When you owe back taxes an installment agreement can be extremely helpful in solving your IRS tax problems.
An installment agreement or payment plan will stop enforced collection and allow you to pay your back taxes over a period of time. Generally, taxpayers who owe $50,000 or less and can pay the outstanding tax balance within six years (or prior to the statute of limitations on collections) can qualify for a streamlined installment agreement. A streamlined agreement prevents the need to provide your financial information to the IRS and does not require you to pay down your back taxes with any available assets. Even if you have the ability to fully pay your back tax debt immediately or can pay it off faster than six years you won’t be required to do so. However, you must maintain in compliance with your current tax obligations.
But what if you owe the IRS more than $50,000 in back taxes, can you request an installment agreement? The answer is yes, but you must disclose your financial information and the IRS will expect you to use any equity in your assets in pay down the outstanding balance. Thus, the IRS may require you to tap your saving accounts, brokerage accounts, or even your IRA. If you have the financial means to do so, it is actually a good strategy to pay your their back taxes down to $50,000. You won’t have to provide the IRS with your financial information and you can keep any additional assets the IRS might otherwise require you to give them.
The starting point in negotiating an installment agreement in excess of $50,000 is to complete an IRS collection information statement. The collection information statement tells the IRS about your income, living expenses and assets. The IRS has established guidelines for allowable living expenses based upon your family size and area of residence. If your living expenses exceed the guidelines you’ll have to demonstrate the need for the greater amount is either for the health and welfare of the family or for the production of income. However, if you can show the IRS you can meet your current tax requirements and fully pay your back taxes within six years including projected interest and penalties accruals all expenses can be allowed.
If you’re unable to fully pay your back taxes within six years because of excessive expenses, the IRS may give you one year to reduce or eliminate such expenses. This means the IRS will allow you to keep these expenses for one year which in turn reduces the amount of your monthly installment payment as long you can pay your back tax debt in full within the six-year period.
Example: Marianna is renting an apartment and her total housing expense is $2,500 per month and she has nine months remaining on her lease. The IRS standards for the county in which is lives provides for $1, 600 per month for housing expenses. When calculating the amount of her monthly installment agreement amount the IRS will use Marianna’s $2,500 housing expense for the first year if she is able to demonstrate the ability to fully pay her back tax debt within the six year period including projected accruals. This reduces the monthly installment agreement amount in year one by $900. This gives her time to find an apartment with a lower rent. In the second year, her installment agreement payment will increase as the IRS will only allow the standard housing expenses for her area of residence.
An installment agreement is the most used method to resolve a taxpayer’s back tax problems. If you owe more than $50,000 in back taxes, using a tax professional specializing in IRS Tax Problems will give you the best chance to establish a payment plan that works for you. The tax resolution specialists at East Coast Tax Consulting Group have the experience and knowledge to negotiate an installment agreement that will put an end to your back tax problems. However, if an installment agreement is not the answer to your tax issues, we’ll find the right solution such as on offer in compromise, hardship status or other tax relief strategy.