Resolving an IRS Complex Installment Agreement

When a taxpayer owes the IRS more than $50,000 and he wishes to enter into a payment plan, then it’s not such as easy matter. In fact, in most situations, the IRS will want him to submit all of his financial information (IRS Form 433-A), which will tell the IRS all about his income, expenses, other debts and assets.

The Taxpayer Must Be in Compliance

What does it mean to be “in compliance”? According to the IRS, it will mean that all tax returns have been filed, and the taxpayer is making his or her estimated tax payments on a timely basis. The IRS will not agree to an installment agreement (payment plan) if there are any unfiled returns. On the other hand, the IRS will agree to place a collections hold onto the taxpayer’s account, and give the taxpayer a period of time to prepare and file his unfiled returns.

The Complex Case

Option One: if you can pay down on your IRS assessed balance and bring that amount below $50,000, then that might be a good option. The IRS will often agree to 72 month or 84 month payment plans if the balance is below $50,000.

If you cannot pay the balance to get it below $50,000, then you may be faced with the problem of IRS “reasonable expense standards”. These are expense amounts that the IRS deems to be reasonable for food and clothing, along with housing and utilities as well as car ownership and use. The big problem however is that if your current rent or mortgage amount, or your car loan amount exceeds the “reasonable standard”, then the IRS will not allow you to deduct the entire amount when you propose your payment plan amount.  Please note that the “standards” will differ depending on the State and County in which you live, and they may also differ as to the size of your household.

An Example:   a typical taxpayer

John Doe is a taxpayer who owes $65,000 in federal income tax. We know he has a complex case, because his debt exceeds $50,000. He cannot pay this amount to get it below $50,000, so he is forced to submit a Form 433-A to the IRS (please note that the Form 433-A can be anywhere from 10 to 20 pages depending on his expenses, and the IRS will often want to see backup documentation such as mortgage and car loan statements or utility bills).

John is married with two minor children, so for a family of four in Pittsburgh , the housing expense allowance or “reasonable standard” is $1,819 a month in Allegheny County. This includes his monthly mortgage amount as well as the monthly gas, electric, water, cable, cell phone and other utility expenses.  Let’s say that his monthly mortgage is $1,800 and his utility and other expenses are another $700, then the IRS will challenge him on his request, and will want him to pay an additional $681 on his payment plan ($2,500 minus $1,819 = $681).

If John has a car loan payment of $625 a month, then again, the IRS will not agree to him deducting the full amount for his payment plan calculation, because the “standard” is $471 a month.

So, as you can see, John has a problem if he wants to afford his current lifestyle.  The IRS will not force him to sell his house and car, but by the same token, the IRS will want its full monthly payment, in the amount that their “standards” see fit.

Two Options

John does have two potential options.   The first is that he could look into filing a Chapter 13 bankruptcy in order to repay the IRS taxes.   That would give him a full 5 years to repay the amount.  Moreover, it often arises in Bankruptcy Court that some of the IRS tax debt could be wiped out (discharged) because it is more than 3 years old.

Second, if John can show that he can repay the IRS debt within 5 years with a monthly installment agreement amount, then pursuant to the Internal Revenue Manual, the IRS has the discretion to allow the actual living expenses, and permit the payment plan to go through.

Conclusion

If you owe more than $50,000 to the IRS, then you need to educate yourself about the IRS’s collections procedures and find out your best strategy.   Call my office if you have questions, and download my special reports.

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