When most people first examine tax relief options, they might have their hopes set on an offer in compromise – or their tax debt settled for less than what they owe. Unfortunately, OICs are more often denied by the IRS than they are accepted. When tax debt becomes too much to manage, an IRS installment agreement might be your best option. Here’s an overview of how IRS installment agreements work.
What Is an IRS Installment Agreement?
An installment agreement is basically an IRS payment plan to pay your tax bill over a set period of time. The installment agreement will bundle all taxes owed if you owe tax for more than a year. That said, you cannot have two installment agreements with the IRS. During this time, the IRS will generally stop levying. Collections are typically ceased or prolonged while the installment agreement is pending until it can be approved or rejected. However, the IRS will typically keep any tax refunds you receive and apply them to your tax bill. If the installment agreement request is rejected, collections will be suspended for 30 days. Every taxpayer has the right to appeal a rejection. In this case, collections will be suspended until a decision is made on the appeal.
What IRS Installment Agreements Are Available?
The IRS offers both short-term and long-term installment agreements. Let’s review the eligibility criteria, terms, and costs for both.
Short-Term Installment Agreement
With a short-term installment agreement, you will need to pay your full tax bill within 180 days or less. This option is available to taxpayers who owe less than $100,000 in combined tax, penalties and interest. To qualify, you must be current on all tax returns. Individual taxpayers, including sole proprietors and independent contractors, can apply online, over the phone, via mail or in person for free. It’s important to note that interest will continue to accrue while you’re making payments. The current interest rate is 8% per year, compounded daily. Some penalties will also still apply.
In general, the IRS will ask how much you can afford to pay each month. Once a monthly payment is finalized, payments can be made through automatic bank account withdrawals, also known as a Direct Debit installment agreement. You can also make non-automated payments online or by phone, or via check, money order, or a debit or credit card. Payments made with debit or credit cards will also be charged with a processing fee. Debit card processing fees are about $2-4 per payment while credit card processing fees can be up to 2% of the payment. You can review your installment agreement details through your online IRS account. You can also make some changes to your agreement online including your monthly payment, monthly due date, bank information, and more.
Long-Term Installment Agreement
With a long-term installment agreement, you can pay your full tax bill in over 180 days. This option is available to taxpayers who owe less than $50,000 in combined tax, penalties and interest. To qualify, you must be current on all tax returns. Individual taxpayers, including sole proprietors and independent contractors, can apply online, over the phone, via mail or in person for free. It’s important to note that interest will continue to accrue while you’re making payments. The current interest rate is 8% per year, compounded daily. Some penalties will also still apply.
The fees for a long-term installment agreement are more substantial. If you want to pay monthly through automatic withdrawals, there is a $31 online setup fee, or a $107 setup fee to apply by phone, mail or in person. Low-income taxpayers might be able to get this fee waived. If you want to make monthly non-automated payments, you will need to pay a $130 online set up ($43 for low-income taxpayers), or $225 to apply by phone, mail or in person. There is also a $10 fee to revise an existing installment plan or to reinstate after defaulting. This fee may be reimbursed for low-income taxpayers.
Businesses are also eligible for long-term installment agreements if they are current on all tax returns and owe $25,000 or less in combined tax, interest and penalties. The same setup fees apply to businesses.
For debt less than $50,000, you will typically have a maximum of 72 months to pay off your tax bill. Your minimum payment can be found by taking your tax balance and dividing it by 72 months. If you find that you won’t be able to pay this calculated amount each month, you’ll need to complete Form 433-F, Collection Information Statement, which obtains your current financial information to determine how to pay your tax bill.
For debt greater than $50,000, you will usually need to submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, which obtains your current financial information to determine how to pay your tax bill. The IRS will also examine any meaningful assets you have that can be sold to pay down your balance and then set up an installment agreement.
Tax Help for Those Seeking an Installment Agreement
If you know you won’t qualify for tax debt settlement, an IRS installment agreement may be your best option to help manage your tax debt. An IRS installment agreement can truly be helpful to many taxpayers struggling with their tax debt. The most important thing to remember is to always make your installment agreement payment. If you default on your agreement, it may be terminated, and the IRS may begin enforcement actions. Be sure the installment agreement terms are viable for your own financial situation. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt. If you need tax help, contact us for a free, no-obligation tax consultation today.