A task frequently faced in representing clients before the IRS Collection Division is negotiating an “installment agreement” — an arrangement under which monthly payments are made, free of the threat of levies and seizures. Despite the IRS’s imposition of a system of miserly national and local expense “standards” in August 1995, there is still room for effective advocacy. Furthermore, the IRS Restructuring and Reform Act of 1998 has made changes to the negotiation and legal consequences of installment agreements, and places greater emphasis on their use.
Identifying the objective
As Revenue Officers are fond of saying, the IRS is not a bank. And except for certain limited cases involving small balances, the Collection Division will not accept a monthly payment agreement unless there is no alternative.1 In some cases, however, there simply is no other option. In these cases, the task becomes getting the client the best possible deal, which requires an understanding of the client’s objectives.
For some, the goal is full payment as quickly as possible to minimize interest and late payment penalties. Others, however, have created tax debts so large that full payment is not possible. These poor souls must look to the expiration of the statute of limitations on collection, an offer in compromise2, or bankruptcy.3 For them, an installment agreement is an interim solution, and the objective is negotiating the smallest payment the IRS will accept. The IRS’s goal is easier to ascertain and more consistent — the Revenue Officer wants the largest monthly payment the taxpayer can afford.4
A prerequisite to any installment agreement is “current compliance.” This means that all required returns have been filed, and that the taxpayer has rejoined the “pay-as-you-go” system. For business taxpayers, the IRS will demand proof that current payroll taxes are being deposited on a timely basis. For individuals, there must be evidence of adequate withholding or estimated tax payments for the current tax year.
A taxpayer who is piling new liabilities on top of old ones is “pyramiding” in IRS-speak. A Revenue Officer will be thinking about putting such a taxpayer out of his misery, rather than allowing him to make monthly payments against an ever-growing tax debt. Particularly for business taxpayers, the pyramiding of taxes precludes any relief from the onslaught of levies and seizures. You will get much farther with a Revenue Officer by focusing first on current compliance. Indeed, by using the IRS’s own terminology and showing that you understand the importance of current compliance, you will demonstrate that you know what you’re doing and that you are trying to make the Revenue Officer’s job easier. Few would dispute the assertion that Revenue Officers have the worst job in the IRS, and most of them appreciate working with a courteous and professional representative who understands the demands and standards which the system imposed on them.
Collection Information Statements
The IRS, of course, has its own forms for everything, and with regard to installment agreements the key form is the “Collection Information Statement” — Form 433-A for individuals, and Form 433-B for businesses.5 The single best way to help a client with a tax collection problem is to assist him or her in completing these forms accurately, and with complete documentation. Every number must be correct and substantiated, not only because the form is signed under penalties of perjury, but because an incomplete or inaccurate form will destroy your credibility with the Revenue Officer.6
Sources of information
For new clients, it is helpful to obtain copies of any Collection Information Statements previously filed. You can ask the Revenue Officer handling the case for copies. If no Revenue Officer is assigned, consider filing your request with the District Disclosure Officer under the Freedom of Information Act
Also, in all new cases you should ask the IRS for complete “transcripts” for all relevant tax periods. These will give you details on every transaction for each tax period, including assessments of tax, penalties, and interest, payments, refunds and refund offsets, lien filing dates, statute of limitations extensions, and a host of other invaluable information.7 Knowledge is power, and you need to know at least as much about your client’s accounts as the Revenue Officer with whom you are dealing.
Forms 433-A and 433-B include balance sheets, requiring a taxpayer to list all assets, regardless of their nature or where they may be located.8 Before discussing monthly payments, the Revenue Officer will want to talk about selling or borrowing against assets. An installment agreement is allowed only if there is no ability to liquidate or borrow against assets to pay or reduce the tax debt. The IRS “Collecting Contact Handbook” gives explicit instructions to Revenue Officers about how to approach these issues:
Analyze income and assets to determine ways of liquidating the account. Your goal is to collect the tax liability as quickly as possible. Follow these steps:
- If the taxpayer has cash equal to the tax liability, demand immediate payment.
- Otherwise, consider other assets which may be pledged or readily converted to cash.
- Consider unencumbered assets, equity in encumbered assets, interests in estates and trusts, lines of credit from which money may be borrowed, and the taxpayer’s ability to get an unsecured loan.
- If there are assets with value and a taxpayer is unwilling to raise money from them, consider enforcement.
- If there appears to be no borrowing ability, ask the taxpayer to defer payment of other debts to pay the tax.
By being awareof what the IRS expects the Revenue Officer to do, you can be prepared to meet these questions and demands in a manner designed to achieve the most favorable result for your client.
With regard to assets there are two critical issues: ownership and valuation. Form of ownership is particularly important in a case where the assets are jointly owned by a married couple, and yet only one spouse is liable for the tax. Many states offer a high degree of protection for “tenants by the entirety” property. And in such states, no creditor, not even the IRS, can reach such property to satisfy one spouse’s separate debt.9 Similarly, the property of a partnership cannot be reached to satisfy the personal tax debts of a partner.
Valuation offers many opportunities for appropriate advocacy. It is important that the Form 433-A or 433-B and accompanying materials adequately and fairly present the net amount which could be realized from a sale of the client’s assets, with proper allowance for expenses of sale, taxes, and other costs. Thus, the sale of securities might result in a current period income tax, which would reduce the net after-tax proceeds. A premature withdrawal from an IRA or qualified pension plan could result in a penalty in addition to a current period tax. The sale of the client’s house could require closing and brokerage costs, again reducing the realizable value.10 The costs attendant to moving and securing new housing are also relevant in presenting the net amount a client could actually realize from the sale of a house.
Income and expenses
Having demonstrated current compliance, and addressed the question of selling or borrowing against assets, you will finally be able to talk about the client’s monthly income and expenses in an effort to negotiate a monthly installment payment. However, this conversation will be constrained by the system of standardized expenditure allowances which the IRS imposed in August 1995 to force more uniformity in collection cases. Under this system, expenditures are divided into “necessary expenses” and “conditional expenses.” The IRS publishes tables, based on income level and family size, for three categories of necessary expenditures: “national standard” expenses, housing and utilities expenses, and transportation expenses. The IRS Collecting Contact Handbook contains the following discussion of these expense categories:
Necessary expenses. These must meet the necessary expense test: provide for a taxpayer’s and his or her family’s health and welfare and/or the production of income. The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family need to live. Three types of necessary expenses are:
- National Standards. These establish standards for reasonable amounts for five necessary expenses. Four of them come from the Bureau of Labor Statistics Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The Service has established standards for the fifth category, Miscellaneous.
- Local Standards. These establish standards for two necessary expenses: housing and transportation. Utilities are included in housing.
- Other. Other expenses may be allowed if they meet the necessary expense test. They must be reasonable in amount. Since there are no nationally or locally established standards for determining reasonable amounts, you must determine whether the expense is necessary and the amount is reasonable.
Conditional expenses. These expenses do not meet the necessary expense test. However, they are allowable if the tax liability, including projected accruals, can be fully paid within three years.
In computing ability to pay, necessary expenses are allowed whether or not the proposed agreement would result in full payment in three years. Conditional expenses, however, are allowed only if the tax liability can be paid within three years.
Although it is easier to just rigidly adhere to the national and local standards, Revenue Officers can allow excess necessary or conditional expenses for the first year of an agreement. This permits a reasonable “adjustment period” to alter expenditures to bring them within the standards. Revenue Officers will seldom volunteer this one-year relief period, so it is up to you to know about and argue for the application of this rule if it would be beneficial to your client.
Many expenses are “necessary,” even though they fall outside the lists of expenditures covered by the Service’s standards. While the standards are designed to achieve more uniformity, they do not impose a rigid, mechanical cap; “excess” expenses may be allowed if the taxpayer can provide substantiation and justification. Examples of necessary expenditures which fall outside of the national and local standards are the following:
- Child care.
- Dependent care (for the elderly, invalid, or disabled).
- Health care.
- Court-ordered payments.
- Involuntary deductions.
- Secured or legally perfected debts (minimum payments).
- Life insurance (term only).
- Charitable contributions (if necessary for health and welfare
or required as condition of employment).
- Education (for handicapped dependent if services are not
provided by public schools, or
if required as condition of employment).
- Disability insurance (for self-employed individuals).
- Union dues.
- Professional association dues.
- Accounting and legal fees (for representation
before the IRS, and other fees for health
and welfare and/or production of income).
- Optional phone services (call waiting, caller ID, etc.,
or long distance if for health and welfare
and/or production of income).
The Form 433-A has lines labeled for some of these items, but others might easily be overlooked if you simply follow the form without checking the IRS’s pronouncements, including the Internal Revenue Manual and the Collecting Contact Handbook (from which the above list was drawn).11
Finally, you should know that the national and local standards expense change periodically. Merely following the instructions issued with the Form 433-A does not guarantee that you have the latest numbers. You can get the current national and local standard figures in many ways, but the easiest is to download them from the Service’s own website.12 Having the latest numbers will allow you to look at the income and expenditure analysis through the Revenue Officer’s eyes before actually submitting your installment agreement proposal.
IRS Restructuring and Reform Act of 1998
The IRS Restructuring and Reform Act of 1998 (RRA-98) has several provisions which have an impact on the negotiation and use of installment agreements. The most important is a greatly expanded right to appeal threatened collection actions, thereby providing a forum in which to argue that an installment agreement should be used as an alternative to enforced collection action.
Availability of installment agreements in small cases
In RRA-98, the Congress required the IRS to expand its previously existing program of simplified installment agreements for small cases. There are now two kinds of such agreements — the “guaranteed” agreement and the “streamlined” agreement.
The “guaranteed agreement” is the Service’s response to IRC §6159(c), which requires the IRS to grant an installment payment agreement if (1) the tax liability is $10,000 or less (excluding penalties and interest); (2) in the past five years the taxpayer has not failed to file or to pay; (3) financial statements are submitted and the IRS determines that the taxpayer is unable to pay the tax in full; and (4) the agreement provides for the full payment of the liability within three years. Such a guaranteed agreement can be obtained by calling the IRS, or by filing a Form 9465 Installment Agreement Request.13 The IRS has also adopted an “interactive installment payment process” under which guaranteed installment agreements in small cases can be implemented directly over the internet through the IRS’s website.14
The “streamlined” agreement is an expanded version of the policy which was in place prior to RRA-98. Such agreements may be approved if (1) the total due (including assessed penalties and interest) is $25,000 or less; (2) the agreement provides for the full payment of the liability in five years or less, or prior to the expiration of the statute of limitations on collections, if earlier; (3) the taxpayer is otherwise in current compliance, and (4) the taxes in question are not withholding taxes for a business taxpayer who is still in business.15 A streamlined agreement can be obtained by telephone, by correspondence, or through the Revenue Officer assigned to the case.
Reduction in late payment penalty
Second, RRA-98 reduces the late payment penalty when a taxpayer has an installment agreement. Clients are often shocked to find that the IRS continues to assert interest and the 1/2% per month late payment penalty even after they have entered into an agreement. Instead of eliminating the penalty, however, Congress cut it to 1/4% per month for months during which an installment agreement is in place. This modest relief applies only to individuals, and only if the original return was filed on time.
Extensions of statute of limitations
Third, RRA-98 makes changes concerning extensions of the statute of limitations. Entering into an installment agreement did not automatically extend the ten-year statute of limitations on collection. But often the Revenue Officer demanded that the taxpayer “voluntarily” extend the statute to a date far in the future before an agreement would be granted.16 In general, the new law eliminates the IRS’s ability to demand these voluntary statute extensions. For an installment agreement, however, the IRS continues to have the right to ask for an extension for the time it would take to achieve full payment beyond the normal ten-year statute expiration date, plus ninety days.
Annual statements to taxpayers
Fourth, the IRS is now required to send every taxpayer with an installment agreement an annual statement showing the initial balance owed, the payments made during the year, and the remaining balance due. Many of us have had clients who have faithfully made their installment agreements payments for years while receiving no periodic statements from the IRS, only to find that their tax liabilities have actually increased in spite or their payments. This may still happen due to the magic of compound interest, but at least taxpayers will receive annual statements showing where they stand.
Right to appeal proposed collection actions
Finally, although the procedural changes described above are helpful, the greatest impact of RRA-98 on the use of installment agreements will come from the opportunities the new law gives taxpayers to appeal proposed collection actions. This has already had the effect of forcing the IRS to abandon more aggressive collection techniques in many cases, and to rely more heavily on installment agreements.
Under RRA-98, the IRS cannot levy against property unless it has given the taxpayer a “Notice of Intent to Levy,” similar to that which was previously required by IRC §6331(d). Subject to certain exceptions, no levy can occur until 30 days thereafter. During that 30-day period, the taxpayer may demand a pre-levy “collection due process” hearing in the IRS Appeals Office. IRC §6330, as amended, lists the issues which may be raised at this hearing:
(A) In general: The person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy, including‑‑
(i) appropriate spousal defenses,17
(ii) challenges to the appropriateness of collection actions, and
(iii) offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer‑in‑compromise.
Given the ability to easily appeal threatened levy actions, many more taxpayers are taking their cases to the Appeals Office. And at those hearings, taxpayers’ representatives understandably argue that installment agreements provide an effective, reasonable and appropriate alternative to the seizure of their clients’ assets.
The expanded right to appeal collection action also applies to the threatened termination of an installment agreement. The IRS will propose terminating an agreement when it finds that the taxpayer has failed to pay an installment payment when due, failed to pay another tax liability when due, failed to give updated financial information upon request; or secured the agreement by providing information that was inaccurate or incomplete.18 Generally, installment agreements will not be defaulted for failure to make estimated tax payments or tax deposits, or the failure to file another return when due.
A taxpayer is given thirty days notice in writing before an installment agreement is terminated, and no levies will be served until ninety days after the notice is given. Within the thirty day period, the agreement can be reinstated if the taxpayer cures the default. A new Collection Information Statement may be required (unless the case meets the criteria for “guaranteed” or “streamlined” agreements). In addition, taxpayers may appeal defaults and terminations of installment agreements to the Appeals Division.19 The right to an appeal is outlined in the default notice. No levy action may be taken while the taxpayer’s case is awaiting consideration in the Appeals Office.
Unfortunately, many taxpayers are simply unable to pay their taxes in full, even by selling or borrowing against their assets. These folks are forced to look to future cash flow to resolve their tax problems. The IRS will go along with this, but only reluctantly. And when taxpayers do not have adequate and informed representation, the Collection Division sometimes refuses to grant installment agreements at all, or demands monthly payments which cannot be sustained or which jeopardize taxpayers’ ability to make reasonable provision for their families. By fully and creatively representing such clients, we can help them address their tax responsibilities through reasonable and appropriate monthly payment agreements.
1 The Service’s authority to enter into monthly payment agreements comes from IRC §6159.
2 The Service’s evaluation of what it would be willing to accept in an offer in compromise utilizes the same “ability to pay” determination applicable to installment agreements as discussed below.