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:
- Your equity is insufficient to allow a creditor to
loan funds.
- E.g., your equity in your house is less than 20%,
a common threshold for lenders.
- Your loan payments would exceed your disposable
income and, consequently, would disqualify you for the loan.
- 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.
- Your spouse, who owes no tax liability, refuses to
pursue the loan as part owner of the asset.
- Your asset is currently unmarketable, due to a
decline in values or its particular nature.
- 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.
- E.g., business assets often generate more revenue
over time than their sale.
- 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.
- I.e., if the sale, loans, or use of those assets
cause you to be unable to pay your reasonable basic living expenses.
- Conditional expenses are excluded.
- Or if you have extraordinary circumstances, such
as
a dire medical condition.
- 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 expenses. Monthly
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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