If you owe back taxes, paying them off as soon as possible is the only surefire way to avoid collection actions from the IRS. But depending on how much you owe, simply writing a check might not seem like a realistic option. Tax payment plans are another way for you to avoid collection actions from the IRS by making a commitment to pay off your debt at a realistic pace. Choosing the right tax payment plan means knowing what your options are. Let’s go over them together.
Understanding Your Tax Payment Plan Options
In general, your options for tax debt resolution with the IRS are limited to:
- Proving that the debt is a mistake
- A payment plan, or an installment agreement
- An offer in compromise
- Being temporarily non-collectible
- Penalty abatement
The IRS can and does make mistakes. Your tax debt, no matter how insignificant, might simply be the result of oversight or a misunderstanding – if you can prove that you can have your debt-stricken. You may request an appeal for a decision made against your tax account via the IRS Independent Office of Appeals, however, you should consult a tax professional first.
If you do agree that you owe back taxes – perhaps you forgot to make your estimated tax payments, perhaps you missed the due date on your tax return and were penalized, or perhaps certain mistakes on your return led to a higher-than-expected tax bill – then the best way to deal with them is to enter a tax payment plan. The sooner you do, the less you end up owing.
Installment agreements are payment plans with a term length longer than 180 days. While short-term tax payment plans may involve multiple lump sums, installment agreements require monthly payments to be made to the IRS to reduce your tax debt. The full length of the installment agreement depends on what kind of installment agreement you request to enter with the IRS.
To enter an installment agreement with the IRS, you must file an Installment Agreement Request. The cheapest way to file an IA request is through the Internet. Setup fees for an installment agreement can range from $31 to $225, depending on whether you file online or not, and whether you decide to give the IRS authorization to withdraw funds automatically or not (via Direct Debit).
Streamlined installment agreements are available to taxpayers owing $50,000 or less in assessed back taxes, penalties, and interest. Streamlined installment agreements usually involve a total of 72 monthly payments, or monthly payments until the end of an assessed tax debt’s CSED (collection statute expiration date). Taxpayers who owe more than $50,000 in back taxes, but less than $250,000 may enter a non-streamlined installment agreement, wherein they may be subject to a lien determination, which, depending on their financial situation and ability to pay their debt, can lead to a federal tax lien until the debt is paid.
A federal tax lien means that the government places a legal claim on your assets and property as collateral until the debt is paid. The government doesn’t physically take anything away when placing a tax lien – it simply limits your ability to liquidate assets or seek a secured loan. For tax debts over $250,000, taxpayers must enter a verified financial installment agreement, wherein the IRS does a more thorough investigation of your assets, income, and liabilities via a Collection Information Statement.
Partial Payments and Offers in Compromise
Waiting for your debt to expire is not a viable strategy. Unless the IRS never contacted you about your tax debt and it’s been nearly a decade, chances are that the agency knows that you owe a significant amount of taxes, and it will try to collect on them. If your debt cannot be paid realistically by its CSED, then the IRS will meet you halfway to try and collect some of the taxes you owe before the debt ends.
A partial payment installment agreement is an installment agreement that accepts monthly payments until your CSED or the point at which your tax debt has expired. You will be required to pay your debt until the end of your debt’s viable collection date. Another option for taxpayers with very little financial recourse is an offer in compromise. This is an alternative payment plan you can propose to the IRS reducing your total tax debt to the reasonable limit of what you can pay within a certain period of time.
The Fresh Start Initiative expanded the taxpayer’s options and opportunities to avail of an offer in compromise, but it is still generally a last resort. The IRS only accepts offers in compromise that are close to what it ascertains as a person’s Reasonable Collection Potential. It is in your best interest to coordinate with an experienced tax professional if you wish to consider an offer in compromise. Failing to pay back taxes knowingly can result in a criminal charge, but in most cases, it’s the collection actions that pressure a taxpayer into entering a payment plan.
After issuing a lien on your property, the IRS has the right to issue levies to pressure you even further. A tax levy is a physical claim on any account or asset. Note that there are ways to extend the CSED and that the IRS counts certain tolling periods when calculating how much longer your debt will last. For example, if you have been in bankruptcy proceedings or lived overseas for an extended period, there may be multiple months or years where your tax debt didn’t age.
If you aren’t sure how much longer your debt is still active, consider consulting a tax professional. The CSED on tax debt is typically ten years from the date of tax assessment on your original notice of overdue balance. Things that may add to that ten-year period include bankruptcy cases, an appeal action, tax litigation (in the US Tax Court), and a request for an extension on time to file a tax return.
Currently Not Collectible
The true last resort for all taxpayers unable to make any payments to the IRS is to file as currently not collectible. Under these circumstances, the IRS will cease all collection actions. However, your tax debt will continue to accrue penalties and interest. Collection actions will continue after the IRS has assessed that your financial situation has improved enough to warrant a payment plan.
Penalty Abatement for Tax Debt
Penalties can make up a considerable portion of your total debt. There are separate penalties for failing to file your tax return in a timely manner, and failing to pay your taxes, as well as additional penalties such as estimated tax underpayment. If you haven’t had an offense on your tax account for more than three years or have never gotten into trouble with the IRS, to begin with, you may be eligible for first-time penalty abatement. Otherwise, if there is reasonable cause for your failure to pay or file (such as natural disasters, loss in the family, or extraordinary circumstances), you may be able to argue for penalty abatement.
Are you still worried about penalties and interest? Entering into a tax payment plan can reduce the amount of interest you pay and can cut or even eliminate penalties depending on your tax record. Even if you’ve fallen on hard times and don’t have the means to pay off your entire tax debt, there may be options for you to resolve your situation with the IRS through a partial payment plan.