What Is an Installment Agreement?
An installment agreement (monthly payment plan), is when you make an agreement with the IRS to pay taxes you owe over an extended period. If you feel that you are unable to pay off your taxes in full within the timeframe provided, requesting a payment plan can help you manage the fees and pay your taxes owed over a longer time. Keep in mind that even with an installment agreement, you must still pay your taxes when they are due to avoid IRS levy action or a Notice of Federal Tax Lien.
To be eligible, you must meet the following criteria:
· Short-term payment plan: You must owe less than $100,000 in combined
penalties, taxes, and interest.
· Long-term payment plan: You must owe less than $50,000 in combined
penalties, taxes, and interest.
If you’re considering installment payment plans as an option, our professional team at CitoTax can help you navigate critical requirements and identify the best options to fit your needs. We’ll discuss your specific situation and help you determine the right steps to take next. Whatever your circumstances, you can
trust us to work with you to help resolve tax issues and keep you in compliance with regulations.
How Installment Agreement Services Work
Each unpaid tax year has its own deadline for when the IRS can no longer collect on it based on when the taxes were assessed. This is often referred to as a Collection Statute Expiration Date (CSED). If you are closer to the end of the 10-year time limit, the Internal Revenue Service will probably become more aggressive in its attempts to collect money from you. If the IRS demands a payment plan that you know is not practical, you do NOT need to agree to that plan.
There is a formula used in many agreements with the IRS to determine your actual ability to pay. This formula helps set your monthly disposable income. The IRS will use this to help set a realistic monthly amount. There are monthly allowances for many categories that include your typical necessary items such as car payments, house payments, food, vehicle costs including maintenance and fuel, life insurance, health insurance, etc. Form 433A also asks for any assets such as investments, real estate, and vehicle information such as make, model, mileage, and creditor.
All of these pieces of information help the IRS determine what it thinks you can pay back. And while this is a formula the IRS often follows, do not be surprised if they push back and try to disallow expenses. If you are attempting to set up your own Installment Agreement, be prepared for some aggressive negotiations and explanations for any expenses they find questionable.
How does how much You Owe reflect on Your Installment Payment Plan?
How much you owe through your payment plan will be determined by how much you owe in back taxes and how much time you plan on taking to pay it back. The following list shows what type of installment plan you qualify for based on the amount of money you owe:
- $10,000 or below: Pay off your balance within three years with no minimum payment amount required.
- $10,000 to $25,000: You may qualify for a streamlined installment plan where your minimum payment is determined by your total amount owed divided by 72 months.
- $25,000 to $50,000: Your minimum payment will be your total balance due divided by 72 months, and you must fill out a Form 9465-FS.
- $50,000 and above: The IRS will conduct a thorough review of your finances with detailed information on your income, investments, assets and bank accounts. Your minimum payment will be unique to the settlement you determine with the IRS.
After setting up an IRS payment plan, you will still owe a 0.5% monthly penalty, plus quarterly interest for the amount that accrues while you’re paying back your balance. With interest rates like this, setting up an IRS payment plan is almost always more affordable than taking out a loan or putting the balance on your credit card. It will always be in your best interest to set up a payment plan directly with the IRS rather than pay higher interest rates by taking out money elsewhere.
Types of Payment Plan Options
You can consider a few different types of installment agreement plans to fit your needs. Depending on your available resources, you can determine whether a shorter-term or longer-term solution will work best for your business.
Pay Now
If you reach a point where you can pay off the rest of your unpaid taxes, you can pay directly to cover what you owe. Individuals and businesses can select this option and pay electronically or by phone through the Electronic Federal Tax Payment System (EFTPS). To use this system, you will need to enroll first. You may also pay by phone, mail or money order. With this option, you will have no future penalties or interest.
Short-Term Payment Plan
With a short-term payment plan, you owe the tax amount in 180 days or less. You can only apply for a short-term payment plan online if you are an individual taxpayer. With this plan, you have the option of paying electronically or by phone through the Electronic Federal Tax Payment System (EFTPS). You can also pay by card, check, or money order. Keep in mind that payments by card will include fees.
As you pay off your tax balance, you will also need to pay interest and any accrued penalties until you have paid the balance in full.
Long-Term Payment Plan
Long-term payment plans are installment agreements in which you agree to pay the amount you owe across monthly payments for a set duration. With a direct deposit agreement, you will need to set up automatic monthly payments from your checking account. You can apply online or by phone, and you will be responsible for accrued interest and penalties until you’ve paid off the balance in full.
Once you’ve applied and been accepted for a long-term payment plan, you have several different payment options:
- Make monthly payments via money order, debit or credit card, or check.
- Pay monthly by phone or online through the Electronic Federal Tax Payment System (EFTPS). You will need to enroll first.
Change an Existing Payment Plan
If you need to make changes to an existing plan, you have a few main options:
- Make monthly payments by check or money order.
- Pay through Direct Debit or automatic monthly payments from your checking account.
- Pay online or by phone via the Electronic Federal Tax Payment System (EFTPS). You will need to enroll to use this service.
- Pay directly through your bank account.
Importance of a Strategic Installment Plan
It is important to set an installment agreement that you can afford to pay for the entire period. If you default and are unable to make payments, you go back to square one, wiping out any previous work to settle your taxes! If not having a lien on your house or property is the most important part of your resolution, an installment agreement will probably not be your best choice. Even if you have agreed to terms that won’t fully pay your balance, your unpaid taxes will continue to collect interest and penalties until they expire. But the notices threatening wage garnishments, wage levies, and bank levies will stop with an installment agreement!
At CitoTax, we work on your case from start to finish ensuring we see it through to a complete resolution. If necessary, we will appeal, reach out to the IRS personally, assist you with filing, and confirm receipts with the IRS. After resolving your situation, we also provide full-service tax and accounting teams who can help you stay on top of tax payments going forward. Whatever you need to handle tax requirements, we’re here to provide trusted resources and support for you.