As the April 15th deadline for filing 2018 income tax returns draws near (April 17 for Maine, Massachusetts and the District of Columbia), practitioners may encounter some clients who don't have cash to pay the balance due on their returns. Clients can avoid penalties but not interest if they can get an extension of time to pay from IRS. But such extensions merely postpone the day of reckoning for the period of the extension (generally, six months). This Practice Alert examines ways in which financially distressed clients may be able to defer paying their income taxes, including installment agreements and offers in compromise with IRS.
Paying in full within 120 days (short-term payment plan). A taxpayer can pay the full amount owed within 120 days, without having to pay any fee, but interest and any applicable penalties continue to accrue until the tax is paid in full. Taxpayers can use an online payment application (IRS website) or call IRS at 800-829-1040.
Installment agreements (long-term payment plan). Taxpayers unable to pay the full amount owed within 120 days may be able to enter into an installment agreement with IRS to pay the tax. Apply using Form 9465, Installment Agreement Request, and Form 433-F, Collection Information Statement. (IRS website)
There are different installment agreement rules for taxpayers who owe $10,000 or less, and for taxpayers who owe $50,000 or less.
Taxpayers are eligible for a guaranteed installment agreement-in other words, IRS is required to enter into the agreement-if the aggregate amount of the liability (determined without regard to interest, penalties, additions to the tax, and additional amounts) is not more than $10,000 and:
-- During the past five tax years, the taxpayer (and spouse if filing a joint return) have timely filed all income tax returns and paid any income tax due, and have not entered into an installment agreement under Code Sec. 6159 for payment of income tax;
-- The taxpayer agrees to pay the full amount owed within three years and to comply with all Code provisions while the agreement is in effect; and
-- The taxpayer is financially unable to pay the liability in full when due and submits information that IRS may require to make this determination (i.e., a financial statement). (Code Sec. 6159(c)(2); Reg. § 301.6159-1(c)(1))
Observation: Despite the last condition, the Internal Revenue Manual (at 220.127.116.11), notes that as a matter of policy, IRS grants guaranteed installment agreements even if the taxpayer can pay his or her liability in full.
There's a streamlined procedure for granting agreements for payment of tax in installments for amounts of $50,000 or less. IRS may accept streamlined installment agreements without requiring financial statements or managerial approval if the taxpayer (1) has an "aggregate unpaid balance of assessments" (tax, assessed penalty and interest) of $50,000 or less, (2) has filed all returns, and (3) will pay up within 72 months, or will pay in full before expiration of the collection statute of limitations, whichever comes first. (IRM 18.104.22.168, IRS website)
The following fees currently apply to installment agreements, except for low-income taxpayers:
(1) $225 for regular installment agreements, where a taxpayer contacts IRS in person, by phone, or by mail and sets up an agreement to make manual payments over a period of time either by any electronic method other than direct debit, such as direct pay or debit/credit card, or by check or money order. The fee is $149 for those who apply online. (Reg. § 300.1(b))
(2) $107 for direct debit installment agreements, where a taxpayer contacts IRS by phone or mail and sets up an agreement to pay in in more than 120 days through direct debit from a bank account. The fee is $31 for those who apply online. (Reg § 300.1(b)(1))
(3) $31 for direct debit online payment agreements, where a taxpayer sets up an installment agreement Online Payment Agreement application on http://www.irs.gov and agrees to make automatic payments over a period of time through a direct debit from a bank account. (Reg. § 300.1(b)(2))
The first two fees above are reduced to $43 for certain qualifying low-income taxpayers. And no user fee is imposed where the low-income taxpayer enters into an installment agreement under which the taxpayer agrees to make electronic debit installment payments through a debit account. For low-income taxpayers who are unable to agree to make such electronic payment, the user fee applies, but will be reimbursed upon completion of the installment agreement.
Offer in compromise (OIC). An OIC is an agreement between a taxpayer and IRS that settles the taxpayer's tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, won't qualify for an OIC in most cases. IRS says that to qualify for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees. (IRS website)
IRS may compromise a tax liability on any of the following grounds:
-- Doubt as to liability. There must be a genuine dispute as to the existence of amount of the correct tax debt.
-- Doubt as to collectibility. Such doubt exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability.
-- To promote effective tax administration. An offer may be accepted on this ground if: (a) collection in full of the tax owed could be achieved, but (b) requiring payment in full would either create an economic hardship, or would be unfair and inequitable because of exceptional circumstances. (Reg. § 301.7122-1(b))
To request an OIC, the taxpayer must apply via Form 656, Offer in Compromise. The taxpayer also must submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L, Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC). The OIC application generally must be accompanied by a $186 application fee. However, the fee is waived for certain low income taxpayers or if the OIC is based on doubt as to liability. (Form 656-B, Notice 2006-68, 2006-31 IRB 105, Sec. 4.03)
Except with regard to offers filed by low-income taxpayers, or based only on doubt as to liability, an OIC must be accompanied by a nonrefundable payment that depends on how the taxpayer is offering to pay.
A taxpayer may propose to pay in a lump sum, i.e., an offer payable in five or fewer installments within five or fewer months after the offer is accepted. If such an offer is made, the taxpayer must include with the Form 656 a payment equal to 20% of the offer amount. This payment is required in addition to the $186 application fee.
A taxpayer may propose to make periodic payments, i.e., six or more monthly installments made within 24 months after the offer is accepted. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form 656. This payment also is required in addition to the $186 application fee. (Code Sec. 7122(c)(1))
Temporarily delay the collection process. One final option, if payment would create financial hardship, is to ask IRS to delay collection until the taxpayer is able to pay. If IRS determines that the taxpayer cannot pay any of his or her tax debt, it may report the taxpayer's account as currently not collectible and temporarily delay collection until the taxpayer's financial condition improves. Interest and penalties continue to accrue until the tax debt is paid in full. (https://www.irs.gov/businesses/small-businesses-self-employed/temporarily-delay-the-collection-process)
The taxpayer may be asked to complete a Collection Information Statement (Form 433-F, Form 433-A or Form 433-B) and provide proof of financial status (this may include information about assets and monthly income and expenses). During a temporary delay, IRS will again review the taxpayer's ability to pay, and may also file a Notice of Federal Tax Lien to protect the government's interest in his assets. Taxpayers requesting a temporary delay of the collection process or to discuss other payment options should contact IRS at 1-800-829-1040 or call the phone number on their bill or notice.