How Can a Partial Payment Installment Agreement Help You Save Money?
A partial payment installment agreement lets you pay off your tax debt for less than you owe. With this tax settlement option, you make monthly payments until a certain date. Then, the IRS writes off the rest of the tax liability.
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.
Wondering if this option is right for you? Curious if you’ll qualify for this type of payment plan? The tax attorneys at W Tax Group can help you decide if a Partial Pay Installment Agreement 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.
How Partial Payment Plan Installment Agreements Work
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.
However, there is a small catch. With partial installment agreements, the IRS reviews the taxpayer’s financial situation every two years. To continue with this example, imagine that the IRS reviewed the taxpayer’s finances after the first 24 payments and the agency saw that the taxpayer was earning a lot more money. At that point, the IRS may decide to increase the monthly payments to $250/month for the last year of the plan.
Or imagine that when the IRS reviews the situation, and the agency discovers that the taxpayer inherited a vacation home from their grandparent. The IRS can demand that the taxpayer take a loan against the home or sell it and use the proceeds to pay off the tax debt in full. This is one potential drawback to the partial payment installment agreements.
Who Should Apply for a Partial Payment Installment Agreement?
Anyone who can’t afford to pay their tax debt with a payment plan by the collection statute of limitations expiration date should consider this program. Here are some other signs that you should apply:
- You can’t afford to pay your tax bill in full.
- You don’t have any assets that you can sell to pay your tax debt in full.
- You can’t get a loan to pay off your tax debt.
- You can’t afford the monthly payments on a traditional IRS installment agreement.
- You were rejected when you applied for an offer in compromise.
- You can’t qualify for hardship or currently not collectible status.
A partial payment plan is ideal for people who can’t pay in full but who don’t qualify for hardship status. It is a middle-of-the-road option for these situations, but you must meet strict criteria to qualify. When you talk with a tax attorney, they’ll be able to give you a good idea of whether or not this is the right path for you.
Requirements for a Partial Payment Installment Agreement
To qualify, you usually have to owe $10,000 in back taxes or more. You also have to prove that you don’t have assets that you could sell to pay the tax debt and that you can’t afford to make the monthly payments on a traditional IRS installment agreement. Furthermore, you can’t be in bankruptcy or have had an offer in compromise accepted for that tax period.
For example, say that you owe $20,000 on your 2018 taxes, you apply for an offer in compromise and get accepted. Unfortunately, you cannot change your mind and apply for a Partial Pay Installment Agreement on your 2018 taxes. You lost that option once you got the offer accepted.
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.
However, in most cases, the payments must be at least $25 a month if you want a partial payment plan. If you can’t afford to pay at least $25 a month, you may want to check into hardship status. If you qualify, the IRS pauses collection actions on your account until the tax debt expires or your financial situation changes.
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.
Partial Pay vs. Offer in Compromise (OIC)
A partial payment installment agreement and an offer in compromise both let you settle your tax debt for less than you owe. In both cases, the IRS agrees to settle your tax debt for less than your total balance. Once you complete all of the terms of the program, you never have to worry about that written-off tax debt again.
Additionally, both programs have strict application criteria, and you must complete the 433 forms with detailed information about your personal and/or business finances. These programs also share tough approval rates. If you want to get approved for either of these programs, you should consider working with a tax professional.
However, there are significant differences between an offer in compromise and a partial payment agreement. Here are the differences between a partial payment installment agreement and an offer in compromise.
1. Length of Payments
With an offer in compromise, you pay the offer in a lump sum or in monthly payments over 24 months. With a partial payment plan, you make payments until the collection statute expires. That can be a couple of years, but it can also be much longer.
2. Review of Your Financial Situation
When you get an offer in compromise, you must stay compliant with tax filing and payment obligations for five years. For instance, you must file your returns if required and make your estimated quarterly tax payments. If you don’t, the IRS can rescind your offer and demand full payment of the tax debt. However, with an OIC, the IRS can’t take away the offer if your financial situation changes.
In contrast, if you have a PPIA, the IRS reviews your case every two years, and you may have to make the full payment of the tax liability if your situation improves. If your financial situation is stable, a PPIA might save you money in the long run, but if you think your situation is going to change for the better, you may get a better deal from an offer in compromise.
3. Approval Rates
In general, the IRS tends to approve Partial Payment Installment requests at higher rates than OICs.When you talk with a tax professional, they will have a good idea of which programs you’re likely to qualify for. Although only the IRS makes the ultimate decision, tax pros have a good idea because they work with these programs every day.
Does This Mean You Shouldn’t Apply for an Offer in Compromise?
No. The right option depends on your unique financial situation. Some people can afford to come up with a lump sum for an offer in compromise. Others prefer to make monthly payments until the collection statute expiration date. To figure out which program is best for your situation, you should consult with a tax attorney. They can talk with you about your tax problem and help you identify the best IRS resolution option for your needs and your budget.
Additionally, when you apply for a PPIA, the IRS considers if an offer in compromise might be a better option for you. If so, the IRS may deny your PPIA application and tell you to apply for an offer in compromise.
FAQs About Partial Payment Installment Agreements
The IRS PPIA program can be confusing. To help you out, we’ve created a list of some of the most commonly asked questions about this IRS program
What is an IRS partial payment installment agreement?
A partial payment plan is when you make payments until the collection statute expires on your tax debt. Then, the IRS erases the remaining tax debt. It lets you pay off your taxes for less than you owe.
Can you make a partial payment to IRS?
You can always send a partial payment to the IRS. The IRS will just credit the payment to your account. If you want to settle your tax debt with a partial payment, you need to apply for an offer in compromise or a partial payment plan.
How long do you have to pay an IRS installment agreement?
With a traditional installment plan, you usually have to pay off the balance in six years. If you get a partial payment installment plan, the payments last to the collection statute expiration date.
What is the minimum payment the IRS will accept?
The minimum monthly payment depends on your financial situation. The IRS never accepts monthly payments under $25. If that’s all you can afford, you should look into hardship options.
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.