Tax Payment Plans: Understanding the Best Plan for You

Andrea Miller
Expert Contributor
Last Updated:
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  • The Fresh Start Program allows taxpayers who owe less than $50,000 to automatically enter an installment agreement.
  • You have up to 72 months to pay your back taxes under this type of agreement and are able to choose a monthly payment you can afford.
  • If you cannot afford to make payments, you can seek relief through other IRS provisions and programs.

If you are unable to pay your past-due balance, you can work with the IRS to arrange a tax payment plan. When you do not pay your tax balance on time, you will be charged late fees and interest. These are both assessed as a percentage of your outstanding taxes.

Even if you know you cannot pay your taxes, filing your return allows you to avoid the expensive failure to file penalty. This penalty consists of 5 percent of your tax balance assessed monthly, compared to a penalty of 0.5 percent of your balance (10 times less) if you file your tax return but do not pay the balance. Talk with the IRS as soon as possible to set up an installment agreement so that you can pay over time if you can afford to do so.

How Do I Apply for an IRS Payment Plan?

You can use the Online Payment Agreement Application tool to apply online, or you can submit Form 9465, Installment Agreement Request, either by mail or at an IRS office. You can also call the IRS to apply by phone by calling 800-829-1040 or the phone number on your bill or notice from the IRS.

To apply online, you must have no more than $50,000 in combined tax debt, penalties, and interest. All your outstanding tax returns must also be filed. If you have more than $50,000 in tax debt, you will need to submit additional financial information so that the IRS can determine whether you qualify for a payment plan.

To complete your application, you must enter the following:

Tax Payment Plans: Understanding the Best Plan for You
  • Your legal name exactly as it appears on your most recent tax return
  • Your address from your most recent tax return
  • Valid e-mail address
  • Filing status
  • Date of birth
  • Your user ID and password if you have already registered for this information on the IRS website
  • Your Social Security Number or Individual Tax ID Number (ITIN) as well as your spouse’s if you are filing jointly

What Are the Costs Associated With a Payment Plan?

If you can pay the entire balance in 120 days or less and enroll in direct debit payments from your checking account or debit card, you will not be charged an installment agreement set-up fee. The setup fee is also waived if you pay by check or money order. However, you will still be responsible for accruing penalties and interest until your account is repaid in full.

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If you need longer than 120 days to pay your taxes but plan to pay with automatic withdrawals from your checking account, the set-up fee is $31 if you apply online and $107 if you apply in person, by mail, or by phone. You will be responsible for any accruing penalties and interest until your account is repaid in full.

For a long-term payment plan of more than 120 days in which you plan to pay without direct debit, the set-up fee is $149 if you apply online or $225 if you apply in person, by phone, or by mail. You will be responsible for accruing penalties and interest until your account is repaid in full.

If you are a low-income taxpayer, the set-up fee is no more than $43 no matter how you apply and choose to make your payments.  You can also be reimbursed for your set-up fee if you meet certain requirements, but you will still be responsible for accruing penalties and interest until your account is repaid in full.

What Is the Fresh Start Program?

This program is designed to make it easier for taxpayers to repay back taxes through an installment agreement. It raises the threshold at which you can qualify for a payment plan without providing financial information from $25,000 to $50,000 and extends the term of the available plan from 60 months to 72 months. To qualify, you must be current on all tax filings. If you are self-employed, you must also be current on quarterly estimated tax payments for the current year.

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How Do I Qualify as a Low-Income Taxpayer?

Complete Form 13844, Application for Reduced User Fee for Installment Agreements.  You will qualify if your adjusted gross income is at or below 250 percent of the annual poverty guidelines established by the U.S. Department of Health and Human Services.  This depends on the size of your family and ranges from $30,150 for an individual to $103,330  for a family of eight living in the 48 continental United States and D.C. Thresholds are higher in Alaska and Hawaii.

If you qualify and also enter a direct debit installment agreement (DDIA), your set-up fee will be returned as long as you abide by the terms of the agreement.

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How Much Will I Have To Pay Each Month?

Paying as much as possible each month will make the installment agreement less costly over time by minimizing your interest and penalties. When you apply for your agreement, the IRS asks you to enter your desired monthly payment. If you enter an amount that is too low or if you do an enter an amount, the default monthly payment will be your past-due balance divided by 72, plus interest and penalties. For example, the base payment for a tax debt of $20,000 would be about $277.78.

Keep in mind that if you have less than $10,000 in tax debt and aim to pay it off within three years, you are not required to make a specific minimum monthly payment as long as you make a payment on time as agreed each month. This is called a guaranteed installment agreement and may be available to taxpayers who owe more than $10,000 if they qualify by providing additional financial information.

If you owe more than $10,000 but less than $25,000, you may qualify for a streamlined installment agreement. This means you will have 72 months to pay and will not need to submit additional financial information to qualify. However, you will be required to make a minimum monthly payment as described above.

Taxpayers who owe between $25,000 and $50,000 must submit Form 9465-FS to provide income and expense information to qualify for a monthly payment plan. If you qualify, the debt can be paid off with a minimum payment over 72 months.

Tax debt of more than $50,000 requires you to submit to a thorough financial review by submitting Form 433-A along with supplemental documentation. This form asks you to detail all bank accounts and lines of credit, real estates, and any other assets as well as employment information including monthly income and monthly living expenses. You may be required to sell assets to pay off some of your balance before becoming eligible for an installment agreement.

Payment amounts are at the discretion of the IRS. When entering your desired payment amount, keep the following guidelines in mind:

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  • Make sure you can afford the payment you choose. If you default on the installment agreement, you will not be eligible for another and you will be subject to other IRS collections actions. It can be difficult to change a payment plan once it is accepted by the IRS.
  • Pay a reasonable amount by considering your monthly income and expenses. The longer it takes you to pay off your tax debt, the more you will pay overall in penalties and interest.
  • Make your first monthly payment immediately. Making your first payment when you submit the application for the installment agreement establishes your good-faith effort to repay your tax debt.

What Happens If My Installment Agreement Application Is Rejected?

In most instances, the IRS will agree to your payment plan, especially if you owe less than $50,000. If your debt is higher, however, your proposed payment plan may be rejected for one of these reasons:

  • The living expenses you listed are considered extravagant beyond the basics required for living. Examples may include private school, high charitable contributions, and large credit card bills for non-necessities.
  • You provided incomplete or false information on your Form 433. This could occur if the IRS thinks you are hiding property or income, especially if it finds these items by doing a public records search.
  • You previously defaulted on an installment agreement with the IRS.

However, you can negotiate if your initial proposal is rejected. You can resubmit the application with a higher monthly payment amount. You can also ask to speak to the supervisor of the person who rejected your offer.

How Do I Avoid Defaulting on an Installment Agreement?

If you do not abide by the terms of your installment agreement, you may be subject to other collection actions from the IRS. Make sure that you manage your account by doing the following:

  • Making at least your minimum monthly payment by the deadline
  • Filing all tax returns on time and paying taxes on time
  • Changing your existing installment agreement if you are unable to pay taxes due on a subsequent return
  • Applying future refunds to your outstanding tax debt
  • Including all required information on your check payments, including name, Social Security Number, address, tax year, return type, and daytime phone number
  • Completing Form 8822, Change of Address if you move to a new home
  • Reviewing your statements to make sure that the information included is correct

If you default on your installment agreement, you may be charged an additional fee to reinstate the payment plan. You will also be subject to accruing penalties and interest. Contact the IRS right away if you receive a notice that indicates you have defaulted on your installment agreement.

Collections actions are not taken in the following situations:

  • When you are enrolled in a payment plan
  • When you have applied for a plan and the IRS is considering your request
  • For 30 days after a plan is rejected or terminated
  • During the appeal period for a rejected or terminated application

What If I Cannot Afford To Make Monthly Payments?

If you do not have any money left over after paying your basic living expenses each month, you do not have money to dedicate to a monthly IRS payment. Options are available for taxpayers who would experience undue hardship from IRS collections actions. Depending on your specific financial situation, these options may include:

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  • Applying for an offer in compromise, in which the IRS agrees to settle your balance for less than the full amount owed. For an offer to be accepted, it must represent the maximum amount the IRS could reasonably expect to collect from you before the statute of limitations on the debt expires.
  • Requesting currently not collectible (CNC) status, which halts IRS collections activity. To qualify, you must provide financial information to show that paying your tax debt would make it impossible to cover basic living expenses. Keep in mind that if you qualify, the IRS will periodically review your status and can resume collections if your financial situation changes. The balance will continue to accrue penalties and interest even when you are granted CNC status.
  • Filing for bankruptcy, which may discharge your tax debts depending on the type of bankruptcy filing and other factors. In general, tax debt is treated as a priority in both Chapter 7 and Chapter 13 bankruptcies, putting the IRS ahead of other creditors when it comes to getting paid back. However, depending on your financial situation tax debt can be fully discharged in Chapter 7 bankruptcy if the following are true:
    • The debt in question is more than three years old.
    • The return in question was filed at least two years ago.
    • Fraud and/or tax evasion was not committed.
    • The tax assessment date was at least 240 days ago.

Get in touch with Solvable if you need help applying for a tax payment plan or if you are unable to pay your past-due taxes. We’ll match you with a vetted company that specializes in debt relief for individuals in your situation.

 

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Andrea Miller
Expert Contributor
Last Updated: