Legal Definitions - installment agreement

An installment agreement is a formal arrangement made with the Internal Revenue Service (IRS), the U.S. federal tax collection agency, that allows a taxpayer to pay off their outstanding federal tax debt in a series of manageable monthly payments over a set period, rather than as a single lump sum.

This option is designed to help individuals and businesses who cannot afford to pay their full tax liability immediately. By entering into an installment agreement, taxpayers can avoid more severe collection actions from the IRS and establish a structured plan to resolve their debt. While the IRS generally has discretion in approving these agreements, there are specific situations where they are typically required to grant one, such as when the tax owed is below a certain threshold (currently $10,000) and the taxpayer meets other conditions. Other types of agreements exist for larger amounts, sometimes requiring a detailed review of the taxpayer's financial situation. The overarching goal is to ensure the government can collect at least a portion of the owed taxes while providing a feasible repayment path for the taxpayer.

Entering into an installment agreement is a formal process that requires the taxpayer to follow specific procedures and submit the necessary documentation to the IRS. Adhering to the terms of the agreement, including making timely payments, is crucial to keep the agreement in good standing.

Here are a few examples of how installment agreements might apply:

• Scenario 1: Unexpected Tax Bill for an Individual
  Maria, a freelance graphic designer, had a very successful year but underestimated her quarterly tax payments. When she filed her annual tax return, she discovered she owed $8,500 in federal taxes. While she has some savings, paying the entire $8,500 at once would deplete her emergency fund, which she needs for unexpected business expenses. She doesn't want to incur penalties for late payment or face collection actions.

  How it illustrates the term: Maria can apply for an installment agreement with the IRS. Since her tax liability is under $10,000, she likely qualifies for a "guaranteed installment agreement." This means the IRS is generally required to accept her proposal to pay the $8,500 in monthly installments, allowing her to manage her debt without liquidating her emergency fund and avoiding further penalties.

• Scenario 2: Small Business Cash Flow Management
  "Green Thumb Landscaping," a small business with five employees, experienced a sudden surge in demand, leading to higher profits than anticipated. However, they had already invested heavily in new equipment for the busy season. When tax time came, they owed $45,000 in federal taxes. While the business is profitable, paying the entire $45,000 lump sum immediately would severely strain their cash flow, making it difficult to cover payroll and operational costs for the next few months.

  How it illustrates the term: Green Thumb Landscaping can seek an installment agreement. Given their tax liability is under $50,000, they might qualify for a "streamlined installment agreement." This type of agreement allows the business to pay off the $45,000 over a period of time, typically up to 72 months, enabling them to maintain healthy cash flow and continue operations smoothly while fulfilling their tax obligations.

• Scenario 3: Complex Financial Situation Requiring Partial Payments
  David, a retired entrepreneur, faced a challenging year with significant medical expenses and unexpected losses from a failed investment, resulting in a federal tax liability of $150,000. Although he has some assets, his current income is limited, and a full repayment within a standard timeframe is not feasible without selling essential assets. After reviewing his financial statements, the IRS determines that he can realistically afford to pay $2,000 per month.

  How it illustrates the term: David could enter into a "partial installment agreement." In this scenario, the IRS agrees to accept monthly payments of $2,000, even if this amount might not fully cover his $150,000 debt within the typical repayment period. The IRS would periodically review his financial situation (often every two years) to see if his ability to pay has improved, potentially adjusting the payment amount if his circumstances change. This arrangement allows the IRS to collect a portion of the debt while acknowledging David's current financial limitations.