Plenty of people have trouble paying their tax liability. Low-income taxpayers are especially affected badly. If you have unpaid taxes, then a tax attorney may be able to help you negotiate an installment agreement with the IRS to make your tax debt more manageable. Putting in an installment agreement request can be especially helpful for low-income individuals.
What Are Installment Payment Agreements?
Installment payments are exactly what they sound like. Instead of paying your income tax liability and other unpaid taxes all at once, you have an installment payment agreement and make monthly payments. Each IRS payment must be made on time when you enter into an IRS payment agreement.
Many taxpayers find it much easier to pay their taxes by the due date when they work a monthly payment into their monthly budget. IRS installment agreements are designed to help those experiencing financial hardship and finding themselves with insufficient funds when it’s time to file their tax returns.
A taxpayer wanting a short-term payment plan must owe less than $100,000 to the IRS. A taxpayer seeking a long-term payment plan must owe less than $50,000 to the IRS. The total owed includes your outstanding tax balance, interest, and penalty fees.
How Does an Installment Agreement Work?
With an IRS payment agreement, there’s a formula used to determine how much you’ll typically be able to pay every month.
There’s a form you can fill out if you wish to make payments monthly to the IRS. A tax attorney can help you understand and fill out Form 433A. The form will ask about your investments and assets. Your living expenses will also be taken into account when determining how much you can pay each month in your installment payment agreement. The IRS assesses your completed form when determining the minimum payments required in your installment agreement.
However, don’t be surprised if the IRS tries to disallow certain expenses. The IRS’s priority is getting taxpayers to repay the remaining balance of their tax debt. Speak to your attorney if the IRS is demanding unreasonable payment arrangements.
An IRS installment agreement will likely help you out substantially in settling your remaining tax balance by the due date. Installment agreements are designed to be helpful to the taxpayer. However, you don’t have to agree to the payment plan the IRS wants you to agree to. You can consult an attorney to help you negotiate an installment agreement that works better for you and fully takes your financial situation and living expenses into account.
How Long Do You Have To Pay Off Your Tax Liability?
There are different timeframes associated with different installment agreements. How long you have to pay off your balance depends on the size of your federal tax debt. Remember that interest and penalty fees are included when the IRS is calculating how much you owe. Note that not every taxpayer will have their income and expenses taken into account automatically; you may need to contact an attorney if you’re unable to pay the minimum amount based on what you owe.
If You Owe Under $10,000
If your tax debt is under $10,000 total, then you must have it paid off in under three years. There’s no minimum payment amount that you have to pay in each installment, so you can come up with an installment agreement that works best for you. You may also make a partial payment here and there alongside making your monthly payments. Discuss your payment options with a tax attorney who understands IRS payment plans well.
If You Owe $10,000 to $25,000
Needing to repay $10,000 to $25,000 in tax debt means you may qualify for a streamlined payment plan. With these payment agreements, the total amount owed to the IRS is divided by 72 months. The amount you must pay monthly with this installment agreement is based on that divided sum. For example, if your debt is $15,000, then your minimum monthly installment payment may be around $208 before interest and penalties.
If You Owe $25,000 to $50,000
Taxpayers with a debt of $25,000 to $50,000 will typically also have their debt divided by 72 months. So, if you have $30,000 of unpaid taxes, interest, and penalties, then your payments each month will usually come to around $417 at minimum before interest and penalties.
If You Owe Over $50,000
The IRS offers both long-term and short-term payment plans to many taxpayers. Those with over $50,000 of unpaid taxes, interest, and penalty fees often need a long-term plan to fully pay off their liability.
How much your installments will be unique to your situation. The IRS will evaluate your income, expenses, your assets, your bank account or accounts, and the interest rate on your debt.
The IRS will use your financial information to come up with a minimum payment for your installment agreement. You’ll usually be able to pay every month when your IRS installment agreement is fair. However, if you’re unable to pay the amount the IRS is asking for each month, then speak to your attorney. Your attorney may be able to request and negotiate a lower monthly installment payment for you.
Can You Have Your Fees and Monthly Payments Lowered?
Installment agreements are excellent options for taxpayers who don’t have savings and who are on a low income. However, the payments are still sometimes too high for some people based on their income and expenses. Each payment will also have a penalty fee of 0.5%, and there’s a quarterly interest rate you need to pay.
If you’re paying above the minimum, then you can adjust how much you pay at any time, though there may be fees when you do this. Unfortunately, it can be very difficult for you to change the installment agreement if you’re already paying the minimum.
Always speak to your attorney if you’re having trouble sticking to the payment arrangement.
Reducing Your User Fee for Installment Payment Agreements
Although you may not be able to have your monthly payments lowered, there’s a way you may be able to save money upfront.
If you’ll be paying by direct debit, then there’s a one-off fee for installment plan setup. If you set up your plan online, that fee is $31. The fee is $107 if you set up by mail, over the phone, or in person.
For those who aren’t using direct debit, then setting up a plan online will cost you $130. Setting up a non-direct debit payment agreement on the phone, in person, or by mail will cost $225.
Low-income taxpayers may be eligible for a reduced user fee when setting up an installment payment agreement. The user fee may be waived entirely if you agree to make your payments electronically, such as via a direct debit installment agreement. Speak to your attorney about whether or not you’re eligible for a waived or reduced fee when setting up direct debit installment agreements.
A reduced user fee doesn’t lower the amount you pay each month. It simply lowers the amount you must pay to set up your payment agreement. Also, taxpayers who can pay off their tax debt in less than 180 days usually won’t have to pay fees when setting up an installment plan.
Types of Installment Plans You Can Have
There are two types of guaranteed installment agreement. At any time, you may pay off the rest of your tax debt to the IRS in a single installment. Paying your debt in full before your installment plan ends will put an end to your installment payment agreement, and you won’t owe money for any further interest or penalties.
Two types of installment payment agreement are discussed below. Not everyone is eligible for both types of installment agreement.
You must have your unpaid taxes, interest, and penalties paid off within 180 days with a short-term installment payment agreement. There are many payment options available to you, such as sending payments via electronic funds transfer, money order, check, or card. There’s a fee if you send funds by card, as the IRS must pay to process card payments.
You may also be eligible to pay off your remaining income tax, interest, penalties, and any other relevant taxes over a longer period of time with a long-term installment payment agreement.
The interest rate on a long-term installment payment agreement can vary. Once you’ve put in your request for a long-term installment payment agreement and this request is accepted, you can pay each month by check, card, money order, or electronically.
If you wish to pay your monthly installment agreement online or on the phone, then you’ll need to enroll in the Electronic Federal Tax Payment System.
Do you need help creating an installment agreement with the IRS? Contact Seattle Legal Services, PLLC at 206-895-7268 to speak to a qualified tax attorney about setting up an installment agreement. We’ll try to help you set up an installment agreement, fill out forms, and negotiate how much you must pay in your installment payment agreement.