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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Types of IRS payment plans
Short-term payment plan (guaranteed installment agreement)
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:
- through Direct Pay from a checking or savings account
- electronically online or by phone through the Electronic Federal Tax Payment System (EFTPS)
- By check or money order
- By debit or credit cards, although additional fees will apply
Streamlined installment agreement
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.
- Select a repayment term of up to 72 months (6 years).
- A longer term will lower your monthly payments but increase the amount of penalties and interest you pay.
- A shorter term will increase your monthly payments but reduce your total cost.
- It’s recommended to choose the shortest term you can afford to pay.
- You can also select your payment method
- The IRS recommends Direct Debit or payroll deduction.
- If you use direct debit, the IRS will reduce or eliminate the user fee.
Talk to a certified tax professional to set up a payment plan that works for your budget.
High-debt installment agreement
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.
Partial payment installment agreement (PPIA)
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. 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.
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
- There’s no setup fee if you choose a short-term payment plan
- If you can’t pay off your balance within 120 days and need to set up an IA, the fee varies based on how you choose to pay:
- If you sign up for direct debit from your bank account, the fee is $31
- If you want to use DirectPay, EFTPS, check, money order, debit or credit to pay and apply online, then the fee is $149
- You can also choose to set up an IA by phone, mail or in-person, but the fees will be higher:
- If you plan to use direct debit for a checking or savings account, it costs $107
- If you apply for these payment options, the fee is $225
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.
Set up an IRS installment agreement that works for your budget and your goals.
You can’t use the online application system if you:
- Owe more than $50,000
- Want to set up a PPIA
- Wish to apply for penalty abatement
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.“Never change a payment plan for a one-time surplus. If you can't keep it up you'll ultimately default. Instead, make extra payments online or by mailing a check to the IRS. You don't even have to call them.” – Jacob Dayan Click To Tweet
Make an extra payment on your Installment Agreement online
- Go to https://www.irs.gov/payments
- Select whether you wish to make the extra payment by “Bank Account (Direct Pay)” or “Debit Card or Card Card”
- Be aware you choose to make a payment by credit card, they will add a processing fee for the payment; if possible, you want to avoid this!
- From there, click “Make a Payment”
- Select “Tax Return or Notice” as the “Reason for Payment”
- When selecting “Apply Payment To” choose “1040, 1040A, 1040EZ”
- Choose the oldest tax year that you owe for on the “Tax Period for Payment”
- Then click “Continue”
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
- Fill out your check with the amount you wish to pay for the extra payment
- Make the check payable to “Department of Treasury”
- In the memo field, write your social security number and “1040”
- Sign the check and mail it to:
Ogden, UT 84201-0010
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.”
Customize a payment plan that works for your budget, so you can finally eliminate back taxes.
What happens if you can’t pay as agreed?
A Debt.com reader worries what the IRS will do…
My wife and I have been repaying our taxes through an IRS installment agreement, but she just lost her job. She’s looking for a new one but she isn’t finding anything with a comparable salary, so even if she does get a new job, we might not be able to afford the IA payments plus all our other bills. We barely managed to make the payment this month and I have no idea how we’ll make it next month. What will happen if we miss a payment and what can we do? We’re three years into paying this off and I’m worried the IRS will take my business if we don’t keep up with our agreement.
John in Ohio
Our tax expert Jacob Dayan responds…
[On-screen text] My wife and I are repaying out taxes through an IRS installment agreement, but she just lost her job.
What happens if we miss a payment now?
Jacob Dayan: I’m so sorry to hear your wife is having a tough time finding work. I do, however, have some good news for you.
You can attempt to renegotiate with the IRS based on your current financial conditions at any time.
When you agreed to your installment agreement three years ago, you did so under different financial conditions than you are faced with today.
A little-known fact about the IRS collections process is that the IRS cannot create financial hardship for taxpayers.
I know it sounds counterintuitive because the IRS does cause very real financial strain to taxpayers every day.
However, once the IRS evaluates your financial situation and agrees that your back taxes repayment would cause a hardship, then they do not pursue collections.
If you stop paying your installment agreement and do not reengage with the IRS, they will put you back into collections and you could be subject to actions like levies against your bank accounts or garnishments of other income sources.
I always recommend finding a reputable tax professional who’s experienced at presenting financial statements to the IRS and who will act quickly with the IRS to ensure your rights are protected and you receive the best possible outcome.
My experienced team at Community Tax would be happy to help walk you through your options.
[On-screen text] Call today 844-946-1388
How to modify an IRS installment agreement
You have a few options if you want to modify an existing agreement with the IRS:
- Modify your payment amount (as well as due date) through their website: IRS.gov/OPA
- Call the IRS at 800-829-1040 to renegotiate directly
- Work with a certified tax professional to renegotiate for you
If you’ve had a significant change in your financial circumstances, then you may require professional help. This will ensure you get a new payment that will work for your budget.
Get help setting up or modifying your IRS payment plan.
Article last modified on October 6, 2020. Published by Debt.com, LLC