Taxpayers sometimes find themselves in the position of owing money to the IRS. This is understandably a very stressful situation, and the stress is compounded if you don’t currently have the cash on hand to pay the IRS in full by the due date. Unfortunately, penalties and consequences can mount pretty if you do not take swift action.
One of the worst mistakes a taxpayer can make is to simply ignore requests for owed taxes. The IRS isn’t going away. It can use wage garnishments, tax liens, and bank levies to collect. In addition, penalties and interest can make it more difficult for you to afford your tax debt as the months go on. You need to know about your options for paying off what you owe without getting caught up in a stream of mounting IRS penalties.
If you don’t believe you are capable of satisfying your tax debt, a potential option to explore is an IRS Installment Agreement (IA).
What Are the Benefits of Paying Taxes on Time?
Many taxpayers are able to successfully set up Installment Agreements with the IRS when they owe taxes – but you should never look at this as your first option. An installment plan should be thought of as a resolution option if you cannot pay what you owe today.
Staying current with all tax obligations can spare you from the stress and time it takes to deal with the IRS once you owe money. Unfortunately, failing to pay your taxes on time will most likely cause the IRS to file a notice of Federal Tax Lien or bring an IRS levy. Being on time with payments can help you do the following:
- Avoid accruing additional interest and penalties
- Avoid offset of your future refunds
- Avoid issues obtaining loans
We’re really talking about protecting your assets, interests, and financial future. Having your taxes prepared professionally is one of the best ways to ensure that you’re in good standing with the IRS. In addition, utilizing ongoing business support from tax professionals is the best way to make sure that your personal or business tax situation stays on the right track.
What Is a Payment Plan?
If you’ve ever paid off a debt over time, you’re probably already familiar with how a payment plan works. An IRS payment plan is an agreement you make with the IRS that allows you to pay the full amount of taxes you owe within a specific timeframe. Payment plans are available for taxes owed by individuals and businesses.
Keep in mind that the IRS really means a “short-term” payment plan when it talks about a payment plan. This means that you agree to pay the amount you owe within 120 days or less. The benefit of qualifying for a short-term payment plan with the IRS is that you will not be on the hook for a user fee. The IRS allows you to make payments through a short-term payment plan using a checking account, savings account, or the Electronic Federal Tax Payment System (EFTPS). You can also pay by check, money order, or credit card.
A payment plan is referred to as an Installment Agreement by the IRS when the payment period is longer than 120 days. Taxpayers make monthly payments through this type of agreement. The big difference between a short-term and long-term payment plan is that you will be responsible for user fees with a long-term plan. However, the IRS may waive your fee if you can prove low income. The payment options for long-term plans are roughly the same as the payment options for short-term plans.
How Do You Establish an IRS Installment Agreement?
You will need to formally apply for a payment plan. You can’t assume the IRS will agree to a payment plan in every situation, but the good news is that many taxpayers have success when applying. You probably have some questions regarding the process of how to set up an IRS Installment Agreement, so let’s dig a little deeper.
It will be necessary to fill out an official Installment Agreement Request (Form 9465) with the IRS if you want to qualify to make payments. You may be able to apply online if you meet certain requirements. Take your time as you proceed; it’s important to look closely at all of the information the IRS has provided regarding what it claims you owe. There could be circumstances that would actually give you the ability to appeal the amount owed or settle the debt for less than what the IRS says you owe. It is highly recommended that you have a tax expert take a look at your returns and IRS correspondence to unlock all of your options.
How can you know if you qualify for a short-term or long-term IRS payment plan? The maximum you can owe when applying for a short-term payment plan is $100,000 in combined tax, penalties, and interest. The maximum you can owe when applying for a long-term payment plan is $50,000 in combined tax, penalties, and interest.
Different Types of Installment Agreements
There’s a high likelihood that you’re going to qualify for something called a Guaranteed Tax Payment Agreement if you owe less than $10,000 to the IRS. This means that you’re possibly going to get instantly approved for an IRS payment plan as long as you meet the following criteria:
- You have not filed late taxes or paid taxes late at any point during the previous five years (not including extensions)
- All of your tax returns are filed
- You agree to file and pay on time in all future tax years
- You permit the IRS to take any future refunds you may receive
Another option is the Streamlined IRS Tax Installment Agreement. Look into this if you’re trying to work out a larger IRS debt – but bear in mind the option caps out at debts of $50,000. Here’s a look at the criteria that must be met:
- You have filed all of your past tax returns. You will need to file any outstanding returns before you can qualify for this type of agreement
- You have not entered into any installment agreements within the last five years
- You are not in the process of filing for bankruptcy
- You agree to pay setup fees
Taxpayers who are approved for a streamlined installment plan will have up to 72 months to pay off $50,000 or less to the IRS. The IRS added an updated streamlined option for people owing up to $100,000 in 2016. The extended option provides qualifying taxpayers with up to 84 months to pay off balances between $50,000 and $100,000.
People who owe larger amounts to the IRS can still qualify for installment agreements. It will be necessary to explore your options regarding Non-Streamlined IRS Tax Installment Agreements in this case. The big thing to know about taking this avenue is that you will be required to provide the IRS with a financial statement. The IRS will go over your current finances to decide if you are a good candidate for a non-streamlined option.
The timeframe for this type of agreement depends on what the IRS determines is fair and appropriate based on your financial picture. There’s no getting around the fact that applying for a non-streamlined agreement can be complex. Make sure you have a tax expert working with you to increase the likelihood that you’ll get a workable offer from the IRS.
You may be at a point where paying off your tax debt using any type of conventional installment agreement simply isn’t an option. In that case, the IRS may agree to give you what is known as a Partial Payment IRS Tax Installment Agreement. You will enter into an agreement to pay a portion of your full tax liability to the IRS if you are approved for this type of plan. Be aware that the IRS will be assessing your case again in two years to see if your situation has improved. You should also be prepared for the IRS finding out whether you have any assets that can be sold to pay off your tax debt.
A partial payment plan is a complex matter that should only be explored with the help of a tax expert who can anticipate and explain the IRS’s next move every step of the way.
What Are the Costs and Fees for an IRS Payment Plan?
It’s understandable if you’re concerned about adding any extra fees to what you already owe the IRS if you’re about to apply for a payment plan. Some taxpayers can essentially walk away without paying any extra fees, but others are required to pay fees before they can enter into IRS payment plans. What should you expect?
You won’t be responsible for any user fees if you qualify for a short-term payment plan. However, any accrued penalties and interest could apply until your balance is paid in full. You should also keep in mind that some fees could apply if you make your payments using a credit or debit card.
Fees do apply for a long-term payment plan. The setup fee when applying online for a direct-debit payment situation is $31. The fee climbs to $107 if you set up your account in person, by phone, or by mail. Setting up your long-term payment plan using a payment method other than direct debit online will cost $149. That same setup fee is $225 when setting up your account in person, by phone, or by mail. Your fee may be reduced if you qualify for a low-income waiver.
The IRS will charge you a fee if you need to revise your payment method in the future. The fee can range from $10 to $89. This is one of the reasons why you’ll want to make sure your payment plan is set up correctly the first time around. A tax professional with knowledge of IRS payment plans can help to make sure that happens.
Do You Have Questions About an IRS Installment Agreement?
You should investigate your eligibility for an IRS Installment Agreement if you owe money to the IRS. This option could make it possible for you to get back in the good graces of the IRS without any additional penalties. The team at the Tax Group Center can help you to determine the best payment option, apply directly to the IRS, and begin making payments that will prevent your debt from hurting your financial future. We can assist you with a payment plan for personal or business taxes. We understand how to apply for IRS payment plans using the language of the IRS. Reach out today if you need to find a way to pay off what you owe to the IRS!