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IRS payment plan problems

By Kay Bell · Bankrate.com
Thursday, September 29, 2011
Posted: 1 pm ET

In these tough times a lot of folks have to scrimp to pay their bills. That includes what they owe the IRS.

The IRS understands this. And the agency long ago discovered what private businesses have known all along. If you let people pay off their bills over time, you get the money, and you get interest on the debt.

Now some taxpayers who thought they fulfilled their tax obligations via an installment payment program, one of the alternate tax payment options that the IRS offers, have learned they still owe.

That's the finding of Treasury Inspector General for Tax Administration, or TIGTA, the federal oversight agency that keeps tabs on the IRS.

A recently released TIGTA report found that approximately 3.1 million taxpayers entered into streamlined installment agreements with the IRS last fiscal year. These plans let taxpayers who owe $25,000 or less to make payments on the debt for up to five years or by the collection statute expiration date.

These arrangements require less documentation from taxpayers and require only minimal processing on the part of the IRS.

A win-win, right?

The program last year definitely paid off for Uncle Sam. The payment plans produced nearly $6 billion in tax collections.

But, says TIGTA, some taxpayers found that their tax debt agreements were not (or won't be) paid off when they expected. Because the IRS does not consider current and future penalty and interest charges when computing the streamlined installment payments, many accounts will not be fully paid within the 60-month period.

And just how installment plan participants can avoid user fees was not made clear to taxpayers, says TIGTA.

TIGTA says taxpayers paid more than $1 million in user fees that could have been avoided, and thousands of taxpayers may have been surprised to learn they still owed taxes after they completed the terms of their streamlined installment agreements, according to the report.

Looks like when you're working out a payment plan with the IRS, you need to follow the same rules that apply to any credit deal: Read the fine print.

"The inconsistent processing and treatment of taxpayers may contribute to the inefficient use of IRS resources and jeopardize the IRS's ability to collect tax liabilities," said TIGTA Inspector General J. Russell George in the report. "Inconsistencies can also create an economic hardship for taxpayers and may lead to future tax liabilities."

IRS officials agreed with TIGTA recommendations and say they plan to take steps to address the concerns. If you sign up for a plan, make sure they do.

Have you ever considered an installment plan to pay your taxes? Would you now in the wake of the TIGTA investigation?

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