If you receive an unexpected tax bill that you can’t afford to pay all at once, don’t panic. Read on to learn how to set up a payment plan with the IRS, which can help you manage your debt over time. You can establish a payment plan online, over the phone, or in person. It’s important to file your return on time, even if you can’t pay the full amount, to avoid additional late-filing fees. While interest and penalties will still apply as you make payments, they can be lower than the fees charged by high-interest credit cards. Explore your options and take advantage of the IRS payment plans or other tax debt relief options available to you.
What Does an IRS Payment Plan or Installment Agreement Entail?
An IRS payment plan refers to an arrangement made directly with the agency, allowing you to pay your federal tax bill over a specified period. The IRS provides both short-term and long-term payment plan options to accommodate different needs.
Short-term Payment Plan
A short-term tax payment plan allows taxpayers to settle their tax debt within either 90 or 180 days, offering a more manageable timeframe to clear their obligations.
Long-term Payment Plan
A long-term tax payment plan, also known as an installment agreement, allows taxpayers to make monthly payments over a period of time if they require more than 180 days to pay their tax bill. The specific agreement that is most suitable for you will depend on the amount you owe and the estimated duration of repayment.
By sticking to your agreed-upon plan, the IRS typically does not impose a tax levy or lien. It is important to note that participating in an IRS payment plan does not exempt you from interest and late payment penalties, which will continue to accumulate until the balance is fully paid off.
Who Qualifies for an IRS Payment Plan?
If you meet the following criteria, you can request a short- or long-term payment plan using the IRS’s Online Payment Agreement tool:
Short-term payment plan: You must owe less than $100,000 in combined tax, penalties, and interest; have filed all your tax returns; and be able to pay off your tax debt in either 90 or 180 days or less.
Long-term payment plan: You must owe $50,000 or less in combined tax, penalties, and interest; have filed all your tax returns; and require more than 180 days to settle your tax bill.
If the tool determines that you are ineligible, you may still qualify for a tax installment plan by submitting Form 9465 or contacting the IRS’s main hotline to apply over the phone.
How to Apply for a Payment Plan With the IRS
If you are eligible for a short-term or long-term payment plan, the quickest method to apply is through the IRS’s online payment plan application portal. As previously stated, you can also apply for an IRS payment plan by mail (complete IRS Form 9465) or over the phone (dial the IRS’s primary contact number: 1-800-829-1040).
Applying for an IRS Payment Plan Online
If you have already registered for an online IRS account to obtain a tax transcript or an identity protection PIN, you can use the same user ID and password to access the IRS’s Online Payment Agreement tool. If not, you will need to create an ID.me account to verify your identity, which requires the following information:
- A valid email address and access to your email
- Photo identification (driver’s license, state ID, passport)
- Your Social Security number or individual tax ID number
- A smartphone or webcam for identity verification
- A phone or email for multi-factor authentication
If you need help verifying your information or require accessibility assistance, visit the ID.me help page for further details.
Minimum Monthly Payments for IRS Installment Plans
Generally, with a long-term payment plan, you have the flexibility to select your monthly payment amount based on what you can afford. However, it’s important to choose a payment amount that ensures your debt is paid off within a 72-month period.
What Are the Fees for an IRS Payment Plan?
The cost of an IRS payment plan can vary depending on the specific plan you choose, how you apply, and whether you qualify for a fee reduction. If you are a low-income taxpayer, the IRS may waive the user fee if you agree to have your payments automatically withdrawn from your bank account. If you qualify as a low-income taxpayer but cannot make electronic debit payments, the IRS will refund the user fee once your balance is paid off. In order to be considered a low-income applicant, your adjusted gross income must be at or below 250% of the federal poverty level. You can determine your eligibility by completing IRS Form 13844.
A few other fee-related details to note:
When making payments using a debit or credit card, you will incur a processing fee. Debit card fees typically range from $2 to $4 per payment, while credit card fees can be up to 2% of the payment amount. If your owed balance exceeds $25,000, you must make payments through automatic withdrawals from a bank account, also known as “direct debit.”
How Can I Make Changes to an IRS Payment Plan?
The IRS Online Payment Agreement tool allows you to modify your monthly payment amount, alter the monthly due date, enroll in automatic withdrawals, and reinstate a payment plan if you’ve fallen behind. If your updated monthly plan doesn’t meet IRS requirements, you may need to adjust the payment amount. If you’re unable to afford the monthly payment, you may need to complete Form 9465 and Form 433-F (Collection Information Statement).
Is It Possible to Apply for an IRS Payment Plan Myself?
Yes, you have the option to apply for a payment plan with the IRS on your own without the need to hire a third party. However, if you choose to use a tax-relief company, you may have to grant them power of attorney to act on your behalf in applying for a payment plan.
More About the IRS Payment Plan
An IRS payment plan is an arrangement made with the IRS to pay back taxes over time. If you are unable to pay your tax bill in full when filing your return, a payment plan allows you to make monthly payments until the balance is paid off. There are various payment plans available, each with its own terms and conditions. These plans provide taxpayers with a manageable way to settle their tax liabilities without facing immediate financial hardship.
The three main types of plans include:
- Guaranteed Installment Agreement: If you owe $10,000 or less, the IRS will accept this agreement provided you haven’t filed or paid late in the past five years, commit to making on-time payments going forward, and agree to pay the outstanding amount within three years.
- Partial Payment Installment Agreement: These agreements enable you to settle your tax debt for less than what you owe. To qualify, you must owe over $10,000, have no outstanding tax returns or bankruptcies, and demonstrate an inability to pay the full amount.
- Individual Payment Plan (short-term and long-term): Short-term payment plans last fewer than 120 days, and have no setup fees, but incur interest. Long-term payment plans, on the other hand, extend beyond 120 days and involve setup fees.
What Is the Minimum Monthly Payment on an IRS Installment Agreement?
The amount that you must pay on your payment plan varies with your tax debt:
|
Tax Debt Amount |
Minimum Monthly Payment |
|
$10,000 or less |
No minimum |
|
$10,000 to $25,000 |
Total debt/72 |
|
$25,000 to $50,000 |
Total debt/72 |
|
Over $50,000 |
No minimum |
If you owe $10,000 or less…
If your tax debt is $10,000 or less, the IRS typically grants automatic approval for your payment plan. You have considerable flexibility in establishing the terms of the plan, and as long as it takes you under three years to complete, there is usually no minimum payment requirement. Keep in mind that interest will accrue on your tax debt, so making larger monthly payments is advisable to minimize the interest you’ll need to pay.
If you owe $10,000 to $25,000…
If your tax debt ranges from $10,000 to $25,000, the IRS allows you six years to repay it. A minimum monthly payment is required, but you can choose to pay more if you wish to clear your debt earlier. To calculate the minimum payment, divide your debt by seventy-two (the number of months in six years). Keep in mind that interest will be charged, so making larger payments can help you save money in the long run.
If you owe $25,000 to $50,000…
If your tax debt is $25,000 or more, the IRS will closely monitor your payment plan. You’ll need to submit additional financial information and complete extra forms when applying for the plan. Similar to payment plans for those owing between $10,000 and $25,000, you’ll have six years to complete the plan. The minimum monthly payment is calculated by dividing your outstanding balance by seventy-two (the number of months in six years).
If you owe over $50,000…
If your tax debt exceeds $50,000, the IRS will closely collaborate with you when setting up a payment plan. This process involves scrutinizing detailed financial documents, such as bank and brokerage statements. Since every case is unique, the IRS works directly with taxpayers who owe substantial amounts to create tailored payment plans. Consequently, the repayment period and corresponding minimum payment will vary for each individual.
How to Establish a Payment Plan With the IRS
If you owe taxes to the IRS and cannot pay the full amount upfront, you can apply for a payment plan online. This is a convenient option for those who owe less than $50,000 and want a long-term plan, or owe $100,000 or less and want a short-term plan. The IRS is willing to work with individuals to make the payment process easier and more manageable.
To apply for an IRS payment plan, ensure you have the following information:
- email address
- address from your most recent tax return
- date of birth
- filing status
- Social Security Number or Individual Tax ID Number (ITIN)
- amount of balance due (depending on the agreement type)
To verify your identity, you will need a financial account number, a mobile phone registered in your name, or an activation code received via postal mail (which takes 5 to 10 business days). Apply directly on the IRS website. If you owe more than the maximum amount for online applications, you must contact the IRS directly.
Varieties of Payment Plan Options
For individuals, the IRS offers two types of payment plans: long-term and short-term. Within the long-term category, there are two distinct options – one that includes automatic withdrawals and another that does not.
Short-Term Payment Plan: If your tax bill is under $100,000 and you can pay it off within 120 days, there will be no setup fee for your payment plan. However, interest and penalties will continue to accumulate. You have the option to make automatic payments through your checking account, or you can use a check, debit card, or credit card. Be aware that additional fees may apply when using cards.
Long-Term Payment Plan With Automatic Withdrawals: Long-term payment plans are designed for those owing less than $50,000 in taxes and require payment over a period exceeding 120 days. Setup fees apply to these plans but can be waived for low-income individuals. A fee of $31 is charged for this plan, with payments made via direct debit.
Long-Term Payment Plans With NO Automatic Withdrawals: This plan caters to individuals owing less than $50,000 in taxes and requiring over 120 days for repayment. If you prefer to pay via check, card, or money order instead of direct debit, opt for this plan with a $149 setup fee (rather than $31). Evaluate if the non-direct debit option justifies the additional $118. Low-income earners have a reduced setup fee of $43, which may be waived under specific conditions.
Fees and Interest Payments While on a Payment Plan
An installment plan indicates that you have submitted your tax return but haven’t paid the due amount. As a result, you will face a penalty for late payment, and interest will accrue on the outstanding balance.
Penalties
If you fail to pay the full amount by April 15 and enter into an installment agreement, a 0.5% penalty will be applied to the unpaid balance. For instance, if you owe $1,000, the penalty will be $5.
Additionally, you will be charged 0.25% interest each month on the remaining balance. Suppose you arrange a payment plan of $100 per month on a $1,000 debt. After making the first payment, the outstanding balance is $900, and the interest incurred will be $2.25.
Interest
In addition to penalties, interest will also be charged on any unpaid taxes and penalties. The interest rate is adjusted every three months and is calculated as the federal rate plus 3%. For example, if the federal rate is 2%, the applicable interest rate would be 5%.
Navigating the IRS: Hire a Tax Professional
Dealing with the IRS can be a daunting and stressful experience, but fortunately, numerous tax relief companies are available to assist taxpayers. Here at J&J Tax Resolutions Group, we can help establish payment plans and negotiate tax debt settlements on your behalf. To initiate the process, simply engage the services of a tax relief company and supply the required information. They will take care of tasks such as determining the most suitable payment plan, negotiating a reduced debt settlement, and submitting the necessary paperwork to the IRS.
Navigating how to set up a payment plan with the IRS can be a tricky process, but we’re here to help! If you’re interested in partnering with a tax relief company, set up a consultation with us today.