Installment agreements and offers in compromise are two of the most common ways for taxpayers to resolve their outstanding tax liabilities. An installment agreement is a written agreement between you and a tax agency (i.e., the IRS, FTB, EDD, or BOE) that allows you to pay a tax liability over time through scheduled periodic payments. An offer in compromise is different in that if it is accepted by the agency, it allows you to pay a specified amount to conclusively settle assessed tax liabilities, plus penalties and interest, for less than the amount owed.
With the exception of partial payment installment agreements, installment agreements are entered into with the understanding that the tax liability, plus penalties and interest, will be paid in full. An installment agreement, unlike an offer in compromise, does not reduce the balance due. On the contrary, an installment agreement actually has the effect of increasing the total amount due, because penalties and interest continue to accrue during the duration of the agreement, until the balance is paid in full.
Examples of our work
- $1,400,488 IRS debt resolved with $250/month installments
- $279,809 IRS debt resolved with $400/month installments
Installment agreements and offers in compromise both have significant advantages and disadvantages. The major advantages to an installment agreement are that it allows you to pay outstanding liabilities in manageable amounts over a period of time and, for many cases, the process of entering into an installment agreement is usually very simple and costs less in legal fees. Some major disadvantages are that penalties and interest continue to accrue until the liability is paid, and the monthly payments necessary to pay the balance due may be burdensome for some taxpayers. Additionally, in some cases the process of obtaining an installment agreement is somewhat more complex, requiring that you provide a financial statement (either a Form 433-A, Collection Information Statement for Individuals, Form 433-B, Collection Information Statement for Businesses, or Form 433-F, Collection Information Statement) detailing your assets, income and expenses.
While it is important to understand the relative pros and cons of installment agreements and offers in compromise, the decision to proceed with one option instead of the other should be based primarily on a thorough analysis of your outstanding tax liability, your ability to pay that liability, and any special circumstances that may affect the resolution of your case.
What is the IRS Installment Agreement Process?
The process of entering into you into an installment agreement can be relatively simple, or complex, depending on your financial situation and desired payment amount.More info
Each tax agency generally requires that you meet certain conditions before it will enter you into an installment agreement. Depending on the balance that you owe, various forms will have to be prepared. These forms are used to determine your ability to pay the liability in full or in part from assets and disposable income (gross income less allowable expenses). Requests for regular installment agreements are evaluated on a case-by-case basis, and are accepted only if the agency determines you are unable to fully or partially satisfy a balance due, and that an installment agreement will facilitate the collection of the debt.
The agencies generally do not grant an installment agreement if liabilities can be fully or partially satisfied by liquidating your assets, unless there are factors such as your advanced age, ill-health, or other special circumstances. You may also have to provide supporting documentation such as bank statements, paycheck stubs, etc. In addition, it is critical that you are in compliance with your current tax filing and payment requirements. The agencies will not consider granting an installment agreement unless all returns have been filed for the last six years. You must also be current with estimated tax payments or have adequate withholding.
Requesting Installment Agreement and Negotiation Period:
Depending on your financial situation, an installment agreement request can be made via telephone, in person, or through mail correspondence with the appropriate agency. A proposed installment agreement becomes a pending agreement when it is accepted by the agency for processing, and it remains pending until the agency accepts it, the agency notifies you that the proposal has been rejected, or you withdraw the proposal.
The various forms previously prepared will be used in this process; however, you may be required to submit additional financial information throughout the negotiation process depending on the individual circumstances. If a proposed installment agreement that has been accepted for processing does not contain sufficient information for the agency to evaluate it, the agency asks you to provide the missing information. If you do not submit the additional information within a reasonable time, the agency may reject the proposed installment agreement.
There are two significant consequences when your request for an installment agreement is accepted for processing. First, the agency is generally prohibited from levying to collect the underlying tax liability while the proposal is pending, a period following the rejection of the proposal, or while an appeal of the rejection is being considered. However, the prohibition on levies does not apply in all cases. Second, submitting a request for an installment agreement may also extends the amount of time the agency has to collect the tax liability at issue. The statute of limitations for collection of a tax liability may be suspended during the period that a proposed installment agreement is pending. Generally, a taxpayer who enters into an installment agreement must pay a nonrefundable user fee, payable by check, money order, credit card, or payroll deduction. A reduced fee can apply when you enter into a direct debit installment agreement, in which payments are made by electronic funds withdrawal from a checking account. The agencies may take other actions to protect the government’s interest while an installment agreement request is pending, including filing a tax lien against you, or crediting any overpayment against the liability at issue.
Can I Appeal a Rejected Installment Agreement Request?
Most likely. Except for a very small number of cases, the agencies have the discretion to accept or reject any proposed installment agreement. A proposed installment agreement is not rejected until the agency notifies you or our office of the rejection, the reason for rejection, and the right to an appeal. However, before notifying you of the rejection, the agency generally submits the case to an independent administrative reviewer, who makes a separate determination of whether the rejection is appropriate.
If the reviewer sustains the rejection, the agency notifies you of the rejection, the basis for the rejection, and the specific amounts and conditions for acceptance of the installment agreement request. Once a proposed installment agreement is rejected, you will generally have only a few days to appeal the decision.
What Happens After my Installment Agreement Secured?
Once you enter into an installment agreement, penalties and interest charges accrue on any remaining balance. The tax agency is generally prohibited from issuing levies during the term of the installment agreement, provided that you are in compliance with the agreement. You will generally have several options for making monthly installment agreement payments. Payments may be made by any of the following options: (1) check or money order; (2) direct debit from a checking account; (3) payroll deduction; (4) Electronic Federal Tax Payment System (EFTPS); or (5) credit card.
A taxpayer may make monthly installment agreement payments by check or money order made payable to “US Treasury.” The check or money order should list your name, social security number or EIN, and the period and kind of taxes included in the agreement (for instance, 2009 Form 1040). By entering into an installment agreement, you will agree to meet certain terms and conditions. Most importantly, each installment payment must be made in full and on time. All payments must be received by the agency by the due date each month.
Unlike most tax filing and payment requirements, the timely mailing rule does not apply to payments made under an installment agreement. Therefore, if you are making payments by check or money order, you should send the payments well in advance of the due date. While an installment agreement is in effect, you must file all required tax returns and pay any additional taxes due in full and on time.
During the term of an installment agreement, you may be required to provide the agency with updated financial information. If the information indicates that your ability to pay has changed significantly, the agency may propose to modify or terminate the agreement. However this is very rare. Failure to meet the terms of an installment agreement may cause the agency to terminate the agreement. Please be sure to read the various forms and documents from the agency as they contain more specific conditions of your particular installment agreement.
Why McLaughlin Legal?
McLaughlin Legal is a boutique San Diego tax law firm who defends taxpayers in all types of civil and criminal tax litigation and controversy matters. McLaughlin Legal is dedicated to three core principals:
- Personalized — McLaughlin Legal knows that each client’s goals, objectives, and issues are unique. We pride ourselves on a personalized approach to each client’s case and responsiveness to their needs. We believe in having a string personal relationship with each individual client who entrust us with their case.
- Specialized — McLaughlin Legal prioritizes expertise and a confidence in our concentrated area of the law. By concentrating our practice on tax litigation and estate planning, McLaughlin Legal can offer the same resources of larger law firms with personalized and cost-effective services. When a client needs tax litigation or estate planning services, we can match the level of service of any other law firm.
- Committed — McLaughlin Legal is committed to achieving the best result possible for each client who entrusts us with their case. We believe that being responsive, trustworthy, patient, professional, and honorable are the foundations of a successful law firm. Our firm is driven by the highest commitment to protecting our clients’ rights and achieving the best results possible.
The tax attorneys at McLaughlin Legal are qualified and experienced in all types of tax law matters, including negotiating installment agreements. The combination of our personalized service, concentrated area of practice, and client commitments separates McLaughlin Legal from other firms.
If you are interested in learning more about installment agreements, please feel free to contact us today for a free consultation.