If your IRS Installment Agreement defaults or is cancelled, you are likely worried about what to do next. Here's a real life example of someone who had his IRS Installment Agreement defaulted.
Names have been changed.
John works in New Rochelle, NY and makes $100,000 per year. Unfortunately for John, he has a 2-hour commute from his home in Connecticut. He has a car that he finances that costs him $500 per month. He also spends about $800 on fuel, tolls and upkeep.
John owes $50,000 to the IRS because he withdrew from an IRA to meet medical expenses. The IRS wants him to pay $2,000 a month. John says he can't afford this amount, so his IRS Revenue Officer tells him to fill out a 433-A. John puts down his actual car expenses of $1,300 a month. The Revenue Officer tells him "no, you are only allowed to claim the standard allowances which total $650."
John doesn't know what to do. He tells the Revenue Officer that he wants to hire an attorney. The Revenue Officer says "look, don't waste your money. It is a formula. Whatever the 433a says, you've got to pay, and a tax attorney can't do anything for you except waste your money."
So John agrees to pay the IRS $1,500 a month even though it is at least $550 more than he can afford to pay. He crosses his fingers and hopes everything works out. But as the months go by, John finds he is short on money. He's given up every expense in order to make his $1,500 a month payment to the IRS. He decides to increase his exemptions to "9" at his job, so that his take home pay is more.
Now that he has very little withheld and moves into a cheaper place to live, he is just able to make the $1,500 a month payment to the IRS.
He then files his next year's return and sees that he owes money. He figures the IRS will just include this new year's tax debt into the existing Installment Agreement. But that's not what happens.
John's IRS Installment Agreement defaults/cancels
John then gets a letter from the IRS telling him that he "defaulted" on his Installment Agreement. Panicked, he calls Revenue Officer. The Revenue Officer says that he no longer has the case and that tells John that he needs to call the centralized collections, ACS.
John calls ACS and tells the employee what he did to make ends meet. He asks why the Installment Agreement was cancelled. The IRS employee doesn't know, but tells John to to continue to make the Installment Agreement payments and that the case will be reassigned to a Revenue Officer.
So, John waits. But two months later, he gets a nasty surprise when his bank account is wiped out by the IRS and his employer gets an IRS wage levy against John. He takes a look at the Notices and sees that they are from a new Revenue Officer. John calls the local number but can only leave a message. He is besides himself and doesn't know what to do. Out of desperation, even though he was a told a tax attorney could not help him, he decides he has no other options and calls us.
We first got the levies released by showing the hardship they were causing. Next, we got John's withholdings back up to where they should be. Then, we made arguments why amounts over the allowable expenses must be allowed.
For instance, we argued that John should be able to include his actual commuting expenses. Without those expenses he would be not be able to make $100,000 per year, but rather, have to take a much lower paying job closer to his house.
In John's case we were able to get his actual car expenses accepted by IRS appeals. Additionally, we had him properly document other housing and insurance expenses and we were able to get the IRS to agree that John could only afford to pay back $250 a month — a far cry from the $1,500 a month the IRS first demanded. This type of small payment that John could afford is called a Partial Payment Installment Agreement (PPIA).
What a partial payment installment agreement does
John was still worried. He did a quick calculation and figured it would take him 40 years to pay back the IRS. We told him no, that the IRS only has 10 years to collect on the debt . Because he was now about half-way through that period, he would only be paying $250 a month for the next five years.
Once that time expired, the rest of the debt would be written off. We warned him that if he did come into more money, the IRS may seek to increase that amount. Conversely, we told John that if he lost his income (through no fault of his own) that we could use his new circumstances to argue for even a lower deal, or an offer in compromise, or even bankruptcy.
John realized that over the past year he had paid the IRS $15,000, lived like a pauper, was worried all the time, was humiliated with a tax levy, and yet…still went backwards. He said that he wished he had called us right off the bat.
The IRS does not have your best interest in mind. The IRS will bully you into paying more than you can afford. An amount that can only land you in bigger trouble with the IRS. And then the IRS will advise you to take a course of action that will get you levied. It happens. Any IRS employee who tells you that it is a waste of your money to hire a tax attorney is (1) breaking the law, and (2) not trustworthy.
UPDATE: I was asked why we didn't file an Offer in Compromise in John's case. The reason is that John had a dissipated asset.
What's a dissipated asset? It's taking an asset and getting rid of it before you start negotiating with the IRS. In John's case, years ago, he sold a 1969 Chevrolet Camaro for about $25,000 to pay for his daughter's wedding. So for John, an Offer in Compromise would have likely started at the $25,000. And this makes sense. John could have paid the IRS the $25,000, but instead, he used the money on something that the IRS considered discretionary.
The Offer in Compromise was something we were considering, but we also only had 5 years left for the IRS to collect and filing an Offer would have stopped that remaining collection clock from running while the Offer would be under consideration (typically, about 8-16 months). John thought it was a better idea to not gamble on the Offer in Compromise as we advised him that while he could probably settle the debt for half of what he owed, he had no realistic way to come up with the half that the IRS would require.
With the partial payment installment agreement, on the other hand, John would be paying far less with that than with an Offer in Compromise.
If you have a tax issue you need assistance with, contact us. We can help. Call 888-727-8796 or email email@example.com. Read testimonials about Parent & Parent LLP here.