What if you can afford a monthly installment agreement with the IRS, but your payments will not ever repay what you owe?
The good news is that the IRS will give you a payment plan – and leave you alone – even though you cannot pay them back.
The IRS calls this partial pay installment agreements (PPIA). Payment agreements that do not pay the IRS in full are permitted not only by IRS internal guidelines (Internal Revenue Manual 5.14.2), but by law (Internal Revenue Code Section 6519).
Internal Revenue Code 6159(a) specifically states that the IRS can enter into an agreement that facilitates either full or partial collection of an unpaid tax liability.
Even better news: In conjunction with your partial pay installment agreement, keep in the back of your mind that the IRS does have a time limitation on how long they can collect a tax debt. The time limitation, which is known as the statute of limitations on collection, is 10 years. The 10 years starts when the IRS first determines that you owe them money – that can be when you filed your tax return, when the IRS completed an audit of your tax return and found you owed additional money, or when the IRS filed a tax return for you (called a Substitute for Return) because you never filed on your own. Whenever the IRS puts a balance owed on its books, that’s when the 10 year time to collect starts. IRS collection does not last forever, and neither do payment agreements.
They are called partial pay installment agreements for a reason.
What does this mean to you? To sum up, the IRS will accept partial pay installment plans, and combined with the limitation on how long the IRS has to collect a debt, this results in an agreement where you repay the IRS less than what you owe. In other words, partial pay installment agreements present a viable settlement alternative to the IRS offer in compromise program.
The IRS offer in compromise program gets all the publicity for debt resolution – settle your debts for less than what you owe, pay pennies on the dollar – you may have heard the advertisements on TV and the radio. And the offer in compromise program is real, and it works in the right situation. But it is not for everyone – the IRS has very specific guidelines on determining who qualifies for an offer and the amount of an acceptable settlement.
Partial payment installment agreements are pretty simple – you pay what you can afford over the remaining time the IRS has to collect, and what you cannot pay goes bye-bye when the IRS collection timeframe expires. That’s a settlement for less than what you owe.
Let’s compare an IRS partial pay installment agreement to an offer in compromise, and consider what the advertisements don’t tell you about the amount of time an offer in compromise can take to be processed, investigated, and accepted by the IRS; the time it could take you to pay the settlement amount to the IRS; and the IRS probation requirements imposed on you to prevent an offer from defaulting after it has been accepted.
The standard IRS offer in compromise processing time is 4-6 months. That means before you even get to the plate, it will take the IRS that long to assign your offer to an investigator.
After an investigator has the case, it takes on average 3-6 months for the investigation to be completed.
If your offer is initially rejected and you disagree, add another 4-6 months for an IRS appeal of the rejection.
If your offer is ultimately accepted and you owe more than $50,000, the offer has to be reviewed and accepted by IRS counsel. Add approximately 2-3 months for that.
If you get final approval from the IRS and your offer is accepted, you then have to pay the amount you have agreed to settle for. Add the 24 months the IRS will give you to make the payments (you can pay the settlement sooner if you are able).
And every offer in compromise comes with a five year probationary period after it is complete. That means you have to stay current on every future tax filing and payment obligation for the five year period following acceptance of your compromise. If you do not, all the hard work that went into the compromise will default, the IRS keeps the money you paid, and you go back to owing them again.
If you are counting – and I can’t blame you if your not – that can be as much as four years to have an offer processed, investigated, reviewed, accepted and paid (not counting the probationary period).
And one last thing – while an offer in compromise is being investigated, the time the IRS has to collect is tolled. That means if the IRS has three years left to collect the tax from you when you submit the offer, and the offer takes one year to investigated and you cannot get an IRS acceptance, you will come out of the process still having three years left with the IRS. That’s right – you lost a year by filing and having an offer in compromise rejected.
I think you get the picture on how time can impact an offer in compromise and that it’s not necessarily as easy as advertised. The point here is not to talk you out of an offer in compromise, but to consider all options thoroughly before jumping in.
With that background, let’s take a closer look at IRS partial pay installment agreements.
To begin with, there are no significant time lapses to acceptance of a partial pay agreement – you get the agreement, make your payments, and the clock continues to tick. It does not take years to get into an partial pay installment agreement accepted.
Let’s say we determine that the IRS has three years left to collect your tax debt, and that you can afford to pay the IRS $200/month over the remaining time frame. That’s a settlement of $7,200 ($200 x 36 months remaining on the statute of limitations on collection), done not by an offer in compromise but by the partial pay installment agreement.
Remember, that partial pay installment agreements only last as long as the IRS has to collect your debt from you. If you owed the IRS $75,000, you would have repaid them $7,200 during the partial pay agreement, and the rest would be a goner.
The key part here is that you can get a settlement with the IRS with a partial pay installment agreement for less than what you owe without jumping through the hoops that come with IRS investigation of an offer in compromise. IRS partial pay installment agreements permit informal settlements (as opposed to the more formal, time-consuming, strings-attached nature of an offer in compromise).
In our example, after the three remaining years on the statute of limitations on collections expires, the IRS can no longer legally collect the debt from you, and they will cease to do so as you had a partial pay agreement. Your installment payments will terminate, and the IRS will make an entry into their internal records that the taxes are uncollectible by expiration of time. There will be a credit to your account for the amount you owed but could not pay within the remaining time left on the collection statute, and IRS transcripts can be obtained that would reflect a zero balance owed. You have a fresh start free from the IRS without the offer in compromise.
It is important to note that the IRS will often request to review a partial pay installment agreement every two years to determine if your payments can be increased. That involves submitting a new financial statement to the IRS to show your income and living expenses so a determination can be made if your payment can remain the same.
Settling with the IRS often involves thinking outside of the norm and considering all your options, not just what is easy to advertise (after all, this article does not exactly fit into a TV sound bite). Partial pay installment agreements are an option that permits you to pay the IRS what you can afford, even if that is less than what you owed, and have what you cannot pay permanently forgiven. And in many, many ways, partial pay agreements are simpler and quicker than an offer in compromise, including the fact that they do not toll the time the IRS to collect like an offer in compromise.