Most people who have had the misfortune of getting behind with the IRS have heard about tax settlements, otherwise known as Offers in Compromise (OIC), as a method for repaying far less than the full amount owed. Many fewer realize that there is an alternate method that can effectuate a similar result: the repayment of just a fraction of a tax liability. This method is known as a Partial Payment Installment Agreement (PPIA).
The kicker is that a PPIA can actually be a superior alternative for certain taxpayers. In fact, there are circumstances where one would not even qualify for an OIC, but would qualify for a PPIA. Thus, those wishing to repay the smallest amount of money back to the IRS are “flying blind” if they don’t understand the PPIA method, and could quite easily make the mistake of repaying far more of their tax liability than they really have to. Worse yet, they could wind up repaying the entire amount of taxes, penalties, and interest due (plus future accruals) when they could have repaid far less.
Well, this tax pro ain’t having it! If anyone wants to volunteer to pay more to the IRS than they really have to, this is the time to stop reading. For the rest of you, please read on and allow me to show you when a PPIA is the best route for resolving a tax debt. I’ll even explain how to choose between a PPIA and an OIC for those of you who would make good candidates for either program.
Simply put, a PPIA is an installment agreement to repay an IRS tax debt where the monthly payments are not large enough to repay the entire tax debt (plus penalties and interest and accruals) within the time allotted to the IRS to collect on a tax debt. Although there are a few things that can extend the amount of time the IRS has to collect a tax debt, generally speaking, they have 10 years to collect a tax debt from the date that debt is assessed. Once a tax debt is assessed, there will be a Collection Statute Expiration Date (CSED) set 10 years later. After the CSED passes, the IRS is generally barred from collecting on the debt, though there are a few exceptions to this.
To illustrate, let’s say that a taxpayer enters into a PPIA 20 months after her tax liability was assessed, and agrees to monthly payments in the amount of $200. The IRS has 10 years—or 120 months—to collect after the date of assessment. Consequently, the taxpayer in this example would have to make monthly payments for 100 months (since she entered into the agreement 20 months after assessment, the IRS would presumably have 100 remaining months to collect). Let’s say that this taxpayer owes $100,000. Her payments of $200/mo multiplied by 100 months would equal a total repayment to the IRS of $20,000. That’s a pretty sweet deal on a tax debt of $100,000, especially when you take into account the ongoing penalties and interest that will cause that $100,000 to snowball into a much larger figure over time.
It is, however, extremely important to note that the monthly payments on a PPIA will not necessarily remain at the same amount over the remainder of the collection statute of limitations. Obviously, the IRS wants to collect all of the unpaid tax plus penalties and interest…or at least as much as it possibly can. Consequently, a very important component of the PPIA arrangement is that the IRS will periodically (typically every two years) want to review current financial information of taxpayers who have entered into a PPIA. If the taxpayer’s ability to pay has increased, the IRS will require higher monthly payments.
This is not to say that the monthly payments on a PPIA will increase. For individuals with relatively steady income and expenses, the monthly payments very often stay the same. Even if the individual got a raise or two during the two-year period, his allowable expenses may have also increased making his ability to pay remain the same.
Business Taxpayers & Business Owners
For business taxpayers (and business owners), it tends to be a bit more unpredictable as to whether the payments will increase upon two-year financial review. If profitability has remained relatively steady, there is a good chance that the monthly payments will remain the same. On the other hand, if profitability has increased significantly, the IRS will likely require higher monthly payments.
If you do enter into a PPIA, make sure that you are paying attention to your mail and that you respond to the IRS’s two-year financial review request. If you neglect to respond, your PPIA will default. Then you will be at risk of enforced collections (e.g. levied bank accounts, garnished wages, levied accounts receivable, seizure of assets, etc.). You will also be faced with going through the whole process of getting another PPIA (or other form of tax resolution) approved. Since you’ve defaulted, the IRS may be less likely to approve another agreement. So pay attention and be sure to respond.
Who Qualifies for a PPIA?
As with other tax resolution agreements such as an OIC or a traditional installment agreement, you must be in compliance with filings and current tax payments to be eligible to enter into a PPIA. You must also submit complete financial information (typically a Form 433-A if you are an individual or a Form 433-B if you are a business), and you must include all supporting documents.
In order to get your PPIA request approved, your financial information will need to demonstrate the following:
- An inability to make monthly payments large enough to pay off the entire tax liability within the collection statute. For a business, this usually means your average net income is too small to support payments large enough to pay in full. However, if the owners of the business are taking “unreasonably high” salaries thereby making net income tiny, the business may have a problem getting the PPIA approved. Generally speaking, the IRS will allow whatever business expenses a business incurs. But, there is a limit to this. For example, if your business buys a season’s pass to a luxury suite for its local pro football team and it isn’t the type of business that needs such extravagance to schmooze clients, the expense may be disallowed.
For individuals, income minus allowable expenses must be too small to full pay the entire tax debt within the collection statute. Understand that “allowable” expenses are not necessarily set in stone. It is possible to negotiate variances to allowable expenses under certain circumstances, and this can make a huge difference in getting the PPIA approved. This is an area in which having an experienced tax resolution attorney can really come in handy. If you go it alone, the IRS will basically dictate to you which expenses they will and will not allow. A good tax resolution attorney will know from experience and from knowledge of the tax laws when and where to challenge the IRS on allowable expenses, and will know when it will be to your benefit to take the case to appeals.
- Insufficient equity in assets. This particular requirement can get dicey. As a general rule, when requesting a PPIA, the IRS is going to want you to liquidate or borrow against assets and use the proceeds to pay off or pay down the tax debt—if you can borrow or liquidate. The good news is that there are a number of ways to get around this depending upon the circumstances.
Here are some examples:
- You demonstrate that you cannot borrow against a particular asset. One way of doing this is to apply for a loan secured by the asset in question (typically real estate) with a couple different lenders and show the IRS that your loan applications were declined. Another method that will generally work is if you own property jointly, the other owner is not liable for the tax liability in question, and the other owner is unwilling to borrow against the property.
- You demonstrate that you can borrow against a particular asset, but will not be able to afford the monthly payment for the loan for which you could get approved.
- With regard to your home (or residence), if you demonstrate an inability to borrow or an inability to make the payments on a loan for which you would qualify, there is a very good chance that having equity—even a lot of equity—will not prevent the approval of a PPIA.
- With regard to retirement accounts (e.g. 401(k), IRA, etc.), it is quite possible that you can avoid liquidating them and still get your PPIA approved—even if the accounts have a substantial amount of funds in them.
- If the asset or assets with equity are necessary for the production of income, you generally will not be required to liquidate them in order to get a PPIA approved.
The above is not an exhaustive list. Consult with an experienced tax resolution attorney if you have significant equity in a particular asset or assets and are wondering if a PPIA is the right option for you.
The answer is that it depends on a number of factors, and I strongly encourage you to consult with an experienced tax resolution professional if there is any doubt as to which option is better under your specific set of circumstances. The wrong choice could potentially result in you repaying way more money than you otherwise would have had you made the right choice. Particularly with larger tax liabilities, there is just too much money at stake to pinch pennies on a tax pro and try to do it yourself.
With that said, I’m going to do my best to give you a feel for the types of things that can be critically important when determining whether to go the route of a PPIA or an OIC. Here are some of the more important factors to take into consideration when making this decision:
- You have significant equity in your residence or your retirement accounts. If you have a lot of equity in your retirement accounts or your residence, you may not qualify at all for an OIC or you may qualify for an OIC that will require significantly more money to fund than a PPIA. Yes, with a PPIA, it may indeed be possible for you to keep all of your home equity and/or retirement wealth while only repaying the IRS a fraction of your unpaid taxes.
- You have some reason to believe that you or your business will have significantly higher disposable income or net income at some point in the relatively near future. Unlike a PPIA where future increases in disposable or net income will likely result in increased monthly payments to the IRS, with an OIC, once the deal is sealed, the settlement amount will not change. You could literally win the Powerball jackpot the day after your OIC is approved or you could triple your income, and the terms of the OIC will not change (unless you knew your income was going to be increasing and failed to disclose this fact—that could get you in trouble for fraud and get your OIC voided). Thus, for businesses, business owners, and those who are at a point in their careers where significant raises or promotions are possible, an OIC may be a better option. With a PPIA, the additional income that you earn with your blood, sweat, and tears is likely going to wind up in the hands of the IRS until you either pay off your tax debt in full or your collection statute expires. Not so with an OIC.
- Getting an OIC approved is a time-consuming and/or costly pain in the rear. If you try to do an OIC on your own and want to have a decent chance of getting it approved, it is a major time commitment. In my opinion, the IRS is actively looking for any reason that they can come up with to reject or return your OIC. So, if you do it yourself, you will not only have to invest a large amount of your time, you run a much higher risk of getting it booted on some technicality than you would if you have an experienced tax resolution pro do it for you. If you hire a tax pro to prepare and negotiate the OIC for you (which is usually a very good idea), you will likely have to pay more in professional fees than you would if you wanted a PPIA. It is usually a lot more work than a PPIA. More work for your pro equals higher fees. Also, whether you hire a pro or not, you can expect to be dealing with the OIC process for about 9 months, give or take, and it could take longer—especially if the IRS gives you a raw deal and you need to take your case to Appeals. Setting up a PPIA, on the other hand, can be done in as little as 30 days assuming you submit everything you’re supposed to submit, respond to the IRS promptly, and they don’t drag it out.
- Going through the OIC process will extend the amount of time the IRS has to collect your tax debt. Your Collection Statute of Limitations Expiration Date (CSED) will be extended by the number of days your OIC is pending plus 30 days after rejection plus however many days an appeal of the rejected OIC is under consideration. Accordingly, if your OIC is unsuccessful, you could very easily wind up with the IRS as an unwanted part of your life for a year or more longer than you would have had you gone the route of a PPIA.
- The results of an effort to get an OIC approved are often less predictable than those of a PPIA. For one thing, there is a higher level of scrutiny with regard to your financial information with an OIC than there is with a PPIA. The analysis is also different. Certain bits of financial information could pose a problem in the context of an OIC, but somehow not be a problem at all with a PPIA. Furthermore, the IRS is so notoriously slow to process OICs, that much of the financial information that you submit with your OIC will be out-of-date by the time the IRS is ready to review your OIC. As a result, you will almost certainly have to submit new financials many months after you submit the OIC itself. The actual settlement amount will be based in large part on the most recent financial information that was submitted many months after the OIC was submitted. The settlement amount is based on a mathematical formula that can be quite sensitive to changes in income or expense. Consequently, you could start off with a very strong OIC, have a change of financial circumstances during the 6-8 months after submitting the OIC, and then, due to the change in circumstances, no longer have a strong OIC. This is not a problem in the context of a PPIA.
- You really just want the IRS out of your life for good. Let’s face it. Being in collections with the IRS is no one’s idea of a good time. Many feel like their privacy is being invaded. Others suffer a great amount of anxiety. This is for good reason. The IRS is a scary and formidable creditor. Unlike just about every other creditor, the IRS can garnish your wages and take your stuff without even having to get a court order. Although it takes a good while to get an OIC approved, once you get it approved, you simply have to pay the agreed settlement and follow the terms and conditions of your settlement (basically, keep your nose squeaky clean with all things IRS for 5 years). You do that, you’re done. For good. With a PPIA, you will have to suffer some level of harassment every couple of years until you reach your CSED, and you might wind up having to increase your monthly payments.
As you can see, there is a lot to consider when making the decision between a PPIA and an OIC. This is not a decision that should be made haphazardly since the financial implications can be substantial. If at all possible, consult with a tax resolution professional. We have friendly and knowledgeable tax pros here at Fortress, and all you need to do to get a free consultation is pick up the phone and give us a call.