A tax debt with the IRS can haunt you for years. Failing to settle it can lead to hefty penalties and a stark interest rate on your debt. And as a government agency, the IRS has many resources at its disposal to coerce payment; especially through federal tax liens and income, bank account, or asset levies. Thankfully, the IRS does not expect you to pay the entirety of your debt upfront if you do not have the financial means to do so.
However, the IRS does expect you to cooperate with them in some fashion. Payment plans are one way of assuring the IRS that you intend to pay them back fully – even if it takes a few months or even years. The IRS offers multiple different payment options for taxpayers with an unresolved due balance. Let’s walk through the basics together.
What Are Your IRS Payment Options?
If you owe taxes that you haven’t been able to pay by the original filing due date, then your due balance will be subject to penalties and interest. The sooner you pay, the less you end up owing in the long term. In general, you have three major payment options when working with the IRS.
The first is a short-term payment plan. If you have the means to pay your debt within 180-days, you qualify for a short-term payment plan. Setting up a short-term payment plan is typically free of charge. If you need more time, you will want to consider an installment agreement or a long-term payment plan. Installment agreements involve monthly payments made to the IRS over a period of more than 180-days to cover your entire tax debt.
Unlike a short-term payment plan, long-term payment plans do require a setup fee. Taxpayers who qualify as low-income can reduce or even waive this fee. These plans usually have 72-month terms, but never extend past the CSED (collection statute expiration date) on your tax debt. If your installment agreement does not fully pay your liability before the end of the CSED, this is referred to as a partial payment installment agreement. Any amounts not paid before the CSED expires can be waived as not collectible.
Finally, some taxpayers qualify for an offer in compromise. This payment option is typically exclusive to taxpayers who cannot afford to make monthly payments at a rate that would allow them to pay off their debt before it reaches its expiration date. It involves negotiating for a reduced tax debt, so you can at least pay off a portion of your debt. It is not recommended to consider an offer in compromise without first consulting a tax professional.
For most taxpayers, an installment agreement may be the most straightforward and sustainable way to approach a tax debt. However, it’s important to keep in mind that there are several ways to set up a monthly installment agreement, depending on the amount you owe.
Streamlined Installment Agreement
IRS Streamlined installment agreements are the most straightforward type of installment agreement – they require no additional verification of your expenses, liabilities, income, or assets. Thus, they are streamlined. To qualify for an IRS streamlined installment agreement, you must owe either less than $25,000, including assessed penalties and interest, or less than $50,000 with additional qualifications.
If you have an aggregate unpaid tax balance of less than $25,000, you qualify for a streamlined installment plan right away. However, if your total unpaid balance is between $25,001 and $50,000, you may only enter into a streamlined installment agreement if you do so via an automated payment plan such as direct debit or payroll deduction.
Non-Streamlined Installment Agreement
If you are not eligible for an IRS streamlined installment agreement, there may be some additional steps before you can start paying off your tax debt. A non-streamlined installment agreement is an option for taxpayers owing less than $250,000 in total tax debt. A non-streamlined installment agreement generally starts at 72 months but can be pushed to the length of the CSED for your liability. While a non-streamlined installment agreement does not require a thorough assessment of your finances, it can require a lien determination.
A lien determination can lead to the filing of a federal tax lien, limiting your financing options and placing all your property under lien. This means everything you own becomes collateral to secure your debt to the government. Note that if you make a payment to reduce your debt to be within the limits for a streamlined installment agreement before agreeing to a payment plan, you can potentially avoid a lien determination.
Verified Financial Installment Agreement
Finally, you may be forced into a verified financial installment agreement if you do not qualify for an IRS streamlined installment agreement or a non-streamlined installment agreement. To qualify for a verified financial installment agreement, you will typically have to submit a Collection Information Statement (CIS) in addition to the typical Installment Agreement Request. A CIS will provide a detailed overview of your financial situation, including your income, assets, and liabilities.
Direct Debit Installment Agreement vs. Paying Manually
When signing up for an installment agreement, taxpayers typically have the option between a direct debit agreement and scheduling their own payments. Choosing to pay automatically confers certain perks (such as lower initial fees), as it assures the IRS that the money for your debt will be sent their way on time each month. To enter into a direct debit installment agreement, you will have to provide the IRS with your bank details and written authorization to initiate automated withdrawals.
For example, a DDIA initiated via Form 9465 costs $107 when initiated in-person, via mail, or via the phone, and $31 when initiated online. In contrast, choosing to pay by check costs you $225 in setup fees via traditional means, or $149 if requested online. Payment plans with the IRS can be organized and managed online, by phone, by mail, through an in-person visit, or via a mobile device, through the IRS2Go app. You can log into a secure federal tax account via your private home network through the official IRS website.
As a general safety precaution, avoid logging into any accounts or utilizing any sensitive credentials while on public networks, such as cafes or malls. Your online tax portal not only informs you of any outstanding balance and tax debt, but also allows you to review your payment history, check pending or upcoming payments, and download and print your tax records, as well as review your own key information from this year’s tax return.
The IRS may stop assessing certain penalties and can lower the rate of other penalties if you enter into a payment agreement. This means you can reduce the amount of tax you would potentially owe by paying at least one installment of any given payment plan. Either way, the only reliable way to get the IRS off your back after receiving a balance due notice is to talk to them about a payment plan as soon as you can.