Installment Agreement, Partial Payment
Installment Agreement, or Offer in Compromise?
Choose
the appropriate option to resolve your tax assessment
The IRS implemented an additional payment option, on January 17,
2005, known as the Partial Payment Installment Agreement (PPIA)
for taxpayers who have outstanding federal tax liabilities. This new
payment option became possible with the passage of the American Jobs
Creation Act of 2004 signed into law on October 22, 2004. The new
legislation includes language amending Internal Revenue Code 6159 to
allow the IRS to enter into installment agreements that result in full
or partial
payment of the tax liability. Prior to
enactment of this legislation,
taxpayers that could not fully pay their outstanding tax liabilities
could only
enter into an Installment Agreement (IA) with the IRS if it resulted in
full payment of the
liability. This left taxpayers unable to meet this criterion with
limited
payment options, such as an Offer in Compromise (OIC).
In addition, effective July 16, 2006, a new federal law changed the way
the Offer in Compromise program operates. Taxpayers
submitting a lump-sum offer must make a 20 percent up-front,
nonrefundable payment to the IRS, while those submitting a
periodic-payment OIC offer must make an up-front, nonrefundable
installment payment, plus any other proposed payments that may be due,
while the IRS is evaluating the offer, which could take as long as two
years.
What do both recent changes in payment options mean to taxpayers? What
are the different alternatives available to taxpayers to resolve a tax
assessment? What are the differences between these options?
Which payment alternative is best for you?
A conventional Installment Agreement for an outstanding tax liability
under $10,000 is guaranteed to be acceptible to the Internal Revenue
Service as long as you propose to settle your tax liability within 36
months, and during the past 5 years, you have timely filed all
income tax returns, paid any income tax due, and have not entered into
a previous Installment Agreement for payment of income tax. All
you would need to do is file Form 9465, enter your name and address,
the
monthly installment amount, and then sign, date, and mail it to the IRS
service specified for your location. No property would be liened
if you
continue to make your installment payments on time; however, penalties
and interest would continue to accrue over the entire installment
period. For tax
liabilities greater than $10,000 but less than $25,000 and proposed to
be paid in full within 60 months, you would be fairly assured of
receiving
approval upon filing Form 9465. But when tax
assessments are much
greater than $25,000, obtaining approval for the Installment Agreement
would in all likelihood be a lot more taxing. In addition to
filing Form 9465, you
also would be required to complete Form 433-F Collection Information
Statement, disclosing all of your assets, income, and necessary living expenses.
For taxpayers unable to pay the full tax assessment, the Partial
Payment Installment Agreement is available as well as the
Offer-in-Compromise. The Partial Payment Installment Agreement
would allow you to pay what you could "afford" to pay of your tax
assessment
in installment payments. For your application to be considered by
the IRS, you would need to file Form 9465 Installment Agreement
Request, Form 433-A
or 433-B
The Collection Information Statement (individuals and businesses,
respectively), a letter requesting a Partial
Payment Installment Agreement, and three months of documentation
substantiating all income and expenses reported.
Under this alternative, liens would be filed on your properties by the
Internal Revenue
Service. In order to be approved, you would need to offer the
maximum monthly payment based upon your "ability to
pay", termed the "Reasonable Collection Potential" (RCP) in IRS
literature. A worksheet is available to calculate your Reasonable
Collection Potential; however, it is included in
Form 656-B Offer in Compromise Booklet, and not in Form 433-A, 433-B,
or 433-F.
The biggest drawback to the Partial Payment Installment Agreement is
its "open door" policy: the Internal Revenue Code Section 6159
requires that PPIA's be reviewed every two years, wherein the IRS
would determine if there were any increases in your assets or income so
that
it could demand full payment
of
the tax assessment or an increase in your installment payment
amount. On the other hand, the Offer in Compromise would be a
done
deal: once an agreement is reached, it would be final and not
subject to adjustment or modification, unless the
taxpayer were to default on his payments. If there were little or
no chance of improvement in your financial situation over the period of
installments, then the biannual review of your finances would not
present a serious drawback to its selection as your option.
In addition to Form 433-A or 433-B, the Offer in Compromise application
would require the completion of Form 656, which would document your
offer, your reason and circumstances for requiring a reduction in your
tax assessment, and your source of funds to be used in its settlement;
in comparison, the Partial Payment Installment Agreement would require
merely an accompanying letter requesting such. Form 656-A Income
Certification for Offer in Compromise Application Fee and Payment would
need to be submitted with your application in order to exempt you from
the recently enacted requirement of including either a payment of 20%
of a lump sum offer or installment payments of a periodic payment offer
during its evaluation. If your "Monthly Income" as calculated on
Form 433-A or 433-B were to exceed the IRS OIC low income guidelines
(e.g., for a family of four, it is $4,594), then you would have to make
the 20% payment for the lump sum offer or the first installment payment
of a periodic payment offer as well as all monthly installment payments
during your offer's investigation period, which could take as much as
two years.
The required 20% lump sum payment or installment payments for up to two
years on a periodic plan might not necessarily constitute a serious
drawback to the Offer in Compromise as a viable option to the
settlement of your tax liability. If you were proposing a lump
sum settlement, requiring payment in full within 5 months or less, you
would require such available cash anyway to settle upon approval.
If you were considering a periodic payment offer due to limited cash,
you might be tempted to select the longest allowable payment plan
available (10 years since the date of the tax assessment), in an
attempt to minimizie the amount of cash to be paid over the plan's
review period (theoretically, as little as 20% of the tax liability);
however, such an approach might make your offer less attractive to the
IRS, because of the additional risk of uncollectibility associated with
longer terms of payment. For those having monthly incomes below
the IRS OIC low income guidelines, no payments would be necessary
anyway. If your monthly income were to exceed those guidelines,
to make your offer as attractive and as tempting as possible to the
IRS, ordinarily consider choosing a shorter payment term within your
means.
The greatest drawback of the Offer in Compromise is its high rejection
rate. If your offer were denied, at worse, you would have paid
off 20% or more of your tax debt since all payments and fees are
applied to your outstanding tax liability. Moreover, you have a
right to appeal the rejection. Complete Form 13711 Request for
Appeal of Offer in Compromise within 30 days from the date of the
rejection letter. The most common reasons for rejection is that
the Offer in Compromise does
not meet the one of the reasons acceptible for filing (i.e.,
insufficient assets and income to pay the full amount, or full payment
would cause economic hardship or be unfair and inequitable), or the
offered amount is materially less than the Reasonable
Collection Potential as defined by the IRS. Consequently, it is imperative
that you act completely in good faith in the preparation of your Offer
in Compromise, providing honest, reasonable, accurate, and complete
information, including all required supportive documentation.
Moreover, you must be knowledgeable of IRS standards and norms used in
the evaluation of your financial information: for example, the
inclusion of conditional living expenses as necessary living expenses
would jeopardize any chance of its approval. Finally, you should
possess extensive knowledge as well as experience in the use of all
accounting and tax methodologies required for a precise calculation of
your Reasonable Collection Potential as defined by the IRS.
Which option is best for you? If your tax assessment is below
$10,000, a conventional Installment Agreement is virtually automatic
and hassle free. If you cannot afford to pay your tax assessment,
you have two choices other than filing bankruptcy: Partial
Payment Installment Agreement or the Offer in Compromise. The
Partial Payment Installment Agreement may be easier to obtain; however,
unlike the Offer in Compromise, its terms of payment may be increased
upon review by the IRS if your economic conditions were to
improve. If there were little chance of that occurring, this
might be the plan for you. The Offer in Compromise offers the
comfort of a done deal. Its biggest drawback lies in the
difficulty of its being approved by the IRS. Before you decide on
which option to select to settle your tax liability, you would be well
advised to consult your certified public accountant, and if you should
decide to apply for the Partial Payment Installment Agreement or the
Offer in Compromise, engage him or some other tax professional to
process the application for you.
This article is provided for informational purposes and is
not intended to be construed as legal, accounting, or other
professional advice. For further information, please consult
appropriate professional advice from your attorney and certified public
accountant.
Have a tax or an accounting question? Please feel free to submit
it to William Brighenti,
Certified Public
Accountant, Hartford CPA Accountants. For information
and assistance on
any tax and accounting issue, please visit our website: Accountants CPA
Hartford.
If and only
to the extent that this publication contains contributions from tax
professionals who are subject to the
rules of professional conduct set forth in Circular 230, as promulgated
by the United States Department of the Treasury, the publisher, on
behalf of those
contributors, hereby states that any U.S. federal tax advice that is
contained in such contributions was not intended or written to be used
by any taxpayer for the purpose of avoiding penalties that may be
imposed on the
taxpayer by the Internal Revenue Service, and it cannot be used by any
taxpayer for
such purpose. The above tax advice was
written to support the promotion or marketing of the accounting
practice of the publisher and any transaction described herein. The taxpayer recipients of this offering
memorandum should seek tax advice based on their particular
circumstances from an independent
tax advisor.
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