Facing a large tax bill can be scary. Figuring out how to handle it can be even more stressful. But if you’re struggling to pay your federal taxes, an installment payment with IRS might be the answer. This arrangement, also known as an installment agreement, lets you pay off your tax debt in smaller monthly payments, rather than one lump sum.
An installment agreement with the IRS offers tax debt relief and gives you some breathing room. It’s a formal agreement, not a “pay what you can, whenever you can” situation. Let’s break down how installment payments with the IRS work, who qualifies, and how to get started.
An installment agreement is a payment plan you set up with the IRS to pay off your combined tax, penalties, and interest. These agreements can help you avoid collection actions like liens or levies. However, an installment agreement requires you to eventually pay the full amount due. If you are a business taxpayer who needs to apply online, IRS online payment agreements can be useful for your business tax as well.
Most individual tax and business taxpayers qualify for an installment agreement with the IRS. You can check your eligibility through the IRS’ online payment agreement tool. You should also have filed all required federal tax returns.
Eligibility also depends on the amount owed. The maximum owed for a short-term payment plan (up to 180 days) is $100,000, while for long-term payment plans (more than 180 days), it is $50,000. Whether you use a savings account or a checking account, the IRS provides electronic federal tax payment systems through various online resources and methods such as Direct Pay, Electronic Federal Tax Payment System, and other online accounts.
The IRS offers a few different types of installment agreements. These cater to a range of needs and income levels, covering various federal tax payment needs.
Setting up an installment agreement is straightforward. There are options based on your preference.
While installment agreements offer flexibility, they come with costs. It’s important to account for these additional expenses upfront.
Plan Type | Maximum Owed | Setup Fees (As of Early 2024 – Always Double-Check with IRS) |
---|---|---|
Short-Term (180 days) | $100,000 | $0 Online, Phone, Mail |
Long-Term (Direct Debit) | $50,000 | $31 Online, $107 Phone/Mail |
Long-Term (Other methods) | $50,000 | $130 Online, $225 Phone/Mail |
Consider other IRS payment options outside of installment plans, especially if you anticipate adjustments to your tax liability, such as through claiming applicable tax credits. The IRS provides resources for taxpayers to determine if they qualify for tax credits and earned income credit, as this can influence the final amount owed.
If the online payment agreement tool doesn’t work for you, submit Form 9465. Low-income taxpayers might qualify for fee waivers. Debit/credit card payments incur processing fees. Interest accrues until the balance is paid. Always verify current fees with the IRS, as they can change. The fees above are from early 2024.
Stay current on payments to avoid penalties for failure-to-pay. These penalties accumulate quickly. Setting up direct debit through a short-term or long-term installment plan simplifies timely payments. This payment method directly transfers funds from a bank account, simplifying tax payments.
After setup, keep up with the agreement terms. View your plan, make changes, or switch to direct debit online.
Be aware, however, you cannot apply an installment agreement that covers multiple different tax liabilities all at once. Each payment agreement must only apply to one type of liability, not multiple ones across the board. It’s recommended that taxpayers should use tax professionals to understand payment options for multiple liabilities.
Life changes, finances shift, and so can installment payment agreements with the IRS. If adjustments are necessary due to financial changes, modifications can be made online through their payment agreement tool.
Fees apply for modifications, whether online or via mail and phone. To gain better insight on claiming available credits, like the Child Tax Credit, or determining how the standard deduction applies, utilize resources for both individual tax and applicable business tax scenarios.
Installment agreements aren’t the only solutions for federal tax debt. Taxpayers sometimes want to avoid installment payments if a tax debt might later disappear due to improper assessment.
Other solutions exist, some which offer avenues for settling without full repayment. Consider other options if an installment plan doesn’t meet your needs. For example, consider claiming tax exemptions and credits before establishing an installment agreement. Certain exempt bonds and government entities like local governments or Indian Tribal Governments, are not subject to the same tax rules as other sources of income.
An offer in compromise (OIC) lets you settle tax debt for less than owed. However, review OIC qualifications first, since it’s not for everyone. You must be current on tax filings, have received at least one tax debt bill, and not have pending bankruptcy. Installment agreement requests can be filed after all your estimated taxes are paid.
If paying taxes would severely hinder your ability to meet basic living expenses, apply for currently not collectible status, or CNC, a temporary postponement of collection.
CNC means you can’t presently pay, but it doesn’t eliminate the debt. Penalties and interest may continue to accumulate. You still need to meet your tax obligations eventually. IRS installment agreements and form 9465, provide methods to address your tax liabilities responsibly.
Dealing with IRS tax debt can be stressful, but an installment payment with IRS offers a way to manage it. Understanding agreement types, eligibility, and costs helps you navigate this process. Proactively addressing your tax situation prevents further problems.
An installment agreement offers breathing room to get your finances back on track. It’s not one-size-fits-all, so consider alternatives like an OIC or currently not collectible status if an installment payment with IRS doesn’t fit your situation. Addressing tax issues clearly brings peace of mind as you work towards resolution.
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