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Uncle Sam is a lot like creditors and not like kneecap busting mobsters. Uncle Sam just wants his money, which means despite stories of heavy-handedness, the IRS is willing to work out agreements with taxpayers to collect overdue tax bills. However, never expect the IRS to extend an offer to work out an installment agreement.
You are the one that has to make the first move.
Overview of the IRS Installment Agreement
The Internal Revenue Service (IRS) has created the installment agreements to allow taxpayers to pay off debt in small increments. However, interest and penalty costs add considerable amounts to already hefty tax bills. Penalties and interest can range between 8% and 10% of a tax bill. Therefore, the IRS encourages taxpayers to pay off an entire balance by the April 15 due date.
The IRS offers four different ways for you to get current with Uncle Sam.
Guaranteed Installment Agreement
Taxpayers that want to take advantage of the IRS guaranteed installment agreement must owe the IRS less than $50,000, excluding the interest and penalties owed on the outstanding balance. You cannot participate in this installment agreement if you entered into an installment agreement over the previous five years. Moreover, the IRS requires that taxpayers must have paid federal income taxes over a previous five year period. The installment agreement covers three years, which makes it a poor agreement for taxpayers that owe large amounts of back taxes. Taxpayers must pay at the least the minimum monthly payment due.
Streamlined Installment Agreement
Most taxpayers who meet the guaranteed Installment Agreement criteria qualify to enroll in the IRS Streamlined Installment Agreement. Once again, the tax liability cannot exceed $50,000 and taxpayers must pay off balances within three years. The minimum monthly payment is either $25 or the minimum accepted payment, whichever is the larger amount. Taxpayers must pay the IRS a fee to set up the Streamline Installation Agreement or a reduced fee to create as direct debit card payment method. As with a Guaranteed Installment Agreement, the IRS does not file a tax lien on taxpayers who sign up for a Streamlined Installment Agreement.
Partial Payment Installment Agreement
The IRS introduced the Partial Payment Installment Agreement to allow some taxpayers to pay some, but not all of a tax bill. You must complete Form 433-F for the IRS to consider you eligible for the agreement. Form 433-F requires taxpayers to demonstrate proof of income and living expenses. The IRS verifies every Form 433-F to discover if taxpayers have assets that can be sold to pare down tax debt. Taxpayers approved for the Partial Payment Installment Agreement must undergo reviews conducted by the IRS every two years. Reviews can lead to taxpayers paying more per month to increase the amount of the partial payments.
Non-Streamlined Installment Agreement
Taxpayers who owe more than $50,000 might qualify to enroll in the Non-Streamlined Installment Agreement. You must negotiate with the IRS to gain acceptance into this agreement. Taxpayers file Form 433-F to provide information about income, living expenses, outstanding debts and delinquent credit card accounts. The IRS tries to prevent back taxes to exceed $50,000, which makes this agreement the least approved of the four installment agreements.
The IRS typically takes three to six months to review proposed installment agreements. You can expect the IRS to reject your installment agreement proposal, if the IRS believes you can eliminate unnecessary living expenses and/or sell assets to raise cash. You can also expect an installment agreement denied for filing false information or failing to complete a previous IRS installment agreement.