INSTALLMENT AGREEMENT (IA): PAYING YOUR DUES
Many people assume that a payment plan is the easiest and best way to tackle an outstanding tax liability. Payment plans are common in today’s world, and the IRS heavily encourages entering into an IA in a wide variety of situations. In recent years, the IRS has made IAs even easier, allowing online enrollment, reducing setup fees, and providing myriad payment options. States may encourage payment plans as well.
There are several different types of payment plans, including short-term and long-term payments, Guaranteed, and Streamlined. The IRS even provides a Partial-Payment Installment Agreement, though this unique program should be considered separately, as it has several major advantages outlined here.
With all these options available, and with the IRS seemingly encouraging payment plans at every turn, you may be asking yourself: is an IA right for my situation?
PROS AND CONS
- For those with predictable, steady monthly income, an IA might be the most convenient fit for addressing a tax issue. It is an organized way of attempting to pay the liability in full.
- It is often easier to set up an IA than other programs; it can even be done online or over the phone in some cases.
- IAs may prevent other collection actions, such as bank levies and wage garnishments, from taking place. Going into an IA can also cause the IRS to reassign a Revenue Officer to another case, relieving some pressure.
- According to the FAST Act rules, entering into an IA may remove IRS restrictions for U.S. passport issuance or renewal.
- In specific cases, an IA can prevent the filing of, or prompt the removal of, a tax lien.
- For all IRS payment plans (other than PPIA), there is no potential savings to be had, as the payments are designed to cover the full current balance, plus interest that will continue to accrue. For some, the interest rate is lower than it has been previously, but the IRS will not stop the interest.
- Some taxpayers may not even be afforded the opportunity at an IA. It is not guaranteed that the IRS will agree to accept an IA request. Some states do not even offer payment plans.
- To apply, a taxpayer may have to divulge extensive financial information, which may help the IRS identify alternate collection sources.
- The IRS may change the payment amount as it sees fit, sometimes unexpectedly, if they think the taxpayer can pay more. This can create a ratcheting-up effect that can prevent a taxpayer from improving his or her overall financial health.
- The IRS sometimes loses, forgets to process, and misapplies payments, causing confusion, penalties, and other issues.
- Late filings and new liabilities most often cause an automatic termination of the IA.
- Having a long-term relationship with IRS collections often means more interaction with IRS agents—more calls, more correspondence, potentially more confusion. Attempts to discuss or make changes to an IA can result in hours and hours on hold.
- The IRS can still collect in other ways, including by levying tax refunds as well as enforcing a lien at the sale of property.
- Being in an IA may cause someone to miss out on a better IRS program that would have resolved the issue more quickly, with more certainty, and for less money.
- In the case of divorced or divorcing couples who share a liability, payment plans can create an unfair dynamic, confusion, or even a false sense of security for one or both parties.
A SPOTTY TRACK RECORD
It is because of these pros that many people wind up in IRS payment plans, but it is because of the cons that many payment plans are unsuccessful. Enrollment into these plans is common, but too often the IRS liability is not satisfied using this method. This can be because of taxpayer default, new liabilities, ratcheted-up amounts, or the IRS simply changing its mind about the best way to collect in that particular case.
Payment plans can be beneficial for some, either as a method of satisfying the liability or as part of a larger strategy. Their value as an option should not be overlooked. But before you let someone—be it an IRS agent, inexperienced tax preparer, or tax representative pursuing the path of least resistance—tell you it is your only option, it pays to fully investigate.
To learn more about payment plans and all the other IRS options, contact WatchGuard today.