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IRS Partial Pay Installment Arrangements An Overlooked IRS Resolution Alternative
When you are faced with an overwhelming tax liability that you can’t fully pay based on your current financial circumstances, and where you don’t have enough savings to make a lump sum payment to the IRS as part of a settlement via an offer in compromise, you might consider a partial pay installment agreement (PPIA).
Most taxpayers are not aware of this IRS payment plan which allows for affordable monthly payments based on the taxpayer’s available disposable income and results in the taxpayer paying less toward an outstanding tax debt over the length of the plan than would otherwise be required.
The PPIA is often an overlooked IRS resolution option because it is more complicated than the basic installment agreement and typically requires the involvement of tax counsel. Also, it is more time-consuming and involves a fair amount of disclosure regarding the taxpayer’s financial circumstances.
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 arrangement or payment plan is an agreement with the IRS to pay your outstanding tax liability over a fixed period of time. These payment plans are memorialized via IRS Form 433-D and require payment of a set amount each month for a period of up to 6 years or 72 months, where interest and penalties will be prorated over the term of the agreement.
An installment agreement will be considered full pay when it serves to pay the liability in full prior to the expiration of the ten-year collection statute of limitations period. When a tax is assessed against the taxpayer, a corresponding collection statute expiration date (CSED) is set, which runs 10 years from the date of assessment. In effect, the IRS has 10 years to collect the tax that you owe, and once the date expires, the tax becomes uncollectible, subject to IRS extensions.
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 is more burdensome, takes longer, and requires a significant amount of disclosure regarding the taxpayer’s financial circumstances;
- Taxpayers may have to sell assets, borrow against them, or demonstrate an inability to do so in order to qualify;
- The PPIA will be subject to ongoing review by the IRS, usually 2 years if assigned to the IRS Collections or 1 year if assigned to a Revenue Officer. If your financial circumstances change (i.e., you get a better job), the IRS will require that you pay more per month;
- The IRS will invariably file a tax lien to protect its interest whereas it usually will not file a lien for full-pay installment agreements when the taxpayer owes less than $50,000.
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 asset has value but is unmarketable;
- The asset is necessary to generate income for the PPIA;
- 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.
While the clear benefit of a PPIA is that the taxpayer will pay less over the life of the collection statute resulting in a reduction of total tax that would otherwise have to be paid, the taxpayer’s financial circumstances will be subject to IRS scrutiny during the application process and at regular intervals thereafter, and the IRS will file a tax lien which attaches to all of the taxpayer’s property and goes on the taxpayer’s public record.
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.
To apply, the taxpayer must submit a collection information statement (433A for wage earners and self-employed individuals) and 433B for businesses) to the IRS which contains detailed information concerning the monthly income, expenses, debts, and assets of the applicant. The IRS considers gross income from all sources including wages, net business income, interest income, net rental income, IRA distributions, pension and social security income, child support, alimony, and gifts.
The IRS will only consider necessary living expenses, not conditional living expenses. As per the IRS guidelines, necessary living expenses include those that are required for living and carrying on daily life. For several categories of living expenses, the IRS has national standards that are based on the size of the household and the applicable county which represent a ceiling in terms of allowable expense.
The expense categories that the IRS recognizes for purposes of determining ability to pay include food, clothing, housing, utilities, vehicle ownership and operating costs, health insurance, out-of-pocket health care costs, court-ordered payments, child dependent care, life insurance, taxes, and secured debts. There are specific expense categories that are excluded from this analysis, including education costs and payments toward credit card debt.
Gross income offset by necessary living expenses will yield your monthly disposable income as calculated on line 50 Section 5 Monthly income and Expenses on page 4 of the 433A. This figure represents the amount the IRS has determined you can pay per month toward the satisfaction of your tax debt. You may be eligible to set up a partial pay installment agreement if this amount is less than what would be required on a monthly basis to full pay your tax debt before the collection statute expiration date.
You should be prepared to submit proof of income, expenses and assets along with your 433A or 433B when applying for a partial pay installment agreement. If you have assets, you may have to demonstrate that you cannot borrow against them by providing loan denial letters from lenders or financial institutions.
Do You Need a Tax Attorney?
A tax attorney understands the IRS rules and regulations concerning partial pay installment agreements and can advise you if you are eligible based on your financial circumstances and explain why it might be better given than alternatives such as an offer in compromise or currently not collectible status based on your unique situation.
Establishing a PPIA is a somewhat complicated process that involves knowledge of the applicable collection statute expiration date(s), an understanding of how the IRS calculates monthly household disposable income where gross taxpayer income and assets are offset by specific and limited expenses, and comprehensive disclosures with supporting documentation in support of the application. As such, taxpayers are encouraged to consult with counsel in applying for PPIA relief.
In the event that your financial circumstances do not qualify you for a PPIA, a tax attorney can suggest alternate forms of resolution.
The experienced tax attorneys at Segal, Cohen & Landis have helped clients avoid or obtain relief from IRS enforcement action and establish affordable resolution by providing the following services:
- 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 client’s financial circumstances to determine whether they will qualify for a PPIA or an alternate IRS resolution;
- Interface with IRS Collections, assigned Revenue Officers, and IRS Appeals in submitting the Collection Information Statement 433A or 433B along with supporting documents on behalf of clients;
- Secure a release of levy in connection with the successful establishment of a partial pay installment agreement (or other resolution);
- Provide ongoing counsel and support for clients when the IRS conducts the annual or biennial review of taxpayer’s financial statement.
If you are interested in having a complimentary consultation with one of our partner attorneys regarding your tax matter, please feel free to contact us at 866-505-1872. We would be happy to advise you as to how we can resolve your case and how much it would cost.