Posted December 15, 2022
Owing money to the IRS can be an overwhelming experience. There are a lot of misconceptions about available corporate tax resolution strategies, including the process for negotiating a payment plan. Too often the emphasis is put on the size of the corporate tax liability. Most assume if your business (or you) has a large liability, you must then make proportionately large payments. This assumption is incorrect, and explains why approximately 95% of all installment agreements with the IRS fail. Typically, IRS agreements fail because they were set up to fail in the first place.
Fortunately, there’s no rule requiring the IRS to base the monthly payment on an arbitrary timeframe or the size of the liability. In fact, it’s the exact opposite. Instead, the Internal Revenue Manual (IRM) indicates, “installment agreements must reflect taxpayers’ ability to pay on a monthly basis throughout the duration of agreements.” The IRM goes on to explain, “if full payment cannot be achieved by the collection statute expiration date, and taxpayers have some ability to pay, the Service can enter into partial payment installment agreements.” Here is how it works.
What is a Partial Payment Installment Agreement (PPIA)?
A PPIA is a monthly payment plan option for businesses (and individuals) who have a tax balance but are unable to repay that balance in full within the remaining statute of limitations. Generally, the statute of limitations is ten years. The key term is “partial” – a business repays “part” of the liability until the statute expires. Once the statute expires, the IRS cannot collect the debt (and you can stop making the monthly payment).
Determining Affordable Monthly Payments for Your Corporate Tax Liability
The monthly payment should be based on what your business can afford. If your business can remain current with its payables (including IRS deposits) and can afford a substantial payment, then you should expect to make a substantial payment. However, if your cashflow reflects an ability to make a small payment each month, then that should be the payment. Otherwise, you’ll fall behind with your payables and/or break the terms of the agreement.
PARTIAL PAYMENT INSTALLMENT AGREEMENT EXAMPLE
Let’s assume a business owes $3,500,000 in back taxes. Initially, you might think the IRS would require payments of $30,000, $50,000, or even $100,000 per month. Sadly, it’s likely the IRS won’t correct that assumption and might even lead you to believe you have no option other than to agree to such a payment.
However, the business’s cashflow should determine the monthly payment. A business’s “disposable income” – the difference between monthly revenue and expenses – should equate to the payment amount. In our example, the business has $1,000,000 in monthly revenue and $995,000 in expenses. The difference is $5,000, which is the “disposable income.” As such, the monthly payment should also be $5,000.
You might be thinking, “Wait, that won’t ever repay the IRS in full. Why would the IRS do that?” In short, the payment of $5,000 is the only one the business can afford. If the IRS required a larger payment, the business would default the agreement almost immediately. Again, the statute of limitations is generally ten years (120 months) from the date the IRS assesses the liability. Continuing with our example, a payment of $5,000 per month puts the business in a position to repay only $600,000 of the $3,500,000 liability over time. $5,000 X 120 months = $600,000.
SKILLED REPRESENTATION TO RESOLVE YOUR CORPORATE TAX LIABILITY
TIGTA – the Treasury Inspector General for Tax Administration – reported in March 2022 that less than 2% of all IRS installment agreements are PPIAs. And they concluded that the figure is so low because the IRS deliberately withholds information about the PPIA from taxpayers. That’s why it is so important to have experienced representation that understands the available options and can communicate them to you. The example above isn’t an imaginary situation; it’s an actual Tax Guard success story.
Don’t let the IRS tell you what you can pay, let Tax Guard help you set up an agreement you can truly afford.