Are IRS payment agreements bad?

While payment (or installment) agreements aren’t bad, they may be your only choice. Since bankruptcy law changes mean that many taxpayers cannot get rid of their delinquent taxes in bankruptcy and because the IRS has made it much more difficult to get Offers in Compromise accept, payment agreements may be your only option.

If you owe under $10,000 and can pay the IRS in full in less than 36 months (that includes ALL penalties and interest), you have a right to a Guaranteed Installment Agreement. There is no need to hire a tax relief firm in that circumstance. Additionally, no Federal Tax Lien will be filed as long as you keep your end of the agreement.

If you owe less than $25,000 and can fully pay the taxes, penalties and interest within 60 months, the IRS will normally approve an installment agreement as well without much difficulty. Of course, you may be paying $500 a month AND you must meet all CURRENT income tax obligations through proper withholding from your paycheck or estimated tax payments if you are self employed. If you fail to do this, your payment agreement will be defaulted, a Notice of Federal Tax Lien WILL be filed and levies WILL be served on your wages and bank accounts.

However, as of 2006, if you owe MORE than $25,000, expect to find it MUCH more difficult to get a payment agreement approved. IRS ACS (telephone contact unit) personnel are making us give them as much as six months pay stubs, rent checks, utility bills, etc. and 12 months of medical expenses even when the medical expenses are very small.

A new program was introduced in 2005 called the Partial Payment Installment Agreement or PPIA. For the first time, the IRS can officially setup an agreement that will not pay the entire liability. You WILL need professional assistance as the IRS will closely scrutinize these cases and a Notice of Federal Tax Lien will be filed. Because the Offer program is so much less attractive today, the PPIA may be a good alternative in some cases.

Remember, that penalties and interest continue to accrue even while you are on the payment agreement. Currently (as of January, 2006), the interest rate on taxes owed to the IRS is 7%. That amount fluctuates with general interest rates.

The only penalty that you’ll be hit with after a payment agreement is in place is the Failure to Pay penalty. It ranges from .5% to 1% per month to a maximum of 25% of the tax due.

In recent weeks (2006) we have gotten such difficulty from IRS in setting up Installment Agreements that what used to take us 4-6 hours to set up is now taking 12-14 hours or more. Be prepared for higher fees when hiring a tax pro and be prepared for a much for difficult process in getting relatively simple Installment Agreements approved.