If your tax bill is too hefty for a single payment this year, you have options. The IRS can offer you an installment payment plan to help you spread your payments out over a number of months. While it's stressful to have tax debt of that magnitude, an installment agreement can make it more manageable.
If you aren’t sure you want an installment agreement with the federal government, consider the alternative. If you don’t pay in full or agree to pay over time, the IRS can and will seize your property, place a lien against your property, or garnish your wages.
Now an installment agreement doesn’t sound so bad, does it? Not only that, the government has five different plans to choose from. One of them should fit your situation.
1. Guaranteed Installment Agreement
A guaranteed installment agreement is available if you owe $10,000 or less to the IRS and it’s easy to qualify for the plan. You just need to be sure to meet a few criteria.
- File all past tax returns.
- Your previous five years’ returns may not have been filed or paid late.
- You can’t have used an installment agreement plan within the previous five years.
- You can pay the entire amount within three years or less.
This installment program is labeled “guaranteed” because it's simple enough to apply for yourself online, and you are likely to qualify for this agreement as long as you meet the criteria for your past taxes. Also, you don't need to provide a full financial statement to the Internal Revenue Service.
2. Streamlined Installment Agreement
A streamlined installment agreement can be used for tax debts up to $50,000. Also easy to qualify for, it is similar to the guaranteed installment agreement (at least for now). You can make payments for as long as 72 months (that’s six years), and no financial statement is needed. The IRS Fresh Start Program made this possible.
3. Installment Agreement for Tax Debt over $50,000
Now you owe some serious money. When your tax debt hits $50,000, you are in for a difficult time qualifying for a payment program. The IRS thoroughly reviews your financial situation so you can pay the debt off as early as possible. And this time, you will need to furnish a financial statement.
If you are in such dire straits that you need this payment program, get a tax professional to help you. A tax professional can make sure you get the IRS all the required financial information and fill out a Collection Information Statement (Form 433-F or Form 433-A).
4. Partial Payment Installment Agreement
If for some reason, your tax debt is just not affordable for you, you may, possibly, potentially qualify for a partial payment installment agreement. By that we mean it’s hard to qualify for this one, although there is no set tax debt.
The IRS may allow you to pay part of your debt if you show you can't afford the minimum payment for a guaranteed or streamlined installment payment plan. A partial payment agreement allows you to take longer to repay, and the IRS will evaluate your financial position every two years to see if you are better off. They will include your equity in assets in their calculations.
Unfortunately, the IRS will also file a federal tax lien to guarantee debt collection and protect their interests. It’s possible you will have to sell property in order to pay off your tax debt. This is another situation where a tax professional will be a good partner in setting up the agreement and getting all the right forms and information to the IRS.
5. Offer in Compromise (Settlement Agreement)
While it isn’t impossible, obtaining an offer in compromise can be exceedingly difficult. The IRS would much prefer getting all the money due, but even they recognize the blood and stone metaphor.
Again, the tax debt varies. It’s enough that it is not affordable for you to make payments on other installment agreements. You are likely in even worse shape than someone who qualified for a partial payment installment agreement, so you will be allowed to pay less than what you owe. But you pretty much have to be destitute.
Definitely get help from a tax professional to see if you qualify for an offer in compromise. There is an application process to get through, and it's good to have someone familiar with the process at your back.
About Those Fees, Penalties & Interest
Something you should know about all of these installment payment programs. Because you are late paying off your tax debt, even though you are paying it off, you still accrue interest on the unpaid balance. You still owe penalties for not getting things taken care of on time and in full. And if you use a credit card to pay your installments, you will be paying a fee.
If you pay using automatic payments from your checking account or you pay by check or money order, those fees won’t apply, but depending on the agreement program you may have to pay a one-time set-up fee. By the way, the set-up fee gets higher the more time you need to pay off your tax debt. There is a break if you are low income.
Application for IRS Installment Agreement
The IRS allows you to apply online for most of these installment agreements. In fact, if you do, you might get a set-up fee lowered or waived. If you decide to set it up by phone, snail mail, or in person, it will cost you a bit more for all but the shortest term payment plan (120 days or less).
If you need to change an existing payment plan, either to restructure it or reinstate it, again, you can apply online for a small fee ($10) or by phone, mail, or in-person for a fee that is nine times larger ($89 for 2019). You can only get user fees waived or reimbursed if you have an adjusted gross income for the most recent year at or below 250% of the applicable federal poverty level on or after April 10, 2018.
Once you have an installment agreement in place, it is up to you to pay the minimum monthly payment by the due date each month to keep from defaulting. You must also file all your tax returns on time and pay all future taxes in full and on time. Any future refunds will be applied to your tax debt until it’s paid in full, and yes, you still need to continue making payments even if that happens.
We know that life happens and sometimes people get into sticky situations with the IRS. You do have options for paying off your tax debt, but it’s up to you to get it done. Give us a call. We’ll be happy to help you set one up.