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What is an Installment Agreement? LifeBack Tax
As with any debt, taxpayers who owe back taxes to the government may arrange to pay their liability through monthly installments. An IA, or installment agreement, allows taxpayers to pay down their debt over time without facing enforced collection actions. The Internal Revenue Service and most state tax agencies allow taxpayers to enter an installment agreement if they are unable to fully pay their taxes within the deadline. An installment agreement may also be referred to as a payment plan.
In IRS terminology, an installment agreement refers to a long-term payment plan with a payment timeframe longer than 120 days. In order to be eligible for an installment agreement, taxpayers must have filed all required returns before applying. An installment agreement may be paid through cash, check or money order, credit/debit card, automatic withdrawal from a bank account, or voluntary payroll deduction. Taxpayers who enter an installment agreement with the IRS are also charged an initial setup fee. This fee is based on the taxpayer's payment method, whether they apply online or by mail, and their timeframe for payment. This fee may also be reduced or waived for taxpayers with low income. Note that each state sets its own criteria to determine which taxpayers are eligible to pay state back taxes through an installment agreement.
Under IRS policy, taxpayers may apply for a streamlined, guaranteed, or In-Business Trust Fund Express installment agreement online, depending on their situation. Individual taxpayers with a total liability of $50,000 or less and businesses with a total liability $25,000 or less may enter a "streamlined" installment agreement to pay their balance in 6 years or within the collection statute. Alternatively, individuals who owe $10,000 or less in taxes (excluding penalties and interest) and have not entered any other installment agreement in the last five years are entitled to a "guaranteed" installment agreement to pay their balance in 3 years or within the collection statute. Likewise, businesses who owe $25,000 or less may enter an In-Business Trust Fund (IBTF) Express agreement to pay their balance within 2 years. Under guaranteed, streamlined, or IBTF Express agreements, the IRS does not file a public Notice of Federal Tax Lien (NFTL) or review the taxpayer's financial situation. Otherwise, a taxpayer may apply for a routine installment agreement, which requires enclosure of financial information and may require the IRS to file an NFTL. Because state taxes have different collection statues than federal taxes, the timeframe for a installment agreement also varies from state to state.
An installment agreement can provide struggling taxpayers with much-needed leeway, allowing more time to gather funds to pay their tax liability. Additionally, if the IRS previously filed an NFTL against the taxpayer's assets, the taxpayer may request the IRS withdraw their NFTL unless the installment agreement indicates otherwise. However, just like any debt, tax debt continues to accumulate penalties and interest until the balance is fully paid. Consequently, an installment agreement with smaller payments over a longer period of time also costs the taxpayer more in the long run.
An installment agreement is considered in default if the taxpayer fails to make the mimimum payment on time, fails to file a tax return or pay taxes on time during the agreement. If a taxpayer defaults on their installment agreement, the government resumes enforced collection as usual and may resort to filing a public tax lien notice or issuing a notice of intent to levy, putting the taxpayer's property, reputation, and/or livelihood at risk. The taxpayer is also charged an additional fee in order to reinstate a defaulted installment agreement.
If you owe past due taxes and seek to pay through an installment agreement, we at LifeBack Tax can assist you. We can contact the IRS or your state agency on your behalf and negotiate the right IA for your needs.
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