IRS payment plan options are provided by the government to make it easy for taxpayers to settle outstanding taxes or make payments when facing financial challenges.
RELATED: What To Do When You Can’t Make This Month’s IRS Installment Payment
In this article:
- The Basic Facts About IRS Payment Plans
- Short Term IRS Tax Payment Plan
- Setup IRS Payment Plan: Individual Installment Agreement
- IRS Installment Agreement for Individuals Owing More Than $50,000
- Guaranteed Installment Agreements
- Partial Payment Installment Agreements
IRS Payment Plan | How It Works
The Basic Facts About IRS Payment Plans
Owing the IRS any amount of money is terrifying. The more you owe Uncle Sam, the more terrifying it becomes.
We’ve all heard horror stories about how heavy the hammer of the IRS swings when it comes to overdue taxes. A tax debt owed can lead to a long process as well as late fees and penalties.
However, Uncle Sam does have a little bit of a heart when it comes to arranging to pay taxes you owe. One option to lessen the tax debt owed in the short term is to go choose any of the IRS payment plan options.
Provided of course that you play (and pay) by their IRS payment plan rules.
Playing by the rules allows taxpayers to stop accruing more interest and penalties from their unpaid tax debt. An installment payment plan also helps taxpayers avoid other more burdensome tax collection methods, like a tax levy, by proving good faith to the IRS using payment arrangements available to taxpayers.
Before paying for the current tax return, a taxpayer should focus on knowing how much back taxes he or she owes.
Of course, there will be a price to pay for paying late, and you must do the following prior to the IRS tax deadline:
- File your taxes for the year.
- Request a payment extension.
- Make a partial payment. Pay as much as you can as this will help reduce the penalties and interest fees you must pay the IRS.
Keep in mind that the IRS has the right to refuse your proposed installment agreement as well. And, once you make the agreement, the IRS may revoke the plan and demand the entire IRS payment plan balance if you commit any one of the following no-no’s:
- Failing to file or pay taxes generated after entering into the IRS tax payment plan.
- Providing false or incomplete information during the payment plan negotiation (even if discovered after the fact).
- Failing to report substantial changes to your financial situation (whether your financial situation becomes better or worse).
- Missing payments. Even a single missed payment can revoke your entire agreement.
Once you take care of the basics, it’s time to explore the payment plan options available to you.
Short Term IRS Tax Payment Plan
For the taxpayer who can pay the whole tax debt rather than simply send a monthly payment plan, he or she can use the short term option. In this option, a taxpayer should know that:
- He or she should pay the total tax debt in full in 120 days;
- A taxpayer can pay via Direct Pay or the Electronic Federal Tax Payment System;
- Setting up the short term installment payment plan costs nothing, even if the taxpayer sets up the installment plan via phone or online; and
- Payment of the tax debt owed can be done via check. However, taxpayers are advised to make the check payable to the US treasury rather than just the IRS, as criminals can easily change “IRS” to a different name.
For some taxpayers, a short term plan can help taxpayers pay off their tax problems with minimal fees. If the taxpayer simply needs to wait as he or she anticipates incoming money, it may be cheaper to just have a 5% penalty compared to paying set up fees for a longer installment plan, as well as other possible transaction fees from a debit or credit card.
Setup IRS Payment Plan: Individual Installment Agreement
Individuals who owe $50,000 or less in combined taxes, interest, and penalties can apply for the IRS payment plan online. The individual installment agreement, if approved, allows you to make payment through a variety of ways, including:
- Direct deposit
- Money order
- Debit card
- Credit card
- Payroll deduction
- Online payment agreement
The IRS wants to make paying your debt to the agency as simple as possible, providing many avenues through which you can do this. Keep in mind, though, that you must be able to meet your terms of the agreement and pay each month, on time, to maintain the agreement.
It bears repeating that some banks can charge extra fees for the monthly payment. That means possible 1) overdraft fees from the bank, 2) late payments to the IRS, and 3) bigger total tax debts.
Being late on an IRS payment plan can mean the cancellation of the agreement. The IRS has the privilege of accepting or rejecting any application, and any failed agreements can negatively impact the success rates of any other offers by a taxpayer.
IRS Installment Agreement for Individuals Owing More Than $50,000
Some individuals have extraordinary debts to the government. To make arrangements for tax debts greater than $50,000, you must first fill out the IRS payment plan Form 9465. Then, fill out form 433-F.
The government wants a little more information about your financial situation, employment, income, etc. before making arrangements allowing you to pay your debt over time.
Due to the bigger tax debt, set up fees as well as other miscellaneous expenses creep up, making the tax burden a lot bigger. The IRS also has the power to still apply interest on the tax debt due to the size, especially for taxpayers who have a history of late tax payment.
Also, any taxpayer should know about the tax debt categories, as a tax debt of $50,000 can mean a lot of tax problems. Knowing also how to minimize tax debts, like bad debt expenses, can also help taxpayers lower the monthly payments of their tax debt.
RELATED: How To Use The IRS Payment Plan Online
Guaranteed Installment Agreements
Uncle Sam will automatically allow installment agreements for tax debts of $10,000 or less, as long as you meet all of their requirements:
- No late filings or payments in the previous five years
- Good record of filing all tax returns
- Show the ability to pay off the balance (including penalties and interest) within 36 months, you can use the IRS payment plan calculator to help with this.
- Agree to file and pay on time in the future.
In return for this agreement with you, the IRS agrees to refrain from placing tax liens on your personal property, provided you live up to your end of the agreement.
Sometimes, it may be better for taxpayers to simply apply for a bank loan or to dispose of a few assets to pay the tax debt owed. While tax liens no longer show up on credit reports as of 2018, creditors will think twice about lending money to people who have a history of difficulty paying off loans.
Partial Payment Installment Agreements
People who owe more than $10,000 may enter into a PPIA, which allows them to make IRS payments according to what they can afford after paying their essential living expenses. With this agreement, you must owe $10,000 or more, have limited assets, no bankruptcies, and no outstanding tax returns.
With this agreement, the IRS may establish a tax lien on property you own to protect its interests. Tax liens are damaging to your overall credit and they mean that if you sell the property subject to the lien, the IRS takes its share of the proceeds first.
Now that you have all the facts about IRS payment plan options, it’s time for you to decide if this is a good move for you or if you want to explore other options for settling your tax debt first.
Have you experienced any issues or problems with the forms, process, tax debt computation, or schedule of payments in the IRS payment plan process? Share your experience with us in the comments section below!
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.
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Editor’s Note: This post was originally published on December 31, 2018, and has been updated for quality and relevancy.
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