Many taxpayers who owe large amounts of back taxes to the IRS set up IRS installment plans in an attempt to clear up their accounts. These installment plans can be a convenient way to pay off back taxes without putting an unnecessary strain on an individual's budget. While an IRS payment plan may seem like a good idea in theory, there are a few situations where signing up for this type of plan may not be the best solution. Here are some of the advantages and disadvantages of IRS installment plans.
What is an IRS Installment Plan?
Basically, an IRS installment plan is a payment agreement between a taxpayer and the IRS. Under this agreement, the taxpayer usually has three to five years to pay the debt in full. For this reason, the IRS generally restricts payment plans to taxpayers who owe less than $25,000 in back taxes, since these individuals are more likely to pay off their debt in the timeframe provided. To sign up for an installment plan, taxpayers can complete Form 9465 along with their income tax return and select the amount they would like to pay each month.
Advantages of an IRS Installment Plan
An IRS payment plan offers several advantages for taxpayers. For one thing, the plan allows them to pay on their back tax debt over a longer period of time, which keeps them from having to come up with a large lump sum payment at once. This is usually why so many people sign up for installment plans, since it makes it easier for them to keep up with their other bills. Another benefit of using an IRS payment plan is that the Failure to Pay penalty is reduced by half for taxpayers who are enrolled in the plan.
Disadvantages of an IRS Installment Plan
Despite its obvious benefits, an IRS installment plan can also pose a few disadvantages. Even though a taxpayer is currently paying on a back debt through an installment plan, he or she is still incurring penalties and interest for each month that the debt is not paid in full. This means that the taxpayer will have paid much more than the original debt by the time the total tax is paid off. In some cases, the IRS may proceed with imposing a tax lien, even if the individual sets up an installment plan.
IRS installment plans make it easier for taxpayers to clear up their back tax debts. Finding out the advantages and disadvantages of IRS installment plans can help a taxpayer decide if this arrangement will work for his or her unique situation.
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