How to Settle Your Tax Debt by Negotiating a Payment Plan with the IRS

Struggling taxpayers may be eligible for tax breaks as the IRS eases enforcement and collection efforts to help Americans in financial distress. Because of the extraordinary challenges of today's economy, the IRS is pledging to be more forgiving of Americans who have fallen behind on their taxes due to unusual financial hardship.

And one way you can settle your back taxes is by negotiating an Installment Agreement
with the government that that allows you to pay liabilities over time.

If you cannot afford to make monthly payments and don't qualify for another type of tax relief, such as an Offer in Compromise, there are other options including negotiating that your account be placed in a "currently not collectible" status so that you will not be required to make payments and the IRS will not pursue collection action.

The IRS encourages taxpayers to pay what they owe as quickly as possible. For those individuals or businesses not able to resolve a tax debt immediately, an installment agreement can be a reasonable payment option. Installment agreements allow for the full payment of the tax debt in smaller, more manageable amounts.

In most cases, the IRS will accept some type of payment arrangement for past due taxes. In order to qualify for a payment plan with the IRS you must meet the following rules and provide the IRS with this information:

* You must have filed all tax returns (It's OK to owe money but you must file).
* You will need to disclose all assets owned including all cash and bank accounts.
* You must not have adequate cash available in a checking, savings, money market, or brokerage account to pay the IRS.
* You must not have the capacity to borrow the amount owed to the IRS from other sources (i.e., a second mortgage on your home).
* You must not have adequate equity in a retirement account from which you can borrow or liquidate; for example, IRA's or 401K's.

The total dollar amount you owe usually dictates with whom the negotiations will be handled.

* Typically, IRS Revenue Officers are not involved in cases where the amounts owed are less than $25,000.
* The IRS will ask you to complete a personal financial statement and if a business is involved, you will also need a business financial statement.
* The IRS has determined allowable monthly expenses for individuals, which will be matched against your actual monthly expenses.
* The difference between your monthly income and your allowable monthly expenses will be the amount that the IRS will require you to pay on a monthly basis.

These monthly payments will continue until your outstanding tax liabilities are paid in full.

It is important to note that the IRS continues to add penalties and interest while you are making monthly payments. This may cause you to be paying what you consider a large monthly payment to the IRS and your outstanding balance may in fact be increasing due to additional penalties and interest.

The IRS may not explain this to you! So be careful!

Additionally, for taxpayers that enter into an installment agreement, the IRS may require a signed waiver to extend the time IRS can collect. While it is always in the best interest of the IRS to get a signed waiver, it may not be in the taxpayer's best interest. If you are asked to sign a waiver, protect your rights, seek the advice of a tax resolution expert first.

The IRS in most cases, to protect their interest, will file a Notice of Federal Tax Lien, with the County Recorder's office in the county you reside. This will inevitably be reflected on your credit report decimating your credit (FICO) score. In addition a recorded Federal Tax Lien means the IRS has a monetary interest (claim) against all real and personal property owned (at time of filing) and any and all real or personal property acquired in the future while the lien is in effect. Generally, the lien is effective throughout the 10 year Collection Statute of Limitations.

Whether the IRS demands full payment up-front or a payment plan that is substantially higher than what you can afford to pay, a professional tax resolution specialist

can help you negotiate an arrangement for the lowest possible monthly payment and also provide you with various options for making those payments.

Additionally, if you owe more than $25,000 to the IRS, you will be required to provide full financial disclosure and you will need to hire specialized tax representation to negotiate on your behalf with the IRS.

Although the IRS is pledging to be kinder and gentler to taxpayers in these challenging times, you will still need to meet your installment payment requirements. However, the IRS has announced that they will try to be more flexible with taxpayers who miss an installment payment.

"We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today," Shulman said. "We want to go the extra mile to help taxpayers, especially those who've done the right thing in the past and are facing unusual hardships."

If a taxpayer with an existing installment agreement is worried about missing a payment because of a job loss or other financial hardship, Shulman has assured the public that a missed payment will no longer lead to an automatic end to that agreement.

Additionally, the IRS has announced that it is more likely to forgive a missed payment and they've instructed staff to not automatically default someone who is having trouble.

What do you have to do to be eligible for an installment agreement?

To be eligible for an installment agreement, all returns that are due must first be filed.

What are the payment terms?

Installment agreements generally require equal monthly payments. The amount of an installment payment will be based on the amount owed and on the taxpayer's ability to pay that amount within the time legally available for the IRS to collect. By law, the IRS has the authority to collect outstanding federal taxes for ten years from the date of assessment.

What are the conditions of an installment agreement?

As a condition of an installment agreement, any refund due in a future year will be applied against the amount owed. Therefore, taxpayers may not get all of their refund if they owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. The IRS will automatically apply the refund to the taxes owed. If the refund does not take care of the tax debt, then the installment agreement continues until all of the terms are met.

Does interest stop with an installment agreement?

Interest does not stop accruing until the entire obligation is paid. An installment agreement is more costly than paying all the taxes owed now. Penalties and interest continue to be charged on the unpaid portion of the debt throughout the duration of an installment agreement.

Are there fees to set up an installment agreement?

The IRS charges a user fee of $43 to set up the installment agreement. And it is possible for an installment agreement to be reinstated if the agreement defaults.

Also, installment agreements may be restructured to include additional amounts owed in one agreement. Reinstating or restructuring an existing installment agreement will cost an additional $24 user fee.

What are enforced collection actions?

Generally, IRS enforced collection actions (levy against personal or real property) are not made while an installment agreement request is being considered, or:
While an agreement is in effect,
* For 30 days after a request for an agreement has been rejected, and
* For any period while a timely appeal of the rejection or termination is being evaluated by the IRS.

Can my installment agreement be defaulted?
Yes. Failure to make timely payments can default the agreement. A defaulted installment agreement could subject a taxpayer's account to enforced collection action and potentially have a negative effect on a taxpayer's credit standing.
What is an annual statement of balance due?

In accordance with the law, installment agreement taxpayers receive an annual statement from the IRS. The statement provides the amount owed at the beginning of the statement period, the payments (credits) posted to account(s), any fees or assessments, and the ending balance. Currently, the annual statement is sent each year in July.