Installment Agreements: What Should You Do If You Can’t Pay Your Taxes

If you can’t pay your taxes, don’t panic.

Here’s what to do first: Make sure to file your tax return on time—failure to file is a much higher penalty than failure to pay.  Pay as much as possible when you file your tax return, as every dollar you pay at tax time reduces the late payment penalty and reduces the interest charges associated with the outstanding balance.

If paying in full is not realistic, consider applying for an Installment Agreement through the IRS.

Applying for an installment agreement can be done by your tax preparer in conjunction with the filing of your tax return, or it can be initiated online by the taxpayer through the IRS website:  https://www.irs.gov/payments/online-payment-agreement-application

Short-Term Payment Plans

If you are able to pay the balance you owe the IRS in 120 days or less, there is no setup fee for an installment agreement.  Penalties and interest will continue to accrue until the balance is paid in full.

Payment options include automatic debit from bank account, paying online through the IRS website, initiating a payment over the telephone via the Electronic Federal Tax Payment System, or mailing a check or money order to the IRS.

Long Term Payment Plans

If you can’t pay your IRS debt, that fast, here are your log-term options.

  1. $10,000 or less owed: The IRS generally approves all installment agreement requests for balances in this range.  The repayment period must be completed within three years, but there is no specific minimum monthly payment required.
  2. $10,000 to $25,000 owed: No additional financial information is required to approve this agreement, but acceptance isn’t guaranteed.  Repayment must be completed within 72 months.  Minimum payments are required and are equal to your balance owed divided by the 72-month repayment period.
  3. $25,001 to $50,000 owed: In addition to completing the Installment Agreement request, you will need to provide supplemental income and expense information on Form 9465-FS.  Repayment must be completed within 72 months.  Minimum payments are required and are equal to your balance owed divided by the 72-month repayment period.
  4. Greater than $50,000 owed: Form 433-A must be completed, which is a comprehensive accounting of your investments, assets, income, and bank accounts.  Repayment length and monthly payment will be determined based on your specific circumstances.

 

Installment Agreement Fees for Long Term Payment Plans

  • Direct Debit: If set up online, the fee is $31.  If set up by phone, mail, or at an IRS office, the fee increases to $107
  • All other payment methods: If set up online, the fee is $149.  If set up by phone, mail, or at an IRS office, the fee increases to $225.
  • Low income taxpayers may qualify for a reduction or elimination of these fees

 

Offer in Compromise

After you have considered the above payment options, you may find that you cannot pay your tax debt or that doing so will create financial hardship.  An Offer in Compromise allows you to settle your tax debt for less than the full amount you owe.

Generally, the IRS will not accept an offer if you can pay your tax debt in full via an installment agreement or a lump sum payment.  In order for the IRS to consider your Offer in Compromise, you must be current with all tax filing and payment requirements and may not be in any open bankruptcy proceedings.