It is now past Tax Day, and if you're taking stock of their tax liabilities and saying, “Yikes!” - you're not along. Many people are watching as their tax debt keeps growing with interest and penalties and wonder where it all stops.
Do you owe more than you can pay all at once and wonder what to do? Luckily, the IRS offers a variety of payment plans that can help you pay off your tax debt without going completely broke. While your ability to pay is not usually a top concern when the IRS assesses penalties, the agency still provides some avenues to help you get out from under the load.
Before You Consider a Payment Plan
Before you can think about payment plans and other methods of paying your taxes, you need to get a few things done.
- File all your tax returns, including those from years past.
- Remember you must disclose all assets, including cash and bank accounts.
- You cannot get a payment plan if you have adequate cash in checking, savings, money market, retirement accounts, or brokerage accounts to pay the debt.
- You must complete a personal (or business) financial statement.
- The IRS determines the allowable monthly expenses for individuals, and they may not be the same as your actual monthly expenses.
- You must continue to pay until your tax debt is completely paid off.
Consider all these points because they impact whether you qualify for a particular payment plan. The IRS doesn't believe your six streaming services are allowable monthly expenses. You may have to miss the last season of Stranger Things when it finally debuts.
If you don't file or pay your taxes on time (or file an extension by the deadline), the IRS assesses a penalty, a percentage of the amount you owe. Also, every day your tax debt remains unpaid, the balance accrues interest.
Therefore, you should file, even if you cannot pay. It gets one penalty off of your back.
Also, the IRS tends to encourage payment using a credit card or home equity loan because the interest rate is usually lower than the combination of interest and penalties imposed by the agency. Look carefully — the Feds have been raising the prime lending rate, so this trick may not work right now.
If you do obtain an installment agreement through the IRS, you have many options for making your monthly payments.
- Direct debit from your bank account
- Payroll deduction by your employer
- Payment by check or money order
- Payment by the Electronic Federal Tax Payment System (EFTPS)
- Payment by credit card — consider your APR
- Payment by an Online Payment Agreement (OPA)
The IRS charges a $105 user fee for standard installment agreements or payroll deduction agreements. However, if you are low-income, you might be able to reduce that fee with Form 13844 Application for Reduced User Fee for Installment Agreements. You pay $43 in user fees unless you qualify for a low-income reduction.
Types of Installment Agreements
You can choose partial payment, regular installments, or automatic payment agreements.
The partial payment installment agreements help when the IRS cannot obtain full payment by the Collection Statute Expiration Date. The taxpayer has some ability to pay, and the IRS evaluates the taxpayer’s equity to see if it can be used to pay down the tax liabilities.
The IRS expects, but does not require, the taxpayer to use their equity in assets to pay the tax liabilities. However, if the individual has substantial equity, the IRS may consider seizing or levying them in accordance with the Internal Revenue Manual.
A regular installment agreement is only available when your balance exceeds $50,000. You must follow the rules of the Automated Collection System (see below), which offers a three-tiered Customer Information Control System (CICS). The IRS encourages voluntary payment, but that doesn't guarantee it won't pursue a tax levy if needed.
Automatic IRS installment agreements allow taxpayers to make monthly payments using one of three online payment options. Taxpayers self-certify through the online payment application and work out payments without facing an IRS representative in the flesh.
- Pay in full
- Request a short-term extension
- Make monthly payments
If you pay in full within ten days of the due date, you can save a bundle on interest and penalties.
Short-term extensions require no fees, although the penalties and interest continue to build on the balance. A monthly payment plan is pretty self-explanatory.
An automatic installment agreement includes payroll deduction for wage earners. However, before applying, you should ask your employer if they will accept and process the executed agreement. Some employers don't want the added hassle.
If you want to go with payroll deduction, fill out Form 2159 Payroll Deduction Agreement, and hand deliver it to your employer, so the bookkeeper has enough time to prepare.
Direct Debit Installment Agreements take money directly from your checking account. You use it when payroll deduction isn’t practical or if you (gulp) defaulted on a previous agreement. The user fee is $52 and reduces your chances of forgetting to make payments. You can use the free federal tax payment processing tool, the EFTPS.
Each month the IRS takes out a set amount from your account and pays down your tax debt.
Offer in Compromise
OK, you just cannot pay your tax debt. You may get the IRS to agree to an Offer in Compromise.
You agree to pay a specific but substantially lower amount than your tax debt in return for the IRS to consider everything paid in full. You must fill out paperwork, gather documentation, and pay $205 for the privilege of applying.
The IRS only accepts about one-third of offers in compromise. If yours is one of them, you can pay a lump sum or make monthly payments on the reduced amount.
You cannot be in bankruptcy proceedings, and the IRS analyzes your future income, debts, assets, and overall ability to pay your tax before agreeing. If the IRS rejects your offer in compromise, you can appeal within 30 days of the rejection notice. Still, you have to explain exactly why the IRS should reverse its decision.
If you wait too long to appeal, you can submit a new offer after 30 days of the rejection notice.
An Offer in Compromise is suitable for you if you have severe tax debt or face legal problems with the IRS. Also, people on fixed incomes or facing bankruptcy may consider an OIC. If you have significant tax debt that can't be settled by other programs or don't have much in assets to help pay the debt, you should try an OIC.
Talk To Us
A simple installment agreement is easy to set up. If you have any questions or want a shot at an Offer in Compromise, please contact Top Tax Defenders. We can help you find the right solution for your tax problems.