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Many individuals and businesses who fall behind with their taxes are struggling to make ends meet as it is, and the last thing they need is the added stress of having to figure out a way to resolve their tax debt. Many simply don’t have the ability to repay their entire tax liability in full, even over a prolonged period of time. While such a situation is disconcerting to say the least, it may not be as bad as it seems. The IRS has programs available where qualified taxpayers can repay much less than the full amount that they owe. One of these programs is called a Partial Payment Installment Agreement (or “PPIA”).
The IRS may approve a Partial Payment Installment Agreement if you succeed in demonstrating that your ability to pay is so low that the payments you can afford will not pay the debt in full within the time that the IRS can collect it—typically within 10 years of the date when the tax was assessed. A Partial Payment Installment Agreement is available to both individuals and businesses.
While this may come as comforting news, proceed with caution. A PPIA has tremendous upside, and it might be exactly what you need. However, depending on your situation, entering into a PPIA could be a grave and costly mistake. I’ll explain the basics of a PPIA below and help you determine whether a PPIA—or a different program–is right for you.
After falling behind with the IRS and receiving threatening collection notices in the mail, you or your tax pro will probably call the IRS at some point to discuss resolving the tax debt. One of the first things an IRS agent will ask is “Can you pay the balance off today?” If you can’t pay it off in short order, that starts a process of determining what the IRS will require you to pay on a monthly basis.
The IRS wants to be repaid as quickly as possible, and they will often pressure taxpayers into payment agreements that are not affordable. However, they cannot force individuals into a hardship situation where it becomes impossible to pay for necessary living expense. As for businesses, the IRS is not supposed to force a business to operate at a loss.
The IRS must give a reasonable allowance for housing, food, clothing, miscellaneous items, vehicles, insurance, student loans, current taxes, health care, child support and other already established court ordered payments. Unfortunately, there are a number of common expenses that the IRS will typically disallow. Credit card payments and the portion of housing and utility expenses that exceed what the IRS considers allowable are two very common examples. Consequently, tax debtors who have significant expenses that are disallowed may find it challenging to negotiate payments that they can actually afford. A good tax relief attorney may be able to negotiate variances in allowable expenses, can make sure that you receive credit for all of your allowable expenses, and can fight to make sure that the monthly payments that the IRS approves are as low as legally possible.
The amount left after subtracting your allowable expenses from your income is what you can expect to pay the IRS on a monthly basis. Just keep in mind that “allowable” expenses tend to be modest.
For a business, the IRS will carefully review the revenues coming in and expenses going out each month, even scrutinizing the owner’s salary and personal expenses to determine if the business can pay more. If you provide all the evidence of your income and allowable expenses and show that at the end of the month there is only $100 (or whatever amount) left to pay the IRS, then the IRS may have to accept that level of payment, at least for a period of time. If your payment is not high enough to pay off the balance in 2-4 years, the IRS will likely schedule a follow up to determine if your monthly payments can be increased.
The follow up review does not apply to Streamlined Installment Agreements (or In-Business Trust Fund Express Installment Agreements). Those are designed to pay off the balance within 6 years for individuals with balances of $50,000 or less, and within 24 months for businesses with balances of 25,000 or less.
If you don’t qualify for a Streamlined or Trust Fund Express Installment Agreement, the IRS includes a provision in its payment agreement reserving the right to review your financial information at their discretion at a later time in order to determine if your ability to pay has changed. This future financial review can also be an opportunity to prove your payments are too high and should be reduced if your business or personal situation has taken a downturn.
The periodic review is more likely to occur if your payment agreement is a PPIA instead of an agreement that is designed to pay the balance in full before the collection statute (IRS deadline for collecting) expires. So, if you are in a financial hardship and obtain a PPIA, you will most likely have to deal with the IRS again to scrutinize your financial condition even if you make all the agreed payments and follow all the IRS rules.
The time period given for periodic reviews is usually 18 to 24 months. After a couple years of making the low payments, the IRS will send you, the individual or business, a financial information request asking for all the evidence they need to determine if you can pay more than you are currently paying. Do NOT ignore this or your agreement will default.
If your revise your payment agreement, either up or down, you can still expect another review after a couple years. As your PPIA nears the expiration of the collection statute, the IRS may become more aggressive in trying to get you to pay more. If you have personal debt to the IRS and you own a home with equity, the IRS may get more demanding. Before they allow another PPIA, they may demand that you either sell your home (especially if it you have a lot of equity) or get a loan to access the equity in your property to pay the IRS before allowing you to continue with your Partial Payment Installment Agreement.
THE PROS OF A PPIA
- You pay a very small monthly payment in relation to the size of your tax debt.
- You can rest at ease that the IRS will refrain from taking enforced collection action (bank levies, accounts receivable levies, wage garnishments, the seizure of assets, etc.) against you while your PPIA is in effect.
- If your financial situation does not change over the years, your payment will remain low and your debt will eventually expire.
- Some taxpayers wind up paying only a small fraction of their total tax debt via a PPIA.
THE CONS OF A PPIA
- You are never really done dealing with the IRS until the debt expires (typically 10 years).
- The longer you pay under a PPIA, the more aggressive and less flexible the IRS becomes in working with your current situation.
- If your income increases, the IRS is probably going to require that you increase your monthly payments. Thus, if you get a raise or if you work hard and make your business more profitable, you likely will not enjoy a better lifestyle—at least until the IRS is either paid in full or the collection statute expires. The IRS effectively reaps the rewards from your hard work and success.
Many individuals and businesses who qualify for a Partial Payment Installment Agreement are also good candidates for a tax settlement called an Offer in Compromise (OIC). For these taxpayers, the decision of whether to pursue an OIC or a PPIA is an extremely important one.
Wrongly choosing an OIC instead of a PPIA can easily result in doing a ton of work (OIC’s are far more labor intensive to get approved than PPIA’s) with the result being a rejected OIC. Worse yet, the clock for the collection statute of limitations is paused while the OIC is pending plus 30 days following rejection. Whereas it can easily take 9 to 12 months (or more) from the time an OIC is filed until the date of its rejection, wrongly choosing to pursue an OIC rather than a PPIA can give the IRS an extra year or more from which to collect—and an extra year of your life dealing with the specter of the IRS.
Keep in mind, too, that having an OIC rejected is more than a little frustrating. You or your tax pro has done a huge amount of work to get the OIC approved. If it gets rejected, you’re right back at square one with an unresolved tax liability and concerns that your bank accounts or paychecks will be levied.
Wrongly choosing to pursue a PPIA rather than an OIC can also lead to costly and unwanted results. To illustrate, let’s assume that you owe the IRS $150,000 and that your present ability to pay (income minus allowable expenses) is $300/mo. Let’s assume that you have some reasonably modest equity in assets (a component of determining an OIC settlement amount), and that you qualify for an OIC tax settlement of $50,000. Assume also that there are 100 months remaining in the collection statute.
In this example, the PPIA may appear to be the better option because:
- A 100-month payout of $300/mo totals $30,000. That’s $20,000 less than the $50,000 OIC settlement you could have secured. It’s also way less than the $150,000 owed.
- Getting a PPIA approved is less time-consuming and less hassle than your OIC alternative.
- You avoid having to figure out a way to fund a $50,000 (in this example) OIC settlement (you would have to pay off the $50,000 settlement within 5 to 24 months of approval). Rather than borrowing or selling assets to fund your settlement, you simply start making your PPIA monthly payments of $300.
Although the above PPIA example may sound like a screaming deal, remember that you are not out of the woods just because you got the PPIA approved. The IRS will almost certainly require you to submit updated financial information in 18-24 months.
Continuing with the above example, let’s say that you make the first 18 monthly PPIA payments and the IRS then demands updated financial information. Somewhere during those 18 months, you and your spouse each get a raise of $500/mo. So now, instead of having $300/mo available to pay the IRS, you have $1300/mo. Consequently, the IRS increases your monthly payments to $1,300/mo. Note that the equivalent can happen to a business that increases its net income by $1,000/mo during the 18-month period.
During the first 18 months of the 100-month collection statute, you paid $5,400 (18 * $300). You still have 82 months remaining in the collection statute. At $1,300/mo, you will pay $106,600 ($1,300 * 82) over the remaining 82 months. Adding in the $5,400 you’ve already paid, you will pay the IRS a total of $112,000 ($5,400 + $106,600)—and that is assuming that the IRS doesn’t increase your monthly payments again sometime in the remaining 82 months. Even modest increases in income (and, thus, your PPIA payments) could easily result in you paying the entire $150,000 liability back in full. As you can see, in this example, you would have been much better off settling via an OIC for $50,000.
SO, WHAT IS ONE TO DO?
Your best bet is to consult with a reputable, experienced, and skilled tax relief professional, especially if you have a large tax liability. A good tax relief pro can steer you in the right direction, guide you through the process, help alleviate the stress of dealing with the unknown, fight and win when the IRS isn’t giving you a fair shake, and give you a far better chance of securing the best terms.
Fortress Tax Relief has knowledgeable and caring professionals on staff who would be happy to help determine which program is best suited to your unique needs, and there is no charge for a telephone consultation. Please give us a call.