You’ve had a rough year financially causing you to not pay the required income tax. Maybe, you just got the sums wrong and you didn’t pay enough, totally by accident. Don’t worry; the IRS is not going to kick down your door. Contrary to what you may have heard, the IRS is very versed in handling late taxes and payments that are in tow. Just like you would with a creditor, you will need to make arrangements in your life and work with them and agree to an IRS payment plan. There isn’t a one-size-fits-all approach but there are two main types of plans that you’ll more than likely want to choose from. There are no fancy terms for them; it’s either a short-term or long-term plan. However, if you thought it sounds pretty simple so far, prepare to dive into the nuances.

Why would you need an IRS Payment Plan?

This might seem like a simple question that has an obvious answer, but it’s not. The IRS is a branch of the federal government, it’s not a bank or a money lender. Private financial institutions may not like to, but they will extend you an olive branch. You’ll set up a payment plan and have an extended period of time to pay what you owe. This is because they would rather have a client pay something than nothing at all. The IRS, on the other hand, has limited time as it is the tax revenue branch of the federal government. Your taxes are inherently linked to federal spending, so in effect, if everyone stopped paying what they owe, the gears of government would grind to a halt.   The IRS has to adhere to the statute of limitations regarding outstanding tax debt collection. Therefore, sometimes the only option is to sell your assets as collateral before the clock runs out. But you or the IRS doesn’t want to get to that stage. It’s bad for you, the economy, for other citizens and it’s bad for businesses. So, you need a payment plan so that the money you owe can be accounted for on the national books. It provides a timed solution for everyone involved.  

Costs

  • It costs you nothing to apply, online, phone, mail, or in-person.
  • Any accrued penalties and interest on your IRS payment plan balance will be included in each payment until the debt is cleared.
  • You will need to pay any card fees yourself when using a card to make payments.
  • Long-term: If you can only clear your tax debt in 120 days or more.
 

Option A

  • You make monthly payments straight from your checking account. Also known as a Direct Debit Installment Agreement (DDIA), the IRS will automatically take monthly payments from your account. (This is why it’s vital to negotiate and agree to an IRS payment plan you’re happy with so you’re not in financial worry at the end of each month.)

Option B

  • You make direct debit payments from a checking or savings account, by yourself. You will need to do this through Direct Pay after you’ve agreed to a plan. You can also check your payment history or make a payment manually, on the IRS website. Only individuals can do this.
  • If you would rather make each payment by yourself, you’ll need to use the EFTPS. Payments can be made online or on your smartphone through online banking.
  • You can also make monthly payments via debit or credit cards, checks, or money orders.
 

Costs for Option A

  • Applying online will cost $31.
  • Applying via phone, mail or in-person, will cost $107
  • If you have been approved for Low-Income status, you can apply to have any setup costs waived.
  • However, you will be paying any accrued penalties and IRS payment plan interest with each payment until the debt is paid in full.
 

Costs for Option B

  • Applying online costs $149.
  • Applying via phone, mail or in-person, will cost $225.
  • Even if you have Low-Income status, you will initially be charged $43 but this may be reimbursed if your conditions warrant it.
  • You will be paying any accrued penalties and interest with each payment until the debt is paid in full.
 

Do you qualify to apply online?

There is no set plan which you can choose the IRS will need for you to qualify for either a short-term or long-term plan. The short-term payment plan is only for those with less than $100,000 in tax debt. This includes any penalties and interest. The long-term payment plan is an installment agreement since you will need more than 120 days. If you owe $50,000 or less in tax debt, penalties and interest and have filed all the required returns, then you are eligible for this route and can head to the IRS payment plan login.  

Setting Up Your Installment Agreement

Unless you are readily available to pay the taxes, you owe and set up your installment agreement, you’ll want a bit more time to figure things out. Most individuals will opt for the long-term payment plan. However, unlike the short-term plan, you’re now working with the IRS to pay the taxes you owe while also looking after your personal desires and duties. It’s a good idea to sit down with an accountant to figure out how much money you could be letting go of every month and not be in any kind of financial danger zone. Just as you would when forging a payment plan for a creditor, you’ll want to budget carefully. Find out how much you need for the basics such as food, utilities, clothing and money for transport to get to work. Then you should consider what kind of things you can live without. Maybe you cancel this year’s holiday and instead use that money to pay off the tax debt. Perhaps this year you don’t buy presents at birthdays or Christmas. Just remember that the quicker you pay what you owe, the quicker your life will resume to normal.