IRS Installment Agreement: Setting Up a Tax Payment Plan
Can’t pay your back taxes off in a single lump sum like the IRS expects? If you receive a notice that you owe money on your income taxes, an?IRS installment agreement?(IA)?or?short-term payment plan?could be the solution you need. It breaks your balance down into a monthly repayment plan, so you can pay off?tax debt?in a way that works for your budget. Installment agreements give taxpayers a practical way to pay off tax bills that often feel completely overwhelming at first.
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9 Things to Know About Setting Up an IRS Tax Payment Plan
If you can’t pay federal taxes by April 15, you may qualify for a payment plan with the IRS.
1. Apply for a payment plan online
If you’re a qualified taxpayer or authorized Power of Attorney (POA), you may qualify to apply online on the IRS site for a payment plan and installment agreement to pay off tax owed over months or years.
The IRS offers three payment plan options: Pay the full amount upfront; pay in 120 days or less; pay in more than 120 days. Payment plan options are determined by the amount you owe in taxes to the IRS.
2. Apply by mail or phone
If you don’t qualify to apply online for a payment plan, you might still be able to set up a monthly installment plan by mailing an installment agreement request. You can also apply by phone by calling?800-829-1040?(individual) or?800-829-4933?for a business.
3. Set up a short-term payment plan
You may qualify to apply online for a short-term payment plan – paying the amount owed in 120 days or less – if you owe $50,000 or less in combined tax, penalties, and interest and filed required returns, according to the IRS.
Only individual taxpayers (not businesses) can apply for a short-term payment plan. If you’re a sole proprietor or an independent contractor, you can apply for a short-term payment plan as an individual.
4. Set up a long-term payment plan
You may qualify to apply online for a long-term payment plan – paying in more than 120 days – if you owe less than $100,000 in combined tax, penalties and interest, and filed all required returns, according to the IRS.
Business owners may qualify to apply for a long-term payment plan online if they owe $25,000 or less in tax, penalties, and interest (combined) and filed all required returns. Sole proprietors and independent contractors should apply as an individual for a long-term payment plan.
5. You may have to pay a setup fee
Short-term payment plans don’t charge a setup fee. But if you set up a long-term payment plan (installment agreement) with the IRS and pay monthly through automatic withdrawals, you must pay a $31 “setup fee” plus accrued penalties and interest until you pay the full balance if you apply online. The setup fee may be waived for qualified low-income taxpayers.
Applying for a long-term payment plan by phone, mail or in-person raises the setup fee to $107. The?setup fee for a long-term payment plan if you pay (non-automated payments) electronically online, by phone or using the Electronic Federal Tax Payment System (EFTPS) jumps even higher: $149.
6. You’ll pay a penalty
You’ll receive some breathing room to pay taxes with a payment plan, but you’ll still pay interest and some penalties, including a “failure to pay” penalty – 0.5% of tax not paid by April 15 and 0.25% during the installment agreement – until you pay the full balance.
The IRS may also impose other penalties, including a penalty for failure to file of 5% of unpaid tax required to be reported, which is reduced by the failure-to-pay amount if both penalties apply.
7. You’ll also pay interest
If you owe federal tax, the interest on tax, penalties and interest starts on April 15 and accumulates daily. The IRS determines the interest rate once every quarter.
“The IRS doesn’t remove or reduce interest for reasonable cause or as first-time relief. Interest is charged by law and will continue until your tax account is fully paid,” according to the IRS.
8. You may be able to revise your payment plan
If you want to change your payment plan once it’s set up, you can revise the plan using the IRS Online Payment Agreement Tool. You can change your monthly payment amount or monthly due date, convert the existing agreement to pay with direct debit or reinstate a payment plan after default.
If the revised plan doesn’t meet requirements, you’ll be prompted to change the payment amount.
9. Make sure you pay on time
If you don’t stick to the agreed payment plan, your plan could go into default and be subject to forced collection actions such as a levy on your salary and other income, bank accounts or property.
Types of IRS payment plans
1. Short-term payment plan (guaranteed installment agreement)
The 120-day plan for taxpayers who owe less than $10K
If you owe less than $10,000 and can pay off your full tax bill, plus assessed penalties and interest, within 120 days, the IRS considers this a?short-term payment plan.[1]?This is also known as a?guaranteed installment agreement. If you apply online, there’s a $0 setup for individuals. You have a few different payment options:
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2. Streamlined installment agreement
The 6-year plan for taxpayers who owe less than $50K
If you owe less than $50,000 and can repay the whole amount over time, you can use a?streamlined installment agreement. This type of IA doesn’t require a full financial disclosure to the IRS. You won’t be required to provide extensive information about your income and assets. In exchange, you agree to repay your full balance, plus penalties and interest, within a set timeframe that you select.
3. High-debt installment agreement
The plan for taxpayers who owe more than $50K
If you owe more than $50,000, then you must generally use a traditional “high-debt” installment agreement. This requires a full financial disclosure. In other words, IRS will expect to review a full summary of your income, liabilities and assets. You won’t be able to apply online. The IRS will review your financial situation to determine the monthly payments you can make over a set period of time.
4. Partial payment installment agreement (PPIA)
The 10-year plan for taxpayers who can't pay everything
If you’re willing to go under the microscope, you may qualify for the Partial Payment Installment Agreement. PPIAs allow you to pay back only a portion of your tax debt. The monthly payment requirement depends solely on your ability to pay. In order to determine your ability to pay, the IRS does an extensive review of your financial situation. You then pay installments until the statute of limitations on the debt runs out. After that, even though you have not paid your total tax debt, you are no longer required to make payments. Be warned: This can take 10 years or more!
Avoiding a Notice of Federal Tax Lien
In the past, using an installment agreement meant that the IRS would apply a Notice of Federal Tax Lien on any property the taxpayer held.[1]?However, the?Fresh Start?program revised these rules. Now, if you owe less than $25,000, the IRS won’t file a Notice of Federal Tax Lien. If you owe more than $25,000, you can avoid the Notice of Federal Tax Lien by agreeing to pay your IA via direct debit or payroll deduction.
Things to know before you apply
Before applying for an installment agreement or payment plan, make sure that you can fulfill the requirements of the plan. Review your budget carefully to ensure you can meet the payment requirement by the due date every month. The IRS may fine you for defaulting and you may be required to sign a new agreement. When you apply for reinstatement, the IRS will expect an explanation of why you didn’t meet your obligation. You may also be required to submit to a full review of your finances before they agree to set another agreement up for you.
If you don’t feel like you can pay off your balance to the IRS, then you may want to consider another solution. For example, an?Offer in Compromise?is basically a debt settlement program for back taxes. You can get out of tax debt for a percentage pf what you owe.
Interest and penalties
Using an Installment Agreement for the payment of?tax debt?means that you will need to pay the penalties interest imposed by the IRS on your unpaid balance. Usually, the IRS charges a penalty of 0.5% of the total debt amount each month. However, the IRS charges an additional penalty on taxes due that have not yet been filed. Typically, this penalty is 5% of the total amount of unpaid taxes each month, but the IRS can charge a maximum of 25% penalty on unpaid and/or unfiled taxes.
The penalty for not filing your taxes on time is 10 times the penalty for not paying them on time. Don’t procrastinate just because you can’t foot the bill right now!
Even after you have begun making monthly payments to the IRS for the fulfillment of tax debt, penalties and interest will still be charged on the amount of tax debt that remains to be paid. So, it is important to pay as much as possible upfront to avoid higher?penalties and interest.
Applying for an installment agreement
If you owe less than $10,000, regardless of whether you can pay it back within 120 days or after, you can apply for an IA online through the?IRS website. The fees vary based on the plan you want to use, your payment method and how you set the plan up
Setting up an installment agreement is more difficult if your debt is higher or you are looking to pay less than what you owe. The financial disclosure the IRS requires is complicated and can be tricky for the average person to complete. A tax debt resolution service can help you complete the disclosure forms correctly to avoid potential issues as you set up your IA.
You can’t use the online application system if you:
Making extra payments to the IRS
If you’re currently enrolled in an IRS installment agreement and you come into some extra cash, it’s a good idea to make any extra payment. The IRS allows you to pay off all or just an extra portion of your Installment Plan. Doing so will get you out of tax debt faster and, as a result, minimize interest and penalties.
Our resident tax expert,?Jacob Dayan, CEO and co-founder of?Community Tax?and?Finance Pal, does warn that you want to make sure you’re making an extra payment instead of permanently adjusting your monthly payments.
Make an extra payment on your Installment Agreement online
From there, simply follow the prompts to receive confirmation that your extra payment has processed. Make sure to print the confirmation for your records in case there’s any issue in the future.
Make an extra payment by mail with a check
Paying off the full remaining balance on your Installment Agreement
Dayan says that if you plan to pay off the full amount left on your payment plan in one shot, you should call the IRS first. The reason for this is that the amount you owe today may not be the amount you owe on the date you wish to pay it off. You could leave a remaining balance of penalties and fees that got assessed after you checked the balance.
“If you want to pay the remaining balance in full, call the IRS to get the payoff amount,” Dayan advises. “You’ll need to know the date you plan to pay, so the IRS agent can calculate the proper amount of interest and penalties. Then you can make that payment using the same instructions we provide above.”