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:  info@cpa-connecticut.com
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How the IRS Evaluates Partial Payment Installment Agreement Applications
Is a Partial Payment Installment Agreement a Viable Tax Payment Option for You?

If you owe taxes, penalties, and interest of more than $10,000 and cannot pay them in full, you might consider requesting a Partial Payment Installment Agreement (PPIA) with the Internal Revenue Service.  For your application to be considered by the IRS, you will need to file Form 9465 Installment Agreement Request, Form 433-A or Form 433-B The Collection Information Statement (for an individual and a business, respectively), a letter requesting a Partial Payment Installment Agreement, and three months of documentation substantiating all income and expenses reported on Form 433-A or Form 433-B.  Ordinarily under a Partial Payment Installment Agreement, you would be expected to pay the available equity in your assets as well as your disposable income over the remaining statutory period of collection of your tax assessment (ten years less the intervening period since the date of assessment) in order to satisfy your tax liability.  Your application for a Partial Payment Installment Agreement may be approved even if you have no assets or equity in assets.  Furthermore, it may be granted even if you have equity in assets but do not sell or cannot borrow against those assets for the following reasons:
  1. Your equity is insufficient to allow a creditor to loan funds.
    1. E.g., your equity in your house is less than 20%, a common threshold for lenders.
  2. Your loan payments would exceed your disposable income and, consequently, would disqualify you for the loan.
    1. The IRS requires you to make a good faith attempt to obtain a loan, using normal business standards when applying for an equity collateralized loan; consequently, retain copies of all loan application documents in order to substantiate a bonafide attempt to secure a loan.
  3. Your spouse, who owes no tax liability, refuses to pursue the loan as part owner of the asset.
  4. Your asset is currently unmarketable, due to a decline in values or its particular nature.
  5. Your asset generates income required to finance the Partial Payment Installment Agreement, and that income stream's present value exceeds your yield on its sale.
    1. E.g., business assets often generate more revenue over time than their sale.
  6. The sale of the assets, loans on those assets, or the use of those assets to pay your taxes would create an economic hardship on you.
    1. I.e., if the sale, loans, or use of those assets cause you to be unable to pay your reasonable basic living expenses.
      1. Conditional expenses are excluded.
    2. Or if you have extraordinary circumstances, such as a dire medical condition.
    3. E.g., if you are elderly, in poor health, subsiding solely on social security, and your only asset is your house, and its sale, seizure, etc., would make you unable to find suitable replacement housing or meet necessary living expenses.
As in an Offer in Compromise, the Internal Revenue Service will evaluate your Reasonable Collection Potential, which, in essence, is what it reasonably and potentially could expect to collect from you from the attachment of your wages and income as well as from the seizure of your assets in order to settle the tax assessment against you.  It would equal the realizable value of all of your assets (assuming none of the circumstances itemized above would exclude the equity in your assets from consideration) after deducting all loan balances remaining on those assets plus your monthly disposal income times the number of months remaining in the statutory collection period of your tax assessment.  Disposal income equals your monthly income less necessary living expensesMonthly income includes monthly wages, interest, dividends, pensions, social security, child support and alimony, business profits, rental income, and Schedules K-1 distributions.  Necessary living expenses include expenditures for food, clothing, housekeeping and personal care items, rent or mortgage, property taxes, residential and life insurance, maintenance, dues, fees, utilities, vehicle leases or loans and operating costs, mass transit fares, medical expenses, court order payments, child/dependent care, taxes, secured debts. All of the above information to allow the determination of your Reasonable Collection Potential is required to be entered in Form 433-A The Collection Information Statement along with three months of supporting documentation in order for verification by the Internal Revenue Service.

Once you have derived your Reasonable Collection Potential (allowing for unmarketable and noncollateral assets, if any) in accordance with the instructions presented above, compare it to your outstanding tax liability.  If your Reasonable Collection Potential for any reason exceeds your tax liability, either you made an error or you may not be eligible for a Partial Payment Installment Agreement, since a Reasonable Collection Potential in excess of the outstanding tax liability ordinarily indicates the ability to pay the tax assessment.  If such is the case, consider other alternatives, such as a regular Installment Agreement.  If your tax liability exceeds your Reasonable Collection Potential, simply divide your calculated Reasonable Collection Potential by the number of months remaining in the statutory collection period of your tax assessment (120 months less the number of months since the date of your tax assessment) to calculate your proposed monthly installment payment.  Enter that amount on line 9 of Form 9465.

If you dare to undertake the procedures involved in the preparation of an application for a Partial Payment Installment Agreement as presented in this article and/or elsewhere without professional assistance, inevitably you will encounter numerous questions concerning terminology and appropriate valuations.   These concepts and computations of fair market values, realizable values, monthly income, necessary living expenses, Reasonable Collection Potential, etc., have precise, technical meanings.  Moreover, they require detailed, supportive, and reconciled substantiation in order for your proposal to be accepted as accurate and credible by the ever-watchful eyes of an Internal Revenue Service examiner.  In addition, you may be unfamiliar with certain computations and methods commonly used in accounting and taxation.  Consequently, unless you possess a solid background in accounting and taxation, you are strongly advised to seek the assistance of a tax professional in order to ensure the minimization of your installment payments and the risk of your application being rejected.

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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