Payment Arrangements

[lenboush]

Under the old rules, we could, by default, create a payment arrangement to anyone who owed less than $25,000. We could divide their balance by 60 months (5 years) to arrive at the payment.

Under the new rules, the balance due can be up to $50,000 with the payment arrived at by dividing the balance due by 72 months (6 years).

Here is my question. If we divide the balance due by 72 months, then at the end of the 6 years there would still be the interest and/or penalties that accumulated over that 6 years.

I have heard from multiple sources that as long as those payments are made as scheduled, the account will be considered "Paid in full" at the end of the 6 years. Unfortunately, I cannot find anything in writing to support this. Can someone tell me if they have a cite for this? THANKS!




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[JohnH]

l usually use a divisor which is slighly less than the number of months allowable in order to make provision for the interest & FTP penalty, but I can't cite a reason beyond just simple math & common sense. Using the smaller divisor helps give the client an idea of the minimum amount they willbe expected to pay. If they say they can't do that, then there's not use going down the automatic plan road. (but see my comments below regarding calling IRS)

I do believe that if you divide the balance by 60 (or 72 as the case may be), there will be a balance due at the end of the period because:
a) The FTP penalty will accrue;
b) Interest is statutory.

This is where calling IRS to set up a payment arrangement is preferable to mailing in the form. The automatic plan is more or less a guideline. The person on the line does have the authority to extend the payment period beyond the time constraints of the automatic plan. I know because I've helped a client do that before - it surprised me when they offered to do that.

It might be possible to request a waiver of penalties toward the end of the payment plan, but I don't think that's worth pursuing at the beginning.

[Roberts]

I'm still learning this but it seems to me the IRS has to approve the payment dollar amount of any plan and they'll want you to include interest in the payments. When you submit the request for a payment plan, they will notify you of the amount or you can try to determine it yourself with one of the software programs available.

[JohnH]

You don't really need software to estimate the payment due on the automatic plan. If the taxpayer owes $25K or less and they request a repayment period which pays the debt off (including interest and FTP penalties) in 5 years or less, approval is automatic unless the taxpayer has other collections/filing issues. Right now the total of the interest and FTP penalty is the equivalent of about 10% APR. (4% interest plus 6% FTP penalty)

So working backwards, you can divide the balance by 46 and that will give you the minimum required monthly payment for automatic approval. No matter what the balance may be (as long as it's under $25K) , dividing by 46 will work.

If the interest rate starts going back up in the future, the divisor will need to be reduced. For example, if the combined equivalent rate were 14% as was the case a few years ago, the divisor would need to be 43.