Do I qualify for an IRS payment agreement?
This is one of the most common questions that I’m asked. Unfortunately, it’s not a very simple question to answer. I’m tax attorney Darrin Mish and I’ve been representing clients before the IRS since 1999.
When you want to set up a IRS payment agreement (also known as an Installment Agreement) one of the big factors in determining the size of your payment is the amount that you owe to the IRS. If you owe $50,000 or less and can pay in equal monthly installments over 72 months, you might be in really good shape. Assuming you can’t readily pay them back from a liquid asset (like cash in your bank account) they will likely grant you an installment agreement assuming you owe less than $50,000 and you can full it within 72 months.
In this example that payment would likely be around $700-750 per month. Penalties and interest continue to accrue so it could be quite some time before you see much movement in the principal if you enter into such an installment agreement.
Second, if you owe more than $50,000 the IRS is going to want to look at your monthly income and monthly allowable expenses. The difference between your monthly income and monthly allowable expenses is called your monthly disposable income. The IRS looks at your monthly disposable income, and that it’s what they want you to pay on a monthly basis for your installment agreement. This may not sound like a problem, but the monthly allowable expenses that they actually allow our draconian in nature, and don’t reflect reality at all.
So, for example, you may actually pay $2500 per month in rent but the IRS monthly allowable amount for your county might only be $1500. In this example you would have $1000 in monthly disposable income actually doesn’t even exist! Without some advice about how to arrange your monthly finances and some planning beforehand your monthly installment agreement payment could be much higher than it needs to be.
The IRS is also going to want your monthly installment agreement payment to be sufficient to full pay your liability before the collection statute of limitations expires. This means that your payments must be enough to pay off the liability before the balance of the 10 years of the IRS has to collect your liability has run out.
Lastly, there is something called a partial pay installment agreement. in a partial pay installment agreement the IRS will look at your monthly disposable income, and allow you to pay a monthly amount that will not for a pay the balance of the liability before the collection statute of limitations expires. For example, if you only have two years left on the collection statute of limitations and you know $24,000 but they agree that your monthly disposable income is only $300, then you will only pay a total of $7200. That’s $300 times 24 months. This is a great deal!
The big catch in this type of a situation is that you must have no equity in assets. If you own a home that has equity in it for example, the IRS cannot and will not allow you into a partial pay installment agreement without demanding that you liquidate that asset. If you can’t or won’t liquidate that asset they will not allow you into the partial pay installment agreement, or any installment of rent for that matter and you end up in sort of a limbo situation.
An IRS payment agreement can be tricky. You really have to know the ins and outs of how monthly payment is calculated. if you don’t know what you’re doing you can end up paying way more than necessary on a monthly basis. It’s also almost always in your best interest to explore other alternatives such as an offer in compromise; currently not collectible status; or bankruptcy before making the decision to enter into an installment agreement. If you have questions about installment agreements or really anything having to do with IRS problems please call us at 888-438-6474.