IRS tests relaxing of installment agreement rules
People who owe between $50,000 and $100,000 will find it easier to get into a payment plan
Editor’s note: This article has been reviewed for changes following the passage of the 2017 Tax Cuts and Jobs Act. The information provided in this article was not affected by the 2017 TCJA.
A new IRS test program doubles the dollar limit for people to more easily set up payment plans for their tax debt.
The one-year test program, scheduled to run through Sept. 30, 2017 and extended to September 30, 2018, will allow taxpayers who owe between $50,000 and $100,000 in assessed back taxes, penalties, and interest to more easily set up an installment agreement with a simple phone call or form request.
Before this new test program, taxpayers who owed more than $50,000 had to set up more complex payment plans that require financial disclosures and lien filings.
With this test of expedited payment-plan processing for people who owe between $50,000 and $100,000, the IRS is building on its 2012 Fresh Start Initiative that helped taxpayers more easily set up payment plans on higher tax balances.
Fresh Start Initiative expanded the scope of installment agreements
The IRS’ 2012 Fresh Start Initiative expanded the scope of streamlined installment agreements, which constitute more than 90 percent of all installment agreements completed by taxpayers. These agreements allow taxpayers to get into a payment plan with the IRS without submitting financial disclosure documents and corresponding extensively with the IRS. An important advantage of these agreements is that the IRS generally won’t file a tax lien.
Fresh Start expanded the advantages and scope of streamlined installment agreements by:
- Increasing the dollar threshold from $25,000 to $50,000 – and allowing tax-lien relief on up to $50,000 – if taxpayers agree to pay by direct debit from a financial account or payroll deduction
- Relaxing the payment terms from 60 to 72 months (or the collection statute limitation, whichever is shorter)
- Allowing taxpayers to get a lien withdrawal sooner by paying the balance to less than $25,000 and completing three consecutive automatic payments
The results were good. Taxpayers set up almost 3 million streamlined installment agreements in 2015. And the number of installment agreements with automatic payments has increased 117 percent during the past five years. Automatic payments benefit the IRS and taxpayers by reducing the amount of defaulted installment agreements.
Fresh Start changes also helped the IRS reduce time-consuming analysis of financial documents and correspondence with taxpayers to set up more complex installment agreements.
New test program expedites payment-plan processing for larger tax debts
On Sept. 23, the IRS announced its test program that will run through Sept. 30, 2017. The program will streamline payment plan set-up for more taxpayers, by:
- Increasing the dollar threshold for expedited processing from $50,000 to $100,000, if taxpayers agree to pay by direct debit from a financial account or payroll deduction
- Increasing payment terms from 72 months to 84 months (subject to collection statute limitation)
- Removing the requirement to submit financial condition documentation that’s normally required for all installment agreements on balances of more than $50,000.
However, an important distinction of the test program is that the IRS will continue to file a federal tax lien on taxpayers who owe more than $50,000.
Expedited processing comes only with automatic payments
Taxpayers who don’t agree to automatic payments will need to submit financial documentation (Collection Information Statement, Form 433A or Form 433F, depending on taxpayers’ sources of income) and work with the IRS to set up their monthly payment amount.
Presumably, if taxpayers don’t agree to automatic payments, the IRS will most likely still accept payment terms of up to 84 months – as long as the IRS determines that taxpayers can’t pay right away by selling assets or making higher payments. In the coming weeks, the IRS will provide more detail on agreements without automatic payments.
People who owe between $50,000 and $100,000 will still get a tax lien
The new streamlined processing rules won’t provide relief from a lien filing. The best course of action for taxpayers who owe between $50,000 and $100,000 may be to pay down their balances to less than $50,000. Then, they may qualify for a streamlined agreement with automatic payments, which avoids a lien filing.
Taxpayers can use two common strategies to help pay their balances down to less than $50,000 to qualify for a streamlined agreement:
- Get an extension to pay. The IRS often encourages taxpayers to get an extension to pay, so they can get the funds together to pay down their assessed balance. The IRS allows extensions of up to 120 days for taxpayers who aren’t in IRS Collection and 60 days for taxpayers who are in IRS Collection.
- Request penalty abatement. Asking for penalty relief can help reduce the liability. First-time penalty abatement can remove significant penalties for qualifying taxpayers – especially late filers with significant balances and a clean compliance history.
Test program will help people whose passports were restricted because of tax debt
The December 2015 Fixing America’s Surface Transportation (FAST) act created Internal Revenue Code Section 7345, which tied foreign travel to taxes. Under this section, taxpayers’ passports can be restricted if they owe more than $50,000 in tax debt and aren’t in an agreement with the IRS on the balance. The IRS is preparing to implement these rules in the next few months.
Under the new IRS test program, taxpayers whose passports have been restricted because of tax debt will have an easier time getting back in good standing with the IRS. With the program’s increased debt threshold, these taxpayers will be able to work quickly with the IRS to establish a payment agreement. Then, the IRS can work with the State Department to lift passport restrictions.
Without the streamlined processing, taxpayers would have to navigate a longer process to get into an installment agreement, including financial disclosures and likely back-and-forth correspondence with the IRS.
The 2012 Fresh Start Initiative was a win for higher-debt taxpayers and the IRS. Softened payment terms and lien-filing relief in exchange for automatic payments has worked for the IRS.
With its new test program, the IRS will expedite payment plan set-up for more taxpayers, and provide an efficient way for some people with restricted passports to get back into good standing with the IRS. However, the new test program will not help taxpayers avoid lien filings.
When the IRS announced the new streamlined processing rules, the IRS also promised more information about the test program and other changes that will make it easier for taxpayers to get into installment agreements. During the next year, we will also see significant changes to IRS Collection policies to implement private debt collection and passport rules.
As IRS Collection rules change constantly, stay tuned for more.
Editor's note: This article originally appeared in Accounting Today.