Many taxpayers enter into an installment agreement without fully understanding how it works.
Before you read further, ask yourself the following questions:
As the name suggests, an IRS installment agreement allows taxpayers to pay taxes due in smaller monthly installments instead of a single lump sum. The arrangement is flexible. This means you may pay more than the required minimum each month or pay off the balance in full at any time without incurring an early payment penalty.
Next, let’s understand how an installment agreement may help prevent aggressive IRS collection actions against taxpayers.
If properly established, an installment agreement can help prevent more aggressive IRS collection actions, such as levies on bank accounts or wages. However, it does not stop the statute of limitations from running.
Next, let’s understand the statute of limitations and how it is affected under the installment agreement.
Under the Statute of Limitations, the IRS usually has 10 years from the assessment date to collect unpaid taxes. This period is known as the Collection Statute Expiration Date (CSED). Requesting an installment agreement suspends the CSED while the IRS reviews your request. Once approved and while you are making payments under the installment agreement, the collection period generally continues to run. Once the collection statute expires, the IRS is generally barred from collecting any remaining unpaid balance.
Example:
Let’s say the IRS finds you owe $15,000 in unpaid taxes on January 15, 2024. The IRS has 10 years from the end of the assessment date to collect the taxes. So the collection period will generally end on January 15, 2034. Let’s say you request an installment agreement on March 1, 2024, and the IRS approves it on May 1, 2024. This request suspends the CSED for the two-month review period, extending it by about 2 months to March 15, 2034. While you continue making payments under the approved installment agreement, the collection period generally continues to run. If any balance remains unpaid when the CSED expires in 2034, the IRS is barred from collecting the remaining unpaid amount.
A taxpayer can voluntarily waive or extend the Collection Statute Expiration Date (CSED) by agreeing with the IRS, most commonly when entering a Partial Payment Installment Agreement.
Next, let’s determine whether an installment agreement affects the accrual of interest, penalties, and fees.
Interest and certain penalties may continue to accrue until the liability is paid in full. The applicable interest rate is set by the IRS and may change quarterly. Taxpayers may also be required to pay a user fee when applying for certain installment agreements.
Next, let’s understand the different types of IRS installment agreements.
The IRS generally offers several types of installment agreements, each with different eligibility requirements and payment terms. Let’s understand some of them, which are as follows:
Guaranteed Installment Agreement
The most common option is the Guaranteed Installment Agreement.
Under 26 U.S.C. § 6159(c), the IRS is highly likely to accept your request for an installment agreement if the following conditions are met:
Other options include the following :
Next, let’s understand whether and how U.S. taxpayers living abroad may avail an IRS installment agreement.
U.S. taxpayers, whether living within or outside the U.S., are subject to tax on their worldwide income. This creates unique challenges when entering an IRS installment agreement for U.S. taxpayers living abroad.
U.S. Expats and those with foreign income or assets can often benefit from other valuable tools to lower their taxes. This includes the Foreign Earned Income Exclusion (FEIE via Form 2555) and the Foreign Tax Credit (FTC via Form 1116), which may significantly reduce or eliminate U.S. tax liability.
These credits can even help reduce prior-year tax returns. This can adjust the tax liability from previous years, potentially leading to an installment agreement. Furthermore, if a taxpayer is under an installment agreement, the IRS can offset future tax credits or refunds against the outstanding balance.
This includes refunds or credits arising from amended returns for prior tax years.
International taxpayers should remain fully compliant with all U.S. tax filing and payment obligations, including FBAR (Foreign Bank Account Report) and FATCA (Form 8938) requirements. Any lapse may jeopardize the agreement and trigger substantial penalties.
Expats often face unique logistical hurdles when managing an installment agreement, including:
Due to these complexities, it is highly recommended to consult a tax professional experienced in international tax matters before proceeding.
It is important to consult a qualified tax professional before applying for an installment agreement, especially for U.S. expats, as international tax treaties can influence cross-border collection efforts. If you owe back taxes, entering into an installment agreement may make it significantly easier to satisfy your obligations while avoiding more severe collection actions.
If you’re considering an IRS Installment Agreement, ask yourself these questions:
It is important to consult a tax professional before applying for an installment agreement. If you owe back taxes, entering into an installment agreement may make it easier to satisfy your obligations while avoiding more severe collection actions. Do not delay, as interest and penalties may continue to accrue until a resolution is reached. Contact our office at (551) 800-0007 or click here to schedule a case evaluation today.