The Internal Revenue Service normally expects people to pay their tax liabilities in full as they are incurred. It also recognizes that circumstances may exist in which the individual cannot do so. In some instances, the IRS may be willing to accept a financial agreement.
Tax Debts over $50,000
The installment agreement is based upon the taxpayer’s ability to pay. For tax debts over $50,000, the IRS requires the tax payer to submit a Form 433-A, Collection Information Statement for Wager Earners and Self-Employed Individuals. This is a detailed financial document, in which the taxed individual discloses all assets, including:
- Real Estate;
- Bank Accounts;
- Personal Property including vehicles;
- Life Insurance;
- Retirement Accounts;
- Liabilities, including mortgages, car loans, unsecured debts and credit cards.
The form also requires the taxpayer to provide information on monthly income and monthly expenses. Both business and personal monthly expenses must be disclosed.
If the taxpayer shows a positive monthly cash flow that is sufficient to pay the tax debt over a period of a number of years, the payment plan is usually accepted. Five years is usually the maximum number of years the debt can be repaid. The IRS will carefully look at the taxpayer’s expenses. It uses its own tables for determining whether certain expenses are considered reasonable.
If the taxpayer shows a negative cash flow or substantial equity in assets, the installment agreement may be denied. In those cases where the taxpayer has far more liabilities than income, the taxpayer may not be able to fund a payment plan. In those cases where the taxpayer has equity, the IRS prefers the taxpayer to liquidate assets to pay the tax liability.
Tax Debts Less than $50,000
If the taxpayer owes less than $50,000 and has filed all returns, a far less formal procedure is instituted. The taxpayer does not have to submit the financial disclosure statement detailed above. Rather, the taxpayer can complete an online application. The information necessary is:
- Taxpayer ID number;
- Date of Birth;
- Bank address;
- Amount that can be paid;
- Employer address;
- Taxpayer PIN or last year’s AGI information.
Unlike those owing over $50,000, the IRS normally accepts the taxpayer’s promise to pay on an installment with little verifiable information. The form can also be completed in paper form, using Form 9465. If the taxpayer does not specify a payment amount, the IRS will divide the tax debt by 72 months and use that figure as the monthly payment.