Meeting your tax obligations promptly is not only a legal requirement but can also save you a significant amount of money in penalties and interest. However, there are circumstances where individuals and businesses may find it difficult to pay their tax debt in full. The Internal Revenue Service (IRS) understands this and provides a solution in the form of IRS payment plans, also known as installment agreements.
Defining an Installment Agreement
An installment agreement allows taxpayers to pay their outstanding tax debt in manageable monthly payments, reducing the financial strain of a large, one-time payment.
An IRS payment plan is not a one-size-fits-all solution, however, and a qualified tax lawyer is the best person to help you understand how to work out solutions that are right for you.
There are several types of installment agreements available, including short-term IRS payment plans and long-term IRS payment plans, designed to accommodate the varying financial circumstances of taxpayers.
What Is an IRS Payment Plan or Installment Agreement?
An IRS payment plan is an agreement between you and the IRS that allows you to pay your tax bill over a specified period in monthly payments. This method is a viable option for taxpayers who can’t afford to pay their tax debt in full by the due date.
How Do I Have to Pay?
Under an IRS installment agreement, taxpayers can make these payments in various ways – via direct debit, direct pay, or even using a debit card. One of the most convenient methods is through a direct debit installment agreement, where automatic withdrawals are made from your savings or checking account each month.
Are There Other Options?
Depending on your specific circumstances, you might qualify for other types of installment agreements. The IRS determines the suitability of these options based on your combined tax, financial status, and ability to pay. Your tax lawyer can give you more information based on your specific situation.
Interest Rate Without an Installment Agreement When You Don’t File on Time
Failure to file your tax return or to pay your tax liability by the stipulated deadline attracts lots of interest and penalties, adding to your tax debt.
As of 2023, the IRS interest rate for underpayment of tax is typically the federal short-term rate plus 3%. This interest compounds daily from the due date of the return until the date when the balance is paid in full.
It’s important to note that even if you have an installment agreement in place, interest and late payment penalties continue to accrue on unpaid balances. However, the overall rate of penalties is significantly reduced once the IRS installment agreement is approved.
Minimum Monthly Payments for IRS Installment Plans
The minimum monthly payment for an IRS installment plan depends on your outstanding tax debt and the type of installment agreement that fits your situation.
Under a short-term payment plan, for example, you have up to 180 days to clear your tax debt. However, for long-term payment plans, the IRS usually divides your outstanding balance by 72 to determine the minimum monthly payment.
Remember, these are minimums: if you can afford to pay more each month, it’s in your best interest to do so. The quicker your balance is paid, the less you’ll pay in accrued interest and penalties.
Short-Term Payment Plan Fees (180 Days or Less)
A short-term payment plan, also known as a short-term IRS payment plan, allows taxpayers to pay off their tax debt in 180 days or less.
The IRS does not charge a setup fee for taxpayers who apply online for this plan and opt to make their monthly payments using direct debit from their bank account. If you choose to pay via other methods, such as a debit card, money order, or check, a setup fee might apply.
It’s important to note that while a short-term payment plan might seem convenient, tax penalties and interest continue to accrue until the tax debt is paid in full. Therefore, it’s crucial to pay the balance as soon as possible to minimize these additional charges.
Long-Term Payment Plan Fees
A long-term payment plan, or an installment agreement, is an option for those who need more than 180 days to pay their tax bill. Unlike short-term plans, a setup fee is associated with this option. However, the IRS offers a reduced user fee for those who qualify as low-income taxpayers and even reimburses this fee entirely if certain conditions are met.
Under a long-term payment plan, you can choose between making manual payments or setting up direct debit payments. Direct debit installment agreements offer a more manageable and worry-free way of keeping up with your IRS payment plan, as the agreed-upon payment is automatically deducted from your checking or savings account each month, and your fee will be reimbursed.
Fees Charged on Installment Agreements
The setup fee for installment plans varies depending on whether the payment plan is short-term or long-term and the payment method chosen.
The setup fee is generally lower if you apply online, and it’s even further reduced for direct debit installment agreements. For low-income taxpayers, the setup fee may be reimbursed if certain conditions are met.
Remember, even with an installment agreement, interest and penalties continue to accrue on the unpaid balance until the tax debt is paid in full. Hence, the sooner you can clear your balance, the less you’ll end up paying in the long run.
Why Do I Have to Pay a Setup Fee?
A setup fee is charged by the IRS to cover the cost of establishing and managing the installment agreement. The amount is based on your payment method (direct debit, check, money order, etc.), how you apply (online, phone, mail, or in-person), and your income level.
For instance, a direct debit installment agreement has a lower setup fee compared to other payment methods, given that it’s less costly for the IRS to process. Similarly, online applications have lower fees than phone, mail, or in-person applications.
Other Fee-Related Details to Know
Other charges might apply to your installment agreement, depending on your circumstances. For instance, if your bank returns your payment due to insufficient funds, you might be charged a fee.
Also, if you need to revise your existing agreement – such as by changing your monthly payment amount or due date – you might need to pay a restructuring or reinstatement fee.
Are There Fees and Penalties on Other Payment Arrangements With the IRS?
The IRS offers other payment arrangements, like an Offer in Compromise (OIC) and Currently Not Collectible (CNC) status. An OIC lets you settle your tax debt for less than the full amount you owe and involves a thorough examination of your assets, income, expenses, and ability to pay. It also requires an application fee and a potential initial payment while your offer is considered.
CNC status is for taxpayers experiencing financial hardship, where the IRS temporarily halts attempts to collect the tax debt. This does not eliminate the debt, and interest and penalties continue to accrue until the tax debt is paid or the collection statute expires.
How to Apply for an IRS Payment Plan
You can apply online using the IRS Online Payment Agreement tool if you owe $50,000 or less in combined tax, penalties, and interest. Before you begin the application process, however, ensure that you have your individual tax ID number, notice from the IRS if you received one, and a review of your tax returns for the past five years.
If you owe more than $50,000, you’ll need to apply by mail using a minimum of four forms you’ll find on the IRS website. You’ll also need to disclose details about your income, expenses, and assets.
For a Business
If you’re a business, you can apply online if you owe $25,000 or less in combined tax, penalties, and interest for the current and prior calendar year. If you owe more than this, you’ll have to apply by mail and will need to complete all the appropriate forms.
Why Help Is Essential
Navigating the IRS payment plan application process can be daunting and complicated. While it’s possible to apply on your own, having a seasoned tax lawyer by your side can make a substantial difference in what you end up paying as well as the amount of stress you undergo.
How Does a Tax Lawyer Help?
A tax attorney is well-versed in tax law and the inner workings of the IRS and can help you understand the process, fill out the necessary forms accurately, and advocate for you in negotiating the most favorable terms for your payment plan.
In other words, with a tax lawyer’s assistance, you’re likely to secure a payment plan that fits your financial capacity and minimizes the stress associated with tax debt.
The investment in professional legal assistance can also pay dividends in the long run by saving you from costly mistakes and ensuring the best possible outcome with your IRS payment plan application.
What Happens When I Request a Payment Plan?
When you apply for an IRS payment plan, several things happen.
Getting a Notice
After you’ve submitted your application and the IRS has reviewed your tax account, they will send you a notice outlining the terms of your proposed installment agreement.
Reviewing the Notice
The IRS notice will detail your minimum monthly payment and due date, and the IRS will continue to apply penalties and interest until the balance is paid in full. Be sure to review this notice carefully with your tax lawyer to make sure you fully understand all the implications.
Agreeing to the Notice
Once you agree to the proposed terms and begin making payments, the IRS will generally not take any aggressive collection actions like a levy or lien as long as you keep up with your installment agreement.
Am I Eligible for a Waiver or Reimbursement of the User Fee?
Low-income taxpayers may qualify for a waiver or reimbursement of the setup fee for an installment agreement. The IRS will automatically identify you as a low-income taxpayer if your income is at or below 250% of the federal poverty level.
Don’t Deal with the IRS Alone
Our team of seasoned tax professionals stands ready to provide you with the assistance you need to negotiate a favorable deal with the IRS. Whether it’s a short-term payment plan or a long-term installment agreement, we understand the intricate details and potential pitfalls of each.
In the world of taxes, knowledge is power, and having a tax professional by your side gives you access to the knowledge you need. So, if you’re overwhelmed by your tax bill and need help exploring IRS payment plans, contact Seattle Legal Services, PLLC today at 206-895-7268.