How Does the IRS Partial Payment Installment Agreement Work?
What’s the first thing that comes to your mind when you get a notice from the IRS saying you owe them a significant amount of tax? You feel like paying them the full amount the next day. While paying the tax debt in one shot may seem a suitable option, many people don’t have that much money in the first place. If you are in that group, you can opt for a partial payment installment agreement. An IRS partial payment installment agreement is a payment option where the IRS allows you to pay the entire amount through monthly installments instead of paying it at once.
The only thing that you need to keep in mind is that you must pay the money the full amount before your tax liability expires. Usually, the IRS has 10 years to collect its tax debt from the date of tax filing. Suppose you have paid your tax up to 31st December 2020. The next tax filing date is 1st March 2021. You are not able to pay the tax for the 2021-22 period. The IRS will have until 28th February 2031 to collect the tax due for the 2021-22 accounting year. Similarly, if you fail to pay a few months later, the IRS will give you ten years to repay the tax debt.
Eligibility criteria for IRS partial payment installment agreement
The IRS has some strict rules when it comes to approving a partial pay installment agreement. It doesn’t allow anyone to opt for this scheme. Here are some of the eligibility criteria that you need to keep in mind before applying for a partial pay installment agreement:
• First of all, the IRS will only trigger the partial pay installment agreement if you owe it at least $10,000. The amount doesn’t have to be the principal debt amount. It may include your tax debt, interest, and penalties.
• The IRS will check your bank statement before approving your IRS partial payment installment agreement request. It will not approve your request if you are already bankrupt. You must have a sufficient amount of money in your bank account before applying for this scheme. Most importantly, you won’t be eligible for the partial pay installment agreement if you have already made an offer in compromise before.
• Your assets are crucial for this type of payment scheme. You won’t be able to liquidate your assets until you finish paying all your installments. Moreover, the IRS will not approve your request if your total assets don’t add up to the total tax debt. That means if you owe $1000 to the IRS, you should have assets that add up to at least $1000 or more.
According to experts, the partial pay installment agreement is an appealing solution for tax payers as it helps you save a lot over time. However, it’s one of the most challenging resolutions to qualify for this payment method. Apart from the above eligibility criteria, you should also note that you shouldn’t have pending taxes in your tax history. In fact, you can’t have an active OIC if you want to apply for a partial pay installment agreement. Additionally, the IRS may not grant you the partial pay installment agreement if you have equity in assets like a car, a profitable land, or your home. The concept is simple – if you can’t pay the tax debt, the IRS will acquire one of your assets whose value is equal to the pending debt.
How does this system work?
Consider the partial pay installment agreement as a contract between you and the IRS. You are the taxpayer. Therefore, it’s your duty to make sure that you have enough money in your bank so that the IRS can’t decline your request. Calculate the approximate monthly installment that you need to pay if the IRS approves your application. Next, make sure that the bank account that you will link with the IRS has more balance than the average installment. This would make a good impression on the IRS, and it may approve your request after going through your paperwork. But apart from the minimum bank balance, here are a few more things that you need to keep in mind regarding your partial pay installment agreement contract:
• You must pay your taxes in full until the last accounting year before applying for a partial pay installment agreement. The IRS would immediately cancel your request if you already have a pending tax debt.
• Apart from the principal tax amount, you should also pay the interests and penalties, if any, before sending the application. Even a few dollars matter to the IRS before accepting your request.
• The IRS expects you to file all your future tax returns on time. It may not provide a partial pay installment agreement if you already have an ongoing agreement.
• The IRS re-evaluates your monthly payment amounts every two years. This is to ensure that you are in a sound financial condition to repay the rest of the amount within the pre-decided period.
Things to remember
Every taxpayer who can’t pay the full amount right away wants to apply for a partial pay installment agreement. But experts believe that you should always talk to a tax consultant before applying for this scheme. A tax consultant is the best person to assess your financial conditions before negotiating a deal with the IRS. It goes through your previous incomes and expenditures and provides an installment amount that you can afford for the next few years.
The tax professional also calculates the average penalty and interest you may need to pay apart from your principal debt amount. This helps to calculate the approximate monthly installment figure. He also sends your tax file documents and online transcripts to ensure that the IRS agrees to sign the agreement. Many people forget that they also need to add the interest and penalty amounts. These eventually lead to a significant amount over time. Therefore, take time to discuss everything with your tax consultant before applying for an IRS partial payment installment agreement.