What do you do if you owe the IRS taxes but don’t have the money to pay? Believe it or not, the IRS is not your enemy. You can set up a payment plan and pay what you owe over as many as six years.
It is always best to pay all the tax you owe when it is due—this way, you’ll avoid having to pay interest and penalties. However, because you’re human, you may find yourself with a large tax bill you can’t pay in full (or at all) by April 15.
If you’re in this situation, be sure to file your return on time and pay as much as you can. This effort will keep interest and penalties to a minimum. Never fail to file a return, even if you can’t pay anything — failure to file subjects you to additional IRS penalties.
Next, you should set up a payment plan to pay what you the IRS over time.
What is an IRS payment plan?
With an IRS payment plan, you pay the tax you owe a little at a time over several months or years. There is no reduction in the tax due. You still have to atone for every penny you owe.
You also have to pay interest and penalties on the unpaid balance until fully settled. However, the interest and penalties will go down as you pay down your balance.
When you enter into a payment plan, the IRS usually does not take any collection action against you. Defaulting on your tax payments could incur filing a tax lien on your property or levying your salary or bank accounts.
There are two basic types of payment plans: short-term and long-term.
With a short-term payment plan, you must pay what you owe the IRS in 120 days or less (no more than four months). When you handle your tax debt this fast, you don’t have to pay the IRS a set-up fee.
However, most people use a long-term payment plan. With a long-term plan (also called an installment agreement), you have up to 72 months (6 years) to pay what you owe. A set-up fee goes along with a long-term payment plan.
Applying for a payment plan
IRS payment plans are easy to set up by yourself. There is no need to hire an expensive tax professional to do it for you.
If possible, you should apply online. It is both quicker and cheaper than off-line applications. You can request for a payment plan online if you:
- Have filed your tax returns
- Owe the IRS no more than $50,000 ($100,000 for short-term plans), and
- Can pay off what you owe in 72 monthly payments or less.
Businesses that owe $25,000 or less from the current and prior calendar year can also apply online for a payment plan provided they can pay off what they owe in 24 monthly payments or less. If you are a sole proprietor or independent contractor, apply for a payment plan as an individual, not a business.
To apply online, go to the IRS website. You’ll need to create an account. However, if you previously registered for an Online Payment Agreement, Get Transcript, or an Identity Protection PIN (IP PIN), you should log in with the same user ID and password.
What do I need to apply for an IRS payment plan?
You’ll need to provide the following information:
- Name exactly as it appears on your most recently filed tax return
- Valid e-mail address
- Address from most recently filed tax return
- Date of birth
- Filing status
- Your Social Security Number (and spouse’s if filed jointly) or Individual Tax ID Number (ITIN).
Have a monthly payment amount and due date in mind when you apply. You must pay off what you owe in 72 months or less. Also, decide how you’ll make your payments. You have two options: direct debit or mailing a check to the IRS every month.
With direct debit, your bank automatically sends the money to the IRS. The IRS prefers you to pay by direct debit. If you do, your set-up fee will be much lower: $31 vs. $149 for long-term payments plans not paid through direct debit.
Once you complete your online application, you will receive immediate notification of whether your payment plan has met approval.
If you can’t apply online, you’ll need to complete a paper application and mail it to the IRS. Use Form 946, Installment Agreement Request. If you owe more than $50,000, you’ll also need to file Form 433-F, Collection Information Statement, providing detailed financial information. The set-up fees are higher for offline applications–$107 if you make your payments by direct debit, otherwise $225.
How to manage your payment plan
Once your payment plan is accepted, you must live up to its terms. If you default on your plan, the IRS will take enforcement action against you. To avoid defaulting of your payment plan, make sure you:
- Pay at least your minimum monthly payment when it’s due, and
- File all required tax returns on time and pay all taxes in full and on time.
When you owe the IRS back taxes, your future refunds will be applied to your tax debt until it is paid in full. Even so, you are still required to make all scheduled payments under your payment plan.
If you move, let the IRS know your new address by mailing Form 8822, Change of Address.
If you want to change the terms of your payment plan, you can do so online by signing onto the Online Payment Agreement tool and clicking on the Apply/Revise button. For example, you could give yourself more time to pay what you owe (up to 72 months) or change the date of the month you make your payments.
Alternatives to IRS payment plans
IRS Payment plans are outstanding if you are financially able to pay off all you owe within 72 months. However, if you want to reduce what you owe, a payment plan won’t help you. There are a couple of ways you might be able to reduce your tax debt.
If having to pay your full tax debt will result in substantial economic hardship, you may qualify to reduce your tax bill through an offer in compromise. To do this, you determine how much you can afford to pay using an IRS formula that considers your income and assets. You then submit this offer to the IRS. If your proposal is approved, you have up to 24 months to pay off the reduced amount, satisfying your debt in full. For more details, visit the IRS website at https://www.irs.gov/payments/offer-in-compromise.
Another way you might be able to reduce your tax debt is to file for bankruptcy. Of course, going in this direction is a complex process. You should consult with a bankruptcy attorney to determine if this is a good option for you.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.