Authored By: Neal Machanic completed his Masters in Accounting at the University of Utah prior to qualifying as a Certified Public Accountant.  He is also an Enrolled Agent authorized to represent taxpayers before the Internal Revenue Service. He is currently studying to become a Certified Valuation Analyst. Neal crunches numbers in his sleep!

What happens when a taxpayer is ready to file their 2011 individual income tax return and they have a balance due? Well, the Internal Revenue Service wants them to pay it in full by April 15^th. Unfortunately, a taxpayer’s current fiscal situation might require a different response.

If a taxpayer is not going to pay their tax bill in full they usually have three options:

1. Ignore it, hoping it will go away (it never does)
2. Pay it off over time (very much like a loan)
3. Negotiate a reduction in the total amount due (such as with a short sale of a house)

We can assist you with all three options. In fact, many taxpayers who originally chose option one have come to us to help them out. We may have then chosen option two or three to assist them in getting their tax dilemma resolved.

The option that this article will focus on is number two, which in tax lingo is called an installment agreement. The condensed version goes something like this: a taxpayer cannot pay their balance due in full, they request an installment agreement. The IRS sets them up with monthly payments. They pay the tax bill over time with smaller, more manageable payments. The downside to this option is that the IRS will continue to charge them interest on the outstanding balance until it is paid in full. 

Beginning in 2012, the 2011 tax filing season, the Internal Revenue Service has loosened its rules on who can qualify for an installment agreement and the amount of financial data the taxpayer is required to disclose in order to qualify for an installment agreement. They have also increased the maximum number of months generally allowed to pay off an installment agreement.

The IRS now requires only minimal disclosure for tax balances up to $50,000. They have identified three balance groups: balances up to $10,000, balances between $10,000 and $25,000 and balances between $25,000 and $50,000; with each group requiring progressively more financial disclosure. However, disclosure in the highest group listed is minimal as compared to the information the IRS requires for installment agreements over $50,000.

For those taxpayers who owe $10,000 or less in combined tax, interest, and penalties for all open tax years, the IRS will guarantee acceptance. The IRS cannot turn you down as long as you meet these three conditions:

1. During the past five years, you have filed all tax returns in a timely manner, paid any tax due, and did not enter into any other installment agreements.
2. The IRS determines you cannot pay the balance in full when due, and you provide the IRS any information it requires to make that determination.
3. You agree to complete the installment agreement within three years, and you comply with tax laws while the agreement is in effect.

For those taxpayers whose total balance owed is between $10,000 and $25,000; they are not guaranteed acceptance for an installment agreement, although most requests are granted. In this group, if accepted, they can have up to seventy-two months to pay off the balance owed.

For those taxpayers who owe between $25,000 and $50,000, they must provide answers to a number of basic financial questions in addition to the information provided with lower dollar balance owed installment agreement requests.

It should be noted here that balances owed that are greater than $50,000 are eligible for an installment agreement. But before the IRS grants such a request for these large balances, a taxpayer would be required to disclose substantial amounts of financial data, and fill out a significant amount of IRS forms.

Even though the IRS has relaxed its rules on what balances qualify for an installment agreement and how long a taxpayer can take to pay, the IRS does not want to be America’s money lender. They want taxpayers to try to obtain the funds from any and all other possible sources before resorting to an installment agreement.

So, if you are faced with a tax bill you cannot pay in full, an installment agreement is an excellent way of taking care of your tax responsibility. It sure beats the option of doing nothing because the IRS will find you eventually; they always, always do. It is also an effective method unless you are in dire financial straits, and cannot pay even with an installment agreement. Then an offer-in-compromise might be in order for you. But before this method is considered, remember that like a request for an installment agreement greater than $50,000, the amount of financial information that must disclosed and provided is significant.

The accountants of Cook Martin Poulson, PC are ready to assist you with this or any tax situation or problem.