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PAYMENT PLANS WITH THE INTERNAL REVENUE SERVICE

The IRS grants tens of thousands of monthly payment agreements each month.  Generally, to qualify for an installment agreement arrangement, the taxpayer must have filed all delinquent returns as well as demonstrate an inability to fully pay tax liabilities over the short term.  It is generally more difficult to secure business installment agreements (e.g., unpaid employment tax liabilities (Form 941) than installment agreements for individual income tax liabilities (Form 1040).

The IRS has stated two objectives in deciding whether to allow an installment payment arrangement:

1. The agreement should provide for the satisfaction of the past due tax liabilities in the shortest possible time; and
2. It must be geared to the taxpayer's ability to pay.

This office has noticed an inconsistency among IRS personnel, whether it be an IRS Revenue Officer or an IRS phone collection representative, in determining the appropriate amount of the monthly payment. The Internal Revenue Manual has a "facts and circumstances" test which has resulted in a wide variation in  results. Despite Congressional "friendlier IRS" legislation in 1998, there has not been a noticeable change in the historical lack of uniform treatment of taxpayers. Luck often plays into whether an IRS collection representative proposes an installment agreement which is realistic and allows a client to meet all of his other financial obligations or whether the agreement is so onerous as to make it impossible to live up the terms of the agreement.

Having trouble arranging an installment payment arrangement with your local Revenue Officer? Try the IRS Collection Appeals procedures (CAP request). A recommendation by a field Revenue Officer can be appealed through his manager and on to an independent Appeals Officer. This office has used the collection appeals procedure often which resulted in agreements which a taxpayer can live with.

Generally the IRS has the authority to default an installment if the taxpayer does any of the following.  Usually levies are not far behind.

1. The taxpayer provides inaccurate or incomplete information in the negotiations.
2. The taxpayer fails to pay an installment when due.
3. The taxpayer fails to file or full pay a post agreement tax return. 
4. The taxpayer fails to respond to any reasonable request by the IRS to supply updated financial information.
5. The IRS determines that the collection of any tax is in jeopardy - this is rarely utilized.  The result is usually immediate levy. 

TAX LEGISLATION ON IRS COLLECTION RESTRAINTS:

The 1998 tax legislation know as the "IRS Restructuring and Reform Act" was signed into law on July 22, 1998. This new legislation goes a long way to guaranteeing taxpayers the right to an installment payment arrangement. Moreover, in enacting the legislation, the United States Congress chastised the Internal Revenue Service for using arbitrary national and local standards. The IRS, nevertheless, appears to have changed policies and installment agreement formulas on a regular basis since the legislation.  Arbitrary positions still plague the IRS.  Helpful information is as follows:

1. Since January 21, 1998 the IRS must give taxpayers the opportunity for a hearing before any levy seizure of assets.  This is known as the Due Process Hearing rights IRC Section 6330.  The law goes even further in that if a taxpayer is not satisfied with the results of the Due Process Hearing conducted by an IRS Settlement Officer, taxpayers have the right to judicial review in United States Tax Court prior to any such levy on the taxpayer's assets or income stream.  Due process rights are also applicable with regard to due process notices associated with IRS tax liens but unlike levy situations, the hearing is post filing of the Notice of Federal Tax Lien.  The issue then is appropriateness of the filing of the federal tax lien in addition to collection alternatives other than IRS levies and garnishments.  In due process matters relating to the filing of a Notice of Federal Tax Lien the IRS, in the usual case, will refrain from levies during the pendency of the IRS administrative lien hearing and judicial review.  
2. Unfortunately, there has been taxpayer abuse of Due Process Hearing rights which have been used as delay tactics rather than as genuine attempts at resolution of tax controversies.  Care is indicated.  The due process administrative hearing approach is also an excellent vehicle in which to present Offer in Compromise paperwork for a settlement of outstanding tax liabilities.  Due Process Settlement Officers have greater discretion in accepting offers than current Offer in Compromise units in New York, Tennessee and California.  Face to face meetings, unavailable in regular Offer in Compromise proceedings, are available in Due Process hearings.   
3. Federal legislation guarantees an installment agreement for a taxpayer if the liability (excluding penalties and interest) is under $10,000.00 and the installment agreement provides for full payment of the liability within 3 years.  But caution is advised.  Even this type of agreement can be defaulted by taxpayer non-compliance.
4. The usual employment tax (Form 941) installment agreement will not last more than 12 months.  Employment tax installment agreements expected to be paid over longer periods of time are difficult to negotiate. 
5. Before negotiating an installment payment arrangement, a client should give serious thought to alternatives such as an Offer in Compromise or even a bankruptcy proceeding.  Often times, the monthly payment amount does not even pay for accruing penalties and interest.  This result means an ever-increasing tax balance with no hope of being free of the IRS assessments over multiple year periods. 
6. Installment agreement consideration requires current compliance.  All delinquent returns must be filed, payroll tax deposits timely made and estimated tax payments (Form 1040-ES) timely made. 
7. If you are seriously considering an installment agreement arrangement, go to the IRS website (irs.gov) and print copies of Form 433-A (Financial Statement for Individuals) and/or Form 433-B (Financial Statement for Businesses).  This will provide you with information which will be required by the Internal Revenue Service prior to entering into the installment agreement.  Form 433-F is utilized by the IRS Automated Collection phone services unit and walk-in locations to gather financial information from taxpayers. 
8. Generally speaking, if a client has equity in his house, that client is better off obtaining an equity loan to pay off the tax liabilities.  An installment agreement will not stop penalties and interest from accruing nor will it stop the filing of a federal tax lien.  These accrual rates on penalties and interest far exceed commercial loan interest rates.  However, if a tax lien is in place it is difficult to obtain bank refinancing or a second mortgage.  Certificate of Lien Discharge or Federal Tax Lien Subordination procedures are difficult and time consuming.