What to do when you can’t make your IRS installment agreement payment on time
If you are in an Installment Agreement with the IRS and find yourself unable to make your payments, if you act quickly enough, you may be able to get the IRS to reinstate your Installment Agreement. But before you do so, you must ask yourself a question: Can you honestly afford this repayment? If you have to miss a payment, if you skipped a payment, if your payments are late, there is a good reason: the payment is too high and needs to be renegotiated.
In this article I will discuss the top seven reasons why taxpayers get into IRS Installment Agreements that they can’t afford.
After reading Victoria’s blog about Form 433-A, 433-B and 433-F posted, I felt inspired to contribute to the discussion about payment plan affordability and why it is important to get competent tax help.
The IRS has so many rules it can make your head spin! If you don’t understand the rules of the game, how can you play? As a person who prepares a lot of Form 433-A’s, B’s and F’s, I really, truly believe that taxpayers should not fill these out if they don’t understand the rules. When you are going up against an agency that wants as much money from you as fast as possible, you may be put into a payment situation that you can’t handle.
From time to time, our new clients provide us with a 433-A, B or F, that either they or a previous representative had previously filled out in order to negotiate with the IRS. In many of these cases, the client states that they cannot afford the Installment Agreement they were issued, or that the IRS wouldn’t accept a lower payment plan. Upon further review of the figures that were used vs. the financial documents they provided to us, we start to understand how the payment plan came to be.
So here are some of the top reasons taxpayers get into IRS installment agreement payment plans they can’t afford:
1. The taxpayer has necessary living expenses in amounts higher than the IRS will allow
Yes, the IRS wants to dictate how much they think you should be spending. On the financial forms, the IRS provides categories for which you may indicate your expenses. For example, there is one category for food, clothing and miscellaneous, one for housing and utilities, one for vehicle operating costs, etc. Seems simple enough, right? What taxpayers may not know is that the IRS places a cap on expenses based on a countrywide or national basis. This means that any amount over the maximum allowable expenses in each category will not be allowed (without good reason and proof), thus increasing your perceived ability to pay the IRS monthly. In addition to caps on personal expenses mentioned above, there is a whole list of things subject to limitations and exclusions, both personal and business related, that are too numerous to list in this blog.
The clear flaw with the IRS maximums, is that sometimes they are not realistic. We are seeing more and more clients who purchased their homes when interest rates or home prices were outrageous and have mortgage payments that exceed the IRS maximum by thousands of dollars. This is just one example of how the IRS maximums inflate a taxpayer’s monthly payment plan.
2. The taxpayer has liquid assets
Sometimes people enter into payment plans that would put tremendous strain on their finances in order to protect their liquid assets. This would be a situation where the taxpayer accepted a higher payment plan even though they technically couldn’t afford it because their expenses are over the IRS maximums.
An Installment Agreement that would not repay your liability in 5 years requires you to liquidate any liquid assets before the IRS will grant you a lower payment plan. Many of our clients cannot bear the thought of liquidating their entire retirement account that they worked so hard to save, just to make a small or moderate dent in their liability, and I don’t blame them. However, lowering their liability may open up the door for a smaller payment plan. In this situation, the taxpayer has some really hard decisions to make; do they keep the higher payment plan they can’t afford, or keep the retirement account?
Note: Not all situations result in a choice between keeping your asset or a higher payment plan. This is just one example of how a high payment plan could be issued to a taxpayer who is unwilling to let go of their assets, and is unaware of other resolution strategies. You should consult with a tax professional to determine what is in your best interest.
3. The taxpayer is overspending
Once in a while, we have to have a serious conversation with a client about why exactly they CAN afford the payment plan they were given. In these instances, we have reviewed months of bank statements and determined that the lack of remaining monthly income is a result of overspending on unnecessary living expenses. Things like those daily iTunes purchases, Dunkin’ Donuts, eating out, trips to the spa, timeshares/vacations, luxury vehicles and casinos. Unfortunately, when you have an IRS liability, you may need to make sacrifices in spending to afford your Installment Agreement, since you will not get credit for these types of expenses on your Form 433-A, 433-B or 433-F.
4. Using the 433-A, 433-B or 433-F will not give you the best Installment Agreement.
Sometimes, providing a financial analysis won’t get you the best payment plan. Based on how much you owe, providing a financial analysis may actually increase your payment plan higher than is required. The agents at the IRS may not tell you that, though. At IRSMedic, we always complete a financial analysis and compare it to all other options available to you before arranging an Installment Agreement.
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As Victoria pointed out in her blog, there are times when special circumstances or expenses affect a taxpayer’s financial situation and should be brought to the IRS’s attention. It is important to communicate with your tax professional, tell them your story and provide them with all information needed to make an informed and accurate determination on what resolution options you are eligible for. An experienced tax professional will know how to structure and present your finances to the IRS in a manner that is most beneficial to you. They will also be able to resolve any tough, complicated issues that may arise by requesting an appeal when the IRS doesn’t initially accept a reasonable or legitimate payment arrangement.
Just as an Offer in Compromise calculator will not get you the best Offer in Compromise and may often lead to the exact wrong result, using the IRS’ forms to figure out what is reasonable is playing the IRS’ game. Quite simply, no one’s life is an equation. We like to take an open, realistic viewpoint first.
5. Taxpayers will do anything to get the IRS to go away
We have seen it before many times. Often our clients who tried dealing with the IRS themselves felt pushed into accepting a deal they couldn’t afford. Anthony wrote a blog about one such client who foolishly accepted a deal an IRS revenue officer demanded.
6. Taxpayers don’t know how to appeal
A rejection of an Installment Agreement may be appealed. However, the IRS does not make the process simple for the average taxpayer or professionals. There are Collection Due Process Hearings, Equivalent Hearings, Collection Account Program (CAP). Taxpayer Advocate Requests, and even petitions to tax court. What each one does, and how to best prepare and qualify for appeals is not for the layperson. And while we find IRS appeals officers to be very fair with us, especially the local appeals officers in New Haven and East Hartford (the two appeals offices closest to our headquarters), it is likely because we know exactly how to present a case to them. We don’t ask them to do something they can’t do. And we find ways of accommodating their concerns in a manner that still allows our clients to repay the IRS in a way that doesn’t put their financial well-being and entire life in turmoil.
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7. People don’t understand that you don’t have to pay the IRS back
A lot of people think they have to pay the IRS back in full. This is not true. And you don’t even need an Offer in Compromise. So many times, I’ve seen people trying to repay the IRS in full, with very high installment agreement payments. Then they wind up defaulting and the IRS comes back harder.
The truth is, you could negotiate to pay the IRS an amount each month…an amount that won’t pay the debt back in 5 years. Or even 10 years. And that’s OK, because the IRS can only collect for 10 years. After 10 years the debt goes away. So with a partial payment installment agreement, you only pay what you can afford each month until the debt is wiped out by time. Of course, if you come into money, the IRS will want more. But if your financial picture goes down, you can renegotiate. Or even file bankruptcy. Trust me, the IRS won’t tell you that Chapter 7 bankruptcy could potentially wipe out all your personal tax debt—but in many cases it can.
Our firm never promises any potential client a particular resolution. We don’t control the IRS, and we don’t know all the facts about a client until our analysis and financial investigation are complete. So sometimes we will say to a potential client, “You may have to repay your taxes with an Installment Agreement.” The response to that is sometimes, “All you are guaranteeing me is a repayment agreement? Well I can do that on my own.”
Yes, getting into an IRS Installment Agreement is easy. Anyone can do that. But getting into an IRS Installment Agreement that you can actually afford and is most beneficial to you that will actually end the tax problem takes a high degree of skill and experience.