IRS Pay Plan: Setting Up An Installment Agreement for Back Taxes

Ok. Let's start with an easy one. Malcolm C. of Lexington, KY writes me asking how he can set up a payment plan with the IRS on his $19,000 tax debt.

Let's review some of the facts of the case first:

1. Malcolm owes for two years; 2003 and 2004.
2. All of his tax returns are filed.
3. He is not under a current levy/garnishment.
4. He does not owe for business taxes, just personal.

It turns out Malcolm claimed "exempt" on his W-4 for 2003 and 2004 to try to get some extra cash. And now the IRS wants their money. The IRS wants Malcolm to pay $753 per month on a payment plan. But he can only afford to pay $400 per month. What are his options?

This is a very common scenario that I see over and over again with my clients. First of all, you will never get away with claiming "exempt" on your W-4. Eventually you will always have to pay the piper (plus penalties and interest). In almost every situation, the extra money you got during the exempt period just isn't worth the hassle and expense you experience later on.

If the IRS wanted to get super technical about it, they could probably make a criminal charge of tax fraud stick by claiming that you knowingly and willfully underwithheld on your income taxes. However, the chances of you getting even investigated (let alone indicted) are next to none in a case like this. Bottom line: Just don't do it.

SOLUTION: The best thing for Malcolm to do is call the IRS ACS (Automated Collection System) line at 1-800-823-1040 and request a "Streamlined Installment Agreement."

A Streamlined Installment Agreement is available to any taxpayer as a matter of right if you owe less than $25,000; have all of your tax returns filed; and only owe for personal income tax (no business payroll tax debts).

The Streamlined Installment Agreement is calculated by taking your total tax liability (in this case $19,000) and dividing it by 60 months. So Malcolm is looking at a monthly payment of approximately $320 to $325 per month over the next five years (60 months) that he can set up with the IRS ACS unit.

The benefit of a Streamlined Installment Agreement is that the IRS will not levy or garnish you as long as you are on the pay plan. It becomes another monthly bill and you just pay it for the next five years (it will actually be a little longer than 5 years since penalties and interest will still accrue).

Now the IRS reserves the right to file a Federal Tax Lien even if you are making the payments to preserve their interest in the debt until it is paid in full, so don't be shocked if this happens. Remember a Lien and a Levy are two different things. The lien will not take your money, your wages, or your property. It just sits on your credit report until the debt is paid.

Also, you need to make sure that you stay compliant for the future. Any non-compliance will put the agreement in default and then all bets are off. The IRS defines "compliance" in this case as making sure all of your returns are filed on time (usually by April 15th) and that you do not run any new balances (all taxes are paid by April 15th for the previous year).

Good luck Malcolm. In a future post I will explain how you can get a reduction in a similar case by getting the penalties and interest on penalties removed.