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IRS Payment Plans

Overview of IRS Payment Plans: Types and Benefits

If you’re struggling to pay off your tax balance, you’re not alone. Millions of Americans have trouble paying their tax bill each year. 

You may be going through a financial hardship that limits your ability to pay. You may be so swamped that you forgot to file your tax return on time. Or perhaps you just didn’t stay on top of tax savings throughout the year and are in over your head.

Whatever your reason, it’s common to struggle with tax obligations, especially as they continue to change with shifting tax laws and regulations. One common form of relief: the IRS payment plan. Find out how this option could be right for you.

irs payment plan

What Is an IRS Payment Plan?

The IRS gives taxpayers a few options for tax relief. The most common is the payment plan, also known as an Installment Agreement. This arrangement helps taxpayers pay off their tax balance over time instead of all at once in one lump payment. 

Payment plans allow you to avoid collections from the IRS as long as you comply with the agreement, and you can also avoid additional penalties.

As soon as you realize you’re having trouble paying your tax bill, it’s best to apply for a payment plan right away. You can then limit the fines you’re hit with and stay in good standing with the IRS. 

Types of Tax Payment Plans

You have several payment plan options based on the amount of money you owe and what your financial situation looks like. Let’s walk through the different types of plans the IRS offers:

  • Full payment: This option isn’t really a plan. It just means you pay your tax bill in full when it’s due.
  • Short-term payment plan: These plans are only for individuals and the balance must be paid off within 180 days. 
  • Long-term payment plan: These plans allow you to pay off your balance over a longer period of time, and individuals or businesses can qualify.
  • Guaranteed installment agreement: Under a guaranteed plan, you must owe $10,000 or less and agree to pay it off completely within three years. To qualify, you can’t have any late tax returns or unpaid taxes from the last five years.
  • Streamlined Installment Agreement: streamlined plans apply if your balance is between $10,000 and $50,000. This plan gives you six years, or 72 months, to pay off what you owe. You’re required to do direct debit if you owe over $25,000 with this plan. 
  • Partial payment plan: The partial payment installment agreement (PPIA) is when you make monthly payments on your tax bill but you’re not able to pay off everything you owe within the statute expiration date. This is usually 10 years. The PPIA may allow you to pay less than you owe in the long run.

You must be in filing and payment compliance to qualify for an installment agreement with the IRS. This means you must have all tax returns (or at least all for several years) filed, and be able to show that you are not incurring new tax liabilities (by demonstrating tax withholding, estimated tax payments, etc.). If you are not in compliance, that should be addressed before attempting to establish an installment agreement.

Direct debit is required for some payment plans, but optional for others. If direct debit is setup, the IRS is given the routing and account numbers of a bank account you control, and they automatically debit your monthly payment, rather than you needing to make a manual payment online or mail a check.

Financial statements are required for some payment plans as well. The IRS has their own method of calculating how much you can afford to pay them, based on your finances and what they deem to be “allowable” expenses. Partial payment and long-term installment agreements typically require these financial statements. Preparing a financial statement that is supported by documentation and presents you in the best possible light is a complex process. You should consider having an experienced tax resolution professional like those at McLaud Law P.C. represent you to help ensure you get the best possible resolution from the IRS.

How to Apply for an IRS Payment Plan

Depending on your situation, it may be a simple matter to get set up with a payment plan. Follow these basic steps to get started:

  • Gather your tax information: When you need a payment plan, you’ll need to provide information about your tax return and financial situation to the IRS. Make sure you’ve kept detailed records and can provide the requested information. You will need to create an account if applying online, and you’ll need your bank routing and account information if setting up direct debit.
  • Apply online: Visit the Apply Online for a Payment Plan page for the applicable instructions and links to apply for a payment plan online. Qualifying individuals and businesses can use this page. Eligibility requirements for applying online include:
    • Long-term plan: Owing $50,000 or less
    • Short-term plan: Owing $100,000 or less
    • Long-term plan for businesses: Owing $25,000 or less
  • Use Form 9465: If you’re not eligible to apply online, you’ll use Form 9465, Installment Agreement Request, to apply for a payment plan. You may also need to send Form 433-F/A/B with your financial information. Mail in this documentation based on the IRS address linked to your location. 

It’s not always easy to understand what you’re eligible for and which option is right for you. Also, sending the IRS the wrong information can make your tax problem worse. Always talk through your options with a tax expert who understands the applicable tax laws and can help you navigate paying off your tax debt. McLaud Law P.C. has an experienced team of tax resolution professionals who know the IRS rules and how to prepare your financial statement so it adheres to their guidelines and helps you get the resolution you want.

Payment Plan Interest Rates

While setting up a payment plan could help you avoid most tax penalties, you usually still have to deal with continuing accrual of interest on your balance. The IRS charges interest anytime you have unpaid taxes, and these charges will start on the first missed deadline. 

Interest is an additional fee on top of any penalties or taxes owed. While you’re paying off your balance through an installment agreement, interest will continue to accrue until you get the full bill paid off. 

Note that if you are granted penalty relief, the IRS will automatically reduce any interest related to that penalty, too. However, the IRS doesn’t reduce or eliminate interest on the tax liability “for reasonable cause or as first-time relief.”

For 2024, the underpayment interest rate is 8%.

Other Tax Resolution Options to Consider

Applying for an installment agreement isn’t your only option when you’re having trouble paying taxes. Depending on your financial situation and the amount of taxes owed, you could work out another arrangement with the IRS. Here are other common resolution options:

  • Offer in compromise: This could be the right fit if you’re unable to pay off what you owe but can make an offer based on your financial situation. The IRS will review your assets, liabilities, income, and expenses. They will accept your offer if that amount is all they can reasonably expect to collect from you, or if special circumstances warrant relief. 
  • Temporary collections delay: If you’re dealing with some kind of financial hardship, such as loss of income from a death, you could let the IRS know that you need a temporary delay. They’ll put your account in currently not collectible status. Note that this is only temporary, and you’ll have to pay off your debt when your financial situation gets better.
  • First-time penalty abatement: Some taxpayers may qualify for first-time penalty abatement, wherein the IRS agrees to waive a penalty for failure to file or failure to pay because you have a history of good tax compliance. To receive this abatement, you must have filed and paid on time over the last three years. As the name implies, you only get one of these, so one you use it, you can’t do it again.
  • Innocent spouse relief: In some cases, spouses can apply for innocent spouse relief from the IRS if they weren’t aware their spouse underreported their income or made some other mistake on the couple’s joint tax return. If approved, this relief could remove the innocent spouse’s liability for the other spouse’s tax debt.
  • Tax filing extension: If your main issue is filing your tax return late, you can always ask for an extension. This allows you to have an extra six months to file your return. You’ll still be required to pay any taxes you owe by the initial deadline, though. But an extension can help you avoid the failure to file penalty.

While the IRS offers several forms of tax debt resolution to help taxpayers, you don’t have to navigate these options on your own. Always talk through your relief options with an expert like those at McLaud Law P.C. Your unique situation deserves a customized approach.

Dealing with Common Payment Plan Questions

You may still have questions about payment plans when you’re assessing your options. You never want to do anything that will get you in deeper with the IRS, so it takes careful planning. Here are a few common questions about payment plans with answers:

Can You Appeal a Rejected Payment Plan?

The IRS does reject payment plan applications sometimes. Reasons could be that you can’t afford the payments under the agreement, the monthly payment you requested is too low, or there’s missing information on your documentation or evidence. You could also be dinged if you haven’t complied with tax law in the past. What can you do?

You do have the right to appeal a rejected payment plan. First, contact the IRS using the phone number provided on your IRS notice regarding the rejected plan. Talk to the IRS first about any misunderstanding or issue. You can also fill out Form 9423, Collection Appeal Request, to submit your appeal.

Can I Have More Than One Payment Plan?

Unfortunately, you are not allowed to have more than one payment plan at the same time with the IRS. However, if you’re unable to pay your taxes next year, too, you may be able to include that debt with your current installment agreement. 

What if I default on an IRS payment plan?

You want to do everything you can to avoid defaulting on your payment plan. This could lead to additional penalties and problems with the IRS. If you do default, the IRS will try to collect the money from you and may even file a federal tax lien on your property, which means they have the right to seize your assets to pay off the tax debt. 

This is a situation you want to avoid. Make sure you are able to pay the monthly amount owed or talk to a tax expert about your other tax relief options. 

Are There Setup Fees for Payment Plans?

There is no setup fee for short-term plans for individuals, which are under 180 days. For long-term plans, there’s a $31 setup fee when you pay via automatic withdrawals and apply online. Non-direct debit plans have a $130 setup fee when you apply online. Revising an existing payment plan may cost you $10. 

With long-term plans, you may have to pay a setup fee of up to $225 if you apply by phone, mail, or in person instead of online. You may qualify for low-income discounts to reduce your setup fees. Remember, you still have to pay any accrued penalties and interest on your tax balance in addition to setup fees.

Getting Payment Plan Help from McLaud Law 

Payment plans can be effective tax relief options when you can’t afford to make your full payment in one lump sum at tax time. These agreements allow you to pay what you owe in installments and avoid further collection actions from the IRS in the meantime.

Installment agreements aren’t for everyone, and you have to carefully review eligibility requirements before applying. This takes understanding tax laws, regulations, administrative procedures, and policies to be able to analyze which options will help you get your debt paid off the fastest.

The team at McLaud Law P.C. is ready to help you with tax resolution. Our team can learn all the details of your situation and figure out the best solution forward to help you meet your goals. 

Talk to McLaud Law today to set up a free consultation with a tax attorney or call us at 585-397-7785.

This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.