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IRS Payment Plans

Can You Set Up A Payment Plan With The IRS?

Yes, you can set up a payment plan with the IRS if you cannot pay your tax debt in full by the due date. Setting up a payment plan may help you manage your debt more effectively and avoid more severe consequences, such as tax liens or levies. Below, we will explore the various aspects of setting up a payment plan, including eligibility criteria, types of payment plans, application processes, and considerations to keep in mind.

Understanding Payment Plans

What is a Payment Plan?

A payment plan, also known as an installment agreement, is an arrangement with the IRS to pay your tax liabilities over time. When you enter into a payment plan, you agree to pay a certain amount every month until your debt, including interest and penalties, is paid off.

Eligibility Criteria

To be eligible for a payment plan with the IRS, you generally need to meet the following criteria:

  • For Individuals: Owe $50,000 or less in combined tax, penalties, and interest, and have filed all required tax returns.
  • For Businesses: Owe $25,000 or less in payroll taxes during the current and prior calendar year and have filed all required returns.

If your debts exceed these amounts, you may still qualify for a payment plan but might need to provide more information.

Benefits of a Payment Plan

Setting up a payment plan with the IRS can offer several benefits:

  1. Avoiding Collection Actions: Once in a payment plan, the IRS will generally not initiate collection actions like wage garnishments or bank levies.
  2. Structured Debt Management: Payment plans provide a structured method to pay off debt, making it easier to budget and manage finances.
  3. Potential Reduction in Penalties: While interest continues to accrue, penalties may be reduced or halted once a payment plan is set up.

Types of Payment Plans

Short-Term Payment Plan

  • Duration: Less than 120 days
  • Fees: No setup fee, but interest and penalties will continue to accrue until the balance is paid in full.
  • Application: You can apply online, by phone, mail, or in-person.

Long-Term Payment Plan

  • Duration: More than 120 days
  • Fees: A one-time setup fee applies. The fee depends on how you set up payments — the lowest fees are for direct debit arrangements.
    • Direct Debit installment agreement: $31 setup fee (low-income taxpayers may pay $0)
    • Installment agreement with automatic payroll deductions: $107 setup fee
  • Benefits: Allows for more time to pay and often lower monthly payments.

In-Business Trust Fund Express Installment Agreement

  • Eligibility: Businesses that owe $25,000 or less in payroll taxes.
  • Duration: Payment of debt in full within 24 months.

Steps to Set Up a Payment Plan

Gather Necessary Information

Before you apply for a payment plan, make sure you have:

  • Your most recent tax return(s)
  • A list of all income sources
  • Details of any assets and liabilities
  • Bank account and routing numbers if applying for a Direct Debit installment agreement

Apply for a Payment Plan

  1. Online Application:
    • Visit the IRS website and navigate to the “Payment Plans” section.
    • Use the “Online Payment Agreement” tool to apply.
  2. Phone Application: Call the IRS at 1-800-829-1040 for assistance.
  3. Mail Application: Complete Form 9465 “Installment Agreement Request” and mail it to the IRS.
  4. In-Person Application: Visit a local IRS office.

Payment Methods

  • Direct Debit: Payments are automatically deducted from your bank account. This is often the most convenient and lowest-cost option.
  • Check/Money Order: Mail payments with the IRS form.
  • Payroll Deduction: Arrange for payments directly from your paycheck.
  • Online Payment Agreement: Use direct pay or debit/credit card (note: processing fees may apply).

Finalize the Agreement

Once you have submitted your application and selected a payment method, the IRS will review your application. If approved, you will receive a notification outlining the terms of your payment plan.

Important Considerations

Interest and Penalties

While you’re under a payment plan, the IRS will still charge interest and penalties on the unpaid debt until the balance is fully paid. The interest rate is generally variable and can be compounded daily.

Maintaining Compliance

To stay in compliance with the terms of the payment plan, you must:

  • Make your payments on time and in full.
  • File all required tax returns and pay taxes due during the term of the agreement.

Modifying or Cancelling a Payment Plan

If your financial situation changes, you can request to modify or terminate your payment plan by contacting the IRS. Modifications might include changing the payment amount or method, or cancelling the plan altogether if you're able to pay off the balance sooner than expected.

FAQ Section

Can I renegotiate my monthly payment if my financial situation changes?

Yes, you can request modifications to your existing installment agreement if you experience financial hardship or significant changes in your financial situation. Contact the IRS to discuss potential changes to your plan.

Will establishing a payment plan affect my credit score?

Generally, setting up a payment plan with the IRS will not impact your credit score. However, if a federal tax lien is filed due to non-payment before entering into the agreement, it could negatively affect your credit.

Are there any fees associated with setting up or maintaining a payment plan?

Yes, there are fees for setting up a long-term payment plan depending on the payment method you choose. Low-income taxpayers may qualify for reduced or waived fees.

What happens if I default on my payment plan?

If you miss a payment or otherwise default on your agreement, the IRS may take enforced collection action such as filing a lien or levy. It’s important to contact the IRS immediately if you anticipate any issues with maintaining your payments.

Conclusion

Setting up a payment plan with the IRS allows you to manage your tax debt responsibly and avoid more severe tax collection actions. By understanding the types of plans available, the application process, and compliance requirements, you can effectively manage your obligations and work toward financial stability. For more detailed information or assistance, consulting a tax advisor or visiting the IRS website can provide valuable guidance tailored to your specific situation.