Under certain conditions, the IRS will allow taxpayers to enter into an agreement in which their outstanding taxes can be made in monthly installments. There are two types of IRS installment plans – short-term and long-term. If you qualify the IRS also has a hardship program for those who are going through financial hardship.
Tax Installment And Hardship Plans
IRS May Agree To Accept Tax Installment Payments
An installment agreement is an agreement to pay taxes over a period of time in monthly installments. If you and the IRS have an installment agreement, the IRS will not take any other collection action unless you default on the agreement.
Small tax debts
If you owe less than $10,000, the IRS must allow you to pay in installments if you meet three conditions:
- You must have filed and paid all your taxes on time for the past five years.
- The IRS must be satisfied that you cannot pay off the debt immediately.
- You agree to pay off the debt within three years and to comply with all tax laws during that time.
The IRS will then send you a monthly statement showing how much remains to be paid.
Large tax debts
For larger debts (over $10,000), the IRS will want to look at your overall financial situation. You must complete a two-page financial declaration listing your assets, liabilities, and monthly income and expenses Form 433-A.
This form is used to obtain current financial information in order to determine if the taxpayer can satisfy an outstanding tax liability.
Operating A Business
If you operate a business, you must also complete the business financial declaration Form 433-B. This form assists the IRS in determining whether your business qualifies to enter into an installment agreement or a partial payment installment plan.
Suppose the IRS determines your business tax returns and accounting methods have been intentionally deceptive. In that case, no installment plan will be offered, and your case may be referred to the IRS criminal division. The amount of the installment payments will depend on your income and expenses and the resulting taxes owed.
Proving income and expenses
The IRS will want documents that prove your income and expenses. These can be submitted with the offer or provided when they ask for them. Based on your submitted financial information, the IRS will determine what they consider a reasonable and good faith monthly payment.
Offers in Compromise
An Offer in Compromise is an offer the taxpayer makes to pay less than the total amount the Internal Revenue Service claims you owe. The IRS might accept the offer if you convince them that there exists “doubt as to liability,” “doubt as to collectibility,” or “for effective tax administration.”
While the offer is pending, the internal revenue service will typically not take any collection action – unless they feel the request was submitted solely to delay collection. The Statute of Limitations for collection usually is ten years, but this may be extended while the IRS reviews the offer.
If You Owe Employee Withholding Tax
If you owe the IRS back employee withholding tax, it is doubtful you will be allowed to enter into an installment agreement and, upon repayment of the tax, be forgiven. When it comes to non-payment of employment tax, the IRS is known to shut businesses down unless strict repayment provisions are made including payment of substantial fines and which may include your tax case being referred to their criminal division for prosecution.
IRS Financial Hardship Program
Suppose you have past unpaid taxes and are struggling to pay basic living expenses. In that case, you may qualify under the IRS Financial Hardship payment program.
The IRS defines financial hardship by determining if an individual would face unfair financial hardship if unpaid taxes were collected. Stated another way, a person will qualify for the IRS Hardship program if the IRS determines they cannot pay their taxes after paying for their basic living expenses.
IRS basic living expense test
The IRS may agree that you qualify for the financial hardship program if you can establish that you cannot or can barely pay your current basic living expenses.
The IRS will use its collection financial standards formula to determine allowable basic living expenses against current income.
Not collectible due to financial hardship
If you are determined to be in financial hardship, you will fall into the IRS status of not collectible. The taxpayer will need to apply for the program.
Changed circumstances
Another way of determining financial hardship, the IRS will look to see if there has been a changed circumstance in the taxpayer’s life, such as a disabling injury, loss of job, divorce, death in the family, or of the primary earner’s military deployment.
The IRS will require that you provide them with detailed financial information as proof of your current financial situation.
