Partial Payment Installment Agreements: Paying What You Can Until the Statute Runs

Most payment plans are built to pay the debt to zero. The partial payment installment agreement, or PPIA, is built to do something else: collect what you can actually afford each month until the IRS runs out of time to collect. When the collection statute expires, whatever is left expires with it.

This is not a loophole. It is written into the statute. In 2004, the American Jobs Creation Act amended IRC 6159(a) to say the IRS may enter into an installment agreement if it determines the agreement will facilitate full or partial collection of the liability. The words or partial are the PPIA.

When a PPIA fits

IRM 5.14.2.2 describes the situation in one sentence: if full payment cannot be achieved by the collection statute expiration date and the taxpayer has some ability to pay, the IRS can enter into a PPIA. Both halves matter.

Cannot pay by the statute date means your realistic monthly payment, multiplied by the months left on the 10-year clock under IRC 6502, falls short of the balance plus the interest and penalties that will keep accruing. Some ability to pay means there is money left over after allowable living expenses. If there is nothing left over, the conversation shifts to Currently Not Collectible status instead.

The PPIA tends to make sense for people whose debt is large relative to their income, whose assets are limited, and whose collection clock has already run for a few years. For the alternatives, see the earlier guides on settling for less with an offer in compromise and currently not collectible status.

The price of admission: full financial disclosure

There is no simplified PPIA. IRM 5.14.2.2.1 requires a full collection information statement for every one: Form 433-A for individuals and the self-employed, Form 433-B for businesses. Campus units handle individual PPIAs on Form 433-F as well, under IRM 5.19.13.

The IRS verifies what you report. For individual accounts, the Manual has revenue officers compare the income you report to your last filed return and other IRS data; if current income has dropped by 20 percent or more, or the IRS finds assets you did not list, the discrepancy gets discussed and documented. Larger balances trigger property record checks, motor vehicle records and a credit report.

Only necessary expenses count. IRM 5.14.2.2.1 states that conditional expenses not determined to be necessary are not allowed for PPIAs. The six-year rule, which can allow all reasonable expenses on a full-pay plan, does not help here, because by definition a PPIA does not pay in full within six years.

Equity has to be addressed first

This is the hard part. IRM 5.14.2.2 says equity in assets must be addressed before a PPIA may be granted and, if appropriate, used to make payment. The IRS will normally expect a good faith attempt to borrow against or sell assets with meaningful equity, applying normal lending standards, and it will ask for copies of the loan application documents.

But the Manual also lists the situations where a PPIA can be granted even though you keep an asset with equity:

• The equity is minimal or too small for a lender to loan against. The IRM notes some lenders require equity above 20 percent of value.
• You cannot use the equity, for example property held as tenants by the entirety in a state where one spouse cannot encumber it alone, when only one spouse owes the tax.
• The asset cannot currently be sold.
• The asset produces the income that funds the plan, and the government will collect more from that income than from a sale.
• Selling or borrowing would create economic hardship, meaning you could not meet reasonable basic living expenses, as defined in Treas. Reg. 301.6343-1.
• The loan payment would exceed your disposable income, so you would not qualify for the loan anyway.

If you refuse to make a good faith effort to use equity, the IRM treats you as a won't-pay case, and levy or seizure may follow. I go deeper into this in what the IRS expects you to do with equity.

Terms can move in your favor too. If your finances get worse during the agreement, Treas. Reg. 301.6159-1(e)(3) lets you ask the IRS to modify it based on a significant change in your financial condition. Keep paying the current amount while the request is considered.

The deal you are making

A PPIA comes with conditions a regular plan does not.

• You pay the maximum monthly amount your finances support, not a number you pick.
• The IRS reviews your finances at least every two years. IRC 6159(d) requires it, and Treas. Reg. 301.6159-1(i) says the purpose is to decide whether your finances have changed enough to raise the payment or end the agreement. See the two-year PPIA review.
• A lien is likely. The IRM requires a lien filing determination, or confirmation that a lien is already filed, above the balance thresholds the IRS uses internally.
• If you defaulted on a payment plan in the past 24 months, you will generally have to pay by direct debit or payroll deduction unless you are unbanked and unemployed or self-employed.
• The IRS may ask you to extend the collection statute on Form 900, but only in limited situations. You have the right to refuse. See Form 900 waivers.

Two examples straight from the Manual

IRM 5.14.2.2.3 includes examples that show how ordinary these agreements can be. In one, a taxpayer owes $1,800, can pay $100 a month, and has 12 months left on the collection statute. The IRS secures a PPIA for 12 months and lets the statute expire. In another, an individual owes $10,000, can pay $200 a month, has three years left on the statute and a home with minimal equity that cannot be borrowed against. The IRS grants a three-year PPIA with a two-year financial review in the middle, and if nothing changes, the payment stays the same until the statute expires.

In both examples, no waiver is secured. The Manual says a waiver is not required when the taxpayer's only ability to satisfy the liability after the statute runs would be continued payments and the two-year review shows no significant change.

PPIA versus waiting out the clock in hardship status

If your disposable income is close to zero, Currently Not Collectible status may look better, since it requires no payments. But a PPIA has advantages. Your account sits in installment agreement status, which bars levy under IRC 6331(k)(2) for as long as the agreement is in effect. If you filed on time, the failure-to-pay penalty runs at the reduced quarter-percent rate under IRC 6651(h). And you are building a record of compliance rather than waiting for the IRS to revisit your finances.

The IRM even contemplates people who qualify for hardship status but want to pay something anyway. IRM 5.14.1.4 tells employees to consider closing such an account as Currently Not Collectible and to tell the taxpayer payments are not required, or, if the taxpayer chooses to proceed, to set up the plan with a backup Currently Not Collectible report in case it later defaults.

Approval and appeal

Every PPIA requires managerial approval under IRM 5.14.2.2.5. The manager reviews whether the financial analysis was thorough, whether other collection options were considered, why you are allowed to keep any asset with equity, and whether any liquidation request would have put you into hardship.

If the IRS proposes to reject your PPIA request, the same protections apply as for any plan: independent administrative review before the rejection is communicated, then a 30-day window to appeal through the Collection Appeals Program. See rejection and independent review.

A PPIA is the most honest payment plan the IRS offers. It says: here is what you can pay, here is how long the government has, and the arithmetic decides the rest. Build the financial statement right and the arithmetic is on your side.