The Internal Revenue Service needs to do a better job of administering the partial payment installment agreements it offers to taxpayers with delinquent tax debts as many of them end up defaulting, according to a new report.
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Many taxpayers fall short on paying their overdue taxes, especially in the midst of the pandemic, and with economic challenges now confronting them, such as surging inflation and housing costs.
Taxpayers with such installment agreements won’t be able to completely satisfy their delinquent tax liability right away, TIGTA acknowledged, but they should still pay the maximum amount determined by a complete financial analysis. “Taxpayers granted a PPIA will not fully pay all of their delinquent tax liability immediately, so it is important that PPIAs are carefully and accurately administered,” said the report. “However, the IRS is not always properly promoting or establishing PPIAs. When this happens, taxpayers may be unaware that the PPIA is a collection tool available to them to resolve their outstanding balance.”
Congress added the PPIAs provision in Section 6159(a) of the Tax Code so taxpayers with some ability to pay could make payments in installments to facilitate partial collection of their tax debts. Unlike streamlined installment agreements or guaranteed installment agreements, the IRS has more discretion to approve or disapprove PPIAs. Partial payment installment agreements aren’t nearly as widespread as streamlined installment agreements. PPIAs generally accounted for less than 2% of the new installment agreements established from fiscal years 2016 through 2020, while streamlined installment agreements accounted for 56%.
However, TIGTA found PPIAs were established by the IRS without evidence of a complete financial analysis of the taxpayers’ ability to pay. The IRS does delete some of that evidence on a regular basis, though. Based on a sample it examined of 30 PPIAs, TIGTA determined that the taxpayers’ financial statement had been deleted from IRS files for 11 PPIAs because more than one year had elapsed since the PPIA was established. Thus, with no financial statement in the file, TIGTA couldn’t determine whether the IRS had properly computed the maximum monthly payment amount the taxpayers had the ability to pay.
Nevertheless, the collection default data, which is available, indicates the IRS is setting up PPIAs for amounts that taxpayers cannot afford. The default rate for PPIAs is higher at 23% than all other types of installment agreements at 9% and in some years, the amount defaulted was greater than the amount put in PPIAs.
TIGTA found 1,007 taxpayers defaulted on their PPIA, with an original PPIA balance over $197 million, when they failed to comply with an essential term of their agreement. Between fiscal years 2016 and 2020, the IRS established PPIAs for nearly $19.7 billion, but taxpayers defaulted on PPIAs totaling $17.6 billion.
Despite those problems, TIGTA believes the IRS should offer a PPIA option as part of its procedures for closing cases as currently not collectible. The report noted the decision process for determining a currently not collectible case is similar to the steps taken by the IRS before granting a PPIA. TIGTA reviewed a random sample of 51 taxpayer accounts closed as uncollectible during fiscal year 2020 and found the IRS should have offered four of the taxpayers a PPIA instead of closing the case as currently not collectible. If PPIAs were set up for those four taxpayers, TIGTA estimates they could have paid over $79,724 before their respective collection statutes expired. Based on its sample, TIGTA estimates the 16,026 taxpayers who had tax liabilities closed as uncollectible could have entered PPIAs and paid a total of over $319 million before their collection statutes expired.
TIGTA made six recommendations in the report about how the IRS could improve the administration of PPIAs. IRS officials agreed to inform taxpayers of the availability of PPIAs and provide outreach; explore and consider additional changes to the instructions for Form 9465, “Installment Agreement Request”; extend the Accounts Management System history note retention requirements; remind employees in its collection function to conduct and document a financial analysis; and request a change to Computer Paragraph 522, “Installment Agreement – Review Financial Condition,” to notify taxpayers that the financial information they provide may result in a higher or lower installment amount or no change to their installment amount. In response to the recommendations, IRS management agreed with several of the recommendations and partially agreed to revise its currently not collectible procedures.
Darren Guillot, commissioner of the IRS’s Small Business/Self-Employed Division, noted that the PPIA program is distinctly different from the currently not collectible hardship procedures where the financial analysis indicates a taxpayer currently does not have the ability to pay. “Considering PPIAs with these taxpayers risk obligating them to monthly payments they cannot afford and potentially exacerbates a current hardship,” he wrote. “I agree it will be beneficial to make more taxpayers aware of the PPIA and we will remind employees to consider all payment options (including PPIAs) when the taxpayer’s financial condition shows that the taxpayer can afford to make payments but cannot pay their tax debt in full before the expiration of the collection statute.”
