How to Negotiate Your Own Payment Agreement With the IRS

Tax On Money Background
I’ve heard two stories in just as many days about people who paid one of those TV tax companies thousands of dollars to help them with their IRS debt and when all was said and done, all they got was a monthly installment agreement with the IRS.  I’ve got a big problem with that–because in both of those cases, the people could have used that money to pay down their debt–and done the installment agreement themselves for free.
While not everyone can handle their IRS tax debt problem themselves, before you go sending thousands of dollars to some company with a 1-800 phone number, lets see if you can handle this yourself for free first.
The first question:  Do you really owe the money in the first place?  That’s pretty important.  If your taxes were professionally prepared and you have a huge balance due-well you probably really do owe the IRS.  On the other hand, if you haven’t filed for several years and the IRS says you owe them lots of money–there’s a good chance you don’t.  Anybody does taxes better than the IRS–anybody!  The CPA down the hall, H&R Block, VITA, the really bad tax place I won’t name down the street, and even my high school intern — they all do taxes better than the IRS.
True story:  a couple of years ago, I had a high school intern while I was working at the big tax company.  She had only been there for a couple of days, she was supposed to help with the phones, photo copies and data entry type stuff.  A woman came to me with an IRS tax debt of $16,000.  I took the case, but I was busy working on another return so I asked the intern to just do the basic data entry work for me.  A little while later she came to me and said, “I did the data entry but I’m afraid you’re going to have to show me what I’m doing wrong.”  “What do you mean,” I asked, “It’s just data entry.”  “I know,” she said, “But I heard you say she owes the IRS $16,000 and on all the returns I input she’s got refunds!”
I looked over everything the girl had done.  It was perfect.  Instead of the woman owing the IRS $16,000, the IRS owed her $8,000.  So when I tell you that anybody prepares a tax return better than the IRS–I’m not kidding.  Now you can go to an IRS office and they will help you with a return–those people know what they’re doing (usually), but those computer generated IRS returns that get mailed to you are garbage.  Plain and simple.
Second question:  Do you owe less than $50,000?  If you owe more than $50,000, you won’t be able to do an IRS streamline installment agreement.  If you can pay enough on the debt to bring it to $50,000 or less, then you can still do the streamline–otherwise you are going to want to get some help with your debt.  But let’s say you owe $52,000.  Well, you could pay some tax company $8,000 to negotiate for you, but if you paid $2,000 towards the debt, you could negotiate for yourself and still have $6,000 more pay your debt or buy groceries or whatever.
Third question:  How much can you afford to pay each month?  Let’s say you got hit with an IRS bill of $6,000 and you just didn’t have any money saved to pay it.  Realistically, look at your financial situation and figure out what you can afford.  What’s the most you could possibly pay without causing yourself a hardship?  That’s going to be your upper limit number.  You need to think it through because you don’t want to commit to paying $500 a month if it means you lose your house.
Here’s the mechanics of it:  In a perfect world–you should be able to pay of your IRS debt within 2 years (24 months.)   So if you take that $6000 and divide it by 24, then your monthly payment would be $250.  And if you can afford that–great!  That’s the preferred timeline for the IRS to have you pay off your debt.
But if you can’t handle the $250 a month, you need to know that the IRS will go as far as 72 months (or six years) for you to pay off the debt.  So if you take $6,000 and divide that by 72 then you get $85 dollars a month (I rounded up to the nearest 5.)
What you might want to do is negotiate the $85 payment, but then pay the $250 to get rid of the debt faster.  That way you’ve got some wiggle room if you lose your job or have some other issue.
Here’s the other stuff you’ve got to know:
There is a fee of $105 for setting up the installment agreement.  It’s lower if you set up direct debit from your checking account or it may be reduced if your income is low–make sure you ask about it, they won’t always tell you.
If you’re trying to negotiate a payment agreement and things are just not going your way, it’s okay to back out before you commit.  Tell them that you think you’re going to need professional help and that you will have to call them back later.
Once you do have an agreement, you have to hold up your end of it.  Make your payments on time.  If you’re late, your installment agreement is void and you’ll have to start all over again–including the $105 fee for setting up the agreement.  (Not to mention those nasty letters they send about putting a lien on your home and levying your bank account.)
One final word, if you can’t handle the installment agreement yourself–maybe your tax issue is too complex or you’re just too intimidated to deal with the IRS, get help from a local professional.  You’ll need an enrolled agent or CPA because they’re licensed to represent you before the IRS.  I recommend using someone local (okay, someone like me) that you can meet with in person.  Sometimes, IRS debt issues will cost a few thousand dollars to settle up, depending upon the work that needs to be done.  But it’s important to know what is going to be done before you pay that kind of money out.  $8,000 for something you can do yourself is too high a price.  Ask questions, know why they’re charging you that much, and what you’re getting for it.  You have a right to know.

61 thoughts on “How to Negotiate Your Own Payment Agreement With the IRS

  1. Hi Charles,
    What you’re signing is a document stating that you do agree with the adjustments to your tax return, which it sounds to me like you do. Signing that document is step one in getting your tax house in order. Whether you do an OIC or a payment installment agreement – you’ll need to come to terms with the IRS about what you actually owe first. If the auditor is correct, then sign the document.

  2. Hi Shannon,
    My guess is that you don’t qualify for an offer in compromise–which is probably what you paid to get. I’m also getting that the contract says, “if an offer is not avaialable to the taxpayer we will arrange an installment agreement.” That’s pretty much what those contracts say. Don’t expect to get anything back from that lawyer. You can try to talk to the IRS about lowering your payment. The formula is the balance due divided by 72. You may need to submit financial statements if you want a lower payment. If your income is too high to qualify you for a lower payment, you won’t have much luck. I’m hoping your attorney did all that already.

  3. I only owe 4000 to IRS now… Ive been paying for years and is not much left but I would like to know if there is a settlement that I can do to pay it faster?

  4. Hi Lucia,
    I’m thinking that an offer in compromise isn’t going to work for you as the debt is so low. (Yes, I know that $4,000 doesn’t seem low, but for an offer it is.) But I do have one thought- how much of your debt is actually penalties? The reason I ask is because often, a lot of an IRS balance due is penalties and interest. Now you can’t get the IRS to abate (forgive) the interest, but sometimes, you can get them to abate the penalties.

    Here’s where I’m going with this. You say you’ve been paying off the debt for years and there’s $4,000 left. I’m guessing that the original bill was much more than $4,000. Late payment penalties alone can add up to 25% of your tax bill. So if this was all for one year (and maybe it was for more,) but you could call the IRS as find out how much of your bill is for the penalties (or the penalties for the first year of taxes that you owe on.)

    So, maybe the penalties are $2,500 – just for argument sake. What you’d want to do is just as you’re about to pay off that $1,500 (that’s the $4,000 total you owe minus the $2,500 penalty) you call the IRS and ask them to abate the $2500 in penalties. (Or whatever dollar amount the penalties are.)

    You don’t want to ask them to abate penalties until you’re ready to pay off the bill because otherwise the penalties will keep growing (and you’ll have already wasted your abatement.)

    I know that sounds a little funky, but it’s worth a shot. The IRS allows people a one time abatement, so if you’ve been in tax trouble before, they won’t grant it. And if you owe for multiple years, they’ll only grant an abatement for the first year. But you have to ask, they won’t just grant it unless you ask them to. Good luck.

  5. I got a letter stating that I owe back taxes for 10% penalty on early IRA distribution. I agree with most of it but I did have an exception for 1st time home buyer ($10,000 max). I put more that $10k down on a house in 2013 and withdrew 34,000 from IRA. I agree that I owe 10% of 24,000 (not 10% of 34,000). Should I just respond with a disagreement and letter with home settlement statement and/or other documentation or should I call the IRS first.

  6. Hi Steven,
    What you’ll probably need to do is prepare an amended tax return (form 1040X) including from 5329 showing the exception for the first time homebuyer exception. When you send the IRS letter back that notice, you’ll check the box that says “agree with some of the changes” and in the explanation part you’ll say “amended return enclosed”. With your 1040X, you won’t need to submit all the other forms, only the things that have changed, which for you would be the 5329. In the explanation box, you’ll write, “amending to show 10% penalty for early IRA distribution and first time homebuyer exception.”

  7. Ms. Roberg, Thank you for the response. When I called the IRS I got a decent person on the phone and she said to do exactly what you said in your response. What she also added (and surprised me) was that she asked me “why was I withdrawing money each year from my IRA”? She also said that she didnt mean to pry into my private life but I was willing to share the fact that I had lost my job a few years ago and am now making roughly 50% of what I was making in 2010. She said to write a letter (and enclose with ammended return form 5329) stating reasons why I was using my IRA early such as hardship bills, etc. She said maybe the examiner would take that into consideration and allow an exception for the entire amount that I withdrew early. I sent in the response package and await to hear back.

  8. Hi,
    Very valuable and actually helping article. Myself and my wife planned to start an LLC (we both are in India) and we did it in 2009 in Delaware. I was religiously paying the franchisee fee and state tax. And for years I did not know I have to file IRS returns, last year a friend of mine told me this and suggested to dissolve the LLC since we did not make any money even though we transacted about $200K in 7 years and we had to lose about $20K. But I was trying to make it a clean story and got a CPA to file all returns and he said there will be no $ charged since we made no money. Today I got an notice from IRS asking us to pay $4680 per year for 6 years. I almost died. My wife started crying. We are not in a state to even pay few hundreds and this is like almost killing us. We are very nervous and not sure if we should have just dissolved the company or closed it after 3 more years to make it 10 years etc. Any suggestions that you can give?

  9. Hi Venkat,
    Wow, look what happens when you try to do the right thing. I have a couple of thoughts and suggestions. First, you did use a CPA to help you file those returns, so you may want to get her input on this also, he’ll be closer to the work. But here’s my thinking- My best guess is that you and your wife are being hit with late filing penalties on a partnership return. Those amount to $195 per month per person until they reach the cap of one year. That’s where the $4680 per year comes from. Ouch!

    My first thought is to request a penalty abatement. You’ll need to use form 843 In box 5a, you’re going to want to check the box about “reasonable cause.” Explain, you were not living in the United States, you didn’t know about the rules, you are not a US citizen, you filed the returns immediately upon learning about the requirement, etc.

    Like I said, you’ve been working with a CPA so have him help you with this. Good luck.

  10. Hello:
    I’m in an installment agreement. Our balance was $4782. Our installment agreement is $71/mo. I just got our yearly statement, and with all the fees and interest only half of our payment were actually applied to the balance. Our new balance is $4428. I called and there’s nothing that can be done. I think it’s horrible than 50% of our payments are taken by fees and interest. Trying to talk to an IRS representative was like talking to a robot.

  11. Hi Paula,
    You’ve hit upon one of my pet peeves-you set up an installment agreement and the interest and penalties keep mounting up and you don’t get it paid off! The best way to beat that is to increase your monthly payment. The more you pay each month, the faster you knock down that bill. You’re getting hit with the late payment penalty. That’s 1/2 of 1% per month for up to 25 months. So for the first year, that penalty was about $287. (Oh yeah, it goes down as your balance goes down, but you see how slow that is while they pile on the penalties.)
    Now, if you filed late, there’s a late filing penalty of 5% per month. That stopped as soon as you filed so I don’t think that’s hurting you too much now. And then there is the IRS interest rate – which is only 3%, but still that’s another $143.
    So, if your $71 a month all went towards your debt, you would now owe $3930. But as you can see, you’re getting hit by those fees.

    So what else can you do besides paying more each month? If you’ve never been in tax trouble before, when you get to the end of your payments, you can ask the IRS for a penalty abatement. That’s where they forgive the late payment (and late filing if you had that) penalties. Don’t do it now, because then the penalties will start adding up again, you want to wait until you’re all paid up and then ask for the forgiveness. I’d ask once your balance goes down to about $1,000 – that should all be penalty. If they abate the penalty, then you’re all done. You can even do that over the phone if it’s a first time penalty abatement.

    One thing, they will never forgive the interest you pay, only the penalty. But it’s well worth asking to have that penalty lifted.

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