If you owe the IRS money but can’t afford to pay the full amount, you may be interested in setting up an IRS installment agreement.
In this article, we’re taking a closer look at how to setup a payment plan with the IRS.
How to Setup a Payment Plan with the IRS
A simple mistake gone unnoticed, an error left uncorrected, or an extraordinary circumstance – like a global pandemic. All of these things can lead to a tax bill that is higher than you might have expected, and higher than you were prepared for. Thankfully, the IRS doesn’t go after your assets guns blazing the moment it realizes you’re late and short a few dollars. But you don’t want to keep them waiting too long, either.
If you’re in a situation where you’ve got yourself in some hot water and don’t have the cash on hand to pay the IRS immediately, you can setup a payment plan with the IRS to cover your debt over the course of several months and pay off your tax dues with minimal penalties and charges.
The sooner you work on paying off what you owe, the better off you’ll be. Penalties and interest can accrue rapidly with the IRS, and if you decline to set up a plan with them in a timely fashion, they may utilize other means to put some pressure on you (such as tax liens, and even levies).
The good news is that setting up a payment plan with the IRS is by no means complicated. It’s still recommended that you collaborate with a tax professional to ensure that you’re getting through the process as quickly as possible, with as few penalties and additional charges as possible. Different debt amounts and circumstances call for different approaches, fees, and payment options. Here’s a general step-by-step guide:
Gathering the Requirements
One of the basic requirements before negotiating with the IRS is a recent track record of filing and paying all tax returns on time. Before you can start a payment plan for your total tax debt, they want to make sure that you’re being diligent about paying any and all incoming taxes. Even if you can’t pay all your back taxes, you must file your tax returns accurately and on time, and pay what you can.
Doing so will also help you determine your total unpaid tax debt, which is crucial information for anyone seeking to cover their debt with the IRS. Based on your total unpaid tax balance, you will have several different options for paying them back.
Depending on the size and nature of your debt, the process of initiating a payment plan can take anywhere from five minutes over the Internet, to up to two months in postal correspondence (and longer for debts of over $100,000). You can also call or get in touch with the IRS to determine your total unpaid taxes plus all relevant penalties and interest.
Next, the basics. You will want information on hand that the IRS will require to confirm your identity and your current tax debt, as well as your income, assets, and the contents of your account.
Keep your bank account number, cellphone, latest tax returns, filing status, individual tax ID number, and email address on hand. The IRS will need this information if you’re filing online.
Choosing a Payment Plan That Works For You
Once you’ve determined the amount owed (including penalties and interest) and you’ve got your relevant personal information at hand, navigate the IRS’ website to find a payment plan that best suits you.
You have two options:
Short-term payment plan (120 days or less)
A short-term payment plan costs nothing to set up online or by phone, and your payment options include Direct Pay, paying electronically via the Electronic Federal Tax Payment System (EFTPS), or paying by check, money order, or debit/credit card. Short-term payment plans can be made in increments but must be made within 120 days.
Long-term payment plan (more than 120 days)
Long-term payment plans involve monthly installments, and can be paid either automatically (through Direct Debit) or by making payments yourself (via Direct Pay, EFTPS, or check, money order, or debit/credit card).
Setup fees differ depending on the payment option you choose. Automatic payments require an online setup fee of $31, and a phone, mail, or in-person setup fee of $107. Non-automatic payments require an online setup fee of $149, and a phone, mail, or in-person setup fee of $225.
Low-income individuals are eligible for reduced or waived setup fees. Some questions you may have to ask yourself aside from knowing your total tax debt include:
Am I eligible for low-income status?
Individuals who qualify as low-income taxpayers can reduce or waive certain fees. You can apply as a low-income taxpayer if you are eligible and were still charged higher fees via Form 13844.
Can I apply and pay solely online?
You may file and organize your payment plan via the Internet if you opt for a long-term payment plan while owing $50,000 or less in combined tax debt, penalties, and interest, or $100,000 or less if you opt for a short-term play instead. The requirements are different for businesses (note that sole proprietors and independent contractors should still apply as individuals).
You can apply (and revise an existing payment plan) via the IRS’s Online Payment Agreement tool.
The Necessary Paperwork
If you can’t file and pay through the Internet, you still have other options – namely, filing and paying through the mail. The two forms you will need to pay attention to specifically are Form 9465, and Form 433-F. You may not need to file Form 433-F depending on how much you owe.
Form 9465 is an installment agreement request (the actual form that constitutes a request for a payment plan), and Form 433-F is a form attached to the first form for additional required collection information. Both of these will have to be sent to the IRS via mail. Alternatively, you can call the IRS via 800-829-1040 if you’re an individual taxpayer (800-829-4933 for businesses).
Payment Plans and Tax Liens
Something important to keep in mind is that a payment plan does not rescind nor protect you from tax liens. This can be a problem if you rely on credit or loans to keep your business afloat, and generate the money needed to pay back your debt. If you have been issued a tax lien as a result of your debt, and want to negotiate a payment plan with the IRS that involves lifting the lien, you will have to outline this in your request.
You can additionally request to have the lien lifted from certain property, or give certain creditors greater priority to your assets to allow you to borrow money while paying off your IRS tax debt. Speak to a tax professional if you want to learn more about managing your payment plan, avoiding liens, and getting a lien lifted or modified to accommodate your financial situation.
What If You Can’t Pay?
The IRS allows you to contact them and change your existing agreement if you cannot make your payments – provided you have the foresight to do so before you default. There is a reinstatement fee for picking a payment plan back up after you default, but you can contact the IRS and ask to change the plan in order to reduce the pressure on your finances if you’re in danger of defaulting.
If you fall on incredibly hard times and cannot feasibly pay off your tax debt, even if you try and negotiate a payment plan lasting several years, you have the option of potentially negotiating an offer in compromise. This is a very different kind of payment plan that effectively aims to help taxpayers in dire straits pay off as much of their debt as they can within a reasonable timeframe.
Before you settle on a payment plan, contact a tax professional and/or a financial adviser to review your options, and figure out the most feasible and realistic approach.