Owing the IRS is never a pleasant situation, but it can be even more taxing when you can’t pay your bill in full. If you don’t pay your balance by the original filing due date, any amount not paid is subject to interest and a monthly late payment penalty. Continued non-payment can also lead to bank levies, liens, wage garnishment, and tax refund offset. Fortunately, the IRS offers various payment plans that can alleviate some of this burden. Understanding how to set up an IRS payment plan and knowing which option is best suited for your situation can provide much-needed relief. This comprehensive guide will walk you through the types of IRS payment plans available, the steps to set one up, as well as the eligibility criteria and associated fees.
Overview of IRS Payment Plans
When taxpayers find themselves unable to pay their tax liabilities in full, they have the option to establish a payment plan with the IRS. These arrangements allow you to pay off your debt over time, thereby avoiding collection actions such as wage garnishments and bank levies. The key to managing tax obligations effectively lies in selecting the right payment plan that aligns with your financial situation.
Importance of Setting Up a Payment Plan
Setting up an IRS payment plan is crucial for several reasons:
- Reducing Penalties. By entering into a payment agreement, you can reduce additional penalties and interest that accrue on unpaid balances. The regular 0.50% late payment penalty fee will now be 0.25% of any unpaid balance.
- Preventing Collection Actions. A payment plan can protect you from aggressive collection measures, providing peace of mind.
- Affording Flexibility. Payment plans allow you to manage your finances better by spreading out payments over time, making it easier to budget for tax obligations.
Types of IRS Payment Plans
The IRS offers several types of payment plans, each designed to meet different financial circumstances. Understanding these options is essential for selecting the most appropriate plan.
Short-Term Payment Plan
A short-term payment plan is ideal for individuals who can pay their tax balance within 180 days. This option is straightforward and doesn’t cost anything to set up.
- Eligibility: Taxpayers must owe less than $100,000 in combined tax, penalties, and interest.
- Setup Fees: There is no setup fee for this plan.
- Payment Flexibility: There are no minimum monthly payment requirements, allowing you to pay what you want as long as it’s paid in full within six months.
Long-Term Payment Plan
If you need more time to pay your tax bill, a long-term payment plan may be the best choice. This option gives you up to 72 months to pay off your balance.
- Eligibility: Taxpayers can qualify if they owe $50,000 or less in tax, penalties, and interest. All required tax returns must also be filed.
- Setup Fees: The fees vary based on the application type and payment method. For direct debit applications, the setup fee is $22 online or $107 via phone, mail, or in person. Other payment methods have a setup fee of $69 or $178 for phone, mail, or in-person applications.
- Minimum Monthly Payment: The minimum payment is typically calculated based on the total balance divided by the agreed payment duration. For example, a $10,000 balance on a 72-month agreement would require monthly payments of approximately $138.89 each.
Guaranteed Installment Agreement
This agreement is designed for those with a tax liability under $10,000. It allows for a structured plan to pay off the debt over three years.
- Eligibility: You must have filed your returns on time for the last five years. Additionally, you must not have entered into an installment agreement during the past five years.
- Setup Fees: Similar to the long-term plan, the fees for setting up a guaranteed installment agreement are $22 for direct debit applications online and $107 for other application methods.
- Minimum Monthly Payment: You must pay off the balance in 36 months (3 years). For a tax balance of $8,000, monthly payments would be around $222.22 each.
Partial Payment Installment Agreement (PPIA)
A partial payment installment agreement is a viable option for those who cannot afford to pay their tax debt in full but still wish to make some payments.
- Eligibility: Taxpayers must owe more than $10,000 and cannot have any unfiled returns or active Offers in Compromise. A Collection Information States (Form 433-F, 433-A or 433-B) must also be submitted.
- Setup Fees: The fees are $107 for direct debit applications and $178 for other payment methods.
- Payment Terms: Payments are based on the taxpayer’s financial situation and can vary significantly.
How to Set Up an IRS Payment Plan
Setting up an IRS payment plan is a relatively straightforward process that can often be completed online. Here’s a step-by-step guide to help you through the application process.
Step 1: Gather Necessary Information
Before starting the application, it’s essential to gather all relevant documents and information, including:
- Your most recent tax return
- Social Security number (SSN) or Individual Tax Identification Number (ITIN)
- Bank account details (account and routing numbers)
Step 2: Create an ID.me Account
To apply online, you’ll need to create an account with ID.me, a secure identity verification service. Have your photo identification ready, such as a driver’s license or passport.
Step 3: Access the Online Application
Visit the IRS website and navigate to the online payment agreement application page. Click on the “Apply/Revise as Individual” button and follow the prompts.
Step 4: Complete the Application
Fill out the required fields, ensuring all information is accurate. Depending on the plan you choose, you may need to pay a setup fee at this stage. If you are a low-income taxpayer, be sure to also complete Form 13844, Application For Reduced User Fee For Installment Agreements. You may be eligible to have your application fee reduced to $43 or completely waived.
Step 5: Await Confirmation
After submitting your application, you will receive a confirmation from the IRS regarding the approval or denial of your payment plan.
Alternative Application Methods
If you prefer not to apply online, you can still set up a payment plan through alternative methods.
Mail Application
You can complete Form 9465, Installment Agreement Request, and send it to the IRS via mail. Ensure you include all necessary documentation.
Phone Application
Taxpayers can also contact the IRS at 800-829-1040 to request a payment plan over the phone. Be prepared to provide your financial information and tax details.
Benefits of Working with a Tax Professional
Although many taxpayers can successfully navigate the IRS payment plan application process independently, there are instances when seeking professional assistance may be beneficial.
Expertise in Tax Matters
Tax professionals possess in-depth knowledge of tax laws and IRS procedures, enabling them to provide guidance tailored to your specific situation. They can help you understand your options and identify the best payment plan for your needs.
Negotiation with the IRS
In cases where taxpayers owe significant amounts, a tax professional can negotiate on your behalf, potentially securing more favorable terms or exploring additional relief options.
Assistance with Documentation
Tax relief companies can assist in gathering the necessary documentation and completing forms accurately, minimizing the risk of errors that could delay your application.
Final Thoughts
Setting up an IRS payment plan can provide a viable solution for taxpayers struggling to meet their tax obligations. By understanding the various types of payment plans available, the steps to set one up, and the associated fees, you can take control of your financial situation. Whether opting for a short-term payment plan, a long-term agreement, or a partial payment installment agreement, it’s essential to assess your financial circumstances and choose the option that best aligns with your needs. Additionally, engaging with a tax professional can offer valuable insights and support throughout the process, ensuring that you navigate the complexities of tax obligations with confidence.