You’ve had a rough year financially causing you to not pay the required income tax. Maybe, you just got the sums wrong and you didn’t pay enough, totally by accident. Don’t worry, the IRS is not going to kick down your door. Contrary to what you may have heard, the IRS is very versed in handling late taxes and payments that are in tow. Just like you would with a creditor, you will need to make arrangements in your life and work with them and agree to an irs payment plan. There isn’t a one-size-fits-all approach but there are two main types of plans that you’ll more than likely want to choose from. There are no fancy terms for them, it’s either a short-term or long-term plan. However, if you thought it sounds pretty simple so far, prepare to dive into the nuances.
Why would you need an IRS Payment Plan?
This might seem like a simple question that has an obvious answer, but it’s not. The IRS is a branch of the federal government, it’s not a bank or a money lender. Private financial institutions may not like to, but they will extend you an olive branch. You’ll set up a payment plan and have an extended period of time to pay what you owe. This is because they would rather have a client pay something than nothing at all. The IRS, on the other hand, has limited time as it is the tax revenue branch of the federal government. Your taxes are inherently linked to federal spending, so in effect, if everyone stopped paying what they owe, the gears of government would grind to a halt.
The IRS has to adhere to the statute of limitations regarding outstanding tax debt collection. Therefore, sometimes the only option is to sell your assets as collateral before the clock runs out. But, you or the IRS don’t want to get to that stage. It’s bad for you, the economy, for other citizens and it’s bad for businesses. So, you need a payment plan so that the money you owe can be accounted for on the national books. It provides a timed solution for everyone involved.
What are the types of plans?
There are two main types of plans:
- Short-term: If you can clear your tax debt in 120 days or less
- Only individual taxpayers can apply online for a short-term plan.
- Only individuals may use their checking or savings account to make payments via Direct Pay on the IRS website.
- You can pay online or via smartphone by using the Electronic Federal Tax Payment System. The EFTPS has a voice response system that you can call to make a payment.
- It costs you nothing to apply, online, phone, mail, or in-person.
- Any accrued penalties and interest on your irs payment plan balance will be included in each payment until the debt is cleared.
- You will need to pay any card fees yourself when using a card to make payments.
- Long-term: If you can only clear your tax debt in 120 days or more.
- You make monthly payments straight from your checking account. Also known as a Direct Debit Installment Agreement (DDIA), the IRS will automatically take monthly payments from your account. (This is why it’s vital to negotiate and agree to an irs payment plan you’re happy with so you’re not in financial worry at the end of each month.)
- You make direct debit payments from a checking or savings account, by yourself. You will need to do this through Direct Pay after you’ve agreed to a plan. You can also check your payment history or make a payment manually, on the IRS website. Only individuals can do this.
- If you would rather make each payment by yourself, you’ll need to use the EFTPS. Payments can be made online or on your smartphone through online banking.
- You can also make monthly payments via debit or credit cards, checks, or money orders.
Costs for Option A
- Applying online will cost $31.
- Applying via phone, mail or in-person, will cost $107
- If you have been approved for Low-Income status, you can apply to have any setup costs waived.
- However, you will be paying any accrued penalties and irs payment plan interest with each payment until the debt is paid in full.
Costs for Option B
- Applying online costs $149.
- Applying via phone, mail or in-person, will cost $225.
- Even if you have Low-Income status, you will initially be charged $43 but this may be reimbursed if your conditions warrant it.
- You will be paying any accrued penalties and interest with each payment until the debt is paid in full.
Do you qualify to apply online?
There is no set plan which you can choose. Every case is different but if you’re applying for a long-term plan, the IRS expects you to have formulated a plan which you feel comfortable with. The IRS will need for you to qualify for either a short-term or long-term plan.
The short-term payment plan is only for those with less than $100,000 in tax debt. This includes any penalties and interest.
The long-term payment plan is an installment agreement since you will need more than 120 days. If you owe $50,000 or less in tax debt, penalties and interest and have filed all the required returns, then you are eligible for this route and can head to the irs payment plan login.
Setting Up Your Installment Agreement
Unless you are readily available to pay the taxes you owe and setup your installment agreement, you’ll want a bit more time to figure things out. Most individuals will opt for the long-term payment plan. However, unlike the short-term plan, you’re now working with the IRS to pay the taxes you owe while also looking after your personal desires and duties.
It’s a good idea to sit down with an accountant to figure out how much money you could be letting go of every month and not be in any kind of financial danger zone. Just as you would when forging a payment plan for a creditor, you’ll want to budget carefully. Find out how much you need for the basics such as food, utilities, clothing and money for transport to get to work. Then you should consider what kind of things you can live without. Maybe you cancel this year’s holiday and instead use that money to pay off the tax debt. Perhaps this year you don’t buy presents at birthdays or Christmas. Just remember that the quicker you pay what you owe, the quicker your life will resume to normal.
IRS Payment Plan Forms for 2020
Form 9465 is what you need to fill out for your installment agreement request. The IRS will look over and review your request but don’t be deterred if your first request gets shot down. You are in a negotiation, so fight your corner and only meet an installment agreement that doesn’t put you in financial peril.
It’s also a good idea to research what the statute of limitations is on the collection of your debt. This is so you know when the IRS can no longer chase you for the money you owe and what the IRS will more than likely disagree with regard to your request.
What If You Can’t Pay What You Owe?
The IRS would rather collect something than nothing at all or pressing the collateral collection button. Form 433-A is for the partial payment installment agreement, designed for those that simply cannot pay their tax debt in full. It’s the Collection Information Statement which you use to put forward your case as to why you think you qualify for the PPIA.
You must owe the IRS at least $10,000, including any and all penalties as well as interest. You cannot be in bankruptcy and you cannot have had an offer in compromise accepted by the IRS before. Any and all your assets will be taken into consideration. You must have a good reason for why your assets cannot be liquidated. If the assets wouldn’t sufficiently cover your tax debt, this is a valid reason. If selling your assets would create immense financial difficulty such as being made homeless or without a job, then the IRS will understand. If your assets are jointly owned with a spouse and they are not willing to sell them, then again, this will be taken into consideration.
Which Route Should You Take?
This is where it gets difficult. In an all-too-predictable manner, it depends on your circumstances. If you owe a tax debt, chances are that you still have a lot of that money that you didn’t pay. You may have paid too little, so you ended up with extra money which you probably just left in your bank account. Maybe you forgot to pay and used the money you were going to pay. The circumstances vary but as a general rule of thumb, ask yourself these questions before you make your mind up.
- Are you capable of making it short and sweet? In other words, do you have the funds and the stability in your living standards, to make large payments in less than 3 months?
- Would you rather take more time to get yourself into a financial position, which doesn’t jeopardize your living standards? This might be needed if you’re behind on bill payments, have outstanding medical bills or medical bills in the near future, need to make car payments or paying child support, etc.
- If it’s simply too much, are you willing to sell some of your assets in order to reduce the overall debt? This will allow you to qualify for PPIA, which is not agreed to easily by the IRS. You will have to make some heavy sacrifices but you will be given breathing room in the short and long-term.
You never know what kind of pitch life is going to serve you next. If it’s a curveball, then you may want to apply for a temporary delay in the collection process. This can only be done after you have applied for either a short-term, long-term, or PPIA plan. The IRS will also need you to fill out one or all of the following Collection Information Statement forms; 433-F, 433-A, 433-B. You will also need to provide proof of your current financial status. The IRS will need to know why you are unable to make any form of payment at all, until further in the future. IRS Tax Payment plans impacted by coronavirus are also considered.
Your monthly income, the current value of assets and your monthly expenses will all be studied. A delay from collecting is a big setback for the IRS as they are against the clock. Therefore, any attempt at falsifying your financial status will be met with increased penalties and interest on your tax debt. The IRS may also file a Notice of Federal Tax Lien which will prevent you from selling your assets and protects the government’s interests. Essentially, they will need some kind of safety parachute and it will more than likely be your home, car, other property, or business.
IRS Payment Plans: In Conclusion
|Plan type||Eligibility||Payment options||Costs|
Apply in-person, online, mail or by phone.
$31 ( applying online )
$107 ( applying via phone, mail or in-person )
$149 ( applying online )
$225 ( applying via phone, mail or in-person )
$43 ( Low Income status )
IRS payment plans allow you to quickly grab a hold of what could turn into a runaway train. You and the IRS acknowledge the situation and your circumstances. This allows both parties to work together and resolve the issue of your tax debt. You will be prevented from incurring further penalties and increases in interest. You will also prevent your assets from being used as collateral payment and possible legal action.