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Overview

Installment agreements are available when a taxpayer cannot pay his or her entire tax balance in 120 days or less. They often require the filing of one or more of the following forms: 9465, 433-D, 433-A or 433-F. As of summer 2012, there were approximately 3 million installment agreements outstanding with the IRS.

Smaller Balances

For smaller tax balances (e.g., $50,000 or less), normally an installment agreement proposal will be accepted without having to provide financial information on Form 433-A or 433-F – that is, if you propose a monthly payment amount that will settle the balance due in 72 months or less. In these cases, an installment agreement can be obtained through the IRS website in fewer than 10 minutes. If you prefer, you may also obtain an installment agreement by phone in fewer than 20 minutes (not including time on hold). Below is a list of the items you will need from the taxpayer before proceeding:

1. Social security number;
2. Date of birth;
3. Caller ID number (or adjusted gross income and balance owed for past years); 
4. PIN; 
5. Bank address;
6. Employer address; and
7. Amount he or she can pay.

Often, no tax lien will be filed, especially if the taxpayer agrees to a direct debit of his or her bank account. The IRS charges a user fee of $105 ($52 with direct debit) for most installment agreements. This fee is payable with the first installment.

Larger Balances

If the amount owed is greater than $50,000 and the case is assigned to a revenue officer, a meeting may be required and an installment agreement becomes far more difficult to negotiate. This is because the IRS scrutinizes the necessity of expenses and the ability to liquidate assets.

In these cases, certain actual expenses may be discarded in favor of average national and local standards. Higher-than-average expenses for basic needs such as housing, food, clothing and transportation become red flags and complicate installment agreement negotiations. For high-income taxpayers (usually high five figures), an acceptable agreement may be next to impossible as IRS guidelines consider all after-tax income as “disposable.”

Strategy and Best Practices

1. For small dollar amounts (less than $50,000), set up the installment agreement online.
2. For large dollar amounts, have an in-person meeting rather than a conference call. This builds rapport with the assigned revenue officer. In addition, having the taxpayer present at this meeting humanizes him or her, making it more difficult to deny the request for an installment agreement.
3. If the taxpayer’s request is denied, ask to meet with the revenue officer’s supervisor and, if needed, the supervisor’s supervisor. Formal appeals of denials are on Form 9423.

Agreements for Less, Liens and Levies

Under 2004 legislation, the IRS may accept installment agreements that are not full-pay agreements, subject to biannual review. In practice, these reviews are not always performed.

For large dollar amounts, the IRS usually will file a lien, even when an installment agreement is approved. Under IRS regulations issued in 2002, the IRS normally is barred from levying on assets while an installment agreement is in place, or is being sought, and for 30 days thereafter. This restriction does not apply if the IRS determined that collection tax is in jeopardy or if it believes that a request for an installment agreement was submitted only to delay a levy on assets.

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What is mediation?

Mediation refers to the process where the parties sit down with a specially trained, neutral mediator who helps the parties discuss and negotiate any issues arising out the marriage or relationship. If the parties are able to reach an agreement during mediation, the agreement is memorialized in a written, legal document, which is either prepared by one of the parties’ attorneys or the mediator.

What are the advantages of mediation?

Mediation is less expensive than litigation. It also provides the parties with more control over the outcome of the case, as opposed to litigation where the Court decides the outcome of the case. Mediated agreements can also include provisions that a Court would not be able to order at trial, but that are enforceable once the agreement is incorporated into the Judgment of Absolute Divorce.

Can my lawyer attend mediation with me?

Yes.

If we reach an agreement in mediation, do we still have to go to Court?

Yes, you still have to go to Court for the final divorce hearing. However, if you have an agreement on all the issues arising from the marriage, you can file for an uncontested divorce, which takes about 10 minutes.

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What is the FBAR?

IRS Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”), is used to report a financial interest in or signature authority over a foreign financial account. A U.S. person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. The FBAR must be filed by June 30 of the year immediately following the calendar year being reported. This filing date cannot be extended.

What are the repercussions for failing to file an FBAR?

The repercussions for failing to file an FBAR are significant. Criminal exposure can range from up to $500,000 in fines to 10 years in prison. Civil penalties can reach the greater of $100,000 or 50% of the balance of the foreign account. Taxpayers must also consider the cost of any back taxes, penalties and interest on any unreported income.

OVDP

Taxpayers who have failed to file FBARs for prior years need to consider the Offshore Voluntary Disclosure Program (“OVDP”). Under the terms of the OVDP, in most cases, taxpayers who come forward voluntarily face reduced penalties and generally can avoid the threat of criminal prosecution. The IRS has warned that the OVDP could be discontinued at any time.

The terms of the program are substantially similar to previous Offshore Disclosure programs offered by the IRS. Taxpayer must:

1. File original and/or amended tax returns including any income that was not reported from the overseas assets for eight back tax years.
2. Pay any back income tax plus a 20% accuracy penalty and interest on such amounts.
3. File FBARs for eight back tax years.
4. Pay or make acceptable arrangements to pay an amount equal to 27.5% of the highest aggregate balance in the foreign bank accounts for the period spanning 2003-2010. Some taxpayers may qualify for a reduced penalty of 12.5% or 5%. The 12.5% penalty would apply where a taxpayer’s highest aggregate foreign accounts/fair market asset values in each of the years covered by the OVDP are less than $75,000. The 5% penalty only applies where the taxpayer has not opened or caused the account to be opened, has had minimal contact with the account, has not withdrawn more than $1,000 from the account in any year covered by the OVDP, and can establish that all applicable U.S. taxes have been paid on funds deposited to the account.

Would You Come Forward?

The idea of paying 27.5% of the highest balance over the last eight years because you failed to file an information return is arguably excessive. Some taxpayers were made signatory authorities over foreign accounts without their knowledge. Given the severity of the penalties, it is important for taxpayer to discuss the terms of the OVDP with qualified tax counsel before electing to participate.

Form 8938

Certain taxpayers are also reminded of their obligation to file a Form 8938. Generally, Form 8938 must be filed if “specified foreign assets” exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year ($50,000/$75,000 for single filers). Specified foreign assets include not only any financial account maintained by a foreign financial institution but also other assets held for investment including stock or securities that are issued by someone other than a U.S. person. Thus, while overlap exists between the FBAR and the Form 8938, the latter covers a much broader class of foreign assets. Failure-to-file Form 8938 may result in a penalty of $10,000 (increasing to $50,000 if not paid within 90 days).

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Are my retirement accounts considered marital property?

Yes, if they were acquired during the marriage.

How does the Court determine the value of a pension?

There are several different methods the Court can use to value of a pension, which include:

• Present value method;
• If, as and when method; and
• Contributions method.

What’s a Qualified Domestic Relations Order (QDRO)?

A Qualified Domestic Relations Order is a type of court order used to transfer retirement assets.  It must be approved by the Court and retirement administrator before the order goes into effect.

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For a decade, the IRS has focused on bringing back into the system what was between 7.5 and 10 million non-filers, mostly self-employed individuals (including accountants and lawyers). To encourage these non-filers into compliance, the IRS generally does not recommend that the Justice Department prosecute individuals who voluntarily file back tax returns. Therefore, non-filers can generally get back into the system by filing 6 years’ worth of back tax returns.

Federal and Maryland Guidance

Persuasive authority limits filing to 6 years of back tax returns (IRS fact sheet FS-2011-13). This document, published in December 2011, states “Generally, you only need file returns going back six years.” However, per IRC §6501(c)(3), the IRS can assess a return that was not filed at any time (even if the taxpayer believed a return was filed) meaning the IRS can require all back tax returns. The State of Maryland usually requires the filing of all back tax returns or, at the very least, the same years filed with IRS.

Amnesty and Voluntary Disclosures

In 1992, the IRS began an “informal amnesty” program for non-filers of individual income tax returns. A voluntary disclosure by non-filers would result in the IRS not recommending prosecution by the Justice Department. In 1993, this program was extended to corporate, payroll and other tax returns. In 1999, the IRS revised the Internal Review Manual (IRM) to state that a voluntary disclosure will be “considered along with all other factors” in determining whether to recommend prosecution.

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