Shannon Christensen
April 20, 2025
As a tax practitioner, your role extends beyond preparing tax returns; you are a vital advisor who helps clients navigate one of the most challenging situations they may face: an inability to pay their federal income tax liabilities due to insufficient cash flow. Offering strategic advisory services can help clients manage these liabilities effectively while minimizing financial stress.
Practically speaking, there is a strategic order of options to present to clients for resolving tax debt, starting with the least disruptive solutions. Initially, consider recommending the use of available credit or securing a bank loan to pay off the debt, as these options typically have minimal impact on a client’s financial standing. Still, most individual taxpayers will qualify for an IRS payment plan if needed. The quickest and easiest way to set up a payment plan is through an online payment agreement, available at https://www.irs.gov/payments/online-payment-agreement-application.
Advise Clients to Beware of Fraud Scams
Emphasize to your clients that the IRS will never call, text, or contact them via social media to demand immediate payment. Criminals continue to impersonate IRS employees by harassing and threatening taxpayers with aggressive collections or may even impersonate seemingly well-intended businesses offering to settle tax debt through the Fresh Start program. In truth, taxpayers can settle their debt with the IRS directly without the need to pay exorbitant fees to third-party settlement organizations. As a tax practitioner, you can advise your client on all of their available options.
Note: The IRS has a series of online videos that can walk your client through (1) setting up an IRS payment plan online as well as (2) the offer-in-compromise process, which can be accessed online via the official IRSvideos channel on YouTube.
Using Credit or a Bank Loan
Before requesting an Installment Agreement (IA) or payment plan with the IRS for any unpaid tax liability, it may be more practical and cost effective to advise your client to try to get a bank loan or to use available credit. If your client has excellent credit, the lender isn’t charging high origination fees (often up to 5% of the borrowed amount), and the bank loan or credit card has lower interest rates than the penalties, interest, and fees associated with an IRS IA, then avoiding an IRS IA and using these other payment options may be a better solution.
Note: For individuals and businesses, IRS penalties are never deductible. For individuals, IRS and commercial loan interest is considered a personal, nondeductible expense. For businesses, IRS interest on outstanding tax debt is nondeductible, but commercial loan interest may be deductible subject to IRC Sec. 163(j) limitations. For this reason, it may be more cost effective if the business can secure a commercial loan or use credit to pay the outstanding tax debt.
Ability to Pay the Entire Liability within Six Months
Perhaps your client can only pay a portion of the outstanding tax bill with a bank loan or credit card but feels they could raise the additional funds to pay the entire remaining amount within six months. If this is the situation, the IRS has online, automated approvals for a payment plan that won’t involve filing complex forms or talking to an IRS collection agent at all, which minimizes the stress involved with requesting a formal IA payment plan.
By paying past-due tax debt within 180 days (roughly six months), your client can avoid user fees and won’t have to go through the stress and formality of filing IRS forms and providing personal financial information concerning assets and liabilities. With an ability to pay the entire outstanding tax debt within 180 days, the client can simply either (1) call the IRS at 800-829-1040 for individuals and/or (2) if the outstanding debt is less than $100,000 in combined tax, penalties, and interest, apply online at IRS.gov/OPA (OPA—online payment agreement).
IRS Installment Agreements
The IRS has the authority to enter into a written Installment Agreement (IA) to allow taxpayers to pay their tax liabilities over time if such an arrangement would facilitate the collection of tax. An IA is a straightforward option where clients can make manageable monthly payments before the Collection Statute Expiration Date (CSED), i.e., the date beyond which the IRS can statutorily collect the tax debt. As an advisor, you can assist clients in negotiating an IA by evaluating their financial situation, gathering all necessary documents, and by acting as a liaison between the taxpayer and the IRS agent, if one is assigned. Your client, or their IRS authorized power of attorney, may initiate the process with a phone call to the IRS or by submitting Form 9465, Installment Agreement Request.
Note: In assessing a taxpayer’s ability to pay and discretionary income, the IRS will allow the taxpayer to continue to pay all expenses that can be shown to be for the health and welfare of the taxpayer or their dependents, and for the production of future income (enabling the taxpayer to make payments and comply with the terms of the IA).
Throughout the duration of the IA, penalties and interest will continue to accrue on the unpaid liability. However, individual rates are more favorable under an IA. For example, the penalty for failure to pay tax by an individual is half the usual rate (0.25% instead of 0.5%) throughout the duration of the IA. Still, taxpayers should be aware that the penalty is double the usual rate (1%) if the IRS believes that collection of the tax is in jeopardy or 10 days after the IRS gives notice of intent to levy. Failure to comply with the terms of an IA may result in the imposition of significant penalties and accrual of additional interest charges. In more severe cases, the IRS may resort to enforced collection actions, including the issuance of levies and seizure of assets.
The IRS charges user fees for all IAs, but reduced fees are available. For example, reduced fees apply if the taxpayer sets up an automatic/direct debit payment agreement or if the taxpayer’s income is at or below certain government poverty guidelines.
Note: For direct debit agreements, use Form 433-D, Installment Agreement. For direct payroll deduction agreements, use Form 2159, Payroll Deduction Agreement.
Several types of IAs are described below, ranked from least to most burdensome.
Guaranteed Installment Agreements
The IRS is required to accept proposed installment agreements from individuals who owe income taxes of $10,000 or less (excluding penalties and interest). Under this IA, the taxpayer must—
- Be financially unable to pay the liability in full when due.
- Agree to pay the liability within three years.
- Not have entered into a previous IA within the last five years.
- Be current and timely (including extensions) on all tax returns during the previous five years.
- Agree to file and pay all tax returns during the three-year IA agreement period.
In 2025, the IRS introduced new Simple Payment Plans for individuals, which are described as easier to understand and more accessible. According to the IRS, more than 90% of individual taxpayers with tax debt will qualify for a Simple Payment Plan. Eligible taxpayers will not be required to provide a collection information statement and the IRS will not make a lien determination.
https://www.irs.gov/payments/simple-payment-plans-for-individual-taxpayers
Streamlined Installment Agreements
Several streamlined installment agreements exist, all depending on the amount of tax liability outstanding, generally in the following increments: (1) $25,000 or less, (2) $50,000 or less, (3) $100,000 or less, and (4) up to $250,000 in outstanding tax liability. The factor that identifies the installment agreement as “streamlined” is the IRS’s use of its integrated automation technologies compliance suite payment calculator to determine the aggregate unpaid balance, including penalties and interest, and the taxpayer’s ability to pay before the CSED.
Streamlined IAs generally require the debt to be paid within 120 months (ten years) or prior to the CSED, if earlier. A limited amount of financial information may need to be provided to the IRS to justify the ability to pay.
In-Business Trust Fund Express IAs help small businesses with employees to easily qualify for an IA where the balance of the tax liability is $25,000 or less. With this agreement, the business must be able to pay the amount outstanding within two years and the business must otherwise be in compliance with all return filings and estimated tax payment requirements.
Advising clients on managing their federal income tax liabilities when faced with cash flow challenges is a vital advisory service practitioners can provide. Your client’s trust and financial health should always matter, because how you treat your client is a direct reflection of your firm’s reputation in the community.
Editor’s Note: For the full article, read the Practitioner’s Tax Action Bulletin, Tax Action Memorandum (TAM-2308), Issue 4, first published February 25, 2025. Contact Our Sales Team for a Subscription to Checkpoint’s bi-monthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add other valuable Thomson Reuters products to your advisory toolkit.
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