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Do penalties accrue during an installment agreement with the IRS?

When liability over a disputed tax is at issue, our tax law firm has helped many clients prepare a strong case. Yet IRS controversies arise over more than just different interpretations of the Tax Code. For example, an individual may simply be unable to pay back taxes owed to the IRS. Perhaps the repayment of unemployment compensation or an excess advance premium tax credit caught an individual off balance.

An attorney that focuses on tax law can help taxpayers with approaches to repayment, even when the underlying tax liability may no longer be in dispute. Payment arrangements with the IRS include installment agreements, short-term or hardship extensions, offers in compromise, and placing a taxpayer’s account in currently-not-collectible status. Of those, installment agreements are the most common, provided the individual taxpayer’s combined tax debt, penalties and interest do not exceed $50,000. For a business taxpayer, that ceiling is $25,000.

Although a taxpayer may request an installment agreement online, it is a good idea to consult with a tax attorney before agreeing to a monthly payment schedule. For example, taxpayers should be aware that interest and late-payment penalties still accrue during the repayment period, although the penalty amount may be halved.

An attorney can also evaluate whether a taxpayer could raise a first-time abatement or reasonable cause defense to any penalties imposed as part of the installment agreement. For a taxpayer who has filed tax returns and made previous payments on time, the IRS may agree to remove penalties at the beginning of the installment agreement. A taxpayer should also remember to repeat this request at the conclusion of the arrangement, as the IRS may then remove the penalties that continued to accrue until the tax was paid off.

Source: Journal of Accountancy, “Helping clients with IRS payment agreements,” Susan C. Allen, Sept. 1, 2016

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