If you are in an Installment Agreement with the IRS and find yourself unable to make your payments, you may be able to get the IRS to reinstate your Installment Agreement if you act quickly. But, before you do so you must ask yourself a question: Can you honestly afford this repayment? If you have missed or skipped a payment, if your payments are late, there is a good reason! The payment is too high and needs to be renegotiated.
The top 7 reasons why people get into IRS Installment Agreements they cannot afford
1. You have necessary living expenses in amounts higher than the IRS will allow
The IRS dictates how much they think you should be spending. On the financial forms, the IRS provides categories where you indicate your expenses. For example, there is one category for food, clothing and miscellaneous, one for housing and utilities, one for vehicle operating costs, etc.
What taxpayers may not know is that the IRS places a cap on expenses based on a national basis. This means that any amount over the maximum allowable expenses in each category will not be allowed – without good reason and proof. This increases your perceived ability to pay the IRS monthly. In addition to caps on personal expenses there is a whole list of things subject to limitations and exclusions, both personal and business related, that are too numerous to list in this blog.
The flaw with the IRS maximums is that they are often not realistic. We are seeing more and more clients who purchased their homes when interest rates or home prices were outrageous and have mortgage payments that exceed the IRS maximum by thousands of dollars. This is just one example of how the IRS maximums inflate a taxpayer's monthly payment plan.
2. You have liquid assets
Sometimes people enter into payment plans that put tremendous strain on their finances in order to protect their liquid assets. This would be a situation where the taxpayer accepted a higher payment plan even though they technically couldn't afford it, because their expenses are over the IRS maximums.
An Installment Agreement that would not repay your liability in 5 years requires you to liquidate any liquid assets before the IRS will grant you a lower payment plan. Many of our clients cannot bear the thought of liquidating their entire retirement account they worked so hard to save, just to make a small or moderate dent in their liability, and I don't blame them. However, lowering their liability may open up the door for a smaller payment plan. In this situation, people have some really hard decisions to make; do they keep the higher payment plan they can't afford, or keep the retirement account?
3. You're overspending
Once in a while, we have to have a serious conversation with a client about why exactly they CAN afford. In these instances, we have reviewed months of bank statements and determined that the lack of remaining monthly income is a result of overspending on unnecessary living expenses. Things like those daily iTunes purchases, Starbucks, eating out, trips to the spa, timeshares/vacations, luxury vehicles and casinos. Unfortunately, when you have an IRS liability, you may need to make sacrifices in spending to afford your Installment Agreement, since you will not get credit for these types of expenses on your Form 433-A, 433-B or 433-F.
4. Using the 433-A, 433-B or 433-F will not give you the best Installment Agreement.
Sometimes, providing a financial analysis won't get you the best payment plan. Based on how much you owe, providing a financial analysis may actually increase your payment plan higher than is required. The agents at the IRS may not tell you that, though.
There are times when special circumstances or expenses affect someone's financial situation and should be brought to the IRS's attention. It is important to communicate with your tax professional. Tell them your story and provide them with all information needed to make an informed and accurate determination on what resolution options you are eligible for. An experienced tax professional will know how to structure and present your finances to the IRS in a manner that is most beneficial to you. They will also be able to resolve any tough, complicated issues that may arise by requesting an appeal when the IRS doesn’t initially accept a reasonable or legitimate payment arrangement.
5. Sometimes, people will do anything to get the IRS to go away
We have seen it before many times. Often, our clients who tried dealing with the IRS themselves felt pushed into accepting a deal they couldn't afford. IRS Revenue Officers can be very convincing…
6. It's difficult to understand the appeals process
A rejection of an Installment Agreement may be appealed. However, the IRS does not make the process simple for the average taxpayer or professionals. There are Collection Due Process Hearings, Equivalent Hearings, Collection Account Program (CAP). Taxpayer Advocate Requests, and even petitions to tax court.
7. People don't understand that you don't have to pay the IRS back in full
A lot of people think they have to pay the IRS back in full. This is not true. So many times, I've seen people trying to repay the IRS in full with very high installment agreement payments. Then, they wind up defaulting and the IRS comes back harder.
The truth is, you could negotiate to pay the IRS an amount each month…an amount that won't pay the debt back in 5 years. Or even 10 years. And that's OK, because the IRS can only collect for 10 years. After 10 years, the debt goes away. So, with a partial payment installment agreement you only pay what you can afford each month until the debt is wiped out by time. Of course, if you come into money, the IRS will want more. But if your financial picture goes down, you can renegotiate. Or even file bankruptcy. The IRS won't tell you that Chapter 7 bankruptcy could potentially wipe out all your personal tax debt—but in many cases, it can.
Getting into an IRS Installment Agreement that you can actually afford and is most beneficial to you (that will actually end the tax problem) takes a high degree of skill and experience. If you need assistance understanding the best options to settle your tax debt, contact us. We can help. Call us at 888-727-8796 or email firstname.lastname@example.org.