An IRS payment plan or installment agreement is a great way for taxpayers to pay off their liability over an extended period. If followed correctly, payment plans can provide financial relief and are an effective option for tax resolution. Read our tips below to learn how to get approved for an IRS payment plan.
What to Know Before Negotiating an IRS Payment Plan
There are some basic things that you should know before you begin the process of obtaining an installment agreement that can be helpful in deciding whether an IRS payment plan is the best option for you.
- Your current tax returns and unfiled past tax returns need to be completely filed and your current Federal Tax Deposits should be paid before you can be considered for an installment Agreement
- You are required to remain tax compliant for the length of the payment plan or you’ll get kicked out of the payment plan. The installment agreement will be null and void.
- All IRS tax refunds will be put towards the balance owed during the term of payment plan.
- All penalties and interests continue on any unpaid liabilities. However, the penalties and interest are less than if you were not in an installment agreement.
- If you’re thinking about terminating your payment plan agreement, remember that there is the possibility of a hefty fine for doing so.
You also need to make sure you are in a confirmed and formal installment agreement. Many times, clients believe they are in a payment plan and continue to make payments monthly and yet a formal payment plan was never completed. When you are formally entered into an installment agreement, the IRS sends you an electronic report called an “Annual Installment Agreement Statement,” every year that tells you things like:
- An itemized list of payments
- A list of any penalties, interests, and other various charges
- The amount that’s due from your ending account balance
Types of Taxes That Can be Resolved with a Payment Plan
It’s always a good idea to discuss any tax controversy with a tax attorney who can help you determine the best option for you and whether you are eligible for a payment plan. However, generally, if you owe liability on any of the types of taxes listed below, you may be eligible to negotiate an IRS payment plan.
1. Delinquent Taxes: A delinquent tax is when you have a current balance due, or a balance that is turned over to the Automated Collection System.
2. Accrued Taxes: Taxes that have yet to be assessed but which are due on returns or undeposited Federal Tax Deposits at the date of contact with the IRS.
3. Current Taxes: Your current taxes included Federal Tax Deposits and amounts that become due after the date of contact.
Options for Making Monthly Installment Payments
A benefit of having an IRS payment plan is there are a variety of ways for you to pay your monthly installments. This means less work for
Simple ways to pay your monthly agreements include:
- Electronic Federal Tax Payment System (EFTPS)
- Direct Debit
- Payroll Deduction
- Credit Card
- Check or money order
- Direct Pay (which is a free service that allows taxpayers to make electronic payments directly to the IRS from their checking or savings accounts)
How the IRS Determines Whether You’re Qualified for a Payment Plan
IRS payment plans are meant for taxpayers who are unable to pay off their balance in full. The installment agreement allows you to pay in monthly installments until your balance is paid off. Payment plans are generally determined based on your CIS or Collection Information Statement, and your supporting documents. A tax attorney can help you figure out which payment plans you qualify for and which is least intrusive, while still meeting the requirements to pay off your liabilities.
Here are some ways that the IRS determines if you’re qualified for a payment plan:
- They consider all of your income and expenses to come up with monthly disposable income (your gross income minus allowable expenses) you have to pay off your liabilities.
- They see if you have any assets that you could use to pay off your liabilities.
- They use info about your finances to determine how long you get to pay. Generally, you can get up to six years, but if you cannot afford to make the minimum payments over time frame, you may qualify for a longer term.
- It’s possible for them to bring in a manager to help reach an agreement.
- If you don’t qualify for a payment plan, the IRS will let you know that your request is pending and recommend a “rejection of the request.” After a rejection, an appeal is possible.
If you have equity in assets that could be used to pay off a significant part of your liabilities, the IRS will consider the equity before allowing an installment agreement unless:
- You’re ill, at an advanced age, or they recognize some other special circumstance.
- The asset is needed for you to make an income, for your health, or for your family’s well-being.
- You qualify for guaranteed or streamlined or Express agreements.
- You apply for a non-streamline agreement on an assessed balance under $250,000 and a revenue officer has not been assigned to your account.
Consequences of Failing to Adhere to Your Payment Plan
If you don’t follow the agreed payment plan, or you purposefully miss payments, there are several consequences. These consequences may include a new user fee, an increase in penalties, a failure to pay penalty, increased interest rates, and even a filing of
Benefits of Getting a Payment Plan
The benefits of an approved IRS payment plan are simple-it allows you to pay off your liability over an extended period amount of time if you’re struggling financially. Obtaining a payment plan doesn’t have to be difficult, and with the help of your tax attorney you can figure out the best kind of plan for your financial needs.