IRS installment agreement vs. statute of limitations on collection: What’s the impact?
A concern frequently voiced by my clients is whether entering into an installment agreement with the IRS automatically extends the time the IRS has to collect.
The perception is that if you agree to an installment agreement with the IRS, you are in it forever.
Quite simply, you aren’t. IRS installment agreements have end dates. The end date is 10 years from when your IRS liability began.
When does an IRS liability begin? The time the IRS has to collect begins when they place your debt officially on their books. This is called an assessment. Assessments typically occur in three situations: (1) after you file your tax return and there is an amount due but not paid (2) if you did not file a return, the IRS will make an estimated return filing and put an estimate of your debt on their books (3) after the IRS completes an audit of your tax return.
After the debt is put on the IRS’s books (assessed), the IRS has 10 year to collect the tax debt from you. The legal reference is Internal Revenue Code 6502(a)(1).
During those 10 years, the IRS can levy your wages, your bank account, or take your property (possible but unlikely).
Agreeing to an payment plan with the IRS – a better approach than letting them have it at – does not change how much time they have to collect. If you enter into an installment agreement with the IRS, the rule remains the same: They have 10 years to collect, and you have no more than 10 years to pay.
An IRS installment agreement does not extend the time frame the IRS has to collect.
Let’s put this to practical application with an example.
Your IRS liability started, say, 4 years ago, maybe you were self-employed and did not understand how to handle your taxes, or maybe you took a retirement plan distribution and did not have enough taxes withheld. Either way, 4 years ago the IRS made its assessment against you, and put your debt on their books. The IRS made their assessment 4 years ago, and they have 6 years left to collect, for a total of 10 years. An IRS Revenue Officer contacts you, or maybe you are prompted by a threatening letter from the IRS Automated Collection Service. Either way, you agree with the IRS to make monthly payments.
The payment plan will last for 6 years.
Agreeing to make the payments did not give the IRS more time to collect. Even if your monthly payments are not enough to repay the debt over the remaining time the IRS to collect, the unpaid amount will be forgiven by the IRS after the collection period expires in 6 years.
In other words, in our example, let’s say you owe the IRS $65,000, and the IRS agrees to a payment plan of $200/month over the remaining 6 years they have to collect. You are going to pay the IRS a total of $16,800 over what is essentially a 6 year payment plan, and the rest is forgiven when the statute of limitation on collection expires.
A few points:
- Your IRS liability may have started years before you entered into the installment agreement.
- The 10 years the IRS has to collect begins when you first owed the IRS; it does not begin when you entered into an installment agreement.
- Your installment agreement should last for the amount of time that remains on the 10 year IRS limitation of collection period. That could be 6 years, that could be 2 years.
- You have as much time as remains in the 10 years to repay what you and the IRS agree is affordable. What is not paid is forgiven, and you are done with the IRS.
The fine print:
Certain actions taken by you can extend the 10 year collection time period. These include filing an offer in compromise, a request for innocent spouse relief, or a timely collection due process appeal with the IRS. Actions related to terminated or defaulted installment agreements can impact the collection time. So can filing bankruptcy.
The finer print – this is rare:
The IRS can sue you for a judgment in court and get more than 10 years to collect; this is extremely unlikely and happens rarely, and only in significant cases of high dollar noncompliance. The IRS can legally request that you agree to extend the collection time if your payments are not enough to repay what you owe, but IRS policy is to make these requests only in rare cases when an asset may come into your possession after the collection period expires (See Internal Revenue Manual 22.214.171.124.3).
We can find out how much longer the IRS has to collect. The IRS will provide us with account transcripts that are used o calculate when your IRS problem will end. The transcripts have entries indicating when the tax was assessed (begin date), and any intervening acts that would have extended time (offer in compromise, collection appeals). The IRS also has an end date calculated in their computer – we want to ask for that, also.
We can also set-up a payment plan with the IRS to have them leave you alone. Remember, payment plans with the IRS, standing alone, do not give them more time to collect. It just puts your account into compliance and out of the eye of IRS enforcement.
It is possible that you cannot afford to make any payments to the IRS – that’s okay, too – the IRS has a financial hardship program that places a debt in uncollectible status. Like installment plans, financial hardship cases where the IRS agrees that you cannot afford to make any payments does not give the IRS more time to collect.