for the taxpayer; or
• The taxpayer’s loan payment would exceed disposable income making it difficult to qualify for a loan.

A PPIA can make monthly payments feasible when full payment within the collection period is not. The IRS reviews the taxpayer’s finances during the application and generally every two years afterward. Interest and applicable penalties continue. The IRS also makes a tax lien filing determination; a public Notice of Federal Tax Lien may be filed, but filing is not an automatic result in every case. The statutory lien and the public notice are distinct.

Who Should Consider a PPIA, How Do You Qualify and What is the Application Process?

A taxpayer who cannot afford the monthly payments of a regular full-pay installment agreement or who can’t liquidate or borrow against assets to fully pay a tax liability might want to consider a PPIA. In addition, if the IRS rejected your offer in compromise or denied your request for currently not collectible status, a PPIA could be another resolution alternative.

The IRS requires a full collection information statement for every PPIA, using Form 433-A for wage earners and self-employed individuals and/or Form 433-B for businesses, as appropriate, with supporting records. Required returns must be filed, and current estimated-tax payments or federal tax deposits must be maintained as applicable. The financial review considers income from wages, net business or rental income, investments, retirement distributions, Social Security, support payments and other relevant sources. Household contributions, business expenses and the facts of each income source must be analyzed without double counting.

For a PPIA, the IRS allows necessary expenses and does not allow conditional expenses that fail the necessary-expense test. Necessary expenses generally protect the taxpayer’s and family’s health and welfare or produce income. National standards cover items such as food and clothing; local standards address housing, utilities and transportation. Their calculation rules differ, and documented exceptions may be allowed. They are not all county-based, absolute ceilings.

Potential allowable categories include food, clothing, housing, utilities, transportation, health insurance, out-of-pocket health care, required dependent care, court-ordered payments, qualifying term life insurance, current taxes and necessary secured debts. Education is not categorically excluded: required employment education and certain special-needs education may qualify. Credit cards are a payment method rather than a separate living-expense category; necessary purchases may already be covered by allowances, so do not count them twice. Rules that permit additional conditional expenses in a full-pay agreement do not automatically apply to a PPIA.

The IRS compares income with allowable expenses to determine the monthly payment the taxpayer can make. It separately evaluates available asset equity and the time left to collect. A PPIA may be appropriate if the resulting payments cannot fully pay the debt within that period, subject to approval and other requirements.
Submit proof of income, expenses and assets with the requested Form 433-A or Form 433-B. Where the IRS reasonably requires an attempt to borrow against or sell an asset, provide the relevant applications, loan denials or other records showing the result.

Do You Need a Tax Attorney?

A tax attorney can evaluate PPIA eligibility and compare it with alternatives such as an offer in compromise or currently not collectible status. The appropriate choice depends on the taxpayer’s finances, compliance and collection history.

Establishing a PPIA requires identifying the relevant collection expiration dates, evaluating income and allowable expenses, separately addressing asset equity, and providing complete supporting records. Before accepting an agreement or signing a collection waiver, understand its terms and consequences.
If a PPIA is unsuitable, consider other payment or hardship arrangements and any applicable appeal rights.

When discussing representation with the tax attorneys at Segal, Cohen & Landis (SCL), ask which of the following services are appropriate for your matter and included in the agreed scope:

• Obtain IRS account transcripts and wage and income transcripts to assist clients with filing compliance, a prerequisite to setting up an IRS installment agreement;
• Review IRS account transcripts to determine applicable collection statute expiration date(s) as well as outstanding balance information pertinent to an evaluation as to the viability of a partial pay installment agreement and other IRS resolution options;
• Analyze the client’s financial circumstances to assess possible eligibility for a PPIA or another IRS resolution;
• Communicate with IRS Collections, an assigned revenue officer or IRS Appeals, and submit the requested Form 433-A or Form 433-B and supporting records under an appropriate authorization;
• Request a levy release when the applicable legal requirements are met; entering an agreement does not guarantee immediate release in every case;
• Assist with the financial reviews generally required every two years for a PPIA and with changes in ability to pay;

To discuss your tax matter, contact Segal, Cohen & Landis at (310) 285-3999. Ask about the proposed scope, fees and available options; no particular IRS outcome is guaranteed.