Accountants CPA Hartford
William Brighenti, Certified Public Accountant
Certified Business Valuation Analyst
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Office Address:  46 Mildrum Road, Berlin, Connecticut 06037-2423      Phone:  (860) 828-3269      Email:
New Britain
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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