Question: How do I set up an Installment Agreement?
- 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.
- 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.
- 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.
- 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.
Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632.