Installment Agreement and Other Options

 

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Installment Agreement and Other Options

6.  EXTENSIONS OF TIME TO PAY

Granting of Extensions

6.10    Extensions of time to pay provide a specific date by which full payment of taxes is expected. Extensions may be granted for up to120 days for all taxpayers.  Extensions of time to pay are not installment agreements and do not provide for periodic payments. No forms are required. Form 433‑D is not be used.

  • The IRS will not file a lien.
  • The IRS will not issue Notices of Intent to Levy, Notice of Hearing (LT 11 or Letter 1058DO) nor levies during granted extension periods, unless collection is in jeopardy or at risk.

NOTE:  This applies even if taxpayers are given deadlines within the extension period and these deadlines are not met.

EXAMPLE: A revenue officer gives the taxpayer a 60 day extension of time to pay and 30 days to have all federal tax deposits current. The taxpayer has not made all the current tax deposits by the 31st day. Enforcement is not appropriate until after 60 days pass, unless collection is in jeopardy or at risk.  [IRM 5.14.1.4]

Guaranteed Availability of Installment Agreements

6.20    The Internal Revenue Service Restructuring and Reform Act of 1998 requires the Secretary to grant an installment agreement, at the taxpayer’s option, if:

  • the liability is $10,000, or less (excluding penalties and interest);
  • within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision; [Act § 3467; IRC § 6159)

<$25,000 Liabilities

6.30    The IRS has chosen to create a more liberal system that allows installment agreements of up to 5 years for balances of less than $25,000.

6.40    The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:

• Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.

• The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.

• The IRS will also withdraw liens on existing Direct Debit Installment Agreements upon taxpayer request.

Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored. Taxpayers can use the Online Payment Agreement application on IRS.gov to set-up with Direct Debit Installment Agreements.

Relaxed Rules For Installment Agreements For Small Businesses

6.50    The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate. Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.

The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.

 

7.  COLLECTION INFORMATION STATEMENTS

CIS's

7.10    For larger dollar liabilities (income tax liabilities in excess of $25,000) the starting point for analysis is the Service's Collection Information Statement (CIS). The preparation of this document, more often than not, determines which way the Service will proceed with its collection activity. Copies of the CIS's currently used by the Service for individuals and for businesses are provided in the appendices at the end of this chapter. The IRS will not give extended payment plans on unpaid tax liabilities unless a CIS has been submitted by the taxpayer.

Types of Collection Information Statements

7.20    The IRS utilizes three basic types of Collection Information Statements (CIS's).  The Form 433-A and Form 433-F are secured from individuals. The Form 433-B is secured from businesses. If the taxpayer is self employed the service will normally require both a 433-A and 433-B.

Amount of Payments

7.30    Page 4 is a monthly income and expense analysis. The IRS will not grant a Payment Plan for less than the amount shown as the net available income. That figure represents the difference between income and claimed expenses. Unfortunately, as one will note, page 4 contains a column to the right of the claimed column for Allowed Expenses. The IRS utilizes information from the Bureau of Labor Statistics to establish allowable expenses for certain items like transportation, food, clothing and housing.

Form 433-B

7.40    The IRS utilizes Form 433-B to gather information from businesses. Page 2, block 15, requests that your client disclose each of its accounts receivable. The author believes that such a disclosure is foolhardy at the initial negotiating session. If disclosure is made and the negotiations fail, the IRS may levy your client's accounts receivable, thereby destroying its business.

Substantial Net Worth

7.50  The IRS will seldom grant extended payment plans to a business with a substantial net worth indicated on page 3 of Form 433-B.

New more Onerous Allowable Expense Standards

7.60    In October, 2007, and again in February, 2009, the IRS revised its allowable expense standards to make them more onerous. Instead of establishing national standards which recognized the need for higher living expense for higher income families it began a system of one size fits all. It continued to fail to recognize the varying cost of living in different regions and communities and eliminated differentials forHawaii andAlaska. It also added a new category of expenses for out-of-pocket health care expenses.

Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income.  The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live.

There are three types of necessary expenses:

 

  • National Standards
  • Local Standards
  • Other Expenses

 

National Standards: These establish standards for Food, Clothing and Other Items and Out-of-Pocket Health Care Expenses.  Food, Clothing and Other Items - These establish reasonable amounts for five necessary expenses: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. These standards come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey. Taxpayers are allowed the total National Standards amount monthly for their family size, without questioning the amounts they actually spend.

 

Note:  All five standards are included in one total national standard expense.

 

Out-of-Pocket Health Care Expenses - These establish reasonable amounts for out-of-pocket health care costs including medical services, prescription drugs, and medical supplies (e.g., eyeglasses, contact lenses). The table for health care allowances is based on Medical Expenditure Panel Survey data. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend.

 

Local Standards: These establish standards for two necessary expenses: housing and utilities and transportation. Taxpayers will normally be allowed the local standard or the amount actually paid, whichever is less.

 

  1. Housing and Utilities - Standards are established for each county within a state and are derived from Census and BLS data. The standard for a particular county and family size includes both housing and utilities allowed for a taxpayer’s primary place of residence. Housing and Utilities standards include mortgage (including interest) or rent, property taxes, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, telephone and cell phone.

 

  1. Transportation - The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership costs, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has a car, but no car payment only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. [Unless the taxpayer owns a vehicle that is more than 6 years old or has more than 75,000 miles, in which case an ownership cost of $200 is allowed in lieu of a loan/lease payment]  There is a single nationwide allowance for public transportation for taxpayers with no vehicle. [If the taxpayer owns a vehicle and uses public transportation, actual expenses incurred may be allowed if necessary for the health and welfare of the individual or family, or for the production of income.]

 

Note: Vehicle Operating standards are based on actual consumer expenditure data obtained from the United States Bureau of Labor Statistics (BLS) which are adjusted with Consumer Price Indexes (CPI) to allow for projected increases throughout the year. (These CPI are used to adjust all ALE standards.) Vehicle operating standards are not based on average commuting distances. Fuel costs, which are part of Vehicle Operating Costs, have a separate fuel price adjustment which is based on Energy Information Administration (EIA) data which allows for projected fuel price increases.

 

  1. National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.

 

Note:  If the taxpayer or the Service believes reviewing the last three months of expenses are not reflective of the actual yearly expenditures additional months, up to one year, may be reviewed.

 

  1. Other – Other expenses may be allowed if they meet the necessary expense test. The amount allowed must be reasonable considering the taxpayer’s individual facts and circumstances.

 

  1. Conditional expenses. These expenses do not meet the necessary expense test. However, they are allowable if the tax liability, including projected accruals, can be fully paid within five years.

 

  1. Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as exemptions on the taxpayer’s current year income tax return. Verify that exemptions claimed on the taxpayer’s income tax return meet the dependency requirements of the IRC. There may be reasonable exceptions. Fully document the reasons for any exceptions. For example, foster children or children for whom adoption is pending.

 

  1. A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets or reduce excessive necessary expenses.

 

  1. Revenue officers should consider the length of loan payments. Although it may be appropriate to allow for payments made on a secured debt that meets the necessary expense test, if the debt will be fully repaid in one year only allow those payments for one year.

 

Five Year Test

7.70    The amount allowed for necessary or conditional expenses depends on the taxpayer’s ability to full pay the liability within five years and on the taxpayer’s individual facts and circumstances. If the liability can be paid within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense. (See IRM 5.14.1, Installment Agreements) [IRM 5.15.1.10]

 

 

Other Expenses

7.80    The IRM provides the following chart regarding other expenses:

Expense Item

Expense is Necessary:

Notes/Tips

Accounting and legal fees.

If representation before the Service is needed or meets the necessary expense test. Amount must be reasonable.

Disallow accounting or legal fees that are not related to remaining current, solving the current liability or do not meet the necessary expense test.

Charitable contributions (Donations to tax exempt organizations)

If it is a condition of employment or meets the necessary expense test. Example: A minister is required to tithe according to his employment contract.

Disallow any other charitable contributions that are not considered necessary. Example: Review the employment contract.

Child Care (Baby-sitting, day care, nursery and preschool)

If it meets the necessary expense test. Only reasonable amounts are allowed.

Cost of child care can vary greatly. Do not allow unusually large child care expense if more reasonable alternatives are available. Consider the age of the child and if both parents work.

Court-Ordered Payments(Alimony, child support, including orders made by the state, and other court ordered payments)

If alimony and child support payments are court ordered, reasonable in amount, and being paid, they are allowable. If payments are not being made, do not allow the expense unless the non-payment was due to temporary job loss or illness.

Review the court order. Payments that are included in a state court order are not necessarily allowable (such as a child’s college tuition that would not otherwise be allowable as a necessary expense). See Exhibit 5.15.1-1, Question 16.

Dependent Care (For the care of the elderly, invalid, or handicapped.)

If there is no alternative to the taxpayer paying the expense.

 

Education

If it is required for a physically or mentally challenged child and no public education providing similar services is available. Education expenses are also allowed for the taxpayer if required as a condition of employment.

Example: An attorney must take so many education credits each year or they will not be accredited and could eventually lose their license to practice before the State Bar. A teacher could lose their position or in some states their pay is commensurate with their education credits.

Involuntary Deductions

If it is a requirement of the job; e.g., union dues, uniforms, work shoes.

To determine monthly expenses, the total out of pocket expenses would be divided by 12.

Life Insurance

If it is a term policy on the life of the taxpayer only.

If there are whole life policies, these should be reviewed as an asset for borrowing against or liquidating. Life insurance used as an investment is not a necessary expense.

Secured or legally perfected debts

If it meets the necessary expense test.

Taxpayer must substantiate that the payments are being made.

Unsecured Debts

If the taxpayer substantiates and justifies the expense, the minimum payment may be allowed. The necessary expense test of health and welfare and/or production of income must be met. Except for payments required for the production of income, payments on unsecured debts will not be allowed if the tax liability, including projected accruals, can be paid in full within 90 days.

Examples of unsecured debts which may be necessary expenses include: Payments required for the production of income such as payments to suppliers and payments on lines of credit needed for business and payment of debts incurred in order to pay a federal tax liability.

Taxes

If it is for current federal, FICA, Medicare, state and local taxes.

Current taxes are allowed regardless of whether the taxpayer made them in the past or not. Delinquent state and local taxes are allowable depending on the priority of the FTL and/or Service agreement with the state and local taxing agencies.

Optional Telephones and Telephone Services (Pager, Call waiting, caller identification or long distance)

If it meets the necessary expense test.

 

Student Loans

If it is secured by the federal government and only for the taxpayer’s education.

Taxpayer must substantiate that the payments are being made.

Internet Provider/E-mail

If it meets the necessary expense test – generally for production of income.

 

Repayment of loans made for payment of Federal Taxes

If the loan is guaranteed by the taxpayer’s assets when those assets are of reasonable value and are necessary to provide for the health and welfare of the family.

 

 

8.  VARIATIONS ON INSTALLMENT AGREEMENTS

Payroll Deduction

8.10    IRS employees are allowed by their Internal Revenue Manual to offer a payroll deduction option to a taxpayer being granted an installment agreement.

Withholding by Employer

8.20    The Service’s manual provides for installment payments to be sent directly to the Service from the taxpayer’s employer if and when the employer agrees.

Bargaining Tactics

8.30    For a client who has defaulted on previous payment agreements, and/or who has suffered a Notice of Levy on his or her wages, the Payroll Deduction Agreement gives the IRS the assurances it may need to grant or reinstate a payment plan. The practitioner should be aware of this alternative and, if necessary, be the one to propose such a plan to the Service when encountering a hard-nosed employee who refuses to release a Notice of Levy because of the taxpayer’s prior track record.

Direct Debit Installment Agreements

8.40  IRS employees may also grant Direct Debit Installment Agreements (DDIA’s) where payments are automatically debited from a taxpayer’s bank account for the agreed upon amount. The bank may transfer the payment via electronic funds transfer to the IRS. The taxpayer will be required to sign a Direct Debit Installment Agreement, Form 433-G. There will be a default if the client has insufficient funds in the account on the debit date. The author utilizes this method only when the IRS refuses to grant an agreement without a DDIA.

Collection Appeals Program

8.50    Along with a rejection of an installment agreement request, taxpayers must be immediately notified of their appeal rights. Taxpayers, whose requests are rejected, as well as those whose agreements are in default or have been terminated, must follow the procedures in IRM 5.1.9.4.1 “Request for CAP Appeal.” Taxpayers may appeal rejections, defaults, proposed terminations, and terminations within 30 days. The time frame to request these types of appeals cannot be extended. [IRM 5.14.9.4]

Levy Restrictions and Installment Agreements

8.60    No levy may be made on taxpayer accounts:

  • while requests for installment agreements are pending;
  • while installment agreements are in effect;
  • for 30 days after requests for agreements are rejected;
  • for 30 days after agreements are terminated; and
  • while an appeal of a default, termination or rejection is pending or unresolved.

 

Levies may be served during the periods described above:

  • if taxpayers waive the restriction in writing;
  • if collection is in jeopardy (i.e. if a condition allowing a jeopardy assessment exists.) Unless notice of the right to appeal was previously provided, taxpayers must be notified of their appeal rights after jeopardy levies. (See Policy Statement P-4-88. See also IRM 5.11.1.3.9 and Exhibit 1-1 of IRM 5.11 for approval levels for jeopardy levies. Approval level depends on whether notices described in IRM 5.11.1.2.1 were sent, and if required waiting periods have passed);
  • for bal due accounts not included in current installment agreements. (The new tax periods are not affected by the appeal period for defaulted installment agreements.)[IRM 5.14.1.5 ]

 

Partial Payment Installment Agreements

8.70    The IRS publishes the following guidance for collection employees regarding Partial Payment Installment Agreements:

  1. No Asset/No Equity Cases: A PPIA may be granted if a taxpayer has no assets or equity in assets; or has liquidated available assets to make a partial tax payment.

 

  1. Asset Cases: A PPIA may be granted if a taxpayer does not sell or cannot borrow against assets with equity because:

 

  1. the assets have minimal equity or the equity is insufficient to allow a creditor to loan funds;

 

Example: some lenders require equity of greater than 20% of property value in order to grant the loan.

 

  1. the taxpayer is unable to utilize equity;

 

Example: the property is held as a tenancy by the entirety when only one spouse owes the tax and the non-liable spouse declines to go along with the attempt to borrow, and the property does not appear to have been transferred into the tenancy to avoid the tax collection.

 

  1. the asset has some value but the taxpayer is unable to sell the asset because it is currently unmarketable;

 

Example: the business taxpayer owns a vacant lot in a high-value area, but the lot cannot be sold until it meets certain environmental regulations

 

  1. the asset is necessary to generate income for the PPIA and the government will receive more from the future income generated by the asset than from the sale of the asset;

 

  1. it would impose an economic hardship on the taxpayer to sell property, borrow on equity in property, or use a liquid asset to pay the taxes. Economic hardship is defined in 26 C.F.R. 301.6343-1 as not meeting reasonable basic living expenses.

 

Example: the taxpayer is on a fixed income, such as social security, and has the ability to make small monthly payments. The only other asset is the taxpayer’s primary residence and there is equity in the property. The revenue officer does a risk analysis and determines that seizing the property would cause an economic hardship because the taxpayer cannot find suitable replacement housing and meet necessary living expenses if the property would be seized.

 

  1. The taxpayer’s loan payment would exceed the taxpayer’s disposable income and they would not qualify for a loan.

 

  1. The taxpayer will normally be required to make a good faith attempt to utilize equity before the Service will approve a PPIA. This includes applying normal business standards when applying for loans using equity as collateral. Taxpayers will also be required to submit copies of all documents that are used in the loan application process.

 

  1. If the taxpayer does not comply with the requirement of making a good faith attempt to use equity in assets or is not willing to make monthly payments consistent with ability to pay, the taxpayer will be considered a “won’t pay” and seizure/levy action may be appropriate. If enforcement action is appropriate, a PPIA will not be granted. If the taxpayer is in pending IA status, follow rejection procedures in sections 5.14.1.3 and 5.14.9.3. The case history should be documented with a statement as to why the PPIA was not granted.

 

  1. If the taxpayer is unable to secure a loan or liquidate an asset following a good faith attempt to do so, the revenue officer will need to make a seizure/levy determination (See IRM 5.10.1.3).

 

  1. If it has been determined that enforcement action is not appropriate, a PPIA can be granted. The case history should be documented as follows: “Seizure (or levy) of (name of asset) has been considered, but it is not the appropriate resolution because (provide reason)” .

 

Collection Statute Expiration Date

8.80    Consideration will be given to extending the Collection Statute Expiration Date.  By policy, the IRS will now only extend the CSED if an asset will come into the possession of the taxpayer after the expiration of the CSED and liquidation of that asset offers the best case resolution. [IRM 5.14.2.1.3]

9.  RECENT RULES CHANGES

9.10    New Collection Procedures Announced

On February 24, 2011 IRS announced new policies and programs to help taxpayers pay back taxes and avoid tax liens. IRS’s stated goal is to help individuals and small businesses meet their tax obligations, without adding an unnecessary burden to taxpayers.

Over the past several years as taxpayers have endured the Great Recession the IRS has escalated the number of federal tax liens filed against delinquent taxpayers. The IRS aggressive use of liens has been criticized by the National Taxpayer Advocate in her annual report to congress and the IRS Advisory Council in its annual report to the Commissioner.

9.15    More Flexible Attitude

The newly announced policy represents a new, more flexible attitude by the IRS. The IRS making important changes to its lien filing practices that will lessen the negative impact on taxpayers. The changes include:

  • Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
  • Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
  • Withdrawing liens in most cases where a taxpayer enters into a Direct Debit installment Agreement.
  • Creating easier access to Installment Agreements for more struggling small businesses.
  • Expanding a streamlined Offer in Compromise program to cover more taxpayers.

9.20    Higher Lien Thresholds

The IRS stated that it will significantly increase the dollar thresholds when liens are generally filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances. The IRS did not publicly disclose the new lien thresholds. The IRS plans to review the results and impact of the lien threshold change in about a year.

9.25    Easier Lien Withdrawals

The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals. Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government. In order to speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.

9.30    Direct Debit Installment Agreements and Liens

The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:

 

  • Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.
  • The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.
  • The IRS will also withdraw liens on existing Direct Debit Installment Agreements upon taxpayer request.

 

Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored. Taxpayers can use the Online Payment Agreement application on IRS.gov to set-up with Direct Debit Installment Agreements.

9.35    Taxpayer Beware

A direct debit is not without risks to the taxpayer. If the IRS should make an error in placing a direct debit the taxpayer will find that it is almost impossible solve problems via the IRS 800 numbers. The National Taxpayer Advocate has noted in her last several reports to Congress that many taxpayers are placed on hold for interminable times and many calls are dropped. Even those lucky enough to navigate through IRS voicemail Hell find that those answering the phone are less than helpful. Therefore even with the new relaxed rules for liens for those accepting a direct debit alternative one must balance that benefit with the potential that an IRS error may prove almost impossible to resolve. The only thing that could be worse than the current IRS help lines would be if it contracted its phone services toIndialike many large American corporations.

9.40    Relaxed Rules For Installment Agreements For Small Businesses

The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate. Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.

The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.

9.45    Offers in Compromise

The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.

OICs are subject to acceptance based on legal requirements. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

9.50    Past Promises

In 2009, the IRS announced lien relief for people trying to refinance or sell a home. In 2010, the IRS announced new flexibility for taxpayers facing payment or collection problems. Unfortunately those announced changes did not result in a relaxation of IRS enforced collection efforts. During both 2009 and 2010 the IRS increased the number of liens and levies it served against taxpayers.

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Portions Reprinted from

“REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS”

AND

REPRESENTATION BEFORE THE COLLECTION DIVISION OF
THE IRS

by

Robert E. McKenzie

WITH PERMISSION FROM

THOMSON WEST
Rochester, NY

All Rights Reserved

COPYRIGHT 2011

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