Many practitioners are likely to have several clients that owe back taxes to the IRS. Increased salary and bonus, a better investment year, more self-employment income, and repayment of an excess advance premium tax credit are some common reasons. Whatever the reason, clients often are unable to immediately pay the debt. They need help from their CPA to set up a payment arrangement—often, a monthly payment plan.
Installment agreements are the most common payment arrangement. Taxpayers make monthly payments, usually by direct debit or payroll deduction. The IRS charges a setup fee of $120 ($52 if a client makes payments by direct debit and $43 for low-income taxpayers). Interest and late-payment penalties continue to accrue during the installment period, but the late-payment penalty is cut in half for any month an installment agreement is in effect.
To set up an installment agreement, taxpayers or their representatives may call the IRS, use the Service's Online Payment Agreement (OPA) tool, or file Form 9465, Installment Agreement Request. (See Internal Revenue Manual (IRM) §5.14.1, Exhibit 5.14.1-5, for the types of installment agreements and the conditions under which the IRS will generally approve them.)
The OPA tool allows qualified taxpayers and their representatives to request an installment agreement online and receive immediate notification of its acceptance. The process takes about 30 minutes, often quicker than calling the IRS.
To use the tool, an individual taxpayer must owe $50,000 or less in combined tax, interest, and penalties, and all required returns must be filed. A business taxpayer must owe $25,000 or less in combined tax, penalties, and interest, and all required returns must be filed.
Form 9465 can be filed at any time to request an installment agreement for an individual taxpayer, but it is often best to file it simultaneously with a balance-due return. Clients should pay as much of the balance as possible when filing the return to save on interest and late-payment penalties and then request a monthly payment plan for the remaining balance. The form recommends that the monthly payments be as high as possible to save on interest and penalties. However, some advisers recommend a lower amount to protect clients from defaulting if they suffer economic shocks. If the taxpayer does not put a payment amount on the form, the IRS will determine the payment by dividing the balance due by 72 months.
Typically, the IRS responds to a Form 9465 request within 30 days. Though a practitioner could use the OPA tool or call the IRS for a quicker response, attaching Form 9465 to a balance-due return can be the most efficient method. The form can be completed quickly (most tax preparation software can automatically fill out much of the form), and it is seamlessly submitted to the IRS with the return. Clients should continue to pay the IRS as much as they can while they wait for a response.
ADDITIONAL FINANCIAL INFORMATION
Most installment agreements are straightforward—almost all are automatically approved with little information and effort. However, in certain cases, such as if a client cannot pay the entire balance within the collection statute-of-limitation period (typically 10 years) or owes more than the streamlined amount ($50,000 for an individual taxpayer), the IRS will require more information before granting the agreement.
Form 433-F, Collection Information Statement, must be completed when an individual taxpayer, including a self-employed one, owes more than $50,000 or does not agree to make payments by direct debit or payroll deduction. It asks detailed questions about the taxpayer's financial situation. The IRS factors in allowable living expenses to determine how much a taxpayer can afford to pay. The form can take many hours to complete, and the client may have to provide verifying documents.
Business taxpayers owing more than $25,000 will likely need to complete Form 433-B, Collection Information Statement for Businesses, instead of Form 433-F.
The IRS still charges late-payment penalties during an installment agreement period (though, again, at a reduced rate). Practitioners should consider whether first-time abatement and/or reasonable-cause defenses could help the client decrease (or potentially eliminate) penalties.
A first-time abatement is available if the client has a history of filing and paying on time; reasonable cause is based on the facts and circumstances and whether the taxpayer exercised ordinary business care and prudence.
Tip: If a client meets the first-time abatement or reasonable-cause criteria, a practitioner should request penalty abatement at the beginning of the installment agreement and again at the very end (i.e., after the debt is paid in full). If the IRS removes penalties at the beginning of the agreement, and the taxpayer adheres to the terms of the agreement, the Service can also remove the penalties that continued to accrue until the tax was paid in full.
OTHER TYPES OF PAYMENT ARRANGEMENTS
Though most taxpayers who owe back taxes to the IRS set up an installment agreement, practitioners need to be aware of other options for clients.
- Short-term extension: The IRS will grant up to 120 days to pay the liability in full. To request the extension, use the OPA tool or call the IRS. In general, taxpayers will pay less in penalties and interest with this type of extension; unlike installment agreements, no setup fee is required.
- Hardship extension: Qualifying individuals may request a longer extension of time to pay and have late-payment penalties waived as part of the IRS's Fresh Start initiative. If a practitioner believes a client meets the hardship criteria, he or she should file Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship.
- Offer in compromise (OIC): This arrangement allows a taxpayer to settle the debt for less than the amount owed. The IRS grants this relief only if the offer represents the most it can expect to collect from the taxpayer within a reasonable time. Review Form 656-B Booklet, Offer in Compromise, for more details. Expect the process to take up to a year or more, and know that OICs are rarely granted.
- Currently-not-collectible (CNC) status: The IRS can place a client's account in CNC status. Though the IRS will file a tax lien if the client owes more than $10,000, it will cease collection activity. CNC status is temporary, and the IRS will reevaluate (typically, annually) whether the taxpayer's financial situation has changed.
Editor's note: A version of this column also appeared as "Tax Practice & Procedures: Navigating the Murky Waters of IRS Payment Agreements" in the July 2016 issue of The Tax Adviser.
Susan Allen (firstname.lastname@example.org) is a senior technical manager—Tax Practice & Ethics, with the AICPA in Durham, N.C.
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