IRS Law Blog

You are finally on good terms with the IRS – you agreed to a monthly payment plan, and have been filing and paying your taxes on time, as you are required to do.

With that, the IRS should leave you alone, right?

Not necessarily.

The IRS has the right to review an installment agreement, and to negotiate a new one to determine if your monthly payment could be changed.

And when we say changed, we mean increased.Preview

This will usually occur when your installment agreement payments are not enough to repay the IRS back in full.

Let’s say, for example, that you owe the IRS $100,000, but you are paying them $100/month.

The IRS is permitted by law to enter into installment agreements that will never pay them back. It’s okay that yours will not – the IRS has 10 years to collect from you, and after the 10 years expires, you will not owe them, and the remaining balance will be forgiven.

This is called a Partial Pay Installment Agreement.

But Internal Revenue Code 6159(d) requires the IRS to review Partial Pay Installment Agreements once every two years.

Chances are, if you have an agreement that does not full pay the IRS, the IRS made a notation in their computer system to review your agreement in two years.  That means they will want a new financial statement from you showing your income and living expenses to determine if your payment can be increased.

How do you know if the IRS is putting your agreement up for a two year review?

First, the IRS will usually finalize a payment plan by requesting that you sign Form 433D, Installment Agreement.

At the bottom left-hand corner of the Form 433D, there is a box that the IRS fills in (it states in bold letters FOR IRS USE ONLY).

The boxes to be checked include the following three options for future review of your payment plan:

• No Further Review.

• PPIA IMF Two Year Review.

• PPIA BMF Two Year Review.

Some interpretation of these IRS internal codes is in order: PPIA is IRS-speak for Partial Pay Installment Agreement. IMF is the acronym for Individual Master File (this is if you owe personally owe the IRS taxes, like Form 1040 income taxes). BMF means Business Master File (if your business owe the IRS, like Form 941 employment taxes).

You, of course, want the IRS to check the box No Further Review.  They will, but usually only in cases when the installment agreement is calculated to pay the IRS back in full.  For example, you owe the IRS $20,000, they have 5 years left to collect, and you will be paying them $500/month – there is no need for the IRS to put your account back up for review as the agreement will full pay the debt.

If your payment plan is not scheduled to pay the IRS back, expect your IRS agent to check the Two Year Review box.  This determination is with the IRS agent who granted the installment agreement.

You will know if your agreement is being set for future review when you get the Form 433D to sign as the IRS agent will have already completed the form for you and checked any relevant boxes.

What happens when your agreement comes up for review?

Internal Revenue Manual 5.4.11.8 requires the IRS to send you letter CP522P, “Two Year Financial Review” as notification that your agreement is up for review.  A 30 day window for response is allowed.  If no response is made, the IRS will then proceed to terminate your installment agreement and send your case back into the collection queue for levy on your wages or account.

It is important to note that the IRS can also request a financial review for any reason at all if they think your financial condition has improved, even on full pay installment agreements. The IRS usually makes this determination by review of your most recently filed tax return. For example, let’s say your $100/month installment agreement was negotiated at a time when your household income was $50,000/year.  Now, you make $120,000.  This could cause the IRS computer to kick your case back out for a new financial review.

In sum, expect an IRS partial pay installment agreement to be much needed relief from the IRS, but possibly only temporary – after two years, most will be input for a new financial review.

If your agreement is paying the IRS in full, and you stay in compliance on all future tax obligations, the likely culprit to future IRS review is a substantial increase in your income.

Either way, it is important to know in advance what could occur after you agree to monthly payments with the IRS.