When Taxes are Owed to IRS-The Installment Agreement

When a taxpayer falls behind with the Internal Revenue Service whether because a tax return has been filed and tax payment not made or there has been an audit of that filed tax return and the liability to the IRS is then discovered, the taxpayer is in for enforced collection by IRS. Needless to say some taxpayers simply draw the covers over their head and hope the problem will go away. Others of course resort to more elaborate tax dodging by becoming part of the underground economy. As the IRS computers have gotten more sophisticated playing groundhog has gotten more difficult. At the same time IRS has intentionally liberalized some of its rules to welcome taxpayers who owe tax debts back into the fold. Even in the case of the non-filer, IRS is interested in having the taxpayer file delinquent returns and make arrangements for payment. In fact the IRS voluntary compliance program aims at just that. Jail time is reserved for more egregious tax violators. So what to do? Lawyers who represent clients in this area note that the options are several: 1) Try to convince IRS that the client does not have the current ability to pay any amount toward their back tax liability. This is known as code 53 on an IRS transcript. Following this path can result in the statute of limitations on collection running out while the taxpayer’s file sits quietly in uncollectible status. 2) For those taxpayers who are perhaps closest to bankruptcy an offer in compromise may be appropriate. Here the taxpayer basically offers whatever he has in assets and income stream to appease the IRS in exchange for being released from the balance of tax, interest and penalty which may be due. 3) Those who are in fact eligible to file a bankruptcy may find that some or all of their income taxes are dischargeable under the bankruptcy rules as well. While indeed all of these should be discussed with the client who owes back taxes, in reality not many will qualify for any of these procedures. What then? As a practical matter most taxpayers will end up entering into an installment agreement with the Internal Revenue Service. Clients can think of this as Levy insurance. A Levy is the act of IRS taking property from the taxpayer. No Levy can be issued so long as an installment agreement to pay back taxes is in effect. The amount payable to the Internal Revenue Service will depend upon financial Form 433 being filed with the IRS which discloses assets and income the taxpayer has available. IRS will apply its own standards and amounts to come up with a monthly payment schedule. Once entered, while the IRS reserves right to review the financial status of the taxpayer from time to time, for the most part the client’s tax issues have been effectively dealt with. The agreement is a formal contract which both parties are to observe. Taxpayers are precluded from running up any further tax debts or from failing to file any tax return required. Installment agreements can be arranged at the IRS website or by dealing with IRS collection officers in local offices or by contacting IRS regional offices. Section 6159 authorizes IRS to enter into these installment agreements. That can be done whether the tax will be paid in full or partially. Though taxpayers are seeking to pay up under an installment agreement IRS still charges them in order to enter into such an agreement. In general this fee has been $120 or $52 if a direct debit installment agreement is entered. The latter eliminates the IRS worrying that the taxpayer will not send his check. Starting January 1, 2017 these fees will be increased. To enter a regular installment agreement the fee will be $225 and the direct debit installment agreement will be $107. An online payment agreement however will cost $149. To reinstate a defaulted installment agreement the fee will be $89. All things considered the installment agreement for many clients may be the only real alternative to handling their tax liability.