Installment Agreements: A Tax Payment Plan

You can pay off your tax debt with monthly payments, like most other bills. Here’s how…

Build a tax repayment plan

Can’t pay your back taxes in one lump sum without financial hardship? The folks at the IRS have options to help make repaying them easier on you — although penalties ultimately end up making it cost more. That’s the price of delay, just like with a credit card or any other kind of loan.

Still, if a payment plan can get you out of a tight spot, it’s worth it.

Types of Installment Agreements

If you have $50,000 or less in tax debt and are capable of repaying the whole amount, you aren’t required to provide extensive information on income and assets. You can just pay in fixed monthly installments through direct debit for up to six years. (Hopefully it doesn’t take that long!)

Fact: 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.

If you owe more than $50,000, the IRS also requires a financial statement to prove you can make your monthly payments within a specific amount of time.

If you’re really willing to go under the microscope, you may qualify for the Partial Payment Installment Agreement. PPIAs ultimately allow you to pay back only a portion of your tax debt, and the monthly payment is based solely on your ability to pay. In order to determine your ability to pay, the IRS will do 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 will no longer be required to make payment. Be warned: This can take 10 years or more.

Before applying for an installment agreement, you should make sure that you can fulfill the requirements of the plan. The IRS may fine you for defaulting, or even force you to negotiate a new agreement. And they’ll require an explanation when you apply for reinstatement, so always try to work things out before they get ugly.

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 tax debt. Usually, the IRS charges a penalty of 0.5% 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.

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 and can afford to pay your entire tax debt but just need a little time, a simple installment agreement is easy enough to set up on the IRS website. The IRS charges a set-up fee of $52 for direct debit or $120 for payroll deductions.

However, 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 disclosures forms and will help you set up monthly payments that you can afford.