While most of us were celebrating the holidays, the IRS was making changes to its systems, processes and forms.
This year, the IRS made a significant change to how it will collect unpaid balances from individuals and people paying certain business tax liabilities who owe between $25,000 and $50,000. These changes will affect how tax practitioners help their clients with IRS collection issues.
On Dec. 31, 2011, the IRS released Form 9465-FS, Installment Agreement Request. Individuals with unpaid liabilities of more than $25,000 and less than $50,000 can use this form to request an IRS direct debit installment agreement. The IRS changed the threshold for this type of agreement from $25,000 to $50,000, which will allow the IRS to process the agreements faster. And taxpayers won’t be required to attach supporting documentation if they agree to pay the balance owed within 72 months or within the collection statute, whichever is earlier.
Types of Agreements
Internal Revenue Code Section 6159(a) allows the IRS to establish written agreements for taxpayers to pay their full or partial tax balances in installments. Administratively, there are three types of IRS installment agreements for individual taxpayers:
Guaranteed Installment Agreements
- Balance: $10,000 or less
- Timeline: Pay the balance in three years or less, collection statute permitting
- Financial statement/supporting documentation: Not required
- Other requirements: Must have filed and paid on time for the past five tax years without having established an installment agreement to pay
Streamlined Installment Agreements
- Balance: $25,000 or less
- Timeline: Pay the balance in five years or less, collection statute permitting
- Financial statement/supporting documentation: IRS customer service representatives and collection personnel routinely accept these agreements with Form 9465, Installment Agreement Request; via online payment arrangement (OPA) submissions; or by phone without the taxpayer having to provide a financial statement and supporting documentation.
- Other requirements: Must have filed all past tax returns and made corrections to withholding and/or estimated taxes
Negotiated Installment Agreements
Before the IRS recently released Form 9465-FS, any taxpayer who couldn’t pay and owed more than $25,000 had to provide a financial statement and supporting documentation to request a negotiated installment agreement. Under this type of arrangement, IRS collection personnel review the financial statement and payment proposal to determine the taxpayer’s ability to pay immediately with liquid assets or loan capabilities, and with monthly installment payments.
For individuals, the IRS uses collection financial standards to limit living expenses for food, clothing, out-of-pocket medical costs, housing and utilities, and transportation. Taxpayers are regularly held to these standards unless they can show hardship or other circumstances that warrant exceeding the limits.
2012 Brings New Rules
With the new Form 9465-FS, taxpayers who owe more than $25,000 and less than $50,000 can avoid filing a detailed financial statement and supporting documentation. They can instead submit a direct debit installment agreement request to full pay the tax liability within 72 months or within the collection statute of limitations, whichever is shorter.
For new balances filed this year, you can file the paper Form 9465-FS and attach it to the front of the tax return. For existing balances, you can mail the form directly to the IRS.
The IRS also plans to modify its online payment arrangement (OPA) application at irs.gov to allow for taxpayers to request installment agreements for balances of up to $50,000. The current application allows for balances of up to $25,000 and payment terms of up to five years.
If your client cannot pay the tax in full within the prescribed period or doesn’t want a direct debit installment agreement, you must submit Form 433A (long form, Collection Information Statement for Wage Earners and Self-employed Individuals) or Form 433F (short form, Collection Information Statement), along with supporting documentation to substantiate your client’s ability to pay.
Despite the increased threshold for this agreement, it doesn’t appear that the IRS has altered its procedures related to filing federal tax liens. Procedurally, the IRS automatically files a tax lien if a taxpayer owes more than $25,000, even if the taxpayer is in an installment agreement to pay the taxes in full. The IRS does this to protect its interest and enforce compliance. Many IRS practice and procedure experts expect the IRS to relax internal rules related to filing liens for those who owe less than $50,000 and are in direct debit installment agreements to full pay the taxes owed.
With the total amounts in IRS collection up 183% over the past 10 years, the IRS must look for additional ways to collect past-due balances. The new Form 9465-FS may allow taxpayers with balances over the IRS streamlined threshold to achieve more manageable payment plans and avoid extensive financial disclosure and interaction with the IRS. But don’t count on the IRS to immediately provide further relief on filing tax liens.
The tax lien is still the IRS’ most effective collection tool. If your client cannot pay his or her balances owed and wants to avoid a lien, get the balances under $25,000 and enter into a streamlined installment agreement before entering IRS collection.