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When to Use an Installment Agreement and Which Type to Use

Guest post by: Manny Davis

Article Overview: If you owe taxes to the IRS, an installment agreement may be the best solution for you. Installment agreements allow for individuals with back taxes to pay off the amount over time, rather than all at once. Installment agreements, however, have several requirements and classifications that must be understood prior to entering in order to gain the best outcome.

When to Use an Installment Agreement and Which Type to Use

If you owe more taxes than you can afford to pay all at once, an Installment Agreement is a good option for satisfying the IRS. IRS Installment Agreements make it possible to divide your total taxes owed over several months - giving you more affordable monthly payments. It's similar to a bank loan; but unlike a bank loan which requires you have good credit to qualify, almost everyone will qualify for an IRS Installment Agreement. Also, if you were denied an Offer In Compromise, an Installment Agreement is a good alternative. Installment Agreements do not always prevent tax liens against your assets or property. Liens may be placed on your home, for example, to ensure that while you are making payments under your Installment Agreement you do not sell your home and use the money to pay other creditors or for other purposes.

Additionally, while Installment Agreements will allow you to pay the taxes you owe, they are not without interest or penalties. The amount paid in penalty and interest through an Installment Agreement is usually about half what you would pay without having the agreement at all, however, so it will still save you money in the long run.

Choosing an Installment Agreement

There is more than one type of Installment Agreement available. The type of agreement you use is based on the amount of taxes owed and your financial situation. Here are four of the primary types:

1. Guaranteed Installment Agreement - available to taxpayers who owe $10,000 or less, you are guaranteed approval for the Guaranteed Installment Agreement under law. Taxes owed are normally paid back within 36 months to 3 years time, depending on the amount owed.
2. Streamlined Installment Agreement - available to taxpayers who owe $25,000 or less but who did not meet the Guaranteed Installment Agreement requirements. Taxes owed are normally paid back over a period up to 60 months. Your minimum monthly payment is calculated by dividing the total amount of taxes, penalties and interest owed by 60 months. Use a tax professional to set up a Streamlined Installment Agreement.
3. Financially Verified Installment Agreement - available to taxpayers who owe more than $25,000, or did not meet the Streamlined Installment Agreement requirements. Use a tax professional to set up a Financially Verified Installment Agreement, as the monthly payment amount is determined by your proven ability to pay based on a Collection Information Statement (433A for individuals and 433B for businesses).
4. Part Pay or Partial Payment Installment Agreement - available to tax payers who can't meet the other Installment Agreement requirements or can't afford the other agreement minimum monthly payments. The Part Pay or Partial Payment Installment agreement allows some of your tax debt to be forgiven (settlement) and a monthly payment is calculated on the remaining owed balance based on your ability to pay as proven through financial disclosure. You must be able to prove financial hardship and be willing to use any assets you may have toward reducing the total amount owed.

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Article Tags: back taxes, IRS installment agreement, offer in compromise, tax lien



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