If you can’t afford to pay your taxes right away, you may be interested in paying off your debt over time. The IRS provides several IRS payment plans that allow several payment schedules.
In this article, you will discover how to pay off the debt over time with IRS payment plans.
IRS Payment Plans: How to Pay Off Debt Over Time
When a taxpayer has a balance due with the IRS, they have until a set date to pay it off before penalties accumulate, and interest is calculated. At that point, the overdue balance continues to grow slowly until it is entirely paid off.
However, taxpayers don’t need to pay off all their debt at once. The IRS offers a variety of payment plans to help taxpayers pay their debt off over time. These payment plans offer a flexible long-term solution for many struggling to make ends meet yet hoping for a chance to pay their debt off.
Furthermore, taxpayers who would otherwise take years of monthly payments to whittle down their debt has the option of contacting the IRS and negotiating an Offer in Compromise, if they can prove that their reasonable collection potential within the next two years is not enough to cover their total tax debt. An Offer in Compromise helps taxpayers unable to pay the entirety of their tax debt within a reasonable period negotiate for a reduced tax liability that they can pay.
Alternatively, taxpayers burdened by excessive collection attempts, and no means to begin a payment plan can contact a tax professional to help earn the Currently Not Collectible status, halting efforts to collect temporarily. Here is everything you might want to know about paying your tax debt with the IRS.
Explaining IRS Payment Plans Installment Agreements
Failing to pay your taxes on time will lead to failure-to-pay penalties (and failure-to-file penalties if you do not file your tax returns on time, and don’t ask for a six-month extension).
These penalties will be levied on top of the monthly interest rate that does not have a limit and will continue to grow so long as your debt is not entirely paid (even while you are paying it off). Thus, it’s generally in your best interest to pay your tax debt as quickly as you can. Once the debt reaches a certain point, the IRS will claim a lien on your property, limiting your ability to seek loans and credit.
Payment plans can halt or withdraw liens, and reduce the penalties associated with your tax debt. Even if you aren’t sure whether you can pay everything off in a timely manner, getting into contact with the IRS to begin an application for a payment plan can help reduce the chances of being confronted with certain collection methods.
Payment plans for the IRS can be divided into three general categories:
The “Pay Now” Option: This option is self-explanatory, in the sense that it is available for taxpayers who can pay off their entire debt today. There is no limit on how large or small the tax debt should be for this payment option.
The “Short-Term” Option: This option allows taxpayers to pay off their debt within the next 120 days.
The “Long-Term” Option: This option is for taxpayers who would need more than 120 days to pay off their tax debt, typically through a monthly installment plan.
Paying now or in a short-term payment plan within the next 120 days costs nothing to set up. However, opting for a long-term monthly installment plan will cost a setup fee depending on how a person applies, and whether they qualify as a low-income taxpayer.
Taxpayers applying for a long-term payment plan online owe $31 if opting for an automatic direct debit payment plan, and $149 if opting for a non-automatic payment plan.
The setup fees for applying via phone, mail, or in-person are $107 for automatic plans and $225 for non-automatic plans. Low-income taxpayers are eligible for lower setup fees, which may additionally be reimbursed if conditions for reimbursement are met. You can check to see if you are qualified as a low-income taxpayer through the Application for Reduced User Fee for Installment Agreements.
In all cases, taxpayers can either pay via:
- Check, money order, or debit/credit card.
- Pay directly from their checking or savings account.
- Pay online or via the phone, through the Electronic Federal Tax Payment System (EFTPS)
What If You Can’t Afford to Pay?
Taxpayers who cannot afford to pay off their entire tax liability within the next two years or so have the option of speaking to a tax professional about an Offer in Compromise agreement.
While rare, such an agreement can lead to a reduced total tax liability to match your current financial circumstances and capabilities, calculated as your Reasonable Collection Potential based on your current income and total discretionary income (after current taxes and basic necessities).
Collection and Payment During Major Crises
The IRS collection process entails the use of liens and levies to coerce payment in cases where taxpayers have either continued to remain uncooperative or have a very large tax liability. However, some taxpayers are pressured unduly by these collection attempts, or may otherwise be struggling under a personal and/or financial crisis that is temporarily and massively inhibiting their income (and thus, their collection potential).
These taxpayers may ask the IRS to temporarily halt collection efforts, in exchange for a timeout on their debt’s statute of limitations. So long as the IRS is unable to collect, their debt will not continue to age towards its respective Collection Statute Expiration Date (CSED). Furthermore, the tax debt will continue to grow through monthly interest.
The Currently Not Collectible status is a boon for taxpayers who are undergoing tough times and don’t have the means to support themselves and tackle their tax debt, even in the long-term. The IRS checks in periodically to see whether the taxpayer’s situation has improved (thus resuming the collection process), or whether their status requires an extension.
It’s important to speak with a tax professional about your options. There are upsides and downsides to each potential payment plan or approach. For example, it may be in some taxpayers’ best interests to avoid arguing for a Currently Not Collectible status if their debt is close to its expiration anyway. Alternatively, they may be better served to try to argue for an Offer in Compromise if their case for it is strong, rather than letting the debt continue to grow and accrue.
Even if you think you don’t have the means to pay off your debt to the IRS right now, a tax professional may help you find a reasonable payment plan to match your circumstances and abilities, and eliminate the potential for liens and levies in your future.