It can be a helpless feeling when you get notice that you owe the Internal Revenue Service (IRS) any sum of money, but it can be especially bleak to be staring at the prospects of writing a large check for the taxes that you owe.
The good news is that the IRS does offer installment plans to individuals and businesses as a means of paying off what you owe.
The bad news, however, is that an installment plan structured by the IRS may not be to the best advantage of the taxpayer.
“Far too many taxpayers are placed into installment agreements that they simply cannot afford to pay,” said tax attorney Steve Powell. “Remember, the government’s priority is to collect as much money from you in the shortest amount of time possible. Individuals not represented by a tax professional may lack knowledge of how IRS installment plans work, and that will be used against them.”
What is an IRS Installment Plan
A payment plan is an agreement with the IRS to pay the taxes you owe within an extended timeframe.
“Installment agreements are based on financial information that is provided to the IRS,” said Powell. “There are several different kinds of installment agreements available to taxpayers.”
When you request a payment plan (called an installment agreement), with certain exceptions, the IRS is generally prohibited from levying and the IRS’s time to collect is suspended or prolonged while an Installment Agreement (IA) is pending.
An IA request is often pending until it can be reviewed, and an IA is established, or the request is withdrawn or rejected.
The IRS Taxpayer Advocate service says that there are two types of payment plans:
- Short-term payment plan: The IRS offers additional time (up to 180 days) to pay in full. It’s not a formal payment option, so there’s no application and no fee, but interest and any penalties continue to accrue until the tax debt is paid in full.
- Long-term payment plan (Installment Agreement): The IRS offers the following formal payment arrangements, also known as installment agreements, when repayment will take more than 180 days.
If you agree to a long-term payment plan (installment agreement) with amounts owed monthly, then you will pay the following fees:
- Pay monthly through direct debit: $31 setup fee (apply online) or $107 setup fee (apply by phone, mail, or in-person).
- Making monthly payments from checking/savings accounts; electronically online or by phone using Electronic Federal Tax Payment System (EFTPS) ; or through check, money order or debit/cred card (fees apply when paying by credit card): $130 setup fee (apply online); or $225 setup fee (apply by phone, mail, or in-person).
For low income taxpayers the direct debit payment option fees may be waived; or there is a $43 setup fee for low income taxpayers, who apply online, by phone, or in-person, which may be reimbursed if certain conditions are met.
In either payment option, accrued penalties and interest will be charged until the balance is paid in full.
How to File for an IRS Installment Plan
IRS installment plans are based on the amount of taxes owed.
Individuals may qualify to apply online if:
- Long-term payment plan (installment agreement): You owe $50,000 or less in combined tax, penalties, and interest, and filed all required returns.
- Short-term payment plan: You owe less than $100,000 in combined tax, penalties, and interest.
Businesses may qualify to apply online if:
- Long-term payment plan (installment agreement): You have filed all required returns and owe $25,000 or less in combined tax, penalties, and interest.
Note that sole proprietors and independent contractors should apply for a payment plan as an individual.
The IRS will use the following forms to determine your current financial condition and set the amount of your monthly payment:
- 433-A: This 6-page “Collection Information Statement for Wage Earners and Self-Employed Individuals” form can be very complex to complete. Attachments will be required to account for the previous three months of income, assets, and expenses.
- 433-B: This 6-page “Collection Information Statement for Businesses” is also very complex to complete with attachments required of three months of information such as bank statements, bills, monthly reports, credit card statements and more. It should be used by individuals with non-W2 income or business assets, liabilities, and expenses.
- 433-F: This form is used to obtain financial information necessary for determining how a wage earner or self-employed individual can satisfy an outstanding tax liability. This 2-page form, a streamlined version of 433-A and 433-B, is typically requested by IRS collections today vs. the 433-A.
“The information you provided and how your financial information is provided to the IRS is critical when requesting an installment plan,” said Powell.
8 Things to Know Before Requesting an Installment Agreement
The IRS Taxpayer Advocate Service says to keep these 8 things in mind before requesting an installment agreement:
1.) The IRS will not consider an installment agreement until you’ve filed all your tax returns.
2.) Once you’ve entered into an agreement, you’ll have to file and pay all future taxes on time, or your agreement may default.
3.) If the IRS agrees to an installment agreement, it will still charge penalties and interest.
4.) Depending on the type of agreement, and the amount of your income, you may be charged a fee to establish an installment agreement.
5.) If the IRS approves an installment agreement, it will generally keep any tax refunds and apply them to your debt.
6.) If the IRS agrees to an installment agreement, it may still file a Notice of Federal Tax Lien. For more information, see Publication 594, The IRS Collection Process.
7.) If you request an installment agreement, the time the request is pending pushes out, or suspends the running of, the initial ten-year collection period.
8.) If the IRS approves an installment agreement, you must make your agreed upon payments on time.
Contact Powell Tax Law today for help in the Austin, Houston, and San Antonio areas in requesting an IRS installment plan.
