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A large number of taxpayers choose an Installment Agreement payment plan to resolve their back taxes. This IRS plan allows you to pay your back taxes in monthly installments. If you cannot pay your full back taxes in a single lump-sum payment but can pay it back monthly, then an Installment Agreement may be the right plan for you.
There are many types of Installment Agreements the IRS offers. These are:
Each type of Installment Agreement has their own qualifying factors that you need to meet to enter the agreement. Along with these basic requirements, there may be certain other conditions as well.
Guaranteed Installment Agreement – To qualify for a Guaranteed Installment Agreement, your total back taxes amount needs to be $10,000 or less. The total back tax amount is your back taxes due plus penalties and interest.
Streamlined Installment Agreement – To qualify for a Streamlined Installment Agreement, your back taxes need to be up to $25,000 if you are an individual and $50,000 if you are a business.
Online Payment Agreement – If you owe $50,000 or less in back taxes, then you may qualify for an Online Payment Agreement. If you are a business, you may qualify if you owe $25,000 or less.
Partial Payment Installment Agreement – With this plan, you pay only a partial amount of your back taxes due to financial difficulties. The IRS agrees to a partial payment only if you are experiencing financial hardship and cannot afford to pay your full back taxes. To qualify for this plan, negotiations with the IRS may be required.
Non-Streamlined Installment Agreement – This new payment plan was brought into effect in 2020 and has made it easier for those who owe between $50,000 and $250,000 to resolve their back taxes. Previously, the IRS asked for a full and detailed financial disclosure. Now, only a limited financial disclosure is required, and you can also get more time to pay.
When determining how much you can pay each month, the IRS considers your financial capability and the amount of back taxes you owe. You or your tax representative may need to negotiate with the IRS to make them agree with the monthly payments that suit you best.
In an Installment Agreement, because you’ll be paying your back taxes in installments, the IRS charges both interest and penalties each month on the amount you owe.
Penalties – Penalty is charged at 0.5% if you filed your tax return but did not pay your full tax bill. If you did not file your return, then a penalty of 5% is charged. This penalty is charged every month until the return is filed or back taxes are paid.
You may be able to get assistance from certain penalties if you can prove to the IRS that you attempted to file your return or pay your taxes but could not do so due to some sudden occurrence such as a death in the family, sickness, natural disaster, and so forth.
Interest – The IRS charges interest quarterly on the total back tax amount. The interest rate is the federal short-term rate, plus 3%. Moreover, interest compounds daily.
Due to the accruing of penalties and interest, the back taxes amount keeps increasing every day that it remains unpaid. The earlier you enter into a repayment plan, the less you will need to pay in back taxes.
Along with the Installment Agreement, the IRS has other resolution options, which allow you to resolve your back taxes. If your financial situation is such that you can only pay a part of what you owe, you may consider an Offer in Compromise. If you cannot afford to pay any of your back taxes, you may be able to get the Currently Not Collectible status and avoid a lien or levy.
Whatever your financial situation, you can resolve your back taxes and avoid aggressive IRS collection actions that can adversely affect your credit score.
There are a variety of ways to get an IRS Installment Agreement. You can apply online or through the mail.
To apply online, you can use the IRS ‘Apply Online for a Payment Plan.’
Alternatively, you can mail Form 9465, Installment Agreement Request to the IRS to request an Installment Agreement.
Depending upon the time, you take to pay and the amount of back taxes you owe, the plan setup fee differs.
Short-term – If your payment plan is short-term, which means that you will pay back the full back taxes in 120 days or less, then the IRS charges no setup fee. However, interest and penalties will continue to be added to your back taxes until you have paid it in full.
Long-term – The IRS charges a setup fee of $31, if:
If you do not pay through Direct Debit, then the setup fee is $149.
For low-income taxpayers, the setup fee may be lowered to $43 under certain conditions.
In a long-term payment, interest and penalties continue to be added to back taxes.
Even though obtaining an Installment Agreement may look easy, you can get more benefits if you hire a professional tax service. Regardless of the amount you owe, you may be able to reduce the penalties, and in some cases, the total amount you pay in back taxes. The time duration for payment can also be negotiated.
Terms of an Installment Agreement are not fixed and can be negotiated considering the taxpayer’s particular circumstances. Your tax representative can hold discussions with the IRS to negotiate the terms of the agreement to make them more comfortable for you.=
In cases where you can achieve a reduction in back taxes or need to pay a substantial amount in back taxes, hiring a professional can certainly help.
Tax attorneys and enrolled agents are seasoned professionals who routinely deal with the IRS. They have in-depth knowledge of tax laws and the tax code along with years of experience. Most tax services offer a free consultation that you can use to gain a basic understanding of the service and what they can do for you.