How to Work Out a Payment Plan with the IRS for Overdue Taxes


How to convince the IRS to agree to a payment plan for your tax debt. To settle his $19,000 tax liability with the IRS, Malcolm C. from Lexington, Kentucky, contacts me and asks how he might do so.

First, let’s have a look at the backstory of this situation:

1. Malcolm has a two-year debt dating back to 2003 and 2004.

Second, he has submitted all of his tax forms.

Third, there is no active levy or garnishment on him.

He has no business tax debt and no personal tax debt.

In an attempt to increase his take-home pay in 2003 and 2004, Malcolm marked “exempt” on his W-4 form. The IRS is now demanding payment. The IRS has requested that Malcolm set up a monthly payment plan of $753. However, his budget only allows for a monthly payment of $400. Where does he go from here? In my experience, this occurs frequently among my clientele.

First, filling out a W-4 with the word “exempt” will never work in your favor. You must always pay the piper (plus late fees and interest). Almost always, the inconvenience and additional costs incurred later are not worth the extra money earned during the exemption period. The Internal Revenue Service could prove criminal tax fraud charges against you if they tried to get technical and claimed that you intentionally under-withheld income tax. But in a situation like this, the likelihood of you being investigated, much less indicted, is extremely low. Simply said, you shouldn’t do it.

The best course of action for Malcolm is to dial 1-800-823-1040 to reach the IRS’s Automated Collection System (ACS) and ask for a “Streamlined Installment Agreement.” If you’re an individual taxpayer with an income tax obligation of less than $25,000 and no company payroll tax bills, you’re automatically eligible for a Streamlined Installment Agreement. To determine the Streamlined Installment Agreement, divide your total tax liability ($19,000) by 60. As a result, Malcolm can arrange with the IRS ACS unit to make payments totaling around $320 to $325 each month over the following five years (60 months).

As long as you follow the terms of your Streamlined Installment Agreement, the IRS will not levy or garnish your wages. Just treat it like a regular monthly expense for the next five years and pay it off at your own pace (it will take a little longer than five years due to penalties and interest). Don’t be surprised if the IRS files a Federal Tax Lien to protect its interest in the debt until it is paid in full, even if you are making payments toward it. Remember that there is a distinction between a Lien and a Levy. The lien will take nothing of yours, whether money, wages, or property. Until the debt is paid, it will remain on your credit record.

In addition, you must ensure future compliance. If the agreement is breached in any way, all bets are off. Regarding the IRS, “compliance” means filing all returns on time (often by April 15) and paying any outstanding taxes from the prior year. Malcolm, I wish you the best of luck. How to get penalties and interest on penalties waived in a comparable scenario is a topic I’ll cover in a later essay.

Jack Manhire has worked as a tax attorney with the Internal Revenue Service (IRS) for eleven years. Visit his site for free advice on how to resolve your IRS issues finally:

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