What we’re going to be talking about today is something called an installment agreement. An installment agreement is actually nothing more than a payment plan. There are three types of IRS installment agreements, and we’re going to go over those real quick here.
The first is called a streamline installment agreement and that’s for a liability under $25,000 and the rule of thumb for a streamlined installment agreement, or a liability under $25,000, is it’s the liability divided by 60 months equals your monthly payments.
So let’s go ahead and get a calculator out real quick and go ahead and do that.
$25,000 ÷ 60 months = the sheer math is $416.66.
Typically, you need to add in something for interest and penalties. So that if you were to offer the IRS, in this case, $450 or $500 a month, you’re almost sure to get accepted.
If you have what I call a complex installment agreement, that’s for liabilities over $25,000. It’s a little bit more complicated. What you do in that situation is you take your monthly income minus your monthly allowable expenses and then that equals your monthly disposable income and in this case, it also equals your monthly payment. So let me give you an example of that. If you owed $35,000 and after you did your financials, the IRS determined that you had the ability to pay $532 a month, then that would be your monthly installment agreement payment. Also, if they felt like you could only afford to pay less than $500, then that would be your monthly installment agreement too.
There is nothing magic about $500 in this particular case, it’s what they believe your monthly disposable income is and therefore, that would be your monthly payment is.
Now, there’s a third type of installment agreement that actually can be used in a complex or can have some context in a complex installment agreement as well and that’s called a partial pay installment agreement. Now, it used to be just a few years ago if your monthly ability to pay could not full pay the liability within the life of the statute of limitations within the life or within the number of months that the IRS still had to collect the tax, then the IRS would not accept an installment agreement at all. That was pretty silly. Think about that for a second.
I used to see routinely cases where a taxpayer owed say $10,000 and there was only, say 12 months left on the collection statute and the first person had the ability to pay $500 a month. Well, since the $500 times 12 months is only $6,000 and less than 10; that’s less than the 10 that they owed in this scenario that I gave you, the IRS wouldn’t accept even the $500 a month. They would just go ahead and hold it in advance and not ask for any money at all. And that didn’t make a lot a lot of sense.
So in the last few years, Congress has passed what’s known as a partial pay installment agreement. And what that means is that you as a taxpayer can make payments on an installment agreement even if you don’t have the ability to pay the full thing within the collection statute expiration dates. I probably didn’t do a real good job explaining that, so let me give you another example.
Let’s say, you have 12 months left on your collection statute, which is the number of months left that the IRS had in this example to collect 12 months, and you could afford to pay $500 a month. So that would be $6,000. And let’s just say for purposes of this example that you owed $18,000.
So in this scenario using a partial pay installment agreement, the IRS would accept the $6,000 for the $500 a month for 12 months in lieu of expecting you to full pay the entire liability within a number of months leftover.
There’s a lot of catches to a partial pay installment agreement. Number one, you cannot have any equity in a house, for example. So they expect you to liquidate equity and any assets you have before they’re going to accept a partial payment installment agreement. But you can see that a partial pay installment agreement could be a pretty good deal.
Now, except for a streamlined installment agreement, you’re going to need these following required documents. You’re going to need a 433A and a 433B, if you’re in business. Also, it can be useful to use a form 9465, which is the actual formal installment agreement request form. You’re going to need at least three months worth of documentation proving your expenses and income, things like bank statements and other documentation of your expenses and income, like paycheck stubs; and if you’re dealing with ACS, which is an acronym for the Automated Collection System, you’re going to need to use form 433F.