If you owe the IRS back taxes, it might help to know that you’re not alone – and that you’re far from the first or last person to get in trouble with the tax man. In 2017 alone, an estimated 858,000 taxpayers fell behind on their taxes. In 2020, Americans owed as much as $114 billion in collective back taxes. That’s a lot of government dough. But it doesn’t mean that the IRS doesn’t take back taxes seriously.
Failing to pay your taxes can get you in trouble with the IRS, but the process is gradual, depending on what you owe. If your tax debt is negligible, it might take some time for the IRS to act on your debt, but you may still find yourself on the other end of a Notice of Federal Tax Lien and other collection actions against your account. The more serious your debt, the more serious the IRS’ attitude. And as expected, tax debt grows over time through accumulated penalties and interest.
Thus, the longer you take to resolve your debt, the more expensive it will become. Interest rates on tax debt aren’t favorable either, meaning you’re often better off trying to get a loan to pay the IRS than waiting for your debt to become unmanageable. Tax debts can grow, and many taxpayers find themselves in difficult situations where even a minor end-of-year debt to the government isn’t something they can afford.
Because of this, a significant component of any repayment plan is the installment agreement. The IRS offers taxpayers multiple different kinds of installment agreements. Among the most common are streamlined installment agreements which offer flexibility to get back on the government’s good side and resolve tax debt.
What Are Streamlined Installment Agreements?
An installment agreement is a financial report the IRS requires you to fill out to determine eligibility for certain installment agreements and help determine whether you are financially stable enough to support a long-term repayment plan. A streamlined installment agreement is, as the name implies, an expedited installment agreement that involves less paperwork than usual.
In many cases, the IRS requires a Collection Information Statement from taxpayers before they can approve an installment agreement. A streamlined installment agreement does not require this form. Instead, you can begin repayment almost immediately. Furthermore, a streamlined installment agreement protects you from a Federal Tax Lien. Some other installment agreements do not until you’ve made significant payments towards your debt.
When Are Streamlined Installment Agreements Needed?
Nearly all installment agreements have the same general structure. A 72-month agreement consisting of equal monthly payments until your debt reaches zero. When petitioning the IRS for an installment agreement, you can modify the original terms to speed up the rate you’re paying off your debt, provided you have the financial means to do so.
Any debt resolved within less than 180 days does not require an installment agreement. Instead, you can pay the IRS in multiple lump sums (short-term payment plan) or a single cheque or wire transfer. Installment agreements like a streamlined installment agreement are a good idea whenever:
- You are in debt with the IRS.
- You cannot afford to pay back your debt within six months.
How Do I Qualify for Streamlined Installment Agreements?
The requirements for a streamlined installment agreement are simple. You need to owe $50,000 or less. This unpaid balance includes your back taxes, assessed penalties, interest, and all other assessments on your tax account. Additionally, suppose you owe more than $25,000. In that case, you also need to agree to let the IRS automatically withdraw each month’s installment payment from your bank account via payroll deduction or direct debit. Otherwise, you may still acquire an installment plan without a financial statement, but you risk a federal tax lien.
What About Other IRS Installment Agreements?
All IRS monthly payment plans presuppose you will need 72 months to pay off your debt. However, depending on your circumstances and the amount you owe, you may qualify for certain installment agreements but not for others. In addition to a streamlined installment agreement, all taxpayers owing a debt of more than $50,000 must opt for a non-streamlined installment agreement.
As this implies, it requires filing a Collection Information Statement to begin the process. Furthermore, you may be subject to a federal tax lien. Most tax firms will advise you to make as many payments as possible towards your total debt to bring it to less than $50,000 before negotiating a payment plan with the IRS. Tax debt can expire.
However, this takes ten years from the assessment date of your debt, plus any applicable tolling periods. If you waited long enough to pay your debt, you might not have 72 months on your debt’s timer. If your financial means are not enough to pay your tax debt off within less than 72 months, the IRS may agree to a partial payment plan. In other words, you will make monthly installment payments until your tax debt expires, even if you don’t end up paying off your entire debt.
However, the IRS may require you to make more significant monthly installments if your financial situation improves. Alternatively, you may find yourself in a situation where any installment plan is financially unreasonable. In such rare cases, you may be able to settle for a significantly reduced debt via an offer in compromise. However, the IRS does not accept these often, so discuss this option with a professional before proceeding.
What Happens If I Refuse to Pay?
The IRS is not a toothless organization. Refusing to pay, or ignoring the IRS’ warnings, letters, and notices can result in a federal tax lien, levy, and seizure. A federal tax lien is the government’s way of securing its debt. It can force itself to the top of your creditor list, forcing you to address your debt before liquidating assets or seeking financing. Liens can also remove your ability to secure debts until you settle your debt with the IRS, regardless of other debts. On top of this, the IRS can step in with a levy.
A levy is a physical claim of any asset or account, including your primary residence or your only bank account. If you do not have any assets, the IRS can levy a portion of your monthly wages, depending on your income and number of dependents. The IRS will only avoid liens and levies when a taxpayer’s taxpayers situation is so dire that they are under financial distress. The IRS may still place a lien on your account, and your tax debt will continue to accrue interest.
If you owe a tax debt to the IRS, getting ahead of the situation with the right plan can help you avoid much more significant penalties and other costs. Let us help you find the right solution for your circumstances.