Can’t pay your back taxes off in a single lump sum like the IRS expects? If you receive a notice that you owe money on your income taxes, an IRS installment agreement (IA) or short-term payment plan could be the solution you need. It breaks your balance down into a monthly repayment plan, so you can pay off your tax debt in a way that works for your budget. Installment agreements give taxpayers a practical way to pay off their tax bills that often feel completely overwhelming at first.

 

Types of IRS Payment Plan

  • The 120-day plan for taxpayers who owe less than $10k
  • The 6-year plan for taxpayers who owe less than $50k
  • The plan for taxpayers who owe more than $50k
  • The 10-year plan for taxpayers who cannot pay everything
  • Avoiding a Notice of Federal Tax Lien

In the past, using an installment agreement meant that the IRS would apply a Notice of Federal Tax Lien on any property the taxpayer held. However, the Fresh Start Program (FSP) revised these rules. Now, if you owe less than $25,000, the IRS won’t file a Notice of Federal Tax Lien. If you owe more than $25,000, you can avoid the Notice of Federal Tax Lien by agreeing to pay your IA via direct debit or payroll deduction.

 

Things to know before you apply

Before applying for an installment agreement or payment plan, make sure that you can fulfill the requirements of the plan. Review your budget carefully to ensure you can meet the payment requirement by the due date every month. The IRS may fine you for defaulting and you may be required to sign a new agreement. When you apply for reinstatement, the IRS will expect an explanation of why you didn’t meet your obligation. You may also be required to submit to a full review of your finances before they agree to set another agreement up for you.

If you don’t feel like you can pay off your balance to the IRS, then you may want to consider another solution. For example, an Offer in Compromise (OIC) is basically a debt settlement program for back taxes. You can get out of tax debt for a percentage of what you owe.

 

Interest and penalties

Using an Installment Agreement for the payment of tax debt means that you will need to pay the penalties interest imposed by the IRS on your unpaid balance. Usually, the IRS charges a penalty of 0.5% of the total debt amount each month. However, the IRS charges an additional penalty on taxes due that have not yet been filed. Typically, this penalty is 5% of the total amount of unpaid taxes each month, but the IRS can charge a maximum of 25% penalty on unpaid and/or unfiled taxes.

 

Applying for an Installment Agreement

If you owe less than $10,000, regardless of whether you can pay it back within 120 days or after, you can apply for an IA online through the IRS Website. The fees vary based on the plan you want to use, your payment method and how you set the plan up

  1. There’s no setup fee if you choose a short-term payment plan
  2. If you can’t pay off your balance within 120 days and need to set up an IA, the fee varies based on how you choose to pay:
  3. If you sign up for direct debit from your bank account, the fee is $31
  4. If you want to use Direct Pay, EFTPS, check, money order, debit or credit to pay and apply online, then the fee is $149
  5. You can also choose to set up an IA by phone, mail or in-person, but the fees will be higher:
  6. If you plan to use direct debit for a checking or savings account, it costs $107
  7. If you apply for these payment options, the fee is $225

Setting up an installment agreement is more difficult if your debt is higher or you are looking to pay less than what you owe. The financial disclosure the IRS requires is complicated and can be tricky for the average person to complete. A tax debt resolution service can help you complete the disclosures forms correctly to avoid potential issues as you set up your IA.

You can’t use the online application system if you:

  • Owe more than $50,000
  • Want to set up a PPIA
  • Wish to apply for penalty abatement 

 

Making extra payments to the IRS

If you’re currently enrolled in an IRS installment agreement and you come into some extra cash, it’s a good idea to make any extra payment. The IRS allows you to pay off all or just an extra portion of your Installment Plan. Doing so will get you out of tax debt faster and, as a result, minimize interest and penalties.

Make an extra payment on your Installment Agreement online

  1. Go to https://www.irs.gov/payments
  2. Select whether you wish to make the extra payment by “Bank Account (Direct Pay)” or “Debit Card or Credit Card”
  3. Beware you choose to make a payment by credit card, they will add a processing fee for the payment; if possible, you want to avoid this!
  4. From there, click “Make a Payment”
  5. Select “Tax Return or Notice” as the “Reason for Payment”
  6. When selecting “Apply Payment To” choose “1040, 1040A, 1040EZ”
  7. Choose the oldest tax year that you owe for on the “Tax Period for Payment”
  8. Then click “Continue”

From there, simply follow the prompts to receive confirmation that your extra payment has been processed. Make sure to print the confirmation for your records in case there’s any issue in the future.

 

Paying off the full remaining balance on your Installment Agreement ( IA )

 If you plan to pay off the full amount left on your payment plan in one shot, you should call the IRS first. The reason for this is that the amount you owe today may not be the amount you owe on the date you wish to pay it off. You could leave a remaining balance of penalties and fees that got assessed after you checked the balance.

“If you want to pay the remaining balance in full, call the IRS to get the payoff amount,” Dayan advises. “You’ll need to know the date you plan to pay, so the IRS agent can calculate the proper amount of interest and penalties. Then you can make that payment using the same instructions above.”

How to modify an IRS installment agreement

You have a few options if you want to modify an existing agreement with the IRS:

  • Modify your payment amount (as well as due date)
  • Call the IRS at 800-829-1040 to renegotiate directly
  • Work with a certified tax professional to renegotiate for you

If you’ve had a significant change in your financial circumstances, then you may require professional help. This will ensure you get a new payment that will work for your budget.