Finding out that you owe taxes can be undeniably stressful if you can’t pay them all at once. Don’t panic if you find yourself in this situation. The IRS offers some payment plans that will allow you to pay the taxes you owe over time.
What is an IRS payment plan?
An IRS payment plan is an arrangement that gives you an extended period of time to pay the taxes you owe. You’ll avoid collection actions like tax liens and tax liens by setting up a plan.
The IRS nonpayment penalty is 0.5% per month for each month late, up to 25% of the amount due, plus interest. The IRS adjusts your interest charges quarterly. They are always set at the short-term federal rate plus 3%. The interest rate is 3% for taxpaying individuals for the fourth quarter of 2021.
An IRS installment plan is often cheaper than paying your taxes with a credit card if you can’t pay your tax debt in full. Average credit card APR was 20.25% as of August 2021.
All tax refunds due to you for other years while you are enrolled in a payment plan will be applied to your balance until you no longer owe.
You can set up a short-term payment plan if you can pay off your balance in 180 days or less. Taxpayers who owe less than $100,000 and can pay in 120 days or less can 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 phone. Otherwise, you can request a simplified long-term payment plan and make monthly installment payments. The maximum repayment term is 72 months.
Who is eligible for an IRS payment plan?
You are guaranteed to qualify for an IRS installment agreement if you owe $10,000 or less, and you (and your spouse if married 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 instead of 72 months
- You can’t pay the taxes you owe in full
- They are not in bankruptcy proceedings
You may 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 have filed all of their tax returns, but you may be able to apply online even if you owe more.
The IRS relaxed its rules in 2020 to allow some taxpayers who owe up to $250,000 to apply without submitting additional information. But your proposed monthly payment should be enough.
An agreement can usually be established in just a few minutes, according to the IRS website. You can apply by submitting Form 9465 or by calling the IRS if you are not eligible to set up a plan online.
The IRS will require you to set up automatic monthly payments via 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. However, some fees may be waived if the IRS considers you to be a low-income taxpayer: your income for the tax year is at or below 250% of the applicable federal poverty level.
|Plan Type||Rate||Who Qualifies|
|Short term plan (180 days or less)||• No setup fee • Interest and late fees||Individuals who owe less than $100,000 in total|
|Long-term payment plan (more than 180 days) with direct debit of monthly payments from your bank account||• $31 setup fee if you apply online • $107 setup fee if you apply by phone, mail, or in person • Interest and late fees||Online Application: Individuals who owe $50,000 or less and businesses that owe $25,000 or less • Individuals who owe up to $250,000 may qualify in some cases • Individuals who owe more than $25,000 and businesses who owe more than $10,000 must pay via direct debit|
|Long-term payment plan (more than 180 days) with another payment method||• $149 setup fee if you apply online • $225 setup fee if you apply by phone, mail, or in person • Interest and late fees||• Individuals who owe $25,000 or less • Businesses who owe $10,000 or less|
Should I use a tax settlement company?
Generally, your best option is to work directly with the IRS rather than hire a tax settlement company if you owe taxes. Many companies claim they can reduce your tax debt or stop wage garnishment, but the Federal Trade Commission (FTC) warns that most taxpayers won’t qualify for the programs they advertise.
The FTC has received numerous complaints from taxpayers that certain tax settlement companies not only failed to negotiate a settlement for them, but also failed to submit the necessary paperwork to the IRS. They charged unauthorized fees.
The FTC recommends carefully reviewing a tax relief company’s fee structure and cancellation policies before hiring one to represent you. Often a better solution is to contact the Taxpayer Advocate Service, an independent division of the IRS, for unresolved issues with the IRS. Only a Certified Public Accountant (CPA), Enrolled Agent, or 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 can’t pay any of your tax debt. The debt will not go away if the IRS approves your request, but your account will be reported as “currently not collectible.” Interest and late payments will 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. However, this is not an option if you are currently bankrupt. Use the IRS Offer in Compromise Prequalifier screening tool to determine if this might be an option for you.
- An IRS payment plan allows you to spread out your tax bill over a period of time if you are unable to pay your tax debt immediately and in full.
- You can set up a short-term or long-term plan, depending on whether you can pay the IRS within 180 days.
- Interest will continue to accrue if you set up an IRS payment plan.
- Most taxpayers will not qualify for the programs advertised by tax relief companies.