[author: Jennifer L. Rath, Enrolled Agent]
If a taxpayer owes federal taxes, but does not have the financial ability to pay these taxes in full, the taxpayer can apply for a payment plan with the IRS to pay these taxes, and usually on a monthly basis. However, depending on the amount of taxes owed, the IRS may require the taxpayer to submit detailed financial information in order for the IRS to evaluate a suitable monthly payment. For this purpose, the IRS requires a taxpayer to prepare and submit a Collection Information Statement (CIS), typically through a Form 433, and with supporting financial documents and information. Preparation of this financial information, and its review by the IRS, can often be a burdensome and uncertain process for taxpayers seeking to pay their federal taxes.
On May 11, 2020, the IRS issued an important update to the Internal Revenue Manual (IRM) changing the procedural requirements for when a CIS must be submitted as a condition for an installment payment plan. These procedural updates have expanded the tax debt thresholds for individual taxpayers and “Out-Of-Business” sole proprietors, thus now eliminating the requirement for many taxpayers to provide a CIS in order to obtain a payment plan for their taxes.
A CIS reports detailed financial information about a taxpayer’s assets, liabilities, monthly income and expenses, and other information. When a CIS is required, the IRS reviews this information to determine the taxpayer’s monthly disposable income and which can furnish the basis for a monthly tax payment. Information to be reported to the IRS in a CIS includes wage and income amounts from all sources, self-employment income, bank account numbers and balances, investment account numbers and balances, as well as all household expenses, including mortgage or rent payments, secured and unsecured loans and credit lines, food, utilities, child care, healthcare, and other regular monthly expenditures. For income purposes, the CIS reflects ”every penny in and every penny out” on a monthly basis. The IRS also imposes allowable standards for mortgage or rent and other household expenses based on the area of the country in which the taxpayer resides. If a taxpayer’s monthly expenses exceed allowable IRS standards, a monthly tax payment may be based on the lower allowable standard rather than the taxpayer’s actual costs, and which results in a higher monthly payment being due.
Until recently, the IRS required taxpayers seeking a payment plan to submit a CIS where the taxpayer owed more than $50,000 in combined taxes, penalties, and interest. Under the new IRM procedural update now, no CIS will be required where the balance owed is less $100,000, or even $250,000 depending upon which IRS division is responsible for collecting the taxes.
IRS employees in the Automated Collection System (ACS), Automated Collection System Support (ACSS), and Compliance Services Collection Operations (CSCO) divisions attempt to collect outstanding taxes, penalties, and interest from taxpayers through mailed notices. Installment payment plans handled by these divisions can now be approved for outstanding taxes, penalties and interest up to $250,000 without providing a CIS. The term of an installment payment plan can be as long as 10 years, or the remaining balance of this 10-year term which begins from the day the IRS first sends a bill to a taxpayer for the outstanding balance. This 10-year term can be extended, however, where the IRS may be legally prevented from collection taxes, such as where the taxpayer files bankruptcy, submits a request with the IRS to “compromise” taxes, and in other specific instances.
When taxpayers do not respond to mailed tax-due notices, IRS Field Assistance Employees, such as Revenue Officers, may be assigned to collect the outstanding tax debt. Revenue Officers may visit the taxpayer’s home or call the taxpayer in an attempt to collect the taxes. Revenue Officers now have the authority to grant payment plans without a CIS for outstanding taxes penalties, and interest up to $100,000. Here again, any monthly payment plan must fully pay the full tax debt prior to the end of the applicable 10-year period.
Managerial approval of payment plans may be required in some cases. For taxpayers with a history of defaulting prior IRS payment plans, an IRS manager must approve a new payment plan where the amount owed exceeds $25,000. Managerial approval will also be required for payment plans where the taxes, penalties, and interest exceed $50,000 regardless of prior default status.
Taxpayers who cannot fully pay their balances prior to the end of the applicable 10-year period may qualify for a partial payment installment agreement for a limited period of time (e.g. 1 or 2 years), but a CIS will be required for all partial payment agreements. After the end of the initial term of a partial payment agreement, the taxpayer would need to apply for a new partial payment agreement for an additional term.
These IRM procedural changes reduce burdensome information preparation and disclosures for many taxpayers now, and is certainly a welcome change to older IRS financial information requirements. With this new changes. Taxpayers should now be able to more easily qualify for a payment plan for their federal taxes.