Tax Debt Relief - The Pros and Cons of an Installment Agreement for Resolving Your Tax Debt Problems
If you can pay your tax debt over time without financial hardship, an installment agreement (IA) with the IRS may be the right solution for you. Tax debts less than $25,000 can usually be paid with an installment agreement (if you cannot pay off at $25,000 debt by IA, then another option is generally better). There are definite drawbacks to an IA. The biggest drawback is that interest and penalties continue to accrue while you still owe. Although the recent interest rates have been at all-time lows (for those who care, the IRS interest rate is 3% plus the “Federal short term rate" which has been an unheard of .35% in the past months), the penalties are still high. When combined with penalties, the effective annual interest rate is often 8% to 12% per year. In many cases, it is possible to pay for years and owe more than when you started! But if the rest of your financial situation is stable, you can afford the monthly payment, and your payments will eventually pay off the tax debt – then go ahead and make the agreement. It is probably the easiest path to getting out of the debt. However, in the following situations, an installment agreement may not be your best option:
- You have no money left over after paying all of your necessary expenses (and should therefore be an “uncollectible" case);
- You qualify for an Offer in Compromise;
- You can discharge your taxes in a Ch. 7 bankruptcy;
- You are unemployed or disabled;
- You have no assets or money which can be seized.
If you are planning on filing an Offer in Compromise, do NOT enter into an Installment Agreement – especially one where the payments are taken directly from your bank account or paycheck. Instead, just get the OIC on file with the IRS as soon as you can. If you file an OIC while the IRS is taking payments pursuant to an installment agreement, those payments will not stop while the OIC is being reviewed. In other words, you will still be paying even although the IRS cannot collect against you. Note: The Internal Revenue Code Sec. 6331(k) provides protection when an installment agreement isrequested from the IRS. The IRS cannot take levy or seizure action while a request for an installment agreement is pending, for thirty days after denial or termination of an installment agreement, or during the time an appeal of a denied or terminated installment agreement is pending. Therefore, you can ASK for an installment agreement (to protect against a levy/garnishment) and then file your Offer in Compromise. All in all, the installment agreement is a mixed blessing. It pays your taxes in digestible amounts, but it pays them all at high effective interest and prolongs the agony. Certainly if there are better alternatives, they should be pursued. However, the installment agreement is better than its alternative – enforced collection.