It’s not uncommon for taxpayers who owe the IRS to start to panic when they are faced with a sizable balance.  However, there are options if you can’t pay your balance all at once.  In this post, we outlined how to deal with the situation.  In it, we also discussed the IRS monthly payment plan referred to as an “Installment Agreement” or “IA” for short.  In this post, we’ll discuss what you need to do in order to set up an IA.

The actual process of setting up an IA is pretty straightforward.  The challenging part is making sure you are compliant and that you actually meet a number of basic requirements. We assist our clients in meeting these requirements, and then negotiate the actual payment amount after it’s determined that you are eligible.

So without further ado, here are the requirements one must meet to be eligible for a payment plan:

1. File any missing tax returns or substitute for returns (SFRs).
2. Begin making current estimated tax payments (for self-employed people) or Federal Tax Deposits (payroll tax payments for businesses), if applicable.
3. Disclose specific financial information, such as income, expenses, and assets.
4. Demonstrate that you cannot pay off the tax debt from savings, a loan, or other means.
5. If you owe less than $10,000 in tax, be able to pay off the entire debt in 3 years or less.  If you owe $50,000 or less, you get 5 years.  If you owe more than $50k, there is no time limit.
6. Not have defaulted on another IA in the past 5 years.

So as you can see, the requirements aren’t all that challenging.  However, the most difficult part of this process for self-employed and small business taxpayers is #2 — finding the money to begin making payments on their CURRENT tax obligations. This involves some painful elimination of expenses and changing of priorities that most people don’t like, but it’s necessary. Remember, the IRS is the  most powerful creditor that we have and they can really make a mess of your life if you don’t work with them.  Thus, it’s best to get them taken care of, even if that means damaging vendor relationships, not paying other bills, etc.

If you’re eligible, then obtaining a payment plan is actually pretty straightforward. But as mentioned above, getting into current compliance is a critical first and second step, and is the most difficult part for most taxpayers.

Until next time…