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Tax 101: Installment Agreements as a collection alternative

When you’re hit with a tax debt you can’t pay, it can be daunting. You might want to cram the notices away in a drawer and forget about them, but the IRS has deadlines you need to respond by, and unfortunately, this is not a situation where you can ignore the problem. 

The good news is, however, that someone has certainly dealt with a similar tax problem you might be facing and gotten through to the other side. There are tax professionals across the country who can assist you with whatever problem you have, or Low Income Taxpayer Clinics – like the one ICLS hosts – can advise and represent you if you qualify for their services. 

In other words, you can handle this problem and get back into good standing with the IRS. The IRS offers several alternative methods of collection for you to get back into good standing, and we’ll walk you through them in this series of blogs. Today, we’ll be talking about Installment Agreements. 

If you’d prefer to listen to our Low Income Taxpayer Clinic attorneys explain the collection alternatives more in depth, you can find webinars from our Tax 101 Facebook Live series here: Inland Counties Legal Services, Inc. – Videos | Facebook 

What they are 

If you have an outstanding balance with the IRS, and you can’t pay the balance off in full, you can enter into a type of installment agreement making monthly payments towards the outstanding balance. 

There is the Full Pay and the Partial Pay Installment Agreement: a Full Pay installment agreement schedules payment so you pay all of the tax debt in three to six years, and a Partial Pay installment agreement may be available if you are low income. This plan schedules monthly payments too, but it may not result in you paying all of your tax debt before the debt expires. This again is because the IRS has 10 years to collect on your tax debt before the expiration of the debt from the statute of limitations. 

Entering into installment agreement halts collection activity, which means that taxpayer is no longer at risk of levy and may avoid filing of notice of tax lien. The IRS adds interest and penalties each month until you have paid all of the tax debt. Your interest and penalties will be less if you have a monthly plan, because the IRS will charge a lower interest rate. 

What you need to apply 

There are 3 main methods of applying for an installment agreement. The easiest way is to do it online through Applying online provides the lowest setup fees. You can also fax in the Form 9465 to apply. Another method would be to call in. 

You may be required to fill out a financial statement, depending on the amount you owe and how quickly you can pay down the debt. If you owe $10,000 or less, are current on taxes, and you can pay the debt in full within three (3) years, you do not have to file a financial statement. If you owe $50,000 or less and can make payments large enough to pay off the debt within 72 months (about 6 years) and before the 10-year statute of limitations to collect the debt expires, then you will not need to file a financial statement and no lien will be filed. 

You will also need to file any unfiled returns to enter into an installment agreement. 

If you have substantial assets, the IRS may require you to sell or borrow from those assets to pay the balance in full, so be prepared. 

Making payments 

Once you’ve entered into an Installment Agreement, the easiest way to make payments is through direct debit from your bank account. You can provide the information and it will be part of the formal agreement. If you do not want to do direct debit, you can mail in the payment via check every month. However, if you forget, they might default on the agreement, and you will not be in compliance with the IRS for your debt. 

Just remember that getting into an Installment Agreement is one way to get into compliance with the IRS about your tax debt. If you are not in compliance, the IRS may take collection methods into their own hands, such as levies on your bank accounts or garnishment of your wages.