How to Create a Payment Plan with the IRS for Tax Debts
Setting up an IRS payment plan can help you pay back taxes in installments
By Andra DelMonico, J.D. | Reviewed by Canaan Suitt, J.D. | Last updated on July 31, 2024 Featuring practical insights from contributing attorney Richard S. KestenbaumUse these links to jump to different sections:
- What Are the Types of IRS Payment Plans?
- How Do I Sign up for a Payment Plan With the IRS?
- Does the IRS Charge a Fee to Set up a Payment Plan?
- How Do I Effectively Manage My Payment Plan?
- What Are the Consequences of Falling Behind on Payments?
- Do I Need a Tax Attorney to Negotiate With the IRS?
- Find Experienced Legal Help
Each year, taxpayers file their federal and state tax returns. While many will receive a refund, many others will find out that they have a tax bill that must be paid. This debt amount is called an income tax and is calculated based on a formula that uses your total earnings minus deductions and credits. If the amount owed exceeds what the taxpayer can afford, they may need to request a payment plan to satisfy their state or federal tax debt.
An IRS Payment Plan Can Help You Pay Back Taxes in Installments
Ignoring a tax debt is the worst course of action you can take. The debt will not go away and will only continue to increase as time goes on. The Internal Revenue Service (IRS) will eventually take more aggressive action to collect the debt.
The IRS has ten years from the date the tax was assessed to collect on the debt. This is called the Collection Statute Expiration Date (CSED). One thing to note is that it is from the date the tax is assessed, which is the year you file and not the year of the taxes. So if you fail to file your taxes one year and don’t file them until five years later, the CSED period starts from the later filing date.
Even if you cannot afford to pay your debt in one lump sum in the tax year it is owed, tax payment plan options are available. Agreeing to a payment plan limits the amount of additional penalties and interest you pay on top of the assessed tax amount. Richard Kestenbaum, a tax attorney at Kestenbaum & Mark in Great Neck, New York, explains that taxpayers have several options available to them if they need help paying their tax debt. “Many people qualify for [a payment plan]. They can just call up and get some relief in terms of a payment plan, non-collectible status, or installment plan.”
What Are the Types of IRS Payment Plans?
The IRS offers several payment plans available to taxpayers, allowing you to pick the plan that works best for your financial situation.
When comparing payment plan options, consider the total payment amount, monthly payments, and additional penalties or interest that come with each payment plan. One option is to pay your total tax debt in full immediately. However, this isn’t a payment plan and doesn’t offer any financial relief for those who are struggling to pay their tax debt.
1. Short-Term Payment Plans
A short-term payment plan lasts 180 days or less. It is available to individuals who owe $100,000 or less in combined taxes, penalties, and interest.
2. Long-Term Payment Plans
A long-term payment plan has a repayment period of longer than 180 days. You may also hear long-term plans called an IRS installment agreement. The taxpayer will make monthly payments for up to 72 months until the tax debt is paid off. These repayment plans are available for amounts owed that are $50,000 or less. This amount includes the tax owed plus any penalties and interest. While you can apply for a long-term plan online, you can also request an installment plan by submitting Form 9465.
3. Partial Payment
If your tax debt is more than you can afford, you may be able to negotiate it down. This partial payment will satisfy your tax debt and is called an Offer in Compromise (OIC). This program used to be called the Fresh Start Program. Not everyone will qualify for this OIC program, so you will need to review the requirements before applying, as there is a $205 non-refundable application fee. You may be able to get the fee waived if you qualify as a low-income taxpayer. If you qualify for an OIC agreement, it can be helpful as you won’t have to pay the full tax debt.
How Do I Sign up for a Payment Plan With the IRS?
Taxpayers can submit an installment agreement request online through the IRS.gov website. First, they must create an account with ID.me. You will work through the steps of the Online Payment Agreement tool. You can also apply for a payment plan by mail, in person, or by phone. Before approving your payment delay, the IRS may require you to file a Collection Information Statement (Form 433-F, Form 433-A, or Form 433-B). This form documents your financial status to verify your assets, monthly income, and expenses.
Set yourself up for success when submitting your request by doing some preparation. Review your finances to determine what you can realistically afford. File any outstanding tax returns. Gather any relevant documentation that you may need. Kestenbaum explains that if there is no legal issue or question, taxpayers can fill out the required forms and submit them to the IRS on their own. “Go onto IRS.gov and look under the forms tab for Form 433A, which is the financial statement that the IRS uses to make these kinds of decisions. In many cases, [the decision] involves money, not technical legal issues.”
Does the IRS Charge a Fee to Set up a Payment Plan?
Depending on your repayment plan, you may need to pay a setup fee. The website clearly outlines the terms of each payment plan option when filling out the online application. A setup fee may also be waived if you meet certain requirements. The Electronic Federal Tax Payment System (EFTPS) is free to use, but there could be associated fees depending on your payment type.
No Setup Fees with the “Pay Now” Option
If you choose the “pay now” option, there is no setup fee, and future penalties or interest are not added. You can pay by checking or savings account, check, money order, or debit/credit card. Some payment methods do have payment processing fees.
Fees Associated with a Short-Term Payment Plan
If you choose a short-term payment plan, there is no setup fee. However, there will be penalties and interest added to your tax debt.
Fees Associated with a Long-Term Payment Plan
The IRS charges a $22 setup fee to set up a long-term payment plan with automatic withdrawals. However, low-income applicants may be able to waive this fee. With this type of plan, you will need to connect your checking account for direct debit. This Direct Debit Installment Agreement (DDIA) is required if your balance exceeds $25,000.
If you choose a long-term repayment plan that is non-direct debit, the setup fee increases to $69. For low-income applicants, the setup fee is $43.
Repayment Plan Revisions
The IRS charges a $10 fee for revising your repayment plan. If you meet certain qualifications, you may be able to get the fee reimbursed.
How Do I Effectively Manage My Payment Plan?
When setting up a payment plan, the IRS encourages taxpayers to select automatic direct pay from their bank account, such as a checking or savings account. This automates the payment process and reduces the risk of missing a payment.
The IRS requires direct debit for tax debt balances between $25,000 and $50,000. You can also set up an online account to monitor your payments and the amount owed. If you don’t want to set up direct pay, you can also use a credit card, money order, or check to make payment. You can use the electronic federal tax payment system to make a payment online. While it isn’t advisable, you can also make cash payments at your local tax office.
What Are the Consequences of Falling Behind on Payments?
Falling behind on your tax debt due dates is not a smart idea. Not fulfilling your payment agreement will incur additional penalties, increased interest rates, and fees. If you fail to repay your outstanding tax debt, the IRS may take more aggressive measures to pursue compensation. This could include filing a Notice of Federal Tax Lien and/or an IRS levy action. The IRS can only file a lien against your home if the debt exceeds $5,000. They will then file a lien against the property title. It would then need to pursue foreclosure through the court system.
If you can no longer afford your monthly payment amount, consider requesting a revision of your payment plan. The IRS may ask for documentation of your changed financial situation. However, a revision will prevent you from running afoul of the IRS and keep you on track to repay your tax debt in full.
Kestenbaum explains how he helps clients who seek his representation after defaulting on their payment plan. “We jump into the process and try to pause the collection. The IRS starts doing all kinds of things. We gather the facts and go back to the IRS and say, ‘Our client stopped paying, but here’s why. Let’s reinstate the installment plan’” Whether or not a taxpayer is successful with this approach is dependent on several factors. If you have defaulted on your payment plan, it is best to speak with an attorney in your jurisdiction to discuss the unique factors influencing your situation.
Do I Need a Tax Attorney to Negotiate With the IRS?
While individual taxpayers can handle communicating with the IRS on their own, speaking with a tax lawyer could provide valuable insight. The IRS is a large and imposing government agency. A taxpayer could find strength and advantage in hiring a lawyer to advocate on their behalf. The more complex your tax issues and the greater your tax debt, the more likely you will need a lawyer.
Find Experienced Legal Help
If you cannot afford to pay your tax debt, the best thing to do is be proactive. Ignoring your tax debt will only increase fees, penalties, interest, and fines. This will drive you further into debt and make the situation worse. By requesting a repayment plan, you can gain additional time to repay your debt while avoiding more severe consequences. While you may feel confident about handling simple and small debts on your own, consulting a tax lawyer can provide valuable guidance.
Visit the Super Lawyers directory to find a tax attorney. For more information on these legal issues, see our guide on what is tax law and the penalties for filing taxes late.
What do I do next?
Enter your location below to get connected with a qualified attorney today.Additional Tax Debts and Back Taxes articles
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- Working With the IRS When You Can’t Pay Your Taxes in Full
- Will the IRS Take My House for Owing Back Taxes?
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