An IRS monthly payment plan allows taxpayers to repay their past-due tax balances over time. Depending on the amount you owe and other factors, you have various installment plan options to consider. In many cases, the IRS is flexible with taxpayers who owe money as long as they follow established guidelines and make a good faith effort to pay. You can take these steps if you have a larger tax bill than you can currently afford to pay.
The failure to file penalty is 5 percent of your total past-due balance, assessed monthly until your taxes are filed. If you do not file your return by April 15 and the IRS reports that you owe at least $1,000, your balance will grow by $50 each month you do not file. Interest is assessed on the combined balance and penalties.
In contrast, the failure to pay penalty is only 0.5 percent of your balance. Let’s return to the example above. If you file your return on time and owe $1,000, the monthly penalty will be $5 each month. Filing your taxes on time can substantially reduce the overall amount you pay the IRS.
If you can afford to pay a portion of your tax balance, doing so can limit the total amount of penalties and interest you pay. You can arrange an installment agreement for the remaining part of the balance.
However, you should avoid paying your tax balance with a credit card since the interest rate is typically much higher than the rate charged by the IRS (8 to 10% depending on the current federal prime rate). In addition, IRS debt is not reported to the credit bureaus unless you fail to make payments, unlike your credit card balance which is reported to the bureaus monthly.
If you owe both state and federal taxes, Consumer Reports recommends repaying state taxes first. State tax bureaus tend to offer fewer payment options and may be less flexible than the IRS with payment plan options.
If you have not requested a payment extension before and think you may be able to pay within 120 days, you can request an extension without the set-up fees associated with other types of installment agreements. The monthly 0.5% penalty will continue to be assessed along with interest until your balance is fully repaid.
To apply, file IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Tax Return.
If you need more than 120 days to pay your tax balance and owe less than $50,000, you can request an installment agreement of up to 72 months by submitting IRS Form 9465. The set-up fee for your agreement starts at $31 and can be as much as $225 depending on the amount you owe.
This fee is designed to fund the administrative costs of the agreement. For this reason, agreeing to a direct debit installment plan qualifies you for a lower fee. With this type of plan, your monthly payment will be withdrawn directly from your checking account.
Once you enroll in an installment payment agreement, your failure to pay penalty is reduced to 0.25% of the monthly balance. You can also apply online by using the Online Payment Application Tool.
Taxpayers who owe more than $50,000 must submit additional financial information to qualify for an installment agreement. If your tax debt puts you in this category, complete Form 9465, Installment Agreement Request (PDF) and Form 433-F, Collection Information Statement (PDF) and submit them through the mail along with requested documentation of your income, assets, and expenses. Some taxpayers may be asked to sell assets to repay part of the debt before entering a repayment program.
Once you have successfully arranged an installment agreement, you can log in to the online payment tool provided by the IRS to make online payments and edit your monthly payment amount, due date, and type of plan. The new payment amount must meet the minimum payment requirements. You must make a monthly payment of at least $25 or the amount of your balance divided by 72, whichever is greater.
To avoid defaulting on your IRS installment agreement, make each monthly payment on time as agreed and contact the IRS immediately if your financial situation changes and you are no longer able to afford the agreed-upon payment. If you are no longer enrolled in an installment agreement, you will be subject to additional collections actions including a possible tax lien or levy.
The sooner you repay your tax debt, the less you’ll repay over the life of the agreement in penalties and interest. In addition to the penalties described above, you must also pay interest on the balance, interest, and penalties each month. Interest on the full amount is assessed daily until the balance is fully paid.
The IRS interest rate for individual tax balances is determined each quarter and is based on the prime lending rate. If taxes and penalties are reassessed, the interest will be charged on the new balance.
Although you can apply for penalty abatement if you have a reasonable cause for your late tax payment, the IRS does not grant interest abatement. However, you can request reduced interest if an IRS officer is responsible for an unreasonable delay or error. To do so, complete IRS Form 843.
If you need help with a tax balance you can’t afford to pay, Solvable can help. Visit us online and answer a few simple questions about your debt to access referrals to vetted tax debt relief companies. We can help you get on the path to a better financial future.