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Background information from the IRS. This information is very revealing unto payment agreements.

A prior study done by Wage and Investment (W&I), Balance Due Taxpayers with High Risk of Becoming “Repeaters” Need Special Handling dated June 2010, shows that one-third to one-half of balance due taxpayers have a subsequent balance due and/or non filer account within two years.

Our own experience indicates too often taxpayers reduce the with holdings on their W-4 form or skip current year estimated payments so they have funds available to pay the installment agreement leaving them with a balance due on their current year taxes.

In today’s nations economy, we are seeing earlier withdrawals from pensions, unemployment benefits and other income without proper with holdings. It is not uncommon in today’s uncertain financial times for a taxpayer to accumulate several years of unpaid taxes. However, this creates a vicious circle where the taxpayer who is making payments for prior years now is also underpaying their current year’s taxes.

In general, all most all taxpayers can enter into a streamlined installment agreement if the balance owed is less than $25,000 and can be paid in five years or less. This dollar amount has been in place since 1999 and based on today’s economy should be increased. In FY 2010, 94 percent of all installment agreements were streamlined installment agreements.

The overall default rate for all installment agreements is 18.3 percent (non-streamline 23.2 percent and streamline 18 percent). Also, taxpayers who voluntarily make their payment by direct debit have a low default rate of 7.1 percent.

If the dollar limit is raised, there will be more taxpayers qualifying for the streamlined installment agreement. Currently, if the balance due is more than $25,000 then taxpayers must provide financial information, Form 433A or 433F, to qualify for an installment agreement. Also, if they owe taxes in the subsequent year, their installment agreement will default (in most situations) and a new installment agreement must be negotiated.

In FY 2010, the IRS sent out over 25 million reminder notices (CP521) to taxpayers who are on an installment agreement. After the taxpayer misses his/her second payment on an installment agreement, Letter 4458C, the Commissioner’s skip payment notice, is sent. About one million of these notices have been sent so far for FY 2011. After missing their third payment, Notice CP523, Intent to Terminate your Installment Agreement, is sent.

After the Notice CP523 is sent, the installment agreement may be reinstated if the taxpayer contacts the Service either by phone or in writing. There is a $45.00 reinstatement fee which may, in certain circumstances, be waived.

IRS allows 30 days while research is done to see if payment was received or the taxpayer responds. If neither the payment nor response is received, the case is sent to the Automated Collection System (ACS). Now the taxpayer is subject to liens on property and levy action on assets including bank accounts, salary, wages and even social security. The case may continue to be worked through ACS or it may be transferred to field Collection.

Recommendations
1. Increase the streamlined installment agreement to $50,000 if repayment can be five years or less for all taxpayers.

2. Periodically review any revised limits on streamlined installment agreements to assure that they meet the needs of the IRS and taxpayers.

3. Require the following in cases of either a taxpayer who accumulated two periods of unpaid taxes, if within the streamline amount, or a taxpayer who has defaulted an Installment Agreement for a second time:
a) Direct debit installment agreements (DDIA), allowing one skip in a 12-month period, or
b) Direct payroll installment agreements (DPIA) for the unbanked taxpayer.
c) An approved request for reinstated IA automatically if taxpayer agrees to DDIA/DPIA. Failure to agree to DDIA/DPIA would not, in and of itself, automatically disqualify the reinstatement, which could still be granted on other facts and circumstances.
d) Use of the “lock-in” letter that specifies the maximum number of withholding allowances permitted for the employee. This allows the taxpayer to be in compliance, breaking the repeater balance due cycle.

4. Provide sufficient resources, including a dedicated telephone line, to effectively resolve any direct debit issues or problems in a prompt, timely manner.

5. Mail Letter 4458C the first time a payment is missed. Do not wait until the second missed payment.

6. Add a voucher to Letter 4458C for taxpayers to remit with their payments.

7. Add a statement on Notice CP521 that a payment has been missed and the amount needed to bring the account current. The amount should include the current monthly payment and all missed payments (similar to letters sent from credit card companies).

8. Add a Truth in Lending paragraph showing current interest and length of time to pay off based on monthly payment.