How to Qualify for an IRS Partial Payment Installment Agreement?

IRS Partial Payment Installment Agreement

A partial payment installment agreement (PPIA) is an arrangement with the Internal Revenue Service (IRS) to pay a specific monthly amount towards your tax debt that will not pay the debt in full by the end of the collection statute expiration date. Once the IRS’s collection period expires, you no longer need to make these monthly payments.

If you owe a substantial amount in back taxes, a PPIA is an attractive option. Firstly, you can pay your tax debt in installments, making this liability more manageable. Secondly, the payment agreement ends when the debt expires, and you will pay the IRS less than you owe. It effectively operates as a settlement for less than the amount you owe.

What is an IRS partial payment installment agreement, and how does it work? Who qualifies for a partial payment installment agreement with the IRS? How do I apply for an IRS partial payment installment agreement?

In this post, we’ll go over all these questions to help you resolve your tax liability and avoid collection action.

Fundamentals of a PPIA

After the IRS assesses a tax against you, the agency must collect this debt before it expires on the Collection Statute Expiration Date (CSED), typically ten years from the assessment date. In other words, should the IRS fail to collect your tax debt before this date, you no longer need to pay the tax.

In practice, the IRS takes aggressive collection actions against delinquent taxpayers before allowing this time limit to expire. For example, the IRS can force you to pay by garnishing your wages or seizing your assets.

However, if you cannot afford to pay your tax debt immediately and in full, you may have several tax debt relief options available to avoid collection. One of these options is a partial payment installment agreement (PPIA).

Under this agreement, you make fixed monthly payments you can afford for the duration of the collection period. On the CSED, the unpaid portion of the assessed tax balance will expire, so you no longer need to make these monthly payments.

In addition to helping you avoid collection, a PPIA is a form of tax debt settlement. This agreement also makes your liability easier to repay, as you make the monthly payments from your excess income.

An Example of a Partial Payment Installment Agreement

Taxpayer A owes the IRS $20,000 in tax, penalties, and interest for the 2017 tax year. The IRS assessed this tax against Taxpayer A in October 2018, and the agency has until October 2028 to collect this debt.

In March 2024, Taxpayer A submitted a PPIA request and complete financial disclosure to the IRS, proving that they only had $100 left at the end of each month after covering their allowable living expenses.

The IRS grants a PPIA under which Taxpayer A must pay $100 monthly from March 2024 to October 2029 (the CSED), amounting to a total payment of $5,600.

PPIA Eligibility Criteria

The IRS does not grant a PPIA to every taxpayer requesting it. You must prove to the IRS that your current financial situation warrants this agreement. Generally, the IRS only approves PPIA requests from taxpayers who:

  • Owe $10,000 or more in taxes, penalties, and interest
  • Can afford a monthly payment but not one that is high enough to repay the entire tax debt before the CSED
  • Do not have the disposable income to repay their tax liability under a regular installment agreement
  • Are up to date on all past tax returns
  • Did not qualify for an offer in compromise for the tax period in question
  • Are not in bankruptcy
  • Do not own a net realizable equity in assets that can cover their tax liability in full

Depending on your financial situation, the IRS may require you to liquidate assets and use the proceeds to reduce your tax liability before approving a PPIA.

Requesting a PPIA

To apply for a PPIA, you must calculate the monthly payment you can afford after covering your basic living expenses. Then, you must submit the following relief forms to the IRS:

  • Form 9465 (Installment Agreement Request)
  • Collection Information Statement (Form 433-F, 433-A, or 433-B)
  • All documentation substantiating the information you provided on these forms
  • A copy of your tax return

After you apply for a PPIA, an IRS manager will review your application and verify whether you are current and compliant. You can expect to receive a response from the IRS within 30 days of submitting your request.

Working with a reputable tax attorney can significantly increase your chances of a successful PPIA request.

Financial Disclosure

Your collection information statement is integral to your PPIA request. The IRS uses the financial information in this statement to determine if this agreement is the agency’s best option to collect as much as possible on your account before the CSED.

The collection information statement (CIS) you should submit depends on your circumstances and the level of detail the IRS requires.

Individuals or self-employed persons must use Form 433-F to provide their financial information to the IRS. This form includes details about income, expenses, assets, and liabilities to help the IRS assess the taxpayers’ ability to pay their tax debt. Businesses must use Form 433-B. A revenue officer may request that you submit Form 433-A, similar to Form 433-F but more detailed.

After reviewing your collection information statement, the IRS may request any of the following:

  • Information on income and assets that you did not disclose on your CIS
  • Real and personal property records
  • Bank statements
  • Credit reports
  • Reasons for an income decrease of 20% or more

The IRS will also use this information to determine if you can sell or borrow against any assets you own to pay your tax debt.

Calculating Monthly PPIA Payments

Under a partial payment installment agreement, you must pay as much as you can afford. Generally, the difference between your monthly income and allowable living expenses is the amount you must pay every month until the CSED.

Contrary to popular belief, the IRS wants you to have enough cash to pay for your allowable living expenses. These living expenses take priority over your monthly tax payments, provided they are reasonable and realistic. Allowable living expenses include:

  • Food, clothing, and personal effects
  • Housing
  • Transportation
  • Out-of-pocket healthcare costs

Under the necessary expense test, the IRS will consider expenses allowable if they are necessary to provide for you or your family’s health and welfare. An expense that contributes to the creation of an income may also be allowable.

The IRS uses national and local standards to determine allowable living expenses. If your actual living expenses exceed these standards, the IRS will only subtract the allowable amounts from your income to determine how much you can afford.

Selling or Borrowing Against Assets

When evaluating a request for a Partial Payment Installment Agreement (PPIA), the IRS may consider whether you can liquidate or take out a loan against assets to pay off your tax debt. The IRS typically looks at the taxpayers’ overall financial situation, including assets, income, and expenses, to determine the most appropriate payment plan.

While the IRS may suggest that a taxpayer liquidates or borrows against assets, it is not always required. The decision depends on various factors, and you may avoid selling if:

  • The asset is inherently unmarketable or unsellable
  • No creditors are willing to grant you a loan against your net realizable equity
  • Your non-liable spouse co-owns the asset and refuses to borrow against or sell it
  • The asset contributes to your income
  • Selling the asset will create severe economic hardship

Consulting a reputable tax attorney is crucial to navigating this process and negotiating favorable terms for your situation. If the IRS wants you to sell an asset, contact us today to schedule a consultation.

CSED Extension

If the IRS believes that a taxpayer will acquire an asset after the CSED that they can use to pay off the tax debt, they may require the taxpayer to extend the CSED as a condition for approving a PPIA. This extension ensures that the IRS has the legal authority to collect the tax debt when the asset becomes available.

For example, if a taxpayer will likely receive a large sum from a trust after the CSED, the IRS might require the taxpayer to extend the CSED before agreeing to a PPIA. Once the taxpayer receives the trust funds, they would be required to use them to pay off their tax debt.

There are also certain situations where the CSED is automatically extended, such as when a taxpayer:

The clock on the collections period also stops during the automatic stay of a bankruptcy case plus six months.

Financial Reviews by the IRS

When the IRS grants a PPIA, it does not necessarily mean that this agreement will remain intact until the CSED. If your financial situation improves, the IRS can collect more, if not all, of the tax you owe, in which case it will terminate or change the arrangement it has with you.

The IRS will monitor your financial situation by scheduling a review every potentially every 24 months. The IRS agent working on your account can also set up an automatic trigger that schedules a review if the income reported on your income tax return exceeds a specific threshold.

If a review indicates that you no longer qualify for a PPIA, the IRS will set up a traditional installment agreement or request an immediate payment for the entire balance.

Defaulting on a Partial Payment Installment Agreement

The IRS may terminate the installment agreement if you fail to make monthly payments under a PPIA or you accrue a new tax debt. Then, the IRS can take enforcement actions to collect the total amount you owe, including filing a tax lien and levying your wages, bank accounts, or other assets.

Alternatives to a Partial Payment Installment Agreement

Are there any alternatives to a Partial Payment Installment Agreement for handling tax debt? The PPIA is one of several tax debt resolution options for delinquent taxpayers. If you do not qualify for a PPIA, you may want to pursue one of the tax relief options below:

Regular Installment Agreement

Under a traditional installment agreement, you must pay the entire tax balance over 72 months or the remaining CSED period. While these agreements do not result in a lower tax payment, they are more affordable than high-interest loans to repay your tax liability.

Additionally, the IRS will not collect from you for the duration of the repayment period, save for potentially filing a federal tax lien. Penalties and interest continue accruing while you repay your liability under an installment agreement, and the IRS may apply any federal tax refunds to your balance.

Offer in Compromise

How does a partial payment installment agreement (PPIA) compare to an offer in compromise (OIC)? An OIC and a PPIA are similar in that they involve only paying a portion of your tax debt. However, unlike a PPIA, an OIC involves a one-off payment.

The IRS will only accept an offer in compromise if there is doubt that the taxpayer has the income and net realizable equity in assets to pay the tax liability in full and before the CSED.

Currently Not Collectible Status

Financial hardship is when taxpayers cannot pay their tax debt without compromising their ability to meet basic living expenses.

To qualify for currently not collectible (CNC) status, you must demonstrate that paying your tax debt would cause significant financial hardship. If the IRS determines that you are experiencing financial hardship and cannot pay your tax debt, it may place your account in CNC status. While in CNC status, the IRS temporarily suspends collection activities such as levies or garnishments.

If you can only afford $50 or less per month, CNC status may be a better tax debt resolution option than a PPIA.

IRS Partial Payment Installment FAQs

Will I qualify for a PPIA if I defaulted on an installment agreement with the IRS in the past?

If you have defaulted on an installment agreement with the IRS in the past, you may still qualify for a PPIA, but the IRS will likely require stricter terms. One common requirement is setting up a Direct Debit Installment Agreement (DDIA) or a Payroll Deduction Installment Agreement (PDIA) to ensure consistent payments. The first takes payments out of your bank account; the second takes them right from your paycheck.

What are the compliance requirements for maintaining a PPIA?

Make all scheduled payments on time, as missing payments can lead to default and termination of the agreement. You must file all required tax returns on time and pay taxes due in full and on time for future tax periods. Accumulating new tax debts can potentially result in the default of your PPIA. When the IRS schedules a review of your financial situation, provide all the financial information it requests.

What should I do if I cannot meet the terms of my PPIA?

If you cannot meet the terms of your Partial Payment Installment Agreement (PPIA), you should contact the IRS to discuss your situation. You can potentially negotiate a modification of your agreement or explore alternative payment options. Addressing the issue immediately is essential to avoid default and potential enforcement actions.

Partner With a Reputable Tax Resolution Attorney

Understanding the intricacies of a Partial Payment Installment Agreement (PPIA) is crucial for those struggling with significant tax debt. A PPIA offers a manageable way to settle your tax liabilities over time, potentially paying less than the total amount you owe.

However, you must consider this option’s eligibility criteria, financial disclosures, and compliance requirements carefully. Consulting with a tax attorney can provide valuable guidance if you are contemplating a PPIA or have concerns about your ability to meet its terms.

At Wiggam Law, we specialize in tax law and can assist you in evaluating your options, navigating the application process, and ensuring your rights and interests are protected. Contact us for expert advice and support to resolve your tax liability and avoid collection action.