IRS Installment Agreements – Is it Right for You?
Often taxpayers in trouble are unable to pay what they owe immediately. So, what do you do? Luckily, there are ways to break down payments into something more manageable. The IRS offers payment plans that allows the delinquent taxpayer to pay what he or she owes over time.
An IRS installment agreement is essentially a monthly payment plan to pay taxes, interest, and penalties over an extended period of time. Generally, when you set up an installment agreement that means you will pay, in full, the total owed amount within the allotted time (which varies among payment plans). In another blog post, we will discuss a partial-pay installment agreement that allows you to pay something less than the full amount due.
In this post, we are going to go over the basics of an IRS installment agreement and go into the various payment plans in another installment.
What are the fees and costs for an IRS installment agreement?
Before setting up an installment agreement, it is important to know that the IRS charges various fees and costs to set up a payment plan. These fees are taken out of the first payments before your payments are applied towards taxes, penalties, and interest.
If you are auto-paying through Direct Debit from your checking account, also known as a Direct Debit Installment Agreement (DDIA):
- $31 online setup fee
- $107 phone, in-person, or mail set up fee
- These fees may be waived if you qualify as a low-income taxpayer
If you are making monthly payments from a checking account, by phone, online, check, money order, or from a debit/credit card:
- $149 setup fee
- $225 phone, in-person, or mail setup fee
- $43 setup fee, if you qualify as a low-income taxpayer
How are my payments determined?
That depends on which payment plan you qualify for. We will go into more detail in our next blog post but generally your payment will be determined either on your ability to pay or, if you qualify for a streamlined installment agreement, on the amount necessary to fully pay the debt within the IRS collection period (usually 10 years).
A note of caution. The IRS may require that you liquidate valuable assets (such as a retirement plan or borrow against your home) first before approving a payment plan. While not a frequent occurrence, you do need to be aware.
Can I change my installment agreement if later I cannot afford to pay the amount agreed upon?
Yes. The IRS allows taxpayers to modify the agreement. Additional fees will apply unless waived by the IRS if you qualify for low-income taxpayer status. You may be required to submit a financial statements (called a collection information statement) to show your inability to pay the larger amount.
What other information should I be aware of?
First, it’s important to at least pay your required monthly payment on time to ensure that you won’t default. If you are paying by check, be sure to always include all of your account information on the check, including your name, address, phone number, tax year, return type, and SSN. This will help guarantee the money is applied to the correct account for the correct tax year. If you happen to move while you’re in your payment plan period, be sure to notify the IRS of your new address because the payments won’t stop just because you have a change of address.
Second, you are allowed to make more than the required monthly payment. Doing this will reduce the overall interest and penalties paid. Just be aware that if you decide to make more than the required payment that this does not reduce next month’s payment. Always pay each required payment per your agreement.
Third, if you set up an installment agreement then you should avoid incurring a new tax debt. A new tax debt will cause your current installment agreement to default. You will then have to contact the IRS to reinstate the installment agreement.
IRS Installment Agreements are a good option when you know you can make all payments on time over the course of a specific period. Although there are fees and penalties included in this arrangement, it certainly beats owing the IRS and risking a bank levy or wage garnishment. While you may pay more than your original tax debt (fees, interest and penalties), it certainly beats the alternative.
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your unpaid taxes, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.
James D. Wade, Esq.
Law Office of James D. Wade
57 Portland Road, Unit 3
Kennebunk, ME 04043