Are you facing a large tax bill without the ability to pay it in full?

Did you fail to withhold enough from your paychecks to cover the amount due?

Did your bookkeeper fail to make estimated tax payments?

Whatever the reason you fell behind on your taxes, you can likely pay the amount due in monthly installments using the IRS’ installment agreement procedures. Full-pay installment agreement applications (where you pay the full amount due including penalties and interest) are much easier to obtain approval when compared to partial-pay. Most of this article focuses on partial-pay agreements and how to determine the monthly payment amount.

How to Apply

You qualify to use the Online Payment Agreement application if:

• you owe $50,000 or less (including penalties and interest) and filed all required returns; or
• you owe $100,000 or less (including penalties and interest) and offer to pay the amount due in 120 days or less.

You must submit IRS F. 9465 Installment Agreement Request together with a supporting IRS F. 433-A Collection Information Statement disclosing your monthly income, living expenses, and assets if you owe $50,000 or more.

Calculating your Monthly Payment Amount

Full-Pay Payment Plan

Simply divide the balance due (including penalties and interest) by the number of months you wish to make payments to obtain your monthly payment amount.

Partial-Pay Payment Plan

The starting point for any “partial-pay” agreement is the preparation of an IRS F. 433-A Collection Information Statement (hereafter “CIS”). Essentially, the CIS proves (through supporting documentation) your true ability to pay. The formula to calculate your monthly payment amount is below:

Monthly Income – (IRS Allowable Expenses + Negotiated Deviations) = Monthly Payment Amount

The first component to the payment plan formula is income. Your income includes wages for both you and your spouse, interest income, net business income, net rental income, distributions from an IRS or Corporation, social security income, child support and alimony received, and any other income.

The second component to the monthly payment formula is less straightforward. The IRS sets national and regional standards for what are considered “allowable” expenses for the purpose of calculating your ability to pay.

For example, the 2020 IRS allowable housing and utilities expense for a family of two living in Maricopa County, Arizona is $1,813 per month, whereas the allowable housing expense for the same family living in San Francisco County, California is $3,808. As you can see, the allowable expenses are in part based on the cost of living of the county where you reside. In addition to setting a standard allowable expense for housing and utilities, the IRS also sets standards for other expense categories on the CIS (Internal Revenue Service, 2020), including:

• Food, Clothing, and Other items
• Out-of-Pocket Healthcare Costs
• Transportation Expenses

The CIS also includes the expenses listed below, but the IRS does not provide allowable standards for these items and will likely require documentation proving such expenses prior to approving an installment agreement:

• Health Insurance
• Court Ordered Payments
• Child/Dependent Care
• Life Insurance
• Current Year taxes
• Secured Debts
• Delinquent State or Local Taxes

From the IRS’ point of view, any income not used to pay your personal living expenses as defined above should be used to pay your delinquent taxes. The problem is the “allowable” expense amounts are often too low to support even the most frugal of lifestyles. The IRS may agree to deviate from the standard allowable amounts in certain circumstances. Such deviations are the third component to the monthly payment formula above.

For example, a taxpayer with a recent cancer diagnosis can argue for a deviation regarding out-of-pocket healthcare costs and higher health insurance payments. If your child has a learning disability, then higher childcare costs and the cost for tutors may be included in your monthly allowable expenses. A thorough review of your situation with a tax attorney may reveal room for these and other deviations depending on your specific circumstances.

How much does it cost to set up a payment plan?

The IRS charges a $31 setup fee if you enroll in direct-debit where the IRS automatically pulls the payment from your account each month or $149 if you opt to make the payments manually each month by mailing a check or paying online. Penalties and interest will continue to accrue until the balance is paid in full or the Collection Statute Expiration Date.

The legal fees for an attorney to represent you in the installment agreement negotiations will vary depending on the complexity of the issues presented, the amount due, and the forms required to reach your desired result. For instance, a business owner will need to submit a separate IRS F. 433-B Collection Information Statement form specific to their business, which will increase the legal fees charged to assist with their case.

Obviously hiring an attorney will increase the total cost to enter into an installment agreement, but doing so will help you avoid:

• Errors in completing the necessary forms
• Overstating your ability to pay
• Being treated unfairly by IRS personnel
• The stress and anxiety of navigating the process on your own
• The time spent to navigate the process without representation

Need to Know Details

You must file tax returns and pay the amount due on time each year to avoid termination of your installment agreement. Missing a payment will also result in termination.

Published January 25, 2021.

References

Internal Revenue Service. (2020, November 25). Additional Information on Payment Plans. Retrieved from IRS: https://www.irs.gov/payments/payment-plans-installment-agreements

Internal Revenue Service. (2020, March 30). Collection Financial Standards. Retrieved from IRS: https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards