IRS Installment Agreement Basics
When a taxpayer can pay an entire tax debt balance, including penalties and interest, the IRS will accept an installment agreement offer instead of an offer in compromise or currently not collectible status request. This is the "full pay" option. Taxpayers have flexibility to determine the period over which the tax debt is repaid, but penalties and interest will continue to accrue to the extent the tax debt remains unpaid. Unfiled tax returns must be prepared and submitted prior to the IRS accepting any installment agreement. Taxpayers may qualify for a guaranteed or streamlined installment agreement.
Why would taxpayers voluntarily enter into such agreements? For one, the IRS will not use collection enforcement tactics like levies on bank accounts or garnish wages. The IRS will not levy during the period an outstanding installment agreement is pending approval. Another reason is the IRS will not automatically file a notice of federal tax lien, but will leave a notice of federal tax lien in place if existing prior to the installment agreement request. If a taxpayer's installment agreement is accepted, the monthly penalty for failure to pay tax is reduced from 0.5% to 0.25%. This reduction in the penalty rate indirectly impacts the accumulation of interest because the penalty will be smaller.
Other issues may not be favorable to taxpayers. Refunds will be used to offset the taxpayer's tax debts automatically, so taxpayers under an installment agreement should adjust withholding to avoid creating large tax refunds because the refunds are automatically pay off tax debts without reducing the installment agreement payment amount. The IRS may also terminate an installment agreement if a taxpayer fails to make an installment payment when due under the agreement or fails to pay a current tax liability when due. Taxpayers will be provided notice of the default and given 30 days to comply with the terms of their installment agreement prior to the IRS terminating the installment agreement. Once a default occurs, the IRS may begin the levy process again subject to providing the taxpayer with proper notice. The IRS may also consider reinstating an installment agreement that is in default based on the facts and circumstances related to the default and the likelihood of the taxpayer completing the remaining installment payments.
Overall, installment agreements are the most common solution for delinquent taxpayers to repay tax debts and move forward. Taxpayers have some flexibility when crafting an installment agreement to avoid defaulting on the agreement. If you have questions about an installment agreement, or are not sure if an offer in compromise or currently not collectible status is an option, contact Steiger Tax Law at (248) 259-6367 for a free consultation. I am a Michigan licensed attorney based in Detroit who will work with you to minimize your tax liability and maximize your tax compliance.