Installment Agreement or IRS payment plans can help you pay off your tax debt over a period of time in the form of an installment loan agreement.
Typically, IRS payment plans take five years or less to complete.
The monthly payments are based on how much you owe and how much you can afford to pay each month.
The IRS may grant extensions to your installment loan agreement under certain conditions.
You are just about to file your income tax returns.
However, you discovered that you might not be able to pay the taxes due.
Reason A: You owed more than you can pay.
Reason B: You just completed your return.
Installment agreements are one of your options if you can’t pay your taxes in full when they’re due. These agreements are payment plans, and allow you to pay your debt over a time you establish with the IRS.
There are several types of installment agreements:
- In Business; and
Before you consider an installment agreement
Review the tax debt to be sure you owe it
If you don't believe you owe the tax, now is the time to talk to the IRS about it. If you’ve received an IRS notice, start by calling the number on the notice to discuss the amount you owe.
Prepare for the agreement
Before you request an installment agreement, you should:
1) File all required tax returns (even if you can’t pay)
- The IRS will only agree to an installment agreement if you’ve filed all your returns.
- Once you’ve entered into an agreement, you’ll have to pay all future taxes on time or your agreement may default.
2) Review your bills to figure out how much you can afford to pay the IRS each month.
Consider other resources
Can you borrow from a financial institution or a family member to pay the balance? If so, it will probably cost you less money since the IRS charges you interest even though you’re on a payment plan. You may also avoid some penalties and associated interest, by paying the IRS sooner. Compare the costs for your situation.
Types of Installment Agreements (IA)
Guaranteed Installment Agreements
You have the right to an agreement without submitting a financial statement if:
- The amount of tax you owe (not counting interest and penalties) is less than $10,000.
- You (and your spouse, if you filed a joint tax return) have filed and paid all taxes due for the last five years.
- Neither you (nor your spouse, if you filed joint) have had an installment agreement with the IRS in the previous five years.
- You can pay the full amount you owe within three years.
- You agree to pay the liability before the period for collecting the tax expires.
- You comply with the tax laws during agreement.
Streamlined Installment Agreements
There are two types of Streamlined Installment Agreements, depending on how much and what type of tax you owe. For both types, you must pay the debt in full within 72 months (six years), and within the time limit for the IRS to collect the tax, but you won’t need to submit a financial statement.
Assessed tax liability under $25,000 (include all assessed tax, penalty and interest in computing the balance due).
This is available to:
- Businesses that are still operating and only owe form 1120 income tax or form 1065 late filing penalties; and
- Businesses that have gone out of business that owe any type of tax.
Tax liability from $25,001 to $50,000 (include all assessed tax, penalty and interest in computing the balance due).
This is available to:
- Individuals; and
- Out-of-business sole proprietors.
Note: To get this type of agreement, you must pay through either a direct debit or payroll deduction agreement.
Partial Pay Agreements
In this situation, you must have some ability to pay your taxes but can’t pay in full within the remaining time the IRS has to collect. The IRS may allow you to make payments until this collection period expires.
Contact the IRS at 800-829-1040 (TTY/TDD 800-829-4059) or the number on the notice to discuss this option. If you’re in this situation, you might also want to consider submitting an Offer in Compromise to settle your taxes instead of an installment agreement.
In-Business Trust Fund Express Agreement
An In-Business Trust Fund Express agreement may be available for businesses that owe up to $25,000. You must pay the debt in full in 24 months or before the collection period expires, whichever is earlier. You can also pay down the liability to $25,000 or less and then apply.
Routine Installment Agreements
If you don’t meet criteria for guaranteed, streamlined, or in-business trust fund express installment agreements, you can still request an installment agreement from the IRS.
You can request a routine installment agreement by mail, but not online.
Documentation: The IRS may ask you for supporting documents for your income, expenses, and other amounts you owe (For example: Home and car loan payments, other obligations.) The IRS publishes and uses national and local standards to determine allowable monthly expenses and arrive at the appropriate monthly payment. If you feel you should be allowed more than the standard amount, provide reasoning with your application.
The Six Year Rule: Generally, if you only owe individual income tax, you may qualify for the Six (6) Year Rule. You’d need to provide financial information but not proof of reasonable expenses. You must stay current with all filing and payment requirements, including projected penalties and interest on the tax debt, and fully pay the installment in six years (72 months) and within the collection statute - the time the IRS has to collect the amount you owe.
The One Year Rule: If you can’t pay your debt in full within six years, you may be given up to one year to modify or eliminate excessive necessary expenses. By modifying or eliminating these expenses, you may be able to pay the liability, plus accrued interest and penalties, within the six-year limit.
Fortunately, the IRS allows taxpayers to negotiate repayment terms on what you owe them. TheCPATaxProblemSolver specializes in tax debt relief solutions such as installment agreement. I can help you settle your back tax bill for a payment that you can afford.
UNDERSTANDING INSTALLMENT AGREEMENT
An installment agreement is an arrangement granted by the IRS. It indicates that the taxpayer can pay his or her outstanding taxes in equal monthly installments over an extended period of time. Do note that interest is applied to the balance owed.