& IRS Payments Plans
Understanding an IRS Installment Agreement
In 2020, the Internal Revenue Service (IRS) reported that it was owed over $114 billion in back taxes, penalties, and interest. If you are one of the millions of Americans that owe money to the IRS, it’s best to get that debt paid as quickly as possible.
The IRS has robust systems in place for contacting individuals and businesses who failed to file a tax return or pay the taxes they owed. First, you might receive a letter in the mail. If you fail to respond to that, the agency could escalate the situation and assign agents to get in contact with you via phone or even in person.
Though owing unpaid taxes is a very serious issue, you have multiple options to address your debts, pay back the money you owe, and repair your relationship with the IRS. An installment agreement is a common solution offered to individuals and businesses that owe taxes. This payment plan approach can make paying a tax debt bill more manageable while also reducing your overall tax liability due to a reduction in penalties and interest. We’ll break down everything you need to know about the program, how to access it, and get out from under that tax debt. One thing is for sure – once this is resolved, you’ll be able to sleep better at night.
Why is it important to pay my taxes on time?
Every year, the IRS publishes dates on which individuals and businesses have to file their taxes, with deadlines following that process to pay any taxes owed. Depending on your financial situation, you could get a tax refund at the end of the year, or you could owe money to the federal government and have to pay that debt off.
The IRS does not take delinquent payment situations lightly. If you have a history of filing your taxes late or failing to make payments, you might not be eligible for an installment agreement or payment plan. While it’s best practice to pay your debt tax owed immediately, removing your eligibility from a program like this could wreak havoc on your financial situation in years to come. Late payments are also subject to interest fees and penalty fees, increasing your tax debt even further.
What is an IRS installment agreement?
An IRS installment agreement is essentially a repayment plan offered by the IRS. Individuals and businesses that owe taxes to the government can use payment plans to navigate the collection process until their debt is paid in full. Often, the process is fairly simple and even allows people to apply online using an installment agreement request.
What are my Installment payment options?
If you do find out that you owe taxes to the Federal Government, you have a few options to clear up that debt. The first, and probably best route if it’s possible for you, is the “pay now” method which allows people to pay their full amount owed online, over the phone, by check, money order, or even a debit or credit card. This route costs nothing in setup fees and ensures you will not incur penalties or interest fees in the future.
If the amount you owe to the IRS is too large to pay back all at once, you can opt for a short-term payment plan or a long-term payment plan rather than a full payment. Keep in mind that during the repayment period, penalties and interest fees will continue to accrue, so it’s always best to pay off the debt as quickly as possible.
Short-Term Monthly Payment Plan
Only individual taxpayers are eligible to sign up for a short-term payment plan. With this option, the total tax debt owed must be paid back in 180 days or less. You can choose to apply by phone, mail, or in-person for a $0 setup fee. If you are applying on behalf of yourself and not your business, you can also apply online with a $0 fee.
After applying and getting approved for this plan, you can pay directly out of your checking or savings account using direct pay if you are repaying an individual tax debt. Businesses and individuals alike can also use the Electronic Federal Tax Payment System (EFTPS) to pay online or by phone. Lastly, there are also options to pay by check, money order, or debit/credit card. Additional fees will be applied if you decide to pay with a card.
Long-Term Payment Plan
A long-term repayment plan, often called an installment agreement, will allow you to make a monthly payment to pay your debt back over a time period greater than 6 months. If you can pay through Direct Debit, which is an automatic payment that will come out of your checking account, you will face lower setup fees. Also known as a Direct Debit Installment Agreement, this option requires a $31 setup fee when applying online or a $107 setup fee when applying by phone, mail, or in-person.
If the above option will not work for your situation, you can use Direct Pay to make a monthly payment directly through your checking or savings account, use the Electronic Federal Tax Payment System to make payments online or by phone, or, make monthly payments by check, money order, or debit/credit card. With any of these options, the setup fee when applying online is $130. If you apply by phone, mail, or in-person, you will pay a fee of $225.
How do I sign up for a payment plan?
As outlined above, there are multiple ways you can apply for a repayment plan. Individuals that owe $50,000 or less in income tax, penalties, and interest are eligible to apply online, as long as they have filed their returns. Businesses can file online as well, but they face stricter requirements; they must owe less than $25,000 in payroll taxes, penalties, and interest to apply online. However, both individuals and businesses can apply via phone, mail, or even in-person. The setup fees when applying online are significantly cheaper than the setup fees you will incur when using any other application method. So, if possible, we recommend applying online.
Interest Rates and Penalty Fees
The IRS is adamant about sending the message that they are not a lending institution. Owing money to the federal government is a big deal, and it comes with hefty consequences. The only repayment option that won’t stack additional costs on your overall debt is the “pay now” option. If you opt for a repayment plan of any kind, penalties and interest fees will accrue during that time, forcing you to pay back even more than the original amount owed.
April 15th is generally tax day, marking the last date for US citizens to not only file their tax returns, but also pay any tax owed. If you fail to pay your tax debt by that date, the amount you owe will begin accruing interest. The interest rate changes quarterly because it uses the federal short-term rate, which can change often, and adds an additional 3% to it. As of Q3 2022, the interest rate is 6% per year, which is up from the 5% rate during the previous quarter.
In addition to interest rates, even if you file your taxes on time, failing to pay back any amount owed will cause you to accrue penalty fees each month. The penalty for failing to pay your tax deb is 0.5% each month, with a cap at the 25% mark. This penalty fee will continue to be added to your tax debt until it is paid in full. However, if you file on time and request an installment agreement, the penalty drops to 0.25% while your installment agreement is active.
If you do not file your taxes on time, you will also face a failure-to-file penalty. This penalty is 5% of the tax you owe, and penalties continue to accrue monthly for each month that your filing is late. No matter your financial situation, the failure-to-file penalty is one of the most avoidable fees you can incur. Even if you know that you cannot pay your tax debt right away, do not put off filing your taxes.
Are businesses eligible for installment agreements?
Yes! Small businesses are eligible for installment agreements if they owe a tax debt to the IRS. There are minor stipulation differences, and the application process might vary slightly, but overall, an individual and a business entity are both able to apply for payment plans.
I’m a low-income taxpayer, does that change anything for me?
If you have an income that is at or below 250% of the federal poverty level, you are considered a low-income taxpayer. Usually, the IRS will identify you as a low-income taxpayer, so if you were not granted that status, but believe you are eligible, you’ll need to submit Form 13844 within 30 days of your installment agreement acceptance letter for the IRS to reconsider your status.
Those identified as low-income taxpayers will not have to pay a user fee as long as they make payments through a Direct Debit Installment Agreement (DDIA). If direct payments are not an option for your situation, you will be reimbursed for the user fee after you have completed your installment agreement in its entirety.
What happens if I miss a payment?
If you have an active installment agreement in place and you fail to make your monthly payment, there is a 30-day grace period. During that period, you can make your monthly payment and keep your installment plan active. However, this grace period does not delay the next month’s payment, and after the 30-day window, the IRS can cancel your installment agreement.
If that action is taken, you will have to convince the IRS to reinstate your installment agreement. However, it is entirely up to the discretion of the agency if they will agree to reinstate your payment plan. If they choose not to, you can face harsh consequences and restrictions, even to the point of bankruptcy.
How can I avoid defaulting on my payment plan?
Just like with any financial undertaking such as a loan, an installment agreement is contractually binding, so it’s important that you avoid defaulting on your payment plan. To ensure you can resolve your balance and pay your tax debt in full, prioritize making your monthly payments on or before their due date.
If you can make payments in excess of the monthly minimum, you will pay back your tax debt faster, reducing the number of fees and penalties you will experience during the life of your installment agreement. In future years, filing your taxes and paying the amount you owe on time is critical. If you do receive a tax refund, it will be applied to the amount you still owe on your payment plan.
What if I can’t pay back my taxes?
If you fail to pay taxes or your installment agreement goes into default due to a missed payment and a lapsed grace period, your problems will escalate. First, you will have to work with the IRS to approve the reinstatement of your plan, which can be denied after defaulting. You might also receive other fees such as a reinstatement fee.
In extreme cases, the IRS could file a federal tax lien, seize your assets, sell them, and use those funds to pay off your debt. Even worse, some individuals are forced to file for bankruptcy if they do not have any assets to rely on for funds. Bankruptcy has far-reaching consequences and can take multiple years to recover from financially, so avoiding this possibility is crucial.
Disadvantages of an IRS Installment Agreement
Think of installment agreements as a tool if you are in a bind; when you cannot pay your taxes back in full, these payment plans offer a path forward. However, they are not without flaws. With the penalties and interest costs that rack up throughout the life of your installment agreement, you’ll end up paying significantly more than you would have if you paid your taxes outright.
Additionally, installment agreements don’t actually offer any protection from the IRS pursuing a federal tax lien and seizing your assets to pay back some of the debt that you owe. Of course, this will depend on the situation and if you are making payments in good faith according to the requirements of your plan.
Changing an Existing Installment Agreement
If you have an installment agreement that is in process, but you need to make changes to it, you can use the Online Payment Agreement Tool to do so. With this tool, you can make changes to many components of your installment agreement.
If you’d like to increase the amount you’re paying, or even decrease it if you’re regularly paying more than the minimum amount required, you can log into the tool and make the changes necessary. Keep in mind that you will not be able to change your payment amount to anything less than the monthly minimum outlined in your installment agreement.
Payment Due Date
If it feels like all your monthly bills come due at the same time, stretching you really thin during one point in the month, changing the dates of some of those bills can help relieve the pressure. Adjusting your monthly due date should be quick and easy as long as the date you are trying to move to is still within the required payment month for your next payment.
Switching from paying via phone or online to a Direct Debit agreement can make maintaining your plan much easier. You won’t have to think about your monthly payment, and instead, the funds will be taken from your account automatically.
Changing banks or getting new card information is a regular occurrence. Be sure to log into the tool to update your information so you don’t experience a missed payment inadvertently.
If your installment agreement defaults, you can navigate the reinstatement process here as well. It is likely that you will have to pay a reinstatement fee after a lapse.
Navigating Tax Debt is Possible
Although it can feel incredibly overwhelming to get an angry letter, call, or even visit from the IRS, owing funds to the agency is not uncommon. If you are experiencing this reality, you are not alone. There are millions of Americans going through the same thing and plenty of resources to help you through it. If you can pay the debt you owe in full, that’s the best option, but if not, get set up with an installment agreement right away.
Ideal Tax is Here to Help
Our team at Ideal Tax has years of experience in this field and we can help make the process as smooth as possible. If you need help understanding your installment agreement, navigating next steps, or even preparing your application for an installment agreement, contact our Tax Consultants. We will evaluate your situation and even help you determine if you’re eligible for the Fresh Start Program.
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