In 2016, as many as 28 million taxpayers could owe taxes when they file a return. People who filed by the original filing deadline (this year, April 18 for most filers) and who haven’t paid their balance will start receiving their first IRS notice to pay (usually IRS notice CP14, Non-Math Error Balance Due) in the first week of June.
If these taxpayers still can’t pay, they may need a small amount of time to gather the funds to pay their tax bill. The IRS offers such an option, called an extension-to-pay (ETP) agreement.
Here are 12 things you need to know to help clients who have a tax bill and just need a little more time to pay:
1. The extension agreement terms are for full payment. The IRS processes ETP agreements as lump-sum installment agreements. As such, the IRS expects your client to pay the full amount of taxes, penalties, and interest by the extension date. However, if your client’s circumstances change and he or she can’t pay at the end of the extension period, other collection options are available. (For more on collection alternatives, see “IRS Offers Collection Alternatives for Your Financially Distressed Clients,” CPA Insider, May 28, 2013.)
2. Your client can get up to 120 days to pay the additional tax, penalties, and interest. Your client can ask for less time to pay, but he or she can’t extend the period past 120 days for any individual tax year.
3. Your client may be limited to 60 days. ETP agreements are limited to 60 days if your client is in IRS Collection. If your client has received the Final Notice of Intent to Levy (usually IRS notice LT11 or L1058), your client is in Collection. For most individuals who file by the April deadline and owe a tax balance for the first time, this notice usually arrives in late September or early October, after the client has received all notices in the IRS Collection “notice stream.”
The notice stream is a sequence of increasingly urgent and threatening letters asking taxpayers to pay or make other arrangements with the IRS to pay their tax balance. The notice stream typically follows this order:
- CP14, Non-Math Error Balance Due
- CP501, 1st Notice—Balance Due
- CP503, 2nd Notice—Balance Due
- CP504, Final Notice—Balance Due
- LT11, Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing
- L1058, Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing
4. Your client can get an extension on any dollar amount. There’s no dollar limit on tax debt for taxpayers requesting an ETP agreement. But beware: Clients with high balances (more than $100,000) usually get assigned to the IRS Collection field function, staffed by revenue officers. Local revenue officers don’t have to offer or provide ETP agreements. In fact, because they get the most egregious compliance cases, they seldom provide taxpayers with extension agreements.
5. Interest and penalties accrue. ETP agreements don’t stop underpayment interest (currently, at 4% per year). ETP agreements also don’t prevent assessment of the failure-to-pay penalty. After executing an ETP agreement, your client will receive an ETP payoff notice listing the final tax, penalties, and interest due at the end of the extension period.
6. ETP agreements can prevent levies and tax liens. As a standard operating procedure, the IRS will not issue a lien or levy against your client during the ETP period.
7. ETP agreements can release levies. If your client has received all of the notices in the IRS Collection notice stream and has been levied, an ETP can provide immediate relief from a levy. Once your client enters an ETP agreement, your client can ask the IRS to fax a levy release to his or her bank or employer.
8. Clients can use ETP agreements to avoid a notice of federal tax lien. As a standard procedure, the IRS files a tax lien when someone owes $10,000 or more and does not pay or enter into a qualifying agreement to pay after the collection notice stream is complete. An ETP is a qualifying agreement that can help your client gather funds to avoid a lien.
9. An ETP could avoid passport revocation. In 2016, the IRS will implement new legislation with the State Department that will revoke passports from individuals who owe more than $50,000 and aren’t in a qualifying agreement with the IRS to pay their balance. Although the IRS hasn’t finalized its plans to implement these passport-revocation rules, it’s likely that the ETP will be a qualifying agreement. Be on the lookout as the IRS releases details of qualifying agreements this fall.
10. There are no fees. The standard IRS fee to set up an installment agreement is $120. Taxpayers can establish ETP agreements for free.
11. It’s simple to request an ETP agreement. If your client owes less than $100,000, your client can complete an ETP agreement using the IRS Online Payment Agreement tool at IRS.gov. Tax professionals can use this tool with a filed Form 2848, Power of Attorney and Declaration of Representative. ETP agreements can be requested by phone, as well. If your client is not in IRS Collection, you can get an ETP agreement for your client by calling the Practitioner Priority Service (PPS) line. Currently, the PPS line has shorter wait times than IRS Collection and other phone lines.
12. After your client pays, remember to use first-time abatement for the penalties. If your client has been in compliance for the past three years (has filed and paid on time, or received a refund), request first-time abatement from the IRS after your client pays the balance. You can do this for your client with a simple call to the IRS PPS line.
ETPs also help taxpayers avoid complicated installment agreements
Although ETP agreements call for full payment at the end of the extension period, the IRS often uses them to help move taxpayers toward streamlined installment agreements. Compared to more complicated installment agreements, streamlined agreements provide more favorable terms of payment (over 72 months), require less financial disclosure, and avoid a lien filing if taxpayers complete them before the IRS files a lien. If taxpayers can pay their tax balances to less than $50,000 during the ETP period, then they can easily set up a streamlined installment agreement for the remaining balance after the extension period.
For the IRS and taxpayers, this is a win-win: The IRS gets a down payment and a payment agreement that generally has less risk of default, and taxpayers get more favorable payment terms and avoid tax liens on their credit reports.
Look to ETPs first
ETP agreements should be the first stop for clients who owe and can’t pay by the filing deadline. Although ETP agreements don’t avoid the penalties and interest that come with unpaid tax balances, ETP agreements will provide help for clients who just need more time to get the funds together.
You can not only help your clients set up an ETP agreement, but you can also help them after they pay, by requesting penalty abatement and even helping them set up a streamlined installment agreement, if needed.
Jim Buttonow, CPA/CITP, directs tax practice and procedure product development for H&R Block and serves as chairman of the IRS Electronic Tax Administration Advisory Committee (ETAAC). He has more than 28 years of experience in IRS practice and procedure.
