Wendy Kravit
Has the IRS Levied Tax Assessment on Your Client That Can’t Be Paid Immediately?

How you can help your client avert bankruptcy and offer alternate compromises.

November 10, 2011
by Wendy Kravit, CPA

If your client has been assessed tax that he cannot pay immediately, there are several alternatives available to him to avoid Internal Revenue Service (IRS) levy or seizure of property. The three primary alternatives are installment agreements, offers in compromise, and bankruptcy. We will examine each of these alternatives separately starting with the installment agreement.

IRC § 6159 authorizes the IRS to enter into installment agreements with taxpayers if the agreement will facilitate the payment of the tax.

Installment agreements are offered by the IRS in a wide range of circumstances. Some are quite informal short-term agreements that may initially be agreed to by telephone between the taxpayer and the Automated Collection System or a Service Center Collection Branch and confirmed by the IRS by letter. For accounts up to $25,000 which the taxpayer can pay off in five years or less, the taxpayer may be entitled to a “streamlined” installment agreement, one granted without the completion of a collection information statement and possibly without the filing of a notice of federal tax lien (NFTL). For accounts between $25,000 and $100,000, a collection information statement is required, and an NFTL will normally be filed, but the collection information statement will not normally be extensively researched.

Taxpayers may apply for an installment agreement by attaching Form 9465 to a filed tax return with a balance due. The IRS will generally respond within thirty days. Installment agreements may be approved by examination or other noncollection-division IRS personnel. Installment agreements may be entered into after audit and before assessment where the taxpayer agrees to the examiner’s proposed adjustments to tax but lacks the ability to pay. The IRS now supplies an interactive installment agreement application process on its website.

The situation in which tax advisors usually become involved, however, is where the liability is substantial and the taxpayer lacks the ability to pay the liability within a relatively short time period. An installment agreement under these circumstances is handled by the Collection Division and there may be a Revenue Officer assigned to the case. In this situation, before offering or agreeing to an installment agreement, the IRS will usually require an individual taxpayer to submit Form 433-A and, if the taxpayer is a business entity, Form 433-B. The taxpayer will be considered eligible for an installment agreement if the forms show an absence of assets that can be liquidated to pay the liability but a sufficiently large income from which to make payment.

The major advantage to an installment agreement is the fact that it allows the taxpayer to pay his liability over time. The disadvantages to an installment agreement are that interest and penalties continue to accrue during the installment period and the taxpayer must live on a rather tight budget.

Setting Up the Agreement

Before an installment agreement can be put into effect, the taxpayer must be current with all tax filings and other payment obligations. The IRS will not consider an installment agreement when there are unfiled delinquent returns.

In order to meet the requirements of IRC § 6159, the installment agreement must be in writing. The statute of limitation on collection, which is normally 10 years, is tolled while the proposed installment agreement is pending plus 30 days. However, the taxpayer may file a written notice waiving the restriction of the IRS to levy while the agreement is pending and therefore avoid the tolling of the statute.

If the installment agreement provides for only partial payment of the tax owed, the IRS is permitted to require an extension of the statute of limitations as a condition for obtaining the agreement. However, generally, the IRS may not otherwise require an extension as a prerequisite to agreeing to the agreement.

Once an agreement is accepted, the failure-to-pay penalty is reduced from 0.5 percent per month to 0.25 percent per month.

Installment agreements are not permanent and the IRS will periodically review the taxpayer’s account and may request updated financial information. If the taxpayer’s financial situation improves, the Service may require a change in the payment amount. Entering into an installment agreement does, however, prevent the IRS from filing a suit to obtain a judgment when the statute of limitations is about to lapse.

The IRS is required to give a taxpayer a 30-day notice before modifying an installment agreement explaining its actions. There is no judicial review available for modifications to an installment agreement, the taxpayer may only ask for an administrative review.

Extension of Time to Pay Tax on Return

IRC §6161(a) gives the Secretary of the Treasury the discretion to extend the time to pay the tax on an income tax return for a period of up to six months if the T/P is suffering undue hardships. A request for a Section 6161 extension is made on IRS Form 1127. The form must be filed before the tax is due. The application must be accompanied by a financial statement. The application will be granted or denied within 30 days. Early in 2009, the IRS made an announcement that they were willing to work with more flexibility with individuals in economic distress.

Required Acceptance of Certain Agreements

Regulation §301.6159-1(c) requires the IRS to accept a proposed installment agreement if, at the date the individual proposes the installment agreement:

  • The aggregate amount of the tax liability, not including interest and penalties, does not exceed $10,000;
  • The taxpayer has not, in the preceding five taxable years:
    • Failed to file any income tax return,
    • Failed to pay any required income tax, or
    • Entered into an installment agreement for the payment of any tax
  • The Service determines that the taxpayer is unable to pay the liability in full when due and;
  • The liability will be full paid within three years.

The IRS has also created a streamlined procedure for installment agreements where the amount owed is no larger than $25,000 and can be fully paid within five years. Financial statements are not required and the agreement may be made over the telephone. Interest and penalties will continue to accrue.

Additionally, the taxpayers that qualify for such an agreement may make the arrangement at the IRS website through the online payment agreement (OPA) procedures. The taxpayer or the representative may create the arrangement and receive instant notification of the approval.

There are three payment options that are allowed through OPA:

  • Payment in full within 10 days;
  • A 120-day extension to pay; and
  • An installment agreement. This will require a user fee.

This article has been excerpted from The Adviser’s Guide to Doing Business With the IRS. You can purchase the publication at cpa2biz.com.

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Wendy Kravit, CPA, MBA, has worked for the IRS as a Revenue Agent, taught federal taxation for 12 years and provides tax consulting services specializing in representation before the IRS.