Whether you have back taxes or you owe more than expected, you likely need some help paying your tax bill. One of the easiest forms of tax relief is an installment plan. The Internal Revenue Service is often willing to accept regular payments. By making an installment agreement, you show the IRS that you intend to pay your taxes. This demonstrates good faith, which can help prevent the IRS from placing levies or liens.
Everyone’s circumstances are different, and so are the IRS’ options for tax payment arrangements. Read on to learn how to request, set up, and customize an installment plan with the IRS.
How an IRS Payment plan Works
As with installment debt (e.g. a mortgage or auto loan), you will agree to make a set number of monthly payments. Interest and fees may be added to your overall balance. However, as long as you keep up your end of the agreement, the IRS typically won’t pursue any other remedies to collect your taxes.
If you default on the agreement, the IRS may place a levy, which can result in wage garnishment or account seizure.
Generally, though, the IRS is willing to accept installment agreements, as they’d rather have you directly pay the bill.
Types of IRS Installment plans
Short-term payment plans
Short-term plans are resolved within 120 days (about 4 months). If you owe less than $100,000 in taxes (plus penalties and interest), this option can be very helpful. Short-term payment arrangements are free to set up. You can schedule recurring automatic payments or simply make your monthly payment amount via check, money order, or debit/credit card.
If you need a bit more time, the IRS will often extend the payment period to 180 days (6 months).
Long-term payment plans
Long-term plans last longer than 120 days. The exact timeframe will depend on the total amount you owe and how much you wish to.
Although you have more time to pay, your maximum debt is lower than the short-term option. You cannot owe more than $50,000 in combined tax, interest, and penalties.
How Much Does It Cost To Set Up a Payment Plan?
If you can’t pay your tax bill in full, an installment agreement is your best option. The tradeoff is that you will end up paying more in penalties and interest.
Also, if you need more than 180 days to pay, there will be a setup fee. For long-term payment arrangements, you can pay via two methods. Here are the fees for each one:
Method A: Automatic Withdrawals
$31 to apply online
$107 to apply via phone, mail, or in-person
Method B: Another Payment Method
$149 to apply online
$225 to apply via phone, mail, or in-person
You may be able to waive the fees for Method A or reduce them to $43 for Method B if you qualify as low-income. That typically means your adjusted gross income is less than or equal to 250% of the federal poverty level. This changes every year, so check the latest threshold to see if you can avoid or lower your application fees.
If you’re not able to use Method A, the IRS may agree to reimburse the application fee once you pay off your tax debt.
Which Payment Methods Can I Use In An IRS Installment Agreement?
The IRS prefers taxpayers to set up automatic withdrawals from a bank account. So, the application fee for a long-term payment plan is lowest for that method. However, you have options:
- Debit Card: For a payment card linked to your checking or savings account, you can set up automatic withdrawals or simply make a payment each month. There is a processing fee of about $2-4 per payment.
- Credit Card: You can also set up automatic withdrawals or make manual payments with a credit card (i.e. a revolving credit account). The processing fee is 2% of the payment amount.
- Check or Money Order: You may mail a check or money order to the IRS. Be sure to mail it in time to reach the IRS by your monthly deadline.
Note: If you owe more than $25,000, your payments must be done via automatic withdrawals. If you owe more than $50,000, your payment arrangement must be short-term (typically 120 days, although you can request an extension to 180 days).
How Do I Apply For An IRS Installment Arrangement?
To apply for a tax debt payment plan, contact the IRS via phone, mail, in-person, or online. The latter is the easiest method and what the IRS prefers. You can lower your application fees when you apply online. For short-term payment plans, the fee is $0.
If applying online, you will need to set up an ID.me account if you haven’t yet. This will provide you with secure access to your account.
Otherwise, fill out Form 9465 and submit it to the IRS.
However you apply, be sure to have all relevant documents on hand:
- Your latest tax return and any documentation from the IRS
- Your social security number or individual tax ID
- Bank routing and account numbers if setting up direct debit for automatic withdrawals
You do NOT need to hire a professional to apply for a payment plan. If you’re working with a trustworthy tax relief company, they will need Power of Attorney to do this for you.
Unfortunately, not all tax-relief companies are legitimate. They may collect your fees, then fail to even request an installment agreement. Often, they seek settlement instead of a payment plan. Settlement is much less likely to get approved. In short, always do your homework!
So, if you owe less than $100,000, it’s often best to apply for an installment plan on your own.
Can I Change My IRS Payment Plan?
At any time, you can access the IRS’ Online Payment Agreement tool to adjust your agreement. As long as you’ve been making your payments, these changes cost nothing. You can:
- Tweak your monthly payment amount (if it meets the timeline)
- Adjust your monthly due date
- Establish automatic withdrawals
- Change the bank account details for automatic withdrawals
If your agreement is in default, you can and should still make these changes. You may incur a $10 reinstatement fee. It’s always best to set up a plan that you can reliably maintain.
However, if you already have automatic withdrawals set up, it may be best to contact the IRS directly. Fill out a new version of Form 9465 or call to request changes.
What Happens If I Default On My Agreement?
If you establish a payment plan with the IRS, it’s in your best interest to keep up your end of the deal. Failure to pay could trigger the IRS to impose more penalties or place a levy.
However, life happens and circumstances change. If you miss a payment or two, the IRS considers you to be in default. Thankfully, this can be fixed. Your options are:
- Revise your payment plan. You can change the monthly amount, automatic withdrawal method, and/or due date. There is typically a $10 reinstatement fee to change your agreement.
- Request a new arrangement. As long as you owe less than $50,000, the IRS may be willing to set up a new payment plan that better suits your financial situation.
In any case, it’s crucial to keep in touch with the IRS. Any lapse in payment or communication could trigger a notice of intent to levy, after which your options are much more limited.
An installment agreement is a relatively low-cost, convenient way to resolve your tax debt. You don’t need any special tax advisors or extreme measures. If you owe less than $100,000 ($50,000 for long-term payment plans), an IRS payment plan can help you avoid wage garnishment and other levies.
Be sure to establish a plan that you can reasonably keep, depending on your living expenses and other debts. Going into default can make it more difficult to resolve your tax debt. As with any other tax debt matter, keep careful records and seek help when you need it!
For more guidance and important resources for tax debt payment, check out our tax debt relief services here.