Installment Agreements Generally.
Taxpayers do not always have the financial wherewithal to pay all of their federal tax obligations on time. In these instances, the Internal Revenue Code (the “Code”)[i] grants taxpayers with a statutory right to request additional time to make full or partial payment through an installment agreement.[ii] If the IRS accepts the terms of the installment agreement, the taxpayer benefits in that the IRS is precluded from levying against the taxpayer’s assets, provided the taxpayer continues to comply with the terms of the agreement.[iii] Moreover, the IRS benefits in that it is not required to devote its resources to investigate the taxpayer’s financial situation and also seek levy of the taxpayer’s assets to satisfy the outstanding tax debts.
IRS Form 433-D.[iv]
Generally, a taxpayer enters into an installment agreement with the IRS through execution of an IRS Form 433-D, Installment Agreement. A standard-form Form 433-D provides the following terms and agreements amongst the parties:
- The amount of the monthly payment to the IRS;
- Whether the monthly payment will remain static or increase/decrease after a specified period of time;
- Recognition by the taxpayer that the agreement is based on the taxpayer’s current financial condition and that the agreement may be modified or terminated if the IRS has information that suggests that the taxpayer’s ability to pay has “significantly changed”;
- Recognition by the taxpayer that the taxpayer must remain compliant with other federal tax reporting and payment obligations while the agreement remains in effect;
- Recognition that the IRS may terminate the installment agreement in certain instances, including: (1) if the IRS has information that suggests that the taxpayer’s ability to pay has “significantly changed;” (2) the taxpayer has failed to stay compliant with all federal tax reporting and payment obligations; (3) the taxpayer misses a monthly payment; and (4) the taxpayer fails to provide requested financial information to the IRS.
More on Default and Termination.
Generally, after the taxpayer and the IRS have entered into an installment agreement, the agreement “remain[s] in effect for the term of the agreement.”[v] However, certain events will cause either a default or termination of the installment agreement, which permits the IRS to levy against the taxpayer’s assets. These events include:
- The taxpayer misses a monthly payment;
- The taxpayer fails to make a payment on other tax liabilities (e., those tax liabilities that are not subject to the installment agreement);
- The taxpayer fails to provide an updated financial statement to the IRS upon request;
- The IRS later determines that the taxpayer provided incomplete and/or inaccurate information to the IRS prior to its acceptance of the installment agreement;
- The taxpayer fails to make a modified payment amount to the IRS after the IRS has reviewed the financial information and made a determination that the taxpayer may make a higher payment.[vi]
If the IRS determines that the agreement should be defaulted, the IRS will issue a letter to the taxpayer notifying it of its determination. After receipt of the letter, the taxpayer generally has 30 days to request an administrative appeal of the IRS’ determination. If the taxpayer misses this deadline, the taxpayer can make a request for an administrative appeal after the installment agreement has been terminated.[vii]
Reinstatement of the Installment Agreement.
The IRS has discretion to reinstate a defaulted or terminated installment agreement. But, prior to reinstatement, the IRS employee is instructed to consider:
- The taxpayer’s reason for default or termination;
- The taxpayer’s ability to pay;
- The applicable collection statute of limitations;
- Potential levy sources;
- Potential for the taxpayer to reinstate but with a payroll deduction agreement or Direct Debt Installment Agreement;
- Whether a notice of federal tax lien should be filed;
- Review whether the taxpayer is in full compliance with his or her federal tax obligations (including reporting, payment, and estimated tax payment, if applicable).[viii]
In some cases, the IRS may decide to reinstate the installment agreement without managerial approval and without requesting that the taxpayer submit a new financial statement[ix] to the IRS. These cases include:
- The taxpayer defaulted or the agreement was terminated due to an additional liability and the addition of that new liability would result in no more than 2 additional monthly payments with the agreement not extending the collection statute of limitations;
- The agreement meets the streamlined criteria and the taxpayer has not defaulted on an installment agreement within 12 months prior to the current default;
- The taxpayer has remedied the default prior to the termination date.[x]
If the taxpayer cannot show that he or she meets the circumstances above, the IRS is instructed to request additional financial information statements from the taxpayer.
Appeals of IRS Determinations.
If the IRS determines that an installment agreement has been defaulted or terminated, the taxpayer may request a Collection Appeal Program (“CAP”) hearing with the IRS Independent Office of Appeals.[xi] This administrative review by the IRS is required because it is statutory.[xii] As part of the CAP hearing, the taxpayer may contest either the default or termination determination. Generally, the taxpayer must make the CAP hearing request within 30 days after the date of the default or 30 days after the date of the termination.[xiii]
Installment agreements are great collection alternatives to IRS administrative levies. However, as discussed above, installment agreements are not always permanent—that is, the IRS can and often times does revisit the terms of the installment agreement to determine whether payment can be made more quickly and also whether the taxpayer has maintained compliance with other tax years outside the scope of the existing installment agreement. If the IRS asserts that the installment agreement is in default or terminated, the taxpayer should consider his or her options of administrative rights to appeal that determination and request reinstatement of the agreement. Moreover, if the taxpayer’s financial condition has worsened since entering into the agreement, the taxpayer should consider requesting a modification of the terms and a potential reduction of the monthly payments.[xiv]
[i] All references to the Code refer to the Internal Revenue Code of 1986, as amended from time to time.
[ii] See I.R.C. § 6159.
[iii] See I.R.C. § 6331(k).
[v] I.R.C. § 6159(b)(1).
[vi] I.R.C. § 6159; IRM pt. 184.108.40.206 (01-01-2015).
[vii] The IRS generally uses Letter CP523, Intent to Terminate Your Installment Agreement, to notify the taxpayer of a default.
[viii] IRM pt. 220.127.116.11 (01-01-2015).
[ix] Depending on the identity of the taxpayer, the financial statement may be either an IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or an IRS Form 433-B, Collection Information Statement for Businesses.
[x] IRM pt. 18.104.22.168(2), (3).
[xi] IRM pt. 22.214.171.124 (3-11-2011).
[xii] See I.R.C. § 6159(e).
[xiv] Indeed, taxpayers may request a modification or termination of an existing installment agreement where the taxpayer’s financial condition has worsened. See Treas. Reg. § 301.6159-1(e). If the taxpayer chooses to request a reduction of the monthly payment, the taxpayer should ensure that he or she is able to demonstrate the worsened financial position. In addition, the taxpayer should continue to comply with the terms of the existing installment agreement while the IRS reviews the information. See Treas. Reg. § 301.6159-1(e)(3).