When you cannot pay your taxes in full you may be allowed to pay over a prescribed period of time. If full payment cannot be achieved by the Collection Statute Expiration Date (CSED)- USUALLY 10 YEARS, and you have some ability to pay, the IRS can enter into Partial Payment Installment Agreements (PPIAs) as provided by the authority of The American Jobs Creation Act of 2004 which amended IRC § 6159.
To be considered for a PPIA you must provide complete and accurate financial information that will be reviewed and verified. You will also be required to address equity in assets that can be utilized to reduce or fully pay the amount of the outstanding liability. In addition, if granted a PPIAs you will be subject to a subsequent financial review every two years. As a result of this review, the amount of the installment payments could increase, decrease or be terminated contingent upon your financial condition changes.
The PPIA payment option will provide an appropriate payment option for many taxpayers. Those who qualify for the PPIA option will be strongly encouraged to make their payments via the direct debit option. However, complete utilization of equity is not always required as a condition of a PPIA.
For liabilities in excess of $25,000.00 you have to prepare a IRS Form 433A and base the monthly payment amount on the excess of income over expense based on the IRS National Standards. Medical expenses coincidentally are practically unlimited as long as you can provide proof of their accuracy. In addition you also have to demonstrate that you can not borrow on any assets to pay his or her tax liability.
A strategy always worth considering is to get your tax liability below $25,000.00 and then submit IRS Form 9465 which will allow the tax liability to be paid within 60 months. Some people I am told have been able to request that the payments be directed to principal liability first and then as the principle gets close to being paid request an abatement of remaining interest and penalties. It is worth at least asking for when making the request.
Another interesting point that I picked up from a LinkedIn Group is that if you are going to be setting up any type of installment agreement for any state tax liability be sure to do so in advance of filing for the PPIA with the IRS to accurately reflect the payments made to the state on IRS Form 433 and subsequently in theory create basis to reduce the IRS payment amount.