Installment agreements: an alternative to offers in compromise.

• Author: Zwick, Marc

The IRS expects income taxes to be paid in a timely manner, but a taxpayer may be unable to make full payment of a tax liability when it is due. While offers in compromise are extremely complex and are often rejected by the Service, Sec. 6159 provides taxpayers that cannot pay their prior tax liabilities in full an option to enter into an installment agreement and pay off those liabilities over a period of time. The IRS is authorized to enter into a written agreement with the taxpayer that require installment payments based on the amount the taxpayer owes and his or her ability to pay that amount within the time the Service can legally collect payment. While the program provides a taxpayer with additional time to pay the tax, interest and penalties continue to accrue while the payments are being made. The IRS may also file tax liens on the taxpayer's assets until the taxes are paid. Depending on the amount of tax due, there are different options available under the program.

Application Process

To apply for an installment agreement, the taxpayer must file Form 9465, Installment Agreement Request. If the total amount owed is more than $25,000 (including amounts owed for prior years), the taxpayer must complete Form 433-F, Collection Information Statement, and attach it to Form 9465. On acceptance of the agreement, the taxpayer will be charged a fee of $105 ($52 if the taxpayer agrees to make the payments by electronic funds withdrawal) for a new agreement or $45 for a reinstated agreement. Low-income taxpayers may qualify for a reduced fee of $43 for new agreements but must pay the full amount for a reinstated agreement. Based on the information provided to the Service in these forms, an installment amount will be calculated, and the taxpayer will make monthly payments.

If the IRS accepts the agreement but the installment payments will not result in full payment of the tax due, the Service is required to review the agreement at least once every two years. If the taxpayer's financial situation changes, the amount of each monthly installment is subject to change as well. Unlike an offer in compromise, the installment agreement gives the Service the option of increasing the monthly payments if the taxpayer's financial status improves. As a result, it is more likely to approve an installment agreement than an offer in compromise.

Streamlined and Guaranteed Installment Agreements

For taxpayers who owe less than $25,000 (including interest and...