Understanding a Partial Payment Installment Agreement
A partial payment installment agreement effectively reduces your tax bill and allows you to make monthly payments. These arrangements can save you money, but they are complicated and have strict qualification criteria.
The tax attorneys at W Tax Group can help you decide if a PPIA is right for your situation, and we can guide you through the application process. Here’s what you need to know.
What Is a Partial Payment Installment Agreement?
With a partial payment installment agreement, the taxpayer makes monthly payments on their liability until the collection statute expiration date (CSED). Typically, the CSED is 10 years after the date the tax was assessed. Once the collection statute expires, the taxpayer doesn’t have to make any more payments, even though the total of their payments was less than the amount owed.
Here’s an example: Imagine a taxpayer owes $10,000. They can only afford to pay $100 per month, and the collection statute expires in three years. If they qualify, they will make the $100 monthly payments for 36 months. At that point, the collection statute will expire, and even though the taxpayer has only paid $3600, they won’t owe any additional money.
How Partial Payment Plan Installment Agreements Work
If you qualify for a partial payment installment agreement, you should set up a direct debit from your bank account or agree to have the payments deducted from your paycheck. Taxpayers who have defaulted on an installment agreement in the last 24 months must use one of these options unless they are unbanked or self-employed.
To qualify, you must be compliant with tax filing requirements, federal tax deposits, and estimated tax payments. The IRS will review your financial situation every two years during your PPIA. If your finances change, the IRS may require a larger monthly payment or even require you to pay off the balance in full.
How to Apply for a Partial Payment Installment Agreement
To apply for a PPIA, you need to request a payment plan online or using Form 9465 (Installment Agreement Request). You also must fill out IRS Form 433A (Collection Information Statement for Wage Earners and Self-Employed Individuals) or 433B (Collection Information Statement for Businesses). These forms require extremely detailed information about your assets, liabilities, income, and expenses.
For the best chance of securing an agreement, you may want to work with a tax attorney.
Depending on the amount of your unpaid balance, the IRS will dig deeper into your financial situation. If the IRS rep sees any issues, they may request information on the following:
- Assets and income that were not disclosed on the financial statement.
- Reasons behind income decreases of 20% or more.
- Real property records.
- Personal property records.
- Records from the Department of Motor Vehicles.
- Credit reports.
- Bank statements.
Based on the financial statements you provide, the IRS will decide if you need to sell any assets or take out loans against them. Then, the agency will determine your monthly payments.
How the IRS Determines Your Monthly Payment
With these types of arrangements, the IRS requires you to pay as much as you can afford. Unfortunately, the IRS doesn’t allow you to state how much you can afford. The agency has very strict rules on the expenses you’re allowed to have, and it requires you to use all of your extra income toward payments.
For example, if the IRS thinks your housing payment or car loan is too high, it won’t allow you to consider those amounts when determining how much you can afford. The IRS has detailed guidelines for how much it thinks taxpayers should be spending on food, clothing, shelter, and transportation, and the agency doesn’t give much leeway.
This is why it can be critical to work with a tax attorney. We understand the IRS’s expense allowances, and we can help to ensure that the IRS grants you the highest allowances possible for your situation.
Selling Assets for Partial Payment Installment Agreements
The IRS may require you to sell assets or take out a loan against them to cover part of your tax liability. For instance, if you owe $10,000 and you have a brand new snowmobile, you’ll probably be required to sell it. Only a very small amount of assets are exempt from this requirement — remember the IRS has a lot of power, more than any other entity collecting delinquent payments.
You may be able to avoid selling your assets or taking out loans if the following situations apply:
- The assets have minimal equity.
- No creditors will grant you a loan against the equity.
- A spouse who co-owns the asset but isn’t liable for the tax bill refuses to take out a loan against the asset.
- The asset is unmarketable and cannot be sold.
- The asset is necessary for generating income so you can make your monthly PPIA payments.
- Selling the asset would create a severe economic hardship for you.
Before selling your assets, you should consult with a tax attorney. They can help to ensure you’re making the right choice and negotiating the best arrangement with the IRS.
Extending the Collection Statute Expiration Date
Again, the collection statute expiration date is the date when the IRS can no longer collect your tax due. If the IRS believes that you are going to come into possession of an asset that could help cover your tax liability after the collection statute expires, the agency may require you to extend the CSED before approving your PPIA.
Here’s an example. Imagine that you’re on a fixed income and you can only afford to make a small monthly payment. The collection statute on your tax liability expires in two years, but in three years, you are going to receive the principal of a trust. Before approving your PPIA, the IRS may require you to extend your CSED. Then, when you receive the principal from the trust, you will be required to use those funds to pay off your tax bill.
This can happen with businesses as well as individuals. Say that a business owns a piece of property that cannot be sold right now but is likely to be sold in two years. The collection statute expires in one year. The IRS may require the business to extend the CSED before approving its PPIA.
Your CSED will automatically be extended in the following situations:
- If you apply for an offer in compromise.
- If you request a Collection Due Process (CDP) hearing.
- If you request innocent spouse relief.
- If your case is being reviewed in tax court.
- During the automatic stay of a bankruptcy case plus six months
Before agreeing to extend your CSED, always consult with a tax attorney. You may need to extend the CSED to qualify for the PPIA and avoid any other collection actions. But you don’t want to agree to an extension if it’s not in your best interest.
Get Help Applying for a Partial Payment Installment Agreement
PPIAs are complicated and difficult to set up. We can help you with the process.
At W Tax Group, our tax attorneys have extensive experience with PPIAs as well as other tax resolution methods. To get help and to learn the best option for your situation, contact us today.