When & How to Request a Partial Payment Installment Agreement
With a Partial Payment Installment Agreement (PPIA), you make monthly payments to the IRS, but you end up paying less than you owe because some of your tax bill expires before the end of your payment agreement.
With authority coming from the American Jobs Creation Act of 2004, partial pay agreements let you pay off your tax liability for less than you owe, without forcing you to make a large lump payment. But they can be tricky to qualify for. You must complete an application and send a full financial disclosure to the IRS. Then, depending on your situation, you may also have to sell some of your assets or agree to extend the expiration date.
To help you decide if a Partial Payment Installment Agreement is right for you, this guide breaks down the essentials and explains how to apply.
Who Should Apply for a Partial Payment Installment Agreement?
If any of the following apply, you may want to look into a Partial Payment Installment Agreement:
- You cannot afford monthly payments that will pay off your tax liability before the Collection Statute Expiration Date (CSED).
- You don't have any assets that you can liquidate to pay off your tax bill in full.
- You can't get a loan to pay off your tax bill in full.
- You have been rejected for the Offer in Compromise (OIC) program.
- You don't qualify for hardship or currently not collectible status.
Generally, the IRS only accepts these agreements if you don’t have enough assets to liquidate (there are exceptions) and you don’t have enough monthly disposable income to make payments on a regular installment agreement. In addition, the IRS must also believe that you are not going to earn enough money to cover your taxes owed in the upcoming years.
How Partial Payment Installment Agreements Work
With a regular installment agreement, your minimum monthly payments must be enough to pay off the taxes within six years (72 months). For instance, if you owe $7,200, the IRS will want you to pay at least $100 per month. Note that there are exceptions to this rule. In some cases, the IRS gives taxpayers seven years. In other cases, the agency may require a faster repayment plan.
If you cannot afford these payments, you may be able to make smaller payments through a Partial Payment Installment Agreement. When you make smaller payments, you take longer to pay off your tax liability, and as a result, you may not be able to pay off all of your tax bill before it expires. In other words, if you're accepted into this program, the IRS lets you make the smaller payments and allows some of your tax bill to expire.
Here's a quick example. Imagine that you owe $7,200 that expires in six years. You can afford to pay $50 per month. The IRS accepts this payment arrangement. Over the next six years, you pay $50 per month for a total of $3600. The remainder of your bill expires. You don't owe anything else.
How to Apply for a Partial Payment Installment Agreement
A tax pro can help you apply for a Partial Payment Installment Agreement (PPIA). Or you can apply on your own using these steps:
- Complete Form 9465 (Installment Agreement Request) or apply for an installment agreement online.
- Complete Form 433-A or 433-B.
- Gather financial documents to support the details on these forms.
- Estimate what monthly payment you can afford.
- Send the above documents to the IRS.
- If you paper file, include a copy of your tax return with your application. (You don't need to include a tax return if you e-file.)
- Include the application fee which ranges from $107 to $225 depending on it you set up direct debit for your payments or not. If your income is below a certain level, the IRS may waive this fee.
- To be on the safe side, include your first monthly payment.
Then, just wait. The IRS usually responds within 30 days. If you don't hear back within 30 days, make your monthly payment as scheduled. This shows the IRS that you are serious.
Form 433 Collection Information Statements and Partial Payment Agreements
As indicated above, you must make a full financial disclosure to the IRS if you want to get approved for this program. Individuals should fill out 433-A (Collection Information Statement for Wage-Earners and Self-Employed Individuals) and businesses should submit 433-B (Collection Information Statement for Businesses). These forms require detailed information about everything you own, how much you earn, your savings, your debts, and your expenses. The IRS looks closely at this information to determine your monthly payment. The agency wants to be sure that your monthly payment is truly the most you can afford to pay.
The IRS compares the information from your collection information statement (CIS) to the details reported on your last tax return. If the income on your 433-form is more than 20% lower than the income reported on your last tax return, the agency will want more information from you. Similarly, if the IRS believes that you have not included all of your assets on the 433, it will also require you to explain your position.
Determining the Monthly Payment for a Partial Payment Installment Agreement
The IRS uses the info on your 433 collection information statement to determine if you qualify for a PPIA and to determine your monthly payments. Here is an overview of how that process works.
- You prepare the 433 statement with detailed information about your income, expenses, debts, and assets, but you don't include conditional expenses.
- The IRS determines how many months away the Collection Statute Expiration Date is -- this is the last day that the IRS is allowed to collect on your tax debt.
- The IRS multiplies your excess monthly income by the number of months until the collection statute expires. For instance, if you have $200 extra per month and the statute of limitations is in 36 months, the IRS says that you can afford to pay $7,200 out of your income.
- Then, the IRS adds the realizable equity in your assets to your available income. This is not all of the equity in your assets. Generally, it's a portion of the equity, and as explained above, the IRS doesn't take all assets into account.
- Based on these numbers, the IRS decides if you qualify for this program and it establishes your monthly payments.
If the total of your realizable equity and available income exceeds your tax debt balance, you are not eligible for this program. If the total is less than your tax bill, you may qualify. Typically, your monthly payments will be your available income plus your realizable equity, divided by the number of months until the collection statute expires.
PPIA and the Collection Statute Expiration Date
As explained above, with a PPIA, some of your tax liability expires and disappears, allowing you to pay off your tax bill for less than you owe. This happens on the Collection Statute Expiration Date (CSED). After this date, the IRS can no longer collect on the bill. The CSED is usually 10 years after the tax was assessed or the return was filed.
Should You Agree to Extend the Collection Statute?
In some cases, the IRS may require you to extend your CSED before approving your PPIA request. Typically, this happens when the IRS believes that you are going to receive extra money after the CSED.
For instance, imagine that your tax liability expires in two years but in three years, you're going to receive the principal of a trust. Or, imagine that your business has a property that it can't sell until six months after the CSED. In these situations, the IRS may not approve the partial payment plan unless you agree to extend your CSED so that you can use these assets to pay off some of your tax liability. In other cases, the IRS may request that you extend the CSED, but it won't require you to do so. To give you an example, imagine that your income is going to increase soon, and to collect more money, the IRS agent asks you to extend the CSED. You say no, but the IRS decides to approve your PPIA anyway. In this type of situation, the agent will make a note to review your case in two years. Then, at that time, the agency has the right to rescind your payment agreement or continue as originally planned.
There are some situations where the CSED gets automatically extended. In the following cases, the collection process is temporarily paused and the extra time is added onto the CSED:
- When you apply for an offer in compromise.
- When you request a Collection Due Process (CDP) hearing.
- When you request innocent spouse relief.
- When the tax court is reviewing your case.
- During the automatic stay of a bankruptcy case, plus six months.
Sometimes, extending the CSED is the right decision. It may help you get approved for a Partial Payment Installment Agreement, and it may stop the IRS from taking certain collection actions against you. But you need to tread carefully. Don't be bullied into making a decision that might not be in your best interest. Consult with a tax pro before allowing the IRS to extend the CSED. Note that the IRS can only extend the statute of limitations when you're applying for the PPIA. It cannot extend the statute during the two-year review unless you set up a new PPIA. In all cases, the agency can only extend the statute of limitations on tax debt collection by five years plus one for administrative review.
Requirements for a Partial Payment Installment Agreement
You generally must meet the following requirements if you want to get approved for a Partial Payment Installment Agreement (PPIA):
- Owe over $10,000.
- Can afford monthly payments but cannot pay off the entire tax liability before the collection expiration date.
- Have filed all past tax returns.
- Are not in bankruptcy.
- Have not had an Offer in Compromise accepted.
- Have no assets or can’t access the equity in your assets.
If you cannot afford to pay at least $25 per month, you may want to apply for hardship status. With this program, the IRS marks your account as currently not collectible, stops collection actions, and revisits the situation every year or two to see if anything has changed.
When you apply for a partial payment plan, a group manager will review your application. They will ensure that you are compliant with all current filing obligations, withholding, federal tax deposits, and estimated taxes. They will also ensure that the IRS agent that reviewed your original application made the right decisions in regard to selling your assets, and they will ensure that none of the decisions made are going to cause you economic harm.
What If You Defaulted on a Payment Agreement in the Past?
You may be able to qualify for a partial pay agreement even if you have defaulted on an installment agreement in the past. However, in this situation, you will be required to set up direct deposit so that the IRS can take your payments directly from your bank account. This is called a direct debit installment agreement (DDIA). Alternatively, you can ask your employer to withhold the payments from your paycheck and send them to the IRS. This is called a Payroll Debit Installment Agreement (PDIA). The IRS doesn't charge extra for a PDIA, but your employer may be able to charge you a small fee to cover the cost of administering the payments. There are limited exceptions to this rule. For example, if you're self-employed and don't have a bank account, the IRS may not require you to secure your payments with a DDIA or PDIA. A tax pro can help you figure out what you need to know in your situation.
Selling Assets for a Partial Payment Installment Agreement
Sometimes, the IRS may require you to sell some of your assets or take a loan against them before approving you for a Partial Payment Installment Agreement. The IRS is serious about collecting unpaid taxes, and if the agency thinks you have frivolous assets, it may not accept a payment plan until you liquidate or take out loans.
You may be able to avoid selling or borrowing against your assets if any of the following apply:
- Assets are not sellable.
- Selling assets would not cover taxes owed.
- Assets do not have sufficient collateral to obtain a loan.
- You wouldn't be able to pay the loan if you used the asset as collateral.
- Assets are off-limits because your non-liable spouse does not want their part of the assets sold.
- You use the asset to generate income.
- Selling the assets would create financial hardship.
It's important to note that in cases where you can't liquidate your assets, the IRS will request additional information if your unpaid tax debt exceeds a certain threshold. The IRS calls this the unpaid balance of assessment (UBA), and the agency has not disclosed the threshold it uses. The revenue officer working your case may request to see real property records, DMV records, and a copy of your credit report.
If the IRS is asking you to sell your assets, consult with a tax pro before making a decision. The IRS revenue officers are focused on getting the bill paid. They are not focused on your best interest. A tax professional can help you negotiate with the IRS while keeping your best interest in mind.
Partial Payment Agreements Vs. Offer in Compromise
With both partial payment agreements and offers in compromise, you get to resolve your tax debt for less than you owe. For many taxpayers, the partial payment option is easier than an offer in compromise because you don't have to make a lump sum payment. Instead, you can spread out your payments over a longer time frame. That is the central advantage of PPIA vs OIC.
However, when you get an offer in compromise, the deal is set in stone unless you break one of the requirements. For instance, if you don't stay current with tax filing obligations for a certain number of years, the IRS can rescind your offer in compromise and demand full payment. A partial payment plan, however, works a little differently. With a PPIA, the IRS reviews your situation every two years. If you can afford to pay, the IRS can require you to pay the full balance due or set up a regular installment plan.
Note that the IRS doesn't always remember to do the two-year review. If the IRS forgets to review your PPIA, you don't have to reach out or do anything. Just keep moving forward with your plan. If the IRS forgets the two-year PPIA review, that usually works in your favor. However, your tax pro may reach out to you to prepare for the two-year review so you might want to plan ahead for that.
When you apply for both an offer in compromise and a partial payment plan, the IRS takes a close look at your finances. In both cases, the IRS will only settle your tax bill if you really cannot afford to pay the full tax debt. When evaluating your finances, the IRS uses Collection Financial Standards to ensure that you aren't overspending. These standards outline how much the IRS believes you should be spending on housing, food, vehicles, utilities, transportation, etc. Some of the numbers are national, while others vary based on your area.
However, when you apply for an offer in compromise, you can bring up conditional expenses. For instance, the IRS may allow your spending to exceed the Collection Financial Standards when you have excess medical expenses due to a chronic condition, you have high utility bills due to running a business in your home, or you're paying college tuition for your child. These are just a few examples. The IRS takes all kinds of conditions into account. Unfortunately, in contrast, when you apply for a partial payment agreement, the IRS won't consider conditional expenses. If your expenses exceed the allowed threshold when you apply for a partial payment plan, the IRS will give you a very small window of time to adjust them.
Partial Payment Agreement on Employment Taxes
You may be able to get a partial payment agreement on employment taxes, but it depends on your situation. Here is an overview of the elements the IRS considers and a look at how the options differ depending on if you're in business or no longer in business. These rules apply to sole proprietorships, partnerships, LLCs, and corporations.
Companies In-Business That Want a PPIA on Employment Taxes
If your business is still operating, the IRS will verify the income and expenses on your application. Then, the agent will document anything questionable, and look for records of your real and personal property. If necessary, the agent may require you to sell or borrow against your assets. Finally, they ensure that you can afford to pay your current business taxes, operating expenses, and PPIA.
Here is an example of the type of questionable issue the IRS will look more deeply into. Let's say that your collection information statement shows that you have more expenses than income, but you also report that you are not behind on your mortgage. The IRS agent will want to know how you're making that payment so they will look deeper into your situation. Now, imagine that the agent finds out that you recently took out a loan, and you've probably been using those proceeds to cover your monthly bills. The IRS also notices that the repayments for the loan start in three months. Based on this information, the IRS may determine that you can't afford to pay the PPIA and that loan. This is why it's critical to be very thorough when you complete your application. A tax pro can ensure that you don't present any questionable information that may derail you from getting approved.
Out-of-Business Companies That Want a PPIA on Employment Taxes
If you are no longer in business and you're trying to get a partial pay agreement on employment taxes, the IRS will assess a Trust Fund Recovery Penalty (TFRP) against you unless there is no way to collect this penalty from you or any other responsible party. Remember, the IRS can assess the trust fund recovery penalty against any responsible party. If the responsible party works for the liable business, the IRS can require both of them to make payments on the trust fund taxes and penalties. In some cases, it can help if the business reduces the liable person's salary by the amount of their ability to pay so that the business can afford to increase its monthly payment.
To give you an example, imagine that you own an S-corp, and you pay yourself an annual salary. Both you and the business are responsible for employment taxes and you apply for a partial payment agreement. The IRS says that you can afford to pay $200 per month and the business can afford to pay $500 per month. Theoretically, you may want to reduce your salary by $200 so that you can't afford to make a payment, and then, the business can increase its monthly payment to $700.
What's the advantage of this technique? Well, as an individual, you cannot claim a penalty as a tax deduction, but when the business makes these payments, it can deduct them as part of its payroll expense. This helps you save money in the long run.
What Happens If You Default on a Partial Payment Plan?
If you miss a monthly payment, your plan goes into default. When you default on a partial payment plan, the IRS sends your case back to the collections department. If you have assets or wages, the IRS may enforce collection actions. If not, the agency may mark your account as currently not collectible.
Get Help Applying for a Partial Payment Installment Agreement
A Partial Payment Installment Agreement can be a great option in the right situation, but it's a complicated program. For best results, you should work with a tax pro who has experience helping clients to secure this type of agreement. Wondering if it's the best option for you? Want to get help applying? Then, contact a tax pro today. On TaxCure, you can search for tax pros based in your area who have experience with your specific situation. We are committed to ensuring you get the hands-on help you need.