What Is an IRS Payment Plan?
An IRS payment plan is an agreement that gives you an extended period of time to pay off the taxes you owe. You’ll avoid collection actions such as tax liens and tax levies by setting up a plan. The IRS failure-to-pay penalty is 0.5% per month for each month you’re late, up to 25% of the amount you owe, plus interest. The IRS adjusts its interest charges quarterly. They’re always set at the federal short-term rate plus 3%. The interest rate is 3% for individual taxpayers for the fourth quarter of 2021. An IRS installment plan is typically cheaper than paying your taxes with a credit card if you can’t pay your tax debt in full. The average credit card annual percentage rate (APR) was 20.25% as of August 2021. You can set up a short-term payment plan if you can afford to pay off your balance in 180 days or less. Taxpayers who owe less than $100,000 and can pay in 120 days or less may apply for a short-term plan online at IRS.gov/OPA; those who need more time to pay, up to 180 days, must apply by mail or telephone. Otherwise, you can apply for a long-term streamlined payment plan and make monthly installment payments. The maximum repayment period is 72 months.
Who Is Eligible for an IRS Payment Plan?
You’re guaranteed to qualify for an IRS installment agreement if you owe $10,000 or less, and if you (and your spouse if married and filing jointly):
Have filed your tax returns on time for the past five years;Agree to pay your tax debt in full within three years rather than 72 months;Can’t afford to pay the taxes you owe in full; andAren’t in bankruptcy proceedings
You might still qualify by applying online if your tax bill is higher or you need more than three years to pay. Individuals who owe less than $50,000 and businesses that owe less than $25,000 can generally apply for a payment plan online as long as they’ve filed all of their tax returns, but you may be able to apply online even if you owe more. An agreement can usually be set up in just a few minutes, according to the IRS website. You can apply by submitting Form 9465 or by calling the IRS if you’re not eligible to set up a plan online. The IRS will require that you set up automatic monthly payments by direct debit from your bank account if the balance you owe is greater than $25,000. The same rule applies to businesses that owe more than $10,000.
What Are the Fees for an IRS Payment Plan?
Fees also apply if you set up an IRS payment plan. Some fees can be waived, however, if the IRS considers you to be a low-income taxpayer; that is, your if income for the tax year is at or below 250% of the applicable federal poverty level. The FTC recommends carefully reviewing a tax relief company’s fee structure and cancellation policies before hiring one to represent you. A better solution is often to contact the Taxpayer Advocate Service, an independent division of the IRS, for unresolved issues. Only a certified public accountant (CPA), an enrolled agent, or an attorney can represent you before the IRS if you want the assistance of a third party.
Alternatives to an IRS Payment Plan
You can ask the IRS to delay collection if you’re unable to pay any of your tax debt at all. The debt won’t go away if the IRS approves your request, but your account will be reported as “currently not collectible.” Interest and late payments will still continue to accrue. You may also be eligible for an offer in compromise (OIC) in which the IRS agrees to settle your debt for a reduced amount. This isn’t an option if you’re currently in bankruptcy, however. Use the IRS Offer in Compromise Pre-Qualifier screening tool to determine whether this could be an option for you.
