Most people who have had the misfortune of getting behind with the IRS have heard about tax settlements, otherwise known as Offers in Compromise (OIC), as a method for repaying far less than the full amount owed. Fewer realize that there is an alternate method that can effectuate a similar result: the repayment of just a fraction of a tax liability. This method is known as a Partial Payment Installment Agreement (PPIA).
The kicker is that a PPIA can actually be a superior alternative for certain taxpayers. In fact, there are circumstances where one would not qualify for an OIC but would qualify for a PPIA. Thus, those wishing to repay the smallest amount of money to the IRS are “flying blind” if they don’t understand the PPIA method. Worse yet, they could end up repaying the entire amount due (plus future accruals) when they could have repaid far less.
Partial Payment Installment Agreement Basics
Simply put, a PPIA is an installment agreement to repay an IRS tax debt with monthly payments not large enough to repay the entire tax debt within the IRS’s time to collect. Generally, the IRS has 10 years to collect a tax debt from the date of assessment, though a few exceptions can extend this period.
How PPIA Works
To illustrate, imagine a taxpayer enters into a PPIA 20 months after assessment and agrees to monthly payments of $200. Since the IRS has 10 years from the assessment, the taxpayer would have 100 months left to pay. If the total liability is $100,000, payments of $200/month over 100 months would result in a total repayment of $20,000—a fraction of the debt.
However, note that the monthly payments in a PPIA may not stay the same. The IRS will periodically (every two years) review the taxpayer’s financials and, if there is an increased ability to pay, they may require higher payments.
Business Taxpayers & Business Owners
For business taxpayers and owners, it is more unpredictable whether payments will increase upon review. If profitability remains steady, payments may stay the same. But if profitability increases, the IRS will likely require higher payments.
Beware! Ignoring IRS Mail Could Cause PPIA to Default
If you enter into a PPIA, make sure to respond to IRS mail regarding the two-year financial review. Ignoring this could lead to default, enforced collections, and the risk of a denied PPIA renewal. Avoid this by staying attentive to IRS correspondence.
Who Qualifies for a PPIA?
To qualify for a PPIA, you must be in compliance with filings and current tax payments. Complete financial information, including Form 433-A for individuals or Form 433-B for businesses, and supporting documents must be provided.
PPIA Approval Requirements
To get your PPIA request approved, your financial information will need to demonstrate:
- An inability to make monthly payments large enough to pay the full liability within the collection statute. For businesses, this usually means limited net income. For individuals, allowable expenses must leave insufficient income to pay in full. Variances can sometimes be negotiated with the IRS on allowable expenses, an area where a tax resolution attorney can help.
- Insufficient equity in assets. Generally, the IRS will want you to liquidate or borrow against assets to pay down the debt if possible. However, there are ways around this.
Here are some examples:
- You show that you cannot borrow against a particular asset, such as real estate, by submitting declined loan applications.
- You demonstrate that you cannot afford the loan payments, even if you qualify for a loan.
- If you have equity in your home, showing an inability to borrow or make payments may allow PPIA approval without liquidation.
- Retirement accounts may also be protected in some cases.
Which is Better: PPIA or OIC?
The answer depends on several factors. Consulting with a tax resolution professional can help you make the best choice. Here are some factors to consider:
- Equity in residence or retirement accounts: High equity may disqualify you from an OIC but may allow a PPIA with reduced repayment.
- Potential increase in future income: With an OIC, future income changes don’t affect the settlement. In a PPIA, future income increases could lead to higher payments.
- OIC process complexity: Getting an OIC is more time-intensive and costly than a PPIA, which can be set up in as little as 30 days.
- Collection Statute Extension: The OIC process extends the IRS collection statute, potentially lengthening your time in collections.
- Predictability: PPIA outcomes are often more predictable than OIC outcomes, which can be impacted by changes in your financial situation during processing.
- Desire to resolve IRS collections permanently: An OIC resolves your debt for good, while a PPIA requires ongoing IRS reviews.
As you can see, choosing between a PPIA and an OIC is a complex decision. If possible, consult with a qualified tax resolution professional. We have friendly and knowledgeable tax pros at Fortress, ready to help. For a free consultation, just give us a call.
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