All taxpayers are expected to immediately full pay their delinquent taxes. When this is not possible taxpayers may be permitted to pay their back taxes over a period of time. If a taxpayer is unable to make full payment of his/her tax liability before the expiration of the Collection Statute Expiration Date (CSED), but has some ability to pay, the IRS has the authority to enter into a Partial Pay Installment Agreement (PPIA).
Before a PPIA may be granted, a taxpayer’s equity in assets must be addressed and, if appropriate, be used to make payment. In most cases taxpayers will be required to use equity in assets to pay liabilities. However, complete utilization of equity is not always required as a condition of a PPIA.
No Asset/No Equity Cases: A PPIA may be granted if a taxpayer has no assets or equity in assets; or has liquidated available assets to make a partial tax payment.
Asset Cases: A PPIA may be granted if a taxpayer does not sell or cannot borrow against assets with equity because:
• The assets have minimal equity or the equity is insufficient to allow a creditor to loan funds.
Example: Some lenders require equity of greater than 20% of property value in order to grant the loan.
• The taxpayer is unable to utilize equity.
Example: The property is held as a tenancy by the entirety when only one spouse owes the tax and the non-liable spouse declines to go along with the attempt to borrow, and the property does not appear to have been transferred into the tenancy to avoid the tax collection.
• The asset has some value but the taxpayer is unable to sell the asset because it is currently unmarketable.
Example: The business taxpayer owns a vacant lot in a high-value area, but the lot cannot be sold until it meets certain environmental regulations
• The asset is necessary to generate income for the PPIA and the government will receive more from the future income generated by the asset than from the sale of the asset;
• It would impose an economic hardship on the taxpayer to sell property, borrow on equity in property, or use a liquid asset to pay the taxes. Economic hardship is defined as not meeting reasonable basic living expenses.
Example: Taxpayer is on a fixed income, such as social security, and has the ability to make small monthly payments. The only other asset is the taxpayer’s primary residence and there is equity in the property. The revenue officer does a risk analysis and determines that seizing the property would cause an economic hardship because the taxpayer cannot find suitable replacement housing and meet necessary living expenses if the property would be seized.
A waiver extending the statute of limitation on collection may be required on a PPIA when an asset will come into the taxpayer’s possession after the collection statute will expire and liquidation of that asset offers the best resolution of the case (in lieu of liquidating existing assets to partially pay the liability). If a waiver is warranted, it must be secured at the inception of the installment agreement, not at a two-year review unless a new PPIA is executed at that time.
Example: The taxpayer owes individual income tax and is the beneficiary to a trust. The taxpayer will receive a monthly distribution from the trust that would be used to fund the PPIA. The taxpayer will not be entitled to the principal of the trust for two more years. The CSED will expire in one year. The only other asset is the taxpayer’s primary residence. The equity in the property is less than the net value of the trust but is available for immediate collection action. The taxpayer has been unable to secure a loan against the equity of the property due to numerous factors such as limited income and poor credit. The risk analysis was completed by the revenue officer and the taxpayer offered to extend the statute and to liquidate the trust in two years. The waiver was secured for two additional years.
Example: A corporation taxpayer cannot pay its payroll tax liability within the CSED. It can make partial payments for the remaining CSED period. The corporation is current with its federal tax deposits. The corporation has an interest in undeveloped real estate which is under development and will be completed in two years. The land once developed would increase significantly in value and will be immediately sold. The CSED will expire in one year. Seizing and selling the assets of the business which would include the vacant land and construction equipment would not significantly reduce the liability and would impact the business’s ability to complete the development of the property. The corporate officers offer to extend the statute to provide the opportunity to complete the development and pay the taxes along with other business debts.
A waiver is not required to be secured when the taxpayer’s only ability to satisfy the tax liability after the CSED expiration is through a continuation of the installment agreement and there is no significant change in ability to pay as identified through the two year financial review process.
Example: The taxpayer cannot pay the liability within the CSED but can make monthly payments. The statute will expire in twelve months. The taxpayer has no equity in assets. The taxpayer owes $1,800 and can pay $100 per month. The taxpayer can be granted a PPIA for twelve months and no waiver is required. The statute would be allowed to expire.
Example: The individual taxpayer cannot pay the liability within the CSED but can make monthly payments. The statute will expire in three years. The taxpayer owns real property with minimal equity and they cannot borrow against the equity. The taxpayer owes $10,000 and can pay $200 per month. Secure a PPIA for three years and no waiver is required. There will be a two year financial review conducted. If there is no significant change in ability to pay, the payment amount will remain unchanged until the statute expires.
In the past, if the taxpayer was unable to pay the tax within the statute of limitations, an offer in compromise was the normal resolution. An offer in compromise locks the taxpayer and the IRS into a set amount unless a collateral agreement is part of the settlement. On the other hand, a partial pay installment agreement requires the IRS to re-analyze the taxpayer’s financial condition every two years and offers an opportunity for the IRS to increase the monthly payment. Because the partial pay installment agreement has a chance of increasing the amount collected in later years, Collection personnel are steering more taxpayers toward this option.