Partial Payment Installment Agreement Overview
A Partial Payment Installment Agreement (PPIA) is, essentially, an agreement between the taxpayer and the Internal Revenue Service under which the IRS "flexibly defers collection" from the taxpayer so long as the taxpayer makes a payment each month. This agreement supersedes a regular Installment Agreement and has the effect of extending the period of time the IRS can collect from the taxpayer. Although the agreed monthly payment may be lower than would be required under a regular Installment Agreement , the statute of limitations on collection from the taxpayer extends only until the amount accepted by the IRS under the agreement is paid in full, rather than until the statute of limitations on the tax runs under the law.
There are both drawbacks and advantages to entering into a Partial Payment Installment Agreement with the IRS. On the downside, the period of time the IRS can collect against the taxpayer is extended. On the positive side, monthly payments under a Partial Payment Installment Agreement are generally much lower than would be required under a regular Installment Agreement.
Qualifying for the IRS Partial Payment Installment Agreement
To qualify for a Partial Payment Installment Agreement (PPIA) with the IRS, an applicant must meet certain eligibility criteria that both financial and non-financial. The ability to qualify for the PPIA program is critically important as it effectively enables the taxpayer to "buy time" in order to reduce tax liabilities over time. Since the IRS can aggressively pursue asset seizure and other collection options, the PPIA would generally be a favorable option for those who meet eligibility requirements.
Under non-financial eligibility criteria, taxpayers must be compliant with all previous IRS filings for the last five years in order to qualify for the installment plan. The IRS must also have filed the tax return to establish the amount owed.
Financial eligibility criteria require that the taxpayer’s monthly disposable income must be less than the applicable monthly living expense allowance. When determining eligibility, the IRS will only consider your necessary monthly living expenses. If the calculated monthly payment for your offer in compromise or from your audit exceeds the monthly allowable living expenses, one of two things will happen: First, you will be found to be ineligible for the installment agreement; or second, only the lesser amount may be accepted by the IRS.
Disposable income is determined by reducing a person’s gross monthly income by a set amount based on standards for monthly expenses, which is established by the IRS. Current standards are available as an appendix in IRS Publication 5329. This allowance limits the amount of disposable income which the IRS will use in the calculations for an installment agreement. The IRS will then determine the reasonableness of the living expenses allowed against the information that you have provided in your financial statements. In addition, the IRS will consider the location of where you live, the size of your family, and your current financial circumstances against the information provided in your Application for Additional Installment Agreement Time (Form 1128).
Application Process for Partial Payment Installment Agreement
A taxpayer can set up a Partial Payment Installment Agreement with the IRS online. The request may be completed by going to the IRS’ website and accessing the payment plan Page or by clicking here and entering their personal information. Information required to be entered includes:
If the information provided is complete, the taxpayer will go directly to an Application Fee Payment screen with the options to make the required tax payment by direct debit, electronic funds transfer via bank account debit, debit or credit card or payment by check.
If the required information is incomplete, the taxpayer will run through a series of question in a Help Tool. Once these questions are completed or bypassed, the taxpayer will go to an Application Fee Payment screen with the options to make the required tax payment by direct debit, electronic funds transfer via bank account debit, debit or credit card or payment by check. All payment arrangements provide a transactional FAQ help screen with a chat functionality.
When entering the tax liability balance information, the system will display tax type, tax period, amount, due date and the assessment date for each balance (tax type includes Individual Form 1040 and 1040 filed by third parties (Form 1099, etc); Excise; Employment; Corporate; Partnership; Consumer; Estate; Gift; Estate Tax Return linked to Form 706). For any tax period that has a payment plan balance, the system will display the most recent period for each tax type and a listing of unpaid prior years for each tax type. Once the taxpayer makes a selection, the system will add the additional amount to the current payment plan balance and ask for confirmation before moving to the next screen.
The application is processed and a consensus advisory opinion is generated. Taxpayers provide financial disclosure information to the IRS and the IRS uses the disclosure information to determine the appropriate payment plan arrangement. Taxpayers are required to make the initial payment as a lump sum. Payments may be made online or sent in the mail using a payment voucher.
The System allows taxpayers to view installment agreement balance information on the Online Payment Agreement (OPA) site. The balances shown are based on the underlying account information available in the Integrated Data Retrieval System (IDRS); therefore, if any period has a balance that has a zero balance on IDRS, then OPA will not show that period on the Payment Plan Balance Screen. Taxpayers will need to contact the telephone number on the Notice CP 504 notice for this information.
Once the IRS issues a Services Initiated Installment Agreement
Taxpayers who requested a Temporary Delay of Collection must continue to pay the installments as mandated by the agreement until the Temporary Delay of Collections period expires.
Any changes in financial condition that will no longer allow the taxpayer to continue to pay as agreed should be reported to the CS. Reinstated and reviewed agreements may require income verification depending on other factors such as how much of the original term of the agreement has expired or based on the total amount paid to date.
If the taxpayer is not able to pay the amount agreed to on the Installment Agreement, a payment proposal may be computed online using Form 9465, Installment Agreement Request and Form 2159, Request for Installment Agreement. A partial pay installment agreement is created in the system after the taxpayer agrees on the payment amount, and the installment agreement balance is added to the record. The taxpayer is provided a confirmation number accepting the terms of the partial pay installment agreement. The taxpayer is also provided a link to the Financial Statement, Form 433-F, Collection Information Statement. An expected completion date, based on the current terms of the partial pay agreement, is also provided.
Taxpayers may go online to add a new year or existing year to their pending partial pay agreement using the ‘Request Changes to a Pending Installment Agreement’ application. Taxpayers are required to download the Form 9465, Installment Agreement Request, and return it to the address listed on the form for their specific agreement. Taxpayers should send in the payment for the new year requested to be included on the agreement.
Benefits and Drawbacks of the Partial Payment Installment Plan
The key advantage of a Partial Payment Installment Agreement is flexibility. The IRS allows a taxpayer to pay less than the maximum monthly payment the IRS will take, and with a Partial Payment Installment Agreement the IRS agrees to allow the taxpayer to pay less even if the taxpayer cannot pay within the normal 72 or 84 months. A Partial Payment Installment Agreement allows a taxpayer who cannot pay all tax within the statute of limitations for collection to obtain an agreement to pay the IRS an amount that is reasonable.
A Partial Payment Installment Agreement can be a good choice for those who do not quality for Currently Not Collectible status, and who cannot pay all tax within the statute of limitations for collection. The main advantage for a Partial Payment Installment Agreement over a Currently Not Collectible status is that a taxpayers income can increase, resulting in more IRS collection leverage at a later date. By taking advantage of the partial payment relief afforded by a Partial Payment Installment Agreement, some taxpayers can agree to a payment plan now that is a reasonable amount, without putting their finances in financial peril, and therefore have an ability to pay the IRS in the future.
Allowing the IRS to levy on a regular Installment Agreement can be a major disadvantage of a Partial Payment Installment Agreement. By choosing a Partial Payment Installment Agreement, it may be possible to end up paying substantially more in the long run than if the taxpayer simply paid the full amount that would have been due on a standard Installment Agreement. Because the IRS tries to calculate a partial payment Installment Agreement that is the minimum amount required under the collection policy and not the amount that the taxpayer can afford to pay, a Partial Payment Installment Agreement may be for years longer than a standard Installment Agreement. Assuming the IRS levies for enough to pay the tax, interest and penalties, even a small wage levy can mean thousands of extra dollars paid to the IRS in the long run.
Defaulting on Your Installment Agreement
If you default on your existing Installment Agreement with IRS, be prepared for an onslaught of penalties, interest additions, and a visit from the IRS to serve Sec. 6331 Notice of Federal Tax Lien prior to going to the US District Court for the Wisconsin Eastern District to seek an order to issue a Face Value Summons against you for failing to pay the delinquent taxes as required by your Agreement. You will then be given an opportunity to explain to the judge why you should not be jailed for this failure to meet the conditions of your Agreement. If the judge is not persuaded by your arguments, he will likely order you into custody until all the back taxes plus fees, costs and interest are paid in full. If you attempt to leave court without paying all amounts due, then the bailiff will have you held until a Form 433-A Collection Information Statement is filed and the money is paid .
The IRS can also file another, or newly amended, Notice of Federal Tax Lien against you, and the Special Agent assigned to any outstanding criminal investigation may also seek a Criminal Referral for Tax Fraud violation of Section 7201 of the I.R.C. No one in their right mind wants to face the court’s contempt and potential imprisonment for defaulting on a Partial Payment Installment Agreement with IRS.
Don’t do it unless you and your qualified tax professional have done the math, and come to the conclusion that compliance with the Agreement terms is absolutely impossible. Otherwise, you will suffer the consequences, and IRS will be very happy for forcing you to do what most individuals know they should be doing anyway.
What to Know About Using a Partial Payment Installment Agreement
Managing a Partial Payment Installment Agreement requires dedication, and care must be taken to ensure ongoing financial obligations can be met. The following are some tips to consider when working to maintain compliance throughout the life of the agreement.
- Budget your monthly expenses. Knowing how much you have coming in is important because it allows you to actively plan for your monthly payments. A carefully planned budget will help you avoid excessive overages, which could result in falling out of compliance with the agreement, and potentially result in a tax levy being placed against your assets. It’s also a good idea to leave yourself a bit of wiggle room in your budget if you can – a few extra hundred dollars in the bank can be your safety net.
- Consult a credit counseling service. If you find that you have issues sticking to your budget, that you are running out of money before the end of the month, or that you are constantly stressed about money, it might be time for a credit counselor to step in. A credit counselor can help you budget your money, organize your expenses, and may even help you reduce your debt load or increase your income through possible tax refunds or other measures.
- Avoid high interest debt. If you’re struggling to make ends meet, you may consider taking out a loan to pay off higher interest debts and creating one single payment. While there can be benefits to this, participation in a debt management program like this will be reported on your credit score, and can also affect your ability to file bankruptcy in the future. The lender may also require you to give up the right to file bankruptcy as part of the agreement, making bankruptcy protection unavailable in the future if needed. However, for some, a debt consolidation loan can be beneficial. The key is to make sure you have a plan in place to cover the loan payment each month.
- Contact customer support if you feel you are having financial struggles. It’s important to have a plan in place if you find that you are becoming unable to keep up with your payment plan. Consulting with a CPA or financial advisor, or perhaps requesting a payment modification agreement or hardship program, are often the best options.
Partial Payment Installment Agreement FAQ
Frequently Asked Questions on IRS Partial Payment Installment Agreement
What are the minimum monthly installment requirements?
For individual taxpayers, the minimum monthly payment amount is the greater of 1.0% of the balance owing or $25. For certain business taxpayers, the amount increases to $125.
Are there any restrictions on what the IRS can take?
While not an outright prohibition, there are certain restrictions on the amount of assets that the IRS can levy. The restrictions merely limit that the amount of the levy cannot exceed the amount necessary to satisfy the liability.
Do I still file a tax return if I have the partial payment installment agreement?
Yes. There is no exception from the requirement to file a tax return under this program. If you fail to file a tax return , your partial payment installment agreement may be defaulted and the IRS can start enforcement against you.
Will the IRS issue a refund if I overpaid?
Yes, but only if the overpayment is one that will be refunded to you by statute. This includes overpayments where the tax year has expired, a "1033 loss," an "excess payment" where the IRS misapplied a payment, and where the taxpayer claims an overpayment in response to a notice from the IRS. Refunds generated from overpayments can be issued under this program.
If I currently have a partial payment installment agreement, do I have to file an appeal with the office of appeals?
No. Under these guidelines, the IRS is able to consider the partial payment installment agreement within the confines of the collection due process (CDP) appeal instead of sending the case to the appeals office.