The IRS recently reviewed the government cost of processing IRS tax payment installment agreements, which has resulted in the IRS proposing to increase the costs for filing IRS installment agreements.

The IRS tax payment installment agreement is one of the remedies of last resort to taxpayers who have outstanding tax liabilities. There are a number of rules associated with the IRS installment agreement program, but generally the program allows taxpayers to pay their tax obligations out over time. In exchange for this extended payment time, the taxpayer is required to waive certain rights.

In Proposed Regulation 148576-05 the IRS has proposed to raise the cost of filing an IRS installment agreement to $105, from the current $43 fee. The Proposed Regulation also proposes that the IRS installment agreement filing fee will only be $52 if the taxpayer agrees to allow the IRS to draft the payments directly from the taxpayer's bank account.

According to the IRS the increase in the fee is due to the increased cost to the IRS to process IRS installment agreements and the reduced cost for those who allow the IRS to draft funds from their bank accounts is due to the IRS believing that it will result in fewer installment agreement defaults.

These “reasons” are suspect. First, few taxpayers are out of compliance with our tax laws for their entire lives. In most cases, non-compliant taxpayers do not have outstanding tax debts for more than ten years. As such, they have a lifetime of paying taxes in and a short time of non-compliance. Moreover, incompliant taxpayers make up for their tax errors by paying tax penalties and interest.

The taxes that are paid for the bulk of a taxpayer's lifetime and tax penalties and interest should offset any costs associated with collecting the tax from that taxpayer for the time in which they are not in compliance with our tax laws. As such, the IRS should not pass the fees for IRS tax payment installment agreements on to taxpayers as the taxpayers have already prepaid these costs or they pay them via payment of interest and penalties.

Imposing fees to come into compliance with our tax laws is particularly troubling if the taxpayer voluntarily comes forward to come into compliance with our tax laws by requesting an installment agreement. A better system would incentivize taxpayers to come forward to comply with our tax laws by not charging those taxpayers fees, such as IRS installment plan fees. A better system would also not impose fees on taxpayers who are not compliant with our tax laws for reasons out of their control, such as death, illness, divorce or other life-changing events.

If the IRS were looking to reduce the costs associated with processing IRS tax payment installment agreements, they could streamline the process by providing an online means for taxpayers to submit installment agreements directly to the IRS.

Second, the IRS reason for imposing lower fees on those who allow the IRS to draft installment payments from their bank accounts is also suspect. The real benefit to the IRS in these cases is that the IRS will easily know where the taxpayer's bank accounts are, which will permit the IRS to levy on the bank accounts should the need arise. This is much more efficient for the IRS in that they do not have to spend the time to try to locate taxpayer bank accounts in order to levy on them.

The bank draft installment agreement will also allow the IRS to continue to taking payments, even after the taxpayer has notified the IRS to stop taking payments from their account. We see scores of these types of issues for private companies that use bank drafts to collect payment from their customers, such as electricity and gas companies.

In these cases the private company bureaucracy will delay the processing of paperwork necessary to stop the bank drafts in a timely manner, resulting in additional payments beyond what is authorized by the customer. This will be particularly problematic where the taxpayer is undergoing some hardship, such as where a taxpayer cannot afford to buy life sustaining medicines because the IRS took a few payments too many when the taxpayer could not afford to send in the extra payments. This may sound like a bit of a stretch, but it isn't. The majority of taxpayers who enter into installment agreements are poorer taxpayers. Poorer taxpayers have very tight financial budgets, budgets that they actively have to manage in order to keep afloat.

With that said, bank draft installment agreements could have some benefits for taxpayers. The real benefit to taxpayers for entering into bank draft installment agreements will be to provide proof as to when payments were remitted to the IRS. Presently taxpayers inadvertently violate their IRS tax payment installment agreements because their payments do not get to the IRS in a timely manner or the payments are misapplied by the IRS.

For example, it is not uncommon for taxpayers to violate their installment agreements due to postal failures (such as the delayed delivery of mail by the US postal system around the Christmas holidays) or where the IRS applies one or more payments to the wrong taxpayers tax account. In bank draft installment agreements, at least taxpayers will have some record as to when their payments were sent out - even if the payment was not properly received or applied correctly by the IRS.