Tuesday, August 2, 2011

IRS Installment Agreements: How to Setup and Negotiate an IRS Installment Agreement (IA)

Yesterday, I blogged about how to determine if an Installment Agreement is the right course of action to mitigate your tax problems.  Today I will discuss how you can set up one of these Installment Agreements yourself.

Question: How do I set up an Installment Agreement?

If you have decided that an Installment Agreement (IA) is your best option, you may want to try setting one up yourself.  Generally, there are no hidden “secrets” or “tricks” to this process.  Being prepared is always the best strategy here.  This means you should be aware of what the IRS representative is looking for and be able to provide accurate information (and documentation in support of this information). 

In this blog entry, we will discuss the “nuts and bolts” of setting up an IA using a financial statement.  In certain situations, you can set up an IA without any disclosures or documentation to the IRS.  We will discuss this type of arrangement and its advantages on another day.
To start, you should be able to answer a few basic questions.

How much do I want to pay?
Your request for an IA begins with an IRS collector analyzing your Collection Information Statement (IRS Form 433-A, or the shortened Form 433-F).  The collector uses the information on the form to determine the amount you can pay.  Payment amounts are at the discretion of the IRS.  If you deal with 10 different collectors, you might end up with 10 different IAs!
Nevertheless, here are some strategies for negotiating an installment plan:
  • Be nice!  Do not take your frustrations out on the front-line IRS representative.  They have heard it all and more importantly, your aggression won’t help you.  You may be surprised how many more bees you can get with honey vs. vinegar.  A few minutes of being nice (even to the point of being phony) may save you a ton of pain over the next few years. 
  • Begin the negotiations with a number in mind.  If you don’t have a number in mind, you might end up committing to payments that you cannot afford.  This will cause you long-term hardship over the term of the plan as you try to plug the various financial holes that pop up as you try to meet your commitments.  You should also be prepared to give reasons for the number that you want – don’t just pull a number out of thin air. 
  • Complete the Form 433-A (or Form 433-F) before you talk to the collector.  The IRS will ask you how much you spend on individual expenses per month.  This includes FOOD, HOUSEKEEPING SUPPLIES, APPAREL & SERVICES, PERSONAL CARE PRODUCTS & SERVICES and MISCELLANEOUS but necessary personal expenses.  You will also be asked how much you spend on out-of-pocket health care expenses  (prescription drugs, medical services, co-pays, et al.), transportation, automobile expenses and finally housing and utilities.  Without a doubt, compiling all of this information and making sure that it will be accepted by the IRS is the “bread and butter” of the process.  Go to the IRS website at to make sure that (i) you claim all of the expenses that you are allowed, and (ii) the expenses do not far exceed the allowable amounts.  These expenses are the so-called “necessary living expenses” that is so important to the IRS collector.
  • You should also have certain “conditional expenses” in your back pocket.  Generally, the IRS will not allow expenses that are not “necessary” when determining the amount of an IA payment.  However, if you have additional monthly expenses that you are paying (such as credit cards, personal loans, 401K, etc.), be prepared to give these expense to the IRS with reasons why you must continue to pay them.  You will likely be required to document these expenses.  The IRS may reduce your monthly commitment to allow you to pay these creditors.
  • Set a monthly payment for as LOW as you can.  You can always pay MORE than the allowed amount, but you can never pay less.  Promising the IRS more than you can deliver is a serious mistake.  Once an IA is approved, the IRS makes it difficult for you to renegotiate it.  It is always helpful to set the bar as low as you can in case something unexpected arises.  I recommend that you pay off the tax as quickly as you can in order to reduce accruals (penalties and interest) but only if it doesn’t put the rest of your financial house in disorder.
  • Offer to pay at least the amount of your income minus your necessary living expenses. This is the cash you have left over every month after paying for the necessities of life.  Again, do not promise to pay more than you can afford just to get your plan approved.
  • Set the date of the first payment as far out as you can.  Generally, you can push the first payment out 45-60 days without any argument.  You can take this time to save up a fund from which you will pay the IA (and which could give you a cushion if some emergency comes up).  If you can afford make payments before the first due date, feel free to do so.  However, I have not found that making voluntary payments influences the IRS collector in any way. 
  • If the IRS grants an installment plan, it may take several months to notify you in writing.  Remember to ask the IRS where to send the payments if you don’t get the letter on time.

What method should I use to pay the IRS?
You have three (3) options for making payments once your IA is approved:
  1. Personal Check (or money order):  Until you receive written notice of approval, this is your only option.  You can send payments to your local service center (whose address you received from the IRS) using a personal check (if you don't want the IRS to know where you bank, use a money order or cashier's check from another bank).  Make sure to allow time for mailing.  You don’t want to default on the IA because it was late in the mail.
  2. Direct Debit. You can elect to allow the IRS to automatically debit your checking account each month in the amount of the payment.  As long as you keep the account open, this is the most foolproof way to make sure you don't miss a payment and risk having the agreement revoked.  However, never allow the IRS access to your personal checking account.  Instead, set up a separate account for the sole purpose of paying the IRS.  You can even establish an automatic transfer into this account to make life easier.
  3. Direct Payroll Deduction.  You can allow the IRS to take its payment directly from your paycheck.  Your employer must agree to send payments to the IRS each month using the IRS's payment slips.  I don’t suggest this option. 

In my opinion, your first priority is to make sure that the financial needs of your family are met first.  If an emergency arises, you want the option of defaulting on the Installment Agreement.  Personally, I would rather pay for the medical emergency of a child than send another payment to the IRS.  When you give the IRS access to your money before yourself (by payroll deduction or debit from your personal checking account), you put the needs of the IRS ahead of the needs of you and your family. 

If you need help or advice on this process, it might be helpful to seek the advice of an experienced tax professional.  Such a person often will advise you without a fee – just to help you out.  Feel free to call me at (760) 990-1632 if you need any clarification of this process.  I will be happy to hear from you.

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Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632.

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