From the Nolo Taxes & Audits Center

The most widely used method for paying an old IRS debt is the monthly Installment Agreement, or IA. If you owe $10,000 or less and have a clean record with the IRS, you have an automatic right to an IA. One condition is that your monthly payments must be sufficient to pay the balance in full within 36 months. If you owe less than $25,000, you may qualify for a streamlined installment agreement. This is an installment agreement plan that you must complete within 60 months, and can get without managerial approval (as long as you're current on your other tax payments). If you owe more than $25,000, the IRS must negotiate with you in good faith. (Internal Revenue Manual 5331.1.) But if you have money or assets that the IRS deems unnecessary for you to live on, the IRS might not grant an IA when the balance exceeds $25,000.

Don't assume that a payment plan is your best option -- there are definite drawbacks. The biggest is that interest and penalties continue to accrue while you still owe. Interest is adjusted quarterly. Combined with penalties, the rate is often 13% - 15% per year. It's possible to pay for years and owe more than when you started.

Example:
Rodney and Rebecca owe the IRS $30,000 in back taxes at the beginning of 2000. They enter into a $300 monthly payment plan at a time when interest and penalties total 12% a year, adding an additional $3,600 to their balance. But they pay only $3,600, and so they will owe $30,900 (plus interest and penalties on the $900) at the end of the year.

WARNING: If IRS computers show that you haven't filed all past due tax returns, you will not be eligible for an IA. Likewise, if you are self-employed, you must be current on your quarterly estimated tax payments for the current year if you want an IA. Finally, if you have employees, you must be current on payroll tax deposits and Form 941 filings before you will get an IA.

How Long the IRS Has to Collect from You
The Tax Code imposes a ten-year time limit on the IRS to collect taxes after they are assessed. (Internal Revenue Code § 6502.) If you were billed after filing your return, this period starts on the date you filed. If you were audited, the ten years runs from the date the IRS assessed additional taxes.

Negotiating a Monthly Payment
If you owe more than $25,000 or can't pay the amount you owe in five years or shorter, your request for an IA begins with an IRS collector analyzing Form 433-A or 433-B.

The collector uses the information on the forms to determine the amount you can pay. Beyond that, however, there are no hard and fast rules. Payment amounts are at the discretion of the IRS. If you deal with eight different collectors, you might end up with eight different IAs!

Nevertheless, here are some strategies for negotiating an installment plan.

  • When you hand the completed Form 433-A or 433-B to the collector, immediately propose a payment plan you can live with.
  • You must offer to pay at least the amount on line 53 of Form 433-A -- income less necessary living expenses. This is the cash you have left over every month after paying for the necessities of life. If possible, offer slightly more than the amount on line 53. Tell the collector that you will cut back on expenses to make up the difference. For example, if line 53 is $189, offer $200. Don't, however, promise to pay more than you can afford just to get your plan approved. Promising the IRS more than you can deliver is a serious mistake. Once an IA is approved, the IRS makes it difficult for you to renegotiate it.