by Dave Horwedel, EA and CEO of Torchlight Tax.
An IRS payment plan, also known as an Installment Agreement (I/A), is an agreement with the IRS to pay your back taxes in monthly payments instead of one big lump sum.
A streamlined installment agreement is the easier, faster version. If you’re an individual who owes under $50,000, or a business that owes under $25,000, the IRS will let you set up a streamlined plan without a full financial disclosure. You still owe the money, but the process of getting an approved agreement is simpler.
Under $25,000, the paperwork is lighter, and you have more flexibility in how you make payments, as long as the debt is paid before the IRS Statute of Limitations on Collection runs out. When the IRS Statute of Limitations runs out, the IRS can no longer collect and the IRS debt falls off.
Between $25,000 and $50,000, you can still qualify for a streamlined agreement, but the IRS tightens the rules. They require direct-debit payments from your bank account and are more serious about filing a lien to protect their interest. Remember, a lien is not a levy, where they actually take your bank account or assets. See my video, IRS Lien vs IRS Levy, if you have any questions here.
Above $50,000, you can still do an I/A, but the IRS requires full financial disclosure. This differs from a streamlined agreement in that the IRS wants to know what you can reasonably pay. In a streamlined agreement, you could have hundreds of thousands of dollars in your bank accounts or other assets and still get onto an I/A. Above $50,000, the IRS may still approve an I/A, but they want to review it more closely.
These types of installment agreements are called full pay installment agreements because eventually you pay off the full debt. These differ from a Partial Pay installment Agreement or an Offer in Compromise, where the debt is actually reduced.
If you cannot realistically make any payments, you may qualify for Currently Not Collectible status. The IRS will monitor your income while you are in this status and may cancel this status if your income goes up and then resume collection actions. If the IRS Statute of Limitations expires, the IRS will actually cancel your debt.
Penalty abatement can be used in conjunction with any of these settlement options. If you cannot pay the whole amount before the collection statute runs out, you may qualify for a Partial Payment Installment Agreement or an Offer in Compromise, where you try to settle the debt for less than the full balance.
A regular payment plan does not make the debt disappear, and interest keeps running, and most penalties keep accruing as well. However, once your installment agreement is in place and you are in good standing, the accruing IRS failure-to-pay penalty is generally cut in half. That reduction does not stop the clock, but it slows down how fast that particular penalty grows while you are on the plan and making your payments.
For many taxpayers, that, plus relief from aggressive collection actions, is what makes an IRS payment plan attractive. A payment plan is a viable option where you can pay off your debt in full but need more time.
Penalty Abatement, Currently Not Collectible Status, and Offers in Compromise are other options based on your specific situation. An understanding of the IRS Statute of Limitations is also important when sorting out settlement options.
You are welcome to visit the Torchlight Tax website and YouTube channel where we have videos on all of the above topics and many more. The more you understand how these things work, the more likely you are to have a successful tax resolution.
You are also welcome to contact Torchlight Tax for a free consultation at 877-758-7797 or fill out a form here.
For the taxpayer, there is a lot of complexity and different options for different tax situations. We are glad to sort these out in a free consultation. There are many advantages in using a firm like Torchlight Tax that has staff trained and experienced in all aspects of IRS Representation. However, if you decide to do it yourself after a consultation with us, that is fine. We are glad to help.
