Most Serious Problem: Installment Agreements (IAs)

The IRS Is Failing to Properly Evaluate Taxpayers' Living Expenses and Is Placing Taxpayers in IAs They Cannot Afford

The IRS is authorized by law to enter into an agreement with a taxpayer to pay any tax due in installments to facilitate full or partial collection of the tax. Installment Agreements are offered as a collection alternative mutually beneficial to taxpayers and the IRS — taxpayers can make payments to the IRS over time and spread out the burden of paying their tax accounts, and the IRS can increase revenue by collecting portions of tax due rather than collecting nothing.  However, certain types of installment agreements result in higher rates of taxpayers failing to make payments as agreed (defaulting) while other taxpayers are being placed in IAs where their income is less than the living expenses permitted by the IRS, and potentially not meeting their basic needs in order to pay the IRS instead.

TAS analysis of IRS installment agreement data suggests that the IRS is placing taxpayers into installment agreements where their total positive is less than their allowable living expenses. Nearly 300,000 taxpayers who should have qualified for currently not collectible status had entered into installment agreements in calendar year 2014 despite their income being below the IRS allowable living expenses. Taxpayers may agree to an IA they can’t afford out of fear of the IRS, a misunderstanding of the options available, or out of obligation to repay their debts at any cost. The IRS has the data available to determine if a taxpayer has enough income to support payments under an installment agreement. However, the IRS does not use this information to estimate the taxpayer’s ability to pay or to determine the appropriate collection alternatives for each taxpayer in order to prevent rework for the IRS, reduce burden and frustration for taxpayers, and craft individual taxpayer solutions that encourage current and future compliance. As the IRS moves on its “Future State” plans, it should focus on using data and technology to assist taxpayers entering into realistic and affordable payment arrangements instead of relying on a one-size-fits-all strategy.  

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Related Content of the Report:

Volume 2: The Importance of Financial Analysis in Installment Agreements (IAs) in Minimizing Defaults and Preventing Future Payment Noncompliance

Volume 2:
IRS Should Use Its Internal Data to Determine If Taxpayers Can Afford to Pay Their Tax Delinquencies

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