What is a Partial Pay Installment Agreement?
A partial pay installment agreement (PPIA) is an agreement with the IRS (or a state tax authority) to make regular, periodic payments on unpaid tax liabilities, but the payment amount will not pay the debt off in full within the agreed time period. A PPIA is typically a five-year agreement with the ability to renew, however, in some circumstances it may be extended substantially longer. In stark contrast to the full-payment plan, where you pay the owed balance in full within 36 months or five years, the PPIA allows you to pay less each month and leave a remaining balance at the end of the time period. As payments are received from the taxpayer , the IRS or state tax authority pays down the debt.
While a partial pay installment agreement is a flexible and low-cost way to resolve a tax debt, it is also a costly one. Even when an amount is paid at the end of the PPIA term, that amount will accrue interest and penalties until it is paid. The most dramatic difference between the full-payment agreement and the partial payment agreement is the fact that the full-payment plan actually pays down the balance. Under the partial payment plan, the IRS sets forth to collect the remaining balance after the end of the payment plan. This is why having effective representation is absolutely critical. Without that representation, you may be in over your head by the time you realize the amount you owe.
Advantages of Partial Pay Installment Agreements
When you don’t have the income to pay the back taxes, the partial pay installment agreement can allow you to make payments you can afford right now. In addition to allowing the taxpayer to repay a lower dollar amount each month, the alternative – pay nothing and wait — could possibly result in the IRS taking more extreme measures like asset seizures or garnishments. This payment plan also gives the taxpayer a little breathing room while you get finances sorted out.
If your income is limited because of settling with past due bills from the aftermath of the recession or if you’ve become disabled and can’t work as before, not only can the partial pay installment agreement allow you to stay current on your taxes moving forward, it also provides a practical and legal way for you to handle the back taxes over a period of time you’re comfortable with.
The partial pay installment agreement also doesn’t impact your credit report. If you had been running up your credit card balances high and widening your debt gap, you get a clean slate as long as you make the minimum monthly payment. However, you do need to make timely monthly payments or you risk falling out of the agreement.
Who is Eligible?
To enter into a partial pay installment agreement, you must be in compliance with various requirements set by the IRS. Generally speaking, you need to be in full compliance for at least five years, and you cannot be currently in bankruptcy proceedings. Alternatively, your taxes do not have to be filed for the previous year (although if you’re in compliance now and file late you’ll just need to add it once you’ve received your acceptance into the agreement).
You also must disclose your assets and liabilities on IRS Form 433-A, or the successor form, and submit the most recent tax return, as well as verify your income, equity in assets and disposable income. If you’re self-employed, you may be required to provide additional documentation to verify your income and/or expenses.
How to Obtain a Partial Pay Installment Agreement
As with other payment arrangements with the IRS, a "Partial Pay Installment Agreement" will require an application. The form used is the IRS Form 9465. This form is generally used for all installment agreement requests. Installment agreement requests must be submitted to the IRS as a complete package including Form 9465.
The IRS will require a separate Form 9465 for each type of tax due. However, all forms may be submitted in one envelope together.
When submitting an application for a PPIA, it is essential that you show the IRS your current financial condition. When you do so, it acts as proof of your inability to pay the balance due. You will want to be as detailed as possible regarding income and expenses. In many cases, it is beneficial to attach a cover letter explaining why you qualify for a Partial Pay Installment Agreement. It will help direct the IRS examiner’s attention to the accurate figures and statements. For example, if you have reduced your income or you are recently disabled. You will want to offer proof of how your situation has changed since you last filed your tax return.
Remember to be accurate and use reasonable averages in your calculations. In doing so, you will avoid having to recalculate your budget. You may think that a higher average is better, but that is not the case. Furthermore, if you have been paying your back taxes for some time, you should have no difficulties providing the IRS with accurate figures.
In some cases, you may need to include documentation with your original Form 9465 request. The IRS will often request tax returns for prior years. It is a good idea to include them voluntarily. If you cannot get copies of your prior returns, you can use our Form 4054 to identify what was filed instead. You should inquire about whether the IRS files tax returns from your previous filed returns. It is important to do this if you filed your returns jointly with a spouse and your spouse is behind on alimony payments to a former spouse. The former spouse is limited to try and collect the alimony from your jointly filed returns. You can then use the Form 4054 to prove that the alimony payments were assigned.
Below is a summary of other requirements for submitting a PPIA application: In some cases, there may be a filing fee for an installment agreement. However, low income taxpayers don’t pay it. Those who qualify must submit Form 13844, entitled "Form 9465 Installment Agreement Request (IA) Available for Low Income Taxpayers". The form can only be filed online.
Usually an installment agreement will be accepted without requiring a minimum down payment. However, a PPIA has a minimum required amount to pay when the request is approved. The IRS may also require additional payment than what is proposed in your application. Generally, they will not give more than 60 months if you are still liable for tax. If you are not liable for tax, they usually allow 5-10 years to pay the balance due.
The IRS only processes a PPIA if you have filed your tax returns for the past 6 years and are current in estimated tax payments.
Avoiding Missteps
As with most things, obtaining a partial pay installment agreement is a process. A person looking to enter into a PPIA must: (1) complete the paperwork that is required by the IRS; (2) get that paperwork accepted as filed; and (3) remain in compliance with the payment while it is pending and then after it is granted. Each of these steps has the potential to result in a denial of your case, or improperly grant you a partial pay installment agreement and then later revoke it.
As I said above, a person seeking a partial pay installment agreement must complete the paper work required by the agent, usually Form 433-A, Collection Information Statement, and Form 656, Offer in Compromise. The key here is to be thorough and honest in your responses. You might not have all of the supporting documentation required with the first submission, but the agent will contact you soon after the first filing and request the documents that were missing. You will then need to provide the missing documentation in order to have the PPIA submitted as filed. It is very important to be thorough and honest in your responses on each submission, both with the initial submission and with the documentation. If you report that you have a dog and you do not have a dog, or if you report that you pay a certain amount to replace that dog, the agent will verify your information . If your misinformation is discovered your PPIA may be rejected as filed and you will have to start the process over again. With some of the PPIA submissions, you are asked to provide a written explanation for any discrepancies between what you reported on your Form 433-A, and what the IRA has from the taxpayer. Again, be truthful, and back up your position with documentation, or you risk rejection as filed and a denial of a PPIA. After the paperwork is filed, and the agent has made a determination whether or not to accept your PPIA as filed, the taxpayer must remain in compliance with the payment terms. Failure to make the payment as required will almost certainly result in a rejection of the application, even if it is a one-time missed payment. However, often times a PPIA is approved and plaintiff starts making the payments but then moves or changes jobs or has some other significant life change that may have an impact on their finances. You may request that the agent review the PPIA terms and allow a modification. If you are granted the modification you must be sure to keep careful records. If you miss a payment following the modification, the IRS may revoke the PPIA, and you will have to start the process all over again.
The Importance of Professionals
Particularly in cases where you are otherwise eligible for an installment agreement, the assistance of a tax professional (usually a tax attorney) is invaluable in securing the agreement and staying in compliance. There are several important areas where a tax professional can make the difference, including the following:
First, if you have unfiled returns, the IRS will not approve an installment agreement unless those returns are filed. Unless you have knowledge of all your unfiled returns, you likely need a tax professional to assist with this.
Second, the IRS may require a financial disclosure to determine your "ability to pay." This generally requires the completion of a form containing information on income, expenses, and assets, and may require third party substantiation of that information. There are often significant issues with these disclosures. For example, the IRS refuses to accept a disclosure which does not allow for full payment of a tax liability and also allows for living expenses below the standards prescribed by the IRS for expenses, such as health insurance, dental expenses, life insurance, and others. There is also a problem when a taxpayer has been substantially reducing or eliminating living expenses for some time in order to either qualify for an installment agreement, or simply out of necessity, they have been unable to pay basic living expenses. The IRS will ignore or question the genuineness of such reductions even when it is clear the taxpayer has been gradually reducing expenses over a period of years. In such cases, the taxpayer is obviously experiencing financial difficulties and any unreasonable adjustments will further unnecessarily penalize the taxpayer. This is generally the area in which the professional could effectuate the most meaningful change to IRS policy.
Third, sometimes the information submitted in a financial disclosure is internal to the IRS, for the purpose of reviewing the taxpayer’s financial ability to pay. Even though this is an internal document, the IRS will often require that the financial disclosure be notarized.
Fourth, a tax professional may have more time to argue or discuss incorrect IRS decisions and help reduce the negative consequences if the IRS decides against you. For example, if the IRS rejects a payment plan and you do not have financial ability to make the payments demanded, your tax area will start to build up and accrue penalties and interest. A tax professional may be able to convince the IRS to allow a partial payment installment plan, which would relieve you from the pressure of greater amounts being levied, but without having a fall-back position other than bankruptcy, you will have to accept the IRS’ decision. It is much better to have a tax professional who can convince the IRS that they have considered your position and the IRS policy, and should acquiesce, otherwise you risk getting into that cycle of levies or garnishments.
Termination and Modifications
The partial pay installment agreement can be modified or terminated by the IRS when a taxpayer(s) in default on their agreed upon terms or conditions of the agreement, when it is apparent that the present agreement can no longer be followed, or other criteria are not being met.
If compliance isn’t achieved or maintained by a taxpayer(s), the IRS will terminate the agreement. If the taxpayer(s) has not filed their return(s) or the taxpayer(s) income exceeds the originally agreed upon term, the IRS can modify the agreement. In the event the taxpayer(s) is experiencing a significant change, the IRS may withdraw a current notice of intent to levy, however cannot guarantee a favorable response to an amended/installment agreement request.
If the taxpayer(s) complies with their terms or conditions of the agreement, it will not be necessary to contact the IRS. The taxpayer(s) is not considered in default while making the required monthly payment. In addition, if the taxpayer(s) filed their tax return(s) and submitted their information in a timely manner, the IRS will receive the return and the information timely submitted.
If a taxpayer(s) falls behind on their term or condition of the agreement, the IRS will send a 30-day notice of default with the required payment amount.
IRS will not allow a partial pay plan in the event the taxpayer(s) does not bring their required minimum monthly payment current prior to applying for a new agreement. If the amount of the proposed monthly payment exceeds the taxpayer(s) allowable expenses, the IRS will not accept the agreement until the required modification has been submitted and approved.
The IRS will notify their supervisor to verify a valid address on collection activity. The IRS will send a letter to the taxpayer(s) to notify them of this action, including the amount of the payment due, the date the payment is due, and when the delinquency will occur.
If a taxpayer(s) is unable to submit their payment(s) on time and the payment(s) was initiated by an Automated Clearing House (ACH) debit or credit card, it is important that the taxpayer(s) takes prompt action. Delinquency notices are sent out immediately for missing payments and in the event a payment is submitted late, the IRS will not notify the taxpayer(s) that the payment is being held until the following month, or until the funds have cleared the bank.
The IRS will list the payment as applied to the last month that shows a balance due and apply subsequent payments to the following tax period(s). For example, if a payment is missed in December and then made in January, the January payment will be applied to the month of January, but the February and the March payments, will be considered delinquent.
If a taxpayer’s income has increased or their situation has changed in a significant manner, the taxpayer(s) must contact their assigned revenue officer or call the IRS toll-free number at 1-800-829-1040 as soon as possible. When a taxpayer(s) experiences a significant change, the IRS can withdraw a previously filed Notice of Intent to Levy or may request additional information in order to determine if their proposed modification is acceptable.
When a partial pay installment agreement is accepted, the IRS will not guarantee the establishment of a non-collectible status. In the event a non-collectible status is granted, the responsible taxpayer will be required to provide verification of their financial situation. Circumstances may include a taxpayer(s) recent incarceration, which created a change to their financial situation.
Questions and Answers
Will the IRS continue to take my refund if I enter into a partial pay installment agreement?
Yes, currently the IRS policy is to take your full refund for any year that your IRS balance is out standing. Once you have satisfied the terms of your partial pay installment agreement and you are back in compliance with paying your taxes you should be able to start receiving your refunds again.
What’s the difference between an offer in compromise and a partial pay installment agreement?
This is a myth, an offer in compromise will take care of the entire balance even if you cannot pay it all at once. If you have a balance due and can’t afford to make payments on the back taxes you owe, an offer in compromise will allow you to settle the debt for less than what you owe . If the IRS accepts the offer in compromise they will likely expect you to pay it off over a period of months, much like a partial pay installment agreement.
Will the IRS place a lien on my house if I enter into a partial pay installment agreement?
They likely will not. As long as you are making your payments on time the IRS will not place a lien on your home to secure the debt. But it is important to know that at the end of the partial pay installment agreement a lien will likely be place on your home to secure the debt.
Can I make my last payment on my partial pay install agreement, then file bankruptcy?
Yes, you can file bankruptcy after making your last installment payment. But necessary taxes will not disappear. While bankruptcy may be able to wipe away many of your debts you will still have to pay your post petition taxes and your tax return hold back. You can often only include your pre-petition taxes.