If you are behind on your taxes and you want to pay your taxes to avoid interest and penalties, you have the option of applying for an IRS payment plan. The Internal Revenue Service has various methods to pay taxes owed to the government for taxpayers at all income levels. Learn more about IRS payment plans and how to apply today.
If you owe taxes, this does not automatically mean you will be sent to jail. However, you should be aware that repeated tax evasion is a punishable offense that can result in jail time, along with other penalties and interest on your tax debt. As long as you are willing to work with the Internal Revenue Service to pay off your taxes in good faith, you will not face incarceration.
What Are Common IRS Payment Plans?
The best way to work with the IRS to pay off the taxes you owe is to apply for a monthly installment plan that will allow you to gradually reduce your tax debt over several months. IRS installment agreements give taxpayers the opportunity to pay off back taxes with several payment options. Payment plans are either short-term or long-term.
Short-Term Payment Plan
Also known as a guaranteed installment agreement, a short-term payment plan is an ideal option for taxpayers who owe $50,000 or less in assessed taxes before interest and penalties are factored in. A guaranteed installment agreement must be fulfilled in four months. To qualify for this plan, you must not be actively fulfilling a different installment plan and you must have paid all your taxes for the last five years.
This payment plan allows taxpayers to pay off a tax bill by transferring money to the IRS directly from a savings account or checking account. Alternatively, taxpayers can make payments for short-term payment plans by writing a check, sending a money order, or paying the bill with a credit card. Paying a tax bill with a credit card may give you more flexibility for paying down the debt through a personal loan, which could eliminate penalties and interest for unpaid taxes.
Long-Term Payment Plan
In general, long-term payment plans last for 72 months, unless you are able to fully pay your taxes before then. There are many more options for long-term payment plans for taxpayers to consider, and each plan has distinct advantages.
Streamlined Installment Agreement
A streamlined installment agreement is the most simple long-term payment plan available. Also known as the Fresh Start program, this installment plan is best for taxpayers who owe less than $50,000 and who can pay off this balance in 72 months. This payment plan can help taxpayers avoid a federal tax lien.
Partial Payment Installment Agreement
A partial payment installment agreement is ideal for taxpayers who will not be able to fully pay off tax debt and interest within 72 months. With this payment plan, you will agree to pay part of your back taxes over several months. However, this payment option has stricter qualifications, so you will need to provide financial information, as well as details about your monthly income and monthly expenses with Form 433-A, also known as the Collection Information Statement. You will need to comply with a financial review every two years.
Non-Streamlined Installment Agreement
If you are a taxpayer who owes more than $50,000 in back taxes, your best option may be a non-streamlined installment agreement. With this plan, you will need to submit documentation about your finances, including information about your living expenses with Form 433-A. The IRS may reject your application if your information is deemed inaccurate, misleading, or incomplete. You may also be able to set your desired monthly payment amount with this plan.
What Is a Direct Debit Installment Agreement?
In general, a direct debit installment agreement is any IRS payment plan that is paid with automatic withdrawals from your checking account or bank account. Direct debit is the best way to be consistent with your monthly payments. You can set up direct debits with form 433-D Form. A major benefit of agreeing to pay your taxes through direct debit is the reduction of certain fees and interests associated with your installment agreement.
Instead of a direct debit installment agreement, you may also want to consider a payroll deduction. When you agree to a payroll deduction, your minimum monthly payment will be automatically deducted from your paycheck. In either case, both of these automatic withdrawals will prevent the IRS from filing a tax lien against you.
Can I Change My Existing Payment Plan?
Sometimes, your financial circumstances may change and you may need to update your existing agreement. Sometimes, updating your existing plan means revising your payment methods, such as agreeing to enroll in automatic withdrawals or direct pay. You can also revise which bank accounts are used for your direct debit or change your due date. You can apply to update your existing plan online at the IRS website or over the phone, but there may be additional fees involved.
Can I Have Multiple Installment Agreements?
If you already have an existing installment agreement that you are working to pay off, but you owe taxes on your tax return for the next tax year, you may be able to apply to consolidate your back taxes into a single installment agreement. Essentially, your new tax balance will be added to your current tax bill. However, you may be charged additional interest and penalties until your balance is paid in full.
What Will My Monthly Payment Amount Be?
The minimum monthly payment for your installment agreement will depend on the type of payment plan you have, your tax debt amount, and your income. While a short-term payment plan may have higher monthly payments, a long-term payment plan allows taxpayers to choose how much their monthly payments will be. However, although you should select an amount you can afford to pay each month, you should select an amount that will allow you to pay off your tax bill within 72 months.
Are There User Fees for Payment Plans?
With the exception of a short-term installment agreement, most payment plans have a setup fee. For a streamlined installment agreement, the setup fee is $31 if you plan to make payments with automatic checking account deductions. The setup fee may also be determined by your method of application; applications submitted by phone or mail cost more than applications submitted online.
In many cases, a low-income taxpayer can have the setup fee waived. A taxpayer may qualify for a waiver if their household income is at least 250% below the federal poverty income threshold. Furthermore, low-income taxpayers who cannot make electronic debit payments can also be reimbursed when owed taxes are paid in full.
Are There Payment Fees for Payment Plans?
If you send payments for your monthly tax bill via check or direct debit, you will not be charged additional payment fees. However, if you are making your monthly payment with a credit card or debit card each month, your payment may be subject to a payment processing fee. Typically, the fee for a credit card or debit card payment is between 1.87% and 1.98%.
How Do I Apply for an IRS Payment Plan?
To apply for an IRS payment plan, you can submit your application online at the IRS website, visit your local IRS field office, print and mail your application, or apply over the phone. Regardless of your method, you will need information about yourself and your financial circumstances, including your bank account information, Social Security number, valid photo identification, and your contact information. You may need to submit multiple forms to the IRS, such as Form 433-A, as well.
How Are Penalties and Interest Determined?
The interest rate and accrued penalties on your tax debt will vary depending on your specific situation. The IRS determines interest on back taxes based on factors such as whether or not you file your taxes on time.
Tax returns that are filed on time have a lower interest rate of 0.5% per month until the tax is fully paid, with a maximum penalty of 25% of the debt for failure to pay owed taxes. Tax returns that are filed late will have a compounded daily interest rate equal to the federal interest rate plus 3% and additional late filing penalties for the outstanding balance.
Can I Have Penalties With an Installment Agreement?
If you have an installment agreement, you may still be charged interest and penalties for tax returns that are filed late or taxes that are not fully paid. The interest rate on an installment agreement is 0.25%, while the failure-to-pay penalty will accrue until the balance is paid in full.
Will an IRS Payment Agreement Affect My Credit Score?
IRS tax debt is different from consumer debt. While credit card debt and other debt from personal loans may cause your credit score to dip, tax debt will not have a direct impact on your credit score. When you apply for an IRS payment plan, you will also be able to avoid a federal tax lien that may negatively impact your credit score.
Do I Need to Contact a Tax Attorney?
If you aren’t sure which IRS payment plan is optimal for your financial situation or you want to avoid penalties such as a federal tax lien, it’s a good idea to contact an attorney or a tax advisor. An expert can assess your financial information, your tax debt, and your current circumstances to identify the plan that will pay off your taxes quickly.
Sometimes, a tax expert may also advise you to apply for other debt relief programs, such as an Offer in Compromise, which allows you to negotiate with the IRS to settle your debt. If your monthly expenses outweigh your monthly income, a tax expert may also recommend appealing to the IRS for a Currently Not Collectible status.
Can Tax Debt Relief Plans Stop Interest and Penalties?
In some cases, applying for a tax debt relief plan will temporarily reduce or pause any accruing penalties and interest on your tax debt. In particular, when you pay off your tax debt with an Offer in Compromise, your debt will no longer gain interest and other penalties once the tax settlement is paid in full.
IRS installment agreements give taxpayers an extended timeframe to pay off tax debt via a monthly payment. However, applying for an installment agreement can be complicated, especially if you need to provide financial information. It’s best to speak with a Seattle tax attorney as soon as possible. For more information about IRS payment plans, contact Seattle Legal Services, PLLC at 206-895-7268 today.