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If you owe back taxes to the IRS, you can catch up using an installment agreement – a tax repayment plan that breaks your debt into manageable monthly payments.
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.
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. 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:
If you need more than 120 days (about 4 months) to repay your tax bill in-full, then you set up an installment agreement.
There are two types of IRS installment agreements. If you owe more than $50,000, then you use a traditional high-debt IA. However, thanks to the IRS Fresh Start initiative, individuals with an “assessed balance of tax, penalties and interest up to $50,000” can use a streamlined IA.
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.
In the past, if a taxpayer used an installment agreement, the IRS would apply a Notice of Federal Tax Lien on any property the taxpayer held. 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.
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.
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!
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 the 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.
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.
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 disclosures forms correctly to avoid potential issues as you set up your IA.
“The more complex your tax situation, the more likely you are to need help to resolve your issues with the IRS. Working with a certified tax professional can help ensure you get out of tax debt for the least amount of money possible. It also helps ensure that you set up a plan that will work for your budget.”Jacob Dayan, Co-Founder of Community Tax
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.
“You never want to change a payment plan to reflect a one-time surplus of extra cash. Because if you can’t pay the same amount moving forward, then you’ll ultimately default on your Installment Agreement. Instead, you can just make extra payments online or by mailing a check to the IRS. You don’t even have to call the IRS to tell them you want to make an extra payment. Just go online or send them a check and your extra payment will be processed and deducted from your balance.”Jacob Dayan, Co-Founder of Community Tax
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.
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.”
Article last modified on September 17, 2019. Published by Debt.com, LLC