Thousands of taxpayers fall short of their federal and state tax obligations each year. And although the IRS has a reputation as a hard headed collection agency there are still options available to those that owe. However, the options become more and more limited if taxpayers ignore notices and wait too long. In this blog, I will discuss how to calculate a minimum monthly payment, based on IRS guidelines and personal experience, which should help taxpayers avoid bigger issues down the road.
What is Required for an Installment Agreement?
IRS installment agreements or payment plans are generally available to most taxpayers. However, there are requirements that must be satisfied before the IRS will agree to accept payments over several months or years, which are listed here.
1. Tax returns filed
In order to qualify for an installment agreement all required tax returns must be filed. There is some debate (in the tax community) about what “all” actually means. Generally speaking, the IRS looks at the past 6 years, which means if a taxpayer has filed returns for the past six tax years they may qualify for a payment plan.
However, if they have unfiled returns dating back further than six years, the taxpayer is still legally required to file them (assuming they have a filing requirement in each year). Determining when and if returns should be filed in previous years should be left up to a competent tax professional. This will help mitigate exposure to tax crimes and other unforeseen outcomes.
2. Current taxes paid
Before the IRS will accept a payment plan, they will want to ensure another tax liability is not going to occur next year. In order to do so, the IRS will typically verify whether current tax payments have been made (depending on the type of installment agreement you qualify for). Even if the IRS does not verify current taxes, taxpayers should. After all, if a taxpayer owes an additional balance in the subsequent year, the payment arrangement will default putting them even further behind.
How do I find my current balance owed?
The next step toward being able to calculate your minimum IRS payment amount is determining how much you owe the IRS. For taxpayers that only owe for one tax year this is easy, simply reference the most recent IRS tax bill. For others, it can be time consuming to uncover the total amount owed. However, recent strides have been made (more like baby steps) that streamline the process of gathering tax information with the IRS.
The IRS has an online “get my transcripts” portal that allows taxpayers to download the last ten years of tax transcripts. However, there are strict “identity verification” rules in place that may make it difficult to access. Also, the system is constantly down for “maintenance.” Nevertheless, this option can be the most efficient way to obtain IRS tax balances.
Another common way to find a tax balance is to call the IRS. Now, this can be an unpleasant experience unless calling
Side note: Imagine owning a multi-billion dollar business and putting customers on hold for two or three hours before allowing them to at the right time (arguably there isn’t a right time) because the hold times are outrageous.
pay. I suspect this business would fail pretty quickly.
Nevertheless, if you are willing and have the time to wait, this is where you can find the IRS phone numbers.
Taxpayers may be able to schedule an appointment at a Taxpayer Assistance Center (“TAC”). At the appointment, the IRS employee can generally provide account transcripts, tax return transcripts, and basic tax information. Once the tax balance is obtained the next step is to analyze which payment plans are available.
How to calculate the minimum monthly payment (individuals only) based on IRS thresholds
$10,000, $25,000, and $50,000 or less owed
For the sake of brevity, and general lack of difference, the above thresholds are grouped together for this blog, particularly because the focus is on finding the minimum monthly payment. Essentially, if you owe $50,000 or less, you can qualify for what is called a streamlined installment agreement. This means, if the Collection Statute Expiration Date (“CSED”) is far enough out, taxpayers can simply divide their balance due by 72 months to determine a monthly payment amount.
For example: Bob owes $27,000 to the IRS. The balance originated one year ago. Using the calculation above Bob’s minimum monthly payment is $375.
If you owe for multiple years and are unsure what your CSED is or if they have been affected by tolling events, check out our blog on how to calculate your CSED, which includes a free download. Additionally, if you cannot afford the minimum monthly payment, check out our blog on what you need to know about the IRS Offer in Compromise.
Between $50,000 and $100,000
A few years ago, the IRS piloted an “Extended Streamlined Installment Agreement” which allowed certain taxpayers owing over $50,000 but no more than $100,000 to establish a direct debit installment agreement without having to provide financials. The program was supposed to end in September of 2018. However, the IRS still accepts these types of payment plans, despite the lack of public notice. In order to calculate the minimum monthly payment under this program, taxpayers need to divide their balance by 84 months instead of 72 months. This calculation also requires the CSED to be more than 84 months out. Essentially, this allows taxpayers with higher balances to extend the repayment period and reduce the monthly payment. However, for those owing more than $100,000 the calculation becomes more complicated.
For taxpayers owing over $100,000 the IRS is going to require full financial disclosure. This means, disclosing assets (houses, vehicles, bank accounts, etc.), income (wages, business income, rental income, etc.), and monthly expenses. The IRS has a financial disclosure form that is commonly used, which is the 433-A. Depending on a taxpayer’s ability to pay (based on the financial disclosure) the IRS may ask for a larger payment than the minimum payment allowed under the streamlined installment agreements. If there is any uncertainty in how to properly disclose financials to the IRS, taxpayers should seek counsel from an experienced tax professional. There are a myriad of possible hiccups that could arise otherwise.
What if you cannot pay?
Regardless of the thresholds above, if a taxpayer is unable to make the minimum payment it is necessary to explore alternative solutions. For some, this may mean an offer in compromise or hardship status. For others, spending habits may need to be adjusted and certain expenses eliminated to make room for tax payments. Either way, it is always worth it to speak to a tax professional for more guidance.
Are you locked into the payment plan?
This is a fairly common question and the answer is, no. When a taxpayer’s financial situation changes and they are no longer able to make payments to the IRS, there are options available. Options include renegotiating the payment amount, proceeding with an offer in compromise, or getting into a temporary hardship status. The answer may not be one-size-fits-all but there is still an answer.
Calculating the minimum monthly payment for an IRS payment plan is an important step in any case. It provides a benchmark, which can help determine if other types of solutions are available. Additionally, it gives taxpayers insight into how they may be able to keep the IRS off their back. However, for taxpayers that feel overwhelmed or uncertain about their options it is a great idea to seek out legal representation.
For a free phone consultation regarding a tax issue you may be dealing with call us at 760-932-0042.