Getting an installment agreement approved by the IRS will not only put you in their good graces, but bring peace of mind.
That’s because once your agreement is approved, your IRS file will be closed by their collection division. While your agreement is in effect, the IRS will be prevented from levying your income, accounts, and property.
An active IRS installment agreement means that there will be no looking over your shoulder for a surprise visit from an IRS agent, or unwanted IRS threatening mail.
But how long will your freedom from IRS intrusion last?
Not all IRS installment agreements are created equally, with some protecting you for the long run, until their collection statute runs out and any unpaid taxes are forgiven. Others may require the IRS to contact you in two years to see if your payment amount can be increased.
When the IRS approves your installment agreement, it is important to know if, and when, you will hear from them again.
Here is the fine print on how long your installment agreement will last:
1. The time remaining on the IRS 10 year collection statute.
Internal Revenue Code 6502 gives the IRS 10 years to collect from you, and that is the longest your installment agreement should last. This is called the IRS collection statute expiration date.
For example, if you have owed the IRS for nine years, and they have one year left on the collection statute, your agreement should only last only that remaining time.
By comparison, if your IRS debt goes back six years, then the longest your installment agreement should last is four more years.
When the IRS collection ends, so does your installment agreement, and so does your tax debt. The IRS forgives any amount you have not paid when the collection ends, and clears your debt to $0.00. IRS collection of the debt is over, and you no longer have a tax debt. (Records can be secured from the IRS telling us when your agreement ends and showing your tax debt has been cleared to zero.)
The formula is simple: When the IRS collection is over, your installment agreement ends, and so does your IRS problem.
2. Two years if you are in an IRS partial pay installment agreement.
Under Internal Revenue Code 6159(a), the IRS cannot force you into a payment plan that pays them if full if you cannot afford to do so.
That means you can pay the IRS a small amount monthly on a large balance.
The IRS calls this a partial pay installment agreement.
The catch is that the IRS must review your partial pay installment agreement every two years (up until the 10 year collection statute expires) to determine if the amount you are paying can be increased.
Here’s an example of how partial pay installment agreements work.
You owe the IRS $150,000, the IRS has three years left to collect, and you can only afford $250/month under their guidelines. They must accept the $250, and cannot force you to repay $150,000 on a monthly basis over the next three years if it would leave you with no money for basic costs of living (like food, clothing, housing, utilities, auto expenses, and medical expenses).
After second year of your agreement, the IRS is required to send you a letter requesting that you update your current income and living expenses. If nothing has changed, you will be able to continue on the $250/month for one more year, until the collection expires. If there are changes, the IRS can decrease your payment, or increase it, for the remaining year they have left.
On your $150,00 tax debt with three years left for the IRS to collect, you will have paid them $6,000 during your two year partial pay agreement ($250/month x 24 months), and then $3,000 over the last year the IRS had ($250 x 12, presuming your payment stays the same after they review your finances), for a total of 36 payments. After you make your 36th payment, the collection statute will expire along with your payment obligations, with the IRS clearing your debt to zero.
This is $9,000 paid on $150,000 over the course of a two year partial pay installment agreement and a one year partial pay installment agreement, with the IRS forgiving the remaining $141,000 you owe at the end as their ability to collect terminated.
Remember that installment agreements will not last longer than the amount of time the IRS has left to collect. And the time you are in an installment agreement does not give the IRS more time to collect.
Consider partial pay installment agreements as an alternative to an offer in compromise. They settle and eliminate your tax debt.
Avoid giving the IRS more time to collect and extending the length of your installment agreement.
It is important to avoid IRS “time extenders” that give them more than 10 years to collect.
The filing of an offer in compromise, bankruptcy, innocent spouse claims, or collection appeals will add time to the 10 years. These filings protect you from the IRS levying your property while they are pending. But Congress decided that when you take an action that stops the IRS, they are allowed to reclaim that time and add it to the 10 year collection statute.
So if you ordinarily would have two years left to pay on the collection statute, and previously filed an offer in compromise that took the IRS one year to investigate and deny, the IRS will get an extra year on your installment agreement, and a total of 11 years to collect.
In that regard, it is important to properly manage the clock to avoid taking an action that gives the IRS more time if they are already short on it.
It is also important to note that the IRS requires you to not have any new tax debts while you are in an installment agreement. If their computer sees a new debt from a recent tax return, it will automatically flip your agreement into default mode, and notice you with termination.
It is good to know that IRS installment agreements are not forever. The longest they can last is the time remaining on the IRS statute of limitations on collection. The shortest is two years under a partial pay installment agreement. Properly used and understood, installment agreements can be excellent alternatives to more commonly considered fresh start options like an offer in compromise. When the collection ends, so does your installment agreement and your tax debt.