An unanticipated tax bill can be financially devastating, especially when it looks like you'll need to raise a huge sum of money in a short time.
But don't worry, there's good news. Like monthly credit card payments, you can make payment plans with the IRS to settle your tax debt before they take some aggressive action.
How does an Internal Revenue Service payment plan work?
Suppose you owe the IRS money when you file your tax return. In that case, you have three options:
Pay in full immediately.
Create a short-term payment plan and pay off the debt within 180 days.
Agree to a long-term payment, which must be completed in 72 months.
Assuming you cannot pay off your debt in full immediately, you can work with the IRS to create a plan to help balance your expenses over time.
Regardless of the payment plan, you can expect to accrue penalties and interest on unpaid debts. Short-term plans are usually free to set up, while long-term plans cost money. (As of February 2022, the cost of paying by direct deposit was $31 for an online application and $107 for an application by mail, phone, or in person. The cost is significantly higher if you don't agree to automatic monthly payments.)
Plans are contingent on individuals making punctual payments each month, and your contract may be terminated (with any outstanding balance due immediately) if you fail to make necessary payments.
Am I Qualified For An IRS Payment Plan?
Chances are, you can develop a payment plan with the IRS as an individual and a business. Although you can usually request a payment plan online, there are some limitations. In particular, you will not be able to apply for a repayment plan online if:
You are an individual applying for a long-term payment plan and owe more than $50,000 in taxes, penalties, and interest combined.
You are an individual applying for a short-term payment plan and owe more than $100,000 in taxes, penalties, and interest combined.
You have a business that requires a long-term payment plan, and you owe more than $25,000 in taxes, penalties, and interest combined.
Please note that these are only the limitations of the online application system. You can still apply by mail, phone, or in person if your debts exceed these numbers. For all scenarios, you must have filed all required returns.
Continue To File Your Taxes
Even if you cannot pay what you owe, you'll still have to file a tax return. Failure to do so may lead to additional fines on top of what you will be charged for late payment. Failure to file the tax return on time can add 5% to the outstanding balance each month, up to a maximum penalty of 25%. If what you owe is large, this penalty can make it difficult for you to repay.
Do Not Take Drastic Measures
Just because the money goes to the IRS doesn't mean you have to file for bankruptcy to deal with it. Especially if what you owe is less than $10,000. Many believe that the IRS will take aggressive action immediately, and they have no choice. It's not necessary. The IRS will ask you before you pay and give you a few opportunities to do so. Avoiding these requests will leave them with no choice but to go after your funds, so don't ignore them. Instead, try working with them.
Consider your option before creating an IRS Payment Plan.
Although the cost of setting up a payment plan with the IRS is quite reasonable, the interest and penalties you will be charged during the payment period can be significant. Before agreeing to a payment plan, make sure you have better options.
Pay with a Credit Card: If you can, pay the bill, or at least a large part of it, with a good credit card. Even if you can't pay your entire credit card bill, reducing your debt will make it easier to work with the IRS. Make sure you plan to manage your credit card portion of the debt.
Request a Loan: Getting a low-interest personal loan to pay all of your income tax may be a better option than setting up an IRS payment plan. Interest and penalties rates may be higher and cost more in the long run. Also, a loan company will not have the ability to be as aggressive in seeking repayment.
Request an IRS Installment Payment Plan
If you decide to start a payment plan with the IRS, you can apply through the online portal. You can also call 800-829-4933 (for businesses) or 800-829-1040 (for individuals) or mail the completed installation agreement request form to the IRS address.
You can get an exemption or reduction from certain taxes if you are an individual taxpayer with an AGI (adjusted gross income) at or below 250% of the federal poverty level.
Please note that interest rates, as with your credit card or personal loan, will still apply, so the bulk of your payment will go towards prepayment interest.
Make an Offer-In-Compromise with the IRS
If you owe taxes and continue to file taxes each year, you may qualify for an OIC (Offer-in-Compromise). This will allow you to work with the IRS to reduce the total amount owed and pay it off in one payment. The Internal Revenue Service will determine your ability to pay based on your current job, income, and debts. They will then work with you to pay off your debt appropriately based on your financial situation.
If you are concerned about your ability to pay any amount to the IRS, consider speaking with a licensed tax professional.
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Tiffany Gaskin