Starting in the New Year, the Internal Revenue Service plans to increase the processing fees for installment agreements and offers in compromise, in addition to other payment arrangements.

Effective Jan. 1, 2014, processing fees for standard installment agreements and doubt as to collectability offers will increase, the IRS said in an email to tax professionals last Friday. Fees for direct debit installment agreements, however, will remain unchanged. Low-income fees and fee waivers will also be unchanged.

The IRS released proposed regulations in August outlining the changes, noting that it would be the first time since 2007 that the fees had been raised (see IRS Aims to Raise Fees for Offers in Compromise and Installment Agreements).

Starting January 1, the fee for entering into an installment agreement will increase from $105 to $120, according to the Federal Register. The fee for restructuring or reinstating an installment agreement will go up $5 from $45 to $50. The fee for processing an offer in compromise will rise from $150 to $186.

Under the regulations as originally proposed, the reduced fee of $43 for low-income taxpayers who request a new installment agreement would remain unchanged. The IRS pointed out, however, that the fee is substantially less than the full cost to the IRS of processing a request ($282) and the fee charged to other taxpayers ($120).

One of the commenters on the proposed regulations questioned why the fee was waived entirely for low-income taxpayers who are making offers in compromise but only reduced for low-income taxpayers who enter into installment agreements. The Treasury Department and the IRS responded that they believe it is appropriate to charge a reduced fee for a low-income taxpayer to enter into an installment agreement but not to charge a fee to low-income taxpayers for the consideration of an offer in compromise for two reasons. First, unlike the fee for an installment agreement, which is charged only when the taxpayer enters into an installment agreement, the fee for an offer in compromise is charged for the mere consideration of the offer and is not refunded if the offer is not accepted. Therefore, the fee for an offer in compromise could dissuade a low-income taxpayer from making an offer because the taxpayer cannot be assured of reaching an agreement.

Second, a low-income taxpayer making an offer in compromise ostensibly does not have the ability to pay the tax liability in full. Section 7122(d)(3)(A) of the Tax Code specifically provides that the IRS should not reject an offer from a low-income taxpayer based solely on the amount of the offer, and requiring a fee from low-income taxpayers could result in a similar hardship in cases where the taxpayer does not have the ability to pay the fee, the IRS and Treasury noted. In contrast, the vast majority of installment agreements contemplate full payment of the tax liability because the taxpayer has the ability to do so over time. While there are partial-payment installment agreements—those that do not provide for full payment of the liability—they are rarely used.

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