If you have outstanding payments or tax debt, it’s important to take steps to resolve the issue as soon as possible. Here’s how to set up a payment plan with the IRS in five easy steps.
The IRS is responsible for ensuring that every taxpayer upholds their end of the collective bargain. If one fails to do so, they are penalized, and a debt is created, in their name, to the government. As time passes, this tax debt can grow. And as it does, the IRS may choose increasingly aggressive means to pursue the individual’s finances and coerce payment.
There are countless reasons why a person might be in debt to the IRS. Even the agency recognizes that most tax debt isn’t nefarious, or malicious. Sometimes it’s a late fee or unpaid penalty, or a case of forgetfulness. Sometimes, a really bad year or two can push the thought of filing your taxes to the back of your mind. While these are understandable reasons, there are consequences nonetheless.
A payment plan, or installment agreement, is the most straightforward (and often only) way to address those consequences, and prevent the IRS from deploying its increasingly aggressive and restrictive collection methods, from liens to levies. But how do you go about paying the IRS back what you owe?
What Do IRS Payment Plans Look Like?
Payments to the IRS can be made either in full, via multiple payments in a short period, or over a long period in the form of monthly installments. All three options are viable, although they have different setup fees.
You can apply for any of these payment plans online, provided your tax debt is underneath certain limits. For example, individual taxpayers with a total combined tax debt of more than $50,000 cannot apply for a long-term payment plan via the Internet. You can still opt for the old-fashioned way, via mail.
How to Set Up a Payment Plan With the IRS
To set up a payment plan with the IRS, you must first identify your three options:
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- If you plan to pay now, you pay nothing in setup fees, but need to pay the full amount from a checking or savings account, via the Electronic Federal Tax Payment System, via check, via money order, or via a debit/credit card.
- If you plan to pay in a handful of lump sums (within 180 days or less), you pay no setup fees, but you continue to accrue penalties and interest until the payments are complete.
- Additionally, if you plan to pay in monthly installments (more than 180 days), you can choose to either pay via Direct Debit (automatic payments) or voluntary payments via Direct Pay, or any of the methods mentioned above.
- Paying via Direct Debit will cost a $31 setup fee online, or a $107 setup fee in-person/via mail/via phone, and you will continue to accrue penalties and interest until the payments are complete.
- Paying via Direct Pay or any other voluntary way will cost $149 in setup fees online, and $225 in setup fees in-person/via mail/via phone. Only a portion of your setup fees will be reimbursed if you meet the criteria for low income.
Let’s go over what it takes to set up a payment plan with the IRS and work your way through the IRS’s payment systems.
Step One: Determine Eligibility and Debt
Taxpayers each have their own tax account with the IRS. You can create your account if you haven’t yet, or request an Account Transcript via the IRS’s website. The IRS’s website may be the easiest way to figure out exactly what you owe. You can also utilize the letters and notices that the IRS will have been sending your way to figure out what you need to pay off.
Determining what everything will cost you is a good first step. Next, you will have to figure out if you are eligible to begin payment, and whether you can do so online. Applying online is always the best choice, because it’s simpler and cheaper. But it isn’t available to everyone.
As mentioned previously, tax debts over $50,000 cannot be paid off online in monthly installments. You can still apply for a short-term payment plan of 180 days or less, if your debt is $100,000 or less.
Businesses have different requirements, and a lower limit. Your overdue balance would have to total $25,000 or less.
Step Two: Consider Your Choices
Aside from the three choices mentioned previously, a fourth (rare) choice requires you to be out of all financial options, and at a point where your debt cannot be paid within a reasonable timeframe (i.e. before it expires), even if you liquidate all non-essential assets and property.
These circumstances would allow you to argue for an offer in compromise, reducing your debt to something you can manage to pay. This is an offer you need to make, meaning the IRS will not suggest how much you should pay. If you offer to pay too little, they will not accept your offer.
It is crucial to tackle an offer in compromise with a professional. There are many nuances to calculating the right offer, and it takes time for the IRS to deliberate these offers. This time will cause your debt to continue to accrue interest.
Step Three: Actualize Your Tax Returns
A crucial step to set up a payment plan with the IRS is being up to date with your tax returns. The IRS generally ignores payment plans if you haven’t gone back and filed all the returns you’ve missed, even if you can’t afford to pay your back taxes.
Always file your returns. A good way to ensure that you’re working through your backlog of returns quickly and efficiently is by contacting an approved tax return preparation service.
Step Four: Gather the Paperwork and Begin
There are a few different documents to work on before you can formally apply for a payment plan. These documents and data include:
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- Your SSN or individual TIN.
- Basic personal information, such as name, date of birth, address from your most recent tax return.
- A valid e-mail address (if applying online).
- Your filing status.
- The amount due.
- Confirmation of your identity (a mobile phone registered to your name and address, an activation code sent via postal mail, or a financial account number tied to your name).
- IRS Form 9465 (Installment Agreement Request).
- IRS Form 433-F (Collection Information Statement) if you owe more than $50,000 and can’t file online.
- IRS Form 13844 (Application for Reduced User Fee for Installment Agreements) if you qualify as low-income.
With this information in hand, you can set up a payment plan with the IRS with the help of a professional, and complete the process.
Step Five: Wait
Before you start making payments, you need to wait for the IRS to approve your request. They’ll take this time to double-check the info, make sure you’re eligible for the agreement you’ve requested, check your tax information, check your tax returns, and so on.
This can take time, especially if you plan to pay in installments. It may take multiple weeks for the IRS to get back to you. The bigger your bill, the longer it takes.
Once they do respond, you will know what to do next. After paying the requested setup fees, you will begin making payments (monthly, in lump sums, or all at once) until your debt is paid. Missing payments is a huge deal.
The IRS can penalize you and make it much harder for you to waive penalties in the future. Your debt will also continue to grow at a faster rate than if you had continued making payments.
Why Set Up a Payment Plan With a Professional?
The process for getting in touch with the IRS is a lengthy one. The last thing you need is missing info. A professional can help you prepare everything you need before you begin contacting the IRS, so you can start paying off your debt as soon as possible. The sooner you set up a payment plan with the IRS, the less money you send the IRS in the long run.
