To be eligible to resolve an outstanding federal tax liability voluntarily (i.e., installment agreement or offer in compromise) with the IRS as opposed to having it forcefully resolved through collection action such as levies, garnishments, and the seizure of assets, the IRS has two basic requirements.  

IRS Requirement #1

The first requirement is that you are in filing compliance.  This means that all outstanding tax returns that are required to be filed have been filed.  Most people do not have a difficult time understanding this requirement once it is determined whether or not there are delinquent returns that need to be filed.

IRS Requirement #2

The second requirement is that the taxpayer is current with all required federal tax deposits and quarterly estimated deposits. Several possible deposits may need to be considered current by the IRS.

Estimated Deposit Requirements For Individuals

One type of deposit is the Estimated Deposit Requirements for Individual Income Taxes. The deposit requirements for individuals tend to be simpler than that of a business because only one deposit may be required. Suppose a federal tax liability has been assessed against you, and you seek a voluntary resolution such as a payment plan or an offer in compromise. In that case, it is a prerequisite that any required quarterly estimated payments be made.

Determining Quarterly Payments

To determine if you are required to make a quarterly estimated payment, the first and best step is to review your prior year’s federal income tax return, Form 1040. 

If the return was filed with a tax liability of over $1,000 (after subtracting federal tax withholding and credits), and you expect the federal withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2015 federal tax return, or 100% of the tax shown on your 2014 federal tax return (only applies if your 2014 tax return covered 12 months – otherwise refer to 90% rule above only), then you are required to make estimated quarterly payments toward your next income tax return as it is presumed that the next income tax return will be similar to the current one.

Determining Each Estimated Quarterly Payment 

The more straightforward way is to divide the tax liability of the last and most recently filed return by four.  For example, if you filed your 2014 1040 income tax return with a tax liability of $5,000, you must make four estimated quarterly payments of $1,250 toward your 2015 1040 income tax return.  If you anticipate your next return to be substantially different than your present return, another means of determining the amount of each estimated quarterly payment is to complete an IRS estimated tax worksheet.

This can be found on the IRS website.  The worksheet is a series of calculations and estimates that will determine the amount of the estimated quarterly payments to eliminate any future liability on the next filed return.

If you are an individual whose income is derived from a W2 wage, one relatively simple method of eliminating the need for an estimated quarterly payment is to increase the income taxes being withheld from your wage.

The required quarterly estimated payments are due on April 15th, June 15th, September 15th, and January 15th. However, you do not have to make the payment on January 15th if you file your tax return by February 1st and pay the entire balance due with your return.

 IRS Deposit Requirements for Businesses

The second type of deposit is IRS deposit requirements for businesses. Like an individual, a business may also have to make quarterly estimated payments toward its future income tax return. The same criteria for individual estimated payments apply to a business.  However, in addition to being current with estimated quarterly payments for income tax, the business also has to be current with its required federal 941 employment tax deposits and possibly with its 940 unemployment tax deposits.  The 941 employment tax deposits are due on a quarterly, monthly, or semi-weekly deposit schedule, depending on the number of wages issued each quarter.

940 Unemployment Deposits

Additionally, the business may be required to make quarterly deposits toward its future 940 unemployment tax return.  The amount is determined by looking at the current quarter’s tax liability.  If the 940 unemployment tax is $500 or less during that quarter, you can carry it over to the next quarter and not make a deposit.  You can continue to carry the tax liability over to the next quarter until the cumulative tax is more than $500. At that point, a tax deposit is required for the current quarter. 

The deposit is due by the last day of the month after the end of the quarter.  If your tax for the next quarter is $500 or less, you are not required to deposit your tax again until the cumulative amount is more than $500.  Suppose the cumulative tax liability never exceeds $500. In that case, it is acceptable to pay the liability with the return at the end of January of the following year when you file the return.

The IRS requires deposit and payment compliance to obtain voluntary resolution for one essential and primary purpose.  The IRS wants to ensure that liability is not incurred on a future return.  It is critical for any voluntary resolution of back tax liability not to accrue any additional tax liability.  The IRS does not want to grant voluntary resolutions such as a payment plan to resolve a back tax liability if the payment plan is likely to default shortly when you file your next return with a liability. Thus, the IRS has established these requirements to ensure that a future liability does not occur, allowing the taxpayer to adhere to the terms of their approved resolution plan.

Greg Johnson has prepared the above article.  Mr. Johnson is a tax attorney and of counsel at The McGuire Law Firm.  Greg has represented many individual and business taxpayers before the IRS regarding many different issues. Call us at (720) 833-7705.

What is an installment agreement with the IRS?

An installment agreement with the IRS is an agreement whereby a taxpayer will make a monthly payment each month to eventually satisfy their IRS tax debt.  The payment can be made by mailing a check, paying via phone or other automatic payment options.

What forms may I need to complete?

If you owe 1040 individual income taxes, you may have to complete Form 433A or 433F.  If you own a business and the business owes taxes, you will need to complete 433B.

Do penalties and interest continue to accrue when I am on an IRS installment agreement?

Yes, penalties and interest continue to accrue.  The failure to pay penalty is cut in half to .25% per month as opposed to .5% per month when an agreement is finalized though.  This penalty will max out at 25%.  Interest continues to accrue until the debt is paid in full at the current interest amount.

Can the IRS levy me when I am on an installment agreement?

No, there is a hold on enforcement as long as you are complying with the installment agreement terms, which will include making the monthly payment and timely paying all future taxes and filing all tax returns.  Thus, if you are making your monthly payment per the payment plan arrangement, timely filing all applicable tax returns and timely paying all taxes, the IRS will not levy your bank account, garnish wages, seize assets or other types of collection action.

Can the IRS still file a tax lien if I am on an installment agreement?

Yes, the IRS can still file a Notice of Federal Tax Lien if you have established an installment agreement.  Although, formalizing an installment agreement can in some circumstances prevent the IRS from filing a federal tax lien, the IRS can still determine that the filing of a tax lien is in the best interest of the government.

Does an IRS installment agreement release my IRS tax lien?

No.  Formalizing an installment agreement with the IRS will not cause your tax lien to be released.  If you continue to make payments and pay off the tax debt, the IRS will release the tax lien or tax liens upon the debt being satisfied.

What if I cannot make my IRS installment agreement payment?

It is probably best to contact the IRS and advise them that the payment cannot be made.   You may be granted a grace period or the ability to adjust the payment amount.  If your overall circumstances have changed, you may even be able to settle your tax debt with an offer in compromise.  I have assisted clients where their circumstances changed and after being on an IRS installment agreement, they became a candidate for a tax settlement with the IRS offer in compromise unit.

If you owe taxes to the IRS, speak with a Denver tax attorney at The McGuire Law Firm regarding your options to resolve such debt.  A tax attorney can assist you with establishing an installment agreement with the IRS or analyzing your ability to settle your tax debt.  The McGuire Law Firm offers a free consultation to all potential clients.

The IRS allows taxpayers to satisfy their debts by making installment payments.  If your tax debt is $25,000 or less, the IRS is likely to allow an installment agreement without verification of financial information given you are willing to pay up to, or more than a certain amount.  Moreover, if the tax debt is $50,000 or less, the IRS may formalize an installment agreement with minimal financial disclosure given that the amount proposed by the taxpayer will resolve the tax debt within a certain period of time, which is usually 72 months (or six years).  These types of installment agreements are generally referred to as streamlined installment agreements.

If the taxpayer is unable to pay the amount of which would allow for a streamlined installment agreement, the IRS will require financial disclosure.  This financial disclosure would consist of Form 433A for individuals and/or Form 433B for businesses.  The IRS uses these collection information statements to determine what a taxpayers monthly ability to pay is and thus what they would request as a monthly installment agreement amount.  Often the amount the IRS would request as a monthly payment will exceed what the taxpayer feels they can pay because the IRS applies national standards for allowable living expenses.  If these standards are less than what the taxpayer actually pays for certain expenses, the IRS is likely to feel the taxpayer can pay more than they are offering to pay on a monthly basis.

Important considerations and issues regarding an installment agreement are stated below.  Please feel free to contact our Denver tax attorneys to discuss any of these issues or related tax issues.

–         Once an installment agreement is proposed, this can act as a hold on IRS enforcement.

–          Once an installment agreement is formalized, the agreement will act as a hold on enforcement.

–          To comply with the installment agreement, the taxpayer must make the required monthly payment and remain current and compliant by timely filing all tax returns and paying all future taxes.

–          Upon formalization of the installment agreement the failure to pay penalty is reduced.

–          The terms of an installment agreement can be amended due to changes in financial circumstances or even reduction of the tax debt.  Further a taxpayer who is/was on an installment agreement may be able to default the installment agreement and submit an offer in compromise if their financial circumstances would allow them be an offer in compromise candidate.

–          A taxpayer can establish an installment by calling the IRS automated collection system, working with their assigned revenue officer or through a collection due process hearing.

A Denver tax attorney at The McGuire Law Firm can assist you in establishing an installment agreement with the IRS if you have IRS tax debts, and can assist you with other IRS problems.

Contact The McGuire Law Firm and schedule your free consultation with  tax attorney in Denver.