Yes, the IRS does have the ability to accept less than a full amount required to pay off a tax liability. This is known as a Partial-Pay Installment Agreement (PPIA). In other words, you pay what you can afford (after providing the IRS with a full picture of your monthly income, family size, and monthly expenses).
Comparing a PPIA to an Offer in Compromise
All of us have seen the endless commercials advertising how “the IRS settles tax debts for pennies on the dollar.” Let’s compare these two programs to give you a better idea of the pros and cons involved of each option.
Partial-Pay Installment Agreement:
- does not stop the Collections Statute Expiration Date from running (this is the 10 year time period in which the IRS can collect taxes from taxpayers;
- will be reviewed by the IRS every 18 to 24 months to see if taxpayers have an increased ability to pay;
- will not generally be a good option if the taxpayers have significant equity in assets;
- no application fee or down payment needed to apply, and
- can be approved quickly by the IRS Collections Division.
Offer in Compromise:
- once an Offer has been submitted, it must be accompanied by a $186 application filing fee, plus a 20% down payment of the total Offer. In other words, let’s say that your total Offer is $10,000, then you must submit with your Offer a check for $186 as well as a down payment of $2,000;
- it stops the Collections Statute Expiration Date from running, and this will add years to the time in which the IRS can collect taxes from you if your Offer is rejected;
- the Offer review process is long, sometimes taking 6 to 12 months, or even longer, and there is no guarantee that your Offer will be approved;
- most importantly, if your Offer is approved, then you will be on tax “probation” for 5 years, meaning that if you fail to file your returns on time, or pay your entire tax balances owed during those 5 years, then your Offer will be retroactively rejected. Yes, this is a very harsh penalty, but one that must be soberly considered prior to considering the submission of an Offer.
A Case Study
A client named Stan owned a small business that had a lot of fluctuation of income. He also had a number of adult children who he was used to assisting financially. He owed about $75,000 to the IRS, and was interested in an Offer in Compromise. His problem: he couldn’t figure out a way to pay his estimated taxes each year. He also struggled with some of his business record-keeping.
With an Offer in Compromise, he would be able to pay $7,100 to the IRS to settle his $75,000 tax debt. His big problem was that his Offer was inevitably going to be rejected in future years due to owing taxes at some point in the future. He simply wasn’t a good candidate for the OIC Program.
Instead, I reviewed with him all of the pros and cons of the Partial-Pay Installment Agreement option. After reviewing his monthly income and expenses, his IRS payment was only going to be $165 a month. And the IRS would not do any other enforced collections against him (that is, no levies or garnishments, for example.)
His reaction: “yeah, that sounds like a good plan. I just want to sleep soundly without having to worry about the IRS for now. They had levied on all of my bank accounts a while back, and I don’t want that to happen again. I can definitely afford $165 a month.”
I told him that I could set up a Partial Pay Installment Agreement within a week or two, and that it would be good for around 18 months, at which time, the IRS would send us notices to respond to them with updated income information then.
If you have questions or comments, please write them in below, or call my office at 412-920-6565 to talk about your IRS tax situation.