PAYMENT PLANS
The Tax Installment Agreement Time Bomb

Many entrepreneurs and executives feel strongly that they can handle state and federal payroll tax problems directly with the agencies involved. In many cases they are right to do so, especially when there is a certainty that the taxes can be paid in full in a very short period of time.

However, more and more managers are finding themselves in serious trouble as a result of making a commitment to a state or federal tax payment plan which they later cannot keep. Part of the problem lies in the priorities and temptations inherent in cash management: often, for example, the manager has a false sense of cash availability because only net payrolls are paid. Further, trade creditors can often be induced to repeatedly extend payment terms because they are afraid of losing an account or the money owed on that account.

Unlike trade creditors, however, state and federal taxing authorities have real clout when it comes to enforcing collections. When there is a default on a payroll tax installment agreement, the authorities generally begin talking of asset seizures, and in some cases criminal prosecution.

Standard Plans Both the state and the IRS have informal payment plans which are available to most taxpayers having a reasonable compliance history. In the case of the state, a 3-4-month payment plan is generally offered to pay the entire past due-tax. In the case of the IRS, a 5-6-month plan is usually available.

Both state and federal installment agreements are contingent on a number of additional commitments.

The commitments of most practical importance include avoidance of a jeopardy situation (such as an attempt to defraud the agency by disposing of company assets without payment of the liability), and staying current on all ongoing payroll tax liabilities.

Informal installment agreements are usually made by telephone and the contingent factors indicated above are often not explained except possibly in a follow-up letter. Further, the telephone representatives may not be authorized to offer payment plans which exceed the time limits indicated above. As a result, the taxpayer may feel forced to accept the payment arrangement offered. Such an arrangement does not take into consideration the problems and circumstances facing the business involved.

IGNORING THE PROBLEM DOESN’T HELP

The Time Bomb As a result, the executive or entrepreneur may enter into an unrealistic payment agreement because of optimism or the desire to take off the heat. This starts the time bomb ticking.After the taxpayer agrees to a payment plan, the tax account is monitored and supervised by the taxing authority. There is a distinct change from normal account handling procedures. When a payment or payments are missed, the system is set to initiate enforced collection actions and the time bomb explodes. In certain instances, for example, when the taxpayer is not current on forward-going payroll taxes, a seizure may be difficult, costly or impossible to avoid.

Defusing the Time Bomb The best time to defuse the time bomb is before it starts ticking. In the case of a payroll tax installment agreement, this means hiring a professional to assist you to obtain the longest term payment plan that the taxing authority/law permits . . .given the particular circumstances. Since an entire company is often “on the line,” this is not the time for the CEO to try out negotiating skills in the unfamiliar territory of taxing authority internal policies. Correcting an improperly handled negotiation and/or agreement can prove impossible or uneconomical to correct later.

If a business cannot make, or sees that it cannot make payments as scheduled in an installment agreement, the following are important factors to keep in mind:
Installment agreements are contingent on staying current with on-going payroll taxes. If the taxpayer is not current, becoming current very quickly is critical to avoid enforced collection action.
It is usually better to come forward before a default than it is to attempt to negotiate with enforced collection officials after payments have been missed.
Professional help should be sought to re-negotiate the agreement.