IRS Payment Arrangement – Everything You Need To Know
Every person has a different financial capacity, and now more than ever is the time to think of maximizing your liquid assets. The economy is unstable, but payables like taxes are still due. Though some people can manage to stay afloat at this time, some can barely survive.
If you’re unsure how you can pay your taxes, know that the Internal Revenue Service offers installment plan arrangements. One of the most prominent is the IRS payment plan.
This plan is meant for those who cannot pay the full amount of taxes they owe, but would like to pay it off over time. There are certain qualifications which must be met with the Internal Revenue service, but for smaller amounts of taxes owed, almost everyone is approved.
If you owe a large amount of back taxes ($50,000 or more) – then the IRS may take a closer look at your finances. If you can’t afford to pay back your taxes (even with a payment plan), you may be able to do an offer in compromise (OIC).
What Is The IRS Payment Plan?
The payment plan offered by the Internal Revenue Service involves an agreement that you, the taxpayer, should make a direct payment of your federal tax dues within a specified period. It’s akin to taking out a loan and pledging to pay the same in installment over a certain period. Currently, the federal agency supports two payment schemes — long-term and short-term.
The IRS payment arrangement involves you making monthly amortizations to pay up what you owe the government. As long as you continue to honor and make good of your monthly payment commitment, the IRS won’t seize your property and bank account or garnish your salaries and wages. And like any other payment amortization plans from agencies that you owe money to, you can’t get away with accrued penalties and interests on the principal.
How Much Does It Cost To Set Up A Payment Plan With The IRS?
The cost of creating an IRS payment plan depends on your chosen payment application channel, whether or not you’re qualified for reduction of fees, and what program you’re applying for.
Short-Term Payment Plan
- Set-up fee: Free if you apply in-person, online, through the mail, or by phone.
- Terms: You can pay up the taxes you owe up to 180 days or sooner.
- Maximum tax amount covered: Up to $100,000 (inclusive of the accrued tax payments, interest, and penalties)
- Mode of payment: Payable by auto debit, check payment, credit/debit card, or money order.
Long-Term Payment Plan
- Set-up fee: $31 if you apply online, $107 if you apply by any other means, and waived for applicants belonging to the low-income classification. This is paid via automatic withdrawals from your checking account.
- Terms: You need to pay your accrued tax payments within 120 days or less.
- Maximum tax amount covered: Up to $50,000 (inclusive of the accrued tax payments, interest, and penalties).
You can be tagged as a low-income applicant if you have an adjusted gross income equal to or lower than 25% of the national poverty level. You can check your IRS Form 13844 to know whether you qualify.
The good news for low-income taxpayers is that the IRS waived the user fee for your application when you authorize them to make monthly automatic payment withdrawals from your bank account as a tax payment. However, if you belong to the low-income group but you’re not able to set-up automatic debit payments, the federal tax agency will reimburse the user fee you’ll pay at the time you can pay off your tax dues.
If you use your debit or credit card to make payments, you will be charged a processing fee. For debit cards, this amount ranges from $2 to $4 for every transaction. For credit cards, it’s around 2% of the total charged amount.
However, these options are only available for tax dues that are less than $25,000. For those equal to or more than $25,000, you will be required to make payments thru automatic withdrawals from your bank account.
As a form of assistance to the people during the pandemic, the government will not tag as default in installment payments those who have unpaid tax payment due from April 1 to July 15. Unfortunately, the penalties and interests that accrued during this period will still have to be paid.
How To Set Up An IRS Payment Plan
You don’t have to make a call to the IRS to apply for a payment plan. You can apply online if any of these circumstances apply to you:
- You owe the IRS $50,000 or lower in tax, penalties, and interest, you’re applying for their long-term payment plan, and you have already filed your tax returns;
- You owe the IRS less than $100,000 in taxes, penalties, and accrued interest, and you’re aiming for a short-term payment plan.
If you fall in any of these categories, you need to submit the following information to confirm your taxpayer identity:
- Name (it should be the same name as indicated in your most recently completed and filed income tax return)
- Existing and active email address
- Where you recently filed your income tax return
- Date of birth
- Tax filing status
- Personal Tax Identification Number or Social Security Number
- Tax Balance due
- Mobile phone applied and registered under your name or the corresponding activation code sent to your email
- Financial account number.
You can save time by using the same login details (username and password) you used when you registered for your tax transcript, previous online IRS payment agreement, or Identity Protection PIN. In this case, you can forego the requirements mentioned in the preceding paragraph. You can also choose to fill out the IRS Form 9465 before mailing it to the IRS.
Making Changes To Your IRS Payment Plan
If previously you’ve already subscribed to an IRS payment plan and you’re wondering if you can make changes to the said subscription, you can do so. The IRS offers an online tool that allows users to access and make changes to their subsisting monthly payment amount and due date.
Aside from these, you can also modify your existing settings for automatic withdrawals. Lastly, you can also use the same tool to reinstate any payment plan you failed to pay before.
Unfortunately, this feature only works if you have not subscribed to direct debit payments.
Having various options for payments of certain obligations offers great help to people, especially during these most trying times. If you want to know more about any of the plans we mentioned above, you can check the IRS website.
What Is The Minimum Payment The IRS Will Accept?
The good news here – if you can’t afford to pay your taxes, you can likely qualify for a payment plan with the IRS. You will avoid garnishments and levies, as well as additional collections.
You will owe penalties for late tax payment, but it is still a better option. Typically, your minimum payment will vary based on how much you owe in back taxes.
You can apply online, over the phone, or using various IRS forms to set up a payment program. You will want to pay as much as possible each month, to avoid higher fees and penalties.
If you owe $10,000 or less, you are guaranteed to be approved for a payment plan. As long as you agree to pay your taxes back within 3 years, there is no minimum monthly payment.
If you owe more than $10,000 (but less than $25,000), your monthly minimum will be the amount you owe, divided by 72. If you owe between $25,000 and $50,000, you will have the same monthly minimum payment.
Is The IRS Collecting Payments During COVID-19?
COVID has wiped out many citizens, financially. Therefore, the IRS has responded with more lax rules and regulations for those who owe back taxes.
Essentially, the IRS granted more leniency to just about every level of back taxes owed. They also made it far easier to set up installment agreements, and allowed those setting them up to have lower monthly payments.
More Details On The Taxpayer Relief Initiative
The IRS also has other tools to help taxpayers now, like temporarily delaying collection. By contacting the IRS, taxpayers can stop collection completely, for a brief period of time.
An offer in compromise has always been a tool in the IRS toolkit, but there has been more leniency granted with this tool, during the coronavirus pandemic. If you are a first time offender, there has also been some relief from normal fees and penalties that would normally apply.
Can I Pay Extra On My IRS Payment Plan?
Yes, there is no reason not to pay more each month, since it means you will pay off your back taxes faster. Since late penalties and interest continue to accrue with time, you will end up paying less money to the IRS if you make bigger monthly payments.
How Do I Qualify For The IRS Fresh Start Program?
There are a number of stipulations which must be met, in order to qualify for the IRS Fresh Start program. Below is a list of the requirements to meet, as required by the Internal Revenue Service.
- First time falling behind on their tax payments.
- Agree to the direct payment method.
- They have their taxes up to date.
- Owe less than $50,000 (or can pay down a larger amount to $50,000)
- Can pay off any debt in 60 months or less.
- They stay on top of finances in the future.
- They filed an offer in compromise, and can pay this amount within 12 months.
How Does The IRS Calculate Interest On Unpaid Taxes?
Interest on unpaid taxes is easy to calculate. It’s simply the federal rate, plus an additional 3%. Short term interest rates at the federal level are frequently near zero, so you can expect to often pay a 3% penalty for interest.
If you fail to file your taxes, the penalties can be even more severe. This is why we recommend always filing your tax return on time, even if you cannot pay the amount you may owe.
Can You Have 2 Payment Plans With The IRS?
If you owe taxes to the IRS, but you already have an installment program in place, you can simply add to this existing agreement. It does not constitute having a second plan in place with the Internal Revenue Service.
If you have trouble paying back taxes frequently, you can request various actions with the IRS. One is the “currently not collectible” status, which tells the IRS you don’t currently have the means to make payments to them.
Do IRS Payment Plans Affect Your Credit?
Generally, IRS issues do not show up on your credit report – no matter how severe. However, they do still show on your public record (especially if it’s a tax lien).
This means that you always want to pay your taxes on time, whenever you can. If you really cannot pay your taxes, still file a return, and then immediately set up a payment agreement with the IRS.
Does The IRS Forgive Tax Debt After 10 Years?
Strangely, yes. Generally speaking, the IRS does not collect unpaid taxes after 10 years passes. This is referred to as the 10 year statute of limitations.
After 10 years pass, the IRS wipes the tax debt clean from its books. Obviously, it is not in the IRS’s best interest to advertise this information, so it is a bit hidden.
However, waiting out a 10 year tax debt is not a very good strategy. For starters, the IRS becomes increasingly aggressive at collecting taxes, when they are owed for a longer period of time.
Can The IRS Refuse A Payment Plan?
Yes, the IRS can refuse a payment program, but it is rare. If you’ve defaulted on a previous agreement, or if you are still paying a tax debt from a previous year – you may be turned down for a payment plan.
Can The IRS Revoke An Installment Agreement?
If you don’t file a future tax return, your financial circumstances change drastically, or you miss a payment – the IRS may revoke an installment agreement.
How Much Should I Offer In Compromise To The IRS?
This is a tricky one, and we suggest partnering with a qualified tax professional to make this determination. If you qualify for an offer in compromise (OIC), you’ll want to next determine what to pay.
Generally speaking, the IRS only accepts an offer in compromise if they don’t think they can collect the back taxes you owe, within the time period they are due. You will usually need to pay part of the OIC amount when you submit the application (often 20%).
What Forms Of Payment Does The IRS Accept?
The IRS takes payment in essentially any form. Check, credit card, money order, direct debit, and even cash can be used.
You can set these payments up online or over the phone. It’s important not to miss payments though, as this may cause a payment agreement to be revoked.
How Can You Stop The IRS From Garnishing Your Wages?
You will need to show proof that the garnishing puts you into financial hardship. The IRS does not want to make it impossible for you to live, they want you to be able to work and pay back your debt.
What Percentage Will The IRS Settle For?
This amount will vary, and a little over half of offers in compromise are rejected by the IRS. However, the average settlement for the IRS when they do accept an offer in compromise – is just over $5,000.
However, even being accepted for an offer in compromise is a bit complicated. The IRS utilizes a very specific formula to determine who can get an OIC, and who cannot.
They calculate how much you can pay them every month, and therefore how likely they are to be able to get the full amount of back taxes you owe them. If they do not think you can meet this amount, they will often settle for an offer in compromise.
Can You Buy A House If You Are On A Payment Plan With The IRS?
Yes, as long as you have a payment plan in place. If there is no federal tax lien filed, you should be able to qualify for a mortgage.
Of course, in order to buy a house, you also have to have good credit. This means establishing a good history of on-time payments, a good income and savings account, and more.
Your debt-to-income ratio (DTI) must also be considered, when buying a house. You should also have made at least three successful payments in your payment plan to the IRS, before applying for a mortgage.
You should also submit your IRS paperwork to the organization approving your mortgage. You may also need to receive permission from the IRS for the mortgage, if you have had a federal tax lien placed on your finances.
What Is A Debt-To-Income Ratio?
Just like it sounds, your debt-to-income ratio is the amount of money you make, divided by the total amount of all your costs. You can be qualified for a mortgage if your debt-to-income ratio is 43% or less, generally.
This ratio is also important in determining an offer in compromise (OIC) with the IRS. The IRS will want to see what your ability is to pay off your back taxes, as well as how likely you are to be able to pay future taxes.
Another factor to consider is the size of a creditor. A smaller creditor will be able to offer you a qualified mortgage if your DTI ratio is above 43%.
Larger lenders could also offer you a mortgage if your DTI ratio is above 43%, but it may not be a qualified mortgage. Generally, if you have a higher DTI ratio, you may have more trouble making payments.
Other Factors To Consider Regarding IRS Payment Arrangements
If you are making a payment arrangement with the IRS, you may be looking at an offer in compromise, a direct debit installment agreement, or some other type of regular payment. The IRS often makes you pay back the full amount you owe, and they will still need your financial information to do this.
However, if you’ve received a notice of federal tax lien, or another form of an IRS notice – you will undoubtedly agree that paying off your back taxes in an installment plan is far better than having a tax liability (or something like a payroll deduction) hovering over your head.
Ideally, you want to pay more than you owe, each tax year, so you get a tax refund. You want to avoid a negative tax situation, as these will result in you owing the IRS – which results in direct pay from your bank account to the Internal Revenue Service themselves.
The Bottom Line On IRS Payment Arrangements
If you can’t pay your income taxes on time, a payment arrangement with the IRS can be made. While this is not ideal, it’s better than facing the exorbitant penalties and fees that come when you do not make a proper payment arrangement.
The IRS is not an organization that you want to mess around with. They have endless resources, time, and money to go after you.
You should always do your best to make your income tax payment on time – but if you need to, utilize an installment agreement request. The IRS can do a direct debit from your bank account, much like an automatic credit card payment each month.
The IRS ultimately wants to work with you – but it’s far better to make your monthly payment on time, and not fall into further issues with this government agency.
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