Owing a lot of income tax debt often feels inescapable, and the Internal Revenue Service (IRS) can seem intimidating. Fortunately, the IRS has many options available to taxpayers who can’t pay all their taxes right away and will usually work with you to find a solution. This article takes a closer look at how the partial payment option works, how it compares to other solutions, and whether it may be a good choice for your situation.
Written by Attorney Paige Hooper.
Updated June 28, 2021
Owing a lot of income tax debt often feels inescapable, and the Internal Revenue Service (IRS) can seem intimidating. Fortunately, the IRS has many options available to taxpayers who can’t pay all their taxes right away and will usually work with you to find a solution.
Some examples of these potential solutions include an installment agreement, an offer in compromise, or a partial payment plan. This article takes a closer look at how the partial payment option works, how it compares to other solutions, and whether it may be a good choice for your situation.
When Is It A Good Idea To Ask The IRS For A Partial Payment Installment Agreement (PPIA)?
Federal law grants the IRS broad collection powers, including the ability to seize and liquidate assets, levy funds from your bank account, set up a wage garnishment, and place a tax lien on your property. If you owe a large amount of past-due taxes, you’ll likely have to face your tax problems sooner or later — hiding from the IRS is not usually a successful plan.
With that said, the IRS ordinarily tries to work with taxpayers to find manageable tax payment solutions that benefit both sides. The taxpayer can resolve their debt and move forward, and the IRS can collect more than it might have been able to otherwise.
Common Tax Debt Solutions
Some of the most common solutions available to taxpayers who can’t afford to pay their taxes include:
Installment Agreement: If you have enough income or assets to pay off your tax liability over time, you can set up a payment plan. If you owe less than $50,000, you usually don’t have to submit any documentation to qualify. For most installment plans, you must be able to pay your debt in full within 72 months (6 years).
Partial Payment Installment Agreement (PPIA): Under some circumstances, you may be eligible to make monthly payments on your tax liability without paying the debt in full. You must prove that you don’t have the financial ability to pay your debts through an ordinary IRS installment agreement.
Offer In Compromise (OIC): If you don’t have enough money or assets to pay your full tax debt through a standard payment plan, you can make an offer to settle your debt by making a lump sum payment that’s less than what you owe. If the IRS believes that this offer will be its best chance to collect from you, it may accept your offer.
Currently Not Collectible Status (CNC): If you can’t afford to make even small payments on your past-due taxes, you may qualify for CNC status. You must prove that you’re unable to pay under any other arrangement. This option allows the IRS to declare your debt uncollectible for a set amount of time, typically one year. During this time, the IRS will not take any collection action against you or your property, but your debt will not go away.
To determine whether a partial payment agreement is the best tax relief option for you, it helps to understand how it compares to other possible solutions.
Partial Payment Vs. Other Types Of IRS Installment Agreements
Most ordinary installment plans require you to pay the full amount of your tax debt over the course of the payment plan. That said, the payment plans don’t last forever. Federal tax law limits the payment period for most installment agreements. Typical agreements (sometimes called streamlined installment agreements) must be completed either within 72 months or by the collection statute expiration date (CSED), whichever comes first. The CSED is the collection cutoff date: The IRS can’t continue trying to collect a tax debt after its cutoff date has passed.
A few important things to know about the CSED:
In most cases, because of the statute of limitations, the IRS only has 10 years to collect taxes. After this, the taxes are considered uncollectible.
The 10-year period starts on the date the tax is assessed, not when the tax is due. In other words, if you didn’t file your 2016 tax return until October 2018, the 10 years for that debt starts running in October 2018, not April 2017 when the tax was due.
The collection period can be suspended under some circumstances, such as while you are protected from collections actions during an active bankruptcy case. The IRS can also extend the collection period by up to 5 additional years in some situations.
Tax debt may continue to show up on your credit report for up to 7 years after the CSED has passed.
In some cases, you might not be able to completely pay off your back taxes within the payment period required for an ordinary installment plan. This is usually because either your tax debt is too high, or your monthly disposable income is too low. In this situation, a partial payment agreement might be a better choice.
To be eligible for a PPIA, you must be able to prove that you don’t have enough money or property to be able to complete a standard installment agreement. If the IRS believes you can fund an ordinary plan, you won’t qualify for a partial agreement.
Partial Payment Agreement Vs. OIC
Both an offer in compromise and a partial pay installment agreement allow you to pay less than the total amount that you owe, but there are many significant differences between these two options. Each has its unique benefits and drawbacks.
With an OIC, the IRS agrees to accept less than the full amount owed — usually in a lump sum payment — as final settlement of a tax debt. One of the most important advantages of an OIC over a partial payment agreement is that the IRS accepts an offer in compromise as a final satisfaction of the debt owed. In other words, with an OIC, you will no longer owe affected tax debts, even though you haven’t paid them in full. With a partial payment plan, you will continue to owe all unpaid taxes until the CSED passes. (Fortunately, the IRS won’t take other collection actions if you stay current on your installment payments.)
Another advantage of an OIC is that there are no consequences if your income increases after entering the agreement. Over the course of a partial payment agreement, the IRS will re-evaluate your financial situation every 2 years. You may have to submit additional documentation for each financial review. If your income increases or your situation changes, your payments may increase.
One advantage of a PPIA is that federal laws allow you to complete more than one of these agreements during your life. An OIC, on the other hand, is a once-in-a-lifetime solution. If you have ever completed an OIC before, you aren’t eligible for another, making PPIA your better — or only — option. A partial payment agreement is also a better choice if you were recently rejected for an OIC.
Another advantage of a partial pay agreement is that the processing time for this option is that it is much faster than it is for an OIC. While the IRS typically processes a partial payment plan request in around 30 days or less, it usually needs 3-6 months to determine whether you qualify for an OIC, plus an additional 2-3 months for legal review and final approval. To make matters worse, the CSED is usually suspended during the 5-9 months that your application is pending. This gives the IRS more time to collect against you if your offer isn’t approved.
Partial Pay Installment Agreement Vs. Currently Not Collectible Status
A partial pay agreement is almost always a better option than a CNC status, because the PPIA is a solution, while a CNC merely defers or delays the situation. The CNC may be a better alternative if you truly can’t afford even a small monthly payment and are relatively certain that your situation isn’t going to change before your CSED expires.
How Do I Request A Partial Payment Installment Agreement?
If you think that a partial payment plan could be the best way to resolve your tax liability, your next step is to begin the application process. Before going any further, it’s important to note that, to be eligible for a partial pay installment agreement, you must owe at least $10,000 in taxes (including penalties and interest). You must also have filed all required tax returns for at least the past 6 years. Finally, you can’t have an active bankruptcy case pending.
Required Forms And Documents
To begin the application process, you’ll need to submit certain forms and financial information so that the IRS can determine your eligibility for a partial payment agreement.
IRS Form 433-A is a 6-page form entitled “Collection Information Statement for Wage Earners and Self-Employed Individuals.” The purpose of Form 433-A is to prove that you can’t pay your tax debt in full within the legal time limits. (This means not only that you don’t have the income or money on hand to pay, but also that you wouldn’t be able to raise enough money even if you sold most of your assets.)
Fill out this form as completely and truthfully as you can. In addition to the form, you’ll also need to attach supporting documentation of your assets, expenses, and income for the past 3 months. This documentation might include pay stubs, bank and other depository account statements, loan and credit card statements, and bills reflecting your monthly living expenses.
Form 9465 is a 2-page form entitled, “Installment Agreement Request.” Form 9465 is where you will submit your proposed monthly installment payment amount. It’s worth noting that the IRS doesn’t provide an expected payment amount. It’s your responsibility to make the first offer, which is then subject to negotiation.
It can be tricky to determine a proposed payment amount for Form 9465. On one hand, if you choose a payment amount that’s too high, you may not be able to afford the payment each month, making it more likely that you’ll miss payments and jeopardize your entire agreement. On the other hand, if your proposed payments are too low relative to your income and expenses, the IRS might deny your request. Do your best to determine an amount that takes both of these challenges into account.
Include either a check or direct debit information with Form 9465 to cover the installment plan fee and your first proposed installment payment.
When the IRS receives your application, it will launch an investigation to independently verify your financial situation and the value of your assets.
A partial payment agreement is intended as something of a last resort, so you’ll need to prove that you’ve exhausted your resources. The IRS will evaluate how much equity you have in real and personal property, then determine whether you could sell — or borrow against — your assets to pay off your taxes. In its investigation, the IRS will review property records for any real estate that you own, check your state’s motor vehicle records for any automobiles in your name, and review your full credit history.
If the IRS finds that you have assets with equity, your case will be classified as an asset case. Otherwise, it will be labeled a no-asset case. This process is similar to the one a Chapter 7 bankruptcy trustee uses, except that, unlike a trustee, the IRS does not take exemptions into account.
In a no-asset case, the IRS will evaluate your proposed payment plan based only on your income and expenses. In an asset case, the IRS may force you to liquidate (sell) your assets before evaluating your request for a partial payment agreement. You will not have to liquidate assets under the following circumstances:
Your equity in the property is minimal or isn’t enough for you to use the property as collateral for a loan.
If you were able to use the property as collateral for a loan, the loan payments would be higher than you could afford to pay.
There’s an ownership interest in the property that makes selling the property illegal under state law.
Federal or state law requires that the property’s environmental status must be brought up to code before it can be sold.
The property is used to generate income that you will use to make your tax installment payments (such as tools or a work truck).
Selling the property would cause you undue economic hardship (for example, you won’t have to sell your house if, by doing so, you would end up spending more per month on your new rent or house note).
Occasionally, the IRS discovers that a borrower is scheduled to receive a substantial asset or sum of money in the future, such as a large distribution from a trust. If you wouldn’t receive an asset until after the CSED passes, the IRS may request that you agree to waive or extend the CSED as part of the terms of your partial pay installment agreement.
The IRS offers payment solutions for just about any tax debt situation. If you owe more than $10,000 in taxes, penalties, and interest, and can’t afford to pay your debt within the next 6 years, a partial payment installment agreement may be a good option for you. If you’re not sure how to proceed, discussing your circumstances with an experienced tax professional may help you choose the most beneficial course of action to resolve your tax debt.