If you can't pay in full after filing your taxes, one of your options involves entering into an installment agreement from the Internal Revenue Service (IRS). Installment agreements are payment plans with the IRS that let you pay off your tax debt over a set timeframe. There are many installment agreement payment options available to taxpayers to settle tax debt. In this article, you'll learn about the different payment plans that can help you wipe out your tax debt.
Written by Attorney Tori Bramble.
Updated August 23, 2021
Finding out that you owe federal taxes and can't afford to pay them in full is stressful. If you can't pay in full after filing your taxes, one of your options involves entering into an installment agreement from the Internal Revenue Service (IRS).
Installment agreements are payment plans with the IRS that let you pay off your tax debt over a set timeframe. There are many installment agreement payment options available to taxpayers to settle tax debt. In this article, you'll learn about IRS payment plans that can help you wipe out your tax debt.
Guaranteed Installment Agreements
If you owe back taxes, a guaranteed installment agreement is the easiest installment plan to get. So long as you meet the basic requirements, this payment plan is guaranteed by law.
To find out if you qualify for this payment plan ask yourself the following:
Are your tax debts $10,000 or less? This amount excludes penalties and interest that the IRS tacks onto back taxes. For example, if you owe $9,000 plus penalties and interest of $2,000 for a total of $11,000, you still qualify for this installment agreement because your principal tax debt is $9,000, which is less than $10,000.
Have you filed and paid all your income tax returns over the last five years? If you haven't, you won't qualify for this installment agreement.
Are you unable to afford to pay your income tax immediately? Even if you can pay your taxes on time, the IRS generally will allow a guaranteed installment agreement.
Do you agree to pay your taxes within 36 months? If you can pay your tax balance off in 36 months or less this may be the payment plan for you.
Do you agree to file all tax returns and pay all returns while you're on the installment agreement? You'll have to get every one of your future tax returns filed on time and pay any outstanding tax balance you may have on them to the IRS while you're on this payment plan.
If you can answer “yes” to each of these questions and you haven’t entered into an installment agreement during the last five years, you’re guaranteed to be approved for a new installment agreement. Be aware that the IRS may file a lien for the term of the installment agreement but it isn't required.
You can request this installment agreement online or apply by phone, in-person, or by mail. To apply by mail, print Form 9465 (Installment Agreement Request), fill it out, and mail your application to the address on the form.
Streamlined Installment Agreements
If you don’t qualify for a guaranteed installment agreement, you may qualify for a streamlined installment agreement. These agreements are for taxpayers who owe $50,000 or less in taxes and have filed all tax returns required for prior years. To qualify, you must also be able to finish making payments in 72 months or less. If you think it's going to take you longer to pay, then this installment agreement will not work for you.
The streamlined installment agreement is available to individuals, businesses, sole proprietors (for income taxes only), and businesses that are no longer operating. It's important to know that once you enter into this payment agreement, the IRS doesn't have to file a federal tax lien, but it may. You'll also be required to pay penalties and interest.
The streamlined installment agreement is divided into three categories based on the balance due.
Tax debt that is $50,000 or less: Keep in mind that if you owe $47,000 plus $5,000 in penalties and interest, you won't be able to get into a streamlined installment agreement because you have $52,000 in total tax debt.
Tax debt of up to $25,000: If you owe less than $25,000 then this tax payment plan may be for you. But, if your tax debt is more than $25,000 and you want to have a chance to qualify, pay down your tax liability to less than this amount. Then you can apply for a streamlined installment agreement.
Tax debt between $25,000 and $50,000: For this installment plan, your tax balance must fall between $25,001 and $50,000 and you’ll have to agree to an IRS payroll deduction or direct debit from your bank account.
Also, if you've defaulted on an installment agreement in the last 12 months, the IRS may require that you fill out and file IRS Form 433, the "Collection Information Statement for Wage Earners and Self-Employed Individuals." Sometimes, the IRS requires this form when a person owes federal income taxes that they can't afford to pay in full.
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If you can't pay your federal taxes and don't qualify for or don’t want to enter into the payment plans discussed so far, you may have more options to pay your taxes over time. No matter which direction you go, remember that applying for an installment agreement doesn't stretch out the time you have to file your tax returns. The IRS still expects you to file your tax return every year and to pay the taxes you owe when they're due. So if you intend to ask for an installment plan, you must file on time and apply for an installment agreement quickly.
Short-Term and Long-Term IRS Installment Agreements
The IRS offers a short-term repayment plan and a long-term repayment plan. Short-term payment plans are available if you owe less than $100,000 in back taxes, including penalties and interest. With this plan, you’ll make an agreement with the IRS by completing an online payment agreement application, but only if you can pay your delinquent taxes in 120 days or less. You can also apply for a short-term payment plan by mail, phone, or in-person if you can pay your tax debt in 180 days or less. The IRS allows you to pay by check, debit card, credit card, money order, or automatic bank draft.
Long-term payment plans are available if you have $50,000 or less in tax debt, including penalties and interest. To qualify, you must be able to pay in full in 72 months or less. If you choose to make your installment payment via direct debit, you can avoid paying additional setup and processing fees. If you apply online, the IRS will charge a setup fee of $149. If you apply in person, by phone, or by mail, you'll be subject to a $225 setup fee. If you are a low-income individual, you'll be charged a $43 setup fee regardless of how you apply. If you choose to pay via credit or debit card, you'll be subject to an additional processing fee as well.
These fees were set on January 1, 2017, but are subject to change. Similar to the short-term plan, long-term payment plans can be paid with a credit or debit card, but a processing fee will be added to your installment payment. Know that with all payment plans, interest on the tax balance you owe will continue to accrue until your balance is paid in full.
How do I apply?
If your tax debt is $50,000 or less, you may be able to apply online to get into an installment agreement. Your payment options and filing requirements vary depending on the amount you owe to the IRS.
If you owe between $25,000 and $50,000, you'll have to enter into a direct debit installment agreement. The IRS will take monthly installment payments from your bank account or with a payroll deduction order. If you want the IRS to collect your monthly payments another way, you can file Form 433-F. The IRS uses the financial information you put on this form to decide how much it thinks you can reasonably afford to pay on your federal income tax debt and if you're eligible for a payment plan.
If you owe more than $50,000, you'll be required to file IRS Form 9465 and Form 433-F. You'll also have to pay an application fee to get on this payment plan. Those who apply online for a short-term agreement and choose to pay via direct debit or payroll deduction will be charged the lowest fees. Low-income applicants can have the fees waived if they apply online for a short-term installment plan. Those applying for a long-term agreement will pay higher fees, especially if they pay by check or in person.
What does the IRS consider a low-income taxpayer for application fee purposes?
You're considered a low-income taxpayer if your adjusted gross income is at or below 250% of the U.S. Department of Health and Human Services poverty guidelines.
Partial Payment Installment Agreement
A partial payment installment agreement (PPIA) is a long-term payment option. PPIAs usually last until the end of the 10-year collection statute. This is the deadline to collect delinquent taxes.
To apply for a PPIA, you must file an IRS Form 433-B to prove that you can't pay the full amount of your tax debt in a payment plan. If accepted, while you're in this plan, the IRS will review your financial situation every two years to determine whether it has changed significantly. If the IRS finds that you've earned more money, you'll receive a notice from the agency telling you that you'll have to make higher monthly payments.
Offer in Compromise with 24-Month Payment Plan
The offer in compromise with a 24-month payment plan is similar to a PPIA but is limited to 24 months. The advantage to this payment plan is that, unlike with a PPIA, the IRS does not periodically review your financial situation. Your monthly payment amount will stay the same for the entire 24 months. If you owe a balance at the end of your payment term, your tax balance will be forgiven.
An IRS payment plan lets you spread out your tax bill when you can't afford to pay it all at once. If you qualify, you can choose to set up a short-term or long-term plan, depending on whether you can afford to pay the full amount to the IRS within 180 days.
Remember that the IRS will add penalties and interest to your tax balance if you set up a payment plan. Knowing which payment plan options that fit your situation can help you get rid of your tax debt and breathe easier.