Qualifying for the IRS direct debit installment agreement: Calculating assessed balances
It is possible to get an IRS installment agreement to repay your taxes without ever disclosing where you work, what car you drive, what your house is worth, or even what you can actually pay.
No IRS Form 433A, Form 433B or 433F. No application of the IRS Collection Financial Standards that can put a cap on your living expenses.
The IRS calls these payment plans direct debit installment agreements. Sometimes, they are also referred to as streamlined installment agreements.
No managerial approval is required with direct debit installment agreements, and the IRS probably will not even file a tax lien against you and damage your credit if you qualify.
But qualifying for a simple IRS plan of resolution with the direct debit installment agreement is not always so simple.
The IRS bases qualifications for the direct debit installment agreement on a technical term called your “assessed balance.”
An assessed balance is what you originally owed the IRS when you filed your return.
Your assessed balanced has to be under $50,000 to qualify for the direct debit installment agreement. That begs the question: What is my assessed balance?
Here’s how the IRS calculates your assessed balance:
When you filed your return, the IRS made a bookkeeping entry on its books for the amount of tax you owed. This entry is called an assessment.
At the same time, the IRS probably charged you penalties. These penalties could be for not paying your tax on time when you filed the return, for filing the return late, or not making estimated tax deposits.
When you file your return, the IRS will add a bookkeeping entry calculating the amount of penalties you owe at that time. This is also an assessment.
The IRS will also make a calculation of any interest you owe on the unpaid balance when your return is filed, and place that amount on its books as an assessment.
Most penalties are charged over time. For example, the late fling penalty is calculated at 5% for every month the return is filed late, maxing out at 25%. The late payment penalty is 1/2 of 1% per month, maxing out at 25%. Interest also continues to accrue over time after the initial assessment.
Both the penalties and interest will continue to grow in an amount that is more than what was assessed when you filed your return. After assessment, the IRS will continue to charge you for the penalties and interest. The continued compounding of penalties and interest after the initial assessments are made are called accruals.
With our definitions (assessment and accruals) out of the way, let’s pull this all together.
The key point in qualifying for a direct debit installment agreement is that the IRS does not consider the accruals of penalties and interest after assessment in determining whether to grant you the payment plan. So you can actually owe the IRS, say, a total of $60,000, and still qualify for the payment agreement provided the original assessed balances are under $50,000. If your assessed balance is under $50,000, the IRS will permit you to pay the $60,000 back over a term of 72 months by a monthly debit out of your bank account without the financial disclosures, negotiations, tax liens and managerial approval.
So, we need to accurately determining your assessed balances to determine your qualifications. Here’s an example of how that works:
Example: You owe the IRS back taxes from 2009, 2010 and 2011. Your IRS collection notices state the total amount owed is $63,723. You want to pay the IRS back, but prefer to avoid a detailed, in depth disclosure and negotiation with them. We need to calculate your assessed balances to determine if you can get into the IRS direct debit installment agreement program.
To calculate the assessed balances, we need to obtain and analyze IRS transcripts of your account. Analysis of those transcripts reveal the following:
Assessed Accrued interest Accrued penalty Total
2009 $15,235.00 $1,340.00 $2,755.00 $19,330.00
2010 $17,762.00 $2,552.00 $3,250.00 $23,564.00
2011 $16,114.00 $1,933.00 $2,782.00 $20,829.00
Total $49,111.00 $5,825.00 $8,787.00 $63,723.00
Result: Even though you owe the IRS $63,723, your assessed balance is $49,111. As the assessed balance is under $50,000, the IRS will not require any financial disclosures to determine the amount of your payment plan, and should not file a tax lien against you. Your monthly payment will be $885/month, calculated by dividing the total amount owed, $63,723, by the 72 month payment term the IRS will give you. We will have to provide the IRS with a bank account so they can withdraw the monthly payment from your account.
Strategically, if your assessed balance was over $50,000, the IRS would permit you to reduce it to under $50,000 with a lump sum payment to qualify for the direct debit installment agreement. It is also important to note that when sending in a check to reduce an assessed balance to under $50,000, to tell the IRS to specifically apply the payment to the assessed balance. This is called a designated payment. Without the designated payment, the IRS may apply the payment to accruals of interest and penalties, defeating the plan to get your assessed balance under $50,000.
The IRS’s authority to enter into direct debit installment agreement can be found in Internal Revenue Manual 184.108.40.206.
If you think you could benefit from an under the radar solution to your IRS problem, consider the benefits of a direct debit installment agreement (streamlined).