Understanding the Partial Payment IRS Installment Agreement
In some cases, it’s difficult to pay the tax debt in full. The Internal Revenue Service (IRS) can permit you to enter into what is known as a “Partial Payment IRS Installment Agreement,” abbreviated as PPIA. This agreement divides your tax debt into equal, manageable monthly payments.
The partial payment plan differs from other IRS installment agreements in these ways:
- With PPIA, you’ll not have to pay your entire tax debt. But, unlike other installment agreement methods, PPIA requires lots of financial documentation to prove to the IRS you’re unable to pay your full tax debt
- Comes with a 2-year review. Contrary to other IRS installment agreements, the IRS may reconsider the terms of your PPIA after the 2-year review of your financial situation
- The application process is longer. You can process a streamlined installment agreement with a few clicks online. In the case of partial payment, it may take up to a month to complete.
When Should You Consider a Partial Pay IRS Installment Agreement?
It makes sense to apply for a PPIA if:
- You owe a large debt, and you don’t have enough assets to liquidate (there are exceptions)
- Your monthly disposable income doesn’t qualify for a regular IRS installment agreement
- The IRS has recently rejected an Offer in Compromise
- IRS believes you’re not going to earn money to cover your debt in the coming years
Partial Pay Vs. Offer in Compromise (OIC)
The most appealing feature of Partial Pay is it’s easier to obtain than an Offer in Compromise.
Other reasons why you should choose PPIA over OIC are:
- Applying for a PPIA is easier. PPIA takes 30 days or less to process. An Offer in Compromise, on the other hand, takes 5 to 9 months to complete. That is, it takes 3 to 6 months for the IRS to determine if you qualify and 2 to 3 months for an IRS lawyer to review it and accept the deal.
- There’s no 5-year probation. Unlike the OIC, you don’t run the risk of going back to square one (owing the entire tax debt amount) due to late filing of tax returns or missing payments.
- Less hassle than the OIC. A Partial Installment Plan is easier and faster to get than OIC, less paperwork is required compared to OIC.
- (Often) Lower monthly payments. Although the IRS can increase the monthly payments on a PPIA, they’re lower monthly payments compared to the OIC. Also, there is no lump sum payment.
- Extension of IRS statute of limitations on collection (SOL): In the case of OIC, the IRS may extend the amount of time in which they can legally collect your tax debt.
Does this mean you shouldn’t apply for an Offer in Compromise?
Sometimes an Offer in Compromise could be better than a PPIA. The most significant advantage of OIC is finality. If you qualify for an OIC, the total amount paid could be less, regardless of the amount you make after the deal.
The most notable downside of PPIA is the lack of closure. Your taxpayer’s financial situation is reviewed every two years. Meaning, if your financial situation improves, the IRS can increase the monthly payments and sale of assets.
Therefore, the IRS is willing to agree to a small payment today in hopes of getting a larger payout in the future.
The Collection Statute Expiration Date (CSED)
The CSED (usually ten years from the time the taxes were accessed) is the period within which the IRS is required to collect a tax debt.
You can end up paying less than what you owe if the CSED comes earlier. The remaining debt becomes “uncollectable.”
You should know, in certain situations, the IRS may automatically extend the CSED. Even after the expiration of the SOL, the tax debt may continue affecting your credit report for a more extended period.
What You Need to Qualify for a Partial Pay Installment Agreement from the IRS
To qualify for PPIA, you need to meet these specific requirements according to the Internal Revenue Manual:
- Can pay the IRS, but you cannot pay in full
- Filed and paid tax returns for previous years
- Owe over $10,000 in tax debts, interests, and penalties
- Have not filed for bankruptcy
- Have not had an Offer in Compromise accepted
- Completed Form 433 (Collection Information Statement)
- Completed Form 9645 (IRS Installment Agreement Request) or applied for Installment Agreement online
- Have no marketable assets or can’t access the equity in assets because:
- The sale of the assets or loan on those assets would create a financial hardship on you
- Your spouse owes no tax liability and does not want their part of the assets sold
- The asset is not enough to allow a creditor to loan funds
- Selling assets would not cover the tax debt
How to Request the Partial Payment Installment Agreement with the IRS
While it’s easier to request a PPIA with the IRS, it still needs some attention to detail. Here are steps involved when requesting a PPIA:
- Print and complete Form 433-A if you’re self-employed or a wage earner, and Form 433-B if you’re a business.
With these details, the IRS will determine if an individual or business qualifies for a PPIA. The amount of installment varies according to the income, expenses, and the amount of taxes owed.
- Fill out Form 9645. It helps you tell the IRS how much you can pay. With the help of a tax expert, you can propose a reasonable and acceptable monthly payment to the IRS. Remember, it’s a negotiation.
- Estimate how much you can pay every month in Form 433. The IRS expects maximum monthly payments, but it doesn’t have to be too high.
It’s worth noting, if you miss a payment, you pay a reinstatement fee of $89, or you lose your agreement altogether.
- Send Form 9465, Form 433, and include a copy of your recent tax filing to the IRS. If you use the e-file, you don’t have to include a copy of your return.
To be on the safe side, make your first payment and the fee for the installments plan (include it in your application form). Usually, the fee is $225. If you choose the direct debit option, you’ll pay $107
- IRS will respond. Once you’ve submitted the documents, wait for a period not longer than 30 days for a response from the IRS.
- If you don’t get a response within a month, it’s wise to continue making payments and contact the IRS directly.
The Take-Home Point
If you’ve received an IRS final notice or a threatening letter, don’t ignore it. You may qualify for a Partial Payment Installment Agreement, and you’ll be able to settle your debt for less than you owe.
At True Resolve Tax, we carefully consider all the IRS installment agreement methods to help you get the IRS off your back for good. As Enrolled Agents, we are licensed to guide you through the complex process of requesting the PPIA. Contact us to better understand your tax problems and to choose the best IRS installment agreement option.