Payroll Deduction Agreements
Normally if a taxpayer is unable to pay his taxes when they are due, the Internal Revenue Service (IRS) will enter into an Installment Agreement (IA) and accept monthly payments until the tax is paid in full or until the statute of limitations expires. There are three primary IA payment methods: mail in a check, electronic funds withdrawal (direct debit), and payroll deduction.
The taxpayer can initiate the direct debit method directly on Form 9465 or Form 433-D, but a payroll deduction agreement requires use of a separate form: Form 2159. There are some potential traps associated with this form that taxpayers need to be aware of. One is the “increase/decrease" clause – you don’t want the IRS increasing your payment amount unless you specifically agreed to it. Another potential trap is the “additional terms" box – any additional terms would almost never be in favor of the taxpayer, especially since this field is “to be completed by IRS."
There are three parts to Form 2159: the Acknowledgement Copy (to be returned to the IRS), the Employer’s Copy, and the Taxpayer’s Copy. The front page of each copy is identical. However, there is an instructional second page to each copy, each containing different information. The second page of the IRS Copy contains a list of internal codes and number designations. The second page of the Taxpayer’s Copy contains some rather redundant instructions on how to fill out the form and what to do with it after it is completed.
The second page of the Employer’s Copy is the most interesting. The employer is instructed to “continue to make payments unless the IRS notifies [the employer] that the liability has been satisfied." This could obviously be prejudicial to the taxpayer. First, the likelihood that the IRS will notify the employer in a timely manner is not very high. The form itself acknowledges this by stating, “When the amount owed, as shown on the form, is paid in full and IRS hasn’t notified you that the liability has been satisfied, please call the appropriate telephone number below to request the final balance due." Second, if the taxpayer’s financial situation changes and he is unable to continue with the IA, it could potentially be difficult to cancel the payroll deduction agreement.
Under new IRS guidelines, a tax lien can be released by entering into a Direct Debit IA as long as the total balance is $25,000 or less. But if a taxpayer does not fit these criteria, or is not concerned about the tax lien, then making IA payments by check may be the best method because, if the taxpayer is no longer able to continue sending in payments, he simply stops sending in payments, and then other options can be discussed with the IRS. A taxpayer cannot expect that ceasing payments will have no consequences (the least of which would be a defaulted IA), but sometimes the taxpayer has no choice, such as when he experiences a severe reduction in wages or the total loss of an income source. Some of the problems discussed here can be avoided by electing to mail in IA payments each month.