How to Set up a Tax Debt Repayment Plan With the IRS
The following is presented for informational purposes only. For specific advice, please consult with a qualified tax professional.
An unexpected tax bill can be financially devastating, especially when it seems like you'll need to come up with a large sum of money in a short period of time.
But don’t worry, there’s good news. Just like making monthly payments on your credit card, you can make payments to the IRS to take care of your tax debt before they take more aggressive action.
How Does an IRS Payment Plan Work?
If you owe the IRS money come tax time, you have three options: pay in full immediately, create a short-term repayment plan and pay your debt in 180 days, or agree to a long-term installment plan, which must be completed within 72 months. Assuming you can't pay the debt in full right away, you can work with the IRS to create a plan to get you squared away over time.
On any repayment plan, you can expect to accrue penalties and interest on the unpaid debt. Short-term plans are typically free to set-up, while it costs money to apply for a long-term plan. (As of February 2022, the cost when paying by Direct Deposit was $31 to apply online, and $107 to apply by mail, phone, or in-person. The cost is substantially higher if you don't agree to automated monthly payments.)
Plans are contingent on participants making timely payments each month, and you may have your agreement terminated (with the remaining balance due immediately) if you don't make your required payments.
Am I Eligible for an IRS payment Plan?
Chances are good that you'll be able to work out a payment plan with the IRS, whether you're filing as an individual or a business. While you can normally apply for a repayment plan online, there are some limitations. Specifically, you won't be able to apply for a repayment plan online if:
- You're an individual applying for a long-term payment plan and you owe more than $50,000 in combined tax, penalties, and interest.
- You're an individual applying for a short-term payment plan and you owe more than $100,000 in combined tax, penalties, and interest.
- You're a business applying for a long-term payment plan and you owe more than $25,000 in combined tax, penalties, and interest.
Keep in mind, those are just the limits for the online application system. If your debts are over those figures, you can still apply by phone, mail, or in-person. For all scenarios, it's important that you've filed all of your required returns. Speaking of...
Continue to File Your Taxes
Even if you can’t pay what you owe, you still need to file your taxes. Not filing can add more penalty fees on top of what you’ll be charged for paying late. Not filing your tax return on time can add an extra 5% to your unpaid balance every month up to a maximum 25% penalty. If what you owe is significant, this penalty can make it much more difficult to repay.
Don’t Take Drastic Measures
Owing money to the IRS doesn’t mean you have to file bankruptcy to deal with it. Especially if what you owe it less than $10,000. Many people feel like the IRS will take aggressive action immediately and they have no other choice. That’s not the case. The IRS will first ask you to pay and offer you a few opportunities to do so. Avoiding those requests will leave them no other alternative than to go after your funds so don’t ignore them. Instead, try to work with them.
Before Creating an IRS Payment Plan, Consider Your Options
While the cost of setting up a repayment plan with the IRS is pretty reasonable, the interest and penalties you'll collect during the payment period can be substantial. Before agreeing to a payment plan, check to see if you have any better options.
Take Out a Loan
Taking out a personal loan with a low interest rate to pay off your tax bill in full may be a better option than setting up a repayment plan with the IRS. Their penalties and interest rates may be higher and cost you more money in the long run. Plus, a loan company won’t have the ability to be as aggressive when seeking repayment.
Pay with a Credit Card
If possible, pay your bill, or at least a large amount of it, with a credit card with favorable terms. Even if you can’t pay the whole bill on your credit card, reducing what you owe will make it easier to work with the IRS. Just make sure you have a plan in place to manage the credit card portion of the debt.
Request an IRS Installment Plan
If you decide to start a repayment plan with the IRS, you can apply through their online portal. You can also call 800-829-1040 (for individuals) or 800-829-4933 (for businesses) or mail the completed installation agreement request form to the correct address from this list.
You may be able to get certain fees reduced or waived if you're an individual taxpayer (not a business) with an adjusted gross income at or below 250% of the federal poverty level.
Keep in mind that interest fees, just as with your credit card or a personal loan, will continue to be applied so most of your payment will go toward interest in the beginning.
Make an Offer in Compromise to the IRS
If you owe back taxes and have continued to file your taxes every year, you may qualify for an Offer in Compromise. This will allow you to work with the IRS to reduce the total amount you owe and pay it off in one payment. The IRS will analyze your ability to pay based on your current employment, income, and debt. They will then work with you to settle your debt for an amount they feel is fair based on your financial circumstances.
If you’re concerned about your ability to pay any amount to the IRS, consider speaking with a certified credit counselor first. Credit counseling is free and is a helpful tool for anyone struggling to balance their income with their expenses and debts. It’s also nonprofit and unbiased, so you can feel confident that the advice you are given is in your best interests.